“Sahil, you should focus on your studies. Whenever you need something just tell us and we’ll get it for you. Leave the money handling to us.”

Big mistake

“Dad, I want to open a bank account of my own.”

“But Arushi, except for a little bit of pocket money that we give you, you don’t have any more money. What will you do with a bank account? It will be one more account for us to manage”

Bigger mistake

“Dad, I read in a book that we should invest our money wisely so that we can stay ahead of inflation. I think I should invest the money from my savings account in a Fixed Deposit. I have heard that Fixed Deposits earn a better rate of interest.”

“Harshita, you only have a few hundred rupees in your account. It’s not worth investing that anywhere. Whatever investing needs to be done, I am doing for you.

Disastrous!

Knowingly or unknowingly, consciously or unconsciously, or perhaps based on what we have inherited over generations, it has been engrained in our minds that money is the root of all evils. Though we understand that we cannot avoid dealing with money, we believe that we should at least keep our children away from this ‘evil’. And this mistaken belief is what drives our behaviour whenever our kids question us on money or want to deal with it themselves. We become so protective that we do more harm than good for them.

First things first

Is money evil? Is it so bad? Well, if it was so bad, why are you working for it? Money is not the cause of evil. It is only the ‘greed of money’ that causes evil. Let us assume that you are holding a kitchen knife in your hand. Now, if I ask you whether kitchen knife is good or bad, what will your response be? You would say that it depends on the intent of the person with the knife—he can use that knife to kill someone or as a kitchen tool. It is exactly the same with money. Money is neither good nor bad. It depends on the intent of the person holding it. Look at Bill Gates and Azim Premji and you would realise that money can be such a boon for the society.

Now, I never understood the logic as to why we should keep our children away from money. We are preparing them in life to earn and deal with money, but want to keep them away from it till they start ‘mis-managing’ it and start learning from their own mistakes. What an irony! I know that they will finally learn by making mistakes, as all of us did. There is no harm learning from one’s mistakes, but there is one thing your child would have lost if you wait till she makes money for her to handle it—and that happens to be the most critical element that makes the money grow—TIME.

The time leverage of INR 50 saved and wisely invested over 15 years is far more than the value of INR 10,000. The key is to teach your children early. And lecturing will not work. Get bank accounts opened in their names while you are the guardian. Their curious eyes must see the interest being credited into their savings account under their name. They must realise the power of the fact that their money can earn more money for them.

They should see their interest earning more interest for them. They must see time leverage in action in their own bank accounts. Once they absorb this concept that money is their slave, they will never have to be taught about saving a part of their pocket money. You will be surprised to see the changes in them. I have seen this with my children, and with most mature adults who were not aware of the power of saving early-on.

Every parent should do this

Every parent should keep in mind the following to ensure the future financial wellbeing of their children:

• Irrespective of the amount, make sure that you give your child pocket money. This ‘earning’ helps them learn concepts like money is limited, that they must plan and spend, and they must save a part of the money they get.
• They may start saving in a piggy bank, but sooner rather than later, open a bank account for them and get them involved in the process. Preferably take an online banking facility. Your kid’s bank account can be linked to your account and you can monitor it at any stage.
• Show them the bank account statement—either online or a hard copy—which shows the interest credited. Do not worry about whether the amount is big or small; it’s the concept that has to be explained, and engrained in them. The concept is that their money just became their slave; it just earned more money for them in the form of interest.
• Starting to save early is the single most important factor that will determine their wealth in the long run. If you have missed this train in your life, do not let your child make the same mistake. Tell him that he or she should try and save from his/her pocket money. This habit will go a long way.
• Let them define their own saving target every month. The equation “Expenses = Income – Savings” is far wiser than the equation “Savings = Income – Expenses”. The former teaches you to spend after you save, while the latter inculcates the wrong habit of saving whatever is left after spending, which in most cases is negligible. Though technically same, there is a world of difference between these two equations.
• Lead by example. Your child will follow what they notice you doing. If you are in the habit of saving money and controlling your expenses, it will not be difficult for them to follow suit.
• Discuss money with them—openly and quite often. Money is not a taboo. It is a necessity of life. Its priority ranking comes quite close to oxygen. Teach them to deal with it properly. If they don’t learn to deal with money from you, and our academic institutes do not teach them, the chances that they will mismanage money are quite high. Do not leave this critical life skill to chance.

This was first published in the November 2014 issue of Complete Wellbeing.

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Published by: Jaico Books

ISBN-13: 978-81-8495-577-4

Pages: 229

Price: INR 229

The rich get richer, “I have to make it to the Forbes list,” they cry. The middle class get deeper in debt—“Sales online… just a mobile app away,” they sigh. And the poor seem to be getting poorer—“Daal mein aur thoda paani dalo,” to make the meal go around.

Whichever group we may belong to, our quest for money is soul-searing. Along comes Mehrab Irani who promises you financial nirvana, but only if you follow his ‘10 commandments of financial freedom’, which he introduced using a fictional account of two friends.

Dr John Pinto, an orthopaedic surgeon in posh South Mumbai, seems to have it all—a great job, an extravagant lifestyle and a loving family. And yet, at the age of 45, he tries to take his life—an attempt that is foiled by his childhood friend, Vijay Desai. The contrast between the two men is a dig at the Indian educational system. John, who had a brilliant academic career, failed himself spectacularly in life. But Vijay, a school dropout, rose to be not just an international business tycoon, but one with a heart.

When Vijay learned that John’s suicide attempt was brought on by his dwindling finances, he decided to take his friend—and the reader—on a financial pilgrimage. As you travel along with them, you visit not only the Meccas of money [New York and London] but also the massage parlours of Bangkok, the remote mountains of Afghanistan, the Australian outback, Kenyan safari, Kruger National Park and Shanghai water town amongst other places. The teachers of the 10 commandments are as exotic as their locales. There’s an ex-porn star, an ex-terrorist, a marathon runner and, predictably, an ex-Wall Street investment banker. The one factor they share in common is that they are all protégés who have been ‘rescued’ by Vijay and taught financial emancipation, which they will now pass on to John.

The author’s skills as a teacher shine through in this book. Each chapter deals with a single financial precept—equities, real estate, insurance, budgeting, allocation of resources and even speculation. The lesson is embedded in parable and brings out the connection between man and money. The financial lesson is summarised at the end of each chapter feels like the moral of an Aesop’s fable. Sometimes, these lessons seem repetitive but I guess that is necessary for reinforcement. At times though, the lesson is difficult.

As the main aim of the book is to make you financially savvy, you will need to overlook some small flaws. The character of Dr John Pinto is sketchy and rather unconvincing. Most of the author’s aphorisms seem to be largely drawn from ‘inspirational internet forwards’ but what works is the way he neatly weaves them into the story. While the underlying lesson is clear, the attention to detail is lacking and this tends to take away a bit from the story.

The New York chapter is the most compelling with an entertaining and brilliant lesson on investing in equities. I am sure this is what prompted Rakesh Jhunjhunwala to call his book “a page turner that will permanently change the way you look at life and money.” And I heartily agree!

This was first published in the November 2014 issue of Complete Wellbeing.

The post Mad Money Journey: A Financial Adventure By Mehrab Irani appeared first on Complete Wellbeing.

Shared financial values and goals

Money is a touchy subject. Most couples tend to avoid discussing it transparently. This results in sub-optimal outcomes vis-à-vis achievement of financial goals and, in some cases, even becomes an impediment to marital bliss.

A lot of times, two people come into a marriage with different money-related values: one may be a cautious spender while the other may spend as if there is no tomorrow; one may be dedicated to saving and investing to meet financial goals, while the other might live just for the day and believe that the future will somehow take care of itself.

Shortly after marriage, once the couple has got to know each other fairly well, they should have an exchange regarding their money-related values. In due course, they should evolve a common minimum programme, comprising financial goals that they hope to achieve and a roadmap for achieving it.

Get reliable advice

Financial planning may seem like a rather simple thing to do. But in my career I have seen numerous couples who adopted the DIY [do it yourself] approach and paid a heavy price. Some of the common mistakes that couples commit are having excessive exposure to real estate [which weighs them down with debt and offers little liquidity in case of need], investment in insurance-cum-investment plans [which give inadequate life cover and produce poor returns due to high fees], and so on.

In my view, those who can afford to, should find a reputed financial planner in their neighbourhood, get a financial plan prepared, and go for regular reviews to ensure that they stay on the right track.

Get rid of high-cost debt

During your single days, you may have spent rather too freely and hence acquired high-cost debt such as personal loans and credit-card debts. Though this could be a touchy subject, after marriage it is best to pay off these debts first—either with the help of your spouse or without. You will not make any progress on the road to prosperity if you are simultaneously paying 16 – 30 per cent interest on high-cost debt while earning only 12 – 15 per cent on your investment portfolio.

Set up a contingency fund

Another prerequisite before you can begin investing to meet your goals is to set up a contingency fund. This fund could bail you out in case of loss of employment, an accident that leads to temporary disability, and so on. It will save you from dipping into your investment corpus.

The contingency fund should equal 6 – 10 months of personal expenditure, including EMIs, insurance premium and child’s tuition. The exact amount put in the contingency fund should be governed by stability of income and the risk profile of your jobs. Two months of savings may be kept in a savings account where it is accessible. The rest may be kept in the liquid fund of a mutual fund from where it can be withdrawn within a day.

Set a saving target

When cash flows are high, people walk on air. Anything that they desire appears within grasp and the tendency to splurge on high-cost purchases is high. But couples must remember that cash flows may not always remain high. Double incomes get whittled down to single income when the couple starts a family. A high-paying job can be lost for no fault of yours. So right from the start, couples must save to have a cushion for meeting contingencies. Moreover, only disciplined saving will help them meet their myriad financial goals.

At least 25 – 30 per cent of the couple’s combined gross income should be saved and invested each month.

Buy life insurance

As soon as there is a dependant within the family [non-working wife, elderly dependent parents or a child], the couple must ensure that they have adequate life insurance. A rough rule of thumb is that you must have life insurance worth at least 10 times your annual salary. If you go to a financial planner, she will calculate your assets, liabilities and future requirements [in case of death of the bread winner] and then calculate the sum assured. This is a much more scientific way of calculating your insurance needs.

If the husband works and the wife is dependent on him [or vice-versa], the policy should only be purchased by the breadwinner. If both the husband and wife work [and they have a dependent child or parents], both may purchase life policies, naming each other as the nominee.

Buy a term insurance policy [online policies are less expensive] to meet your life insurance needs. Avoid buying an insurance-cum-investment product where, despite paying a high premium every year, you may not have adequate life cover.

Buy health insurance

Even if your employers provide health insurance, buy individual health insurance policies for both partners [and child, if any]. That way you will still have insurance cover in case you give up your job or need medical treatment when you are between jobs. Once you have crossed the age of 40 [when your chances of falling ill grow], and to keep pace with rising healthcare costs, supplement these stand-alone policies with a floater policy. Keep in mind issues such as the insurer’s policy regarding pre-existing diseases, sub-limits, exclusions, renewability and claim loading to avoid unpleasant surprises at a later date.

Don’t go overboard with debt to create assets

Even when taking a loan to create assets, couples should stick to prudent limits. The total of their car and home loan EMIs should not exceed 30 per cent of their gross income, otherwise they could face cash-flow problems.

When buying a car, be prudent regarding its size. Similarly, buy a house only after your income has reached a reasonable level and you are in stable jobs. Buy a house of a size proportionate to your combined incomes.

Investing to meet your goals

Couples should divide their investment goals into short, medium and long-term goals. Saving and investing to collect the down payment for the purchase of a car [which can be met within two years] is a short-term goal. Investing to start a family [when wife stops working and household expenses grow] or to collect the down payment for purchasing a house is a medium-term goal [two to five years]. Saving for your child’s education and for retirement are long-term goals [above five years].

To meet short-term goals, it would be best to invest in a fixed deposit scheme, where the risk of loss is nil. For a medium-term goal you may go with a hybrid fund [equity and debt in the ratio of 60:40 or 70:30].

For long-term goals such as child’s education and retirement, you may invest primarily in equities if you have adequate risk appetite. Conservative couples should decide on an asset allocation that is in keeping with their risk appetite [more in equities for those with higher risk appetite] and current wealth [a less risky portfolio if you are already comfortably placed].

Once the asset allocation has been decided, divide the portfolio among diversified-equity funds for the equity portion and Public Provident Fund [PPF] and Employee Provident Fund [EPF] for the debt portion. About 8-10 per cent of your total portfolio may also be invested in gold.

The equity portion of your portfolio should be divided among large- and large-and mid-cap funds [70 – 75 per cent of total equity portfolio] and mid-cap and small-cap funds [25 – 30 per cent]. If you are financially savvy and will monitor your investment portfolio periodically, then invest in actively-managed funds with sound long-term track records. If the performance of a fund falters [it underperforms benchmark for three quarters], switch to another fund. On the other hand, if you don’t wish to keep close watch on your funds, go with passive funds [exchange traded funds and index funds] which will give you returns at par with that of their benchmark indexes.

Financial planning for couples is a detailed and meticulous exercise, difficult to capture in a short article. As said earlier, those keen on achieving financial success should use the services of a financial planner who can play the role of advisor and mentor and put the couple on the road to enduring financial freedom.

This article was first published in June 2013 issue of Complete Wellbeing.

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