The education system too does a pretty poor job of teaching students about the practical aspects of finance. Hence the responsibility of imparting financial literacy to their children rests squarely on parents. Here are some tips that will help you get started:

FIRST STAGE [ages 2.5 to 5 years]

You may feel this is too early and kids this young may not understand the meaning of money and savings, but it’s never too early to sow the seeds of financial literacy. Of course, it needs to be done in a fun way. Start with buying two piggy banks–one is a Savings Bank and the other is a Spending Bank. Kids should be made to understand that the Savings Bank is where the money will only be put in, whereas the Spending bank is one where they can withdraw from when they want to buy something. This is also an opportunity to teach them goal setting. For instance, every child has a favourite chocolate or candy. Suggest to your child that one out of every five times she will buy that for herself from the money collected in her Spending bank. Make sure that the item has to be something inexpensive and a goal that is achievable for the child. By doing this, you are helping the child understand that parents will not buy everything for them in a heartbeat and money does not come from an indefinite source.

This may be difficult for some parents as it involves saying ‘No’ to your little one, but the sooner you get used to that, the better it is for you and your child. Because, there will be plenty of instances later in life—and not necessarily related to finances—where you will have to say No to your child for his or her own wellbeing.

SECOND STAGE [ages 5 years to 8 years]

Get your child to count the money in his/her piggy bank every three months. It’s a good way to  only making the child financially savvy but also to improve their basic math skills. Teach them to maintain a simple book of accounts, wherein they can write the total amount in the piggy bank with the date. This way they will see how money grows by saving and it will also keep their involvement in the process going. At this age, your child can graduate from buying their own chocolates and candies to something slightly bigger, like a small toy or book.

This is the right age to buy a third piggy bank, which is the Giveaway/Donation Bank. This bank should be used to inculcate the values of sharing and giving; they could use the money for donating to a cause or buying something that they would like to share with others.

THIRD STAGE [ages 8 years to 12 years]

By this age, pocket money would have been introduced. Always ask for an account of how the money was spent. This can be tracked with the help of an expense sheet in their accounts book. The balance amount at the end of the month has to be put into their savings bank. It’s also the time for setting bigger goals. For example, if one of the parents’ birthday is approaching, you can remind the child that to start to save up to buy a gift or card for daddy/mummy. The money for the gift should come from their Spending Bank. After they withdraw  money from that bank for spending, you can replenish it with equivalent amount in their Savings Bank. Such habits inculcate a sense of responsibility and maturity in the child.

You can also start introducing the concept of incentives by this age. So, if the child is helping you in your additional chores, you can give him/her some money for it. This motivates the child to work harder. This is also the stage when you can make a child take some monetary responsibilities. For example, take them grocery shopping; make them count the items and their prices and give them the money to pay at the billing counter; make them count the change that is returned. You may also consider starting the concept of actual banking with your child. Let your child accompany you to your local bank and encourage them to ask questions about the workings of the bank.

Don’t forget to explain to your child what a debit/credit card is. Often children watch parents paying at a store using cards and develop a notion that these plastic cards can be used to make unlimited purchases. Put to rest all conjecture and speculation by explaining how the various cards work.

FOURTH STAGE [ages 13 years to 18 years – the most crucial years]

At this age it’s important to fix with your child a budget for everything. For instance, there should be separate budgets for shopping, mobile phone bills, socialising with friends etc. If they manage to save from one budget, they can spend it somewhere else or add the money to their savings. By now your child should have a better understanding of the banking features. On their birthday or any festival celebration, consider opening a fixed deposit for them. Involve them in the process and explain to them terms like interest rate and tenure. Make banking a regular feature in their life. If you do not already have an account for your child, open one. All the money saved by him or her can be deposited there periodically.

By age 16, you can introduce your teen to different forms of investment. Invest on your child’s behalf and explain him/her how their principal amount grows with the power of compounding. Make them do more chores during their vacation time while fixing an incentive like a salary for them.

There are plenty of age-appropriate books that your child can read to help her learn more about money matters and also to develop the right mindset towards money.

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While you can invest in anything that catches your fancy, the current favourites are art, wines, coins, stamps and vintage cars.

Art

The top on the list and one that has attracted numerous collectors and investors for centuries is art. The practice of investment in art is quite common around the world. In recent times, many Indians too are foraying into this market.

Why invest in art…

• The art market is an insulated one, which means that fluctuations in economy, interest rates, inflation, the share market have very little effect on art prices, making it relatively stable.
• Art will always have value and if chosen correctly, will appreciate with time. In worst case scenario, you can hold on to the paintings, which will give you visual pleasure as well as retain its original price.

How to go about it…

Start with visiting art galleries, exhibitions and auctions. Art worlds have their publications [you’ll find them at an exhibition or a gallery] and websites. Hob-nobbing with fellow art connoisseurs helps you gain important insights into the art world. The artists are present at the exhibitions. Make sure you interact with them to understand what inspired them and hear them talk more about their paintings.

It is not necessary to buy works of only famous artists on order to reap good benefits. At times, it makes more sense to invest in budding artists as you may get their paintings at a cheaper price and if the artist goes on to be successful, the prices of your paintings will soar to astronomical heights.

To decide which painting you should invest in, the most important thing is to like the painting. Unlike other investments, these should offer you visual appeal or else they can become a thorn in the eye.

Once you set your heart on a painting, do a background check about the artist’s profile and his previous works.

Gather opinions of others from the art world about the particular painter—this can definitely earmark your returns.

Consult an art advisor, who too, can be found by word of mouth or through frequent visits to galleries, exhibitions and auctions. Seek their advice before you make an investment since investing in art is not a small deal.

When to sell…

Unlike other investments, art is not a place to make quick money. Also, in case the price doesn’t appreciate, you need to hold on to the investment, sometimes even for decades. There are no fixed returns, but at times, international art index has given returns as high as 30 per cent. On an average, a good investment can earn between 7 – 13 per cent.

To sell, you can talk to an art dealer or a gallery or an auction house.

Wine

Investing in wines is different than collecting wines for consumption. Also, investing in Indian wine is not an option.

Why invest in wine…

• The wine industry or the global market for fine wine is expected to grow at 3 billion dollars, annually.
• In the year 2010, London based Liv-ex Fine Wine 100 index rose by over 26 per cent. The year before, it grew by 31 per cent. This index represents the price movement of 100 of the most sought- after fine wines.

How to go about it…

The quality of wines and its pricing depends on climate, soil, the age of wines, genetics of wines and most importantly, the skill of the wine maker. Soil and genetics are not changeable factors but with the passing of years, as the wine ages, the quality of the wine ‘may’ improve. Remember, not all wines improve with age. As a particular wine ages, it may also become scarce thereby, appreciating in value.

As a wine investor, you have to look for international wines, wineries and wine funds for lucrative returns. International fine wines like Chateau Lafite Rothschild and Chateau Mouton Rothschild are some names you can consider. The Chateau Lafite Rothschild 2000 vintage has risen more than five times over last five years. And Chateau Mouton Rothschild 1982 vintage has risen by a whopping 173 per cent in the same period. Certain vineyards and regions in Europe are recognised as being historic in determining the quality and return price of the wine.

Indian investors can approach Indian wine advisory companies, which will help you with the know-how and also hold and preserve the wines on your behalf—once you invest in wines, they have to be stored in a particular surrounding and at a particular temperature or else the wine may lose its flavour and you can bid you investment, adieu.

One can also invest in wine futures, which means wine which has not been bottled and is still in barrels. Given the demand for fine wines, your chances of getting higher prices are better when you invest earlier. International wine investment portfolio invests 80 – 90 per cent of their value in just eight brands or vineyards. Five of the best fine wines are from Bordeaux in France. The restricted supply makes them rare and expensive.

When to sell…

Beware that the risk involved is high. Investment in wines is for individuals who know and understand wines and just like other off-beat asset classes, liquidity of investment can be an issue. The best time to sell each wine will vary and selling is easier through a wine broker or wine societies.

Antiques

The rules for investing in antiques are similar to those for art. Before you take the plunge, a deep understanding of the subject is required.

Why invest in antiques…

• While other investments stay put in the bank, you can use antiques to adorn your home while you own them.

How to go about it…

Begin with scouting exhibitions, galleries, auctions and the internet. Gain as much information as possible before you invest. Buy from a reputed dealer who will be able to provide all authentic information about the item. Whenever possible, get a certificate to validate the authenticity of the item. These asset classes require huge investments and may remain with you for a few decades, so always go with an item that appeals to you.

Study the era from which the item belongs, find out its rarity and how many number of pieces were produced. Check its historic significance [if any]. Finally, take the opinion of an antique expert. Antiques can range from furniture to jewellery and silver coins to curios.

When to sell…

It is difficult to judge the return on antiques but the cost of selling antiques is high, almost 30 per cent or more. The longer you hold, the higher you will gain on selling. Antiques can be sold back to galleries or through auctions.

Vintage cars

Cars have always been viewed as a symbol of aristocracy. And there is nothing like vintage cars to give you that feeling of royalty. The moment you lay eyes on a well-maintained vintage car, you are transfixed by its beauty.

Why invest in vintage cars…

• They are a fortune on wheels. In the year 2011, the classic car segment performed better than equities and even gold. Some segment of classic car rose by 20 per cent in 2011.
• On an average, a return of 12 percent over a period of 30 years has been recorded by Historic Automobile Group International [HAGI] which measures returns of 50 classic cars.

How to go about it…

One way of investing in classic cars is to buy an old car, restore it and then resell it. The investment here is higher, though the returns are good. Of course, you’ll have to confirm that the car you’re thinking about is recognised as a classic. Investing in vintage cars of the makes of Ferrari and Porsche makes sense as they fetch value when you plan to sell them. Also do not forget that buying cars involves high maintenance costs, which will affect your profitability and depreciation.

When to sell…

The time to sell a collectors item like a vintage car is best decided by its owner. You’ll have to first prepare yourself to part with your item. Make sure you have the documents of the vehicle in order and approach dealers and car clubs to help you sell you car.

Choose what you like

There are many others items that catch the fancy of investors looking to merge investments and excitement—antique single malt whiskey, rare stamps, rare movie posters, comic books and cards of base ball players…the list goes on.

All the above investments come with a risk. Do an exhaustive research before investing as along with risk, the amount involved is huge. Also, remember

• Invest only 10 – 15 per cent of your portfolio in it.
• Treat your investments with care and preserve them to gain high returns.
• Always buy an item that you love and not only because it is recommended by a dealer because you may have to be stuck with it for a long time.

This article was first published in the August 2012 issue of Complete Wellbeing.

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Gold coins, bars or bullions

This is the most common form of gold investment. It involves physical ownership of the metal in the form of gold coins or bars that are available in different denominations starting from 1g and in two forms of purity—99.5 and 99.9. It’s advisable to buy these from banks or known dealers.

Pros

• Easily available
• Gives you the satisfaction of owning gold and holding it
• Easy to sell
• Can be privately held and stored locally.

Cons

• Fear of theft or loss in case you don’t have a safe deposit box
• Chances of getting adulterated goods
• No price transparency as physical gold is available at a price that does not reflect the on-going rate.

Exchange traded funds

An exchange traded fund known as the ETF is a mutual fund that allows you to buy units just like you buy shares on a stock exchange. Minimum 90 per cent of the asset allocation of these funds is in gold and remaining 10 per cent in money market instruments. You need a demat account to subscribe to an ETF as the units are stored in demat form.

Pros

• No fear of loss or theft
• No need of a safe deposit box. All you need is a demat account [you can use your existing demat account for the same] and a trading account
• Real time price—Gold ETF reflects the real time price of gold unlike when you buy gold in physical form
• No wealth tax applicable.

Cons

• Liquidity takes time since there is no physical ownership
• You do not receive gold on redemption of units unless you have units that are equal to the funds ‘creation size’, which is a certain number of units
• Delivery centre for physical gold is only in Mumbai
• Brokerage and demat costs
• Tracking error in case fund house invests in money market instrument or in gold mining stock.

When selecting an ETF, choose the fund with the least expense ratio.

E-Gold

Launched by the National Spot Exchange Limited [NSEL], e-gold enables offers flexibility of buying gold in any denomination. It is similar to buying physical gold but in a demat form. However, investing in e-gold requires a separate demat and trading account with an empanelled depository participant [look up the National Stock Exchange site for a list].

The clearing and settlement [pay-in and pay-out] are based on transaction plus two days basis. Unlike in the ETF, you can redeem units in physical form starting with 8g. Delivery of physical gold is in Mumbai, Ahmedabad and Delhi, with more centres in the pipeline.

Pros

• No hassle of holding physical gold
• Flexibility of redeeming units as physical gold or as financial instrument
• No price discrepancy—Since NSEL operates pan India, prices quoted for e-gold are same across the country
• Genuine—the physical gold is certified for purity
• Cost effective as it does not involve management cost or other recurring expenses associated with Gold ETF
• E-gold directly tracks physical domestic gold prices mitigating currency risk better as prices are converted into local currency
• More trading time—trading in e-gold is open till 11.30pm.

Cons

• There’s the hassle of opening and maintaining the extra demat and trading accounts
• E-gold is taxable in the same way as physical gold. So, wealth tax and long term gains tax are applicable after three years
• Taking physical delivery attracts one per cent Value Added Tax, 0.1 per cent octroi [if you stay in Mumbai] plus processing charges.

Gold fund of funds

Being a fund of funds, it allows investing in gold without a having demat account. The fund invests in Gold ETFs run by the same fund house, which invest in gold. These funds are passively managed funds suitable for long term investors as they offer the option of Systematic Investment Plan [SIP].

Pros

• The SIP allows you to mitigate market risk and volatility and build your portfolio over time
• Similar to mutual fund, it offers options like Systematic Transfer Plan [STP] and Systematic Withdrawal Plan [SWP]
• Relative easy liquidity
• No concerns of purity and safety.

Cons

• Since it is a fund that invests in another fund, it incurs dual recurring expenses
• If you redeem within one year, 2 per cent exit load is applicable.

These charges can be considerable if your investment is huge.

Gold futures

Futures allows one to trade specific quantity of gold [in a lot] at an amount and price decided now but with a settlement day in the future. Trading in futures requires opening a specific account with a maximum deposit of INR 1 lakh. Part of the money is margin money, required to trade. There’s an option of taking delivery of physical gold by the end of contract period [four months]. Just like in the stock market, you can sell or buy a future.

Pros

• You can start accumulating gold at a price much lower than what you would have to shell out in the market
• Opportunity to book large profits as buying is in big lots
• It gives you the chance to make money on the price volatility of the commodity.

Cons

• Because of the large lot size, there is a risk of incurring huge losses
• In case you opt for physical delivery at the end of the contract, you require a gold certification and accreditation by an exchange appointed assayer, which increases costs
• Every trade needs a counter party to set off a buy or sell order, which may be difficult to find in case of huge investments
• There is a hassle of opening a separate demat and trading account with the commodities exchange
• You need to always keep liquid cash on stand by in case you require more margin money due to price fluctuations.

This was first published in the May 2012 issue of Complete Wellbeing.

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Write down your income and expenses

List all your incomes and expenses. Write down the expenses as mandatory and voluntary. After listing all the heads, make two columns against each expense: one for the expected expense, the other for the actual money spent. This way, you can compare the amounts and keep a track of your hard-earned money and accordingly cut down wherever necessary. Also, make it a habit to write down every rupee you spend every single day.

Be ready for emergencies

In order to be ready for any emergencies, here are two steps, which everyone needs to follow:First, prepare an emergency fund. Keep aside funds equivalent to three months mandatory expenses in the form of cash and fixed deposit so you are prepared for any untoward incident. Second, have insurance in place. This means life insurance for the earning member of the family and health insurance for all other members of the family. Remember to pay the health insurance premium on time, especially for members over 50 years of age. This is because once their policy lapses, getting a new policy for them is difficult.

Manage your debts

Debt may help you in buying that dream house or the car you desire, but if you go overboard, it can land you in trouble. Whenever you plan to borrow, first calculate the ratio of total annual debt payments to the total annual take-home pay.

The ratio should not be more than 45 per cent of your total take-home pay. If it is more, not only will you be in financial trouble, but your credit history in the market also will take a beating.

Read financial statements carefully

Reading your bills, statements and all your financial mail as soon as you receive it, is a habit that will serve you well.

Often, credit card statements bill the same item twice or banks charge you erroneously. If you do not read your statements in time, you won’t be able to do anything about it and then it will take a lot of time and hassles to sort things out. The same goes with your bank statements, demat statements, and fund statements. Reading your financial documents helps you know what’s going on with your finances and brings discrepancies to your notice while you can still get them rectified.

Systematically file financial statements

This way you will have track of all your financial dealings and can refer to them in case of any trouble or find them when you need them. Also update your financial records regularly rather than letting it pile up for the year end.

Complete bank work on time

Don’t procrastinate your bank work. For example, if your cheque book is exhausted, make sure you have a new one before the last cheque is used. It generally takes 4 – 5 working days for the new cheque book to arrive. This way, if you have to make any immediate unexpected payment, then there is no need to panic. The same holds true for all other bank work. Also, keep your bank profile updated at all times so that your statements reach you in time.

Make timely payments

Never delay money-related transactions—be it credit card bills, any other bills or your mortgage payments. Delay means penalties and mind you, they are quite a bit.

Save in a disciplined manner

Everyone should have a piggy bank—not just children, but adults as well. However small the amount, save every day! With the money saved per month, you can start small savings like post office schemes where the minimum required amount is Rs 100. When you start saving larger amounts, start investing in different investment avenues.

Be penny-wise

Even if you can afford everything, there is no harm in being frugal. The extra 10 bucks saved on something add up and before you know, you are saving huge amounts. When planning to buy an expensive product do look out for deals. Due to increased competition, everyone offers deals. So why not save if you can?

Plan your retirement

The earlier you start, the faster you will reach your goal. The amount required to save for your dream corpus will be much less if you start saving at an early age.

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