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How does one understand personal finance?

Preetha Wali

So you think it is rocket science and full of geeky stuff filled with number
crunching? Allow us to break this long standing myth .

Personal finance is common sense at the end of the day! For all the numbers, we
have enough tools on the web that will crunch both simple and complex ones.
Rest you just need to figure out your own goals and where you see yourself in the
near and distant future.

Lets start at the very beginning :

1. How does one start one’s financial journey? For those who have invested
and those who haven’t, the very first step should be to learn the very
basics of personal finance. Its all there on the net! (but if you find that
confusing do reach out to us and we will be more than happy to help!)
Usually people make the mistake of investing first and then trying to put
some learnings together. This either leads to some very costly irreversible
mistakes or delaying their investment journey due to which they deny
themselves the benefit of the power of compounding (something we all
learn in middle school)

2. What next? Take a pen and paper and write down all that you own (gold,
real estate, FDs etc) and owe (housing loan, credit card dues, business
loan etc). Next look at your present age, income and other commitments
in the near, middle and long term (marriage, children’s education, ageing
parents, etc). Have a rough idea as to how much you will need for each
(keep in mind however, that as we rise up the income ladder we need to
account for our lifestyle expenses too – like say a bigger car, holidays
abroad etc).

3. Then what? Have a rough estimate (an exact estimate is even better) of
how much you spend on broad large expenses like rent, healthcare,
schooling, kids wedding and your retirement years. Make a note of the
various sources of income too (salary, rent, etc)

4. And? Once you have these broad expenses and sources of income in place
break them into phases. Say you are in your early 20s then marriage will
likely be a few years away and then kids a year or two (or more) after
that. Map this for all the significant phases of your life (single, married,
married with kids, dependent parents and retirement). Even if you are a
homemaker you need to draw this timeline

5. Where does this lead? Firstly, it gives you a realistic hold on where you
are and what all you must plan for. Secondly, it divides your life into
different phases of life and gives you goals to work towards - single (few
expenses), married (single or double income), married with kids
(increasing expenses) and retirement. This will help you work the
numbers for each of these phases. Say you are single and your expenses
are around 30K per month. You decide to get married and have kids. Now
think of all the possible expenses that will go up with more dependents
and add inflation to that (newspapers say costs are rising by 5% every
year but in reality its much much more. Like say healthcare costs are

going up by 15-20% annually, education by 10-15% and so on). Inflation
is a much ignored number while planning finances.

6. What else do I have to plan for? Another ignored area is in case of an
emergency. We all live in the bubble that we will be fine. What if there is a
job loss due to lack of work or due to health reasons? How will you
sustain yourself and your family? Keep aside 6-8 months (more if
possible) of regular monthly expenses in a contingency fund.

7. So what are the investment avenues available to me and how do I look at
each? Each type of investment offers different returns and must be
bought for a different purpose. Say real estate is bought to either live in or
rent out or to sell when prices appreciate. Gold is largely bought for
ornamental purposes. FDs are largely held as an emergency fund or for
keeping some amount for safely withdrawing when one needs cash
suddenly. Mutual funds are held for ensuring long term wealth it creates,
due to the power of compounding. PPF, ELSS etc are for tax saving
purposes. Identify what you are investing for and allocate your money to
that category of investment. Too much or too little in one category can be
dangerous and investing for the wrong purpose in each instrument can
lead to a shortfall when required (eg FDs, India’s favorite mode of
investing, are a bad instrument to park large sums of money as the
returns are very low and barely beat inflation)

8. What about insurance investment? Firstly, insurance is not an investment
(even though some give returns after a period)! It must be viewed
basically as an amount one sets aside in case of an eventuality. Say the
bread winner is either no more or incapacitated then insurance must
replace his or her income. Here we must say one crucial point that people
miss. EVERYONE needs health insurance – kids, elders, ourselves. Anyone
can fall ill irrespective of age, gender, status, etc. With rising healthcare
issues and costs one must ensure adequate health insurance for the entire

9. What else? All of us take on a home loan at some point in time. With the
Indian dream of owning a home being still top priority (not to forget the
lure of the lovely ads which proclaim the urgent need to own that
beautiful house with a pool, gym and lots of greenery) many Indians
invest in a house either at the wrong time (when they are too young), for
the wrong reasons (parental pressure) or when they cannot afford it
(when interest rates are high, when we are unsure of our job security,
when we have not accounted for a growing family, etc). Add to this we
might need a loan for other reasons and may not be in a position to take
one as we are servicing a home loan for 15-20 years.

10. Any last points? Many people don’t know the rights of a nominee before
they choose one. Each investment has a different definition of a nominee.
For some investments the nominee is the direct beneficiary and some
others he or she is just a custodian to pass on the investment to the legal
heirs. Ensure you know the nominees’ rights, that the nominee has been
informed that he or she is a nominee and choose the right nominee. Most
Indians don’t have a will. Writing a will today is so easy – a pen, paper and
two witnesses is all one needs. Registering it makes it more solid to
dispute, if contested. Lastly, all family members must know about the

various investments, insurance and other financial details to ensure a
smooth transition.

While this looks like a humungous task it isn’t! All this takes just a few hours
initially and then, when the systems are in place, one has to just keep adding or
deleting the information! Today so many apps and websites are available even to
tell us where we need to invest more or less. All we need to do is key in the details.