Let's Talk Money: You've Worked Hard for It, Now Make It Work for You

by Monika Halan

The goal is to separate out money according to its function so that the brain is better able to map it. I do this using three boxes for the three functions of money. These are income, spending and saving. If we can separate the money into these three boxes each month, we’ll be in better control.

Use your Income Account as the sump for all kinds of money inflow that we get. You may quickly say: ‘Oh, but I get only a salary.’ But there is always some other cash that flows into your life. Cash gifted by parents or relatives, a bonus, a refund from work, a matured insurance plan, rent from a property you own, dividend on stocks or mutual funds, return of money borrowed. Other than interest earned in the other two accounts, rest of the inflow into your life falls into one account – your Income Account.

your Invest-it Account is empty, you know you’re spending too much. You should be able to move a minimum of 10 per cent of your income in hand each month to your Invest-it Account – irrespective of EMI, rent and whatever else your commitments are. Sneak a peek at the retirement chapter if you are impatient to find out thumb rules on how much you need to save at each age and stage.

So buy the policy the moment you realize that other people in the family will suffer financially if you die suddenly. Buy as early as possible because you get locked in for the duration of the policy from your first premium. And this is something you need to know: The younger you are the cheaper you lock in for.

Touching thirty is usually a good time to buy the cover. You are old enough to have a good income flow and dependants, but not that old for covers to be too expensive. The cost of life cover rises exponentially as you age. A cover of Rs 1 crore for a thirty-year-old will cost between Rs 8,000–10,000 a year. For a forty-five-year-old, this cost will more than double.

But that’s the real-estate story. It is a horrible, clunky, chunky investment that has lots of costs, which people forget to add to the profit maths. It is illiquid – you can’t sell in a hurry. You can’t sell one room to raise some funds – you need to sell the whole darn property. It needs periodic investments for maintenance. For society flats, there is the added cost of high charges. But we remain wedded to real estate.

You’ve heard this phrase so often – it is not market timing but time in the market that matters. Time in the market matters because it smoothens out the volatility of the market. Which is why you should not put money into the equity market if you need it next year.

both gold and real estate have high transaction costs that equity does not have. The returns in hand in both cases will be lower than with equity.

So the first thing to remember is that we must buy debt funds to match the investment horizon of the mutual fund scheme with ours. Investment horizon, or the time for which we want to invest our money, can also be called ‘tenor’. We are going to match our holding period with that of the scheme we buy.

Repeat after me. I need a short-term product for my short-term needs. I need a medium-term product for my medium-term needs. I need a long-term product for my long-term needs. I must match my investment horizon to that of the fund I buy. My outcome will depend on how well I understand the product I buy. I will not sit in a bullock cart if I need to cover a very long distance. I will not sit in a plane if I need to go across the city. Each of the debt fund categories serves a purpose and can replace the existing products we use.

the role of gold in your money box is to provide diversification and a hedge against inflation.

An SIP matches the earning rhythm of most people and is very useful in building the habit of regular investment. Two, an SIP allows you to average out your price as you invest over the year, either monthly, or fortnightly, or even quarterly.

Commissions in investment products encourage sellers to maximize their income rather than your financial well-being. Therefore you need to choose products with zero or very tiny front costs. Ongoing costs over a long period also will cost you a lot.

You know that when governments borrow too much money, they use the tool of inflation to reduce the real value of their debt.

You need three bank accounts when you are starting out. As you get more used to the cash flow system, you can use just two. Your salary account is your income account where all inflows drop. The Spend-it account can be a joint account with your partner or parent or child – whoever shares the routine household expenses with you. It is a good idea for both partners to contribute to running of the house. It is usual for a woman to use her salary to run the house and the man his to build the assets. Unfortunately, in a divorce situation, the law awards assets to the person that paid for them. So share the routine expenses and build assets in both names. The third account is the Invest-it account into which you move either the leftover money from expenses as savings or the amount you target each month towards investments.

Finance is not just about numbers; it should work for all the people in the house and must look after individual preferences, fears and goals. If a product leaves one person feeling insecure, the product is not worth it.

For a goal that is three years away you can use a mix of ultra-short-term debt funds and conservative hybrid mutual funds, with the mix tilted towards the debt funds. For a goal closer to seven years, go fully into aggressive hybrid mutual funds and diversified equity funds. I would do a mix of aggressive hybrid funds and diversified equity funds for a goal that is seven years away.

No more than 5–10 per cent of your total portfolio is in gold, and that too paper gold, not jewellery. The government’s sovereign bond issue is very good and if you don’t need the money for the next seven years, you can begin to build a gold laddering system. It is useful for inflation protection at short notice and for use in marriages of the kids.

You know that I’m not a big fan of real estate. I find it really messy. Keep it down to the one house you live in. If you can manage the stress that comes with real estate, add to the cell, but do remember to look at your overall asset allocation. Real estate as investment should not be the biggest share of the net worth.

But having enough money to retire gives you many freedoms. Freedom to choose the work you want to do, when you want to do it, and how much you want to do.

At age forty, you should have three times your annual income as your retirement corpus already.