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

by Monika Halan

What about the taxes?

We’ve been brought up to think that a life insurance premium is the only way to do tax-saving at the end of the year. I used to get a lot of panicked calls around 15 March every year asking for what to do about making the tax-saving investment.

Rule Two: When buying a term cover, check the claims experience of the insurance firm.

When do I not need a life cover? If you have no dependants on your income, you don’t need any life insurance cover. Let me repeat that. If there will be nobody to miss your income – do not buy a life insurance cover. There is one more situation in which you don’t need a cover – when you are financially free. When are you financially free? When you don’t need to go to work to pay your bills, EMI, fees and other living costs. Your investments are large enough to look after all your expenses – current and future.

The job of the life insurance cover is to serve you till you are debt-free and financially independent.

A life cover is a crucial piece of your money box that allows your family to maintain their lifestyles and future goals. You have been misled about this product for decades. You are doing OK if … you have a pure term insurance plan; you bought this online to remove agent commission cost; you don’t have a single ULIP or ‘traditional’ plan in your money box; you have a sum assured that is eight to ten times your annual take-home income or fifteen to twenty times your annual expenditure.

FINALLY, WE’RE INVESTING

if you look hard enough, you will find the money for things that are important to you. You need to decide what is important. So if you began reading this chapter thinking – where is the money to invest – all I can tell you is that look harder, you’ll find it. We all go through tough times.

Money is never in plenty in the early years. But getting into debt to fund current spending is not the way out. Either find a way to raise income or spend less. There is no third option.

Not having money to invest is one of the four big reasons we put off the investing decision. At number two is the desire to keep money in a liquid form for a future emergency. Third is the fear of making a mistake and fourth is the lack of knowledge.

We all need to remember this: We are not stock market traders or speculators. There is a role for day traders and speculators in a stock market – but you and I are not traders. We are investors. Understand that difference.

We don’t need a lot of money first to start investing. We need a lot of little money streams to keep gathering to make a large corpus.

the financial seat belt does another thing – it reduces the need to keep most of your money ready at hand. Keeping money ready to use for an emergency is one of the key reasons that people don’t invest for the long term.

We’ve grown up with FDs, land, insurance plans and gold as the holy grail of investment. Moving away from these into other financial products, such as mutual funds, means getting out of our comfort zone – and that is always scary. But remember this – it is better to have something in investments, even if it earns less, than not to have anything at all. The purpose of this book is to migrate you from low-return, clunky products into financial products that look after the needs of a very different Indian citizen than of the 1970s angry young man.

What you need to remember is that understanding investing is a one-time fixed cost in terms of your time. Once you get it, nobody can take it away from you. Once you get the logic of a financial plan and understand the basics, you can’t get cheated again. It won’t take long. You are a doctor, a lawyer, an engineer, a teacher, an entrepreneur, a homemaker – you are all smart people. You can do this. Remember that it is in the interest of the financial sector to make you believe that you are a money dummy.

Remember that each financial product you buy must solve a problem you have.

Pull out your mental money box and look at it again. Remember that the first cell has your cash flows, the second is the emergency fund, the third your medical cover, and the fourth has the life cover. We now create three more cells in the box for our investments. We name each cell: The first is called Almost There; the second, In Some Time; and the third, Far Away.

Now, then, when Any planned expense that will happen within two to three years is a short-term need that you put down under Almost There.

In Some Time are planned expenses that sit between three to seven years away. Already, it begins to get a bit difficult to plan ahead. But let’s try. Depending on your age and stage, In Some Time could fill with down payment on your house, kids’ higher-education fees, kids’ marriage and your retirement. Write down what you think your unique In Some Time needs will be.

Far Away are expenses that are really hard to imagine today. At age thirty to thirty-five it seems impossible that you will ever get old.

Next, we put down what each of these will cost you in the future. Put down a value next to each of these – what it costs today. For example, if you know that you will need money to pay for a down payment on a house in two years, you know already what your budget is and approximately how much you will need in two years.

Not everything suits everybody – we need to match our financial needs to financial products.

We match products to your holding period. Or look at it this way: Each financial product has a certain time period over which it works best. A product that is very safe in the long run becomes very risky in the short term. And a product that works in the short term becomes a drag on returns if you hold it too long. When you now think of a financial product, learn to ask the question: Over what holding time period does this work the best?

It is never the ‘right’ time to begin investing. You feel you are too poor or too young or too dumb to begin. The right time is now. No matter what your age, stage or circumstance is, you need to begin investing right away. But investing according to a plan. You are doing OK if … you are committed to drawing up an investment plan; you have written down your near-, medium- and long-term goals; you have put a monetary value to these goals; you understand what amount you need to invest today.

LET’S DE-JARGON INVESTING

There are three asset classes that we need to understand. Debt, equity and real assets. Debt is just an umbrella term for all financial products that are based on borrowing. Equity is ownership of a business and the risk that it brings, either directly (through stocks) or indirectly (through mutual funds). Real assets are those that can be physically seen. Debt and equity are called ‘financial assets’, while real estate and gold are called ‘real assets’.

Debt

loans. But when used by the sharp Suits, debt means the cell with products that give you an assured return – like a bank fixed deposit or a tax-free bond or a public provident fund. The core of the product is a loan. When you make a deposit with the bank, it treats it as a loan from you. And needs to give a periodic return, and then the principal back to you after an agreed upon time.

Ever wondered why government bonds pay the lowest interest? Because they are the safest. That is why a real-estate company will have to offer interest rates on its corporate deposits much higher than a bank FD to get your money. They are offering a higher interest as a sweetener for the higher risk you take. You must remember this each time you are offered a company deposit or a ‘scheme’ that offers you very high interest rates. The higher the return it promises, the higher is the risk – even in a product you think is ‘safe’ like a company deposit.

Think of your bank FD rate as your benchmark or measuring rod.

no comparison of returns in finance. If somebody offers you a rate of interest that is much higher than a bank FD, understand that the risk of non-payment of both your investment and the interest on this deal is much higher.

We will include your provident fund, public provident fund, fixed deposits, corporate deposits, all the small savings products, bonds of all kinds under the heading of ‘debt’. Some of these products come with tax benefits and some do not.

The role of debt products in your money box is to provide money at short notice and to provide stability to your long-term investments.

equity which is much more volatile – prices go up and down almost on a daily basis. They also make up the core of your long-term investments.

Why not put all your money into debt products? After all we want to be certain about what we get back in the future? We don’t put all our long-term money into debt because we want the growth that equity can give to our money. Debt products are good for stability but not for growth.

Gold

is there a need to hold gold? What is the role of gold, why should it occupy a place in our money box at all? Ideally gold is good as a hedge against inflation. This means that the price of gold rises over the years, so that your money does not lose purchasing power. Gold does not give an interest like your bank deposit. It does not throw off dividend like a stock. Nor does it give rent, like your property. The only way you can profit from gold is when its value goes up – when you actually make a profit. So, how good is gold for getting capital gains or profits?

The answer is it depends when you bought it and how long you held it. If you bought when gold prices were down, you made a large profit. If you bought gold when prices were high, you made a loss. If you held gold long enough, your returns kept your purchasing power intact – you got a positive real return.

Remember these are bullion prices. If you bought jewellery thinking you are making an investment, the numbers in the table above are all much lower. You lose 30 per cent straightaway...

When you go to sell your gold jewellery, you lose another 10 to 30 per cent depending on the purity of gold and making charges. Few people actually sell gold jewellery to bring home the profit; it is usually gifted one generation to the next. So buying gold jewellery as investment just does not make sense. There are other ways to hold gold.