#97 Let's talk about money
The day you realize that investment and insurance products are separate things, is the day you move solidly towards building your financial security
Saturday, January 14, 2022
I missed out on last week’s edition of The Passion Pad because I had a lot of assignments to catch up. To be honest, I left a major chunk of my homework on ChatGPT, thinking my AI friend would solve all the questions in a few minutes. However, destiny had different plans for me. Either the professor gave out a really tricky assignment or my AI friend was conspiring against me to make me do my own homework. This is how confused ChatGPT was when I asked the first question from the assignment sheet -
Anyways, let’s talk about money today.
A common question that we hear from people when we talk about investments is -
'Where is the Money To Invest?'
'We have nothing left to save'
'I have no idea where my Money goes'.
We are often advised to write down our daily expenses. Doing this results in two things, either we get bored and stop recording it in a week or we are more focused on the expense sheet rather than enjoying the coffee that we ordered. Most financial plannings fail because we don't have an efficient cash flow system. Cash Flow System is an idea to separate the money according to its functions so that the brain is able to map it efficiently. The 3 components of money are : Income, Expenses & Savings.
One of the simplest and easiest way to execute this cash flow system is to have three accounts and label them as Income, Expenses and Savings respectively.
Income: This account is credited with all your inflows - salary, cash incentives, bonuses, money from relatives etc. As soon as the money is credited be prepared to transfer it to the other accounts. The goal is to maintain this as a zero balance account.
Expenses: This account should have all the money that you need for the current month. From EMI's to Credit Card Bills, grocery to electricity bill, car fuel to gas bills. The important goal is to ensure that more money is not needed from the other two accounts.
Savings: Whatever left (Income - Expenses) is transferred to the Savings account. Minimum 5-10% of the Income should go into savings. Maintaining this cash flow system enables you to keep a check on your expenses.
Life is unpredictable and there can be events that are completely unplanned. A fatal accident, expelled from the job etc. For such unplanned events you need an Emergency Fund. The thumb rule is to have 6× your spending amount as emergency fund. Where to store this Fund? At the time of crises we will need this amount immediately. It should be easier to cash out. The better option is to go for a Fixed Deposit rather than depositing it in the Bank for better interest rates.
Choosing a medical cover for yourself and your family is really a complex task. Getting a good medic cover is probably more important than buying Life insurance, you're more likely to go to a hospital for broken leg than die.
How much cover do you need? You need a basic cover of 3-15 lakhs per person, rest depending on the place you live and the lifestyle you follow. What policy do you need? There are 25 companies and each company has 8-10 policies. Comparing them and choosing one is difficult. Insurance companies have the ability to set up the game so that you loose. You need to find out if your policy gives at least these 8 benefits -
No clause of co-pay: This clause states that at the time of claim, company is entitled to pay only a few % of the amount.
Pre-existing disease clause: Company will not cover disease that you already have when you take the policy.
Disease waiting period: Companies pay the claim after a cool off period of 30 to 90 days under this clause. Make sure there is none in your policy.
Sub- Limit: It is a limitation on what the company will pay out for specific things (Eg. Only 1% of the total cover on room rent). Make sure there is no sub limit.
Check for exclusion: Diseases that the policy will not cover. Pregnancy, Cosmetic surgery and dental.
Ask how much of the costs before and after hospitalization the policy will cover. For example medicines, diagnostic tests, fees of the doctor etc.
Look at the no claim bonus feature: when you don't make a claim in a year, you get rewarded by the company.
At the same time it is important to check the claim records of the company you are buying policy from. Look at the claim data and look for a policy that has less than thirty complaints on every 10,000 claims made.
What if you die?
Close your eyes and think about the people who are dependent on you. The financial burden adds more grief to a sudden death of the family member. You need a Life cover to protect your family's financial health if you die an untimely death. For a Life cover you pay an annual premium till your retirement and if you outlive your policy you get nothing. It's a 'waste'. But is it really a waste? It is this belief of waste that we need to change. This is a price you lay for the life cover. Life term policies should not be bought for returns. The day you realize that investment and insurance products are separate things, is the day you move solidly towards building your financial security.
After you have established your cash flow system, you have an Emergency fund, medical insurance and a Life cover, you are all set for an Investment. There is nothing called 'Enough Money'. If you find yourself short of money every month, either spend less or increase your income. There is no third option. If you look hard enough, you will find the money to invest.
Investing and why we resist investing for long terms?
1. Not having enough money
2. Desire to keep money in liquid for near future
3. Making a mistake
4. Lack of knowledge
Waiting for a large corpus for investment is like waiting to get fit before dieting. You can even start by investing 1000 INR/month. We don't need a lot of money to start investing. We already have the emergency fund in liquid for the emergencies in near future. People make mistakes in investment only when they choose products that are not suited for them. You don't follow the same diet plan as your Best Friend does. Similarly it is important to invest according to your needs and what works best for you. Long term products won't give you results in shorter term and vice versa. Learning about investment is a one time cost that will give you lifelong returns.
There are 3 assets where people can invest: Debt, Equity & Real asset
We are familiar with the word debt as borrowing of money. But in terms of investment there is more to it. Debt means the products that give you an assured return. For eg PPF, FD, bonds. These are the safest investment product and has the minimum return. Debt products are good for stability but not for growth. Real asset has two options - Gold and Real Estate. People in India are obsessed over buying gold as an investment. If you look at the returns gold is the worst performing asset. Buying gold in the form of jewelry is not an investment as you loose 30% straight away to making charges. Not more than 5-10% of your portfolio should go into gold. After gold, the next obsession is Real Estate. The problem with real estate is that we often ignore the additional costs of maintenance that comes with it. It is a horrible, clunky investment that has lots of costs, which people forget to add to profit maths.
Next comes the equity. It is the ownership of a business and the risks that it brings along, either through stocks or through mutual funds.
I know YOU, the one reading this, is a wonderful cook. Suppose you plan to expand ur cooking business by opening new chains across the city. But for expansion you need funds. So either you take a loan or I (your generous friend) give you some money to own some part of your business. The profit that the business makes is divided according to the ownership. This is where Sensex comes in.
It is important to know that buying stocks is not gambling. Equity is a slow cook noodle. There are rules and regulations that each business has to follow while listing themselves on the stock exchange to attract investors.
YES.
You are an investor and not a trader.
People consider stock market as gambling because we are afraid to invest for long term. In a growing economy, stock prices go up over the longer run because those are legitimate firms who are investing in the future. In a longer term, you get around 14-15% returns and a very diminished volatility (experimentally proven).
Golden Rule: When investing in stock market, show the same amount of patience when in real estate. The investment will slow cook over the years. If you are confused with which stocks to buy the best option is to go with Mutual Funds.
A mutual fund is a way to pool the money of a large no. of small investors who do not hav the time to research and hand it over to the experts to manage it. This cuts the cost you need to pay to a financial advisor and your money is invested in a way that is suitable to your needs.
If this post made you curious about investing and you want to learn more on MF, insurance, investments, I would suggest you to read Let’s Talk Money by Monika Halan. It is a fantastic handbook to live a life on your own terms.
See you next Saturday. Have a fantastic weekend :)
Cheers!