Monday, August 30, 2021

The gist of Personal Finance

The world of personal finance is made needlessly complex by the plethora of undifferentiated products that are available, the hordes of snake oil salesmen calling themselves money managers peddling toxic products to gullible customers, and clueless investors who are gullible prey for the sharks.

Are there a few simple rules that can help guide investors in such a situation? Especially the minnows, the newbies who are not so financially literate?

Based on my years of learning and teaching  the subject, if I were to attempt such a list, this is what it would be.

1. Spend less than what you earn. For doing this you must: 

Keep aside your savings first every month, before you start spending

Live in a locality that is equivalent to your earning or less - peer pressure can make you do dumb things

Invest what you have kept aside and stay invested for the long term.

2. Have only one goal, multiple goals are confusing. That goal is: being in a position to retire. 

How much do you need for that?

Let us say your current monthly expenses are x,

You need 400 times your current monthly expenses (400x)  to maintain your current lifestyle and to  take care of inflation.

3. Invest in Gold, Real Estate, Stocks or Fixed Income 

Don't touch commodities, derivatives, currencies, futures and options, and don't trade on margins. On no account, touch cryptocurrencies.

4. Buy an affordable house , don't overreach on this one. Your house is not considered part of your wealth and thus is not part of the 400x.

5. Borrow only to buy a house, or to save your life.

6. Do not ever, ever, pay interest on your credit cards

7. Take term insurance for around 100x to 150x , expiring at your age of 65. 

Do not ever, ever, take any other form of insurance.

8. For tax saving invest only in PF, PPF, ELSS, or NPS, to the extent required. Ignore all other options

9. Invest your surplus every month as follows: 

10 to 15 percent in gold. This can be in Gold ETF's. 

The balance in equity mutual funds and debt mutual funds,  in any ratio between 30:70 and 70:30 as per your comfort. Always choose the growth option and not  the dividend option. 

Do not invest in bank FD's, they are tax inefficient.

Do not invest in direct company deposits, they are risky, tax inefficient, and cumbersome to keep track of.

11. When a good real estate investment comes along, liquidate your gold, equity and debt holdings, and take a small loan if needed.

12. Good real estate means land, neither in the center of the city, nor too far away, in a locality that is about to see development. Apartments are neither good, nor real estate. This advice does not apply to those from Mumbai since there is no land in Mumbai.

13.Four years before you plan to retire take a Family Floater health insurance policy for a coverage of about 5 lakhs per annum.

14. Marry into a rich family. It is not your fault if your parents are poor, but you can try to ensure that your prospective in-laws are not.

15. When you reach a wealth of 400x, you are in a position to retire.

Ensure your x does not go up too significantly in the meanwhile.

That kind of sums it up.

Now go and do something about Point No. 14 above

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