MUSING 43 THE SHORTEST BOOK ON FINANCE - EVER: ALL OF 87 WORDS PART 1
MUSING 43
THE SHORTEST BOOK ON FINANCE - EVER
ALL OF 87 WORDS
PART 1
Good morning and a happy Republic Day to all. We
all have read a number of finance or investment related books. While writing my
books, I must have read more than 50 of them, a shortlist of the recommended
ones I will share in this post. Every book requires an investment of your time
and money and may or may not give you the “bang for the buck”. In this post, I
will introduce you to the shortest finance book ever written- all of 87 words.
The book has been written by the famous cartoonist, Scott Adams, the creator of
the iconic Dilbert comic strip.
Some
trivia before I lay out the book before you. Adams titled his book as, “Everything
You Need to Know About Financial Planning” but when he went for publishing his
book to the publishers, they declined, not because the contents of the book
were not juicy enough but because it was too short to be published as a book.
Be that as it may, Adams still calls his 87 words treatise a “book” and here is
it for your reading pleasure.
“Make a will. Pay off your credit cards. Get term life insurance if you
have a family to support. Fund your 401 (K) to the maximum. Fund your IRA to
the maximum.
Buy a house if you want to live in a house and you can afford it. Put
six month’s expenses in a money market fund. Take whatever money is leftover
and invest 70% in a stock index fund and 30% in a bond fund through any
discount broker and never touch it till retirement”.
That’s
it. 87 words of sane personal finance advice which is jargon-free and contains
the essentials that any investor need to know and do. I will deconstruct these
87 words to you shortly as few of the terms may not be familiar to you being
part of the USA lexicon. But before that, my second book, “The Millionaire
Mechanic” is showing some very impressive initial sales figures and is globally
ranked 49 as of yesterday. I am sure it is because of your support to the
book in the form of its purchase by you and sharing the link with your family,
friends and social circles. Please keep blessing my endeavour.
Returning
to our topic- Adams is well-qualified to talk about finance. He has a
bachelor’s degree in economics. He is an MBA and has worked in the banks for
more than eight years. So, let’s demystify this book, in the order of financial
priorities of a common investor.
Firstly, take Term Insurance if you have dependents.
For effective and efficient financial management, a regular income stream is a
prerequisite. If the sole source of income is the breadwinner of the family,
his/her wellbeing becomes absolutely vital for the financial security and
indeed survivability of the family. The first and the most important form of
insurance is Life insurance which protects against loss of the life of the breadwinner.
A good thumb rule figure is ten times the annual
income. “The ten-time rule of thumb is not an arbitrary number. Remember, life
insurance is designed to replace your income. If your surviving spouse invests
that $400,000 (assuming an annual salary of $40,000) in good mutual funds at an
average 10–12 percent return, he or she could peel off $40,000 a year from that
investment to replace your income without ever cutting into the principal.[1]”
We
also need to factor in other
liabilities of the breadwinner. Let’s say he has taken a home loan
of Rs 20 lakh and a car loan of Rs 8 lakh. In case of a mishap, paying off
these two liabilities itself will polish off most of the coverage amount. This
amount of Rs 28 lakh (Rs 20 lakh+ 8 lakh) must, therefore, be added in the
required coverage amount. If the breadwinner has children, their expenses, as
they grow up and settle down in life also need to be catered for (education,
marriage etc.).
The
next issue to be tackled is which kind of life insurance one should opt for?
There are a whole lot of options out there- Endowment plans, whole life policy
plans, unit-linked insurance plans, and money-back plans. All are avoidable. The only plan one should
go for is a pure term insurance plan. A term insurance plan is for a predesignated term, say 40 years.
So, if you buy a 1 crore term insurance plan for 40 years and pass away in this
period, the insurance company will pay your next of kin, Rs 1 crore. If you
survive 40 years, you get nothing. Always go for a term insurance plan even if
you are taking insurance to cover your house mortgage, car loan, personal loan
and so on. It works out the cheapest and most effective.
Secondly,
Make a will. We all keep postponing this important aspect for our older
age thinking that no mishap can occur to us in our younger days. This is a
folly as life is uncertain and accidents do happen. A will is a legal
document that names individual/ individuals who would receive the property and
possessions of a person after his/ her death. It can always be modified by the
person executing his/ her will.
A
will can be made on a plain paper and remains functional even if it is
unregistered. However, it is always better to register a will by going to the
sub- registrar’s office along with the witnesses- at least two. Remember that a
beneficiary under the will can’t be a witness. The will can be kept in safe
custody in a sealed cover with any registrar.
A
related issue is to acquaint your spouse and children with all your investments-
insurances, mutual funds, stocks, FD etc. Most of our transactions are online
and require passwords to log in. Please make a list of all the passwords, login ID etc and create a folder. It should contain a list of all your bank
accounts, investments, loans and any other related issues. I recommend updating
this list every quarter. Mail this document to your spouse and take a printout and
hand over to her/ him. In the case of a mishap, your spouse will not be left
floundering.
I
will stop here and continue to demystify the shortest personal finance book
ever written next week. In the interim, please complete these first two steps
for financial planning. Also, please read my books and provide feedback. I will
also request you to put in a review on Amazon.
Enjoy
your weekend.
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