The Shortest Finance Book Ever- Concluding part

THE SHORTEST FINANCE BOOK- EVER

ALL OF 87 WORDS

CONCLUDING PART

“Too many people spend the money they earn, to buy things they don’t need, to impress people they don’t like”- Dave Ramsey

        First, my apologies for the long break in bringing out this second part. The delay was due to some inescapable reasons. Hereafter, the posts will be more frequent.

I am happy to inform my readers that the first part of this post was very well received and a few of my friends and my brother gave some fantastic suggestions too. To begin with, one of my dear friend, Atul, forwarded this beautiful definition of success as given by Ralph Waldo Emerson:

“To laugh often and much; to win the respect of intelligent people and the affection of children; to earn the appreciation of honest critics and endure the betrayal of false friends; to appreciate beauty; to find the beauty in others; to leave the world a bit better whether by a healthy child, a garden patch, or a redeemed social condition; to know that one life has breathed easier because you lived here. This is to have succeeded.”

Then my elder brother Ashok brought out a very valid observation keeping the frequent hacking of our social media and email accounts in mind. If you recollect, I had stressed the need of sharing all your financial details including the passwords with your spouse and children through email. The suggestion is to either share a printout or have it saved and updated regularly on your personal computer or have the document protected by a password.

The last observation was raised by at least two friends who are in a government job. They felt that since their organization was insuring them for an amount of Rs 80 lakh, additional insurance was not required. Let us do some back of the envelope calculations for the approximate corpus required should something untoward happen to the breadwinner of the family. We will assume that the couple in question has two children, both studying and liability of Rs 40 lakh (home loan, car loan, credit card dues, personal loans etc.) We will also assume that the spouse is a homemaker.

Before one gets about planning for a child’s education, it will be worth our while to look at the current costs of a UG degree in India: MBA up to  Rs 25 lakhs, MBBS Rs 70 lakhs and B. Tech. Rs 20 lakhs, just to name a few mainstream and popular courses. Since parents would not know the interest of the child for quite some time, let’s work on an average cost of the three courses which comes to Rs 38 lakhs. You also need to factor education inflation @ 10 percent, that means the education cost doubles every seven years. This mental calculation is by using the wonderful rule of 72, about which we shall discuss in a later post. We are not even factoring if the children have an aspiration to study abroad but just to give a glimpse. Graduation in Canada today costs 300,000 Canadian Dollars over 4 years- nearly Rs 1.6 crore. Add rupee-dollar depreciation, which is a reality and the cost increases exponentially. Just as an aside, the rupee has fallen by around 2000% as compared to the US dollar since independence.

Even doing this basic math, of Rs 76 lakh for the education of both the children and Rs 40 lakh to settle the liabilities, one is looking at the requirement of a corpus of Rs 1.16 crore. We have not even discussed the expenditure which will be incurred in two marriages. And mind you, the family will have household expenses which the pension (if at all) will definitely not be able to fulfil and hence a decent corpus for that will also be required. The verdict, one has to look very closely at one’s liabilities and err on the positive side while taking life insurance.

So now getting back to this post, we are discussing the shortest finance book ever written, titled “Everything You Need to Know About Financial Planning”. The book is 87 words long and has been written by Scott Adams, creator of the iconic “Dilbert” comic strip. We had deconstructed the first two issues about Life Insurance and making a Will. Let’s get on with other issues. The book is here to refresh your memory.

“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 left over and invest 70% in a stock index fund and 30% in a bond fund through any discount broker and never touch it till retirement”.

The next issue is putting six month’s of expenses in a money market fund or liquid fund. I call this a Breathing Fund because it allows you to sleep peacefully at night despite what life may throw at you financially. The financial and job destruction in the wake of ongoing CoVid 19 pandemic has brought this stark reality out in the open. In fact, along with Life Insurance, it is the second most important financial planning one has to do. This fund has to be built up fastest even if you have no other investment going on in this interim period. This six month’s expenses should include not only your household running expenses but also any EMI and SIP etc. which may be going on. It is very important to define what would constitute a financial emergency for which this Breathing Fund will be used? Your Parent’s Marriage Anniversary will not be one because that is on a fixed date and for which you should plan through regular saving nor an annual vacation in Andamans, which also should be a planned event funded out of your monthly income.

The next issue is of Credit Cards. All the authors of personal finance books that I read, and I did read nearly fifty of them, are dead against using a Credit card. One of them, Dave Ramsey, in his book “The Total Money Makeover” goes to the extent of urging the readers to just cut their Credit cards into two- yes you read that right, just cut the Credit cards off. And this advice is not without some good reasons, few of which I would elaborate and leave you to make your own judgment.

Like Investing is using today’s earnings for tomorrow’s spending, Credit or borrowing is using tomorrow’s earnings for today’s spending- fundamentally a bad concept. The biggest problem with Credit card usage is that it engenders a habit of overspending beyond one’s Needs/Wants budget. One gets tempted with the interest-free payment period of 50 odd days and may get into a vicious cycle of mounting Credit card debt.

The second problem is seemingly benign rates of Interests- only 1.5% (per month is in fine print) which can burgeon into a humongous debt within no time. Then, even one missed payment of Credit card balance or large outstanding amount adversely impacts your “Credit Score” resulting in difficulty in getting loans or getting one at competitive rates. I will not go to the extreme of proscribing the use of Credit card totally- may be having one Credit card which is used responsibly and paying off the balance in full in every billing cycle is not a bad idea.

The next advice is to fund the 401 (K) and IRA to the maximum. These instruments are specific to the US. The 401 (K) is a qualified retirement plan that allows the employees of a company to save and invest for their retirement on a tax-deferred basis. These contributions are deducted from the salary on a pre-tax basis. The IRA or Individual Retirement Account is also a retirement plan but not by the employer of the individual. These plans are offered by companies which can be invested into by the individual investor. For our context, we can replace these instruments as mandatory PF, NPS and annual investments in ELSS. The bottom line is that after Life Insurance and Breathing Fund, your retirement planning should be the next most important financial decision. The icing on the cake is the tax break you get in the process of retirement planning.

The next financial decision is of a House. Adams suggests buying a house if you have to stay in it and if you can afford it. I am in full agreement with this advice too. Buying a house is likely to be the most enduring and financially taxing commitment one will undertake. In the initial stages of one’s career, frequent movements, either in search of a better job or due to postings/transfers, are inevitable resulting in shifting bases from city to city. If this is the case, it does not make sense to take on the burden of a house in a city from where one will eventually relocate.

In any case, looking after the house for 3-4 decades including periodic maintenance and tenant management will consume a lot of your time and effort, other than tying down precious financial resources while paying the EMI. It is best to buy the house slightly later in life when you are reasonably sure of finally settling down at a particular place. In General, buying property (rental or commercial) for the purpose of investment is a lousy proposition.

The last financial advice by Adams is to invest the balance of your investible surplus in Index Funds- 70% in equity and 30% in bond (debt) funds. The Mutual Funds that seek to track a given Index (e.g. Sensex or Nifty) by owning all or nearly all of the Stocks in that Index with no attempt to pick Stocks with superior performance (thus the fund buys or sells the stocks contained within the fund only when they move out of the Index, which is rare), are called Index Funds. Since these funds are not trying to chase the market or generate Alpha but only give returns as close to the chosen market Index as possible they are not under pressure to buy and sell frequently and can follow a Buy and Hold strategy, a winner in all market conditions. Of late, new offerings in Index mutual funds have been launched and which are worth having a look. These include- Nifty 50 and Next 50 funds, Nifty Midcap and Smallcap Index funds, Nifty 500 Index funds (funds which give you exposure to virtually the entire Indian Stock Market) at very low costs.

In India, Index funds are yet to catch public fancy but in the Large Cap universe, it is empirically proven that indexing works better than active investing. We don’t yet have bond index funds though recently Bharat Bond ETF has been launched which is a good option. I would recommend investing around 25% of your equity money through Index Funds. Balance 75% could still be invested through active Multi-Cap mutual funds. This issue has been dealt with in detail in both of my books.

This is it- the most important 87 words you will ever read so far as your personal finances are concerned. Mull over this book and its recommendations over the week.

We have many wannabe authors who will be reading this post and for those, I will be writing my next- How to go about publishing your book as a debut author. I hope that my experience of writing and publishing two books will help those who aspire to become published authors.

I am eagerly looking forward to your feedback of my books, “The Millionaire Mechanic” and “Musings of a Financially Illiterate Father”.

The Millionaire Mechanic: Financial Wisdom in the Rann https://www.amazon.in/dp/1646787404/ref=cm_sw_r_em_apa_i_-ZU9EbFWMC05T