Lets Talk Money By Monika Halan : Book Review

This is one book which i will recommend to anyone who is starting his or her personal finance journey considering indian market.

Author has tried to simplify important concepts by using money-box as a tool.

As per author "What to invest in" in is not the first decision one needs to make when you start your journey. Rather the first step is to streamline your cash-flows.

So one needs to have a good cash-flow system as a starting point .

How to do it is by separating your income, spending and savings account.

Few thumb rules to note here:

• You are not allowed to move money from your invest-it account to your spend-it account
• Move at least 15-20% of your income to invest -it account and automate it
• Put a label to your Invest-it account. It will deter you from dipping into it for a splurge
• Ensure that your living cost are not more than 45-50% of your take home and your EMI's not more than 25-30% of your take home.

After streamlining your cash flows "emergency fund" becomes important as it de-risks your life.

Few thumb rules on this:

• Have at least 6 months of living cost as emergency fund
• This fund should sit in an ultra short term or conservative hybrid mutual funds

After building an emergency fund it becomes important to build your protection first via good medical cover and then your life insurance cover in that order.

Important pointers when deciding for a good medical cover:

• Cheapest policy is not necessarily a good plan.
• Buy a policy without a co-pay clause
• Check for pre-existing disease clause
• Check if your policy has sub-limits
• Check for policy exclusions
• Check if it will cover Pre and post hospitalization expenses.
• If it has no-claims bonus feature.
• Look at claims the company settled out of 100
• Also look at the claim-complaints data.
• Plan should be based on the place you live. If you live in a large metro you should have a minimum of 15lakhs family floater
• The earlier you buy the plan the better it is.
• You can also have a top-up plan which costs less to bump up your basic cover.

Also you will need a life insurance to protect your family's financial health if you die an untimely death.

• Always buy pure term cover and not typical endowment/ULIP plans
• Separate your insurance and investment.
• You typically need 8-10 times your take home annual income or 15-20 times your annual expenditure
• Buy a term plan as soon as you have dependents
• Typically online tearm plans are cheapest
• Do check the claims experience of the insurance firm
• Job of a term plan is to serve you till you are debt-free or are financially independent.

Actual investing starts after you have your cash flow system, emergency expenses and your health and term plans in place.

• You dont need a lot of money to start. You can begin with as low as just Rs1000/-
• The early you start the better it is
• Devote time to learn about investing- Its a one time fixed cost in terms of your time
• Each financial product you buy must solve a problem
• Divide your investments under three category viz: " Almost there", "In some time" and third "Far Away"
• Investment products are matched basis their holding period - It's important to remember that a product which is safe in the long run becomes risky in the short run.
• You need to understand your near, medium and long term goals and assign monetary value to these. Doing this will help you understand the amount which you need to invest today

You need to understand below three major asset classes

1. Debt - Its an umbrella term for all financial products that are based on borrowing/loan.
2. Equity - Its an ownership of a business and the risk it brings either directly though stocks or indirectly through mutual funds.
3. Real Assets- Are those that can be physically seen like gold and real estate

Speaking of debt:

• It gives you an assured returns like a bank fixed deposit, a tax-free bond or a public provident fund
• The higher the return anyone promises the higher is the risk - Even on product you consider safe like a company deposit.
• Role of debt in your money box is to provide money at a short notice and provide stability to your long term investments
• As a thumb rule your debt allocation should be equal to your age
• Match the avarage maturity of your debt fund with your holding period
• Understand the quality of papers the debt fund hold.

Equity is an important asset and is the most misunderstood.

• Understand Sensex, Nifty50 and sectoral indices
• Longer you allow an index to work, the lower the effect of volatility
• It is not the market timing but time in the market that matters
• A good equity portfolio needs five years of patience and ten years to see consistent returns
• Do not invest in any product that locks you into a particular company or asset manager.
• Mutual funds are the best way to give your money an equity exposure
• If you don't have an ability to choose funds, invest in either index funds or ETF's

Speaking about real assets you should be aware of following things:

• Gold is good as a hedge against inflation
• Not more than5-10percent of your total portfolio should be allocated to gold
• Do not buy jewellery as investment rather buy gold bonds
• Try to stay away from real estate as an investment in India

Few things you should understand before investing in any mutual fund

• Churning your mutual fund portfolio benefits the seller and not you, so you should choose your fund carefully and stay invested for years.
• Pay attention to the expense ration before choosing as the difference between an expense ration of 0.5% and 1.5% is huge over a twenty year period.
• Choose a systematic investment plan route to invest

Putting it all together here are few important pointers one should keep in mind:

• Each product in your moneybox needs to justify its space
• Returns must be interms of investment. Insurance companies normally link returns to a third number like an insurance agent will tell you that you will get back 105% of the sum assured but the sum assured is not your investment. So be extra cautious
• Always find out what it will cost to exit earlier than the product term.
• Your spend it account can be a joint account with your partner or whoever shares the routine household expenses with you
• If any product leaves one person feeling insecure, the product is not worth it
• Short term goals within three years can be funded by ultra short term or conservative hybrid mutual funds
• For your medium term goals of about 3-7years you should invest in aggressive hybrid and diversified equity funds
• For long term goals that are 7 years and away you invest in mix of diversified equity multi-cap, mid-cap and small-cap funds

Also it is important to plan for your second innings as you have to fund your retirement though your working years only:

• As a thumb rule you need to target 13 to 35 times your annual spending at sixty
• Doing nothing should not be the goal but having a meaning in the work should rank way above
• The idea of financial freedom should be to be free from the boss or from your kids by way of dependence
• Planning should be done in such a way so that the capital should be left as an inheritance to the kids along with the house and other assets
• If you have still not started saving for your retirement you need to start savings as per your age - ex at age 25 save twenty five percent of your post tax income
• Retirement milestones as per fidelity investments are important. At age 40 you should have three times your annual income as your retirement corpus, at 50 six times your annual income and at 60 or retirement you should have eight times your annual salary

In the end it is also important to audit your money box once or twice a year. This will help you tweak it just enough for your situation/need.

You should schedule the audit dates well in advance with a spacing of about 6 months.

These dates can be used for portfolio level rebalancing or reviewing it with your financial advisor.

Would love to know if you have read any personal finance book lately and your top 3 learnings from it.

#My Weekend Reading#Personal Finance