These notes are from books:

  • I Will Teach You to Be Rich by Ramit Sethi
  • Let’s Talk Money: You’ve Worked Hard for It, Now Make It Work for You by Monika Halan
  • Start investing as early as possible.
  • Investing isn’t about picking stocks. There is a difference between trading and investing.

Conscious Spending

  • Spend extravagantly on the things you love and cut costs mercilessly on the things you don’t. This is called Conscious Spending; spending with a plan.
  • A Conscious Spending Plan involves three major buckets where your money will go: fixed costs, investments & savings, and guilt-free spending money.
Fixed cost
(Rent, utilities, debt, etc.)		 45–50% of take-home pay
Guilt-free spending money
(Dining out, drinking, movies, clothes, shoes, etc.)		 20-35%
Investments and saving goals
(PPF, FDs, buying a house etc.)		 20-25%
  • Build cash flow system. Use 3 bank account(income account, spent-it, invest-it) 
  • Use zero balance account for income account. 
  • Transfer money to spent-it account for all the expenditure. 
  • Spending on living costs should be less than 45-50 % of take-home income.
  • Calculating expenditure :
    • Add all basic expenses and transfer this money in Spend-It account.
    • If money is used before month end find the reasons and update your expenditure accordingly.
    • In this way you will get idea about your expenditure in 2-3 months.
  • Optimizing your expenditure :
    • First find your expenditure.
    • Apart from fixed cost, focus on your major 2 or 3 expenditure. eg : eating out, movies, clothes
    • Track them and slowly try to decrease your spending in these areas.
  • If all your expenses and saving goals are met you can allocate remaining money in guilt free money section.
  • You don’t need to obsess over and track each minute change in your spending.
  • Credit cards if used wisely can built your credit score. They provide reward points, consumer protection,  concierge services etc.
  • Credit cards to remember :
    • Don’t get more than 3 credit cards
    • Pay your credit cards bill regularly
  • Tracking calls with financial companies. Use this table :
Call date Time Name of rep Rep’s ID # Comment
         

Building a Safety Net

Checklist :

  • Build cash flow system
  • Have emergency fund
  • Get medical cover

  • Get life insurance

  • Keep aside at least six months of living cost in FD’s , flexi FD’s, short term conservative mutual funds. This is the emergency fund.

Medical cover

  • If your company don’t cover you post-retirement get your personal health insurance.
  • You need a basic medical cover of Rs 3-15 lakhs per person.
    • 3 lakh for small town and less posh facilities
    • 15 lakh for metros
  • Family floater medical cover is good for a nuclear family.
  • Buying a right medical cover is hard. Choose medical cover by judging it on three metrices :
    • How does it perform on the  metric of price
    • How does it perform on the  metric of benefits
    • How does it perform on the  metric of claims(claim history)
  • Look for these 8 things while choosing medical cover :
    • No co-pay option
    • Check for “pre-existing” disease clause
    • Check if policy have ‘disease waiting period’
    • Check for ‘sub-limits’
    • Check for exclusions
    • Ask how much of the costs before and after hospitalization the policy will cover
    • Check details of ‘day care’ clause
    • Look at ‘no-claims bonus’ feature
  • Look for these things regarding claim history of medical policy
    • How many claims does company settle? Should be atleast 95%
    • Should have less than 30 complaints on every 10000 claims made
  • Personal accident policy gives you a lump sum if you meet with an accident that leaves you temporarily or permanently disabled.

Life insurance

  • You need life insurance cover of fifteen to twenty times your annualized monthly expenditure.
  • You can also buy insurance for all the debts that you have.
  • Buy insurance as soon as you have dependents(eg kids).
  • Keep your insurance and investment separate. Don’t buy endowment plans, ULIPs. Get a term insurance plan.
  • Look for claim experience of the term insurance before buying it.
  • Don’t buy insurance if nobody will miss your income or you are financially independent.
  • You are financially independent when your investments are large enough to look after your expenses.
  • You can save tax by investing in PPF, NPS, ELSSs.
  • Each financial product you buy solve a problem you have. It must have a purpose.

Understanding investment jargons

  • Three asset classes : debt, equity, real assets(gold, real estate)
  • Debt
    • low risk, low return
    • role is to provide money at short notice and to provide stability to your long-term investments.
    • includes FDs, PPF, all the small savings products, bonds
  • Disadvantages of buying real estate :
    • Immobile, can be hard to sell
    • Maintenance and other hidden charges which are ignored
    • Not much return rate in long run
  • Market capitalization = no. of shares * share price
  • Large cap company : First 100 companies by market cap on the stock market. These are mature and established firms in market.
  • Investment in equity needs ten years of patience to see consistent results. To get better results invest in equity for 15-20 years.
  • Mid cap company : ranks between 101 to 250 by market cap.
  • Small cap companies are rank 250 and below.
  • Sensex is made up of 30 most representative companies listed in Bombay Stock Exchange(BSE).
  • Similar to Sensex, there can be small cap index, mid cap index etc.
  • When we say the Sensex went up, we mean that of the thirty companies in the Sensex more prices rose than fell.
  • Average maturity : the average holding period of all the bonds is about three months. Some bonds may be maturing tomorrow, some in a week, some in two months and some may mature in four months.
  • Asset allocation : dividing your investment into different asset classes depending on your investment horizon and risk tolerance.

Mutual Funds

  • A mutual fund is a way to pool the money of a large number of small investors and hand it over to experts to manage it.
  • 3 asset class of mutual funds :
    • Equity : buy into stocks of listed companies
    • Debt : buy bonds and debt papers issued by the government and firms
    • Gold : buy actual gold
  • Debt funds types :
    • Liquid funds
    • Ultra-short-term fund
  • Liquid funds :
    • Invest in bonds having average maturity of 3 months.
    • keep money in a liquid fund if you know there is an expense coming up in the next three to six months.
  • Ultra-short-term fund :
    • Invest in bonds having average maturity of 9 months.
    • invest in these if you need the money anytime in the next nine months to a year.
  • Check that the top holdings of your debt fund is in AAA-rated bonds.
  • Actively managed funds : Fund manager chooses which stocks to invest in.
  • Passively managed funds : Buys stocks in indexes such as Sensex, Nifty50 etc.
  • Equity funds types :
    • Large cap
    • Mid cap
    • Small cap
  • Growth option :  Profit is reinvested into the fund.
  • Dividend option : Profit is not reinvested and given as a periodic income.
  • ELSS :
    • Is an equity fund which gives tax benefits
    • has a three-year lock-in period
  • Balanced funds are hybrid funds. 3 types :
    • Conservative : between 10 and 25 per cent in equity, rest in debt funds
    • Balanced :  between 40 and 60 per cent in equity
    • Aggressive : about 65–80 per cent in equity
  • Net asset value(NAV) : It is the price of a unit of a scheme. Multiply the NAV with the number of units you hold to get the value of your mutual fund holding per scheme.
  • Expense ratio :  cost of running and managing a mutual fund scheme. It is expressed in percentage terms.
    • the difference between an expense ratio of 0.5 per cent and 1.5 per cent over a twenty-year period is huge.
    • look at expense ratio of mutual fund you buy
    • A 1 percent fee can reduce your returns by around 30 percent over thirty years.
  • Systematic investment plan(SIP) : making periodic investments into a mutual fund.
  • Systematic withdrawal plan (SWP) is a facility to periodically redeem your units to generate an income.
  • Survivorship bias in Mutual fund performance :
    • Funds that fail are not included in any future studies of fund performance for the simple reason that they don’t exist anymore.
    • For example, a company may start a hundred funds but have only fifty left a couple of years later. The company can trumpet how effective their fifty funds are but ignore the fifty funds that failed and have been erased from history.

Mental Money Box

  • Create a mental money box with following cells  :
    • Your cash flow
    • Emergency fund
    • Medical cover
    • Life cover
    • Almost there
    • In some time
    • Far Away
    • Retirement
  • Any planned expense that will happen within two to three years is a short-term need that you put down under Almost There. eg : Getting married, sending kid to school, buying a house, going for a holiday etc.
  • In Some Time are planned expenses that sit between three to seven years away. eg : depending on age and stage marriage, retirement etc.
  • Far Away are expenses that are really hard to imagine today and can be 30-50 years in future. This expense is for expenses other than retirement.
  • Save your age At age twenty-five save 25 per cent of your post-tax income, at age thirty save 30 per cent of your post-tax income.
  • At age sixty, you need between eighteen to thirty-five times your annual expenses at retirement to retire with the lifestyle you are used to.
  • At age forty, you should have three times your annual income as your retirement corpus already
  • Save about 10–15 per cent of your take-home salary towards your retirement.

Investing

  • Investing isn’t about picking stocks. There is a difference between trading and investing.
  • Most of the financial “experts” cannot reliably pick stocks that will outperform the market over the long term.
  • The only long-term solution is to invest regularly, putting as much money as possible into low-cost, diversified funds, even in an economic downturn.
  • Index funds are best way to get equity exposure.
  • Asset allocation is the most significant part of your portfolio that you can control.
  • Not more than 5–10 per cent of your total portfolio goes into gold. You do not buy jewellery as investment.
  • Your options to buy gold are coins, bars, gold exchange-traded funds (ETFs) and gold bonds from the government.
  • The thumb rule for equity is 100 minus your age. If you are thirty years old, you should have 70 per cent of your money in equity.
  • Asset allocation as suggest by Swensen in I will teach you to be rich :

asset allocation

  • Evaluate your investments atleast once a year and rebalance the portfolio if needed.
  • Rebalancing your portfolio :

rebalancing