Jagoinvestor

July 26, 2011

7 basics of Personal Finance you should know

Today I am going to write on a simple topic which will highlight some basics of personal finance, which you can see as axioms or the core rules of personal finance. If you understand these simple rules then you can probably build lot of understanding and strong knowledge about money. Some days ago I heard Subra saying a one liner – “I strongly believe it requires a brilliant mind to understand simple things” and it is so much true to personal finance.

Investing basics

If you want to learn personal finance in a better way, you don’t need to look at all the policies , all the products and 100’s of topics . All you need is in the start is to build a strong foundation of understanding some of the core rules of money . If you know these core insights, you will automatically be able to see all the complications and secrets behind the complex world of personal finance. I can see that most of these points are nothing but common sense .

1. When you invest in Safe products , Its nothing but Lending

This can’t get simpler. When you choose products like PPF, Bank FD, companies FD, NSC, KVP, Infra bonds, RBI bonds etc … You are choosing safe investment product, where the money will come back with a high guarantee … Now with these products its foolish to expect very high returns, you are doing nothing but lending your money to someone else so that they can expand their own business. In case of Companies FD, your money is used in Companies expansions.

In case of PPF, it is used by Govt. In case of Infra Bonds, it is used by Infrastructure companies and in case of Bank FD’s, it’s used by banks to lend it to other people who are in need of credit. So your money is used by others. You are nothing but a lender, lender and only lender; get that point. All you will get is some near inflation returns or even less.

2. When you invest in Equity or Real Estate, you are a partner

When you put money in stocks, Mutual funds, ETF’s, Index Funds, Real Estate etc, you are not lending money to anyone; all you are doing is putting your money in some business or an idea. You share all the good and bad phase and its effects and  become part of profits or share the risks involved. You can get high returns or low returns or negative returns and that’s not happening because of some secret, you have chosen it yourself.

So if you invested in HDFC Top 200, you are agreeing to take ownership in Reliance, Infosys, Bharti Airetl and dozens of other companies. Your investment will depend on their future and how these companies perform. If you expect 20% return without any risk involved, come on!… Wake up. Over the long-term these investment options will perform good , but in short-term there will be a lot of volatility, which can scare you .

3. Risk and return go hand in Hand

“Where should I invest for next 5 years to get maximum return and minimum risk?” . This can be a question from someone who really has no clear idea of basics. What is being proposed here is just not possible. The safest investments at any point are Bank FD’s or PPF. See how much return they are providing. If any other product offers higher returns than these, there has to be higher risk associated with that, otherwise wont every bank will put their money in these high return product itself and enjoy.

So if you want more returns, then you need to be taking more risk. Else it’s not possible. Over short-term, there is no chance you can get high returns with high probability. Its only accidental and on luck.

4. Companies are here for business, not charity

All the companies offering Mutual Funds, Term Plans, Endowment Plans, ULIPs, Health Insurance, PMS, Motor Insurance, FD’s etc are all in existence only for one reason i.e.- to make excellent profits for themselves. Don’t expect charities. If you are obese, then your life insurance premium or health insurance premiums have to be more than some normal person. Don’t feel bad about it. It’s perfectly ok and ethical from company’s points of view. Even you would do the same thing what companies are doing if you were to run that business.

If you are investing in Mutual funds, AMC’s are bound to charge Fund Management Charges. Insurance companies are there to take your money and exploit your attitude of “If I get something back, the product is good” mentality (example) and throw all the useless policies at you. If you have a Relationship manager assigned, his main job is to motivate you to keep investing your idle money in company’s products and less of helping you with personalised services.

5. You are never sold something, you always buy it

Don’t try to get sympathy of others by telling them “An agent came to my home, threatened me to shoot and took my signatures on the policy, he sold me that policy” or “My uncle created a situation where I had to buy it”. While that might be the case at times, please accept that you were wrong and you need to change that attitude, or else you will keep blaming what happened to you, but never yourself. It will create more problems in your life. A nice short article on mis-buying from subra.

6. Pain now or later, your choice

Pramod Moudgil , one of our readers once told me what his grand mother told him

“zindagi maein bhagwan ne sab ko khane ke liye Channe aur Halwa diya hai aur ye dono sab ko khane hain. Ab agar pehle chane (which are hard) kha loge to phir aaram se halwa khana otherwise abhi halwa kha lo phir chane chabane padenge. Bas fark itna hoga ki tab tak daant nahin rahenge so make your choice abhi mehnat kar ke saari umr aaram karoge ya abhi aaram karke saari umr mehnat”

If you have not inherited lots of money or are not working on something great which will make you millionaire soon, then probably you will work for salary for most of your life and your financial life will be mostly like majority people. If you are enjoying too much today at the cost of future, then there are tough times ahead for you.

People burning their money in useless spending today do not realise that they are eating money from their retirement corpus right now, they are putting pressure on their future at this very moment, just because its years away, you don’t realise all this, but one day you will remember all this. Look around people who are retired today, how many of them are self-sufficient and totally independent, enjoying their life to fullest and exactly the way they dreamt all their life ? Not many . Do you want to be like them ?

7. Not taking risk is extremely risky in today’s world

I remember how one of the person I was talking on forum told me that he keeps all his money in FD’s and PPF and LIC policies , because he does not want to take any risk , All I asked him was “What are doing now then ?” and he didnt understand what I am pointing at .. If you are like that and hate to put your money in Equity , don’t like to spend time on your financial life , don’t like to take time from your busy schedule to organise it , your are already taking a high risk in your financial life , you are distancing yourself from a good financial life each day and each moment. You will probably meet all your goals , but may be half-baked, not on time , who knows !

So what is your learning from these basics of personal finance ? Do you feel more knowledge in yourself now ? Which of these points do you think is hardest for other people to understand ?

Subscribe
Notify of
guest

This site uses Akismet to reduce spam. Learn how your comment data is processed.

73 Comments
Inline Feedbacks
View all comments
Manoj
Manoj
11 years ago

I have invested in LifeStage Pension Advantage for my retirement corpus. Yearly premium is 2lac rupees, I have already paid 6lac and it’s current values is 5.75lac. I am bit worried should I continue with it or withdraw as after three years I can withdraw. Please suggest.

Manoj
Manoj
Reply to  Jagoinvestor
11 years ago

Thanks Manish for the response. I read your articles regularly and they are very informative. I have already invested in Mutual Fund, three SIP around 1500 per month, 5000 half yearly and 5000 per month. So the performance is justified, I will continue and wait for some more time, meanwhile I will not pay this year 2lac premium.

Kajal
Kajal
12 years ago

Thanks Manish.
I am not keeping Gold for marriage. I purchased gold bars as investment 1 yr back.
Is it good to keep them for long term say 4-5 yrs?
Also, should I invest money in liquid fund…reliance money manager?

Kajal
Kajal
12 years ago

Hi Manish,
could u please help me with my portfolio?

I want to get my portfilio reviewed and need your suggestions for the same.

I am 27 yr old single girl working with IT industry.

Following are the details of my portfolio –

SIP – Tax saving

2000 – HDFC Taxsaver – Gr
2000 – Fidelity Tax Advantage Fund – Gr

lumpsome –

28000 – Canara Robeco Equity Tax Saver Fund – Gr
25000 – Fidelity Tax Advantage Fund – Gr
25000 – HDFC Taxsaver – Gr

Other SIP’s –

3000 – Reliance Regular Savings Fund Equity Plan – Gr
1500 – Mirae Asset India Opportunities Fund – Gr
1000 – Kotak Gold Fund – Gr
2500 – HDFC Equity Fund – Gr.

Gold bars –

current value – 6 lacs

PF – 60000 (till date)

LIC New bima gold moneyback policy – paid third premium this yr for 42300

Ideal cash in bank – 2 lac

My questions –

Does my SIP portfolio looks good? How much more should I invest in equity to get a good corpus retirement? I will invest for atleast 5 yrs.
What can I do with ideal cash? Should I invest in liquid fund?
Is my gold allocation correct? I want to keep it for atleast 3-4 yrs.

readtoawake com
readtoawake com
12 years ago

Here are of some ideas to become financially free .

1. Spend less than you Earn – To achieve your well defined Financial goal, you need to spend less than you earn. If you can’t save money then the seeds of success are not in you. In the beginning, try to save 1% per month and then increase the saving amount each month till it reach 10% or more.

2. Minimize your Expenses – If you are living in the big house and driving an expensive car that is costing you a lot, then try to move in a smaller house where you will pay less rent or low mortgage installment. You should buy an economical car that has better fuel efficiency and lower insurance costs than your current car. Here is a great advice to reduce your household expenses – Keep track of your household expenses for next 3 months. And then reduce the unnecessary expenses.

3. Educate Yourself – You need to get financially educated to become financially successful. The key is getting started. Start reading financial and business books, magazines and articles to stay motivated and learn some new things everyday.

ajay
ajay
12 years ago

Vision ( Goal ) without action is only a dream ( Hawaa Mahal ).
Action (performance) without vision is just (like) passing the time.
vision with action can change the world ( gives result).

Ruchika
Ruchika
12 years ago

Very well said and written… I like all ur articles… they r very informative for a newbie like me… 🙂

sagar godse patil
sagar godse patil
12 years ago

hi manish,
i read ur artical regarding personal finanace. I like it so i need some guidance. Currently i have invested 7k in reliance gold ETF. Now i want to invest in equity. I have selected some scripts like TCS, wipro, ongc,icici. But as i am student my budget is low. So i can invest upto 25k. So plz guide me how to invest it properly. I want to invest it for long term investment. N plz guide me on T&c of demat acc. Which i can check while applying for it.

sagar
sagar
Reply to  Jagoinvestor
12 years ago

hi manish,
i would like to know the difference between growth fund and divident fund. and how to judge the performance of the fund? Is there any basic terms to guage its performance. n also comment on how to make the
balanced portfolio.

Kiran
Kiran
12 years ago

Hi Manish, nice article , though you touched the most common sense stuff.I was browsing the Net for some information n suggestions on investments/insurance as we are blessed with Baby. I have invited people from Financial advisers to LIC /Other insurance company agents.After 2 weeks of this exercise, I am still not convinced with the plans n advice they have suggested (child plans(ULIP), Jeevan Komals, Sarals..n all). I wish if we can pay the advisers on their service , otherwise their suggestions look more to earn commissions than creating a Financial Planning for ppl like me.In case you have any advice for me, I can provide some information on my so far savings/policies with current income.Pl. let me know if you can take out some time.Thanks

sunny
sunny
Reply to  Kiran
12 years ago

Thanks to this wonderful website by Manish, i have finally managed to dispose off all my LIC polices 9the endowment, money backs) and took a term plan of 50 lakh and 3 SIPs of 3000 each in HDFC top 200, HDFC Prudence and IDFC premier Equity. I plan to add a midcap and small cap fund soon. You can follow this route. I personally take interest in personal finance and do a lot of reading and i am confident where I am putting money. You need to do a bit of comparisions, check ratings of the Funds, sector allocations (if you have any specific choices) before you put money in there. Its not much hard. And you can always take help of people like Manish.

Suresh K Narula
Suresh K Narula
12 years ago

Dear Manish

Brain stroming article, it is awakening to all of us but it is not necessary that more risk more gain because in current volatile scenario, how can we believe in equity and mutual fund returns as from the last two years, their returns are lagging behind from investing in safe products. Until, the stock market is get out from narrow range bound, how can we invest either SIP or lump sum amount. Traditionally, all experts say that keep investing for long term irrespective market conditons. Sadly, I have been investing in SIP HDFC Top 200 fund since 2006 but after disaster in 2008, all my gains were wiped out and getting only 10-12 % returns.
My question is “where my risk return tradeoff” ? It implies that I am foolish to invest in risky fund to get more returns. Because, I took more risk to get less return. Now a days, banks FDs interest is hovering 9.25% to 10.50%. Why should we invest in risky products in current volalite scenerio. I am not saying you should not invest in risky proudcts. But point is “Timing is very important for investment” It may be interesting to know that people have getting handsome returns from equity and mutual funds who were invested after disaster 2008. In nutshell, while investing “Timing is very important when we are investing and when we need money.

Thanks

Prudent Investing!

sunny
sunny
Reply to  Suresh K Narula
12 years ago

I donot agree with you. Check your returns correctly. It has a 18.4% returns in last 5 years. Use this http://www.moneycontrol.com/mutual-funds/nav/hdfctop200fundg/MZU009

T S Ashok
T S Ashok
12 years ago

Hi,

Lending, partnership… wow… nice terms . Now it is very easy for me to explain to my friends..Thanks..

sridhar
sridhar
12 years ago

Thought provoking article Manish!!! Keep it up.

Sridhar

Vaibhav Aggarwal
Vaibhav Aggarwal
12 years ago

I have got different opinion about your answer to question
“Where should I invest for next 5 years to get maximum return and minimum risk?”
This question means to me where can I invest and reap better returns vis-a-vis risk. We always talk about risk-reward ratio. It’s true that risk and return goes hand in hand but not always.
For a scenario let’s consider following examples:-
1. Their are many AAA bonds rated by CRISIL but all of them does not give the same return.
2. In case of mutual funds, even if we go and see “Balanced Funds” only the returns have varied and by huge margin.
3. The basic reason we say not to go for NFO as we are not sure of their returns but have tested the returns of funds like HDFC TOP 200. So we have reduced the risk but the returns are still great.
—————————————————————————————
Opinions are like Wrist Watches! Everyone’s watch shows different time from other? But all believe that their time is accurate!

Vaibhav Aggarwal
Vaibhav Aggarwal
Reply to  Jagoinvestor
12 years ago

MAIN ANSWER

Kaushik
Kaushik
12 years ago

An excellent article. All points were well articulated but to me the one that hit me hard was the 6th point that you mentioned.
This is so true and I for one knowing and chanting this point for many years now is yet to implement it!

dr vishali
dr vishali
12 years ago

thanks manish for the article.it is usefull for people like us who r learning phase of financial planning. i liked ur 7 point about risk.i think it suits the saying no gain without pain.can u just tell me is it write time to invest in silver or should i go with gold

raj
raj
12 years ago

Hi Manish
excellent article again!
Investment in equity with patience is like “the road less travelled by”.

again lot of Thanks.

shobha
shobha
12 years ago

Hi Manish,

Great article. Completely agree with Point 6, but when I see around me….delayed gratification is the most difficult to understand point.

Thanks to you, I am better informed and have already started to make changes to my portfolio.

Keep up the good work.

Shobha

saumya
saumya
12 years ago

where can i invest my monthly saving of Rs. 3000? Can I invest in some mutual fund? if yes, which mutual fund?
thanks in advance for helping people like me.

raj
raj
Reply to  saumya
12 years ago

dear saumya
invest Rs 3000.00 in mutual fund like HDFC Top 200 or UTI Div Yield

Ashish Modani
Ashish Modani
12 years ago

I really like the simplicity you have used and that is what makes this article great….
wonderful stuff

S S
S S
12 years ago

For younger generation toughest one is point 6. Everything else put aside (savings are made to save tax primarily, so its a rule rather than “will”) youngsters spent illogically on shopping, movies and all that. There’s no method in madness here.

Chinmoy Sur
Chinmoy Sur
12 years ago

Hi Manish!
I may called the article ‘Warning’, that is extremely useful!
In my opinion, the basic problem is in financial literacy in our country. It is not that nobody want to live wealthy but, it is tough to find anybody who explain him the Truth at the first day of start earning i.e. what he really want to achieve financially! If anybody tells him that ‘Today Your lifestyle cost 10,000 which will be lakhs in years to come and to maintain the lifestyle he/she needs Crores at retirement & that is not possible to accumulate by saving 40% in so called safe products’ – obviously he must understand the needs. He must start taking calculated Risk – which may even after 5 years when he realized! I think managing finance is one of the toughest matter in life which should handed over to an honest & expert unbiased Advisor!

Hem
Hem
Reply to  Jagoinvestor
12 years ago

Hi Manish,

Thanks for putting it simple and straight. It is a big warning. Wake up call!!

When I started learning about personal finance in may late 20’s, I thought I was too late. I asked many of my colleagues and friends to not do the same mistake but I never succeeded. I feel bad when they do the same mistakes (buying Money back polices, ULIPS & FDs) again & again even after the warning. Not sure how to convince them. I almost stopped giving them any advice but after seeing your dedication, I’ll spread whatever I knowledge I gain from you.

Thanks,
Hem

Thanks,
Hem