Personal Finance 101

“In this piece, I’ve gathered together crucial personal finance strategies and advice, aiming to give you a solid foundation for building a strong financial future. Everything penned down here is a collection of my own learnings and experiences with money over the past 10+ years.”

Note: This article is primarily tailored for the context of Indian employees and the financial ecosystem in India.

About Me:

Let me give you a quick snapshot of my journey over the past 15+ years. You might think that my MBA or my time at Citibank is what qualifies me to talk about money. But here’s the thing — while those experiences have played a role in learning some finance fundamentals, they aren’t the whole story when it comes to personal finance.

The truth is, that a genuine interest in personal finance is what really matters when it comes to mastering the art of money management. Formal education in this field was scarce (if not nonexistent) in the past, so it was really all about taking the initiative to learn and apply these principles in my own life.

Note: I’m not a financial advisor. I’m sharing these tips based on my personal financial journey and the lessons I’ve learned along the way. My main goal is to get you thinking and help you plan smarter when it comes to managing your money. Please do your own research before making any financial decisions.

As we dive into the nitty-gritty of financial planning, we’re going to touch upon a variety of key topics that are crucial for a secure and stable financial future. And for each section, I’ll tackle some of the common questions that usually pop up. Here is a list of topics covered in this article:

1. Life Insurance
2. Health Insurance
3. Emergency Fund
4. Investments & Asset classes
5. National Pension Scheme (NPS)
6. Credit Card
7. Buying a house
8. Budgeting

Life Insurance

Key Facts to Consider:

• Start Early for Better Rates: Getting life insurance early on can lead to more affordable premium rates.
• Stick to Term Insurance: Avoid complex life insurance policies and choose “Term Insurance” instead.
• Avoid Money-Back Options: Don’t look for money-back features in life insurance policies.
• Be Wary of Structured Products: Instead of opting for ULIPs or other fancy products (which are usually a combination of life insurance and investments), get Term Insurance and invest in mutual funds separately to avoid extra commissions.

FAQs:

1. Isn’t the life insurance provided by my company sufficient?
   Not really. The coverage provided at work is usually not enough, and if you decide to leave your job or get life insurance later in life, you might end up paying more in premiums.
2. How much insurance coverage should I aim for?
   Aiming for coverage of at least 10 times your annual salary is advisable. However, if possible, try to max out what your insurance company offers, which can be up to 25 times your salary, especially if you’re younger.
3. Where should I purchase my policy?
   I personally prefer using marketplaces like Policy Bazaar to compare and find the most affordable premiums. Ditto is also a good option to consider; they provide helpful advice and also help you avoid spam calls. While some might look at claim approval ratios, I don’t find it as crucial for life insurance since the primary claim is usually in case of death, and IRDA ensures a regulated and trustworthy insurance sector in India.
4. Should I opt for any additional riders?
   While I don’t have a strong opinion on this, my suggestion would be to first max out your sum insured. If you can afford more, then consider additional riders like accidental coverage, critical illness, etc.

Health Insurance

FAQs:

1. Is the medical insurance provided by my company enough?

• Not advisable for the Long-Term: Relying solely on your company’s medical insurance might leave you vulnerable, especially if you decide to change jobs or opt for a medical policy later in life. This is particularly crucial if you’re over 30, as you could face more exclusions.
• Understanding Exclusions: Most exclusions last for about 3 years. However, once you’ve paid premiums for this period, you’re likely to be covered for pre-existing conditions.
• Parents’ Coverage: While company insurance may seem appealing due to its absence of waiting or exclusion periods, it’s important to note that you can convert this policy to a retail policy after leaving the company, and even port it to a different insurer if needed. Enquire these aspects of company policy and take a decision.

2. How much medical insurance should I get?

• Base Insurance Policy: Aim for a base insurance policy between 5L to 10L.
• Top-Up Policy: Consider a top-up policy up to 1Cr. This policy kicks in for bills that surpass your base cover, up to the upper limit. For example, if a treatment costs 25L, the first 5–10L would be covered by your base policy, and the remaining 15L would be covered by your top-up policy. Since top-up policy claims are less frequent, the premiums are relatively low, offering substantial coverage for a modest price.
• Combining Policies: You can maintain your company policy and opt for an external top-up cover as well.

Personal Life Experiences Highlighting the Importance of Separate Medical Insurance:

1. Transition from Citibank to Oracle (1-Week Break): My son was born during this time. Since my wife wasn’t working and wasn’t covered for maternity benefits under Citibank’s policy after quitting, we faced potential financial strain. Luckily, my son was born just two days after joining Oracle, avoiding out-of-pocket expenses.
2. Transition from Oracle to Microsoft (1-Week Break): My dad was hospitalized during the COVID-19 Delta wave. Despite the health crisis and the associated challenges, I found myself in a unique financial situation. Since my dad’s admission date fell under my employment with Oracle, the entire hospitalization was covered under their policy, even though I wasn’t actively working there for the entire duration of his admission.

In both these instances, luck was on my side, financially speaking. However, it’s crucial to highlight that depending on luck in such scenarios is risky. Without proper coverage, a single medical event can significantly deplete your savings, a risk that’s simply not worth taking.

Emergency Fund

Building an emergency fund should be your top priority regarding savings, as it acts as a cushion against life’s unforeseen challenges — sudden medical emergencies, unexpected job loss, and other critical situations.

Steps to Establish Your Emergency Fund:

1. Assess Your Monthly Expenses: Start by calculating your average monthly expenditures. This will give you a clear picture of your financial commitments and help in determining the size of your emergency fund.
2. Determine Your Risk Tolerance: Your next step is to allocate funds based on your risk level:

• Low Risk: Set aside 12 months’ worth of expenses.
• Medium Risk: Reserve 9 months’ worth of expenses.
• High Risk: Keep 6 months’ worth of expenses.

3. Choose the Right Investment Vehicle:

• Opt for Fixed Deposits: Place your emergency fund in fixed deposits with reputable banks, particularly those you trust and believe are too big to fail. This is one of the rare scenarios where fixed deposits shine, offering safety and easy access to your funds.
• Focus on Liquidity, Not Returns: The primary goal of your emergency fund is to be readily accessible, not to generate high returns. Ensure you can quickly liquidate your investment and convert it to cash when needed.
• Lock in Long-Term FDs at Higher Interest Rates: With current interest rates being relatively high now, it’s a wise move to secure a long-term fixed deposit at a rate of 7% or above, for a duration of 5 years or more.

“The biggest impact of an unexpected problem is that it is unexpected. Having a plan in place allows you to handle it much more effectively.” — Adapted from various sources :)

Personal Insight

I realized the importance of an emergency fund when I directly witnessed layoffs around me. Despite being a top performer, I understood that job security can never be taken for granted. The key to navigating such uncertain times is twofold:

• Financial Stability: Having enough funds to get through the tough phase.
• Self-Confidence: Believing in yourself and your ability to overcome challenges, such as securing the next job opportunity.

Over the past few years, I’ve encountered numerous individuals who were caught off guard by the COVID-19 pandemic and the recent volatility in the job market. The lack of a sufficient emergency fund was evident in the pressure and stress they exhibited. Don’t let that be you — start building your emergency fund today.

This is the first savings you should ever do and this is a multi-purpose fund for any unexpected problems in your life. It could be for sudden medical experience, job loss, or anything negative in your life.

Investments

Navigating through various investment avenues can be complex. Here, I have broken down key asset classes to provide highlights and insights to help you make informed decisions. This section is not to explain what these asset classes are in details, but just high-level tips on each of them.

Fixed Deposits (FDs):

• Emergency Funds: FDs are perfect for building your emergency fund due to their stability and ease of access.
• Short-Term Goals: They are also suitable for short-term planned expenditures. For example, if you receive a bonus and plan to purchase a car in three months, an FD is a safe option.
• Interest Rate Strategy: In a high-interest-rate environment, lock in long-term FDs to secure better returns. In a low-interest-rate scenario, opt for short-term FDs and rotate them as rates change.

Recurring Deposits (RDs):

• Planned Expenses: RDs are ideal for saving for specific short-term goals that occur at a fixed time every year, like a foreign trip or your child’s education, etc.

Gold:

• Physical Gold: From an investment standpoint, physical gold is less appealing due to making charges and other associated costs.
• Digital Gold:
• ETFs/Mutual Funds: These offer low-cost alternatives to investing in gold.
• App-Based Investments: Platforms like Paytm provide easy access, but it’s crucial to be mindful of the charges. Do your own comparison.
• Sovereign Gold Bonds (SGB): For those willing to commit to a longer-term investment, SGBs are beneficial as they offer 2.5% interest in addition to the potential appreciation in gold’s value.

Important Note on Gold: Gold’s pricing, like oil, is done in U.S. dollars. Consider the following data from the last decade:

• Gold price in USD: Increased by 55%
• Gold price in INR: Increased by 100%

This indicates that a substantial portion of Indian households, perhaps unknowingly, are safeguarding against inflation and currency depreciation. If you hold significant foreign stocks, especially from your employer, you are already somewhat protected against currency fluctuations so consider that while investing in gold.

Mutual Funds:

• Direct vs Regular: Opt for Direct funds to avoid paying commissions.
• Active vs Passive: Passive funds typically have lower fees and often outperform active funds over the long term. Index funds are a reliable choice for those who are not investment experts. For example, Nifty 50 index funds have delivered average returns of around 12%.
• Expense Ratios and Exit Loads: Always check the expense ratio (annual fee) and exit load of a mutual fund before investing.

Stocks:

• Due Diligence: Take time to analyze any stocks you’re considering buying. If this is not feasible, index funds (large-cap, mid-cap, or small-cap) are a safer bet.
• Investing in U.S. Stocks: If you closely track US companies and their product launches and want to invest in US companies, you can use platforms like Vested to invest in U.S. stocks directly. This way you investment portfolio will also be diversified across geographies.

By understanding the characteristics and use cases of these various asset classes, you can make smarter investment choices tailored to your financial goals and risk tolerance.

National Pension Scheme (NPS)

Maximizing Tax Benefits: Utilizing the NPS allows you to take advantage of tax benefits outside the 80C limit.

• Direct Employee Contributions: You can personally invest up to ₹50,000 in NPS and avail tax benefits.
• Via Employer Contributions: Investments up to 10% of your basic salary through your employer also provide tax benefits. Notably, there is no upper cap on this contribution, making it a unique tax-saving tool, especially for high earners.

Flexible Investment Options: NPS offers the flexibility to link your investments to the market, allowing for a diversified portfolio.

• Equity and Bond Allocation: You have the option to allocate your investments between bonds and equity. For example, a 50–50 split between bonds and equity is a viable strategy.

Long-Term Retirement Planning:

• Withdrawal Post 60: NPS is designed to be a long-term retirement solution, with funds being available for withdrawal after the age of 60.
• Equity Investments Until Retirement: Consider treating your NPS investments in a similar manner to long-term equity investments, allowing them to grow until retirement.
• Immediate Returns but unrealized: With the tax benefits considered, your investment in NPS can yield an immediate return of up to 30%, even without market-linked growth.

Summary
Make the most of NPS by leveraging these benefits every fiscal year to enhance your tax benefits and retirement readiness. This will be in addition to the PF contribution for your retirement.

Credit Card

Below are a few tips related to Credit Cards

• Opt for Premium Cards that are Free: Upgrade to the most premium credit card available without an annual fee to enjoy additional benefits.
• Accept Credit Limit Increases: This keeps your credit utilization low, positively impacting your credit score. Just make sure it doesn’t tempt you into overspending.
• Set Up Auto-Pay for the Full Statement Balance: Ensure timely payments and avoid interest charges by automating your credit card payments.
• Be Selective in How Many Cards You Hold: Too many credit cards can be viewed negatively as they are considered unsecured debt. Maintain a balanced ratio of secured (for example home loan) to unsecured debt.
• Use Credit Cards Wisely: Only use your credit card for purchases you can afford to pay off, taking advantage of the card’s benefits without extending your spending ability.

Buying a house

Purchasing a house is undoubtedly a complex topic, and I aim to share various perspectives that I’ve encountered and learned from, even though it might introduce some ambiguity. It’s crucial to weigh these aspects carefully:

Emotional Investment: If you intend to make a house your home and create lasting memories there, focus on the emotional value rather than viewing it purely as a financial investment. The financial math may not always be favourable unless perhaps you managed to secure a great deal during a time like the COVID-19 pandemic.

Rental Yield Arguments I have come across:

1. Basic Rental yield argument: A rental yield of 4% or above (calculated as Annual Rent divided by the Cost of the House) is generally considered a solid investment.
2. Rental yield with capital appreciation argument: But we missed out on the capital appreciation of the property as part of the earlier equation. (Current Annual Rent/Cost of House Purchase in the past)
   For example, if you evaluate the rental yield of a house purchased 10 years ago with today’s annual rent, you might discover a double-digit rental yield, making it an impressive deal.
3. Rental yield with capital appreciation and loan cost argument: It is crucial not to overlook the cost of your mortgage in this calculation. The denominator in the rental yield calculation should also include the interest served on the house purchase.
   (Current Annual Rent/Cost of House Purchase along with loan interest served)
   For example, suppose you evaluate the rental yield of a house purchased 10 years ago with today’s annual rent. In that case, your denominator should also include the interest you serviced on the home loan and this will pull down the rental yield.

Despite sharing these insights, I do not have a definitive conclusion on whether buying a house is the right decision for everyone. It’s a subject I can make strong arguments for from both sides. Currently, real estate prices are at an all-time high, making the financial argument for buying a house less compelling. Yet, the desire to provide a stable and controlled living environment for your family could outweigh these financial considerations.

This decision will likely be the most significant financial commitment of your lifetime. Therefore, it’s paramount that you proceed cautiously, analyze the situation thoroughly, and make a conscious, informed decision.

Budgeting

Below are some key tips for budgeting your personal finances:

Starting Simple:

• Forget Perfection: Instead of aiming for a perfect Excel model or using fancy apps, start with an approximate budget.
• Iterative Process: Understand that budgeting is an ongoing process. Begin with a basic budget and refine it over a period of 2–3 months as you gain more insight into your spending habits.

Separate Accounts for Clarity:

• Essential Step: Having a separate expense account is crucial.
• Joint Account for Families: If you’re budgeting as a family, consider having a joint account to manage shared expenses.

Shifting Expenditure:

• Debit for Day-to-Day: Move your day-to-day expenditures to your debit card.
• Credit for Auto-Payments: Leave only predictable, recurring auto-payments on your credit card.

Prioritizing Savings and Investments:

• Pay Yourself First: Ensure that your savings and investments are deducted from your account at the beginning of each month and moved to the separate account discussed above. This category can include essential commitments like school fees, as well as discretionary spending like vacations or parties.

Adopting the Money Dial Concept:

As part of budgeting, I would like to share this valuable psychological insight that I’ve gained from Ramit Sethi, the esteemed author of “I Will Teach You to Be Rich,” which has particularly resonated with me. I am sure this will help you a lot as well.

• Personalize Your Spending: Decide which areas of your life you want to spend more on (what does rich life truly mean to you), and which areas you can cut back on. This could include aspects like comfort, travel, home, shopping, etc. You should do guilt-free spending on things that matter to you and be very frugal in other areas.
• Stop the Judgment: Understand that different people value different things, and that’s okay. Stop judging others (and yourself) based on spending choices.

Conclusion of this article and the beginning of your financial journey

It’s never too late to start: It’s crucial to understand that it’s never too late to begin your financial journey. I found myself in a similar situation a decade ago, steadily acquiring knowledge and adopting new financial strategies. The most important step is that you’re now taking the initiative, paving the way toward a more secure and prosperous financial future.

Embracing Continuous Learning: The realm of finance is ever-evolving, and there’s always something new to learn. Just this year, I’ve come across several key insights listed below which I was not aware of earlier. However, it’s essential to strike a balance — commit to regular financial reviews, perhaps semi-annually or annually, but avoid overanalyzing.
Few new things I learned this year, and I am sharing examples below to say that there will always be something to learn in this evolving space.

1. Utilizing Capital Gains Limits: Every individual should aim to fully utilize the 1L long-term capital gains limit annually. This is a valuable opportunity that shouldn’t be overlooked.
2. Understanding US Stock Investments: Note that for US stocks, the long-term investment period is defined as 2 years (as opposed to 1 year for Indian stocks). Additionally, US stocks offer the benefit of indexation, meaning you only pay tax on gains exceeding the rate of inflation.
3. Equity Capital Gains and Real Estate: It’s possible to avoid paying equity capital gains tax if you reinvest in real estate, and vice versa. Ensure you research thoroughly to understand the inclusions and exclusions of this provision.
4. PF Withdrawals for Home Loans: Provident Fund (PF) withdrawals can be utilized to pay off home loans. Considering the current PF interest rate is around 8%, which is lower than that of most home loans, and is not market-linked like the National Pension Scheme (NPS), it might be more beneficial to invest in NPS for retirement purposes. Utilize your PF withdrawals when necessary, such as for home loan repayments.

Remember, the journey to financial stability and prosperity is ongoing. By staying informed and making conscious decisions, you’re setting the stage for a brighter and more secure financial future.

Resource Recommendations

Books for a good financial knowledge that I have read. I prefer to watch/listen to the authors so below book recommendations below are limited.

• “The Psychology of Money” by Morgan Housel: This book offers profound insights into how our behaviour and psychology influence our financial decisions, helping you understand the ‘why’ behind your money habits.
• “I Will Teach You to Be Rich” by Ramit Sethi: A practical guide that provides straightforward advice on managing your finances, investing, and making smart financial choices.
• “Rich Dad Poor Dad” by Robert Kiyosaki: This classic book emphasizes the importance of financial education, wealth building, and the contrasting mindsets of the ‘rich dad’ and the ‘poor dad’.

Leveraging Social Media for Financial Knowledge:

• Financial Influencers: There are numerous knowledgeable influencers on platforms like Instagram, YouTube, and Twitter, who share valuable financial tips and insights. They help in breaking down complex financial concepts into understandable content, making financial education accessible to a broader audience. Follow more people who give personal finance tips than stock/trading tips.

Engaging with these resources can provide you with a variety of perspectives and strategies, empowering you to make informed and confident financial decisions. Remember, continuous learning is key to financial success.

I trust you found this article insightful and beneficial. Your thoughts and feedback are invaluable, so please feel free to share them in the comments section below. Moreover, if you believe this information could aid others in their financial journey, do not hesitate to pass it along to your colleagues and friends. Together, we can create a community that is financially informed and empowered. Thank you for reading, and I look forward to connecting with you through your feedback!