Personal finance with Schezwan sauce

A lot has been written about Personal finance over the years. Though the core never changes, but the modern-day adoption means spicing it up with some schezwan sauce to the same old recipe and making it a little tangy for taste-freaks!

So here they are, a few basic hacks to financial freedom – which are oft quoted but least followed.

1) Cash is peace of mind

Yes, keep some cash. It’ll keep you positive and grant you an almost zen-like vibe. In this modern dynamic world rife with uncertainty, having cash at hand will give you the confidence to look your other investments in the eye.

So, let’s not call it Emergency corpus – we will call it plain simple cash kept in a Savings account or even better a sweep-in Fixed Deposit. Always keep aside 6m-12months income and feel the difference!

2) Ladder your life

Everyone will ask you to take a “Term life cover”. We see ditch the sponge cake attitude and layer it up. Take three policies with varying terms and amounts of cover to coincide with the bigger financial goals. Close two of them as you chug along the years. If you have built sufficient assets and have covered your liabilities – you won’t need these. Choose to keep the last one to posterity as a legacy bequeath or go policy less once you feel all financial commitments are done.

3) Don’t fight the medical odds

Even if you are a regular at Gym, do not look at it as a health invincibility program. Life is another name for unexpected events. Get yourself a decent medical cover, something over and above what your workplace provides for which also ensures your health cover is not the aspect binding you to your job. Remember you will most likely fall sick post your retirement so don’t bank on your company to foot the expenses.

4) 50:30:20

Start with this allocation for your monthly income: 50% for routine expenses, 30% for discretionary & lifestyle expenses and 20% for investments. As you age, keep pushing the equation other way round i.e. by age 50 you should reach – 20: 30: 50 (routine, discretionary, savings in that order). This might sound simple, but most of us are not even in the habit of knowing our expenses. Check your equation today and make a plan to gradually move the needle!

5) Degrees of Debt

Rule no. 1: All Debt is not bad. But most of it is.

Rule no. 2: Understand the objective of your debt

Simon Sinek’s fundamental advice Start with Why, comes handy here. Ask yourself why are you taking a loan? Is it to create an asset that you can rarely buy in cash and which could appreciate over time? Then by all means, debt helps. This includes purchasing houses if they are not off the roof, since most of us will find it difficult or cumbersome to make it an all-cash purchase and in some ways, it’s needed for peace of mind. On the other hand, when it comes to shopping sprees and even holidays, its better to save first and spend later.

Credit Card loans, personal loans or in general any debt which is high cost (over 9% rate of interest) is bad. Any debt which is between 7-9% is bearable to certain extent and few years, if for essentials. Anything below 7% can potentially be a great leverage mix!

But make sure – paying off high-cost debt comes before building assets. 1 Cr home loan taken at 9% in effect will mean you pay 2 Cr in 8 years and a stupendous 4 Cr if paid in 16 yrs!

6) Providence of PFs

Most of us underestimate the power of the two PFs which are able instruments in our portfolios– EPF & PPF. These are instruments of extreme power and simplicity – not to forget the tax benefits. Keep investing and touch them only when you retire to see the magic of compounding. With EPF, make sure to transfer it every time you move jobs so that it is all consolidated and never dormant enough to not earn interest.

7) Seventh rule and Eighth wonder

Seventh rule is simply to “Invest” – which will ultimately deliver the fruits of eighth wonder “Compounding”. There is no one-formula to solve this. But here’s how the cookie crumbles:

• 100 Rs of savings:  90 Strategic (long term) and 10 Tactical (roulette money)
• 90 Strategic: 63 in Equity (MFs + Stocks), 18 in Debt and 9 in Gold
• 10 Tactical: Maintain a separate bank and demat account for your thrill-plays. Take your chances. If you keep winning, you are well on course to be the next Oracle of Omaha! If you lose all – close the accounts. Don’t move money from strategic bucket to the tactical one, ever.
• Changing & churning: While rebalancing with minor tweaks and moving among different classes is desirable, jumping between funds in the same category for the lure of numbers not so much.  All that practice does is incur more costs. Once you buy a fund, hold it for 3-5 years.  1-2year performances are mostly a result of random chance and not skill.

8) Simple makes money

If it’s too fancy or good to be true, it probably is. Keep your investments simple and basic. Restrict equity allocation to Mutual funds if you don’t have time and know-how to dabble into stocks. In investments, most boring is the best product. Simple makes the most amount of money.

9) Know what to avoid

• Avoid high cost products. They never make money.
• Avoid Insurance which is linked with investment in any form or manner.
• Avoid structured products with complex pay-off models linked to trigger events
• Avoid real estate linked products like private equity funds, REITs, lease rental yield products etc
• Avoid AIFs, long-short derivative and hedging strategies
• Avoid Avoid Avoid – the more you avoid and less you adopt, the more your chances of winning the long game!

10) Love thy excel

You can be a poet at heart, but when it comes to managing your finances – you have to fall in love with your excel. More you record, more your register. More you track, more you deliver. If someone else is tracking things for you, it ain’t good enough.

After GOD – Believe in compounding! Magic happens if you have the patience to withstand the yin and yang of time, if you have the iron-will to curb temptation to avoid short term plays, if you have the discipline of following basics and be steadfast in your investing approach. Magic happens – believe in it 😊

To conclude, we will borrow from the famous lines of Rabindra Nath Tagore (and add some schezwan sauce to it) to succinctly wrap up what should be every rational investor’s mantra:

“Where the mind is without fear, and the head is held high; Into that heaven of financial freedom, my father, let my investors awake. Where knowledge is free; Where personal finance has not been broken up into fragments, By complex ill-defined product ideas; Where suggestions come out from the depth of truth, Where investors striving stretches towards debt-free life, Where the clear stream of reason has not lost its way, Into the dreary desert sand of high costs, Where the mind is led forward by advisors, Into ever-widening thought and action, Into that heaven of financial freedom, my Father, let my investors awake.”