If There Is One Guide You Need To Fix Your Personal Finances, Here It Is

Let’s Talk Money. Monika Halan. Harper Business. Paperback. 214 pages. Rs 399.

This may be an overstatement, but it is probably true that most Indians are bad at managing their personal finances. And one is not talking only about people who use their credit cards as if there is no tomorrow, go for inappropriate insurance policies, invest in real estate or gold for the wrong reasons, buy stocks on the basis of inside information, or people who generally don’t save for their retirement till it is almost too late.

The truth is, even the financially literate, people who dabble in money day in and day out, can sometimes make huge mistakes based on ego – I know what I am doing; after all, I give others advice on where to put their money. I know, for I was one of them. I invested large sums regularly in the National Pension Scheme (NPS) on the assumption that no law would be daft enough to tax 100 per cent of withdrawals on maturity (usually at age 60, but which can be extended); I assumed that the tax, at best, would be on the gains made on my investment. Well, I was wrong, and ended up losing money on the NPS a year ahead of the time when taxation on withdrawals was made more rational.

Lesson one: don’t assume that rosy schemes drawn up by babus are intended only to benefit you. You have to watch out for the embedded thorns.

The short point is that one can make mistakes – huge mistakes – even when one is financially literate. The shoulder I used to cry on after my NPS disaster was Monika Halan’s, probably the best personal finance writer in India today. Which is why I have no hesitation in recommending her latest book, Let’s Talk Money, published by Harper Business, to everyone. The Rs 399 you would pay to buy the book may well be the best investment you have ever made.

The best part about Halan’s book is not just that it is easy to read, but that it recommends a “system” for managing your personal finances. Most people keep all their money in one pot, usually a bank account, sometimes linked to trading and demat accounts. This is fine, but the fundamental issue in personal finance is often confusion about how much of your income you should spend or invest. Halan comes up with a neat and simple system: open three bank accounts, one to funnel all your incomes and earnings, another to manage spending, and a third one to focus on regular investment.

So, your salary and other earnings go into one account, from which you transfer regular amounts monthly to the spending and investment accounts. You thus know your monthly spending limits and can feel secure that you are building a nest-egg for the future in the investment account. Two of your three bankers may not be happy that the money coming in seldom stays put, but the third one – the spend-it one – should be reasonably happy that the money is whittled down in stages over a month and not instantly. As your income rises (or responsibilities, for that matter – parents, children, spouse, illnesses), you must obviously renegotiate (with your rational self) to raise spending or investment limits, but this system helps you maintain financial discipline.

Starting with this simple system, the book then takes you on your personal finance journey from basics to true understanding. It first asks you to create a contingency fund (what if you lose your job, or suddenly have high expenses coming up?), then moves on to protection money (medical and life insurance), before finally coming to the big issue: investing.

Most of us wrongly focus on investing when the bigger decisions relate to insuring yourself (and your dependents) against the possibility of serious illnesses, or death. Halan will tell you quite clearly that insurance should be treated as cost and not investment. You should take term life insurance for it is the cheapest, while endowment and money-back policies offer a hybrid of life cover and investment. But the point is simple: why mix costs and investments? If you want to invest, why do it indirectly through a life insurance policy when you can do so more transparently through a mutual fund or stocks or bonds?

So, protection comes almost before everything else, and this is an important lesson for all to learn. You may not need life insurance if you are single and have no dependents; but even you cannot do without medical insurance, for the biggest danger is not of dying, but living and not being able to afford the hospital bills.

Halan then takes you progressively up the learning curve, starting with various financial products (debt, gold, real estate, equity, mutual funds, etc) and wrapping it up finally in a “money box” that has cells for various kinds of investments – from cash flows (those three bank accounts), to contingency, to insurance, to investments with various time lines, including retirement. Every box urges you to calculate your costs and benefits, so that you know if you are doing the right thing by yourself and your dependents.

The key is to have the right mix in the money box, something called asset allocation, with the idea of minimising risks and maximising returns. Many of us get misled by stock mavens telling us to buy stocks for the long term when what should decide allocations to any particular class of asset is your risk-bearing ability and life situation. I recall an interview with a big investment banker who advised people regularly to invest in stocks, but when asked where the bulk of his money was, he mentioned tax-free bonds and liquid funds. Not that he didn’t have investments in stocks, but that was a smaller percentage. He, too, was making asset allocations based on his situation. His priority was wealth preservation, not necessarily growth.

Making a will is, of course, compulsory, for all of us are ultimately – or even unexpectedly – going to nudge the bucket. The worst inheritance you can leave your near and dear ones is uncertainty and strife about who gets what when you go to meet your parmatma.

But you may still live long, and Halan recommends a retirement corpus of a minimum of 18-35 times your annual spending at age 60. These are ballpark figures, and the actual amounts should be recalculated according to your situation and plans for the future. You may actually want to head for a cave in the Himalayas after 60, in which case some of these suggestions may fall flat.

But assuming you do intend to attain more normal nirvana living in urban India, with grandchildren sprouting all around you, Halan’s got the right ideas.

If there is one book on personal finance you need to get your hands on, Halan’s is the one. Go for it.