Let’s Talk Money Book Review
Money is not a topic always broached with rationality and/or knowledge in our society. Quite often, our biases and insecurities come into play when choosing how we spend or invest our money. This, in turn, gives way to terrible investment plans where we unwittingly put our money and incur losses. At the same time, a lot of us choose to not care about investing, too bothered by our current spending patterns to worry about saving money for the future.
Not anymore. Through this wonderful book, Monika Halan provides a detailed and comprehensive look at how you can easily manage your personal finances and grow your wealth over time. As Nandan Nilekani states in the preface to this book, “Monika tries hard to make herself unnecessary after you’ve read the book.” And without a doubt, the book helps you understand everything you need, in order to start saving and investing your money while preparing for a secure post-retirement life.
With numerous personal stories and simplistic explanations, Monika takes you through every step of a balanced financial life. The book is specially written keeping in mind the average Indian person, though it can be useful for anyone outside India as well. Of course, reading the book is the best way to go, but if you’re short on time, this review-cum-summary should do the job for you.
Pandemic and the Subsequent Lessons
Barely anyone could’ve seen the pandemic that would hit the globe in early 2020 and claim lives everywhere, halting national economies everywhere. It further showed why having a substantial emergency fund for such unpredictable situations is so necessary. How to have that? We shall see in just a moment, but for now, the pandemic has only proven why it’s crucial that you actively save and invest your money.
Create a Money Box
One of the biggest hindrances to investment is that we have a number of excuses ready at every stage of our lives, or we don’t have any actual financial planning in our lives. The book stresses having this money box in your life, with different compartments that help you streamline and better manage your financial life.
One cell has your usual cash flows, the money you keep in your primary savings account for everyday transactions, another cell for emergency funds, one for medical cover, and another for life insurance. Then we have cells for investments, divided according to the time we can invest them for. By having this mental money box, we’d be able to keep track of our money in a simpler and easier way.
Emergency Funds and Insurance
Sure, keeping emergency funds is crucial but where do you keep them? In your savings account? No, the interest given by banks is much less than the inflation rate, so your money effectively decreases while it stays in the bank. Fixed Deposits? Higher returns than saving accounts, but it’s the same situation there as well. A better solution is to invest in conservative funds that give you lower returns but keep your money safe for any emergency.
To begin with, avoid insurances (in particular, life insurance) that try to combine investment products, because they have terrible returns and often end up giving returns worse than FDs. When getting your medical insurance coverage, make sure to check the diseases included in their terms and the maximum expenses they can compensate for. It’s also useful to keep in mind that getting medical insurance at an earlier age ensures you get it at good prices with more benefits.
Often, we unwittingly purchase insurance products that provide us with no benefits when we need them and only serve to drain our expenses. Therefore, make sure that you understand every aspect of a life cover or medical cover, or any insurance for that matter, to make sure they actually help you in your time of need. Working with a good financial planner and checking online reviews for an insurance product is a good way to gauge the different sides of it.
After keeping money away for emergency funds and different insurance products depending on your age and circumstances, it’s time to invest! Traditionally, Indians love investing in gold and real estate, when they’re quite often the worst investments to purchase. Over a long period of time, gold and real estate often don’t measure up to the higher and better final returns (“final” implying the money you get after removing taxes and other maintenance costs).
As per Monika, you should keep away from real estate completely, despite the general perception of it, because of the hundreds of expenses you have to spend, and that gives you measly returns in the end. Instead, you should focus on equities. Now, equities are the type of investment where you buy a stake in a company, and depending on how their prices rise or fall, your investments grow or decline too. Over time, when you let your equity investments cook and grow, they invariably show growth. This is true when we’re looking at spans longer than 7 years, and this includes all kinds of market volatility, be it a pandemic or some market crash.
When it comes to the stock market, the biggest virtue is patience. Give your investments time, and they’ll show you great returns. The best results are often seen in 15-20 years or more as these long periods serve to smoothen any market volatility. But how do you invest if you don’t have the time or ability to choose the best funds and monitor them? You just go for the index funds. Index funds invest in the top companies depending on the category you invest in.
The large-cap companies, indexed by Sensex and Nifty50, include the top 100 Indian companies at any given point in time. These companies are established and reputable firms and ensure stable returns over time. Then come the mid-cap companies and small-cap companies, that rank between 100-250 and lower than 250 as per SEBI or the Securities and Exchange Board of India. Investing in mid-cap and small-cap companies gives you higher returns but is also riskier than large-cap companies.
So how do you invest in a balanced manner while keeping a diverse portfolio? Simply by investing in mutual funds.
In simple words, mutual funds collect money from several small investors and hand it to experts to handle them. They include all the different kinds of asset classes: debt, gold, equity, and real estate. Depending on your age and current situation, you should have separate allotments to each of these classes, in order to reduce risks and improve returns.
With age, it’s better to keep more and more of your investments in debt funds, reducing the overall risks. Getting government bonds is the safest way to go when it comes to debt bonds, despite it giving relatively lesser returns. When getting equity mutual funds, you have two options. You can either go into the managed, aggressive mode where a fund manager keeps an eye on the market and shifts your funds as per its ups and downs. So, the performance of your investment would also depend on the manager and their performance. These are called active funds.
Passive funds are naturally cheaper, but also have lower rates of return. These would include index funds where you can choose where you want to invest– mid-cap index funds, broad market index funds– and so on. The risk associated with the category of a particular index will be the risk associated with your investments.
Now to Bring All of it Into One Place!
All the financial products that we look at here have their own role and therefore “deserves” a place in the money box. You don’t put them in just because some distant relative told you to, or because some sales representative was being very persuasive. So, you need to make sure you know the different aspects associated with each product in your money box:
You need to make sure you know what the different costs attached to a financial product are. Is there an entry cost, a commission, an ongoing cost, and an exit cost? Examine these costs before purchasing any product.
No matter what magic number someone shows you, make sure to examine the annual rate of return. A simple way to calculate the annual rate of return is the Rule of 72. As per this rule, you find out the time in years) an investment takes in order to double your money, and then divide 72 by that number. The answer would be your approximate rate of return per annum. Also, while calculating returns, it’s advisable to include different factors, such as taxes, maintenance costs, etc., to get a more practical return amount.
Always make sure to check if your amount is locked in for a certain period, and if yes, then how long. Often insurance agents lie about this matter, which is why it’s even more crucial to find out the exact details.
Cost to exit early
There’s no predicting what lies in the future. And in case of some emergency, if you have to exit early, can you do so? And if yes, what are the associated costs? It’s useful to compare it while purchasing a product for a better idea of it.
We have all expressed or seen others express the wish to leave their jobs and lead a simple, peaceful life. But when? Quite easy. When your assets are enough to generate enough income for you today and for the rest of your life, you are financially free. In other words, retirement becomes a choice rather than some distant dream. It takes time to change your spending and saving habits, but with a little bit of practice and perseverance (and with a lot of patience), you can easily reach your ideal financial condition.
You’re doing OK if…
Each chapter has some key checkpoints that tell you if you’re on the right path or not in your financial life. These checkpoints serve as quick summaries as well as points to later come back to, and we’re going to look at 25 such checkpoints spread throughout the book. You’re doing okay if:
- Depending on your age and responsibilities, you have at least 6 months to 2 years of emergency money kept in deposits and funds that are liquid and safe
- You have personal medical cover and your testaments are well documented, with details of who gets what, with your family being aware of all your insurances and other information related to the will
- You have other career options outside of your primary career in order to meet the demands of a changing market and world
- You have separate accounts for your income, monthly expenses, and savings
- You’re spending less than 45-50% on your monthly expenses, less than 25-30% on your EMI payments, and your savings make up for at least 15-20% of your income
- You have at least 3 months of emergency funds when the family has dual sources of income and no dependencies
- You have at least a year's worth of living costs in your emergency fund if you have just one source of income with additional dependencies and they’re ideally kept in short-term or conservative mutual funds
- You have a family floater outside of your work cover, which is between 3-7 lakhs if you’re living in a small town, or over 15 lakhs if you live in top-tier cities and want treatment from five-star hotels and you have a top-up plan over your basic cover if you’re over 60 years of age
- You have a pure-term insurance plan that you bought online and you don’t have any ULIPs or traditional plans
- Your life insurance assures you an amount that is 8-10 times your current annual income and 15-20 times your current annual expenditure
- Your investment in gold should be completely in government bonds and the total investment should not exceed 5-10% of your portfolio
- You don’t have any real estate investments outside of your own house
- You have your provident and public provident fund, but no other debt products and your percentage investment in debt products in your portfolio is less than your age, so, less than 30% when you’re 30, and so on
- You understand that equity isn’t some get-rich-quick scheme, that mutual funds are the best equity option, and that it shows the best results over a long period of time with returns of 12-15% per annum
- You invest through index funds or EFTs if you aren’t able to choose funds
- You know that you can invest in gold, equity, and debt through mutual funds, and that managed funds are riskier and costlier but can also give better returns
- You understand that your safest option is to go for index funds or EFTs that track Nifty50 or Sensex and that it’s better to keep your investments for years for the best benefits
- You understand that the further away your financial goal is, the more risks you can take, therefore conservative hybrid mutual funds for goals within 3 years, hybrid and diversified aggressive equity mutual funds for goals that are 3-7 years in the future, and a combination of diversified equity, multi-cap, mid-cap and small-cap funds for goals that are 7 or more years away
- You’re saving 10-15% of your salary toward your retirement and targeting a retirement fund that is somewhere between 18-35 times your annual spending at the age of sixty
- You start saving 30% of your income at the age of 30 if you don’t have any retirement funds by then, 40% by age 40, and 80% by the age of 50
- By the age of 40, you have 3 times your annual income in your retirement fund, 6 times your annual income in your retirement fund, and 6 times your annual income in your retirement fund
- You don’t change your money box with every stock change and instead rebalance and reconfigure it twice a year or as per your personal situation
- Your spending is controlled and you pay your credit dues on time
- You keep your investments no matter whether the market rises or dips
- You stay away from temporary investment crazes like bitcoin
The book is a treasure trove both for those new and familiar with the world of investing and financial planning. Monika Halan has a witty way of explaining things and she has a suggestive rather than prescriptive mode of explaining that leaves the final decision in your hands. By creating a detailed money box and channeling your money properly, you can make sure that you’ll have a secure and comfortable financial life, both pre- and post-retirement.