Here are some lessons which I wish somebody gives to all graduates. It does not matter whether you are a CA, MBA, a doctor, Engineer or a plain graduate. These lessons are the basics of finance which is nice to know and MUST to implement. Let us enumerate them:

1. Avoid credit cards: Well Warren Buffet (forget his recent behavior, he is still a genius) says this is the most important lesson which a college graduate should know. If you understand compounding you will realize what 3.25% p.m (compounded monthly) can do to your portfolio. If somebody was paying you that on your deposit you would be a millionaire several times over!

2. Learn self -control: What ever you need today see if you can count to 25. If you can hold on to a desire for 25 days and then buy a lot of harsh, impulse purchases can be avoided. Of course if your parents taught you self control that is great!

3. Take to some sport: Company deadlines are all fine..but do not miss out on the fun, it is not worth it. Continue playing with the kids of your building – they will provide more energy than your friends. The energy of a 14 year old is higher than the energy of a 24 year old! Playing some ad-hoc sport and some organized sport both have their advantages.

4. Take charge of your personal finance: Let not your parents, elder brother or even worse a financial adviser not tell you ‘It is too complicated for you to understand’. Get the books to read, understand, and be responsible for your financial welfare.

5. Share the Economic responsibility with your parents: It means learning how to run the house within a budget. Learn if you do not already know how to do it and your parents have not taught it to you.

6. Learn compounding – it will inspire you to invest for the longer term. In the year 2065 or in the year 2070 YOU TOO WILL RETIRE! Start preparing for it. Sign up for a nice equity mutual fund with a clear large cap mandate. Do not buy a pension plan from a life insurance company.

7. Create an Emergency fund: ‘Just in case’ if something goes wrong – an accident, loss of job, replacing a laptop – you do not know from where the emergency could come. So be prepared for it. Of course it you are staying with your parent and he has an emergency fund …you may be better off, but still it is better to create a fund for your own self.

8. Take trouble to understand your C T C (cost to the company) – and your monthly statement. See if you need to make investments to save tax. If the answer is yes start NOW. Today, not tomorrow.

9. Treat your employment as a business: Your boss pays you a salary out of the profits that you make for him (i.e. the income you earned for him MINUS the expenses that you incurred – including salary paid to YOU) adjusted for the risk that he takes. If you brought no revenue learn to be happy with what you are getting.

10. Look after your health: Do everything in moderation – eating, freaking out, drinking, scullying, having fun. All these have their place under the sun, but your health cannot be ignored. Damage done now will haunt you for life. Be careful and take care.

11. Look after your wealth (and your parent’s wealth): If your parents / siblings depend on your income (or even if they do not) see whether you need medical, auto, life insurance – it is important to protect your wealth.

Get a good degree ——> It will lead to a great job—-> You will earn a lot of money —-> You have got rich.

This is one route. Well there are some issues – every body cannot get a good degree..so the scheme is torpedoed at the very beginning itself.

Set your goals, invest in a mutual fund, do a SIP in a good fund, review your portfolio every 3 months (monthly is bad you see), shift portfolios, churn managers, subscribe to the bank’s monthly magazine. We will tell you how to invest every month…and then sit back and relax. Well have you heard this before? I bet you have. It does not work, at least for most people this does not work.

If you ask me the most important step in getting rich is in getting a good financial planner. A guy or gal who is on your side. Fully on your side. This means a fee charging planner who does not sell the product – directly or indirectly. Such a person is difficult to find.

Once you find him ask him how much TIME he is willing to spend with you. And what fee does he charge. Too low is scary (how long will be here?), too high is not worth it (catch 22!).

Stick to simple things – low cost large funds in equity, a term plan, one credit card, that is all…after all like Leonardo Da Vinci said “Simplicity is the ultimate Sophistication”. KISS works here too….so if your Fin Planner suggests, Nifty linked debenture, PMS, F&O, commodities, …you know what to do, do you not?

If you belong to that class of employees who gets a bonus at Diwali time, lucky you! Today you would be sitting on that bonus in your hand and the whole family would have a claim on that.

Who are the claimants on this bonus? Lots in fact!

Thanks to the fact that companies want to look good, they may not cut all the income tax that is actually due on the bonus. Thus if you are in the 30% slab and the company has deducted only, say 10% tax, first set aside the balance tax payable in a money market mutual fund or a bank account – this amount actually never belonged to you, so cool it!

Many people anticipate the bonus and spend on the credit card- which means that payment will be due in 45 days. If you have spent on your credit card, pay it off in full, as soon as you get the bonus. Even non-Diwali purchases sitting on your credit card should now be settled in full. Makes sense to pay off the most expensive debt as soon as possible, correct? Even if the credit card amount is due only after 15 days pay it off TODAY!

What is true for a credit card debt is also applicable to a personal loan that you are paying off slowly. Use this money to accelerate the repayment of the loan. In case you are struggling with a floating rate home loan, use a part of the bonus to pay down a part of the loan so that you reduce the tenor of the loan.

If you have decided to make some purchases specifically with this bonus go ahead and do it. Hopefully you have gone on to the net and done your short-listing before you make your actual purchase.

Having said all that, in case you have no liabilities, rejoice! Then you have some better choices with the end use of your money.
When ever you get a lump-sum (I mean post of tax) and you have an urge to splurge – split the amount into 3 parts.

One part you should use for current consumption (Diwali gifts, clothes, sweets etc.) put one part for your deferred consumption (say your pension accumulation) and use the third portion to pay for some shorter term goal – say as a part of the down payment for your car purchase. Thus a portion goes into immediate gratification of needs, one to a slightly deferred gratification of needs and one to a more deferred gratification! Remember that your retirement money is there to feed you when your earning capacity is limited or zero.

It is always nice to work towards a goal – upgrading a car, upgrading a house, having an emergency fund, children’s education, retirement corpus building, repaying a home / credit card loan are all goals towards which most of us have to work. So use your balance money to do any or all of these and the excess money can be splurged at Diwali.  One important thing to remember is that many people in our country cannot afford Diwali expenses – and crackers make many elder people ill. So in case you have been feeling nice about your portfolio going through the roof and feel like giving some money for charity, now is the time.  My daughter’s school and friends have brainwashed her – she says no to all types of crackers – noise, smoke, scares birds, scares animals, etc. – but it is your call!

Yes, this is also the time when you actually have some money to give to charity. Donating some part of this money to a charitable trust would be good. Visit www.akshayapatra.com and make your contribution.

Also remember that when you have money many people would like to take it away from you promising returns that are in the stratosphere. Be careful of these “un holy” kinds of returns. In case you think these returns are too good to be true, you are correct. Be careful. Diwali is also Lakshmi Pooja day – be respectful. Use wealth wisely, protect yourself from cheats – financial education helps!

This of course could be a fantastic tag line for a financial education business! However I have been convinced about a few things. The old Macaulay system of education in India – and perhaps around the world was created by the ‘Ruler’ who wanted to have a huge supply of clerks and soldiers. It is of course shameful that we have not made any change. However, as Robert Kiyosaki asks – is it accidental or is it deliberately done by the RICH so that the poor do not understand the REAL RULES of money? Welcome to financial literacy.

I wish to do a series of articles / lectures – hate to give it away free, but do not know how to charge!

Let us look at the American ’s.*.o.^b.s did in 1971. They said we have the right to print as many notes as we want, there is no gold linkage. Simple. If you had done it, you would be in jail. Nixon could do it.

In 2005-8 they gave NINJA loans – No Income No Job jokers could get loans because their home value was going up.

Ben was printing notes and making all Americans millionaires, billionaires and now Trillionaires! In US savers was a word  spelt as -S*U*C*K*E*R*S!

In India too the mushrooming of financial product companies – who surely have an agenda of financial illiteracy – and a combination of people thinking ‘financial literacy is too painful’ is a heady cocktail for a financial tsunami. If you have lived your life ensure that your kids do not get caught in it. If you do not know what is a mutual fund, hedge fund, unit linked insurance plan, e-broking account, F&O, credit card but you have all of them, you are already a tsunami victim.

The victim is not an illiterate, servant in your house. It could be a 54 year old Chartered Accountant working as an Executive Director in a Pharmaceutical company who signed up a form because a beautiful girl from a bank called on him. Cost of financial illiteracy? Only Rs. 20 lakhs. Not bad, if he had attended my lecture on personal finance, he would have paid Rs. 20000. He would have found a cheaper way of buying THE SAME POLICY – and saved Rs. 200,000 in fees. Not a bad ROI?

Financial planners talk only of an income emergency. They do not talk about an asset emergency. When your assets crash and you are reluctant to sell at the current prices it is equivalent to not having the asset. For all your requirements in the next three years your money should be in assets you do not mind liquidating IMMATERIAL of the current price. Frankly to me it could include gold, money market mutual funds, arbitrage funds, FMPs, bank fixed deposits, or even in some equity index fund invested over a very long period of time – say 22 years, then, you should be indifferent to today’s price.

For most of your life you’ll want to set aside about six months’ worth of living expenses in the bank. That money covers the EMI, puts food on the table, and pays the kids school fee – should you lose your job. The fact that you’ll earn only about 4% is beside the point. This is a convenience, not an investment. You can’t take the risk. But once you have the basic cushion there is a tendency to invest it, correct? This was the most obvious thing to do. However 2008 makes us revisit this. If your daughter’s marriage is in 2011 normally I would have advised you to start withdrawing in 2010. Now frankly I am as scared as you are – I would happily start withdrawing from 2009 mid and keeping the money in an arbitrage fund with a huge corpus. Forget the returns and risk –YOUR goal is far more important is it not?

IF you were hoping to use your credit card as an emergency fund ask the Satyam employee whose credit limit was squeezed dry. A credit card’s ‘un-drawn balance’ may not be a great emergency fund. It was always the right idea to put money for near-term, big-ticket items in a safe place. But 2008 was a conspiracy against common sense. First, it seemed fussy and old-fashioned to deny yourself leverage and future growth by saving when your house and portfolio were appreciating at 30% a year! For a minute assuming your financial planner had asked you to sell, you may perhaps have changed your planner. It is tough to go against the tide!

I asked her how much has she paid on the credit card…she said Rs. 1600. Then I found that she was paying ONLY 5% OF THE AMOUNT OWNED – because that FIGURE was in BIG, BLACK AND BOLD! Then she paid off Rs. 32,000.

This of course is an extreme case, but there are many howlers. One girl about to join for her MBA was doing an SIP in an equity fund. Now when she needed money, she found her NAV at 50% of her investments. Both aggression and pessimissum can be bad for a portfolio. If you know exactly when you need the money you are normally better off in a debt instrument if the period is less than 3 years. Only if you have a vague idea – and say the period is 10+ years away should you think of an equity fund.

If you have a personal loan (or worse credit card debt @ 51% p.a. from the bank which does not let people sleep), a car loan, etc. I am not sure that you should be investing at all! Partially yes perhaps, but normally investing makes sense only when you have just a home mortgage. Most other loans are likely to be expensive and tax unfriendly.

So it is really very difficult to give one short answer. It really depends on case to case. For a 23 year old girl who wants to do her MBA 2 years hence, and fund her marriage expenses (at least partially)….bank recurring deposit or A MIP (with 20% in equity) is not a bad option at all. STAY AWAY FROM EQUITIES!

Welcome to the world of emergency funds.

In life accidents happen when you least expect it, does it not? If there is a financial emergency (i.e. your main source of cash to meet your day to day expenses is threatened (temporarily or permanently) what do you do?)
The best you can do is to prepare for emergencies that require access to additional money and having an emergency fund is the ideal solution. Financial emergencies can come in various forms. What could it be? Well it could be a job loss, medical expenses, involuntary travel, identity loss, etc. If the problem is clearly temporary you may be able to deal with the credit available on the credit card or take a personal loan. Examples of such expenses are medical emergencies, car repair, etc

However if it is of a slightly more long lasting nature – like a job loss – you do not want to take credit risk. If you are not able to repay on the due date, what happens?

Best course of action is to create and keep a nice Emergency fund – and use it. Some people think having a credit card un-drawn limit is a good way of keeping an emergency fund. I thought so too till the Satyam episode! As soon as Raju ‘confessed’ most banks quickly put a ceiling on the amount of money you could draw on your card.

So I suggest keep your emergency fund safe. How to do it, we will see separately!

There are many ways how a person can use his credit card sensibly. As far as I can see it, the following makes sense. I have a friend who has almost a nil balance in his savings account. He uses his credit card extensively and on the due date issues a cheque – and the money flows from his Liquid Mutual fund. This I think is excellent but not my style. To me moving money from a LF to SB in time to pay bills is a lil too much of an effort.

I have 2 credit cards. One from I bank and the other from H bank. I bank thought it worthwhile to give me a limit of Rs. 47,000 and H bank thought it worthwhile to give me a limit of Rs. 5 L.

Largely i pay for my petrol, telephone, travel, hotel, grocery, vegetables, books etc. on my ‘I’ bank credit card. On the due date (actually 3 days before) it gets paid in full from my Savings bank account. Rarely have any purchases been made for a durable item like a music system. Of course I bank calls me regularly for converting it into an EMI – and that is amusing to say the least. This card is used really heavily for purchases of air tickets, rail tickets, E- buying of books,

The H bank credit card is used once in a while in a very secure atmosphere – to just keep it alive.

Why do I need the H bank credit card at all if I am not using it?

‘Cause it is a card that can be used in case of a medical emergencies. If a dependant is admitted in hospital (and hospitals are notorious for not admitting without payment) the easiest thing to do is to sign a blank slip and get the patient admitted. Next morning withdraw money from the bank and replace the blank charge slip…as simple as that.

So this is the way I use the credit card. I would be happy to see your comments on this whole issue of 3% p.m interest that credit card companies charge…

The caveat first – I hate debt. I hate debt. I hate leverage. I rarely do an Options trade, nor do I ever buy a share in a Futures trade. All assets have been paid and bought.

Now let me ask you a question: “If a 49 year old man has a 3 lakh personal loan (at 21% p.a), a credit card debt of Rs. 100,000 (at effectively 42%), a car loan of Rs. 600,000 (at 14%), and a home loan (at 12.25%) of 34,00,000 – and he gets a ‘gift’ of Rs. 300,000 – what should he do?”.

The biggest problem in being an expert is you have to tell the customer what are the options available – and let him choose.

Let us look at all the solutions:

1. He should take a top up loan for the house (assuming he can get a top up loan of Rs. 700,000), use the gift of Rs. 300k and pay off all the non mortgage loans.

2. He should pay off the credit card loan of Rs. 100,000 and pay down a part of the personal loan. Mathematically it is the best solution because he his paying off the most expensive loan first.

3. He should pay off a part of the housing loan – after all the house is biggest asset and the biggest loan.

4. He should apportion the money amongst all the loans in equal amounts – over all he gets a feeling that every liability is getting reduced.

Now if you are a client what will you do? The planner in me has confused you fully and completely. Sometime later I will tell you the disadvantages of all of the solutions!

Taking responsibility for his whole team, he hired a nice Merc bus from Kuwait up to Iran – and flew down from there to India. What worked as currency for him was of course cash, movie tapes of Amitabh Bachhan and Raj Kapoor, his American Express gold card, gold chains and other gold jewelry.

If you tell such a man that holding cash is foolish – he will lynch you.

Of course you need not face such a dire situation. Many people use the undrawn limit on their credit card as an emergency fund. In a bull market that looked fine, in a bear market that is risky. If the size of the emergency fund that you should have is being determined by an outside company, you could be in trouble. Look at what happened to employees of Satyam. Suddenly the limit was decreased.

Even other wise if you spend 3x of your salary on a medical emergency. The interest rate on the credit card will hurt you. If you earn say Rs. 40,000 a month. You should build up an emergency fund of say 6x your expenses (say Rs. 25k a month) i.e. Rs. 150,000. It is not easy to build up this kind of amount in a simple floater fund when the temptation to blow money is high! However, the balance helps because in a liquid/ floater fund it is growing at least at 7%.

If  you did not have this kind of a fund and you actually spent it on your card, the amount of time it takes to repay such and amount (with interest at 42% p.a) is not funny.

So cash a strategic asset is also a saviour asset.