Tuesday, October 16, 2012

Grand Father's E-mail

My dear grandson,

Please accept my congratulations on joining your first job. It is really great to get a job during your final years of study, and join in a multinational company immediately out of college. Things were very much different in my good old days. In our days, we need to finish our exams, scan the news papers every day for opportunities, prepare and attend the tests and interviews and finally get an appointment letter. It would have taken a few years after study before you join  your first job. 

I know you are celebrating your success. You deserve it well. I guess you are getting many pieces of advices on how to succeed in your career from virtually every one you know, from your neighbors, from your teachers, from your Dad's friends and whom not. However, please understand that it is your career and life, and you are responsible for every decisions you make. Whether to accept or reject these advices - it is upto you.

I will also give you advice on some thing different. Who likes advices? Better we can call these tips. There is high probability that no one told you these things, despite the heavy load of advices you received. So, I thought I should write this.

Once you join your job, you will start doing a new thing, you have never done before. Can you guess what it is? Yes, It is handling your own money. You may have limited experience handling your pocket money, but handling your own money is entirely a different ball game. I hope the below tips will help you to overcome your inexperience in handling money for a certain extend. However, certain things you will have to learn from your own experience. In that case, learn fast and move forward, rather than crying on spilt milk.

As I told you earlier, to accept or reject these tips, is entirely your own judgement. You are only responsible for your deeds.

Here you go.

1. Do not ignore money

This is my first tip. I am sure you got one piece of advice from your Dad's friend "don't think about money, work hard and money will follow". There is no bigger mistake than this. The old saying is that what you give attention grows, and what you ignore wilts.

I am not asking you to think about money all the time. What you need to do is spend some time regularly to plan your finances and to track your expenses. Spend some time to read articles and books on money management. It may not be your obsession, but you need to know the basics to succeed in this world. Believe me there are lot of things to learn about money, than you expect.

There are many instances people will judge you based on money you earn. But it is your life, no need to live it the way your neighbors want. But, please take my word on it, my dear son, without money no matter what else you have you will not be happy. So you can consider money as an umbrella necessity. Just like love and health, money is also very important in human being's life.

2. Spend below what you earn

This tip may seem simple to you. But you will realize how difficult to follow this, only when you start living your own. You may be wondering how some one can spend more than what he earns. There are thousand ways to do this. Below are a few examples
  1. Lend money/loans
  2. Break your previous investments
  3. Use Credit Cards.
 The third one is most common one. Credit cards are to money what smoking to health. Whatever advantages credit cards have, if you want to check your expenses below your income, say no to credit cards. People, who have the habit of tracking their expenses, know how complicated it is when credit cards are involved.

Follow this simple rule, and I am sure you will end up in trouble whenever you break this rule.

3. Track your expenses

Read this tip related to the previous one. They say what you can measure, you can manage. How to measure your expenses? Get into the habit of writing down your expenses every day. It may seem difficulty initially, but once you make it a habit, you will realize how useful it is.

Spend some time at the end of the month to analyze your expenses. And see how you can avoid some of the misspending.

If you have the habit of noting down your expenses, you will think twice before going for a eating out after work (not to mention the boozing)

4. Prepare for the worst

Life is more complicated than you think.  Emergencies pop from nowhere when you least expect those. You need to be prepared all the time for such emergencies. What I am going to say here is about two things, insurances and emergency fund.

Who needs a life insurance? To answer this question we need to understand the purpose of life insurance. Here is the definition of life insurance from Wikipedia "Life insurance is a contract between an insurance policy holder and an insurer, where the insurer promises to pay a designated beneficiary sum of money (the "benefits") upon the death of the insured person.". Yes, that's it. If some one purchase a life insurance policy, and dies during the coverage time, the insurer pays sum assured to the dependents of the insured person. It is a great tool to make sure your dependents continue their life without financial struggles, even without you. I am sorry to discuss things related to death at this time, but then you cannot discuss life insurance without mentioning death. So who needs life coverage? A person who has dependents. But I know many bachelors purchasing multiple insurance plans, considering those same as recurring deposits.

I hope you are clear now that you don't need a life insurance coverage at this time, as you are a bachelor and your parents can support themselves. So say no to that your Dad's friend and insurance agent, who has already approached you to sell you insurance policies.

Having said that you need Life insurance coverage when you start a family. At that time make sure that you have enough coverage to protect your family. Don't purchase insurance policies where you have to pay huge amount as premium and gives you coverage equal to six months of your salary. I cannot discuss different kind of insurances at this time, but in current situation term insurances are most economical. I will write more on this when you start a family.

But this does not mean you don't need any insurance coverage now. I told you don't need a Life insurance coverage. There is another kind of insurance, medical insurances. These insurances protect you against medical emergencies. If you company provides you one, it is well and good. Otherwise spend some money to purchase a good one, which provides adequate coverage.

Treat insurance coverage and investments as separate entities and never mix those. Plan both separately.

The second aspect of preparing for the worst is setting up an emergency fund. This emergency fund is your investment in liquid cash (or which you can encash in short notice). This will help you to meet really emergency situations like loss of job, medical emergencies and emergency vehicle maintenance. Experts say you need to keep an amount equal to six months of your expense as emergency fund. I bet, without this emergency fund, you will need to break your long term investments, before it is that long.

If you don't have ready cash to setup an emergency fund right now, start a bank recurring deposit and invest regularly to meet your target.

5. Plan your retirement early

When do you need to start planning your retirement? After turning 50 years old? After a few years after getting a job? No, my dear son, you need to start planning the retirement from the first month of your job.

The golden rule is start early and continue investing regularly (read it monthly). Do you know that if a person invests Rs 500 monthly from his age of 25 and continue until his 60th age, he will be left with more than Rs 170,000? That too considering an return rate of 10% annually compounding.

Goal based financial planning is the game of the hour. You need to figure out your financial goals (like your marriage, children's education, children's marriage and of course your retirement) and start investing for each. This kind of planning will help you to meet your future financial needs, without getting into big debt traps.

We, Indians are risk aversive people and when it comes to investment, we always want to play it safe. But like in any other fields, taking calculated risks is unavoidable for success. Never insist that you will invest only in schemes which assure guaranteed returns. For example, your PPF account, assures you return with 8.5+% interest, whereas the mutual funds never guarantees anything. So, play-it-safe people goes to PPFs and bank recurring deposits. Wise people builds an investment portfolio, which is a mixture of both. Please remember that unguaranteed 20% is always better than guaranteed 10%.

When you take risk, there is a possibility for failure. Never dishearten, learn from your mistakes and continue your investments.

6. Pay your taxes gracefully 

Income tax is irrational and complicated. If you make more money, you will have to pay more tax. It is like the Goverment is fining you for making more money. You may think it is more of Robinhood style. Take money from the rich, give to the poor.

Whatever you think you are legally obliged to pay tax. However, understanding and planning tax will reduce your burden. I am not asking you to evade tax. On the other hand, understand how to save tax legally.

Go through your salary structure and understand different ways to save tax. It may not be practical to go through all legal books on I-T. However, your can read good articles to understand more on this.

7. Spend for charity

We are all lucky people and always spend some money for the less fortunate ones of the society. I am talking about charity. Do this regularly, and realize the great feeling. Just like investment, do this at the start of the month, so that you will not run out of money, before doing this.

8. Say No to illegal money.

Any discussion on money will not be complete without this one. During different stages, Life will tempt you with opportunities to make quick and dirty money. Believe in your values and say no. There is no meaning in making money without the peace of mind. As you understand more about money, you will realize that there are thousands of other legal ways to make money. So, Enjoy.

I would like to conclude now. This is of course a long email. When I started my career, no one was there to tell me these things. In schools and colleges, they teach us how to make money, but never taught us how to manage it. That's why I took all the pain to write such a big email. After all, it is your life and accept or reject these tips, it is up to you.

with Love,

Your Grand Father

Image Courtesy: Wikimedia Commons

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