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 Acknowledgement

This book is created out of my experience with all the blog readers and
clients I have worked with. While I wrote this book, I received immense help
and support from various people to design and create this book.

I would like to start with a big thanks to thousands of our blog readers and
hundreds of our clients who have given me insights on the issues they face in
real life and the potential areas any investor would like to improve and solve
in their financial life.

I would like to thank my business partner and a great friend, Nandish Desai
who brainstormed with me and helped in shaping to this book. He helped me
with amazing insights on how the book can be of most value to the reader and
how it can become a stronger book.

I would like to thank my parents and wife who supported me in writing this
book and gave me enough space and time to do my job in the best possible
manner. I would like to thank Mahavir Chopra, Namrata and Narendra Ahuja
who looked at my work and suggested me improvements at some places in
the book.

Finally, I would like to thank Network 18 who published this book and my
editor who helped to give a polished look and language to my writing.

Without the support of everyone, this book would not be created the way it is
today.

Thanks to all.
Manish Chauhan
 CONTENTS

Wake Up Call

Step 1: Optimize Life Insurance Policies

Step 2: Optimize and Clean up Other Investments

Step 3: Health Insurance

Step 4: Emergency Fund Planning

Step 5: Short/Long term Goal Planning

Step 6: Start your Retirement Planning

Step 7: Estate Planning

Step 8: Be ready with a Great Credit Report and Score

Step 9: Debt Repayment

Step 10: Organise your Financial Life

Bonus Step - How to be ready for the future

 I want to start this book with this small introductory chapter that I
call a “wake up call”. I have worked with hundreds of clients and
dealt with thousands of my readers replying to each of them
personally on email. I get close to 100+ emails each week with
different kinds of financial problems people face in their life and I
spend countless number of hours solving their queries. Based on
that experience I want to tell you two stories today. Read on.

Story 1__ JATIN

Jatin has lost his job due to recession with a multinational company. Jatin has
always been an amazing performer in his team and he was 100% sure that
nothing can happen to his job ever, but that has been proved wrong. He lived
his life from pay check to pay check and he never thought that he would ever
have any emergency in his life. He faces these issues right now:

1. He is paying EMI for his home loan from last 3 years, but due to the job
loss, he is finding it tough to service his EMI now, as he is not getting a new
job anytime soon. Some of his investments are locked in ULIPs and
insurance products, which he had bought, but those products are not coming
to his rescue in this bad phase of life. He had never saved any extra money
for these kinds of bad situations.

2. It’s time to pay his life insurance premium money, his home bills, house
loan EMI, but it’s literally impossible for him to pay all of them on time. He
fears what he can do in this situation. He applied for a personal loan too, but
it was denied by the bank because they say that he has not paid his credit card
bills on time from last many months on time and they don’t think he is the
right person to lend any money at this moment.
3. He is worried about his situation, because if something happens to his
health or his aging parents, at this moment, he doesn’t know what he’ll do.
His parents are very dependent on him for their survival. While Jatin loves
his parents and wants to do the best for them, he fears now with this eye-
opening incident on how his own financial life is turning out to be in next 10-
30 years. He fears if he has done enough to fund his financial goals in his life
and if he will be so dependent on his children for his retirement needs.

Jatin wants to really change his situation now.

Story 2__ SAKSHI

Sakshi & Shailesh were married just a year back; they were working in
Bangalore in an IT company and earning really well. The amount of money
they were earning seemed as if they would never have any issue in life to
reach their financial goals. The present looked so promising that they just
could not worry about the future.

Shailesh knew that he had to save a lot of money, so each month he kept
making new fixed deposits with the money he got out of his salary. The
money Sakshi earned went into different kind of financial products, but all on
Shailesh’s name only, never on Sakshi’s name. This never came to their
mind. Their life was moving without any issue and the future looked
extremely beautiful. Shailesh was killed in an accident one morning while
travelling to office.

Suddenly the ugly situation that was underneath the beautiful life cropped up
and showed its face to Sakshi. She never imagined how life could take a huge
turn. Here were some of the issues:

1. Shailesh had never covered his life properly against such mishaps and now
Sakshi was very dependent on her own income and she was wondering how
she would be motivated all her life to earn and take care of herself (it’s much
easier to work and grow when you have a life partner).

2. Shailesh had taken all the investments decisions by himself and the couple
had never discussed things between them. There were “too many” policies
and investing products in their life, which only Shailesh was aware about,
nothing was documented well and it was all in his name.

3. Shailesh had never written a will nor had he taken care of putting a
nominee name in any of his investments, which led to 2 problems :

a) Shailesh’s family now wanted to claim a part of the assets, which the
couple never intended to give to Shailesh’s family. The relationship
turned sour, things got ugly, there was a court case, which eventually
was in favour of Shailesh’s parents and they got half the share.

b) Sakshi was literally lost when claiming back the investments and all
the money from banks, insurance company, PPF, EPF and mutual
funds, as she had to run around for death certificate and get a certified
copy from court that she is a rightful legal heir. This whole incident
consumed a small part of her life, she was shattered and her work
suffered.

Sakshi now wonders that under their awesome life, there were so many
loopholes that they never worked on. She wanted to go back in life and fix
those small issues that turned out to be a nightmare. But she could only regret
now.

How do you feel after reading these 2 stories?

Did these 2 stories have any impact on you? Do you feel some tremors? Did
your own life flash before your eyes and you thought - “What if this happens
in my life also”? Can you see that there is some part of Jatin and Sakshi in
your life too?

With these 2 stories, I wanted to give you a glimpse of what kind of financial
life issues people face. These are not imaginary issues, but real issues people
face in their life. This book is going to take care of all these issues and show
you the path of planning things and how to be prepared for these issues.

Over the last 5 years of my experience in personal finance, I have seen that
most people are afraid of the word “Financial Planning”. They are worried
about the fees they have to pay, they are afraid about the financial data they
have to provide, some are afraid about the trust factor with a financial
planner, some don’t think financial planning is really worth it and some feel
they really don’t need to really go to the deep levels of their finances.

Well that’s how an average person thinks and they feel - “All I need is to
work and fix some parts of my financial life to a minimum respectable level”.
They just want to take minimum actions that can improve their financial life
in the current situation.

Is this a financial planning book?

This book is going to help those people in helping them understand and work
on a few important areas of their financial life. After all, a financial life
consists of various areas and if you can fix and correct all the areas, you can
say that you have done your “financial planning” yourself. This will not be
the same as having a financial planner doing it for you, but that’s a different
concept all together.

Financial planning is in itself a great process and an emerging area, but this
book is an introductory level of a workbook, which can be used by any
person and he can do the minimum required in planning his financial life.
10 components of your financial life
After you read and complete this book, you will have a good understanding
of some very important and key areas of your financial life. I have included
the actionable items at the end of each chapter that you can complete as you
complete each chapter. As you read the book, you will also define and
calculate few things and you will get a clearer picture of your financial life
and where is the gap between your financial life and an “ideal” financial life.

I have tried to make it as simple as a person can imagine. I have tried to make
it child’s play if you can call it so. If you are totally new to this area, the book
will be an eye-opener for you and you should be able to learn from this book.

Read this book with an open mind and take the best out of it. If you don’t
understand some term, you can look at its meaning at the back of the book in
glossary section, or just search it on the internet if it’s not covered in the
book. Hopefully you won’t need to go online.

This book is divided into 10 chapters where each chapter represents a big
important area of your financial life. So when you complete this book, you
will have 10 good areas to work on, you will have 2-3 actions to be taken in
each area and over the next 2-3 months, you should work on all of them and
complete them.

I am sure you will be a much more confident investor after reading and
completing this book. My aim is to provide the maximum value to your
financial life. If you have any suggestions and appreciation, you can write to
me personally at manish@jagoinvestor.com.

I wish you a great and successful financial life from the bottom of my heart.

Before you start reading this book, get

prepared for maximum benefit
We will be working on your financial life in this book. At various places, you
will need some numbers and data from your financial life. If you want to get
the maximum out of this book, I suggest you write down some numbers of
your financial life before starting out this book. Do it. Fill up the following
data.

Income and Expenses

Surplus =_________(Income - Expenses)

Monthly Surplus =_________(Yearly / 12)

Assets and Liabilities

Net Worth =_________(Total Assets-Total Liabilities)

By filling up this minimum data, you at least know your basic minimum
situation. You know your surplus each year and month, and your current net
worth. This will really help you in the next chapters.

Let’s start the great journey of working on your financial life.

 The first step in your financial life is to clean up your life
insurance portfolio, before we start work on different areas of
your financial life. We will try to optimize the mess created in your
financial life due to life insurance policies and make sure you are
adequately covered.

How many life insurance policies do you hold? 1,2,3 or more? Now, check
what kind of life insurance policies you have.

Check any person’s “Life Insurance Portfolio” and there is a very high
chance that he will have a few traditional life insurance policies. It’s
exceedingly rare for him to not have one. In fact, you too probably have at
least one in your financial life. Either you bought it for tax saving purposes,
or your parents bought it for you and now you are carrying the legacy and
paying the premium after you started earning.

There is another possibility. You didn’t wanted to buy these policies, but
your parents, uncle, aunty, or neighbourhood uncle/aunty made the decision
for you and convinced you about its usefulness In your life and that it’s a
“must have” product because they trust either the concept or the company
that sells the product. They make it sound like the “way to go” concept!

It happens!
It has happened with millions of people in India and it happens every day. It
has happened yesterday and It will happen tomorrow again. The problem is
not that you had to buy these life insurance policies and this incident
happened in your life, but the real issue is - “what you are doing right now”
with it? What is its role in your financial life, what does it contribute towards
your wealth generation or does it even do its core job of “Protecting your
family security” or “Life Insurance”? Is it adding value to your financial life?
Or is it slowly destroying your financial life and your wealth creation process
without your knowledge!
Let’s openly talk about it now, “it” being traditional life insurance policies.
The policies that combine life insurance and investments into one bundled
product. Admit it. You know you bought those traditional life insurance plans
for investment purposes. Don’t fool others by saying “No no! It was only
because I wanted my family security and nothing else”. That’s kind of a lie,
otherwise you would have taken a Rs. 50 lacs term insurance policy, not a Rs.
5 lacs sum assured policy with life insurance as the cherry on top, exactly the
same way you have a chocolate layer on a chocobar!

Now what to do?

We will divide this chapter into 3 parts and take them one by one. Each part
has its defined purpose and will help you progress and correct your life
insurance portfolio.

What I have seen in my last 5-6 years of experience in personal finance is

that most people are happy with a simple explanation that leads to good
results, rather than a complex explanation leading to excellent results. Truly
speaking there are no excellent results, it is a myth. The whole world of
personal finance is very simple, but those who work in that area try to
showcase it as a complex domain at times, which scares the common man. It
makes an investor feel that without external help, he can’t do much. But in
this book, we will try to break that myth. There is very little to do in the area
of Life Insurance, but what is required is a strong understanding of the
fundamental concept. With some basic guidance, you would be able to do
things on your own, nothing fancy. Just get your basics in place and
understand the core concepts of life insurance and how low returns can
hamper your financial life in the long term. Let’s start.

1. Background
Let me start with some education by introducing a few terms and rules about
traditional life insurance policies. Most people who hold traditional life
insurance policies don’t even understand the terms associated with it and how
it works. This is one reason why they harbour wrong beliefs. Pick up your
traditional policy right now and check its brochure documents and you can
see all these terms.

a) Surrender Value - Surrender Value is what a life Insurance policy is

worth at a given point of time. You will get this value when you want to stop
your policy. In almost all traditional life insurance policies, there is no
surrender value before 3 years. This means that if you want to close the
policy before paying 3 years of premium, you get nothing, absolutely
nothing: it’s a complete loss for you. And after the 4th year, the surrender
value of the policy is very small compared to your premium paid. lt’s a % of
your total premiums paid until now(excluding the first-year premium). It
starts with 30%, and keeps increasing as the tenure increases.

This means that if a policy has 20 years tenure and you want to surrender it in
the 4th or 5th year, the surrender value would be close to 30-40% of your
total premiums paid excluding the first year premium. If you want to
surrender it in the 10th year, the surrender value would be much more than
30%, it might be close to 60-80% of your premiums paid. The good part of
surrendering it later after a few years is that you also get the bonus part of
your policy, if applicable, which is reduced to match the current worth.
If you want to know what your policy surrender value is, just call your
company’s customer care and enquire about the surrender value of the policy
if you want to get back the money today and then compare it with your
“premiums paid” until date. See how less it is! It’s important to understand
this fact that the earlier you surrender a traditional plan, the lower the
surrender value is. In an emergency if you want to get back your money from
these policies, you will be unhappy with what you get.

When you try to surrender your policy,

you will face resistance from the agent or
the company. Be firm about your
decision.
Caution - When you go to surrender your policy, you will face strong
resistance from the agent or the company itself. They will try to tell you why
it’s a bad decision and do whatever they can to reverse your decision. Don’t
buy into their arguments and be very clear why you want out. If you do not
get any support from anyone, stay very firm about your decision. You can
always go to the company office and surrender the policy. There is a
surrender form, fill it and complete the process.

b) Paid up Policy - If you do not want to surrender your policy and take the
money right now, the next best option is to make a policy paid up, which
means you do not want to pay premiums further. In this case you will get
your premiums paid + bonus accrued at the end of the policy maturity. One
very common situation is when the premium is very high and most people
cannot afford to pay the premium due to other commitments like home loan
EMI or more expenses. At that time, they make the policy paid up. This way
they save the money going out of their pocket and get the money at maturity.
However, in this case your life insurance will stop, which might be ok,
because in most cases, the sum assured is so low.
Example - If you have a Rs. 5 lacs sum assured policy, and you paid 5
premiums of Rs. 30,000 per year (or total Rs.1.5 lacs), you can now make the
policy as paid up. In this case, you will not have to make any more premium
payments and you will get Rs. 1.5 lacs at the end of maturity period.
However, if you want to surrender the policy now, you will get close to 30-
40% of your 4 premiums (first premium is not included in Most policies), so
that would be just Rs. 40,000 - 50,000 despite paying Rs. 1.5 lacs.

c) Bonus - Yearly Bonus: Many traditional policies announce a yearly bonus

at the end of each year, which keeps on accumulating and is given to you at
the end of maturity period. So if a policy declares a bonus of Rs. 44 for every
Rs. 1,000 of sum assured, and your sum assured is Rs. 10 lacs, your bonus for
one year will be Rs. 44,000 (4.4%), but this is the amount you would get at
the end. So, if there was a 20 years policy, it declared a bonus of Rs. 44 for
every Rs. 1000 of sum assured, and you would get Rs. 44,000 of bonus each
year, the total would be Rs. 8,80,000 for the whole policy term, and will be
paid along with sum assured at the end. Don’t forget that this bonus is mostly
the amount you are going to get at the end; hence, it’s a future value. This
means that if you surrender a policy before the maturity period, you would
get a reduced bonus amount today (current value of that future money).

Final Bonus or Loyalty Bonus: Few policies also give an extra bonus at the
end of the maturity, called loyalty bonus, provided you have paid for all the
years. It’s a reward for being loyal and keeping your promise to pay for all
the years. This amount can be a very small or big depending on the policy.
You will have to check your policy for details.

So what do you get at the end of the policy

maturity?
The key takeaway here is that at the end of the policy maturity, you will get
your sum assured + bonus (which is not promised at times and gets declared
each year, but almost all policies have a bonus component because
companies keep on making profits year after year).

So you will now realise that with traditional life insurance plans, most times,
you cannot be 100% sure of the maturity amount you will get, because it
depends on the bonus amount; however, you can make a close enough
estimate of the maturity amount based on some assumptions about bonus. So
make sure that when you buy a policy you do not believe what the person
selling you the policy tells you about getting a fixed number as the maturity
benefit. There are cases where an agent promises a big lump sum when
selling the policies and when the investor later discovers that it was just an
estimate based on some numbers, they feel bad. I hope your case was not the
same. Check your policy document right now for the indicative maturity
value of your policies.

Real Life Experience

A woman, Radha, shared a story on my blog www.jagoinvestor.com, where
she talked about how her mother was paying the premium for a LIC policy
assuming that she would get a good amount on maturity. But she was
shocked to find out that there was no maturity value in that policy. The policy
was just going to pay a lump sum amount + pension to the disabled person
who is dependent on the policyholder in case of death.

My mother was sold the LIC Jeevan Adhar Policy (for disabled people,
as my sister suffered from mental retardation) by an agent some 15 years
back and she was told that very good bonus will be added to her money
and will be paid at maturity. Now it is going to mature next year and
when she wanted to know how much will she get, she found out that it’s a
policy like a term policy, money is paid to the beneficiary after the death
of the insured. She works in a government job and had already planned
well for her insurance, was this policy mis-sold to her or is she misguided
still.
You can see from this incident that the woman wrongly assumed that she
would get a big amount from the policy and believed what she was told. But
she never checked about the policy wordings herself and kept on paying in
the misguided belief that it would pay her back in the end. It might happen
that you are also not very clear on what you are going to get out of your
policy. I suggest that you find out exactly what you will get. Although we
love surprises in general, you will not appreciate this particular surprise!

I hope this background is good enough to proceed. There are different kinds
of policies with different rules, but the above-mentioned rules and terms are
generally applicable for all kind of traditional life insurance plans.

Safe but low return products

Note that these policies are secured products that have your money safe, but
at the cost of low returns. The return you get from these policies hardly cross
inflation figures, so you can’t get excellent returns from these policies. It’s
more of a saving instrument rather than a capital growth instrument. Before I
move forward, I want you to do a very small task, a small one, but one that
will help you ahead. Just write down two things and ask yourself:

1. How many life insurance policies do I have (in numbers)?__________

2. What is the premium I am paying for per lac of coverage for each
policy?
Premium Per lac of coverage per year = Yearly Premium * 1,00,000/ Life
Insurance Cover

There is a good chance, that you thought “Ah! Let’s move ahead, I just
have to understand that concept, I will do it at the end.” This attitude has
contributed in destroying your financial life and it’s probably why you are
reading this chapter. My suggestion is to actually take a pencil to paper and
do it. After all, it will not take more than 10 minutes of your life.

Nowlet’s talk about these two points.

Point 1: How many life insurance policies do I

have?
What matters for you when it comes to life insurance? “Having many
policies” or “Having sufficient life cover”?

Before answering this, just try to understand that when you die, your family
will get a sum assured from these policies and if you don’t die, you might get
some return from these policies if you bought them from an investment point
of view. If your total sum assured were Rs. 20 lacs, your family would get
only Rs. 20 lacs, irrespective of whether you have 2 policies or 10 policies.

Most people have many policies and very small coverage from those policies.
There are mainly two disadvantages of this strategy:

Disadvantage 1 - You have to manage so many policies, keep those

documents, ensure that they are safe and store them. This adds to your work
and increases the risk of mismanaging.

Disadvantage 2 - The bigger disadvantage of having too many policies

comes up when you are not in this world, and your family has to claim your
life insurance money from all the policies. This is a very under-looked factor
because it slips your mind, as you don’t have to deal with it today.

1-2 life insurance policies will do the

same thing what 10-20 policies will do
once you die. So focus on life cover
amount, not the number of policies
If you have 10 policies, then your family will have to file claims for each of
them, fill 10 forms, and run around offices for all those 10 policies. Whether
they get the claim or not is immaterial, what is important is the amount of
frustration and confusion they will undergo. This is also a metaphor for the
amount of confusion and headache you are carrying in your life insurance
portfolio.
I believe these two points are enough to convince you to get rid of some
policies and bring down their number to ideally 1 or 2. Not more than that,
and we are purely talking from a life insurance point of view, not an
investment point of view.

So if you have 10 policies with coverage of Rs. 2 lacs each, it’s the same as
having coverage of Rs. 20 lacs from one policy, or coverage of Rs. 10 lacs
from 2 policies. Everything remains same for you, and your headache of
managing them, along with your family’s headache eventually, comes down
drastically.

2. Cleaning your life insurance portfolio

Let’s see how you can clean your insurance portfolio and get rid of some of
the policies that do not serve your financial life. To do this, ask yourself this.
Why did you buy an insurance policy at all? The honest answer in most cases
would be:

Reason 1 - From an investment point of view (mainly for saving tax)

Reason 2 - To also have some life cover

The coverage in case of a Team insurance

plan is around Rs 100 per year for every
Rs 1 lac for a young person
But the sad part is that your existing policies neither give you decent life
insurance cover, nor do they provide you the kind of return you desire. Let
me prove it to you. Visualise a scenario where your family gets the sum
assured from your existing life insurance policy; on an average, it’s generally
Rs. 5-10 lacs. In this fast-paced world with so many necessities, it would not
last for even 1-2 years. So it falls short of your need from a life insurance
point of view. If you look at it from a return point of view, just imagine 10,
15 or 20 years from now when you actually get money from these policies,
will that money be enough for your needs, both in terms of value and worth?
How much will it help you, considering that you will continue to lead an
expensive life even into the future? So even from a “capital growth” point of
view, these policies are not serving you. You are the best judge if you need
these policies. I would recommend that you get rid of those kinds of policies
that do not meet both these criteria. Identify which policies are low on cover
where you are paying very high premium for coverage.

But you will ask - “Is stopping a policy a good decision assuming I have
already paid some years of premium?
Won’t I incura loss?”

That’s a very emotional way of looking at it. The human mind stops you from
taking an action that contradicts your original plan. This question simply
means that by not doing anything, you are just trying to repair the situation
and are emotionally attached to what you’ve already paid. The money spent
stares at you asking you, “So, did you pay so much money for waste?” and
you cannot think logically at this point of time. What really really really
matters is the current situation and what lies ahead. For a logical view of
matters, see the image below.
If you look at the image, you will see that there are 3 kinds of tenures.

The phase or number of years, where you have already

A paid the premiums.

The phase where you still need to pay the money, this
B phase can be either in the same policy, or some other
investment product.

The total tenure.

C
Ideally, when most people are thinking over the decision of what to do with
an existing policy over-focus on A, which has already happened. But what
really matters is phase B, which is real and current, and which is in your
control. What you do in phase B really will decide if you managed or
mismanaged things.
You can always invest your money for the remaining period in some other
financial product. So, what matters is the total of Part A and Part B; even if
Part A gives some loss, if you can manage to generate decent returns in Part
B, It is enough to negate the loss from part A, and eventually exceed the
default situation (when a person continued with the policy and completed C).

So logically - Situation A (not in your control) + Situation B (in your control)

should be better than Situation C (your default situation).

Let me give you an example.

The slow infection

There was a man who led a very healthy life for years. Suddenly one day he
learned during a health check-up that he had a strange kind of infection
originating in his index finger. This bad news affected him deeply. He was
told that the infection had started increasing and spreading to other parts of
the body. It would slowly spread to the other fingers, then to the hand, and
then the entire body.

The only choice to stop it from further spreading was to cut the finger itself
so that the infection stopped spreading. But it was a tough decision, and he
could not imagine bearing the pain of a cut finger. The fact that the big
damage would show months and weeks from now meant that the guy never
seriously cared about the infection deep down. But as time passed and the
infection spread to his hand, he regretted not cutting off the finger and letting
the infection spread to the whole hand. Even then, he did not amputate his
hand, and finally the infection spread to the body, he was left paralysed for
life and one day he died.

Learning
In our life, we take some bad decisions at times, which can leave an effect
like the infection in the story. It can be a bad relationship, working in a bad
job or company or having made some wrong investment decision. Taking a
corrective measure is not that easy because the damage does not seem to be
big instantly; the short-term pleasure of not doing anything is so great that
people just mess up things more for longer. Whether to stop your bad policies
and take corrective measures or not is same kind of decision that the man in
the earlier story faced about cutting his finger or not.

Yes, the pain will be huge, but it will save your hands and whole body. Don’t
let it spread. Cut it now! Let me give you an example:

Example
Ajay bought a Rs. 10 lacs policy for 25 years tenure, the yearly premium is
Rs. 40,000 and the death benefit is sum assured of Rs. 10 lacs. Hence, if Ajay
dies, his family would get Rs. 10 lacs, but if he survives, he would get the
sum assured (Rs. 10 lacs) on maturity along with bonus declared. Let’s
assume that the yearly bonus every year is Rs. 40 per Rs. 1000 sum assured,
or Rs. 40,000 per year. Hence, the final maturity amount would be Rs. 20
lacs(Rs. 10 lacs of sum assured and Rs. 40,000 for next 25 years).

Premium = Rs. 40,000 per year

Tenure = 25 years
Death Benefit = Rs. 10 lacs
Maturity Benefit (in case of no death) = Rs. 20 lacs

Now suppose Ajay has paid premiums for 2 years. So he has already paid Rs.
80,000.

At this point of time, Ajay comes to know that this is not the best policy for
him. He also learns that if he surrenders the plan right now, he will not get
anything, all his Rs. 80,000 paid will be a loss. This will surely alarm anyone
and he would surely be de-motivated to stop the policy. He will try to
minimize this loss and try to find out what best he can do about it. At this
point of time, he wants at least the money he has paid back. This is more of a
short-term pleasure-seeking activity and nothing else. Even though he knows
that this is not the best thing for him, his inner self is shouting at him to not
listen to anyone and keep paying. But he has a choice to make here. Let’s see
these two choices.

Life Insurance Policy

Choice 1 - Continue paying the premium

In this case, Ajay will pay Rs. 40,000 per year for another 23 years, and at the
end, he will get Rs. 20 lacs, but in the whole scene, he will be covered for Rs
10 lacs only. So he is happy in short term that there is no loss and through
these 23 years, he keeps paying Rs. 40,000 in same policy.

Choice 2 - Dump the policy, and take a term

insurance plan + invest in fixed deposit, PPF,
or equity mutual funds
In this choice, he can take some tough decision and restructure things. Let’s
see what he can do here.
Let’s first work on the life cover of Ajay, because in choice 1, his life
insurance was really low and was not up to the mark. The primary thing is to
get a decent life cover, so Ajay take a term insurance plan for Rs. 50 lacs for
next 23 years. This should cost him not more than Rs. 5,000 as of today’s
standard (assuming his health is normal and he is not a smoker).

So out of Rs. 40,000, Rs. 5,000 goes towards his pure life cover; now he will
be left with Rs. 35,000 per year after paying Rs. 5,000 for his life insurance.
Assume that he invests this Rs. 35,000 in a PPF or fixed deposit account for
the next 23 years. For simplicity sake, assume a return of 8% on PPF or
equity mutual funds (current rates for PPF is 8.8% and equity mutual funds
have given 15-20% returns over the long term like 15-20 years). We have
chosen PPF and equity mutual funds, so that the maturity amount is also tax-
free just like insurance policies. This is a fair comparison.

In this situation, the overall final value from his investment would be Rs. 23
lacs (Rs. 35,000 paid each year compounded at 8% for next 23 years). So at
the end of 23th year, he will get Rs. 23 lacs and his life cover through the
period would be Rs. 50 lacs. Now if you see:

Loss from Phase A (first 2 years) = Rs. 80,000

Profit from Phase B (next 23 years) = Rs. 23,00,000
Total Profit (Phase A + Phase B) = Rs. 22,20,000 with Rs. 50 lacs of life
cover

However, in Choice 1, the overall gain was Rs. 20 lacs with a life cover of
just Rs. 10 lacs. Now, numbers can be up and down a little and depending on
future changes, one situation can better or worse than the other, but let’s see
what advantages Choice 2 has over Choice 1. In this example:

Criteria Continue the policy as it Dump policy, take a term

is plan and reinvest the
remaining money in
 PPF/fixed deposit

How much Rs. 10 lacs only Rs.50 lacs + Value of his

will Ajay’s investments in PPF/mutual
family get in funds/FD
case of death
before 25
years

How much Rs. 20 lacs approx. Rs. 22 lacs approx. (this can
will Ajay get change based on the interest
at maturity rate on PPF or performance
of mutual funds)

How much Surrender value as per Close to Rs. 10 lacs

will Ajay’s 15th year along with
family get if reduced bonus amount,
they want should be somewhere
their money in close to Rs. 7-10 lacs.
15th year

What happens Not possible; he will have Just terminate the term
if Ajay wants to either close the policy plan. Because investments
to discontinue itself, which will impact are not linked to insurance,
his life his investment part. Or he the insurance premium
insurance can make the policy paid money can be diverted to
cover in up. Both insurance and investments now.
between investments are linked
here.

What happens He can take a loan on the If invested in PPF, he can

if Ajay wants policy, but there are limits partially withdraw after 7
to partially and restrictions. years. If invested in FDs, he
withdraw can break the FD and take
 money from the amount. If invested in
his policy and mutual funds, he can
keep the redeem the units anytime he
policy in force wants.
too?

Effort Needed Nil - Just continue what is High - Effort required to

going on. Looks take a term plan, start the
extremely tempting investment and get out of
your comfort zone. Not for
everyone!

Note - The alternate investments taken was PPF/fixed deposits/equity mutual funds. If invested
in equity products, the results can be much better in Choice 2 as returns from equity in the
long term are very good.

You will realise that this comparison is valid only when a person is in the
initial phase of his traditional insurance plan. If a person is at the last phase of
investment tenure and a big part of his policy tenure is over, it would make
sense to make the policy paid up or just continue the policy, because the
initial time is lost and the remaining time is not much (phase B). And it will
be really tough to find out an alternative that will deliver enough returns to
offset the loss by surrendering the policy (phase A).

So if you are doing this comparison, better do the math and find out which
situation works in your case. Focus on other aspects also like liquidity, partial
withdrawal aspect and simplicity. Returns are just one aspect and a much
overemphasized factor by product sellers, but in real life, many things matter.
Coming to the point, here is an indicative action item table that you can use,
but make sure you do the calculations yourself before taking any action.

Paid very few premiums (1-3) Stop the policy

for the policy
 Paid 4 - 7 premiums Make it paid up and don’t make further
premium payments

Near to maturity Continue the policy

So coming to your personal case now, you have understood how to think
about the life insurance policy and what factors to look at while cleaning up.
List your policies and make a note of which policies you would like to
discontinue and not pay further premiums.

Bad policies are an opportunity

When we do this exercise with our clients, some of them feel very sad that
they took such a wrong decision and wasted so much time and money on bad
policies. But then we tell them that they should look at them as opportunities.
They have to look at the scenario after they stop the bad policies. We tell
them how the premium they were paying for their policies will suddenly be
“available” for them, and they will now have additional money (which they
were putting in these policies), which can be used for other meaningful
purposes like funding their financial goals. If one was struggling to generate
those premiums, at least now he will not have that pressure in his life.

Your situation vs. your parent’s situation

The world today vs. your parent’s world is very different. There was a time
when there were only traditional life insurance policies, there was a time
when life was not that complex, there was a time when you had enough
people to take care of your loved ones in case you weren’t there, and there
was a time when a small cover was enough for your family.

Not anymore!
Times have changed and what looked like a good product to your parents
might not fit you! Traditional life insurance policies were at one point of time
the only option to invest for a common man, but not anymore. There are
numerous alternatives and much better ones at that. So don’t get the notion
that a product is always bad or always good. It depends on the time and the
situation.

Now let’s move to the final task.

After most people start their career, in a few initial years, their net worth is
not more than Rs. 5 lacs, Rs. 10 lacs or at best Rs. 20 lacs, so these kinds of
numbers look good to them. When they buy a policy, these numbers look big
enough, because they generally look at the return from the policies.

But is it big enough to replace you?

This person does not look at the life insurance number deep down, nor does
he question how much help it will extend to his family for their whole lives.
Note, you will never come back, and your family will be there for next 30-50
years at least. Other than having food 3 times a day, is there not much to
achieve in life? Assuming that Rs. 10-15 lacs will be enough for them is a
joke in today’s world. I am assuming you still have a home on loan or don’t
have a home at all and you also don’t have a great bank balance to show off.

So “how much life insurance to have?” is a simple function of what all you
want to make sure for your family. Your ideal life insurance should be a
number that can:

1. Meet your family expenses for several years.

2. Pay off your liabilities + loans, so that your family can concentrate ahead
and not get tangled in these issues.
Now one way of doing this is through mathematical calculations; but do you
want to really reach that perfect number? Do you want to be too precise?
Because that would call for some calculations, but a more simpler way of
doing it is to approximate. The best thing about life insurance approximation
is that the approximate numbers are as powerful as the perfect numbers.
Think about It, with calculations your life insurance number was Rs. 1.43
crores. Now suppose you take a life cover of Rs. 1.5 crores or Rs. 1.2 crores,
do you really think that’s a blunder? Do you think that’s wrong planning?
No!

The whole idea is to get “decent” life cover”. Rs. 1.43 crores, Rs. 1.2 crores
and Rs. 1.5 crores are all decent numbers and any of them is fine. It should
just make sense and justify your case. So let’s approximate using this table
assuming your situation.

We will assume 3 things.

1. E = your family yearly expenses in your absence (because you are not
around)
2. Inflation you want to assume in long run (depends on how pessimistic you
are about future inflation)
3. Returns earned by the insurance money that your family would put in
some investments (preferably a fixed deposit most times).

Let’s assume that you want to plan for next 30 years. Hence, the life
insurance requirement would be:

Insurance Requirement Table

all the numbers are approx

Now calculate the life insurance amount you need from this table. The best
thing is that this number also takes care of inflation. So, the assumption is
that your family will invest the money and expenses will be withdrawn from
the pool of money each year, as the expenses will also increase as per
inflation.

Example
Ajay’s family’s monthly expenses in his absence are Rs. 30,000 per month or
Rs. 3.6 lacs per annum. He also knows that his family would put the
insurance money into a fixed deposit, which will have an average return of
around 8% per year. He also wants to factor in inflation of 8% over that
period. Now if you see the table and match the returns (8%) and inflation
(8%) column, you can see that it’s 30 times. So it would be 30 X Rs. 3.6 lacs
= Rs. 1.08 crores.

Ajay also has a liability of Rs. 20 lacs of outstanding home loan, and Rs. 40
lacs worth of investments in FD and cash in the bank. So his final life
insurance would be Rs. 1.08 crores + Rs. 20 lacs - Rs. 40 lacs = Rs. 88 lacs.
Now this is a good enough life cover covering different aspects of his
financial life. He can safely get this cover in Rs. 10,000-20,000 per annum.
Higher the age, higher the premium.
If you see carefully, this Rs. 88 lacs figure is just a number, which is a “good
number”, though we tried to reach it using some logic. Still, if I were to tell
his situation to you, you would say around Rs. 1 crore is a good amount of
life insurance for him. Truly speaking, a person can just choose a number out
of Rs. 50 lacs, Rs. 1 crore, Rs. 1.5 crores and Rs. 2 crores. Choose the one
which looks logical to you and that you can mentally justify will help your
family if you are not around. Don’t look for perfection; it leads to delays.
This table is so simple that you can instantly do your planning.

Don’t focus too much on the perfect

number. All you need is a decent life
insurance cover, which can deviate a little
here and there. Don’t pause your actions
because of this.

Checking your life insurance

Your family’s current yearly expenses (E)

Inflation you want to assume (6%, 8%, 10%)

Return on Investments assumption (6%, 8%, 10%)

How much times you need Life Insurance based on table times
above (F)

Insurance requirement (I) - E x F

Your current liabilities (L) (all outstanding loans)

 Existing life insurance, which you will continue further (A)

Existing Assets and Different Investment which can be

used by family (better not include the house you live in)
(B)

Final Insurance Required (I + L - A -B)

Final Outcome
Now let’s see the results of this chapter and what changes happened in your
life insurance.

Criteria Before this After this

Chapter Chapter

Total Life Cover

Premium Paid

Premium Paid per Rs. 1 lac

cover

Number of Insurance Policies

Bonus Tips
• Most term plans give a premium incentive for higher sum assured policies,
so the premiums are generally cheaper for more than Rs. 50 lacs of sum
assured. So, it makes sense to go for higher cover like Rs. 50 lacs or Rs. 75
lacs. At times premium for Rs. 40 lacs of term cover is higher than Rs. 50
lacs. So do check it out.
• You can surrender your policies by sending a surrender letter through post,
which most companies accept. This will be helpful if your original branch
is not in the same city where you currently live.

• In case of LIC policies, you can also get some information by SMS itself.
All you need to do is SMS “ASKLIC <Policy No>
PREMIUM/REVIVAL/BONUS/LOAN/NOM” to 56677 and you will
get an SMS back with the relevant Information.

• When you buy online term plans, most companies give an option to do
medical check-ups at home and this way you won’t have to personally visit
any place.

• You can divide your cover into two companies (suggested if both of them
are above Rs. 50 lacs). That way if you want to decrease your cover after
some years, you can just stop one of them, it’s as simple as that.
 The second step in your financial life is to clean up your other
investments. In the first step, we cleaned up your traditional life
insurance policies. In this chapter, we will talk about optimizing
your other investments like Stocks, Mutual funds, ULIPs, Bank
accounts, Credit cards, and Other Investment Products. Once this
step is complete, you will have a much simpler financial life, after
which we move to more planning actions.

What happens if you are given a plain sheet of white paper and asked to draw
something beautiful on that paper? You will first decide what to draw and
then start the actual drawing, you will make sure what comes on paper is
great and you will give your best. All your energy would focus on what you
are drawing; your creativity will be at its best. Correct? That’s because you
ONLY have to deal with the blank clean paper and apply your creativity.

Now imagine I give you the same sheet of paper, but it’s dirty, crumbled, and
it’s torn a bit too. And a small kid has also scribbled all over it with black ink.
I give you that paper and ask you to draw something beautiful on that. Can
you imagine the situation now?

How easy is to come up with something nice on that piece of paper? Not that
easy, because now you need to clean it first! You need to work on the paper
first; at this point, all your focus will first go in cleaning up the paper. You
will also not be too happy about the whole thing; even if you are great at
drawing, the fact that you have a rough, bad sheet of paper will kill all the
excitement you have as a painter. The more dirt and scribbling on paper, the
higher the chances you will spend more time in cleaning it, rather than
imagining how to make a beautiful picture.

Your financial life is like that sheet of paper

Your financial life is very much like that sheet of paper. And each BAD
decision is every single scribble and bit of dirt on that. Bad decisions mean
DIRT! More bad decisions mean more dirt. I have seen so many people who
carry such a bad financial life that it’s almost impossible at times to work on
it. It really gets tough to give them any good suggestions. These people are
amazing at their respective jobs, their area of work and they can really do
very well in their financial lives too. But due to their past mistakes, they have
really lost that charm in their financial life. They are full of messes! Now if
these people have to do some kind of planning ahead, the first step is to clean
their financial life.

How does your Financial Life look like!

The first step is to get rid of clutter and dirt from their financial life. The first
step is to simplify it to some level first. In the previous chapter, we optimized
the life insurance part because that’s one big area people mess up in a big
way. So this chapter is all about cleaning up your messes and looking at how
you can optimize your portfolio. We will look at mutual funds, stocks, bank
accounts, credit cards and other kind of investments one by one.

Clean up 1 - Optimize your Stocks

The first area we will touch is stocks. Many people have some stocks in their
portfolio. They may have bought it with or without analysis, but it is a part of
many people’s lives and might be potential clutter. Now you can fall into one
of the following two categories:

1. Serious investors looking for wealth creation

These investors have a serious interest in making money through stock
market investments and they are very clear about the rules of stock investing.
They are not looking for quick gains and free tips that will make them fast
money. They know that it’s not possible because of the simple reason that life
is not that easy and making money can’t be that easy. These people study the
tricks of the game, have a deep vision on how stocks and stock markets
function, have controlled their emotions over the years and know how to
make money over the long term. If you fall in this category, your stock
portfolio does not need cleaning and you are in the right direction. You
probably know better than me on this subject.

2. Investors looking for quick gains and excitement

The second category of investors actually forms 99% of the stock investor
population. Their mind-set is to make some quick gains from stock market in
a matter of weeks or months and sell their shares as and when they feel it’s a
“great profit”. I have seen many people who just after their first job, start
buying and selling stocks in the hope that they would make some money.
They look at charts, stock prices, some analysis, but all their focus is on
“quick profits” and to be excited about trading in stocks.

These investors are those “who feel”, I repeat, “feel” that they can make a lot
of money from direct stock investments “somehow”, but they do not do
enough homework. They buy on tips from friends, on hearsay, randomly, and
every other way you can imagine. They subscribe to several “SMS
subscription” services and stock recommendation channels are their favourite
channel. Many of these people keep on buying and selling stocks in the hope
that someday they can label their “luck” as their “talent”.

I recently met a very senior head of one of the largest stock broking firms in
India, who shared with me how small investors are taken for a ride by brokers
and the tactics played by brokers to engage common public into direct stock
investing, even when they know it’s only destroying most of them.
If you fall into this category, then you need to be clear that you should not be
investing in direct stocks because of the simple reason that the mutual funds
route is much suitable for you. So my advice would be to either become very
serious about direct stock investing (in which case you don’t need to optimize
your stock portfolio), else just get rid of everything you have and start fresh.

I have seen people who have 40-50 stocks, bought randomly, very small
amounts into each and most of them are duds, not doing anything from
months and years. But these people are just waiting for them to pick up,
relying on some kind of “luck”.

The 2 problems because of your stock portfolio are that:

1. Your money is locked into those stocks that can be used in other parts of
your life.
2. You constantly have to think about those stocks and that consumes your
precious time.

Clean up 2-Optimize your Mutual Funds

The amazing thing about mutual funds is that investors feel that the more
mutual funds they invest in, the better it would be for them. I have seen
mutual funds portfolio of 5 funds, 15 funds and up to 50 funds.

Believe me, it’s not like a stamp collection or coin collection hobby, where
each coin or stamp is different from each other and “more” is always better.

Let me give you a real life story that we share with our clients to explain what
I mean.

Our cook at home makes around 10 chapattis each day on an average.

One day, we told her to make 15 chapattis because we were hungrier.
She generally prepares the dough in morning and uses the same in
evening, so the dough was already in the refrigerator, but she had
prepared it in morning thinking that only 10 would be needed in the
evening.

Guess what she did.

She made 15 chapattis as asked - but with the same amount of dough!
What’s the point of eating 15 small chapattis? We wanted 15 regular size
ones, but due to her laziness, she did not prepare more dough, but used
the same dough and prepared 15 chapattis. Now this way she could have
prepared 50 chapattis if we had asked her!

She didn’t understand that what mattered was the underlying dough quantity,
not the number of chapattis. She focused on the numbers, not the underlying
material used!

In the same way, most mutual fund investors have to understand that the
number of mutual funds does not matter, but the underlying thing matters, the
allocation in different stocks and their quality matters. If I have 3 mutual
funds, you have 30 mutual funds, and finally they are investing in the same
stocks in the same proportion, the performance we both will see will be
almost same, a little here and there. The big disadvantage you have is that
you need to deal with 30 mutual funds, and you need to take more decisions
than me and track more. I have to take care of 3 funds of the same kind.

In my last book “16 Personal Finance principles every Investor should

know”, I have illustrated this point using data from a few mutual funds
where I showed the difference in the portfolio of 5 mutual funds and 10
mutual funds (by adding another 5 mutual funds in the existing 5 funds).

When 5 additional funds were added in the portfolio, there was no significant
difference in the overall underlying portfolio. Here was the result:
Can you now imagine how much duplication is there in mutual funds of the
same category! Note that we are strictly talking about mutual funds of same
category; in this example we are talking about Equity Diversified mutual
funds which invests in all kind of stocks - big and small and from all sectors.

Can you see that there is almost same kind of effect on both portfolio (new
and old) on the performance of top sector, or top 3 sectors or large cap
sectors? There will definitely be a small difference depending on what
exactly happens, but the point is that it’s not worth the effort to increase your
funds from 5 to 10. Having more than 3-5 funds of same category of
investments product is a waste of time and abuse of your resources. Avoid it.

It’s time to work on your mutual funds portfolio and make your portfolio
simpler and manageable.

How to reduce your mutual fund portfolio

Have you ever realised that sometimes making a fresh start is much better
than repairing something? Software programmers know this better than
anyone else, they write complex programs that perform a task and when
things go wrong, they debug it and try to locate what caused the issue and
then fix it. They see where exactly the problem is, they try to connect the dots
and when they identify it, they try to repair it and sometimes it works. But
when things are super complex, where they are so connected with each other
that it raises many questions, finally there is a point where they feel - “I
would have done it faster if I restarted all together”.

When I tell this solution to some people to apply it on their financial life and
investment products, they feel I am joking and look at me in disbelief. We are
so scared of simple solutions in life, that we just don’t apply them. Some
clients do not like this kind of simple solutions from their advisors, because
they feel they are not recovering their fees with such a simple solution. They
feel this simplicity has some hidden flaw that they cannot see. They feel that
to clean their financial mess, the only solution is to pick each of their
investment and do a complex, in-depth analysis and then come up with a
suggestion of “Buy”, “Sell” or “Hold”.

But is it really required? I don’t feel so. A great way of cleaning your mutual
funds portfolio is to “assume” that you dumped everything and now restarting
your portfolio. Here is how you do it.

List down your mutual funds one by one. Make the full list in an excel sheet.
Now assume you have sold everything, you have the investment value in
your bank account. Now you are 100% raw, clean and free of any mutual
funds.

Now restart
Pick each of your mutual funds and ask these questions.
1. Do I understand how this mutual fund works?
2. Does adding this mutual fund add any value to my portfolio?
3. Check that I don’t have more than 3-4 kinds of the same category of
mutual funds already.
If, the answer to all of the questions is YES, then go ahead and add it in your
portfolio, else don’t. Now for those mutual funds where the answer is YES
for all of the above questions, keep all of them, sell off the rest and take back
your money.

Clean up 3 - Optimize your bank accounts

Indians love banking.

Banking products have dominated our country for decades and it still does!
For some families, financial planning and investments means only banking
products. When we work with our “Financial Coaching” Clients, we see
many FDs and bank accounts in their portfolio and we suddenly tell them that
for them “Banks are the Temple of financial life”. For anything in their
financial life, they highly trust banks and any money they accumulate in their
financial life, it suddenly goes to their Temple (Bank).

One reason for that is that most people have very low financial literacy and
they do not understand anything other than banking products nor do they
want to go beyond that, because they feel it will just complicate things. While
banking products are simple and powerful, some people overdo it. List down
the number of bank accounts, fixed deposits or recurring deposits you have.
Right now!

I have___Bank Accounts and____Fixed/Recurring Deposits

Let me share an incident with you. One of the readers of my blog had 90
fixed deposits and around 12 bank accounts. This guy was extremely afraid
of equity products and did not want to take any risk on his money. He was
earning really well in his job and all he was doing was to create a fixed
deposit on his name and his wife’s name. This continued for years. He neither
had time to check this amount nor did he have any clue what this would mean
for his financial life.
This was too much clutter and mess. While there will not beany loss in terms
of money, there are a few issues with having too many bank accounts or fixed
deposits.

Problem 1 - While it might not look like a big issue until you are alive, the
real headache comes when you are dead and your family has to deal with it.
They will have to claim each bank account and each fixed deposit, which is a
lengthy process. We will look at this in more detail very soon in the coming
chapter.

Problem 2 - Each bank account results in different cheque books, account

statements, different kind of penalty and charges and keeping track of each of
them. This can consume a lot of your time and energy.

If you want to keep a simple financial life, your banking aspect has to be
simpler and clutter free. What’s the need of 15 fixed deposits of Rs. 20,000
each? What is the need of having 3 recurring deposits on each of your 4
family member’s names? What really matters is how much money is lying in
a fixed deposit or a bank account for a particular PAN card. If you have 10
bank accounts or 1 bank account, it’s always linked to a PAN card, and the
government is just concerned about how much money is lying with a PAN
cardholder. They are not going to look at the number of bank accounts, so
why are you bothered?
When you increase your bank accounts and FD/RD numbers beyond a
logical/manageable point, you just complicate things and make your financial
life complicated.

Importance of each bank account

Better define the role of each bank account In your financial life. Check the
significance and purpose of each account. Let me share with you what my
wife and I did.

1. We have one joint bank account from where all investments and expenses
happen. Any money that goes out of that bank account is for either for
premium payments, any kind of investment, mutual funds SIP, recurring
deposit or some kind of family expense (common expenses). So it’s our
Expenses and Investments Account. This is a joint account. We both have a
debit card for this particular account and either of us can use it any time. In
case one is missing or one just not present, the other person has access to
everything.

2. Then there is 1 personal account for each of us-for my wife and myself.
Any personal expenses we have or any income that we earn goes in this
account.

That’s all. Everything fits in these 3 bank accounts and we find it extremely
convenient from a documentation and management point of view.

But I have seen several people who have tons of dormant bank accounts,
which are active from many years, but they don’t have any life of their own.
No bank account defines its role. However, the statements keep on coming,
the balance alerts keep ringing each day, the minimum balance applies to all
of them, and few rupees of interest keep on coming in those accounts. It
exists because such people are lazy. It’s always a good idea to optimize your
bank accounts and the fixed deposit numbers.
One big reason why people have many small amount fixed deposits to save
TDS, but legally they need to pay the tax on the interest part anyway (in case
you didn’t know this). Also, in case you do not fall under income tax
brackets, then you can always give form 15G or 15H and not worry about
TDS being cut.

Clean up 4-Optimize your ULIPs

In the last 5-10 years, one of the most widely sold financial products has been
unit-linked plans. ULIP was an innovative concept that mixed life insurance
and investing linked with stock markets. The common selling pitch was that
you get life insurance, tax advantage and excellent returns, as your
investment was done in stock markets. Thanks to the stock market boom
from 2004-2007, selling ULIPs as the best investment product for wealth
creation was easy. People believed the charts and the next 20- years’
projections based on the last 3-4 years of returns.

However, it was not as marketed; it had some fine print that buyers were
supposed to check, and a few things that sellers were supposed to tell
customers. No one did their job correctly and many people for whom ULIPs
were not suitable ended up buying few ULIPs with their hard-earned money.

The top selling points of a ULIP in the market were:

1. It’s a short-term product and you can stop paying premium after 3
years

It was widely sold to customers saying that it’s a short-term product that can
be stopped after 3 years of payment. The limit of 3 years was used because it
came under a tax-saving product and it was a nice way to project it as a short-
term product, but it was never told that there are huge charges in ULIPs in
initial years and some charges were throughout the policy tenure which will
be charged by cancelling the units one gets in ULIP. So one never knows
about it unless they are very careful about monitoring their investments,
which anyway no one does. Most people get a shock only after many years of
payment, after which they check the investment value.

2. You also get benefit of life insurance

As a ULIP is a mix of both insurance and investment, one common way the
product was pitched is that life insurance is an additional benefit implying
that it was free, but they were never told that something called as “Mortality
Charges” are reduced each year for providing life insurance. Most people are
so attached to the word “free” that they could not restrain their excitement
and fell for it. But they were paying the charges for life insurance as they
would pay in a term insurance plan or any other insurance plan.

3. It will give excellent returns

Thanks to the 2004-2007 stock market boom, it become very easy to show
the returns at 20% and 30% assumptions and show people how they could
generate wealth by contributing a small amount of money each year. It was
very easy to show the different funds under a ULIP and how people can
switch between equity and debt funds and control the growth and reduction
of their money. It was illustrated in a way that it’s like child’s play and any
one can do it; for those who don’t want to be active, there was an automatic
plan also where the switch happens automatically based on some “research”.

The higher the complexity, higher the chance of high returns-that’s how
people look at things and that was one reason why the complexity of ULIP
helped its sales. Somewhere, buyers trusted that complexity beyond what was
prudent.

ULIPs are a long term investment product

ULIPs are really a long-term financial product, because the underlying
investments are done in stocks. Also, it’s not a suitable product for the
common man who does not understand various features and switching
options in ULIPs and when to do the switch. Most investors look at them as
“pay the premium and wait for years for it to perform”, but the various
charges make sure that the returns come down over time. It’s not a suitable
product for most people.

How to clean up your ULIPs?

In September 2010, there were some major changes made in ULIPs that made
the lock-in period 5 years and lowered the charges, at least apparently. But
they are still not simple products. Someone who does not have the time to
look at its various features or switch between the various plans under the
ULIP should stay away and take the route of mutual funds. This is purely
from the complexity point of view.

If one can utilize its benefits, only then does it make sense to continue. So
talk to the customer care of your ULIP company and check how much money
you will get back if you surrender the policy right now. Most policies give
back the 100% of your current worth in ULIP after the 5th year. So if you
have completed the 5 years, better take the money back and think of a
suitable use of your money and future premiums.

Clean up 5-Optimize your credit cards

I am counting “credit card” as one of the financial products, because it’s an
important addition to someone’s financial life and it has a big impact on your
financial life. If you don’t handle them in right way, it can literally create
havoc in your financial life. We will go over this in detail in Chapter 8.
Many people have many credit cards. The higher the number of cards, the
higher is their combined credit limit. Also, different kind of credit cards offer
various benefits and offers in terms of cash back, bonus points etc. This
makes many people apply for different credit cards. But credit cards are like
double-edged swords. While there are many benefits, there are various kinds
of problems with credit cards.

It can make you a spendthrift and entice you to spend on those things that you
do not really need. Because of easy availability of credit and the feeling of “I
can always pay it back later”, many people get into a debt trap. They
overspend, they do not pay money on time, they panic when the debt keeps
piling up and it’s almost impossible to pay off the entire amount. Then they
just run off and don’t pay anything or pay a partial amount and settle the
debt. Finally, it takes a lot of time and effort to come out the debt trap
successfully.

Myth of minimum payment in credit cards

I was so surprised to hear from lot of people that they do not understand how
minimum balance works and what exactly it means! Most people feel that
minimum payment is some kind of favour that credit card companies do for
their customer and that it’s totally fine to pay minimum balance each month
and keep on increasing the debt on credit card. It’s totally untrue! Here is a
real life incident shared on my blog, where this guy didn’t know how
minimum payment in a credit card works.

I just can’t believe myself when I preached the concept of paying

Minimum Balance to my wife and brother. In spite of my wife suggesting
to pay off the entire amount outstanding, it was foolish of me to
brainwash her to pay the minimum due and get away with that.

The minimum amount is the amount that you need to pay on your credit card
bill, just to avoid the penalty charges that are charged for non-payment, but
the interest is charged on your dues when you do not make the full payment.
So if your credit card bill i Rs. 20,000 and your minimum payment is Rs.
1,000, you can do 3 things:

1. Make the full payment of Rs. 20,000 - This means you are paying back
your loan on time (a credit card bill is just another short-term loan, which
was given to you for few days)

2. You do not pay anything - In this case, a penalty will be applicable and it
will be added back to your dues, and then the interest will be charged on
your dues, unless you pay everything back. This interest is generally
calculated on a monthly basis and can be as high as 3.5-4% depending on
the credit card company.

3. You make a minimum payment of Rs. 1,000 - In this case, you will not be
charged the penalty amount, but the interest will still be charged on your
total debt.

There are many cases where a person has kept on paying just the minimum
balance and the debt kept growing exponentially over the years. And later a
person thinks that the credit card company has over-charged them, which is
generally not the case.

So to summarize, having too many credit cards is not the right thing if you
cannot control your spending behaviour. What really matters is your total
credit limit when all the cards are combined. If you have 6 credit cards with
the limit of Rs. 20,000 each, your total limit is Rs. 1,20,000. You can’t spend
more than that. There is a high chance that you can get 2 credit cards with
limit of Rs. 60,000 each and achieve the same thing, then why carry 6 cards!

What can go wrong with high number of credit

cards?
• You have to take care of all 6 of them; you have to worry about their
maintenance, check if they are safe and not fallen in wrong hands.

• You have to pay bills on most of them and if you forget or miss to pay the
bills on time, you will be charged interest and penalty. There is a higher
chance of forgetting if you have high number of cards.

Clean up 6 - Optimize your other investments

Apart from mutual funds, stocks, and bank products, there are several
financial products you must have invested in like PPF, NSC, other Post
Office products, infrastructure bonds and real estate. While we can’t cover
each of them here and talk separately about them, the whole point is that you
need to optimize it, list it and ask yourself what purpose it serves in your
financial life. Why did you buy it? Does it add meaning to your financial life
or is it just a random addition due to some kind of pressure or your impulsive
buying decision sometime in the past?

Check if you can minimize them and reduce the number or not, without
compromising your other parameters like returns, simplicity etc.

Collector vs. Investor

In his amazing book “11 Principles to Achieve Financial Freedom”, by
Nandish Desai (disclosure: we are partners and work together), a coach
shows a person coming to him about how to lead a great financial life. The
coach distinguishes between an “Investor” and a “Collector”. The coach talks
about people who live in the myth that they are great investors, whereas they
are just collectors. They collect whatever they encounter in their financial
life. They keep accumulating things, different policies that hit the market, any
mutual fund making the headlines. They don’t go with any informed rational
decision. Here are excerpts from the book, where the coach is talking to his
disciple.

“I want you to play the role of an investor and not a collector who keeps
collecting different financial products. If you are a collector, you just need
one reason and you will become ready to invest. Some advisor will say this
product will help your child or will help you save tax or will give you high
returns and you are ready to dive. As a collector, you are stuck in the
financial products that you bought. It is as if you are stuck in a traffic jam
where every car is owned by you. - Financial clutter leads to Product
JAM.

Here are the differences between a Collector and an Investor

Traits of a collector Traits of an investor

Looking for what’s new in His primary goal is always

market simplification

Always busy collecting Invest in products with understanding

information

They always have complex Focus is on ground rules

portfolio

Always on a crossroad A big NO to instant gratification

Collectors lack focus Investors are focused on what they

want

Collectors are fear and greed They follow a strategy

driven
Your financial life complexity depends on what you are-an Investor or a
Collector. If you are an investor, try to be a better investor and if you are a
collector, try to first play a role of an investor.

Conclusion
The whole idea of this chapter was to make sure you get rid of unwanted and
low value providing financial products from your life. More products means
more looking after them, more documentation, more tracking and at times it
does not add any value, none at all.

Action time
So now take this action and identify how much of your financial life is
“duplication” and it can be removed. Write your results:

Products How many do you How many will you have

have right now? after clean up?

Stocks

Mutual Funds

Fixed/
Recurring
Deposits

Bank Accounts

Other Financial
Products

Credit Cards
 Anything Else

Bonus Tips
• To get the maximum out of your credit cards, keep two credit cards with a
15-day gap between the billing dates, so that you can use the credit card
whose billing date is later. This way you can get the maximum credit.

• If you are a serious stock investor, ask yourself if you are ready to hold a
stock for next 10 years if the markets still do very badly. If the answer is
NO, it should not be in a serious investor’s portfolio!

• To redeem your mutual funds, you can just fill up a redemption form at
CAMS office or your mutual fund’s AMC office and the money will be
back in your bank account in 3-5 working days.

• Tell your credit card company that you are planning to increase your
expenses through credit card and if they can increase your limits on the
card. Mostly they will accept your request and once they do it, you can
reduce the other cards if it makes sense.

• If you have too many credit cards and debit cards, you can also buy Card
Protection insurance. Just search for CPP protection on the Internet and you
will get more information. It’s a good way to protect yourself from loss and
misuse of credit and debit cards.
 The third step in your financial life is to tackle Health Insurance.
It’s a vital part of your security and before you move to
investments, it makes sense to take adequate health cover.

I want you to imagine this scenario!

A person is admitted to a hospital after an accident/due to some illness/for

some major surgery. Who will pay the bills? Obviously, the patient! Will he
be able to afford it? Does he/she have so much money in case of this kind of
emergency? For most people, this kind of sudden expense is unplanned and
comes as a surprise.

If you look at this example and try to imagine this person’s life, you will see
that before being admitted to the hospital, the patient had to spend nothing on
medical expenses for many years because nothing happened to him. He never
had to imagine a situation where suddenly so much money would be needed
for a medical emergency! This is exactly how most people’s lives are going
on and when this surprise expense appears, this sometimes put a big break on
so many plans! A person might have saved money for his house down
payment, or a wedding at home, or just for higher education and suddenly
one day all the money is wiped out! It’s a situation no one wants to get into.

Now consider another scenario!

Now let’s reverse the process, where each year you keep aside a small
amount for a big future medical expense that might arise. How much will you
have to save each year for a goal of that type? It can be a small or big amount
depending on how well you want to plan and expect the future situation to be.
So you start this plan and now suddenly after 2 years, some medical
emergency happens and you still won’t have enough money. You will be able
to save a respectable amount only after maybe 20-25 years, but by that time
medical costs might be very high due to inflation. So then, how do you deal
with this situation? How do you ensure that you can deal with such
unexpected expenses?

Look at Health Insurance Premiums as

advance payment for a big future expense
in small parts. This will help you
psychologically be more comfortable

This is where the concept of Health Insurance comes into play!

What if you can pay someone a small fee, which will be part of a large pool
of money, and whenever something happens to you and if it fits the agreed
terms and conditions, the expenses can be borne out of that big pool of
money? You don’t have to shell out any money from your pocket, so the
small amount you keep aside Is like the cost of being insured for your health
expenses in the future. That’s Health Insurance.

This sudden surprise can come in 2 years, 5 years or 10 years; it does not
matter because health insurance will cover you from the day you start paying
your premiums for health insurance.

Now let’s understand two important points about health insurance policies.

Indemnity based policies vs. Lumpsum benefit

plans
There are broadly two kinds of health insurance plans in market, and you
should be very clear what each offers.

The first kinds of policies are those plans that reimburse you the actual
expenditure up to a limit. Most plans in the market are of this type. If
someone is hospitalized, they could incur different kind of expenses like:

1. Room charges
2. Nursing
3. Surgeon/Consultant/Anaesthetist fees
4. Cost of blood/oxygen
5. Operation theatre charges

All these kinds of expenses are covered in these indemnity-based policies.

You should be very clear about the rules and regulations by reading the
policy document of the plan in detail.

The other kind of health insurance plan is based on lump sum benefits. These
policies provide a defined amount of money irrespective of the actual amount
spent! The examples of these kinds of policies are:

Hospital Cash Benefit Plans - these kinds of plans provide a fixed specified
amount of money for each day of hospitalization. Your actual expenses might
be more or less. How much will be provided for per day of hospitalization is
clearly defined as per the plan. The benefit is given only after the discharge
and on showing the proof on the number of days spent in the hospital.

Critical illness Plans - These plans are another example of defined benefit
plans. These policies provide a specified lump sum amount if you are
detected to have a particular illness covered under the policy. Some of the
major things covered under these kinds of plans are:

• Heart Attack
• Stroke
• Kidney Failure
• Multiple Sclerosis
• Coronary Artery Bypass Surgery
• Cancer
• Major Organ Transplantation
• Paralysis

Individual vs. Family Floater Health Insurance

Policies
Now we will talk about those policies that provide you the actual
reimbursement of money, not a fixed amount. But before we move ahead, a
critical point to understand very clearly is that these types of health insurance
policies cover only in-patient hospitalization expenses not cover outpatient or
dental expenses. An in-patient treatment is treatment that requires an
overnight stay. There are several things like x-rays, normal check-ups, blood
tests etc. that require only a few hours to complete and hence they are not
covered in a health insurance policy, unless specified. So make sure you
don’t assume that once you buy a health insurance policy, it will cover you
for every small illness and medical treatment.

There are broadly two types of policies:

• Individual Health Insurance Policy
• Family Floater Policy

An individual health insurance policy just covers one person and the
premiums are totally dependent on his health and past history. However a
family floater cover is like a joint cover by many people—husband, wife,
children and at times parents too. The whole sum assured is shared by all and
can be utilized by any number of people in the group with upper limit as the
sum assured. The following tabular comparison will help you understand it in
detail.

Feature Individual Cover Family Floater Cover

Covers Covers the insured Covers Self + Spouse + Kids + Parents

 only (some policies)

Eligibility Must be above 18 The primary insured needs to be above

years the age of 18 years

Cost of High compared to Little low as the Sum Assured floats

insurance Family Floater between 2-3 (or more) members

When to buy health insurance - when healthy

vs. when unhealthy
Health insurance depends on your age. The older you are, the higher the cost
of health insurance because an older person is always more prone to illnesses,
and has higher chances of having a pre-existing disease. This is one big
reason why a person should take health insurance early in life. With each
year of delay the chances of paying higher premium increases. It also gets
more difficult to get a policy later as time increases.

There are two important age milestones that you need to look at: these are the
points where your health insurance premiums take a huge turn and it gets
more difficult to get health insurance.

Age 45: When you cross 45, generally the premiums shoot up pretty fast as
the amount of appreciation is very high.

Age 60: This is another milestone you should watch where you are labelled
as a “senior citizen” and the premiums increase to astronomical levels when
you cross this age. Let me give you one example.

Example
“Optima Restore” is a health insurance policy from Apollo Munich
Company. There are different age slabs for Rs. 5 lacs of cover. When I
choose the slab of 25-34 years the premium is Rs. 6,300; when I increase the
slab to 36-44 years, the premium is approximately Rs. 7,200 per year. That’s
an increase of just Rs. 900, but when I take the slab of 46-49 years (above
45), the premium suddenly shoots to Rs. 11,000; and on the 56-59 slab it’s Rs
20,000. When you cross the 61-64 slab, it shoots up to Rs. 36,000. So a
person who is 59 years will pay Rs. 20,000 as premium and if he is late by 2-
3 years, he will then have to pay Rs. 36,000 just because he has now crossed
the age 60. So watch out for those age points, because a small delay can cost
you a lot of premium each year.

45 years and 60 years are two critical age

points, when health insurance premiums
increase drastically. Better insure
yourself before you hit these points.
This is why you should also take health insurance for your parents as early as
possible, once they cross 60, the premiums become high and at times, it gets
really difficult to get the appropriate policies.

Health insurance protects your wealth

Health-related costs are very high at times: it can range from a few thousands
to many lacs (some surgeries and illness can cost upwards of Rs. 5-8 lacs at
times). The cruel thing about health is that no matter what you do, you have
to deal with it; you can’t ignore or delay it.

If you have to bear the whole cost yourself, it can be a big blow to your
wealth, because sometimes you are not prepared for these big costs and
suddenly if you have to shell out a lot of money, you need to break your
investments and delay some financial goals.

Health insurance in reality does not protect your health, it can’t! It’s up to
you to protect your health. If you look closely, health insurance is actually
protecting your wealth from these kinds of big expenses. Imagine you are
saving Rs. 10 lacs for the last 5 years for making the down payment on your
house, but suddenly you or someone from your family has to be hospitalised
and it costs Rs. 4 lacs. Obviously, you will take care of this emergency first,
but this will definitely affect your goal of house down payment. However, if
you had a health insurance for which you would have paid some premium the
last 4 years, your situation would have been much better. If nothing happens,
you can still meet your goal of house down payment without disrupting your
schedule.

It’s a long-term product, not short-term

The biggest mistake people do while taking health insurance is that they want
to go for the cheapest premium. They feel the end products are the same,
hence low costs are important. This happens because they look at it from a
short-term point of view and they want to minimize the premiums at this
point of time.

Note that health insurance is a very long-term product; you are buying a
health insurance policy not for the next year, but next 5 years, 10 years or
may be for your entire life. It might happen that you will be able to use it
only after 20 years (a possibility). What should actually matter to you are the
overall features of the policies and how good its coverage is when the actual
time comes.

What is the Waiting Period?

A very important reason to buy health insurance early in life is the concept of
“waiting period” in health insurance policies. Waiting period refers to the
duration after which your actual cover will trigger. It can range from few
months to some years. The waiting periods are for two kinds of ailments:

1. Pre-existing ailments - A health insurance policy can put a waiting period

of some ailments that a customer already has. For e.g., if a person already has
diabetes, then the policy can say that it will be covered only after 2 years of
taking the policy, not before that.

2. Specified ailments- Some major ailments are not covered immediately, a

few years wait is required.

Tax Benefits of Health Insurance

Another good motivator for taking health insurance is tax benefits. It
provides tax benefits as follows:

a. Upto Rs. 15,000 for self, spouse, kid

b. Additional Rs. 15,000 for parents
c. Additional Rs. 5000 if one of the parents is a senior citizen

But my employer already provides me health

cover
Many people have this excuse with them for not taking health cover on
their own. They say, “My company provides me health cover, why waste
money on additional health cover?”

Let me give you some background of Employer Health cover - It’s actually a
group health cover for which the employer pays a premium. Group cover is a
health cover where all employees are covered under the plan, the employer
pays the premium, and the features are standard and applicable to everyone.
The advantage to the employer is that he can show it as a benefit to employee
and pamper him with it; it’s a way to show “I care”. The benefit to the health
insurance company is that they get many customers in one shot and a large
premium.

Now this premium is a big expense for companies. A big one. And now,
many companies are relooking at this benefitting and limiting it. Let’s see
some of the disadvantages of only being covered by your employer for health
insurance (same for life insurance).

1. Your employer may take back the health insurance benefit in the future,
what will you do in that case?
2. Your company may exclude your parents from the health cover.
3. When you leave your job and move to next company, there is no guarantee
that the new employer will provide health cover.
4. It’s not a lifetime health insurance cover. What will you do when you
retire? The real benefit of health insurance comes at that time.
5. You employer health cover might not be enough at this moment.
6. Your employer might ask you to share the premiums in future.

These are some of the major reasons why you might want to look at some
additional health cover and consider your employer health coverto be a
secondary and supplementary health cover.

5 things to look for in a health insurance policy

A health insurance policy has many components; we can’t cover each of
them here, but some points are more important than others. Here we will look
at 5 points that you should keep in mind when you take your health cover.
1. Go for a basic policy

Don’t be confused when I say this. I am not saying don’t go for a good policy
and settle for a cheap one. But there are policies that offer many unused
features (nearly 50%) which are not that important for a common man. All
these features cause the premium to shoot up because the policy then
becomes a “premium product.”

Look at a policy that pays for all the consultation charges, medicine
expenses, and covers and pays for major surgeries. This is your primary need
and look at these things in a policy before anything else. If you want a policy
which offers many frills at extra cost, that’s your choice. But to keep the
premium lower, you should consider these points.

2. Maximum renewal age

Health insurance in a way is a yearly contract and every year you need to
renew it. There is no point being covered only until 60 or 70; that would
defeat the big purpose of taking a health insurance policy. Medical costs are
rising and the next few decades are going to be challenging on these fronts
given our complex lifestyles and health habits. You don’t want to go for a
policy that limits the renewal age.

Many health insurance policies offer long life renewals, yes, the premiums
will be a little higher because they are offering you lifelong renewal, but
that’s exactly you should be looking for.

3. Look at sub limits and caps

A health insurance policy always puts a limit on many things. If you take a
Rs. 5 lacs policy, it does not mean that you can spend on anything the way
you want and that will be covered under Rs. 5 lacs. There are sub limits on
things like room rent, some treatments, daily allowance for medicines etc.
This is where you need to take responsibility yourself and take the time and
effort to look at policy documents before you go for it and understand the
limits and caps for those things that matter to you the most.

4. Maximum cover

It’s a good idea to go for a high cover, gone are the days to be covered for
just Rs. 2-3 lacs. You should be ideally covered with a good enough cover
like Rs. 5-10 lacs or even more, obviously depending on your situation. But a
minimum of Rs. 5 lacs is necessary these days. Just imagine the worst
possible medical bill as per your situation and standard and decide the cover.

Go for a policy that can offer you a high cover; if a company cannot provide
you a high cover, better look for another because high cover at the outset will
save you the headache of increasing it later.

It’s important to make sure you have a higher cover, because the health care
inflation in future will make sure that your health insurance amount right now
is peanuts after some years. A Rs. 3 lacs or Rs. 5 lacs of sum assured might
look fine for now, but imagine what will happen after 10 years? Will the
same cover be enough? Most major surgeries’ cost went up by 50% from
2007-2012. This trend can continue and will push the price of everything up.
So it’s a good idea to start your sum assured with a higher amount. Or at least
keep increasing it at the time of renewal of your health insurance cover. You
can also take a “top up cover” which is provided by health insurance
companies, which adds another layer of sum assured on top of the existing
health insurance cover and you can use that once you exhaust your main
policy sum assured.

5. Insurer credibility

One big thing you need to look at is at the insurer company itself. A
preliminary check would be to look at their past, their reviews on the internet,
the company behind it and how trustworthy they are. Although IRDA (the
regulator) keeps a check on many points that you don’t need to worry about,
as a responsible investor you need to do your bit. Prevention is better than
cure!

Good websites to check and compare health

insurance
Many websites provide information about health insurance such as:

1. Medimanage.com
2. Policybazaar.com
3. insurancemall.in
4. insurancepandit.com
5. myinsuranceclub.com

Take Action
Make the list of things that are important to you. Here is a table to complete
before choosing your policy.

Parameters

Who will be covered under it? (Yes/No) Self _____

Wife______
Children______
Parents_____

How much cover you want to take? Minimum_____Lacs

Maximum_____Lacs

What are the top 5 things you will look at your 1.

health insurance policy 2.
3.
4.
5.

Your budget per year (just put a number, but let it _____thousand
not become a restriction for you)

Amount of health cover already there from _____lacs

employer

How much is the short fall right now _____lacs

You will complete this task in Next______days

Check which health insurance policy meets

your criteria
Choose the company that gets the maximum YES.

Bonus Tips
• Once you take the health cover, behave as if you do not have one. Take
care of your health, exercise regularly and eat properly. Health insurance is
not a licence to live an unhealthy life.

• Keep the health insurance TPA, broker, or company phone number saved in
your mobile phone and make it available to your family members. Take a
Xerox copy of the health card if any and keep in your wallet, so that in case
of emergencies, you have easy and quick access.

• It’s a good idea to have individual health cover, along with another family
floater cover that covers everyone. This way everyone has an individual
cover + higher cover too. You can also top up the insurance with “top up”
covers.

• You can enquire into nearby hospitals about their facilities and what they
offer, so that when the time comes, you are mentally are ready to go to one
of them. Don’t make last minute evaluations.
 The fourth step in your financial life is to arrange for adequate
emergency funds to deal with uncertainties and unexpected
surprises in life.

The moment you hear the word “emergency”, what image comes to your
mind? An accident, someone close asking you money for something
important, losing your job or a big unexpected expense? These are some
examples of emergencies, but a one-line explanation would be “An
unexpected situation requiring money”.

How much money have you kept aside for these kinds of emergencies? Ask
yourself, how fast can you access your money if it’s required in a worst-case
scenario? How fast can your family access the money in case you are not
around? There are two questions you need to answer here.

How much?
How fast?

Emergency planning is all about these two questions.

But I already have a good amount of cash in

the bank
You might think at this moment, that you have a good amount of cash in your
bank account, so you have your emergency planning in place. Many people
think like that, but that’s for now; will it be same when the situation hits you?
Will you still have sufficient cash with you when you really need it?

It might not happen, because you have not labelled some part of your wealth
as an “emergency fund”. Many people who have large amounts of cash in the
bank most of the time find out that when they really need it, they don’t have
enough at times. It’s possible that 2 months ago they used the money for their
car down payment, invested the money to save tax, or just loaned it to a
friend for a short time.

So, the point is that you need to keep aside some money only and only for
those bad situations that you feel are “emergencies” for you. Whatever
happens, that money has to be treated as the alien part of your life; you can’t
use it for any purpose, because the purpose for that money is already defined.
It can only be used when you are in an emergency, not otherwise.

Peace of Mind
Many people keep on worrying about uncomfortable situations, which people
do not want to deal with, but can happen.

1. What if I lose my job suddenly?

2. What If I meet with an accident and cannot earn for the next 6 months?
3. What if we suddenly need money for some unexpected event?

These thoughts keep coming to mind and make us worry. They really haunt
us in times of a recession, when we hear of layoff plans in our company or
when we escape a bad accident.

Imagine if you have done your emergency planning well and you are
prepared for the worst already. While the bad thoughts and worry cannot be
eliminated totally, it will surely reduce. Don’t you agree?

How much to keep aside

“How much to set aside?” is an Interesting question that can be debated for
hours and days without reaching a conclusion. An emergency is an
emergency and it does not have a price tag. It can’t be just put in a formula to
get a number. It’s purely personal.

But, we can look at it in a very simple way.

You don’t have to overdo it, but the amount you keep aside should give you
peace of mind and a feeling of safety from unexpected events. For some
people, it’s just a big lump sum amount like Rs. 1 lac or Rs. 4 lac and for
some it’s a function of their monthly income like 3 months income or 1 year
of their income.

To keep things simple and move ahead, let me take an example of an

emergency situation: a “job loss” scares more people compared to an
accident these days.

If you lose your job, how fast you will get another job? Now this is a question
only you can answer and it will depend on how good you are at what you do
and how confident you are at what you know.

3 months? 6 months? Or never!

Eventually you will get another job, but many months can you wait before
you get another good one? What is your threshold? What is your limit? I
think 6 months is a good enough gap. Most people can get a new job within 6
months of trying hard. So let’s assume that 6 months is a standard time
frame.

So you need to keep aside 6 months’ worth an emergency fund! But 6 months
of WHAT? Your income? Your expenses? Or what you’re worth?

That’s where most people go wrong, they go with 6 months of income and it
shoots up like anything. The number they get is pretty big. It’s actually the
“expense” you need to look at, why look at income. If you earn Rs. 2 lacs per
month, but your expenses are just Rs. 50,000 per month, you need to have
just Rs. 3 lacs aside to take care of your next 6 months! It’s not a function of
income, but a function of expense.

When you start looking at “returns”

from your emergency fund, then the
purpose of an emergency fund is
defeated. Any expectations of returns
from it should be purely secondary.
But 6 months is just an indicative number I have chosen in this example, you
need to choose yours.

Where to Invest?
The moment you say, “invest”, you think of “returns”. That’s the honest, sad
truth. You want to get the best returns and that’s when the complexities start.
Ask yourself, do you invest your emergency fund money somewhere or do
you keep it safe? All you need from it is that it’s safe, accessible in a few
hours or minutes, and does not decrease in value. If it increases in value, that
would be great. But that should not be the primary focus.

Some options where you can keep this emergency fund money are:

1. Savings bank account

This is one of the best options to keep liquid money. We can always access
money through an ATM. You can keep around 50% of your emergency fund
in a savings bank account, but ideally this should not be in same bank
account you use for every other purpose, otherwise it would become too
tough to track your emergency fund and maintain enough discipline to not
touch that money. It will eventually get used for some purpose.
You can keep this fund in another bank account or into an account that you
don’t deal with on a regular basis. This would increase the chance that you
don’t access this money easily. The money lying in a savings bank account
will also earn some nominal interest of 4-6% depending on the bank.

2. Liquidfunds

Liquid funds are those mutual funds that invest the money in very short-term
debt instruments; these liquid funds might provide marginally better returns
than a savings bank account, but this is a good way to make sure that the
money is kind of “invested” too. It appears as “invested” and hence you don’t
touch the money unless you really need it. This can be a strong reason to use
liquid funds to park your emergency fund.

3. Online fixed deposits

Another good option to keep your emergency fund is into fixed deposits that
can be opened and broken online. Most banks these days provide this facility
and it’s easy to operate it online. Emergency funds are used only in
emergencies, which don’t really happen every day. So a good part of your
emergency fund can lie in fixed deposits, which can be broken anytime you
want.

A good part of your emergency fund can

lie in fixed deposits, which can be broken
any time you want.
4. Credit card

Now you don’t have to really “put” any money into credit cards, but you can
always look at your credit card as a good option at the time of real
emergencies. If you have a good credit card with a high limit (which you
should have anyway), you can use it when things really get ugly and are not
getting money from anywhere else.

But beware! Use a credit card only as the last option. Use it only when it’s a
matter of death and life, because it has its own ill effects. Don’t look at them
as the primary option but the last option.

Emergency fund helps you maintain discipline

in investing
Now an emergency fund is created, so that you can have that extra money to
deal with a bad situation. But do you know “the most important reason” for
creating an emergency fund and how it can have a major positive effect in
your financial life?

“It increases the overall discipline and quality of your financial life.”

Emergency fund is a protective layer of your

financial life
We take financial decisions based on greed and fear. Any emergency evokes
“fear”. It disturbs our mind and does not allow us to think rationally. We are
so consumed in that bad moment that we cannot think properly and we take
decisions in such a frame of mind, they are not always the best decisions. An
emergency fund gives that extra layer of time and acts as a resource that
allows us to keep our mind a little cooler and think better.

Let me explain why!

Imagine you have invested some money in fixed deposits for some financial
goal, started your mutual funds SIP (monthly investments) which are
happening on its own each month, and invested your money in some financial
instruments for the next 4 years. But you failed to have an emergency fund.
You don’t have much money kept aside fora bad phase if any. Now imagine
the following scenario:

You lose a job now!

What will be your first reaction? Panic! It will happen irrespective of an
emergency fund or not!
Then what’s next? A person who has lost a job has to deal with his monthly
commitments like home expenses, any EMIs to be paid, regular children
school expenses etc. A person can manage things for 1 month with a little bit
of problem. For the second month he will struggle, but by the third month if
things don’t get into control, the first thing he will do is, is to stop his regular
investments (in case there is a recurring deposit or a SIP in mutual fund),
because his first priority Is “consumption”. There is no point of “investing” at
this moment of crisis. He might also break his existing investments in the
worst case.

What did he do just now?

He has put a brake on his wealth creation strategy that he put so much
thought into! You must have experienced this. We struggle to start and take
these investing actions. We think for months and years about starting these
important things in our life, we keep on telling ourselves that “someday”
soon we will be responsible, and then after a lot of thinking and lethargy, we
finally take that action after constant self-reminders. And then in case of
emergencies, we break the momentum. We get back to the old state of
“inaction”.

It’s highly probable that once we are back in control of our situation, we
won’t restart the same actions. It will again months and sometimes years to
take that small action that matters in your financial life. We keep on delaying
our investments by telling our self “next month” and “next week” for sure!

This happens when you do not have a sufficient emergency fund.

What if you had an emergency fund?

If you had properly planned for your emergency with 6 months of expenses
and other kinds of commitments, then there were lower chances for you to
reach a condition where you disturb your existing investments or break them
for consumption purposes.

I hope you are getting my point. A buffer makes sure you are in a
comfortable position and do not get tempted to break your existing system.
You do not disturb the existing structure of your financial life.

What about the mental stress!

In the same example of “job loss”, you can imagine how your mental stress
will go up in two situations. The first being “no emergency fund” and other is
“sufficient emergency fund”.

When you don’t have any emergency fund, you are more desperate to take
another job, because your monthly commitments are to be arranged. You
might want to wait for a much better opportunity, but might not have the
patience - The state of mind will be “I need this job at any cost right now”.

However, with sufficient emergency planning, you can have that cushion to
let one opportunity go out of your hand and have that guts to say, “I will wait
for another, my next 6 months are in my hand”.

Minimum Emergency Fund

A nice strategy can be to divide your emergency fund into “minimum
emergency fund” along with “additional emergency fund”. I might need a
minimum to minimum 3 months of my monthly expenses at any cost, but I
would still want to keep 3 additional months of expenses and that would be
my “additional emergency fund”. It’s like breaking your overall emergency
fund into two parts: Part 1 is what you want at any cost and Part 2 is “good to
have”.

Then I can keep my “minimum emergency fund” into a savings bank

account, ideally into a joint account with my spouse or someone else and
have two debit cards for it, each with husband and wife. So that not just one
person has access to it.

The rest of the emergency fund can be kept into a liquid fund or a fixed
deposit that can be liquidated within 1-2 days maximum if required.

This structure has the elements of simplicity, fast accessibility and better
returns than a savings bank account. Now enough gyan, let’s get into action
and crunch the numbers to create your emergency fund.

Action Time
 Your Monthly Expenses (A)

Number of months you want to plan (B)

Total Emergency Fund (C) AxB

Money kept in Savings Bank account

Money Kept in Liquid Fund/Fixed Deposit

How will you arrange for this Emergency Fund?

I will arrange for this emergency fund by

Bonus Tips
• If you are in a job where there is a lot of uncertainty, you can create an
emergency fund for more than 1 year.

• In case you are going to opt for entrepreneurship, it’s wise to work on an
emergency fund for the next 3 years of cash flows.

• In case you cannot save a large amount for the emergency fund, start small!
Increase it in the coming months.
 The fifth step in your financial life is to think about your short-
term and long-term financial goals, and be ready with some rough
arrangements for each of these.

“Financial Goals” - The moment you hear this word, some images appear in
your subconscious mind. Your children’s education, the down payment for
your house, the car you want to buy in the next 2 years, your retirement or the
new business you have been wanting to start from a long time. At the same
time, you may be disturbed by some thought and fear if you can achieve all
these goals or what if something goes wrong, etc.

These goals bring a lot of stress in our life, from the time we think about
them to the time when they are near. But after a while, we are relaxed back in
our day-to-day life, we are consumed in our daily routine and forget about
these short and long-term goals, because we don’t have to deal with these
goals “right now”. We have so many other things to deal with and these goals
appear to be “important”, but “not urgent” right now. The amount of
optimism we have with respect to our abilities to meet these goals
successfully later in life is very high at times. However, we fail to realise that
it’s just a psychological trap we are in. Just look at your current life, you have
some financial goals to meet right now at this moment, some big and some
small. You knew that they would arrive at some point of time, you knew
about them a few years ago, vaguely or clearly.

Are you all set to achieve your current goals?

Are you 100% set to achieve the current goals without much problem? How
prepared are you for these current goals in your life that you have to meet
NOW?
Are you struggling to complete them without much issue? For most people,
the answer is NO, but there can be a few who would say YES - “I am able to
meet my financial goals as planned”. They are probably much better in
planning and are already living their financial life the way this book wants to
teach you. But for most people the answer is “I am really struggling to meet
my goals smoothly and easily”. This is clearly a sign that you will face the
same kind of situation later also. And that’s a good enough reason to at least
do some level of planning for these goals. By planning, we mean “getting
ready” for the goal. By planning we mean “Moving towards that goal”. By
planning, we mean “Be prepared to face those goals when they arrive”.

What kind of financial goals are we talking

about here?
In this section, we are talking about one-time goals, like children’s higher
education, house down payment, wedding costs, buying a car, etc. We are not
talking about the regular recurring expenses goal here. We will also consider
retirement as a separate goal and look at it in the next chapter, because it is a
separate concept all together.

Time left for your goals

Now for every financial goal of yours, there will be some time left to achieve
it. If you want to buy a car after 2 years, then you still have 2 years left to
achieve it and plan for it. If your child is 3 years old and you want to save for
her graduation and post-graduation when she turns 18, then there is 15 years
left for this goal.

If you have read my first book - “16 Personal Finance principles every
Investor should know”, I have very powerfully shown the concept of “Early
Investing”. It totally blows your mind with many examples about how early
investing in your life can be helpful and positively impact your life. It shows
how having lot of time on your hand is a big boon for your financial life. The
closer you are to your goal, the less time left for your money to grow, the risk
you can take on is limited and hence you will have to limit your choice of
investments. The higher the tenure left, the higher risk you can take and the
returns you can achieve from your investments improve.

Hence, you can now look at your financial goals into two categories: short-
term goals and long-term goals. To simplify both concepts, any goal that is
going to arrive in next 5 years is a short-term goal and anything beyond 5
years can be marked as a long-term goal. Now to plan for any kind of goal,
you need to know 3 things very clearly before planning.

1. What is the current cost of the goal, i.e., if that goal had to be achieved in
this current year, how much would it require?
2. How much time is left for your goal? This will also tell you if it’s a short-
term or long-term goal?
3. What kind of person are you - a risk taker or a risk avoider?

Now with these 3 inputs, you can start some planning. Here are the steps:

Step 1 - Calculate Future Value of your goal

Your goals are years away from you, and you want to know how much you
would need in the future when the goal is really at your doorstep. Some
people might just throw a number like “I want Rs. 20 lacs for my kid
education after 15 years”, which is fine. That’s how most people look at the
future value; they say a number with their gut feeling. There’s nothing wrong
with that because at times the number they think they would need really is a
good estimate of the future value. But another alternative would also help you
project the current cost into future assuming some inflation for the goal.

Every 1,00,000 rupees required today will become

All values are just approximations 6% is assumed for low inflation 8% is assumed for moderate
inflation 10% is assumed for high inflation

Today an MBA from a decent college costs Rs. 8-10 lacs in total. But 10
years ago, it required just Rs. 3-5 lacs. You can see that the cost has literally
doubled over 8-10 years. So you need to define the current cost and assuming
inflation, try to project a future cost. It is just a rough estimate of the future.

Now to give you an example of how to calculate the future cost. Let’s say the
current cost of a goal is Rs. 10 lacs (like fees for an MBA course). Suppose
your daughter is 8 years old and you want to plan for her post-graduation,
which is due in next 15 years. Now you can look at the chart given here and
project the value in future assuming low, moderate or high inflation. That
would totally be on you depending on how optimistic or pessimistic you are
about the whole situation. Let’s assume the inflation as moderate (@8%).
Now you can see that for even Rs. 1 lac required today, you would need Rs.
3.2 lacs after 15 years with moderate inflation. So for Rs. 10 lacs, you would
need Rs. 32 lacs in the future. For simplicity sake, let’s take Rs. 30 lacs as
your future target. Now that’s really a rough estimate so don’t get hooked to
that number, just understand that you would need close to Rs. 30-35 lacs.
This is the range you should target; the reality can be different, but that’s the
best you can do now.

Step 2 - How much do you need to save?

The next question now is, how much to invest to reach this goal per month? I
am taking an example that calculates on a per month basis, because that’s
what most people want.

Some people might want to invest on a yearly basis, in which case you can
just multiply the monthly number by 12 and you know how much you should
invest yearly!

Now continuing the same example above, let’s say you want to generate Rs.
30 lacs after 15 years. Here is a table that shows you how much you need to
invest per month to accumulate every Rs. 1 lac of target value.

Before you calculate, it’s important to define few things like:

1. Are you are high-risk taker or low-risk taker?
2. Are you going to increase your investments roughly along with your salary
increase or not? Or you just want to keep a constant contribution
throughout the tenure?
3. Will you invest on monthly/yearly basis or a big lump sum on a one-time
basis?
Once you are clear with these 3 things, then using the table here is child’s
play.

Example
For our example, let’s assume that you are a low-risk taker and want to invest
a fixed sum for full 15 years tenure each month. Then if you look at “monthly
investment required” column, under constant contribution, under “low-risk
taker” sub column, you will see that for the 15 years row, it’s mentioned 310.
That means you need to save Rs. 310 per month if you want to keep it
constant for all 15 years to generate Rs. 1 lacs of target value. As you need
Rs. 30 lacs, you will multiply 310 by 30, and you will get Rs 9,300 per month
value.

To achieve 1,00,0000 you need to save each month

All values are just approximations 8% is assumed for low return 11% Is assumed to be high return

Is that a high number?

For some people it might seem like a high number, that’s because you have
chosen not to increase the amount each year. But if you want to link it with
your salary increase each year (assumed to be 6%), then you can look at the
“6% increase” column, and you will see that the number is Rs. 220 per
month, so for Rs. 30 lacs, you will multiply 220 by 30 and get Rs. 6,600 per
month. Now that’s much lower than Rs. 9,300. But now you will have to
increase your investments overtime as and when your salary goes up.

What if you are a high-risk taker and can

increase your investments per year?
In the same way if you are a high risk taker (if you can invest in mutual
funds), and you want to link it with your salary increase, then you can see
from the table that you would need Rs. 180 for each Rs. 1 lac target and
hence for Rs. 30 lacs, you need to invest only Rs 5,400. For all the examples
above, if you want to invest on a yearly basis, then multiply the “monthly
investments required” by 12.

One-time investment with low risk?

If you want to invest a big lump sum amount in one shot, but want to take
low risk, then you would need Rs. 31,530 to reach Rs. 1 lac target. Just
multiply it by 30 and you will get close to Rs. 9.7 lacs as the answer for
generating Rs. 30 lacs. With this table, I hope you can now calculate the
amount required to meet any kind of goal with a one-time investment.
Now let’s move to the final step of finding out where exactly to invest for this
goal. We will assume our initial number of Rs. 9,300 per month required,
assuming a constant contribution throughout 15 years and low-risk taking
abillty.

Step 3 - Where to invest for your goals?

The obvious question in everyone’s mind is “Where to invest”? What most
people want is a personalized answer depending on their situation. They want
an advisor to understand their situation, their mind set and tell them which
are the best financial products to invest in. But here, the limitation is that you
need to do it for yourself and it’s not that tough a task. With the help of some
defined rules, you can pave that path for yourself. Before you choose a
financial product, it’s important to choose the category of that investment,
and that would depend on two things:

1. Is your goal a short-term goal or long-term goal?

2. Do you want to take high risk on your investment or low risk?
With these 2 inputs, it’s almost clear what should be the asset class you
should invest in. There is no confusion here. If you look at the graph below it
clearly shows you the options.

Coming to our example, you can see that quadrant 4 fits the situation. It’s for
a low-risk and long-term goals mix. You can see the options for investments.
Now all a person needs to do is choose few options from there and then find
out some good investment products in that category. You have to pick the
products but don’t get threatened by it, just pick some good mutual funds that
have performed on a long-term basis. Don’t try to catch the “best” fund,
that’s just a myth !

In our example you can see that if you want to invest Rs. 9,300 on a Monthly
basis, then you can start a Rs. 5,000 SIP in balanced funds (may be Rs. 2,500
SIP in two balanced funds) and invest the remaining Rs. 4,300 in your PPF
account on a monthly basis (you can set up that online most probably, which
we will see in the coming chapters). Now if you have to summarize, you can
see how we planned for a particular goal in few minutes so easily.

Now let’s look at 2 more examples to make it clear to you on how to plan for a goal.

One-time investment with low risk?

Ajay’s retirement is 18 years away and he wants to start a restaurant when he
retires. It would cost Rs. 10 lacs today. He expects moderate inflation
throughout the 18 years and he can take high risk, but wants to keep a
constant contribution for all 18 years. Based on this information, he will
follow the 3 steps we discussed in this chapter.

Step Find out He looks at the first table and find out that the
1 Future future value of his goal is Rs. 40 lacs (Rs. 4,00,000
Value for Rs. 1 lac, so for Rs. 10 lacs, it would be Rs. 40
lacs).

Step Calculate Based on the future value of Rs. 40 lacs, he finds

2 how much out from table that for “constant contribution” and
to invest per “high risk”, it would be Rs. 170 per month to
month generate Rs. 1 lac after 18 years, so he multiplies
170 by 40, and gets Rs. 6,800 per month.

Step Where to From the 3rd table, he finds out that he fits in
3 Invest? quadrant 2. So he decides to invest Rs. 6,800 in
those categories of products.

He chooses to invest Rs 4,000 in an equity

diversified mutual fund and the remaining Rs.
2,800 in an index fund.

Down Payment of House - Goal Example 2

Robert wants to make a down payment for a house after 4 years; he is a low-
risk taker. Right now, he needs Rs. 5 lacs to make down payment. Find out
how much he needs to invest on a one-time basis as well as on a monthly
basis linked to his salary (6% increase). He wants to assume that inflation
will be high in coming years. Now let’s follow the 3-step process.

Step Find out He looks at the first table and finds out that he
1 future value would need Rs. 1.47 lacs for every Rs. 1 lac today,
 so he multiplies Rs. 1.47 lacs by 5 and gets Rs.
9.85 lacs as future value. Let’s take it as Rs. 10
lacs for simplicity.

Step Calculate He looks at the second table and gets the value of
2 how much Rs. 73,500 to be invested on a one-time basis for
to invest for Rs. 1 lac target, so for Rs. 10 lacs target he will
a one-time have to invest Rs. 7.35 lacs (assuming low risk).
investment

Step Calculate Assuming low risk and a salary increase linked

2 how much situation, he would need Rs. 1,710 for every Rs. 1
to invest for lac target, so for Rs. 10 lacs, it would be Rs.
a monthly 17,100 per month.
investment

Step Where to From table 3 - he can see that the quadrant he lies
3 invest? in is Quadrant 3 (low risk and short-term goals), so
based on the options given there he can invest in:

For one time investment option - A fixed deposit

of Rs 7.35 lacs.

For Monthly investment - A recurring deposit of

Rs. 17,100 per month.

Your financial goals

Now in the same way you can also plan for your goals, for which you need to
define:

1. Target year
2. Current value
3. Risk capabllity
4. Inflation assumed
5. Constant/increasing monthly option or one-time option

Note - If you want to invest on a yearly basis, then just multiply the monthly
number by 12.

Making realistic and approximate assumptions

When we work with our clients, we observe two shocking things. One before
goal planning and one after goal planning.

Before goal planning

Most people do not realise that they want the stars and moon while they live
on earth. Their goals are just not realistic. They just do not see what their
situation, earning and their capabilities are, and what they want out of their
life. You need to look at your earning potential in future, your lifestyle, your
overall knowledge and finally speak out a number. You can’t be saying that
you want to plan for your kid’s education after 8 years and the current value
you would need today is Rs. 60 lacs, especially when you are earning just Rs.
5 lacs per year. That’s just not realistic and you are destined to be unsatisfied
in your goal planning.

No financial planner or advisor can help

you unless you keep things in limit.
Hence, when assuming a target value,
make sure you project realistically.
Don’t overshoot an estimate just because you feel that the planning process
can overshadow your limitations. That is exactly how some of our clients also
felt while sharing their goal numbers with us. They thought that just because
they are hiring a financial coach or a planner, all their goals would be planned
somehow. They think advisors have some magic stick that we will use to help
them meet their goals.

Aftergoal planning
After you do some calculations and plan for your goals, you will get some
numbers. In my observation, most people take it too literally and are attached
to the number. They focus on the number, rather than the process or the
concept.

Let’s see this example -

To generate Rs. 25 lacs, they need to invest Rs. 4,850 per month for the
next 20 years and increase the contribution by 6% each year.

Now think about this carefully….

Is it really possible that the guy will get exactly Rs. 25 lacs after 20 years, if
he follows this plan? Can’t the final number deviate?

The final value can be Rs. 22 lacs, Rs. 28 lacs, or it can be Rs. 20 lacs also! It
depends on several factors. The calculations are done with some assumptions,
which are just approximations, and what really matters is that you reached
“near” your goal, not the GOAL itself. A goal should always be looked at as
a fuzzy area and not a point!

If the amount to be invested is Rs. 4,850 in this example, it does not mean
you can’t invest Rs. 4,500 or Rs. 5,000. Also, you don’t need to religiously
increase your investments by 6% each year. It can be a 20% increase every
3rd year. Or just a good enough Increase whenever it’s possible; ultimately
you are going to do things within your limits.

Don’t cancel your SIP in mutual funds after 1 year and add 6% to the amount
and restart the SIP, that’s planning overkill. What it really means is that you
should keep your investments later by a good margin, instead of increasing it
by 6% each year, or whatever works for you.

So don’t be attached to each number and strategy so rigidly that instead of

helping you simplify things, it becomes a burden for you and blocks you
from taking the right actions.

What to do in subsequent years

So you have planned for your goals and now you know how much money
you need per month or on a one-time basis to invest for all your goals. Now
you might have that much money at this moment, or you might be short of
money by some amount. Again, don’t stop.

As I said, don’t block your actions because of numbers. If you have just 50%
of what is required to meet your goal at this moment, at least start.

By now, at least you know that you are 50% short of the amount. After 2 or 4
years when your situation improves and you are able to invest more than
what is actually needed, you can always cover up for the past and invest
more. At that point of time, you can always redo this whole exercise and get
the fresh numbers. It’s not a one-time exercise, it’s a yearly exercise you
should do and check if you are on track or not!
Take this whole goal planning as an exercise to help you in starting and push
you for taking action. At least after this goal planning you now have a better
idea of what you need to do about your financial goals; you know which
direction to move. The whole process is the real essence of financial
planning, it’s not about numbers; it’s about the process and the action you
take. Remember - It’s not just about numbers!

Action Time
Now finally let’s work on your numbers and put some action items. Fill up
the following table.

Bonus Tips
• In case you have planned for a long-term goal, it’s always a good idea to
start withdrawing from your investments 2 years before the goal in case
your money is lying in risky investments like stocks, mutual funds or ETFs,
and transfer the money to safe instruments like a fixed deposit.
• Do not be too attached to the tables and strictly follow them. Use your
creativity and choose some investment options that you feel can be a good
alternative.

• Plan for a goal with a worst and best case scenario, and try to match the
best-case scenario. This way the chances of you meeting the goal will be
high, because you are saving with the best possible scenario!
 The sixth step in your financial life is to think about your
retirement planning and start working on it now. Retirement
planning is one of the major goals in life and should be taken very
seriously.

This chapter is dedicated to retirement planning, an alien concept in India.

Retirement is generally not planned, it just happens in our country! Have you
ever seen your parents or grandparents think and talk about their retirement
as carefully as they think about other things in life like building a home or
planning for a grand wedding?

For decades, retirement was a phase of life where parents depended on their
children to support them and take care of them. The attitude was, “I have
done my bit, now it’s your turn.” While that attitude is acceptable, is that the
right approach towards retirement, especially in current times?

One has to look at cultural and societal changes in our country and look
ahead to visualize the future. With an increasing number of nuclear families
and growing trend of families parting with their main families, it’s highly
probable that when your retirement arrives you will need to take care of your
own life. No doubt your children and loved ones will be around and support
you if needed, but you cannot deny that ultimately your retirement is in your
hand and you cannot take it for granted.

Times are changing! You need to change your

mind set too
Because of the old mindset, it’s really tough to imagine your retirement as
totally in your hands, and because of that, most people cannot digest that
retirement planning has to be one of the top most goals of their lives.
Whenever one hears the word “retirement”, the thought that comes to mind
is, “There is enough time ahead” and this way months and years pass on. One
day they realise that they have done everything for their children and family,
and completed all the responsibilities of life, but have terribly forgotten about
retirement planning. All their life they have earned and spent it on others, but
now when their time has come, they do not have enough money to survive a
fulfilling life.

In his landmark book, “11 Principles to Achieve Financial Freedom”,

Nandish Desai explains, “There are some financial goals in life which we
set and then there are some goals which are already set by themselves,
the moment we take birth. One goal that is already set from the moment
we enter this world is retirement. You don’t have to set the goal, you
have to just set yourself now”.

It will not matter if you have planned for it or not, it does not matter if you
are doing anything about it or not. The retirement monster is sitting there
years away from you, staring at you, laughing at you, it’s fixed! You are
approaching it each year, each month, each day, each hour and each second,
very slowly! That’s the reason you do not realise this hard fact.

You don’t set the goal of

retirement. It’s already SET.
Now you just have to prepare
yourself.

Retirement in new India

Different people have their own definition of a word “retirement” where it
means “free from responsibilities” or “not working anymore”.

But what is your definition of “retirement”? How do you “visualize”

retirement? Is it just getting free from responsibilities and the end of your
working life, or it is much more? Mostly you see it as a phase of life where
you no longer have to work for money. You might be doing some work, but
it’s not dependent on the money you get. It’s a phase of life where you live a
life you were waiting for all life: relaxation, freedom to get up in morning at
any time and do what you want all day. Travel somewhere without thinking
about your commitments etc.; in fact, you are so excited just reading this
paragraph that you are literally imagining yourself doing all these.

In the book “Retire Rich - Invest Rs 40 a day,” a dedicated book for

retirement planning, author P V Subramanyam says that “Retirement is a
time bomb waiting to happen!” That’s extremely true at least in the Indian
context, where people underestimate the retirement requirement so much.

Let’s get the facts right - Retirement is not an easy thing to plan for and you
are surely underestimating retirement needs.

If you didn’t think like that, think again! The goal of retirement is not a fixed
point, it’s a phase that will go on for years and years until you die. There is
enough proof around you. Look around you; see the people who are retiring
these days, what are their lives like? Full of struggle? Are they dependent on
someone financially? If you are struggling financially right now in your life,
imagine the days when you will not be earning and your health will not be as
good as it is now.

You are earning for your past, current and

future
The money that you earn today, what is it used for? Most people will say - for
present expenses. Yes, that’s true, almost everyone used their income for
current expenses, but some people also use it to repay back some debt from
their past. Most people do not get this fact in their mind that what they are
earning today is the only money that they have to use in future also–that’s
retirement.

30-30 rule of retirement

Let’s understand a rule called “30-30 rule of retirement”. The rule says that
you will earn for 30 years, but you will use the money for both 30 years of
earning + 30 years of retirement. Let me explain more.

If you are earning for the next 30 years of your life, you will use the money
you have earned in those 30 years in that 30 years’ time frame, but what
about the next 30 years of your retirement? Many people struggle to meet
their expenses with what they are earning today. Imagine a situation when
you still have 30 years to live, and you are not earning. The situation is much
scarier than you can visualize!

What about the money that you will be using in those 30 years of retirement?
I would recommend that from today itself, when you get your monthly salary,
keep it on the table and try to take a part out and see it as a retirement
expense, which you will have to incur in future. It’s the expense of future that
you are saving in this current moment. Bring your retirement into present and
see it parallelly with your current life, see that each year of your working life
is mapped to each year of your retirement life. Most people see a retirement
life AFTER their working life, which is correct in a way, but for a better
perspective, look at each retirement income parallelly to your each working
year, and tell yourself:

“Hey Your-Name-here, for the year 2013, there exists a year 2043 (30+
years), where you will need money to spend, but you will not be earning
anything, so better keep aside some money in 2013 itself thinking about
future. Same for 2014-2044, for 2015-2045 and so on”.

A year lost = more pressure on retirement life

For every year and every month you do not save for future, you are short for
that particular retirement year. Your time left for retirement decreases, but
you still have to save more and more with each passing year. This is a really
serious issue. Close the book for a moment, shut your eyes, think about your
age 60-90 years from now and imagine each day, each desire of yours that
you will fulfill in retirement, each wish you have saved in your heart, each
plan you have for your retirement and stop. Only you are going to fund it, no
one else will give you money for it; if someone gives to you, that’s great, but
can you take the risk of not planning and just live on assumptions?

You earn for 30 years, but you

need to use that money for 60
years - 30 years while working
and 30 years in retirement. So use
that 30-30 rule!
If you had to take only one learning from this book and implement it, I would
suggest that you take this particular point from this book and seriously save
for your retirement. If you don’t do anything else, life will still move on, but
this particular part cannot be ignored, simply cannot!

Coming to the point, let’s look at your retirement parallel to your working
life. Imagine a case of a 30-year-old person with 30 years of working life and
30 years of retirement life.
The diagram above is just an example, your earning years can be different than your retirement
years, but you get the point. Your retirement will need the money you are earning right now. If
you don’t save that right now, in this moment, you are putting pressure on your retirement. For
every passing year of “not planning for retirement”, you are decreasing the quality of your
retirement.

You need a lot of money in retirement. A lot! Most people don’t believe me,
just like you, when I tell them this. Stop fooling yourself, if you still try those
“Crorepati Calculators” on the internet, which shows you how to accumulate
Rs. 1 crore in your life. Those days are gone!

Retirement is much more complex in today’s scenario because now you are
entirely responsible to fund it, totally! With the life Expectancy improving,
you will live longer, so more money is required. Many people still feel that
the maximum they will live is 70-75 years. But these days with better
lifestyle and improved health standards you easily see people living beyond
80-85 and when your time comes, you can be rest assured that you might live
beyond 85-90. While that might not be true for all and it cannot be
guaranteed, it’s always a possibility. Have you ever thought how will you
handle the event of outliving your expectations?

Coming to the point of “underestimating your retirement needs”, let me list

some factors. Check if some of them apply to you too.
1. Most people do not factor in health care expenses at retirement. When a
person is above 60 years, there are higher chances of health complications
and more money can go in medical expenses.
2. This is horrifying, but so many people just don’t take inflation into
consideration. They feel if their current requirement is Rs. 5 lacs per year,
they just multiply it by 10, and say “Rs. 50 lacs are enough! You can get
10% yearly interest per year” But they don’t consider the possible increase
in expenses year on year. They just ignore inflation.
3. They underestimate their retirement life length. As I said before, people
underestimate their retirement tenure. Some people think planning up to
75 years is good enough. But what if you outlive your assumptions, what
if you live up to 90 or 95 years? Don’t you want to plan for it?
4. Some people just look at how their parents live in retirement and think
they can just extrapolate the same. Just because your parents retired with a
corpus of Rs. 20 lacs, does not means you can survive with an amount 2-3
times of that.

How much will you need at retirement?

Now that you are motivated and thrilled to work on your retirement, the final
big question is “How much money do I need to retire?” Think for a moment
about this. It’s not such an easy question to answer; it’s not so simple to find
out as it was to calculate other financial goals that we saw in the last chapter.
It’s because there are too many factors to be looked at before you begin
estimating.

The retirement corpus you need will depend on:

1. How many years are left for your retirement?
2. How well can you grow your money?
3. How much passive income will you already have when you retire?
4. How much retirement benefit/pensions would you have from other sources
at the time of retirement?
5. How long do you need this retirement corpus to survive?
6. How well can you invest your retirement corpus after retirement?
7. How much will inflation be after you retire?

And many other small factors…

You already can sense how difficult it is to arrive at a perfect number for
your “retirement corpus”. This is because if you make some assumptions and
if all the factors deviate a little bit here and there, the result can be very
different. For example, what if you had to retire 2 years earlier than planned,
what if your returns from your investments were 1-2% lesser than planned,
what if inflation was also higher by 1-2% than planned and what if the
inflation is much more than what you thought and planned for after
retirement, or what if you live for 5 more years in retirement?

If you combine all these small deviations, suddenly your “calculated

retirement corpus” might look very small in comparison with the actual
retirement corpus you need. It might happen that you planned for Rs. 3 crore
of retirement corpus, but what you need at the time of retirement is Rs. 5.5
crores.

But right now, what’s the best you can do?

The best you can do at this moment is only assume a few things and try to get
a number as of now. Then you can do your best in investing your money, and
anytime you get a chance to invest more, do it!

X% withdrawal rule
Let us use a very simple method for calculating your retirement corpus,
called the X% withdrawal rule. When you retire, you start withdrawing some
percentage of your total corpus for your yearly expenses and leave the rest of
the corpus to grow. Then next year you increase your withdrawal matching it
with inflation.

For example, suppose you choose to withdraw 4% of your corpus. In the first
year of your retirement, you will withdraw 4% of your total corpus as your
yearly requirement. You will leave the remaining 96% to grow in some
investment product (typically, a very safe instrument). The next year when
you withdraw the money from your corpus, you will withdraw the inflation-
adjusted amount of your previous year: if inflation is 6%, then you will
withdraw 6% more money this year. This way, your retirement corpus will
last for X number of years.

Now how long the corpus will last will depend on 3 things:
1. How much is your withdrawal rate
2. How much is the return from your investments (R)
3. How much is the inflation (I)

The table below will give you some numbers. I assume a withdrawal limit of
3%, 4%, 5% and 6% in 3 scenarios.

Good Situation - When the return generated is 2% more than inflation.

Average Situation - When the return generated is equal to inflation.

Bad situation - When return generated is 2% less than inflation.

Note that in general, the “safe returns” in any economy is very much near
inflation. You can see the current situation and see how much is the
difference between the inflation numbers and the fixed deposits rates to
verify this. Now based on these situations, you can see the table for how
many years your corpus will last.
Withdrawal Rate Table

This way you will know your withdrawal rate based on the situation you want
to assume in the future and the number of years you want to plan your
retirement for.

Now you must have got a withdrawal rate number, let’s call it W%. Now it’s
very simple to calculate your retirement corpus.

Now if you see, your first year of retirement expenses will be W% of your
retirement corpus. You already have W% with you, all you need is to
estimate your retirement expenses for the first year (when you actually retire)
and based on that you can find out your retirement corpus.

Calculating your Retirement Expenses

There are 2 ways of doing this.

1. Lump sum amount assumption

The first method is very simple, where you just call out a number and declare
it as your yearly retirement expenses. You can say “I will need Rs. 20 lacs
per year at the time of retirement to start with” in the first year. This would
depend on your gut feeling and you will subconsciously look at how many
years are still left for your retirement. If your retirement is very near, then
you will say a number that is close to your current expenses, but if your
retirement is very far, then you will say a number, which is very large
compared to your current yearly expenses.

2. Extrapolating current yearly expenses into the future

Another way of doing this is to find out how much will you need to retire in
today’s scenario and then inflate it into the future. This method should give
you some kind of future value. With the following table, you can calculate
your expenses after X number of years.

Future Retirement Expenses Table

How many times of current expenses would you need after X years

Note that your current expenses assumption should be based on the fact that you are retired
today. So treat yourself as if you are retired already, in which case you should not count your
investments, insurance premiums, your children expenses and preferably even rent (because you
might have a home already by then).

Mostly add up expenses that are for grocery, health expenses, travelling,
house help and anything you feel you would need at retirement time. It’s your
retirement, so design it yourself. We will follow the steps below to calculate
your retirement corpus.

Example
Let’s say Ajay wants to calculate this retirement corpus. His assumptions
are as follows:

1. He expects a normal scenario (Inflation = Return on his investments)

2. He feels that Rs.4 lacs/year is enough for retiring in today’s life, in case he
does not have to pay rent and other EMI + children related expenses.
3. He wants to plan for 25 years long retirement.
4. Ajay has 30 more years for his retirement to arrive and expects an inflation
of 8% throughout.
5. To generate retirement corpus, Ajay wants to invest with high risk, and
will increase his investments later when his salary increases.

Step 1 - Find out the withdrawal rate

Now from the first table, he can see that based on his assumptions, he needs
to withdraw 4% from his corpus. So his withdrawal rate is 4%, which means
he would need to multiply his retirement yearly expenses by 25 to get the
final corpus.

Step 2 - Find out first year retirement expenses

Now from the second table, he can see that his retirement yearly expenses
would be 10.1 times (for 30 years, with 8% inflation). So his retirement
expenses for the first year after 30 years = 10.1 * Rs. 4 lacs = Rs. 41 lacs.

Step 3 - Calculate retirement corpus

Now you have to find out the retirement corpus, based on the information
that 4% of that corpus is Rs. 41 lacs, so you divide Rs. 41 lacs by 4%.
Dividing by 4% is the same as multiplying by 25.

So Retirement Corpus = Rs.41 lacs X 25 times = Rs. 10 crores

(approximately)

Step 4: How much to invest?

Now the final question is - How much do you save and invest each month or
on a one-time basis to accumulate these 10 crores in remaining years of
retirement?

For this, you can use the same “How much to save” table from the last
chapter. From the example, you know that Ajay wants to invest with high
risk, and will increase his investments each year as his salary grows later.

If you look at the table “How much to Save”, you can see that for 30 years
row, the number you get is 25 and you know that it’s for generating every Rs.
1 lac of future value, so for Rs. 10 crores, the number required would be 25 *
1,000 = 25,000

So Ajay should start saving Rs. 25,000 per month for his retirement goal
from today.

This can look as a big amount, but note that this is based on assumptions. If
this looks really unachievable, at least save as much as you can, whatever is
possible.

Step 5 - Where to invest for retirement?

Now just look at the “Where to invest” table in previous chapter, you can see
that Ajay falls in “Quadrant 2” (High risk, long-term combination). So look
at that quadrant, you can now choose some investment options from there and
divide Rs. 25,000 per month like this.

• Rs. 10,000 in Mutual Fund 1

• Rs. 10,000 in Mutual Fund 2
• Rs. 5,000 in Balanced Fund 3

This is just one mix of investment options.

Action Time
Now let’s work on your retirement planning calculation. Fill up the table

Assumptions
1 What are your current expenses per year if you want to Rs
retire? Better estimate with caution, the higher it is, __________
 higher your corpus will be and higher you need to save per year
for it.

2 Years left for retirement _____ years

3 How long you want your retirement to be? _______

years

4 How much inflation do you assume until your ___%

retirement? 6, 8, 10%?

5 Are you a low-risk taker or high-risk taker when it

comes for investing for retirement?

6 What kind of situation do you want to assume regarding

returns and inflation in your post retirement life? Bad,
normal or good?

Calculations
A What is your withdrawal rate? (based on point 3 and 6) - ___%
Look at withdrawal rate table

B How many times do your current expenses need to be

multiplied for calculating future retirement expenses?
Calculate it from Table 2, based on point 2 and 4

C Your First year retirement expenses (Value at B X Value

at 1)

D What is the multiplying factor based on withdrawal rate? _____

(1/A) times
 E Retirement corpus (Value at D * value at C)

F What is the amount needed to achieve Rs. 1 lac of corpus

(look at “how much to save” table in previous chapter)

G Amount you need to save per month - (Value at F * value

at E)/1,00,000

H Where to invest? This you can again look to the table 1.

“Where to invest table” ________
2.
________
3.
________
4.
________

Bonus Tips
• Keep note of your EPF and other retirement benefits. They will also give
you a lump sum corpus and pension benefits. So factor them in while
making calculations.

• There is no point of planning for retirement, if you do not plan for a great
healthy life. You will never be able to enjoy your wealth, if you do not have
good health. So start making a good health plan for your future too. Eat
well, eat healthy, sleep well and exercise regularly.

• If you are starting out and are young, your major investments should be
done in equity products. As you move up the age ladder, your investments
should start shifting towards debt side.
• Do not go for “retirement plans” or “pension plans” in market. Just
accumulate your money in different kind of investments and when you are
near your retirement, there will be enough ways to generate regular income
and various pension plans.

• if you are already retired and own a house, you can opt for “Reverse
Mortgage” option, which will provide you some monthly pension as well as
facility to live in the same house. But the house has to be in your name and
in great condition.
 The seventh step in your financial life is to think about your estate
planning. Estate planning is to plan how your wealth will be
passed on to your next generation or whomever you wish to in a
smooth and hassle-free way.

We never want to think about the situation after our death, because we don’t
want to think about our death at all. We consider ourselves to be blessed
much more than others, for no reason. Ask a big group about the chances of
their death in an accident or due to some illness, compared to the rest of the
group and then look at how many people rate themselves to be much more
privileged than others. These are the people who have least focus on their
estate planning.

Now, what’s estate planning?

In simple words for a common man, estate planning refers to the arrangement
or the plan, for smooth and hassle-free transfer of one’s assets and properties
to his family members or anyone they desire. Estate planning is a highly
neglected area of financial life and the importance is learnt by people only
when things go terribly wrong and they have to suffer due to this. But let me
assure you that estate planning is a very core part of your financial life and
more than anything else, you need to work on this area diligently.

You spend all your effort in finding the best life insurance policy, which pays
the money easily after your death. You also make sure you keep investing for
years and decades in financial products with high returns, you take the pain
of working day and night for years and decades in jobs you hate doing and
spend all your energy to earn that extra rupee for your family members, your
loved ones because you want them to enjoy your wealth.
Have you in your wildest dreams ever thought - What if after years of hard
work and generating wealth that wealth does not go to the person you
wished? What if your wealth is not enjoyed by someone you always wanted
to? All your efforts will be destroyed in a flash! If you are wondering how
this is possible and if you are in disbelief… read on!

“What if you did every investment right, you grew your money well, but
when you died, your loved ones didn’t get anything or struggled a lot?
Do you know why it can happen?

Let’s imagine you suddenly die in an accident or for some other reason! What
will happen to your wealth? What will happen to your bank accounts, what
will happen to your properties, what will happen to your stocks, mutual
funds? What will happen to your life insurance policy money? What will
happen to your fixed deposits, PPF, EPF money… the list is endless!

Let me show you the possibilities if your estate planning is not strong or is
incomplete

1. Your wealth might not go to the desired person at all

2. Your wealth might go to the desired person, but partially
3. Your wealth might take a lot of time to move to the right person
4. It can cost lot of money and headache to your legal heirs while claiming
your wealth

Myths investors have

Many investors have myths about few rules and regulations. It’s a myth
because they do not have sufficient knowledge of terms and terminologies
and they do not have much understanding of laws. Let’s see some myths and
if you fall in the same category?
 1 I have made my wife as my “nominee” in my bank account or life
insurance policy, so she will get “100%” of the money from it, no one
else will get it.

2 After my death, all my family members will get my wealth in equal

proportion.

3 I have been taking care of my father during his illness for last 10
years; hence, this house can be claimed by me.

4 I am a married woman now; I don’t have any right to claim a share in

my father’s wealth now.

5 My father spent so much money on my younger brother’s education

and gifted him a house, now all the remaining wealth should go to me
logically.

6 Although I have 4 children, being a wife, I should get 50% share and
rest will be divided between my children.

7 It will be an easy process to claim the bank account, mutual fund,

insurance policy etc. in case nomination or will is not written!

In this chapter, I will try to make sure you understand the minimum level of
rules and terms used in estate planning and will also see what actions and
corrective measures you should take to achieve minimum level of planning.
Note that estate planning is a vast topic and what we will discuss in this
chapter is just a small part of it, but this much should be good enough for a
common man to be informed and take action. We will talk about 4 things
primarily here:

1. Nominations
2. Will
3. Succession Laws
4. Joint Accounts

1. Nominations
When you open a bank account, start investments in a mutual fund, open a
demat account, open a PPF account, post office deposit or buy a life
insurance policy, you have to list someone in the “Nomination” space. Most
people happily ignore it and leave it blank, or at best put a name that instantly
comes into their mind. For most married people it’s their spouse and in case
of unmarried people, it’s their father, mother or one of the siblings.

They ‘assume’ that this person will be the next owner of their assets in case
they die! WRONG!

One of the biggest shocks people get is when they find out that the nominee
is not the final owner of the investment account in question. Yes – that’s true!

The role of a nominee is just like a “trustee” or a “caretaker” who will be

handed over the investment after the death of the main holder. A nominee is
just a contact point who can claim the custody of the particular investment
product. It’s another point if the nominee is the valid legal heir who will be
the final owner or not, but there can be a possibility that the nominee is not
the final owner or the partial owner. A final claim on a financial product will
be of the “legal heirs”, which we will understand in some time.

Exception rule
Note that there is an exception to this above said rule. The scope of the
nominee power is defined as per different laws that govern various financial
products. For almost all financial products, the nominee is just a caretaker or
a trustee, who has the right to receive the money, but he has to then hand it
over to the legal heirs, but for Companies Act, it’s an exception.

As per Companies Act, the nominee is the final owner and will even bypass
any legal heir or any written will. Hence, any financial product that falls
under the purview of Companies Act, the nominee in those financial products
will be the final owner and after the death of the first holder, they have all the
legal rights. So in that case - shares, debentures of companies, fixed deposits
of company and demat account - all these financial products fall under
Companies Act and the nominees mentioned for these financial products are
the final owners.

For every other financial Product, Nominee is just a care-taker and the final
owner will be the legal heirs only, lets understand more on this.

If nomination is missing in any financial

product?
If nomination is present

In case a financial product has the nominee’s name, then it becomes very
easy to claim the asset. All you do is fill up a claim form, show the death
certificate and the required identity proofs and the asset is transferred to you
or you get access to the financial product.

If nomination is NOT present

In this case, it becomes very tough for family members to claim back the
asset. Now you need to have stronger proof that you are the right legal heir of
the deceased person. Compared to the earlier case, there are more documents
to be filled and more processes, after which to establish the relationship
between the dead person and the legal heirs, they have to bring in a will.
If a will is not registered or a will is missing altogether, one might have to
bring a court-certified copy of the will called “probate”, which can prove
legally that you are the legal heir of the deceased.

Depending on the type of asset, complications can arise and in almost all
cases you will have to take the help of a good lawyer, else it becomes tough
to understand the whole process. All this can happen if the nomination is
missing altogether.

Can you visualize how your family members will suffer if you do not correct
your nominations? Can you see that your one action can save your family
members from so much frustration and headache of going through the tough
process? It might happen that you have old parents or an uninformed spouse
who do not understands these things, then it will really be very tough for
them to follow up in these things. So it’s entirely up to you, what kind of
future you want to create for them.

So your first action is to check the nominations for your existing investments
products. It can be your life insurance policies, your ULIPs, mutual funds,
demat account, fixed deposits, bank accounts, PPF, EPF and anything where
your money lies!

2. Will
If you are below 45 years of age, there are high chances you want to skip this
section because you feel “I am too young to think about it”. That’s a
perception issue. Thousands and lacs of people die each year in India who are
young enough and their family members go through a tough time after their
death, because it’s a nightmare to claim back the deceased assets, there are
disagreements between family members on who has how much claim and
there are fights between them, matters move to court and go on for years and
years.
Why don’t young people write a will?
A common reason why young people do not want to make a will or never
think about making one is that they feel that neither they have enough wealth
in the life nor a very complex situation where division of wealth can get
complex. The term “will” is generally associated with “a lot of wealth”,
“rich”, “complex financial life”. But that’s just a way of looking at it, it’s not
the reality.

Even a simple situation may need a will. Let’s take a simple case of a middle
class family where a person has taken a life insurance of Rs. 50 lacs. There is
a small amount of cash in the bank, about Rs. 3 lacs and few investments here
and there. If the guy deep down his heart wants all his wealth to go to his
wife only and no one else, how will he do it?

The first thing which will come to his mind is to make his wife the
“nominee” and once he does that he thinks that “it’s done”. He thinks that in
case of his unexpected death, everything can be claimed by his wife.

But it will not happen!

In this case, the mother of the guy will also be a valid “legal heir” and shall
be able to claim 50% of everything, ranging from insurance money and other
bank balances and investments. The assumption is that there are no children
in this case.

Whatever is mentioned above will be true in case there is no will in existence.

But a person can bypass this if he creates a will, which mentions that
everything goes to his WIFE and no one else, this simple act will make sure
that from legal point of view, everything can be passed on to his wife without
much hassle. While things can still get complicated and the other party can
always fight a legal battle, but it will mostly be a lost battle for them.

But if it’s as simple as writing a will, why don’t we do it?

The blunt truth is-We are lazy! We just don’t want to do it. At least 8 out of
10 people who will read this chapter will still not do it, they are thick skinned
and no matter how much you want them to improve, they are simply lazy!
You better be part of that “2 out of 10” group and complete you restate
planning very soon.

Another reason why many people keep delaying writing a will is that they are
over optimistic about their untimely death, they just think that their future is
as much in their control as much as was their past! They want to just live the
current moment and enjoy the existing things in their life. Why worry about
the future? Somewhere you can say they are too self-centred and do not want
to take action, as they know they personally don’t have to deal with the future
or the aftershocks of the situation: it’s someone else’s headache.

If that is you, then all you need is to imagine after your unexpected demise,
the whole situation that will arise out of it. How much mental agony your
family will have to face in case a will is missing? The picture will flash in
front of your eyes.

What is a will?
A will is a legal document stating how your wealth should be distributed
among a set of people and under what conditions. It’s a way to document
your wish and give a legal framework to it. Note that you can divide only
those assets through a will that are self-acquired and earned by you. You
can’t give away something in a will if you have not earned it-like ancestral
property, which you got in inheritance.

Contents of a will
Some of the things that a will contains are:
• Personal Information like name, date of birth, address.
• Declaration of sound mind, stating that you are writing this will not under
pressure, but with your own understanding.
• Details of property and your investment details like insurance policies,
bank accounts, real estate, mutual funds, shares etc.
• Proportion in which assets are divided and parties to whom it should be
divided.
• Signature of the person writing the will and witnesses.

Basic rules for a will

I will share very simple things you should be clear about the will, which
you should know:

• A person should be above 18 years old to write a will.

• There is no fixed format for a will - you can write it on a plain paper.
• The registration of a will is not mandatory by law, but it’s recommended to
be registered.
• You can make changes to your will any number of times.
• The latest will shall be considered as the final will.
• A will should always be dated.
• 2 witnesses are required at the time of writing the will and their signature is
required, ideally, they should be younger than the will maker and should be
highly trusted.
• Ancestral property cannot be passed on by a will.

Good Habits while writing the will

• Ideally, a will should be written with double spaces (leaving one blank line
between two lines).
• Ideally if the person writing the will is above age 70, there should be a
certificate by medical practitioner that the person is fit for writing a will.
• Will writer should sign on each page with his left thumb impression.
• After mentioning all the legal heirs in the will, it’s a good thing to mention
additionally that “I HAVE NO OTHER LEGAL HEIR”.
• Check if you can videograph the will registration process, so that there is no
question on the authenticity of will. It is already directed by Delhi
Government for registering a will in Delhi.

Example of asset distribution

Let us see a very simple example of how assets can be allocated in a will.

Ajay has a wife, son and daughter in his family. He has a house, few shares
and some cash as his wealth. He wants to divide his wealth in this manner.

Wife • House
• 50% cash

Son • 25% cash

Daughter • 25% cash

• Shares
Two important points regarding a will
Point 1 - Taking Professional Help

Just because you are reading this chapter, does not mean you are an expert in
writing a will. This chapter is just an introductory material. I would strongly
suggest that you hire a lawyer and do it professionally even though a will can
be prepared on plain paper and there is no specific format for it (which means
a person can do it without professional help).

There are many minor details and small points that a common person does
not know, which can create issues later. A lawyer has a deep understanding
about wills and he will use the correct language. He will be able to put your
exact thought process and requirements on a paper and use legal language,
which will leave no ambiguity. Hence, it’s strongly suggested to hire a
lawyer. There are many online websites too which help you In preparing a
will,

Point 2 - Registering a will

Registration of a will is not mandatory as per law; however, again I strongly

suggest that you register it for three reasons.

Reason 1 - A registered will gets a label of legality around it and the chances
of someone challenging it reduces. When you register it, there is one copy
with you and another copy is with the registrar that can be obtained later. If
you want to modify your will later, that’s also possible.

Reason 2 - For many purposes, a “registered will” is demanded, especially in

the area of real estate. And if a will is not registered, then your legal heirs
have to run around court to obtain a “probate” which is nothing but a
document confirming that the will is authentic and the legal heirs’ identity is
correct.
Reason 3 - Registering a will involves nominal fees and is an easy process.
Many people do not have an idea about the fees and complexity part and they
want to avoid the costs of registration and don’t want to take that extra step of
going to sub registrar office and registering a will. In most cases, the cost of
registration is as low as Rs. 200 and at the maximum, it will go as high as Rs.
500-1,000, not more. Can you imagine how much more powerful a will
becomes when it’s registered? You just need to be present with 2
eyewitnesses at the time of registration, but these 2 eyewitnesses and their
spouses should not be the beneficiaries.

See the effort required to write a will with respect to the benefits it will
provide your family after you are gone. The money required for hiring a
lawyer and registering it with respect to the money and energy it can save
later for your family and as percentage of the wealth at stake is minimal. You
will suddenly see that writing a will is such a small task in your life, which
costs nothing, but provide so much value. See it as a protective layer around
your financial life.

Send a blank mail to plan@jagoinvestor.com to get a sample WILL

template and some more bonus material only for book readers.

What if a will is not present?

Most people do not think about this situation. They have no idea how nasty
the situation can turn into if a will is not present. The common myth and
expectation is that family members will divide it between them with each
other support, which is far from the truth. In case a will is not present - the
division of wealth happens as per “succession laws”, which are laws defined
by the country.

3-Succession laws
Estate laws define the rules and guidelines on how a person’s wealth must be
divided between their legal heirs in case a will is missing. Succession laws
are different for different religions like:

1. Hindu Succession Laws for Hindus. Jains and Sikhs

2. Muslim Law of Succession for Muslims
3. Christian Law of Succession
4. Others

For this book, we will only discuss Hindu succession laws, and from a
“deceased male” point of view. In case of a deceased Hindu woman, the
succession laws are a little different, but out of scope of this book. You can
read these in detail on my blog if you want.

Hindu Law of Succession

As per Hindu Law of Succession, relations are divided into two classes. Class
1 and Class 2. Class 1 legal heirs have the first right on the wealth and only if
there is no one left into Class 1, then Class 2 legal heirs are considered. The
following table lists relations that come under Class 1 & 2. Each of them has
equal right in the wealth.

Class 1 (first priority) Class 2 (are considered only if Class 1 is

empty)

1. Mother 1. Father

2. Widow (Wife of the 2. Brother/Sister

deceased)

3. Son/Daughter 3. Parents of dead parents

4. Widow of dead son 4. Siblings of dead parents

 5. Grandchildren 5. Children of siblings

6. Widow of grandson 6. Widow of brother

7. Children of grandson 7. Great grandchildren of dead daughter

8. Children of dead daughter of dead son

Points to Note
One share for each - Each category gets one share each and under each
category if there are more than 1 person, they will divide the share between
them equally. For example if the person C whose wealth is to be divided had
had 2 children A and B, who are both dead, but A had 1 child and B had 3
children. Then for C, A and B are the main legal heirs, who are entitled for
equal share (50% each), but now their children will get it. So A’s child will
get 50% share, but B’s children will get 16.6% share each, so for B, the 50%
part will be divided equally into his 3 children.

Unborn child is counted separately-An unborn child who is in womb will be

separately counted just like a born child.

So your next action is very clear. Just look at your family and identify who
will be your legal heirs in case a will is missing. They will get a share in your
wealth if you do not write a will. Even if the division looks perfect, that’s not
an excuse to skip writing the will. So just get hold of a good lawyer in your
city (or online) and get it prepared and yes, don’t forget to register the will.

4. Joint accounts
The power of joint accounts is one of the most underappreciated things in
personal finance. We all know what is a joint account, but we have never
seen it as a powerful estate planning tool. A joint account holder is always
treated as the second holder apart from the primary holder and he will be the
new owner in case of death of primary holder. So how does joint account
help?

Well, all these concepts of nomination, wills and succession laws come into
picture when there is no holder of an asset, but in a joint account, if one of the
holders dies, the control is still with the secondary holder.

If you know how joint accounts work, then you will be clear now that you
can use joint accounts to give control of your wealth to someone you want
even before your death. But you need to have high trust on that person, else
things can go ugly.
Convert your single accounts to joint if needed
Now if you are very clear that you want a person X to be the next successor
of your saving bank account, mutual fund, demat account or any other kind of
investments, you can convert the investment from a single owner to joint
owner. Almost all instruments allow this conversion. Take the case of your
bank account, you can convert your existing savings bank account into a joint
account along with your spouse, mother or parents, and in case something
happens to you later in life, they will have control over it. However, note that
we have not considered taxation and other issues. You need to find it out
yourself and see if it makes sense to convert or not, we are talking about it
from a pure estate planning point of view.

However this is not true in case of immovable assets like a flat, where each
co-owner (registered on the name of 2 or more parties), is owner of only his
share. In case of death of one of the co-owners, his/her share is not passed to
the other co-owner. It will move to the legal heir only as per will or
succession laws.

Caution - Note that inheritance laws are very vast and it’s not possible to
include all the scenarios and cases into this book. The information discussed
in this book is just for basic information and you should consult a lawyer to
take any decision.

Action Items
Let’s complete this with some actions. Let me summarize some steps for you
to take. List down all the financial instruments you have and check if you
have the nomination done or not. If yes, it’s fine, else you need to complete
it.

Fixing Nomination - I will update and fix my nominations by ______ (date)

 Asset Existing Nomination What are you going to do
Name (Blank, correct person, about it?
wrong person)

Will Planning - I will prepare the will by ______ (Date)

Asset Name of person who should be getting it after your

Name death
Converting single account to joint accounts
Asset Name Who will be the joint owner?

Bonus Tips
• There are many online websites from where you can consult and get your
will drafted.
 The 8th step in your financial life is to be prepared with a great
credit score, in case you need any debt in future. While this is not
to encourage you to take on more debt in life, still at times, you
might need it and having a healthy credit score and report is
necessary.

“Debt” has a big role in today’s life. You take loans for many things, home
loan, car loan, personal loan, education loans etc. Even when you spend some
money on your credit card, the amount due becomes a loan that needs to be
paid on “due date”.

Some people use the credit very responsibly, they make sure they spend only
as much as they can repay on time, some people do not like credit at all and
refrain from using any kind of loan unless the situation forces them to, some
people get into life situations that force them to take debt and they think they
will deal with debt later. Some people are too casual about their debt
repayment on time and keep missing payments either due to their laziness or
because of a genuine constraint, and then there are many people who keep
over-using the credit availability they have; they consume debt because it’s
available in some form or another and no one is stopping them from using it.

All this has been observed and tracked for a very a longtime!

Yes! If you are shocked a bit, read it again. Whatever you do regarding your
“credit”, small or big is being recorded and documented month by month. All
the data is with your bank, they know who paid on time, who didn’t pay on
time, who did not repay the amount back and who did, and this information is
very systematically put up in a document.

Welcome to the world of “credit reports” and “credit scores”.

Why is it important for your financial life?
As we said, debt is an important part of financial life and you must be
planning to buy a home or car on loan in your life at some point of time. You
might also need personal loans in the future and you should be ready for it.
At the time of applying for a loan, if you find that you are not prepared with a
clean credit report and a decent credit score, then your loan application might
be rejected. Hence, you should check your credit report and score and if they
are messed up, you should take steps to improve it.

What is a credit bureau?

A credit information company collects credit information of millions of
borrowers from banks and credit institutions. It then collates this information
into credit reports and provides them to banks for use during the loan
evaluation process. Credit Information Bureau (India) Limited, commonly
known as CIBIL, is India’s pioneer credit information company. At your
request, CIBIL can also provide you with your own credit score and report.
There are other credit bureaus in India other than CIBIL, but as of now,
CIBIL is the biggest one and widely used.

Let me give you an example

Let’s say Ajay had taken a personal loan from Bank A, home loan from bank
B, and credit card from Bank C. Now in case credit bureaus were not there,
all these banks have no way to find out what loans Ajay had taken from other
banks and what is his repayment record. If Ajay wants one more loan from
Bank D, then Bank D had to purely rely on factors like Ajay’s income and his
identity. It could not find out if he had paid his loans on time to Banks A,
Band C, or what is Ajay’s current burden of repayment. So it is a risk for
Bank D to decide what to do.
But with a credit bureau in the scene, what happens is that Bank A, B and C
keep updating a credit bureau about Ajay’s activities and a credit report is
prepared on him. Now when Ajay applies for loan at Bank D, the bank can
just order Ajay’s credit report from the credit bureau by giving them details
provided in Ajay’s credit application like his name, address and PAN card
number which clearly shows what loans Ajay had taken in the past and
current and what has been his credit behaviour and activity in the past. This
will help Bank D to decide on Ajay’s credit application.

Note that these credit bureaus are a central repository of information updated
by all the lending institutions and banks keep updating all the information to
them in a format provided by the credit bureau. Then the credit bureau
processes all these information and for each individual who has taken some
kind of loan ever in life, creates a credit report and generates a credit score.
So credit bureaus rely on the data provided by lending institutions; if a bank
makes a mistake in giving data, it will reflect as such in the credit report.

Credit bureaus in India

There are currently 3 major credit bureaus in India
1. CIBIL
2. Experian
3. Equifax

CIBIL is the oldest one in India and has a strong base with almost all the
lending institutions and all banks (including co-operative banks) as its
members. In this chapter, we will discuss matters keeping CIBIL in mind and
using examples from CIBIL, but the principles and almost all the points apply
for other credit bureaus also.

What is a Credit Report?

Your credit report is a month on month record of your loan-related (home
loans, personal loans, automobile loans and so on), credit card or overdraft
payments. The CIBIL Credit Information Report consists of following 6
sections:
1. CIBIL TransUnion Score: This displays your current credit score. Your
credit score has been calculated based on your credit behaviour as
reflected in the “Accounts” and “Enquiry” sections of your credit report.
Your credit score ranges between 300 and 900.

2. Personal Information: This is the information that identifies you. This

includes your name, date of birth, gender and your identification details
like PAN, Passport, Driver License, Voter ID etc.

3. Contact Information: Your present and past addresses, telephone

numbers, mobile numbers, email addresses, etc. appear in this section. The
most recently reported information will appear first.

4. Employment Information: These sections contain your personal details

as provided to CIBIL by lenders that you have existing credit accounts
with or to those to which you have applied for a loan or credit card. The
 most recently reported information on an individual’s occupation, income
and employment as given at the time of application is displayed here.

5. Account Information: This is the most important section on your credit

report. This section provides a comprehensive snapshot of all your credit
relationships along with a month on month record of up to 36 months of
your payments. It contains:

• The name of the banks and financial institutions that have provided you
the loan or credit card.
• The type of credit facilities you have availed like home loan, auto loan,
credit card and so on.
• The ownership of the loans, whether the loans are single or jointly held.
• Details of your loans - When each loan account was opened, loan
amount, date of the last payment made, current balance, amount
overdue, days past due.
• Status of the loan account - Indicates whether the loan account has been
“written off”, “settled”, “suit filed” etc., as reported by the credit
institution. In short, this section reflects the existing status of the loan
account in case there has been a default on the loan payment.
6. Enquiry Information: This section is simply a list of the lenders that
have viewed your credit report for assessment of your loan application. It
shows the name of the lender, date of enquiry and the type and size of
loan that you applied for. Enquiries are added to your report when you
apply for a loan or a credit card and the lender accesses your CIBIL credit
report.

Using this credit report, lenders can make a judgement if they want to
approve your loan application or not.

What is a Credit Score?

A credit score is a numerical score given to an individual based on his credit
behaviour and past information that shows his future repaying capacity. In
case of CIBIL, the credit score is between 300 and 900, where a high score is
considered better than a lower score. A person having a score of 800 is seen
as a better person to lend compared to someone with a score of 600. A score
keeps changing based on past activities and you can view your score online at
the websites of credit bureaus, but you have to pay a fee to access it.

You can access your own Credit Information Report (CIR) and CIBIL
TransUnion Score on CIBIL’s website in 3 easy steps:

• Step 1: Fill online form-Visit www.cibil.com and duly fill in the online
request form
• Step 2: Payment - Make payment of Rs. 470 via net
banking/debit/credit/cash card
• Step 3: Authentication - Answer questions based on your credit history
successfully

Once these questions are correctly answered, your authentication is

successful, and the CIBIL TransUnion Score along with the CIR is e-mailed
to you within 3 business days.

In case you are not able to answer questions correctly, then your
authentication is unsuccessful. In this case, you are required to print the
online payment confirmation and mail it along with self-attested identity and
address proof documents to the following address:

Consumer Relations - Disclosure Request,

Credit Information Bureau (India) Limited,

Hoechst House, 6th Floor, 193, Backbay Reclamation, Nariman Point,
Mumbai 400 021.
After verifying the documents, CIBIL will dispatch the CIBIL TransUnion
Score and CIR to your mailing address.
Credit report & score used as primary
checkpoint by lenders
When you apply for any loan, the first thing a lender checks these days is
your credit report and yours core along with your income and other personal
details. Only if it is good enough, they move to the next step. Here is a chart
to show you the overall loan process.

How does the loan process work?

Factors that affect your credit report and score

Now we will look at few things that you should be careful with, because they
affect your credit report and eventually your credit score.

1. Late payment/missed payments

The biggest reason for a bad credit score is bad loan repayment history. Many
people pay their bills late or miss the payment completely. It’s so tempting to
pay the minimum balance now and pay the balance due later. Doing this just
saves you from late payment fees, that’s all. The interest is charged and more
than that, you should be worried because this information is updated by your
bank to CIBIL and the next thing is obvious, your credit report and score gets
uglier each month because of this. So every time you miss your home loan
EMI, car loan EMI, credit card payment or you make a late payment, it
affects your score badly. If you have done many late payments or missed
payments earlier, it’s your time to fix it by being more disciplined from now
on. Don’t worry, if you now promise to pay things on time and do it regularly
for next 1-2 years, the score will again come back on track.

2. Higher percentage of unsecured credit

A high number/amount of unsecured credit is bad. Unsecured credit here

means credit card debt and personal loan debt, which are totally unsecured
and you can run away with it. If you have total Rs. 1,00,000 worth of debt
and out of that Rs. 80,000 is because of credit card and personal loan, than
80% of your debt is unsecured. This is bad. If you had 80% of secured debt
like education/home/auto loan, then it was a different thing. High unsecured
debt shows that your life has more “emergencies” than a normal person,
which makes you hungry for immediate credit. So your credit score takes a
hit. Remember that having a good mix of credit types is a good idea. So if
you have a home loan, an education loan and a credit card, i.e. 3 types of
loans that is good. But if you only have 5 personal loans, it shows too much
dependence on one kind of loan.

3. Too many inquiries in short span of time

Making too many inquiries in a very short time is not looked at positively.
Imagine you have made a credit card inquiry, a personal loan inquiry, a car
loan inquiry in last 3 months itself. What does it show? It shows credit
hunger, that you want to get things in life on credit. Hence, have a respectable
amount of gap between each inquiry. Don’t apply for home loan with 6
banks. Note that each and every inquiry you do is reported in your credit
report and if your report is full of inquiries, your score will stink! Any lender
will doubt your payment capacity when you are so dependent on credit.

4. Settlement of your loan or running away

This is the worst mistake of all. There are people who first take on many
loans and then are unable to pay it. So they either run away (companies mark
it as “written-off”) or at best just made some payment and settle the loan
(companies mark it as “settled”). And this will make sure that the remark
appears on your credit report for many coming years. You will not be given
any loan, you can cry your eyes out for that 1 small credit card and you will
be treated like you are nothing.

5. Already having a lot of credit

There is always a “limit” up to which a person should take credit in relation

to his income. Beyond that’s it’s very clear that you are over depending on
credit in your life, if you have several personal loans, credit card debt, home
loan and several other things. It clearly shows that there is higher chance of
you defaulting if given more credit. When a lender looks at this information,
he will clearly be not very interested to lend you anymore.

6. Growing credit over time

If the loan outstanding in your life keeps growing over time, it’s an alarming
signal that something is not correct. It can happen when you do not pay your
dues on time for several months and keep taking additional credit. It can
happen when you spend on your credit card each month but do not pay all the
dues at the end of the month and your outstanding grows each month. Over a
long term, this is not a very positive thing to look at. It’s very obvious that
someone would like to lend to you if your loan outstanding has been coming
down over time and not grow overtime.
Note that it’s not about taking more credit. If you take a loan of Rs. 1,00,000,
it is repaid on time and the loan outstanding comes down, it shows that you
are repaying it and your burden is going down. However, if your credit
outstanding is Rs. 50,000 in one month, then Rs. 60,000, then Rs. 80,000,
then Rs. 1,20,000 in subsequent months and keeps growing and growing, you
can imagine what message it conveys!

7. Length of your credit history

A long history is always more reliable than a short history. This applies to
credit history also. A person with a 5-years-long very good history will be
seen as more reliable than someone with a 1-year-old good history and in the
same way, someone having a 3-year bad repayment record is seen as more
unreliable compared to someone who had a 6-month bad record. Hence, the
length of the credit history also plays a role in a good credit score and report.

8. Utilizing your full credit limit each month

If your credit card limit is Rs. 50,000 a month and every month you use Rs.
40,000 or Rs. 45,000, it will affect your score in a bad way. Even if you are
paying your dues on time, what it shows is that you are utilizing your limit to
the fullest. Companies don’t know that you might be doing it deliberately to
“manage” your credit effectively, but the way it is seen is that your life is
dependent on credit. So stop reaching 80% or 90% of your credit limit.
30%-40% credit utilization is well accepted and seen as “positive” and make
sure it’s the case with all the credit cards you have.

If you have 2 credit cards with a limit of Rs. 10,000 on the first card and Rs.
10,000 on second card and you spend Rs. 9,000 from first credit card, but Rs.
0 from second credit card, then your 1st credit card utilization is 90% & 0%
in second. Which means that you are seen negatively on your first credit card
and “positively” on second card, but what you can do is spend Rs. 5,000 from
first card and Rs. 4,000 from second card, so that your credit utilization is
50% and 40% on both the cards and it’s “positive” on both.
9. Co-signed and joint loans

Have you ever been a loan guarantor for your friend or relative? Or you have
jointly applied for a loan? If that’s the case, you should know that you are
equally responsible for that loan and all activities, good or bad, will affect
your credit score and report. There are several cases where a person was a
guarantor for a loan and it was not paid by the main loan taker. In that case,
the credit report of the guarantor will also take a hit. So beware!

This whole concept of “credit report and credit score” is such a big thing
these days that we decided to include a video course on this topic under our
Jagoinvestor Wealth Club program. You can watch the videos and learn
about the concepts of credit bureaus!

Errors in a credit report

Sometimes, there are errors and mistakes in your credit report. Your name,
address, repayment status for the loan can be wrong. It might be because of a
manual error or it can be a mistake from the bank when reporting. There have
been cases of mixing up two individual reports because of the same name or
same sounding name. If your credit report has any mistake, the usual course
of action is:

1. Contacting the credit bureau - All credit bureaus permit you to raise a
request to look at some mistake in your report, called “dispute resolution”.
Once the credit bureau gets your request for correction, it will then contact
the respective banks to look into it and if found that you were correct, those
changes will happen, but only when banks approve it.

Here’s how to get inaccuracies corrected in

your CIBIL credit report
• Purchase your own CIBIL CIR and Score.
• Review the report thoroughly and identify if there are any inaccuracies.
• If you find discrepancies then log in to CIBIL’s Dispute Resolution
webpage: http://www.cibil.com/consumer-dispute-resolution.
• Provide your name, address, date of birth, report Control Number (CN) and
the nature of the dispute.
• CIBIL’s Dispute Resolution Department will analyse and route the dispute
to the lending institutions for confirmation.
Please remember that CIBIL can only make changes to your report, once the
lending institutions submit the updated/corrected data.

2. Contact the bank - If it’s a bank-related mistake, then you can also
parallelly contact the bank and ask them to report the correct information to
credit bureaus.

Never took a loan or credit card?

You still don’t have a credit report and score? There are cases where banks
have rejected loan application because a person didn’t have any credit
history. Note that a bank is more comfortable lending to someone who has a
past history and having no history discourages them to say “Yes” at times to
a prospective loan seeker. This is a strong reason why someone who never
had any loan should now get one. And the easiest one to get and manage on
regular basis is a credit card. Start using a credit card and keep paying your
dues on time each month to build a good credit history overtime.

Not getting any loan because of bad credit

report or score?
Many people who have a bad credit report and score are now not getting any
further loans or credit cards. This is a Catch 22 kind of situation where to get
a loan, you need a good report and score, but to improve your report and
score, you need another loan, which you can use and repay on time, so that it
builds your credit history.

In this case, the solution is to apply for a secured loan and start using it. For
example, you can make a fixed deposit for Rs. 30,000 and ask for a credit
card against that fixed deposit. Once you get it, you can start using the credit
card and then repay the bills each month on time. Over time, this should have
some contribution in increasing your credit score.

Advantage of a good score

1. If you have a really good score, you can demand a lower interest rate.
While this is still not seen in India at this moment, it should eventually
become a standard rule.
2. For a person having a good credit score, the processing fees and charges
can be waived off by some banks.
3. Many times lenders also waive off prepayment penalty on loans for those
having high credit scores.
4. With good credit score one can expect a faster loan processing and
treatment with high priority.

Action Time
Fill up the following table, which will help you take some action:

You will apply for your CIBIL credit report and score by (put a date)

Your CIBIL score is

Does your credit report have any mistakes?

 Is your credit score below 700?

Bonus Tips
• Another reason of keeping a good credit report and score is that a new trend
of employers asking for credit report at the time of hiring an employee is
coming up in India.

• If you are looking for some loan on an urgent basis and you pay off the past
loan to improve your credit score and report, it will take some time to
update in your CIBIL report. So what you can do is take an NOC from the
credit institution and you can approach your new lender and show them the
letter from the previous bank, so that it will update the CIBIL report. This
will act as proof that you have paid off your past dues that resulted in a bad
score and report.

• Even if you don’t need a home loan or a car loan, it might sometimes be a
good idea to take some part of loan to just build your credit score and
report. This can be done if you are expecting to apply for some other loan
in the distant future. But do it only if you can act responsibly about the
debt.
 The 9th step in your financial life is to think about your debt
repayment. These are applicable to most people.

In the last chapter we discussed how debt becomes an Integral part of your
financial life and how it’s impacting your credit report and your future
chances of getting more debt.

In this chapter will talk about your existing debt, the loans which you have
taken and are repaying them. Loans give us access to many things in our life,
which we could not buy if we didn’t take help of debt, and sometimes it
persuades us to buy things that we might not have bought in case debt was
not available.

We love buying things, if possible by cash; else, we go for loans. At times,

it’s not about the desire to buy something, but the necessity. You might lose a
job and need money, or at times, you might be low on money and some
immediate financial goal demands money for which you either go for a
personal loan or swipe your credit card to buy things, without thinking about
the future consequences. Another common loan taken by people is an
education loan, car loan or home loan. But servicing a loan is a very big
commitment.

It’s a promise to keep paying an amount each month to the bank. The burden
of debt is constantly in your thoughts. You keep worrying about it and at
times, “what if” kind of thoughts keep popping in your mind, especially when
we face situations like layoffs going on in office or lingering bad health. We
are more worried about the “after effects of job loss” rather than the layoff
itself; we are more worried about the “after effects of getting bedridden”
rather than “getting bedridden” itself. The pressure of paying back the
liability is huge; people don’t like their jobs, but keep on dragging for the
sake of repaying a large debt.
How debt enters our life
For an average person there are many ways debt enters his life. Some are due
to his needs, some are due to desires and some are due to family and society
pressure. A car or bike loan can be a need for someone and desire for
someone. A vacation on EMI might be a desire for someone. A home loan
can be due to family pressure even if a person is not ready to make such a
huge commitment. A personal loan to spend on a wedding or for some social
function can also lead to debt in life. And at times, it can just be a casual
attitude towards debt and catering too much for instant gratification that can
lead to debt in life. Slowly there comes a time when a person is too much in
debt, servicing his loan and paying EMI for various things.

Do you want to get rid of your loans faster?

You like the things you buy by going into debt, but we don’t like the “debt”
itself. We want to get rid of it as soon as possible, some people do not have a
mind-set living their life with that kind of burden, they don’t feel free,, they
feel somewhere something is controlling them. And if possible, most people
want to get rid of debt from their head, as soon as they can! That’s a fact.

Now if you have taken a loan and are paying it back or planning to take a
debt sometime soon, this chapter will help you in understanding the loan
structure and how it works. We will also talk about the concept of prepaying
your loan, before the tenure itself.

Note that this does not mean that a debt is bad always and it’s a right
financial decision to get rid of the loan ASAP. We are just talking about an
option and those who feel they want to take this option can take it.

I wrote an article on my blog a while ago titled, “Do Home Loans kill
Entrepreneurship?” which talked about how a debt in our life has a big
contribution in trapping us in a situation where our appetite to take some
risky decision in life goes down due to a loan. Many readers commented on
the article and confirmed how it was true for most of them. They wanted to
make a switch from one company to another company or from their current
career to another career, but could not take such a bold step because they had
to service a loan.

Getting rid of a loan faster is extremely important for someone if he wants to

take a bold step, while one can argue that nothing can stop a person if he is
really committed to achieve something, it can’t be denied that getting rid of a
debt burden certainly helps to some extent.

Relation between principal and interest of a

loan
When you take a loan, you pay back EMI each month. That EMI consists of
the principal amount and interest amount. Most people do not understand the
relation between their loan interest and principal. They do not understand
how their loan structure is being changed and how each EMI payment is
affecting it.

They get a loan for 15-20 years; they get a number for EMI and then keep
paying the EMI each month. In case they get a big sum in between, the
thought of “prepaying the loan” comes into their mind, some do it, but some
don’t. Let me explain it to you in simple terms how things work.

EMI has two components,

principal part and interest part.
Each month the EMI number is
constant, but the composition of
 interest and principle part keeps
changing

But before we move ahead, let me ask you this

simple question
Ajay takes a Rs. 30 lacs loan at 10% interest for 20 years tenure. His EMI
would be around Rs 29,000 per month. He keeps paying his EMIs for 5 years,
so he pays total Rs. 29,000 × 12 × 5 = Rs. 17.4 lacs in these 5 years. How
much of his debt has reduced from Rs. 30 lacs initial amount?

Some people say his debt has come down by a big margin when they hear
that Rs. 17.4 lacs are already paid. But the answer is only around Rs. 3 lacs!
His debt outstanding still is close to Rs. 27 lacs (compared to Rs. 30 lacs in
start). If you are surprised, that clearly means you don’t understand how
things work. Let’s look in detail.

The EMI formula gives a number that needs to be paid each month. That EMI
has two components, principal part and interest part. Each month the EMI
number is constant, but the composition of interest and principal part keeps
changing, and interest part keeps reducing over time. Also, a loan with high
tenure will have high interest component in starting years and only in later
years, it will come down substantially. So there are two rules you should
understand:

For any loan

Rule 1 - Interest part in EMI keeps going down as years pass.
Rule 2 - Interest part is very high in long tenure loans and small in short
tenure loans.

Long tenure loans

Let us take the previous example of a long-term loan. Where the tenure was
20 years, interest was 10% and loan was for Rs. 30 lacs. Now if you see the
below chart, it shows you the interest and principal paid in each consecutive
5 years. The blue part represents INTEREST part and red bar represents
PRINCIPAL part and the total is the EMI paid in those 5 years, which will be
equal in all the 5 years.

You can clearly see from the graph above that the interest component is huge
in starting 5 years and it keeps coming down as the time passes. Can you
notice that even in 10-15th year also the interest paid is higher than the
principal part?

Small tenure loans

In the same way, let’s talk about the short tenure loans, like a car loan or a
personal loan, which lasts say 4 years? Let’s assume there is a loan of Rs 3
lacs at 10% interest rate for 4 years tenure. The EMI in the above case would
be Rs 7609 per month. Let’s see what happens in all the 4 years.
If you now see the above chart, you will notice that the interest part paid each
year comes down, but you will notice that even from the starting years, the
interest component was so much smaller than the principal part. This proves
that the interest part is small when loan tenure is smaller.

The impact on your loan outstanding

Your loan outstanding reduces by your principal payment part; hence, if the
principal part is small, your loan outstanding will reduce by small margin,
and that’s the reason that in long term loans, the principal outstanding amount
comes down at a very small pace in starting years. This ensures that whatever
EMIs you pay will mostly go towards your interest payment.

Prepaying your loan

The interest you pay in any given month is calculated based on your
outstanding loan at that point of time. Now when you prepay your loan by
any amount, that amount is treated as part of your outstanding loan principal
and it’s reduced by that much, which means your loan outstanding comes
down. If that happens, your loan tenure goes down considering your EMI is
not changed.

Let me give you an example

Let’s take the same example we were looking at. Rs. 30 lacs loan @10%
interest for next 20 years. If you use the EMI calculator, you can find out the
EMI is Rs. 28950. But now what are the principal part and the interest part?
It’s very simple.

Interest part for a month = Outstanding - Loan * Monthly Interest

As the interest in our case is 10% yearly, we will divide it by 12 to find out
the monthly interest.

So for the first month:

= Rs. 30,00,000 * 10%/12

= Rs. 30,00,000 * 10/(100 * 12)

= Rs. 25,000

So for the first month, the interest part is Rs. 25,000 and total EMI is Rs.
28,950. Hence, the remaining part is principal part. So,

Principal part = Rs. 28,950 - Rs. 25,000 = Rs. 3,950.

Hence, out of your total debt of Rs. 30 lacs, only the principal part will be
reduced not the EMI amount.

So your outstanding amount after the first month will be Rs. 30,00,000 - Rs.
3,950 = Rs. 29,96,050

Now for the second month, your outstanding loan will be Rs. 29,96,050 and
you will repeat the same process which we did right now. Get the interest part
for 2nd month and then reduce it from the EMI amount, and get the principal
part. And keep doing that to get the full schedule of the interest and principal
part for all the 20 years. In case you do a prepayment in any given month,
you can directly reduce the outstanding loan amount by that additional
payment.

I am sharing the first 20 months of schedule, which will help you understand
how it looks like

So now, you can see that how the outstanding value comes down by each
passing month and it’s only the principal part, which is reduced each month,
not the full EMI amount.

So how much does a prepayment affect your

loan?
With this information, now you can understand in a better way the effect of
prepayment on your loan. You know that at any point of time, your interest
part is calculated on the outstanding amount, and any big reduction in
outstanding part will lower the interest part and as EMI is constant, the rest of
the part will be principal which will increase now; hence, the loan tenure will
come down now.

Taking the same example, Rs. 30 lacs loan @10% interest for 20 years
tenure. Let’s say you have paid your EMIs for 5 years, now you will have
another 15 years to pay or 180 months remaining and after 5 years your
outstanding loan will be approximately Rs. 27 lacs. At this moment, you can
prepay some amount. Let see the effect of how tenure comes down, if you pre
pay some amount at the end of the 5th year.

If you prepay your loan by amount Your loan tenure will come
which is equal to down by

4 times your EMIs = 1,16,000 16 months

20 times your EMIs = 5,80,000 64 months

Rs 8,75,000 90 months (loan will finish in

half tenure)

See the last example in the above table. At the end of the 5 years of your loan
payment, your loan outstanding is Rs. 27 lacs and you need to pay for 180
more months. Now imagine you got a big lump sum amount of Rs. 8.75 lacs
from somewhere and if you use it for prepayment, your loan will be finished
in just 90 months, a reduction of 50% in tenure. Won’t you like that?
Even if you prepay the loan by just Rs. 1.16 lacs, which is possible, it will
bring down your tenure by 16 months. That’s a great relief to most people.

Clever home loan takers do exactly that, as soon as they get any small or big
amount of money, they use it for prepayment of their loan and by doing this
constantly over some months and years, they finish their debt much before
the scheduled debt tenure. Sometimes even in just 4-6 years!

So the key learning is that a small amount prepaid brings a big reduction in
the repayment tenure. This understanding is very critical to plan for your debt
repayment faster. So by now you have understood this point that prepayment
has to be done whenever possible, even a small amount towards principal
over a long time repeatedly would bring down the tenure a lot.

Now let’s discuss few points for you to ponder on how to generate money for
prepayment. These points will not be true for everyone, but let’s at least see if
you can do any of them.

5 Tips for pre-paying off the debt faster

1. Reduction of 10% expenses

You cannot reduce your expenses by 30%, I know that. But you can reduce it
by 10%, you know that.

One of the things a person can aim at is reducing his expenses by a small
margin. You should not target for a big cut, because over the long term it
does not happen. If you want consistency in cutting down your expenses, it
has to be small, and 10% is a good enough small cut. Try to list down all your
expenses and ask yourself and your family, which of them seem to be of low
value and you can cut on that. Maybe you spend too much on outings, maybe
you spend on things that are not truly adding great value in your life? It may
be time to restructure things and save on that.
2. Taking internal credit

We take loans from banks, but not from relatives, family relatives and not
from friends obviously. But for prepayment, you can check with them, if they
have some surplus amount and can lend you at interest. Many people hold a
lot of cash in the bank or just keep their money in fixed deposits. If you can
convince them to lend you the money for prepayment and you can give them
the equivalent interest from your side, it will help both of you.

3. Liquidating investments to pay off loans

Many people keep investing in low return products like endowment/money

back plans and also pay off the EMI on a high interest loan. They can
liquidate those low return products and put the money that they get out of it
as prepayment for their loans. They can also redirect their money that was
going into low return products into loan prepayment regularly. If you have
completed the 1st chapter, you might have a few policies to surrender and
some clean up might have happened from the second chapter also. You can
use that money for prepayment purposes.

4. Mark all the future inflows as prepayment money

Many people might not have the resources currently to prepay the loan, but
they might be expecting money in future from various places such as a bonus
gifts from friends and relatives. It’s always a prudent idea to mark them as
“for prepayment purpose” from starting itself. Most people do not do it
mentally and once the money arrives in their lives, it is spent.

5. Let your next increment go to pay off the debt

You can also look at your increment for further years or at least some part of
it as “for prepayment purpose”. For most people, an increment in their
salaries means an upgrade in their lifestyle. The additional money is never
additional in their life; it just fits in their life and finds its own equivalent
expenses. However, you can be prepared to use it only and only for
prepayment purpose and keep a check on your lifestyle for few years. If you
don’t want to use the full increment for prepayment, you can at least use 50%
of it. A balanced approach!

Investing money vs. paying back debt

One big question in many people’s mind is that if they have additional money
in their life, is it prudent to pay off the loan or invest it to generate a higher
return? Now there can’t be one answer, which will fit for everyone. A lot
depends on you. The biggest factor is how emotionally you are attached to a
“LOAN”. Does having a loan in your life make you uncomfortable? If yes,
you better get rid of the loan fast. If you are too afraid of taking risks in life
and are going to keep the additional money in bank deposits or savings bank
accounts, better pay off the loan.

But tax saving also plays a role

While tax saving itself should never become the big reason to go for a loan
(like home loan), if you have already taken the home loan and you are
already enjoying tax benefits and it’s saving you some money at the end of
the day, you might want to consider it as a strong reason for not repaying
your loan.

Now based on this knowledge, let’s see if you can make some actionable
outcome out of this or not. Fill up the table below.

Action Time

Your outstanding debt

Number of months you have to pay the EMIs as of today

 How much money can you prepay more in next 1 year?

Write down your plan for that 1 year prepayment in detail

How much money can you prepay more in next 3 years?

What is the plan for next 3 year prepayment?

Bonus Tips
1. If interest rates go down, you can ask your bank to decrease the tenure and
keep the EMI constant, instead of the other way round.
2. Some banks have restrictions on how much minimum and maximum you
can prepay, check with the bank and include it in your repayment plan.
3. You can prepay your loan online by linking your loan account with your
bank account. This will help you prepay as soon as you are ready with
money. More on this in the next chapter.
 The 10th step in your financial life is to organise it well and keep
it clean. It’s as important as any other aspect of your financial
life.

Are you organised in your financial life? You might wonder what exactly I
mean. Imagine your financial life as your living room. How does it look? Try
to visualize it for a moment. Does it have clutter all around, are things
properly placed in the right place, are things thrown on the floor or they are
properly kept in a cupboard?

It happens!
1. If your bank deducts Rs. 100 from your bank account and there is no trace
of it, no mention in your bank statement or no SMS on your mobile about
it? There are higher chances that you will not come to know about it,
correct?
2. There are various kinds of financial documents in your life. Are they
scattered all around and you have no idea where they are stored exactly?
3. There is enough financial information and things that your family is
unaware about, and in case you are not in the world tomorrow, it will be
tough for your family to figure out things and really frustrate them.
4. There are many pending tasks in your financial life and you are wondering
from long to complete it, but still they are not completed.
5. Your financial life requires a lot of manual intervention and you have not
optimized it well so that many things can be done online.

If the answer for most of these questions is a “YES”, you are probably too
unorganised in your financial life and you need to make sure you fix things
ASAP so that you become organised.
We respect our money, we respect financial products, we know they will help
us in our financial life, but once we complete our actions of buying the
financial products, we just don’t find time to be organised. Somewhere we
don’t respect the power of organising our financial lives, or we over-rely and
believe the companies we deal with that they will come to our rescue. Many
times, we underestimate the bad outcome due to mismanagement in our
financial life and our unorganised behaviour.

In this section, we will look at 4 major areas to organise your financial life.
Once you complete all of them, you can consider yourself as fairly organised.

1. Organise documents
2. Create your black box
3. Complete your pending tasks
4. Automate your financial life

We will look at them one by one and at the end, we will see the action list.

Task 1: Organise documents

Consider a lottery ticket of Rs. 1 crore and the original policy document of a
term insurance plan for Rs. 1 crore sum assured. You need both of these in
original to claim any money. Which one is more probably to give your family
Rs. 1 crore? Obviously the term insurance plan has higher chances of giving
your family Rs. 1 crore compared to the lottery which has near ZERO
probability (considering 1 chance in millions), whereas chances are higher
that the life insurance policy will be used someday, because the chances of
your death is much higher than winning a lottery. Now just imagine, which
one of these two, will get more care from you, in terms of keeping it safe?
Which one will get more attention?

The answer is the lottery ticket, not the policy document. It’s a fact of life.
We are too careless to think rationally that we do not give due attention to the
real things in life and over focus on importance of others.

Start keeping your records safely and in a

systematic manner
Your task is simple and easy - but it would demand some effort and time
from your side. To complete an important part of organising your financial
life, you need to organise all the documents in your financial life. Buy a
strong folder, which is big enough to accommodate different varieties of
documents or you can buy multiple folders to keep several kinds of
documents separately, one category in each folder.

If your financial life has just started, it must not be too complex at the
moment. There will be fewer things to deal with and it will have minimal
level of documents to deal with, in which case, you are better with just one
big folder with different compartments. However, if your financial life is
complex, the chances are that that you will have a lot of documentation in
different areas of financial life. Your family members might have various
investments in their name and you might want to handle their documents too.
What kind of documents are we talking about?

Here are the document checklists that you can keep

Tax Documents • Tax return acknowledgements

• TDS certificates
• Tax paid acknowledgement forms
• Any other document related to taxation

Bank Documents • Fixed deposits, recurring deposits documents

• Bank Cheques, terms and conditions booklet
• Password slips
• Any cheque deposit acknowledge slip
 • Locker documents

Insurance Papers • Life insurance original policy document

• Life insurance premium payment
acknowledgement
• Health insurance original policy document
• Health insurance premium payment
acknowledgement
• Any communication in writing

Other Investment • Demat account papers

Papers • Mutual funds document
• Stocks related document
• PPF passbook
• EPF acknowledgement
• Copy of a will
• Bonds/debentures
• NSC
• Post office related investment documents

Different kind of Loan • Title deeds

Papers • Home loan agreement
• Any written agreement
• Car loan papers
• Education loan agreement
• Insurance papers for home loan etc.

Different Monthly Bills • Electricity bill

• Phone bills
• Credit card bills
• Water bill
• Internet bills
 • Paper bill receipt

Other Important • Passport

Documents • Driving licence
• Pan card
• Birth certificate
• Voter ID card
• Marriage certificate

After looking at this table, now you are clearer about the importance of this
chapter and the overall suggestions made in this book. You might have also
visualised how organised your financial life would be if you complete this
action. This task is not new to you, you might have thought several times in
your life about it and wanted to do it “someday”, but you never took any
action.

Now today, you again have an opportunity to complete this. What you can do
is close this book right now and go buy a big folder for storing these
documents, and then again start this book. If you delay it again for “next
time” or “tomorrow”, the chances of getting it completed will drastically
diminish.

Duplicate copies and online version

Once you create the physical folder and store all the documents properly, you
will complete 90% of your task. However if you can add another layer of
care, you can do two more things.

You can also have a duplicate version of the folder that carries all the
documents’ Xerox copies. You can keep it in some other part of house, or
your spouse’s house, your parent’s house or a trusted friend’s house. You can
update the Xeroxed copies once a year, which will be your dedicated
“Documentation Day”.

Another good thing you can do is to scan all the relevant documents (not all)
and keep them online. Mail them to yourself and your spouse, so that most
important documents can be accessed from anywhere; anytime you want it,
you can just print them when required. While this might look like over-doing
things, it’s up to you if you want to go to this deep level of documentation or
not. So now, the way I look at it is-there are3 things you are maintaining:

1. Main Folder-With all originals (updated anytime a new document enters

your financial life).
2. Duplicate Folder- With all Xerox versions (updated once in a while,
preferably once a year).
3. Online version - A scanned version of all documents, zipped into a file and
mailed to yourself and your spouse (updated once in a while, when you
update the Xerox versions).

Task 2: Create your black box

No family wants to lose its main breadwinner, but it happens. That’s the
harsh reality of life. And when it happens, your family has two things to do:

1. Deal with their grief.

2. After that they will start connecting different dots in your financial life and
try to understand the various procedures they need to follow to claim back
the assets you owned.

The first part is something you can’t control; you cannot save them from that.
But what about the 2nd part? Is that in your control? Can you do something
today, which can save them frustration once you are not around?

We are talking about the concept of a “black box”. You must have heard
about the “black box” in airplanes. After an air crash, its black box is
retrieved and all the information inside it is accessed and interpreted to
understand few important things related to the air crash.

In the same way, your financial life can also have a black box. It’s the
document with all the information, which your family needs to know such as:

1. All the contact information that your family might require.

Name Who Contact

CA

Life Insurance Agent

Health Insurance Agent

Financial Planner

Tax Consultant

2. All the details and locations where your important documents are stored
and their numbers
 Document Name Number Where is it stored

Driving Licence

Passport

Pan Card

Locker Keys

--

--

3. Some important step-by-step process that they need to follow to achieve

something

Steps to claim life insurance 1.

2.
3.
4.

Steps to claim health insurance 1.

2.
3.
4.
5.

How to redeem mutual funds 1.

2.
3.
4.
 Steps to sell the house 1.
2.
3.
4.

Creating this black box has many advantages and is useful in various
situations like:

• Situation 1: You are dead

• Situation 2: You are critically injured and cannot communicate
• Situation 3: You are not around for few days and cannot be contacted
• Situation 4: Emergency situation when your family quickly needs
information
• Situation 5: When you need various information

Bonus: You can mail us at plan@jagoinvestor.com and collect the book kit,
which has readymade templates and a few more bonus tools that I have
created for you.

Task3: Complete your pending tasks

We all have pending things in life; some are completed soon, some take a lot
of time to complete and your financial life is no different. We have many
things pending in our financial life, like taking a life insurance policy,
starting SIPs in mutual funds, closing some bad policies etc. By now, you
know that you will be completing them soon and might have already started
taking actions for them because you went through the earlier chapters that
have enlightened your thought process.
However, still there are many issues that might be there in your financial life.
Over the years, I have seen many investors with specific tasks that they delay
for years. Your job is to take this section of the book, as another reminder
that those things need to be completed and finally do it. Here are some of the
tasks that might be pending and the solution for completing those.

Action 1: Get your Employee Provident Fund withdrawn or transferred

When you change a job, your EPF needs to be transferred to the new
employer, or you can withdraw it. Some people have not started that process
yet and are waiting for the right moment to arrive; however, some people
have already done what needed to be done and are now waiting for the EPF
transfer to happen or the money to come into their bank account. It has been
years and they are wondering what the exact status of their EPF accounts is.

In case you are waiting for your EPF transfer or withdrawal and could not
find out what to do next, you will be happy to know that EPFO department
comes under RTI regulations. And you can file a RTI query asking the EPFO
office about the status of your application, you can ask them how much more
time it will take. Most people who have filed for RTI whose work was done
within a few days or weeks. There are several proofs on my blog; here is one
such instance that happened to a reader Raja, who was waiting for his EPF
money from years, but got his money within one month of enquiring about
this status through RTI.

“Finally good news. Exactly 1 month after PF department received my

RTI application. I have received the PF money in my account. Although,
I would have liked to receive a detailed statement to verify the
correctness of the amount. But at this moment am pretty happy. Will
follow up with another RTI to get a detailed statement.”

In case you still have to start the process of withdrawing EPF or transfer your
old EPF accounts, then start the relevant process and complete this important
part of your financial life soon.
Action 2: Keep all the important information up to date in all your
investments

There are various kinds of things which keep changing in our life, like
address, phone number, name after marriage (in case of women). We also
want to change the nominations in our investments. These things look very
small, but are very important.

Let me share what happened to me:

“At one point of time, when my credit card expired, I called up my

customer care asking them to issue me a new credit card. To my
surprise, I came to know that they have already dispatched it to my
address, but they had my old Bangalore address with them and I had
come to Pune by that time. There was a big risk of someone accepting my
credit card and misusing it.”

Then all kinds of fights start between customer and bank and the blame game
goes on.

Even a small name mistake can lead to a big issue if your family claims your
investments after your death, because things don’t match in the proof of
identity and the name of the investment document. It’s always prudent to
make sure that every bit of information is correct and up to date with the
organisations you deal with.

Another example of what can go wrong if you don’t update the latest
information with companies is as follows:

Most companies send the policy maturity cheques and the intimation on the
address with them. It can happen that if your old address is with the
companies and you do not remember the maturity date of your policies, it
will be too late to realise about it.
So what you should do is list down each product, bank account, insurance
policy etc. you have, and just make a note of all the information you have
given to them, and match it with current information. If you find any
discrepancies, just update them. In most cases, it should be possible with an
email.

Task 3: Read all your policy documents and rules book

If this does not apply to you, you are an exception.

Almost no one I have met has read his policy documents and terms and
conditions booklet that they get after buying a financial product. While it
might look boring to you, you need to appreciate the fact that it’s a one-time
work. When I bought my term insurance plan, I got a big policy document in
a few days. The moment it arrived, the first thing I did was to read each and
every line mentioned in the policy document. It had all the rules, and the
medical report information and I made sure I double checked it, not because I
doubt the company, but I know that it’s my responsibility as a customer and
If there is anything I want to get changed, this is the best time.

It should not take more than a few hours of dedicated time to read all the life
insurance policy documents, your ULIP documents, your bank terms and
conditions and different charges that apply, your demat account policies and
rules, your credit card and the interest rates charged, the conditions in which
they would cut charges etc. Here is a simple example of how one of my blog
readers Vishal saved himself from continuing a junk insurance policy:

“Free look period’ for the policy saved me. I thoroughly read the policy
document the same day and realized that all the selling guy explained
doesn’t hold true! As the policy has a 15-day ‘Free look period’, I
returned the policy back. I received the amount back in 5 working days.
Though few documentation (etc.) charges were cut, they were minimal”
I don’t see any reason to not read the policy document and spend few hours
of your life on a task that can really have a deep impact on your financial life.
Many people give an excuse like “The language used is complex and it has
lot of jargon”. I can assure you there is nothing like that, it’s plain English. If
you come across anything which you don’t understand you can always ask
your company or just search it on the internet, or just ask a question on our
“jagoinvestor forum” and tons of awesome members there will be happy to
help with your answer within minutes!

Task 4: Use technology to simplify your

financial life
Many of us still rely on manual procedures in this era of technology,
especially in smaller cities. That’s either due to ignorance of what technology
can do for us or due to laziness. While I know that it takes some time to set
up things, but the time you will save over the long term is phenomenal. Let
me show you a few things to simplify things further in your financial life.

1. Connect your PPF account with net banking for online payment

Do you still visit your bank or post office to deposit money in your PPF
account or rely on the agent? You don’t have to. Because you can connect
your PPF account with your bank and make online payments just like you
make payments to any other bank account. For this, your PPF needs to be in
SBI Bank and the net banking facility should be enabled in that branch. Now
in case you have your PPF account in some other bank or a post office, you
can first apply for transfer of your PPF account to SBI Bank and then add
your PPF account number as any other bank account number for NEFT
transfer. Once it’s done, you can then any time invest in your PPF account.
You can get information about this transfer process and everything on my
blog www.jagoinvestor.com or just put a blank email to
plan@jagoinvestor.com and you will get a book kit that has a PDF containing
proper information about transfer process from the post office to SBI Bank.

This one change can save you from the yearly/monthly task of going
manually to deposit in your PPF account. If you are successful in setting up
the link between your PPF account in SBI and your bank, then you can also
invest on monthly basis to your PPF account. Just issue an ECS mandate to
your bank to transfer the money to PPF account on a monthly basis.

2. Connect your loan accounts with Net Banking for online payment

Just like a PPF account, even your loan account can be linked with your
bank. Just use your loan account as the bank account and use it for NEFT
transfer, note that your loan should be with a bank, which should have a IFSC
code, because that’s required for an NEFT transaction.

Once you link your loan account with the bank, you can then prepay your
loan anytime you have the money. You don’t have to visit the bank or rely on
manual payment through cheque or have to visit the bank.

3. Set up your payment reminders

Have you set up your various payments reminder each month? We sometimes
are over confident that we will not forget it and each month we will make the
payment on time, but for a simpler life, why not put a simple reminder for
different kinds of monthly payments?

• For phone bill payment

• For internet bill payment
• For credit card payment
• For life insurance premium payment
• For health insurance premium payment
There are simple ways we can do that, like putting a reminder on our mobile
phone, on Google Calendar (which will send you an SMS for reminder) and
on the respective websites, which send you a mail before few days of making
the payment. For example, my credit card provider sends me a mail and SMS
both a few days before the due date that makes sure that I will never skip the
payment unless I deliberately want to skip it.

4. Create sub accounts for your short-term goals

Many people have many short-term goals like buying a car in a few years,
buying some furniture in the next 1 year, going on a vacation etc. The most
common way to save for these types of small, short-term goals is to keep
accumulating the money in your bank account and mentally accepting that
you will withdraw the money when the goal is near and you really need it.

That does not work!

The uncertainty of life and the “easy access” to money makes sure that,
however good you are at controlling yourself, you are always short of money
when you require it. A very simple idea is to create sub accounts for each
short-term goals.

How do you create a sub account? While you can use different kinds of
investment products to achieve this, the simplest solution I can think of is
using recurring deposits in your bank account. All you need to do is set up
different recurring deposits for each short-term goal and evaluate how much
you need to invest per month to reach that goal. The best thing about this
simple logic is that your goals are segregated into different buckets and your
access to them is not so easy, as it was when you had just put money in a
savings bank account. Also, mentally you view each goal and the money
saved for it as separate and it’s altogether a more focused approach. Let me
give you an example of this.
Ajay has several things to achieve in next 2 years. He is overwhelmed by
looking at all these small goals and wants to save for them in a more
systematic way. Here are his goals:

1. A 5-day trek near Shimla, with his best friend after 1 year, which will cost
Rs. 12,000.
2. He wants to make a down payment for his bike in the next 12 months,
which would cost around Rs. 18,000.
3. He wants to buy an iPad, which will cost him another Rs. 24,000 in next
12 months.
4. He wants to gift his mother something worth Rs. 10,000 by the end of 1.5
years.
5. He wants to join a guitar and photography class in the next 15 months,
which would require Rs. 15,000 fees.

Now if you look at these 5 goals, they are small goals, and going to come in
his life in the short term ranging from 8 months to 1.5 years.

But the truth is, these are goals we WANT, but we don’t plan them in a very
strong way. We either just forget about them or just achieve it “somehow”
with the pool of money we have at the time when the goal really arrives. We
don’t seriously plan for them because we don’t feel it’s worth “planning”
them, after all they are such small and “casual” goals. The truth is these short-
terms goals are the real essence of financial life which we want to achieve.

I recall a great dialogue from the Hindi movie “Bawarchi” where Rajesh
Khanna says “Badi khushiyon ke 10-15 mauke hote hain. Par chote chote
khushiyan hazaaron, lakhon hote hain. Kisi badi khushi ke intezaar mein
humyeh choti-choti khushiyon ke mauke kho dete hain.”

In the same way if you look at your financial life, big financial goals are very
far, very few and in order to achieve them we keep on sacrificing short-term
goals that are real, something we can consistently achieve if we really want.
If you plan for them strongly, and leave the fear of long-term goals, your life
will be better and happier.

If you now look at the monthly commitment required to achieve all the goals,
without complicating it and just dividing the amount with number of months
left before they arrive, it will look like this:

The total amount he needs to save per month is around Rs. 5,000. Now
suddenly this looks more planned and the chances of achieving those goals
look higher. If Ajay just thinks that he will keep saving Rs 5,000 in his bank
account each month, the problem would be things will be mixed up and “easy
access to money” would never let him save for things. He will keep on using
the money for some of the other purpose.

Hence, he should create 5 recurring deposits for these 5 small goals so that
each month the moment his salary touches his bank account, the money is
transferred to each RD on a fixed date and by “default”, each goal is funded.

When each of these recurring deposits matures, he is ready with the money
and he can see his goals. For simplicity purposes, the interest rates are not
considered in my calculations, as it’s a small amount because they are short-
term goals.

Apart from recurring deposits, one can also use SIP in debt funds, SIP in
liquid funds, post office deposits or even a small piggy bank at home for each
goal and put the money in that each month. But a recurring deposit seems to
be the best option to me, as it’s fully automatic. Once you set up things, the
end is always a success. No matter what you do, you will have sufficient
money at the end. Hence the suggestion to use recurring deposits for these
short-term goals.

Action Time
We discussed many things that you can do to organise your financial life and
keep it on track. Now let’s recap and see what all applies in your financial
life, and what is your action plan for this. Fill up the following tables and
check list.

Fill up the following checklist table

Did you create your folder?

If no, then by when will you buy it? (Put a date). _______

Are you planning to create Xerox version of the

folders?

Are you planning to keep online version of the

documents (by scanning them)?

Mention the list of all documents you will keep. Put the list of
documents applicable
to you.

Did you create the list of all contacts in black

box?

Did you create the list of all documents, numbers

and where are they stored?

Mention the procedures and steps you want your 1.

family to know about. 2.
3.
4.

Did you work on your EPF transfer or

withdrawal issue?

Did you update your investments and bank with

the latest information?

Did you read all your policy documents? 1.

Mention the list of all those things that you read. 2.
3.
4.

Did you connect your PPF account with your

bank?

Is your PPF with SBI Bank or are you planning

to transfer it to SBI Bank?

Did you connect your loans account with your

bank for online payment?

Did you set up the payment reminders for 1.

different things? List them here. 2.
3.
4.
5.

Did you create sub accounts for your various

short-term goals? Mention them with the
duration of FD and amount to be invested each
month.
We’re almost there! The book is almost complete, but I want to make sure
that you understand a few rules so that you can lead a great and fulfilling
financial life. The 10 steps we have learned during this journey were more
geared towards planning and organising your financial life.

I’d like to give you a few tips on how to condition your thinking so that you
can take better decisions in your financial life. So, I am going to reveal 2
great concepts that I developed while working with hundreds of clients and
thousands of my blog readers. I call them:

1.3 Layers of Financial Life

2.5 Point Decision-Making Process

I guarantee that once these two concepts are drilled in your head, you will
always make a great financial decision in your life!

3 Layers of Financial Life

Have you ever looked at a 3-storey building? Of course, you have!

But did it occur to you that if you did something to the uppermost storey, the
first and second storey would be relatively unaffected? There would
definitely be an impact, but they wouldn’t crumble to dust.

However, if you break the first storey, the building will be destroyed. The
second and the third storey will come tumbling down because the base is
gone. Similarly, destroying the second storey will not affect the first storey as
much as it would affect the third storey.

And there is your first lesson! Your financial life is like a three-storied
building, with three layers that are undeniably interlinked. Understanding this
concept is essential to empower your decisions and bring some clarity for
when you are confused about anything or anytime in your financial life. The
three layers are:

Security: Whenever we buy a product to insure us from untoward events in

our life (that costs money and impacts our wealth), we are actually building
our “security” layer. These include life insurance, health insurance, home
loan insurance, critical illness cover, accidental cover and even emergency
fund creation.

Growth: Any action you take that helps you grow your money over time
builds your “growth” layer. I don’t mean “grow your money” in terms of
numbers, but about growing your money in real terms, increasing its
purchasing power and ensuring that your money increases even if you
account for inflation and taxes. Many people feel that just because they have
invested in some traditional policy, their money is growing, which is not true.
The money they will get at the end will not be enough after considering
inflation and taxes. If you invest Rs. 1 lac into something and it gives you
back Rs. 2 lacs after 10 years, the value has grown, but not its worth, because
Rs. 2 lacs after 10 years will be able to buy less than what Rs. 1 lac can do
today. That’s why understanding this distinction is very important. Any
investment product that grows in value over time falls in the growth category.

Preservation: Preservation is when you take an action to preserve your

money. All of us, at some point of time, want to make sure that our money is
100% safe so that we can fulfill our dreams. When we need it, the money
should be available. It is more important to preserve it rather than grow it.
Generally, when our retirement or a financial goal is near, the focus shifts to
preserving money.

Relation between preservation, growth and

security
If you think for a minute, you will recognise that security, growth and
preservation are the 3 pillars of your financial life that are inter-related. A bad
planning decision or ignoring the care of one pillar can impact the other
pillars very badly when things go wrong.

Imagine you have taken great care in investing your money in products that
give you very good returns, such as a great policy, or stock, or a mutual fund,
and your money is growing; then you have taken very good care of the
growth part of your financial life. But suddenly, the breadwinner suffers a
fatal accident and that’s when you realise that nothing was done in the area of
security: no health insurance was taken.

You now see the problem of focusing solely on growth. Those investments
will be of little use because a big chunk of wealth will now go in funding the
hospital cost. Or even worse, if the family’s sole breadwinner has an
untimely death, then all those investments made with only growth in mind
will shrink overtime and eventually end, as the family keeps dipping into
them to meet their expenses.

Now imagine a case where a person has taken good care of the security
aspect, but ignored growth. All his life he has invested in only traditional
insurance policies or fixed deposits, but over the years inflation has made
sure that the amount of wealth generated at the end is just not enough
considering the high costs of everything. Now that he is retired, he will
consume from the wealth he has generated; this is preservation time for him
and he has to live with that money only. Do you think preservation will
happen properly? No. He has 100 units of wealth and uses up 10 units each
year for his daily needs, but his wealth can add just 5% into itself because of
interest. In that case only 90 units will remain after first year and 5% of it (4.5
units) will be added back to it and it will become 94.5 units, but again 10
units will be consumed again next year (or 11 units due to inflation). Do you
see where we’re going with this? His money is going to run out soon. This
happens because he did not focus on growth in the early days of his working
life. If he had grown his wealth to 300 units or 400 units, it would be a very
different picture. Instead of living in the fear of “How many more years will
my money last?” he would have been tension free. In short, preservation is
possible only if growth is good.

Both examples highlight the close dependency between security, growth and
preservation. “Security” is the first floor and the base of your financial life. If
you have taken care of “security”, your growth will not be impacted or least
impacted by misfortunes. If you have focused properly on “growth”, then
“preservation” will automatically fall in line.

So, make sure that you take care of each floor of your financial life.

Now complete the following exercise. List all the actions you have taken for
security, growth and preservation and rank yourself on all the 3 areas.

Where have I invested for “security”?

What I have done until now? What do I still need to do?

1. 1.

2. 2.

3. 3.
 4. 4.

Where have I invested for “Growth”?

1.

2.

3.

4.

Where I have put my money that is doing “Preservation” and not

“Growth”?

1.

2.

3.

4.

How do you rate yourself on all the areas out of 10?

Security

Growth

Preservation
5 Points Decision Making Process
I once asked a reader named Animesh on my blog to share about his financial
life, what was working and what was not.

This was Animesh’s response

Thanks for replying. Regarding my financial life, I am really frustrated
with many things that happened in my life. An agent sold me a ULIP
product whose worth is just Rs. 42,000 right now after 3 years even
though I have paid Rs. 20,000 per year for last 3 years. That’s a total of
Rs. 60,000 that I have invested and that idiot never told me that it would
be invested in stock markets.

And just last week I found out that I can’t surrender by Endowment
Plan before the 3 years are up, otherwise I won’t get anything. Now I will
surrender it after 5 years, but still they say I will get just 90% of my
money. This is not supposed to happen to investors like us. It’s our hard
earned money, and why they are deducting 10%, I have no idea.”

And my credit card, oh my god… I just don’t understand that even after
paying my minimum balance religiously, why my credit card debt does
not come down. I am so worried and frustrated at times about all this,
not sure whom to catch and whom to complain about all this. I am just
not getting what to do.

This might look like a very normal reply from someone who has been really
struggling in his financial life, because others cheated him. Fair enough. But
before I comment on this, let me share a story with you.

The bet on Blacky!

A man was once passing through a racecourse. He saw an old friend there
and started talking to him about betting. His friend told him how he could
make a lot of money if he bet on a horse and it wins. They chose a horse
called “Blacky”, an amazing black horse that appeared promising. The guy
standing near the horse claimed that there was no horse like Blacky in the
entire region and that he had won a lot of money on the same horse many
times. This was enough for both friends to decide quickly that Blacky was
indeed the right choice.

The race started. In the first half, Blacky was ok; sometimes he was ahead,
sometimes he fell behind. It seemed like a close finish, but towards the end
Blacky didn’t figure in the first 3! On this side of the fence, the friends who
had bet on Blacky were jumping with horror and excitement. They poked
each other in excitement, pulled their hair out and at times, jumped on the
seat. Despite all the yelling, shouting and screaming, Blacky lost the race.

The man who lost his money came out of the racecourse and as he walked,
his eyes fell on a board containing all the horses’ bio data, history, genetic
information, stamina information, their wins and losses, and the average rank
of each horse. It even had what each horse ate last night and the last time they
fell ill!

Now my question to you is - “How many Blackys have you betted on in

your financial life?”

What does this story teach us about the way we buy our financial products?
The wise man in the story was jumping and shouting and pulling his hair
when the race was on - do you think it has anything to do with the horse’s
performance, do you think his acts will increase the chances of the horse
winning?

How would you have avoided betting on the wrong horse? Simple, do your
homework. Read up on the financial product that you want to invest in.
Understand the brochure, ask questions and only then invest. But wait -don’t
think that doing your homework will get you the best return and guarantee
that you can never lose the money. It will only make sure that you become
responsible, that you don’t complain later about what you did and you are
more accountable to yourself, because you chose it yourself. You have
bought it after understanding what it is and how it will serve your financial
life; it has a purpose in your financial life. Obviously, it increases your
chances of getting a better outcome out of the financial product.

What is the “homework”?

When I say do your homework before you buy a financial product, you need
to look at only 5 things. If you are clear about those 5 things, I can make sure
you never complain or have any worries after buying that product.

5 points to look at before buying any financial

product
1. Return

The biggest thing that people complain about financial products is that they
are not getting the right kind of returns they expected. For example, if you are
buying a policy with sum assured of Rs. 10 lacs and the premium for 20 years
is Rs 50,000. At the end, you will get the sum assured of Rs 10 lacs plus a
bonus of Rs. 45 per Rs. 1,000 sum assured (that’s Rs. 45,000 per year). In
that case you will get Rs. 10 lacs (sum assured) + Rs. 9 lacs (bonus) = Rs. 19
lacs at maturity. Now many people just don’t know the returns. They think
they will pay Rs. 5 lacs, they will get Rs. 7 lacs and the life insurance is
additional, so they feel it’s a good deal. But if you wonder about the
percentage return of this policy, at the end, on a compounded per year, then it
turns out to be 5.78%.
Most probably, you know how much you have to pay over the years and what
you will get from the policy in different years. If not the exact amount, then
you at least know a rough projected amount. So, you can use these numbers
and find out the exact return. The tool for doing this is called IRR (when
payments are on fixed duration) or XIRR (when payments are at irregular
intervals). Watch http://www.youtube.com/watch?v=iJ6Y8qxZu3o to learn
more about IRR and XIRR.

It is essential to use IRR or XIRR to calculate the returns of a financial

product, before buying it, no matter what the agent or your advisor says.

2. Risk

The second thing that people complain about is risk; this is mostly related to
the value fluctuations in their investments or any other kind of risk in their
financial product. This happens again because of not understanding the nature
of investment and relying too much on the words of the person who sold it to
you.

I see many people complain about their investments worth going down in
value compared to what they have invested. For example, a person pays Rs.
20,000 per year for 3 years in a ULIP and after 3 years, his total investment is
worth just Rs. 45,000 only. In the midst of complaining about everybody, he
forgets that he never bothered to find out that the underlying investment was
done in equities (stock market), which is bound to fluctuate. His timing was
unlucky because the markets started plunging from the point he bought the
product. In these cases, not understanding the final asset class where the
money is being invested creates the problem.

So understanding the risk element in the financial product and how the
overall value can go up and down is very important. Suppose I suggest a
fancy mutual fund that appears promising. Clearly, “appears promising” is
not a strategy when it comes to your investments. You need to know where
that mutual fund is investing finally or how they choose the stock (do they
pick cheap Rs. 20 stock hoping that it will soar to Rs. 200?). This can give
high returns, but the risk too will be high. This mutual fund surely stands a
great chance of vanishing returns, even in a bullish market.

Now the risk here in this example is not that the fund is investing in cheap
stocks, but “not understanding the risk”. If you know what is happening in a
financial product and then invest in it after that, then there is no risk, because
you have accepted it, you have said - “fine, I invest after knowing what can
happen in the worst case”. And when it happens, it’s not a risk; it’s just the
occurrence of that event that you know could happen.

3. Costs

Costs are a major pain point for investors, because the maximum complaints
are about “hidden costs”. When they are not aware of the costs and later they
find out, they feel cheated, they feel that had they known about it, they would
not have invested at all. Many times, they make wrong assumptions about a
product’s performance. If you invest in a high-cost financial product A and
low-cost financial product B, your returns will vary in both. For example,
when you invest Rs. 10,000 in A which has costs of 20% of first year
premium, actually only Rs. 8,000 will be invested and with 50% return, it
would just be Rs. 12,000 - translating into a 20% return on investment for
you. However when the same Rs. 10,000 is invested in B, which has 0% cost,
then all Rs. 10,000 is invested and even with 40% return, it will become Rs.
14,000 and the final return for investor will be 40%. You can see that Fund A
was superior in performance giving 50% compared to performance of B
which was just 40%, still Fund B has generated better returns for investors
(40%) compared to A (20%). This was because costs have eaten up a part of
returns from Fund A.

How long does it take to find out the cost structure of a product? Very less!
Most likely, a product will have its brochure on the internet. Download the
PDF brochure, go through it and locate the costs. You will mostly see all the
costs and rules relating to penalty etc.
You should know that there are several costs associated with different
kinds of products like:

ULIPs Mortality charges, fund management charges

Term plans Mortality charges

Mutual funds Expense ratio, exit loads

Demat account Yearly maintenance charges

Credit cards Yearly charges, renewal charges

4. Liquidity

Almost 99% of endowment policyholders do not know at the time of buying

how much they can withdraw before the maturity period is over. This
becomes critical when they discover how illiquid the product is in an
emergency. You may know what happens if you invest right now, but if you
want to break the policy and get back your money in next 1 year, 2 years, 5
years etc., what are the rules, what will be cut and how much? Will you lose
the taxation benefits for previous years?

This situation arises because many people buy financial products as if they
are buying vegetables on the street, randomly, without much thought and
planning. And they are not clear if they can afford the high premiums for all
the years or not. In my last company, this guy told me he was investing in a
cool product with a Rs. 50,000 per year premium. His salary was Rs. 6 lacs
per annum that time; he had just started the job and was excited to INVEST. I
knew he was thinking short term. The premium amount was looking small to
him right now; but he had not thought carefully if he could invest that same
Rs. 50,000 per year for the next 20 years.
Obviously, it became a big payment after 3 years when other expenses
cropped up. In the 4th year, he had to borrow money to pay the premium and
in the 5th year when he just could not pay, he decided to surrender the policy.
Now, he had paid Rs. 2 lacs over the last 4 years, but he got back Rs. 52,000.
He was almost in tears and frustrated. It was not a flaw in the product, or the
premium, or his situation. He was the problem; he had not understood the
liquidity part of the product. You can get the liquidity aspects of any financial
product easily in the product brochure. Or just search over the internet about
it.

5. Purpose

“If you don’t find a purpose for your money, it will find its purpose on its
own.”

The last and final point is that you should always ask yourself the purpose of
an investment before purchasing it. Always assign a financial goal to that
investment. If you are purchasing a life insurance policy, tell yourself that it’s
for your family protection in case you are not around. If you tell yourself that
it’s for tax saving, then the chances of forgetting to pay the premium is very
high.

If you are investing in a PPF account, tell yourself that it’s the debt
investment for your retirement that will be used after 15 years. Don’t tell
yourself that you are opening it just because you read it’s a “good”
investment option.

When you assign a financial goal to an investment, it becomes more

important and you feel more accountable towards it, your commitment rises
for that investment. Let me explain with an example:

Suppose you start a monthly investment (SIP) of Rs. 5,000 in 2 mutual funds.
After 3 years, they are worth Rs. 3 lacs.
Now there are 2 cases:
Case 1: You have assigned it for your house down payment or child’s
education

Imagine you feel like going on a vacation for a week OR you want to upgrade
your car just because all your friends have upgraded to a new car. Will you
dip in that investment you are doing for your house down payment due in
next 2 years or your child’s education that can start anytime soon?

No! Your reaction will be that the investment is for something very
important; the label on the investment stops you and keeps your guilt fresh!

Case 2: You have no financial goal assigned to the investment

In this case, the Rs. 3 lacs you have in your mutual funds is just some wealth
you have grown by luck, it has no purpose, and because it has no purpose,
using it to fund a short-term purpose like a vacation or upgrading your car
seems to be the right option. You tell yourself, “I will make sure I fill the gap
soon,” which is unlikely.

Did you see the behavioural change? Did you see how easy it was to utilize
the investments in this case? When you declare the purpose of the investment
with a meaningful goal in your life, it is psychologically not easy to waste it
on trivial needs.

Once you go through these 5 exercises before buying any financial product,
you will never complain or worry about that product!

Example
Let’s take a money back plan, a popular product in everyone’s portfolio. Start
rating the 5 areas we discussed and assign a rank from 0 to 10 in all those 5
areas, where 10 means you are very clear about that area. Here is an example:

Return 6

Risk 4

Costs 3

Liquidity 2

Purpose 4

Your Average Score 3.8 (19/5)

So, if you look above, your average score is just 3.8 out of 10 (19/5), a poor
score. Aim for an average score of anything more than 7 or 8. That means
you are very clear about all the 5 aspects of a financial product. Start by
filling the table:

If you score less than 7 on any of your financial products, it’s time to
spend some time reading up. Best of luck!
JagoInvestor Wealth Club

Our commitment to ensuring that every investor lives an awesome financial

life

We invite you to build on what you have learnt in our books and blog today
by joining the jagoinvestor wealth club.

The wealth club comprises of an online community of committed investors.

We would like to help you to become a more successful investor. The focus
of the club is to provide investors with a safe environment where learning
personal finance becomes fun. The central theme of this club is ‘wealth’; it is
designed to help you engage in conversations regarding living a good
financial life. And how are we going to do this? By serving up, on a monthly
basis, premium material that helps you as an investor. As a member you will
receive premium content in audio and video format. You will also get
dedicated e-books on different personal finance topics, different financial
products, such as ready a reckoner list, excel based different tools, calculators
and templates, that helps you facilitate and improve your financial life.

To get things started, we invite you to experience a part of wealth club. Send
a mail to manish@jagoinvestor.com and we will send you some useful
material that will help you immensely as an investor. We invite you visit
www.jiwealthclub.com and become a part of this committed community of
investors.

Manish Chauhan,

Financial Coach
 Now available
16 Personal Finance Principles Every Investor Should Know

Written by Manish Chauhan

“16 Personal Finance Principles Every Investor Should Know” aims to

reorient the way in which people perceive money management. With the help
of simple stories and parables, it changes your perception of ‘money
management’ from a complex chore that only financial wizards can master to
a simple, commonsense exercise that you can easily undertake.

Every chapter in this book is based on personal finance principles, which

when applied can make your financial life full of power, freedom and
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16 Personal Finance Principles Every Investor Should Know is a veritable

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In a nutshell, it will help you shift gears and start on an exciting journey of
wealth creation…the only plea that runs through the book is that you must
take action!
 Coming Soon
11 priciples to achieve Financial Freedom

Written by Nandish Desai

This is not just your run-of-the-mill typical personal finance book. This book
goes one level above traditional personal finance books; it teaches you to live
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Your financial life will change when you change, your numbers will change
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The book is written in a story format - Sam’s journey. Sam, an IT

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Sam discovers that his vision for his financial life is ordinary and limited and
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Sam’s financial coach teaches him wealth creation. The 90 Day Money Game
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new relationship between Sam and money. Grab this book and find out how
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