I used to say why save money if I’ll die tomorrow, I haven’t died yet and I have nothing to survive on
The previous two articles have set the stage for us to embark on our journey of success, by getting us to think about what success means to us. Let me reiterate, doing something deliberately and progressively well, which you always wanted to do, is a success. Or in other words- success is a progressive realization of a worthy goal. The goals, of course, will have to be defined on all the seven parameters of success on the Wheel of Life.
Beginning today and for the next few weeks, I will be focusing on the spoke of “Financial Success”, a very important part of our life. Well, the ascetics may say that money is bad but I would invoke the Bhagavadgita to say that money is neither good nor bad but its craving is bad. If you are financially independent there is so much more you can do for your family, society, nation or indeed the entire world.
We are struggling with the CoVid 19 pandemic and to find a vaccine for the same, Bill and Melinda Gates have pledged $ 100 million. Jack Ma, the founder of Alibaba has pledged $ 14 million. Even the pop star Rihanna has given $ 1.4 million for this noble cause. How much have we given for this cause? Not much I guess and that’s not because our heart is not in the right place but because we do not have the financial capacity to donate much.
You can give away only what you possess and hence if you are a pauper you can not give anyone money or anything which money can buy. Recently, we had an episode of a famous television artist asking for money on Facebook- a petty sum of 300- 400 rupees. I am sure he must not have enjoyed the ignominy of virtual begging, a fact which he confessed a few days later. The point that I am trying to make is that the importance of money can not be wished away and we all should endeavour to be financially independent at the earliest.
Education remains the greatest weapon to fight the enemies of ignorance and financial ignorance is one such enemy. Reading good books on personal finance should be the start point for anyone wanting to gain financial freedom. With great humility I would like to suggest two books written by me- Musings of a Financially Illiterate Father and The Millionaire Mechanic, to be an ideal start point. I will be giving the links at the end of this article.
But in any case, we all have read several finance or investment related books. While writing my books, I must have read more than 50 of them. Every book requires an investment of your time and money and may or may not give you the “bang for the buck”. In this post, I will introduce you to the shortest finance book ever written- all of 87 words. The book has been written by the famous cartoonist, Scott Adams, the creator of the iconic Dilbert comic strip.
Some trivia before I lay out the book before you. Adams titled his book, “Everything You Need to Know About Financial Planning” but when he went to publishers, they declined, not because the contents of the book were not juicy enough but because it was too short to be published as a book. Be that as it may, Adams still calls his 87 words treatise a “book” and here is it for your reading pleasure.
Everything You Need to Know About Financial Planning
“Make a will. Pay off your credit cards. Get term life insurance if you have a family to support. Fund your 401 (K) to the maximum. Fund your IRA to the maximum.
Buy a house if you want to live in a house and you can afford it. Put six month’s expenses in a money market fund. Take whatever money is leftover and invest 70% in a stock index fund and 30% in a bond fund through any discount broker and never touch it till retirement”.
That’s it. 87 words of sane personal finance advice which is jargon-free and contains the essentials that any investor needs to know and do. I will deconstruct these 87 words for you shortly as few of the terms may not be familiar to you being part of the American lexicon. By the way- Adams is well-qualified to talk about finance. He has a bachelor’s degree in economics. He is an MBA and has worked in banks for more than eight years. So, let’s demystify this book, in the order of financial priorities of a common investor.
Firstly, take Term Insurance if you have dependents. For effective and efficient financial management, a regular income stream is a prerequisite. If the sole source of income is the breadwinner of the family, his/her wellbeing becomes absolutely vital for the financial security and indeed survivability of the family. The first and the most important form of insurance is Life insurance which protects against loss of the life of the breadwinner.
A good thumb rule figure is ten times the annual income. “The ten-time rule of thumb is not an arbitrary number. Remember, life insurance is designed to replace your income. If your surviving spouse invests that $400,000 (assuming an annual salary of $40,000) in good mutual funds at an average 10–12 per cent return, he or she could peel off $40,000 a year from that investment to replace your income without ever cutting into the principal.”
We also need to factor in other liabilities of the breadwinner. Let’s say he has taken a home loan of Rs 20 lakh and a car loan of Rs 8 lakh. In case of a mishap, paying off these two liabilities itself will polish off most of the coverage amount. This amount of Rs 28 lakh (Rs 20 lakh+ 8 lakh) must, therefore, be added in the required coverage amount. If the breadwinner has children, their expenses, as they grow up and settle down in life also need to be catered for (education, marriage etc.).
The next issue to be tackled is the kind of life insurance one should opt for. There are a whole lot of options out there – Endowment plans, Whole Life Policy plans, Unit Linked Insurance Plans and Money-Back plans. All are avoidable. The only plan one should go for is a pure term insurance plan. A term insurance plan is for a predesignated term, say 40 years. So, if you buy a Rs 1 crore term insurance plan for 40 years and pass away in this period, the insurance company will pay your next of kin, Rs 1 crore. If you survive 40 years, you get nothing. Always go for a term insurance plan even if you are taking insurance to cover your house mortgage, car loan, personal loan and so on. It works out the cheapest and most effective.
Secondly, make a Will. We keep postponing this important aspect for when we are older thinking that no mishap will happen to us in our younger days. This is a folly as life is uncertain and accidents do happen. A will is a legal document that names the individual/ individuls who would receive the property and possessions of a person after his/ her death. It can always be modified by the person executing his/ her will.
A will can be made on a plain paper and remains functional even if it is unregistered. However, it is always better to register a will by going to the sub- registrar’s office along with witnesses – at least two. Remember that a beneficiary under the will can’t be a witness. The will can be kept in safe custody in a sealed cover with any registrar.
A related issue is to acquaint your spouse and children with all your investments- insurances, mutual funds, stocks, FD etc. Most of our transactions are online and require passwords to log in. Please make a list of all the passwords, login ID etc and create a folder. It should contain a list of all your bank accounts, investments, loans and any other related issues. I recommend updating this list every quarter. Mail this document to your spouse and take a printout and hand it over to her/ him. In the case of a mishap, your spouse will not be left floundering.
I will stop here and continue to demystify the shortest personal finance book ever written next week. In the interim, please complete these first two steps for financial planning. Also, please read my books and provide feedback. I will also request you to put in a review on Amazon.
The Millionaire Mechanic: Financial Wisdom in the Rann https://www.amazon.in/dp/1646787404/ref=cm_sw_r_em_apa_i_-ZU9EbFWMC05T
 Ramsey Dave: The Total Money Makeover.
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