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Individual situations can vary, but some principles have universal application

It has been repeatedly mentioned in this column that sometimes your best investments are the ones you don’t make.

In fact, on December 19, 2007 we specified the investments you should not make in order to be a successful investor.

However, 2008 is a brand new year - time for a fresh start. So, to kick off things, we talk about the basic building blocks of a sound financial profile this week. Though each individual’s life situation is different, the following principles of financial planning are universally applicable.

Medical insurance

Medical insurance is a non-compromisable expense, especially in a country like ours, where the state does not cover medical costs. Everyone, young or old, male or female, salaried or with business income, should without exception get a medical cover for himself/herself. Else, if and when an emergency strikes, apart from health consequences, the repercussions on one’s finances can be disastrous.

Of course, if you are salaried, more often than not the employer arranges for medical insurance. But, here too, most would not be aware of the exact amount of coverage. Hence, ideally, have a family floater policy for a minimum amount of Rs 5 lakh.

The premium for a family of four comprising husband, wife and two kids would be in the region of Rs 8,000-8,500 per annum.

Life insurance

The basic financial tenet regarding insurance is that it’s a cost and not an investment. Combining insurance with investment almost always leads to sub-optimal returns.
First, buy insurance only if your family needs it.

Secondly, always (and I repeat, always), opt for a term insurance policy, which is the cheapest and the purest form of insurance. A 30-year-old can purchase a Rs 10 lakh cover for a premium in the region of Rs 3,500 to Rs 4,000 p.a.

If you find you have bought expensive insurance, consider surrendering the policy. Sometimes, you make the right decision and sometimes you have to make the decision right.

Public provident fund (PPF)

PPF is the best fixed income investment you can make. An annual contribution of Rs 70,000 will get you around Rs 32 lakh in 20 years.

Look at it as a fund for the education needs of your children. If you are married, get your spouse to invest, too, and you would have a retirement fund ready.

Buy a house

There is never a good time to buy a house. The sooner you do it, the better. With supply being limited and the country’s population at a billion people and counting, housing in India is never going to be cheap.

Opt for housing finance, even if you have your own funds. Home loans are the cheapest loans on offer. The opportunity cost of the funds if wisely invested will almost always be higher than the interest rate on the home loan.

Avoid credit cards

A credit card is perhaps the most dangerous enemy of a good savings habit. The reason has to do with human psychology.

Whenever you spend money, there is a trade-off. Buying something gives you pleasure, whereas putting up the cash for it is unpleasant. However, you could retain the positive payoff without experiencing the negative emotion. And how?

Use a credit card if you must, but under no circumstance revolve the credit. Credit card interest rates in the country are perhaps the most expensive in the world. Therefore, it is wise to pay off the amount spent on the card the very next day, without waiting for the payment due date. Better still, use a debit card or cold cash.

Equity

Making money in the equity market is easy, but losing it is easier. Hence, know what you buy and buy what you know. If you invest on tips and recommendations, you would be kissing your money good bye over time.

If you buy a stock directly, it must be based on homework you have done. A better overall policy would be to take the mutual funds route.

The flavour of choice should be plain vanilla with a minimum track record of over three years. Don’t time the market. It has never worked and never will. Invest for the long term. If you follow these simple steps, you can’t lose.

Emergency fund

Money lying idle in the bank is all too common. At the same time, investing the last penny you have is not desirable. Have no more than three months’ expense requirements available at any time.

Out of this, cash equivalent to a month’s expense could be kept in the savings account and the rest invested in a money market scheme.

Last, but not the least, be persistent. As Calvin Coolidge has put it so beautifully, “Nothing in this world can take the place of persistence.

Talent will not; nothing is more common than unsuccessful people with talent. Genius will not; unrewarded genius is almost a proverb. Education will not; the world is full of educated derelicts. Persistence and determination alone are omnipotent.”

Do also remember that all the so-called ‘secrets of success’ will not work unless you do.

sandeep.shanbhag@gmail.com