Thangavel PrasanthTP

Let's Talk Money

Book by Monika Halan20 min read

Original sourcePhysical Book (Amazon)
StatusInProgress

I have summarised & highlighted the important points covered/that I liked in the book for speed reading.

Preface to the Revised Edition

  • We worry about investment the way we worry about weight. Instead of dieting or investing being a habit, we only think of them as remedial measures when our weight or our bank balance goes too high or too low.
  • Happiness is a choice - we can choose to be or not to be.

Pandemic Money Lessons

  • Lesson 1: We can up our saving target sharply the day we decide to go to back into lockdown mode.
  • Lesson 2: Emergency fund amount needs to be recalibrated based on age, stage, and nature of work.

Emergency fund rule of thumb

  • If <40 yrs old + stable job, then 6 months of living expenses.
  • Else, up to 2 yrs depending on age and job riskiness.
  • Lesson 3: There is no safe haven for our money. Each investment comes with a risk and we have to decided which one we are able to take.
    • Investments such as liquid cash, FD, debt funds, equity, gold, real estate, etc.
  • Lesson 4: Asset allocation is not an option. Understand the difference between risk capacity and risk appetite, and align them. - Risk capacity: Ability to take risk. Capacity is about our age, stage, number of dependents, confidence of our ability to keep generating income for long time, etc. - Risk appetite: Willingness or desire to take risk. This depends on how well we understand money, finance, our own skills, our ability to manage portfolio, etc.
  • Lesson 5: Our total fixed obligation-to-income ratio (FOIR) should be 30% or less.
    • i.e., Our equated monthly instalments (EMIs) should not be more than 30% of our take home money. Preferably, 15% to 20% ratio..

Pandemic Life Lessons

  • Make peace with death, as it’s also empowering and liberating.

Pandemic Work Lessons

  • We all need Plan B and Plan C.
  • Everyone need two things
      1. Always strive for deeper understanding of what you do, and then try and stretch beyond what the ask is.
      1. Plan for a career 10 years ahead of today.

What you want to be doing 10 years from today, and what you are going to do about to do about it today.

TL;DR: We are doing OK if ...

  1. we have 6 months to 2 years of emergency fund;
  2. our loans are <30% of our take-home salary;
  3. we are increasing safe assets as we age;
  4. we have our own medical cover;
  5. we have our wills in place;
  6. we are building second & third career even as we work our current job.

1. The money order

  • “What to invest in” is not the first money decision we should take.

2. Don’t stash that cash

  • The key to finding the money to save and invest is to have a good cash flow system.

Easy cash flow system

3 accounts for 3 functions of money

  • Salary (Income Account)
  • Spending (Spend-it Acconut)
  • Saving (Invest-it Account)

Moving money from Invest-it to Spend-it is not allowed.

  • Mental accounting - We like to separate our money into separate accounts according to intent, and dislike using it for anything else.

TL;DR: We are doing OK if ...

  1. we have 3-account system that separates our income, spendings, and savings;
  2. our spending on living costs is no more than 45-50% of our take-home income;
  3. our EMI payouts are no more than 25-30% of our take-home income;
  4. our savings are at least 15-20% of our take-home income.

3. Emergencies need a fund

  • “Why are we usually afraid of long-term money commitments? Why don’t we want to invest for long-term?”
    • The answer almost always is “What if there’s an emergency? Then, we won’t be able to use our own money if it’s tied up in a long-term investment?”

The unwillingness to take risks also comes from the fear of not having the money when it's needed.

  • We need money ‘midway’ under two circumstances
    1. Planned events
    2. Unplanned events
      • Hospital bill, getting fired, Chennai floods, COVID pandemic, etc.

It's for the unplanned events we create an emergency fund, and buy insurances.

We can't use our emergency funds even for the downpayment of the house.

What's an emergency fund?

Go-to fund when disaster strikes in the form of a job loss, large hospital bill, death, or natural calamities. It’s the difference between slipping into disaster and staying afloat.

TL;DR: We are doing OK if ...

  1. we have 6 months’ to 2 years’ living costs in emergency fund;
  2. we are a double-income family with no dependents, and have 3 months’ living expenses;
  3. we are a single-income home with dependent parents and have a year’s living costs;
  4. we are in our 50s and have 2 years of living expenses in the fund;
  5. our emergency funds sits fixed deposits or very safe debt funds.

4. Building our protection

Getting a good medical cover is probably more important than buying life insurance - we're more likely to go to hospital with an illness or accident than die.

  • Do we need cover? My office covers me
    • Yes, we do.
    • Especially if we are in our forties or when there is a change in our circumstances (e.g., retrenchment, quitting work during/post pregnancy, etc.) or post retirement (lifestyle diseases might have already set in).
    • Companies are reluctant cover older people, and with ‘pre-existing’ disease, the reluctance is even stronger.
  • What policy do we buy?

Cheapest policy is not necessarily a good plan.

3 factors to decide on a policy

  1. Price
  2. Benefits
  3. Claims

1 Price

  1. How does the price compare with policies from other companies right now?
  2. How does the price compares over the years?

2 Benefits

  1. Ensure that we have a policy that does not have something called a ‘co-pay’ clause.
  2. Check for a ‘pre-existing’ disease clause.
  3. Check if the policy has ‘disease waiting period’.
  4. Check if the policy has ‘sub-limits’.
  5. Check for exclusions,
  6. How much of the costs before and after hospitalization the policy will cover?
  7. List of ‘day-care’ procedures that don’t need us to stay for 24 hours in a hopital anymore.
  8. Check the ‘no-claims’ bonus feature.

3 Claims

  1. Check how many claims does the company settle? Only choose the firm that settles more than 95% of claims.
  2. Look at claim-complaints data and look for policy that has <30 complaints on every 10,000 claims made.

  • What to do if we are not getting cover because of a pre-existing disease?

    • The worst case, at least buy a policy with sub-limits, co-pay, and an exclusion period for our existing ailment.
      • Though they are restrictive, it’s better than not having a policy.
    • If we are unable to get a policy
      • Start a regular systematic investment in long-term product like mutual fund, and label it as ‘medical-cost’ fund.

  • Critical illness and personal accident

    • Critical illness policies pay a lump sum if we get any of the illness that are part of the contract.
    • Personal accident policy adds another layer of security to our by-now robust medical insurance portfolio.

  • Key-terminologies in Benefits, Claims & Policies

Sub-limits

Limits on what will the policy will pay for certain diseases and for the room rent and related costs.

Co-pay

What we agree to share with the insurance company in terms of cost.

Exclusion period

Waiting period before the policy will start paying a claim.

Critical illness

  • Is a disease where we may not spend too much time in hospital, but have very large out-of-pocket expenses.
  • The disease may also affect our ability to work for some-time.

Covers in personal accident plan

  1. Death
  2. Permanent disability
  3. Permanent partial disability
  4. Temporary total disability

Check if the financial planner knows more than us or not by asking about

  • Pre-exiting
  • Sub-limits
  • Claims
  • Waiting periods

TL;DR: We are doing OK if ...

  1. along with our work covers, we have our own family floater;
  2. we live in a small-town India, and have a family floater between Rs 3 to 7 lakhs;
  3. we live in large metros, and want the 5-star hospitals, and have minimum of Rs 15 lakhs’ family floater;
  4. we are over 60 yrs old, and have a top-up plan to bump up our basic cover.

5. What if we die?

I personally found this chapter to be quite a heavy and intense 🤯.

Why do we need a life insurance cover?

  • We buy life insurance for all the wrong reasons - fear, greed, pity, frustration, taxes, pressure, investment, etc..
  • The real & only reason for a life cover is to protect our family’s financial health (lifestyle & future goals) if we die.
  • Is the life insurance cover a ‘waste’?
    • When we buy this policy, if we live beyond the policy term, we get nothing back.
    • It’s not a waste. Rather, it’s price we pay for buying a life cover (an income replacement - an income replacement - a lump sum that we need today so that our income will not be missed by the family if we are not around).

Rule of 72

Versatile rule to know the rate of return of every year of a double-your-money proposition. Over what time, my money doubles? Then, divide the 72 by the time window in years.

e.g., If Rs 1 lakh will grow to Rs 2 lakh in 15 yrs, our return per year is ~72/15 = 4.8%.

Separate/unbundle investment and insurance products.

How much cover do we need?

  • We need 8-10 times our take-home annual income. Or 15-20 times our annualized monthly expenditure.
  • Also, we need to buy insurance for all the debt (e.g., home loan, personal loan) we have.

Examples

  • If our annual take-home income is Rs. 12 lakhs, and life insurance cover if we die was for Rs. 1.2 crore (10x of our annual income).
    • If we die, and even if our family put this in a naive 6% 10 yrs FD, it will generate Rs 60K per month.
  • Say, we take a home loan of Rs. 80 lakhs, and we have a term of Rs. 80 lakhs.
    • If we die, the insurance will pay the unpaid home loan.

When's a good time to buy?

Buy as soon as we have dependants or the possibility of getting dependants arises.

  • Buy the policy the moment we realise that other people in the family will suffer if we die suddenly.
  • Touching 30 is usually the good time to buy the cover.

What cover/term policy to buy & how to buy it?

  • Rule 1: Get a cheap plan.
  • Rule 2: When buying a term cover, check the claims experience of the insurance firm.
  • A policy sold by an agent costs 2x the policy we buy online.
  • A claims experience of over 95% is fine.

When do we not need a life cover?

  1. If we have no dependents on our income.
  2. When we are financially free.

The job of life insurance cover is to serve us till we are debt-free or financially independent.

The moment that happens, we can terminate the term insurance plan, and we loose nothing as they are usually annual contracts.

TL;DR: We are doing OK if ...

  1. we have a pure term insurance plan;
  2. we bought this online to remove agent commission costs;
  3. we don’t have a single ULIP or ‘traditional’ plan in our money box;
  4. we have a sum assured that is 8-10x of our annual take-home income or 15-20x of our annual expenditure.

6. Finally, we’re investing

Why we resist investing for the long term?

  1. Not having money to invest.
  2. Desire to keep money in liquid form for future emergency.
  3. Fear of making a mistake.
  4. Lack of knowedlge.
  1. Not having money to invest
    • Waiting to invest because we don’t have a large corpus is like waiting to get fit before we join a diet and fitness routine.

We are not stock market traders or speculators. We are investors. Understand the difference.

Start rather than wait for the golden moment when we have a big amount to hit the market with.

  1. Desire to keep money in liquid form for future emergency

Emergency fund + insurance covers act like a seat belt.

It also reduces the need to keep most of our money ready at hand.

  1. Fear of making mistakes

We hate mistakes

Big reason why we stay in FDs, gold, insurance, and real estate is the fear of making errors.

  1. Lack of knowledge

Understanding investing is a one-time fixed cost in terms of our time.

How much to invest?

Depends on many factors, such as

  • Why we want to invest?
  • How long we want to invest?
  • How comfortable are we with high risk high rewards?
  • How many people we have in our family?
  • How secure is our job?
  • What products we already have in our money box?
  • Who are we? An entrepreneur, a salaried employee or a consultant

Each financial product we buy must solve a problem we have.

Compartmentalise the money box

  1. Cash flows
  2. Emergency fund
  3. Medical cover
  4. Life cover
  5. Investment
  6. Almost There (2-3 yrs) or short-term needs
  7. Some Time (3 -7 yrs)
  8. Far Away (7+ yrs)
  • Examples of Almost there
    • Getting marries
    • Sending kid to school
    • Buying a house
    • Buying a car
    • Going for a holiday
    • Financing mum’s surgery
    • Buying dad a car
  • Examples of Some Time
    • Down payment of our house
    • Kids’ higher education fees
    • Kids’ marriage
    • Our retirement

Not everything suites everybody

we need to match our financial needs to financial products.

  • Each financial product has certain time period over which it works best.
    • A product that’s safe in long run becomes risky in short term, and vice versa.

Learn to ask the question

Over what holding time period does this financial product work the best?

Even if we were the unluckiest investor ✅ in the world, and bought into the market on the worst day possible, there is a way in which we can still win ✅✅.

It's never the 'right' time to being investing. We feel we are too poor or too young or too dumb to begin. The right time is now. No matter what our age, stage or circumstance is, we need to being investing right away according to a solid plan.

TL;DR: We are doing OK if ...

  1. we are committed to drawing up an investment plan;
  2. we have written down our near-, mid-, and long-term goals;
  3. we have put a monetary value on these goals;
  4. we understand what amount we need to invest today;

7. Let’s de-jargon investing

We are too fond of gold, real estate, and FDs.

There's a purpose for each financial product we buy, and each product needs to fight with others to grab that place in our money box.

3 asset classes we need to understand

  1. Debt: Umbrella term for all financial products that are based on borrowing.
  2. Equity: Ownership of a business and the risk it brings, either directly (through stocks) or indirectly (through mutual funds).
  3. Real assets: Can be physically seen.

Financial assets

Debt & equity

Real assets

Real estate & gold

Debt

  • Products that usually give us an assured return. Example include
    • FD
    • Corporate deposites
    • Bond
    • Provident Fund
    • Public Provident Fund (PPF)
  • The core of the product is loan.
    • Higher the return it promises, the higher is the risk of non-payment of both of our investment and the interest.

Two things are fixed in debt financial products

  1. How much we will get back, and
  2. When we will get back

Debt mutual funds

Another category of ‘debt’ products that carries more risk than the guaranteed-return products mentioned above, which will be covered in Mutual funds.

The goal of debt products in our money box is to provide money at short notice, and to provide stability in our long-term investments.

Debt products are good for stability, but not for growth.

Gold

Gold is a good as a hedge against inflation.

  • The only way we can make profit from gold is when it’s value goes up.

How good is gold for getting capital gains or profits?

It depends on

  1. When we bough it, and
  2. How long we held it

Not more than 5-10% of our total portfolio goes into gold. We do not buy jewellery as investment.

Real estate

We forget how many of our money decisions are related to emotions, power equations within the family and suppressed issues that tend to erupt at some random trigger.

Real-estate story

It’s a horribly, clunky, chunky investment that has lots of costs, which people forget to add to profit maths.

Costs include

  • Interest cost of the loan
  • Monthly maintenance bill
  • Doing-up costs
  • Purchase stamp duty and registration fee
  • Agent fee/commission
  • Yearly property tax

Challenges include

  • Title disputes
  • Land/flat can be grabbed
  • Tenant may refuse to get out
  • …

Why do we like real estate so much?

  1. Habit
  2. Black money
  3. Fear of unknown

Dealing with black-money is like a treadmill

Once we get on it, we have to keep running with the money.

Irony of our investment fears!

We are happy to invest in dodgy property deals, to risk builders running with our money, and to turn our white into black so that we can invest for the long term in something we are familiar with and can ‘trust’.

Rule of thumb to see the true face of our investment returns

  • Count the costs
  • Count the years of investing
  • Look at the post tax returns

TL;DR: We are doing OK if ...

  1. We have no more than 5-10% of our portfolio in gold, and they are in the form of government gold bonds;
  2. we own one house as the roof over our head and no more;
  3. we have our FDs; PF and PPF, debt funds, and no other debt products, no corporate deposits, no chit funds, no ATI bonds;
  4. our debt allocation is equal to our age; rest is equity.
  • at age 30, no more than 30% of our portfolio is in debt products;
  • at age 70, no more than 70% of our portfolio is in debt products.

8. Equity

The most misunderstood of all asset classes.

  • Stocks are not a lottery or gambling where some people get lucky, and most get unlucky.
  • There’s a math & science, and a way to take risk safely.

Equity is slow cook, and not instant noodles.

  • There are two ways entrepreneurs can fund their business
    • Debt
    • Equity

What’s Sensex and other indices?

  • A stock market index, that’s made up of 30 most representative companies that are listed in BSE.
  • The Sensex and Nifty50 are broad market indices and are also called large market-cap indices.

As long-term investors, Can we ignore Sensex?

We can ignore it. However, before we do that, we need to understand

  • What is Sensex?
  • Why is it irrelevant to our life in the short term, but very important in the long term?

What's market cap?

No. of shares of company × Price per share.

Based on market cap, company may fall under

  • Large-cap
  • Mid-cap
  • Small-cap

If we could just buy Sensex or Nifty50, we could hold automatically the large, bestselling companies in India that represent the sectors of the economy that are doing well.

Just as a food index will be more volatile (prices will go up and down with greater intensity) than a broader consumer index, so also the Sensex will be more stable than changes in a mid-cap index or sector-index.

  • In a growing economy, stock prices go up over long run.
  • Good profits and potential growth are the basis for the stock price rise.

Why does the author likes giving her money an equity exposure rather than direct stocks so much?

  • We will gasp on ROI on Rs 1 lakh invested 40 yrs back in
    1. Fixed deposit
    2. Gold
    3. Public provident fund
    4. Sensex

⇒ The power of compounding over long term!

Assuming Sensex gains 13% p.a. steadily every year, after 40 years, an investment of Rs. 1 lakh would be worth Rs. 1.33 crores.

  • Depending on a number of factors, the year at which the minimum return is positive in equity is between 7 and 10 yrs.

It's not timing the market, rather the time in the market that matters.

We should not put money into the equity market if we need it next year.

Rules of equity investing

  1. When investing in stock market, give it the same patience & respect we give real estate - a good equity portfolio needs 5 years of patients, ten years to see consistent returns, but actually will slow-cook over 15-20 years.
  2. Our risk is choosing poor products, and finding out after 15 years that our fund (manager) has malfunctioned.
  3. If we find ourselves frozen while choosing equity products in the market - and don’t want to take risk of choosing a fund manager, go with ETF or an index fund linked to a broad market index or mid-cap index.
  • This is the safest way to get average market returns.
  1. Do not invest into any product that locks you into a particular company or asset manager.
  • We want a product which is portable, where exit is possible, cheap, and easy.
  1. If we want to invest in managed funds, start learning.
  • Read through Mint50 coverage, Value Research data, and Morningstar ratings.

Our money box can handle the risk that equity brings in short term now, because

  1. We have created an Emergency fund
  2. We bought Medical & life covers

What's best way to buy equity?

Mutual funds

TL;DR: We are doing OK if ...

  1. we understand that equity cooks over time, and we need atleast 7-10 yrs of patience to see returns;
  2. we understand that we will not double our money overnight, but will get a return that is between 12-15% a year;
  3. we understand that mutual funds are best way to give our money an equity exposure;
  4. we understand that if we don’t have the ability to choose funds, we invest through index funds or ETFs.

9. Mutual funds

10. Putting it all together

11. My retirement

12. Redo the box

13. Will it

14. What kills a money box?

…

Action items

  • What’s the definition of emergency fund?
  • What’s considered as safe assets?
  • 2. Don’t stash that cash > We are doing OK if … (Compute the numbers for my use case)
  • Why can’t we use our emergency fund even for the downpayment of the house? Isn’t that sort of an investment? Or for any sort of investment besides FD and very safe debt funds for that matter?
  • Check what my office insurance covers? Personal insurance covers? Medisave? etc. Any gaps in it for me and Tharshi? How to go about the child?
    • Revisit the benefits section for both our insurance, and the insurance we are planning for Tharshi’s mom as mentioned in 4. Building our protection
  • What’s considered as annual take home income? Is it post-tax, PF deductions?
  • Can we buy life insurance cover (term) from multiple parties? What is defined as existing medical condition when applying for these insurances? Should we include permanent disability and critical illness in it?
  • In 7. Let’s de-jargon investing,
    • why is the author saying owning real estate house as part of investment and rental yield is wrong? is it because the returns does not add up?
    • why is the author saying “we have our FDs; PF and PPF, debt funds, and no other debt products, no corporate deposits, no chit funds, no ATI bonds;“?
  • What’s inflation?
  • In 8. Equity,
    • You need an equity exposure rather than direct stocks. What does this mean?
    • I still don’t understand some of the 5 points in “Rules of equity investing”
    • Why “Mutual funds” is the best way to buy equity?
  • In 9. Mutual funds,
    • [ ]
  • What’s index fund?
  • What’s ETF?
  • What’s mutual fund? How’s related or different to index fund and ETF?

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