Get your finances in shape
Thu, Jan 10, 2013
Source : Sanjay Kumar Singh, Citrus Interactive

Mao Tse Tung once said that like one's friends a person should select his books carefully. His quote appears apt in today's age of information overload.

A young man who wants to learn how to manage his finances well, or at least be able to tell whether his finances are being managed soundly by experts, would find himself bombarded with information from all sides. But most articles in newspapers and magazines focus on a particular subject in microscopic detail. Because of the limitations of space, few provide a comprehensive framework on the basics of financial planning. Then there is also the question of reliability: how much expertise do the writers of these articles (with honourable exceptions, of course) really have?

A third impediment in the learner’s path is time: after taking care of his day job, a youngster is likely to have only a limited amount of time to devote to learning an essential but ignored subject like financial planning.

What such a beginner needs is a reasonable-sized book that gives him a proper understanding of the basics, and that too from an expert who possesses the discernment (acquired through years of practice) to offer only what is truly important for your financial security.

Amar Pandit's latest book ‘The only financial planning book that you will ever need’ passes these tests. It is of about 300-odd pages and is divided into short, easily negotiable chapters. Pandit is a Mumbai-based certified financial planner who has been practising his profession for eight years. Only his clients will be able to vouch for the quality of his financial advice. What this writer can definitely vouch for is that Pandit’s knowledgeable inputs have augmented the quality of many a personal-finance journalist's articles over the years.

As has been said of tennis, the game of financial planning is also won not so much by finding the investment products with the highest returns as by avoiding the duds: high-cost products that fund the agent’s yacht rather than yours, or those that are patently unsuited for your needs. Pandit highlights the pitfalls to be avoided: don’t combine insurance with investments (he calls this all-too-common malady of investment money being put into insurance products as IIMB: investment insurance mix karne ki bimari); don’t have an overwhelmingly high proportion of your wealth tied up in real estate; avoid “labelled products” like children’s plans (since that investment goal can also be met with low-cost products like diversified-equity funds and PPF), and so on.

The book also provides parameters that will tell the investor whether he is on the right path: what proportion of net or gross income should be saved and invested; what percentage of salary should go into EMIs, etc. Two simple tools that will help you keep track of your finances have been provided: cash flow statement and net worth statement.

In the chapter on insurance, the author begins by offering methodologies for calculating how much insurance you need. He informs the reader of the benefits of buying a term plan, and the mistakes to be avoided while buying a health insurance plan. Most people don't buy products like disability insurance, critical illness insurance, property and asset insurance, and professional liability insurance. The author informs you about the significance of these products, and how you can, for a price, pass on your financial risks to another entity (the insurance company).

Many myths that investors inculcate are exploded here. One of the common ones is: “Real estate is the best possible investment since prices never go down.” Pandit reminds readers of the stagnation in the realty market between 1995 and 2003-4.  Then there is the issue of liquidity: real estate in general and high-end properties in particular are difficult to sell at the right price in case of an emergency.  

The book contains an exhaustive chapter on investments. Towards the latter part, the author tells you how to find the right financial advisor. A chapter on behavioural finance deals with how emotions can distort your judgement while investing. There is sound advice on preparing a will; keeping your spouse or family informed about your investments and the related paperwork; and being thorough with documentation (employ a part-time accountant if the work load is heavy). The chapter on taxation, a subject that most laymen find difficult to come to terms with, provides all the essential information without being technical.

When I went to learn swimming, the instructor asked novices to go to a shallow pool and experts to go to the main pool. For some strange reason I felt I knew swimming and confidently walked to the main pool. As the instructor made us swim across, I floundered and then sheepishly made my way back to the novice’s pool. In real life, feedback about our shortcomings is usually swift and stark. Not so in the world of finance. You may commit a mistake (in fact, several mistakes) and a decade or more could pass before the consequences of your folly are brought home to you.

The opportunity cost in terms of earnings, and equally importantly, time foregone is high. Unless you are a professional trained in the field of personal finance, accept with humility that you know less than you think you do, then set out on the path of learning, which, if all goes well, will culminate in riches. Pandit’s tome is a good starting point for this life-long quest.

Book: The only financial planning book that you will ever need.

Author: Amar Pandit, CFP.

Pages: 324

Price: Rs 499

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