Musings of a (Financially) Illiterate Father
Page 1
Notion Press
Old No. 38, New No. 6
McNichols Road, Chetpet
Chennai - 600 031
First Published by Notion Press 2018
Copyright © Anand Saxena 2018
All Rights Reserved.
eISBN 978-1-64324-727-4
This book has been published with all efforts taken to make the material error-free after the consent of the author. However, the author and the publisher do not assume and hereby disclaim any liability to any party for any loss, damage, or disruption caused by errors or omissions, whether such errors or omissions result from negligence, accident, or any other cause.
No part of this book may be used, reproduced in any manner whatsoever without written permission from the author, except in the case of brief quotations embodied in critical articles and reviews.
Contents
Foreword
Acknowledgements
Prologue: What Makes Me Qualified?
INVESTING ESSENTIALS
MUSING 1: DON’T EVER SAVE
MUSING 2: COMPOUND INTEREST
MUSING 3: PAY YOURSELF FIRST
MUSING 4: SPENDING INVESTING (SI) BALANCE
MUSING 5: THE ONLY WAY TO BUDGET
MUSING 6: THE BREATHING FUND
MUSING 7: FIRST THINGS FIRST
MUSING 8: ASSETS AND LIABILITIES
MUSING 9: THE LATTE FACTOR
MUSING 10: CREDIT CARDS AND CREDIT SCORES
MUSING 11: DEBT MANAGEMENT
MUSING 12: AM I ON TRACK FINANCIALLY?
TOWARDS BEING A BETTER INVESTOR
MUSING 13: TEST THE WATER BEFORE TAKING THE PLUNGE
MUSING 14: WHERE DO YOU INVEST?
MUSING 15: MODERN PORTFOLIO THEORY
MUSING 16: THE ASSET ALLOCATION
MUSING 17: THE MASTERS ARE CALLING
GETTING TO THE BRASSTACKS
MUSING 18: INVESTING IN REAL ESTATE
MUSING 19: ALL THAT GLITTERS IS NOT GOLD
EQUITY INVESTING
MUSING 20: STOCK MARKET: A MINEFIELD BEST AVOIDED (DIRECTLY)
MUSING 21: ARE EQUITY MUTUAL FUNDS THE PANACEA?
MUSING 22: PASSIVE INVESTING: IS INDEXING THE WAY TO GO?
MUSING 23: EXCHANGE TRADED FUNDS (ETF)
SELECTING EQUITY MUTUAL FUNDS – I
MUSING 24: THE STARS FALL DOWN
SELECTING EQUITY MUTUAL FUNDS – II
MUSING 25: GO FOR THE LOWEST COST
SELECTING EQUITY MUTUAL FUNDS – III
MUSING 26: FUND LIFETIME
SELECTING EQUITY MUTUAL FUNDS – IV
MUSING 27: SIZE DOES MATTER
SELECTING EQUITY MUTUAL FUNDS – V
MUSING 28: INVESTMENT STYLE
SELECTING EQUITY MUTUAL FUNDS – VI
MUSING 29: FUND MANAGER
SELECTING EQUITY MUTUAL FUNDS – VII
MUSING 30: GLOBAL EXPOSURE
SELECTING EQUITY MUTUAL FUNDS – VIII
MUSING 31: PUTTING IT ALL TOGETHER
DEBT INVESTING
MUSING 32: FIXED INCOME INSTRUMENTS
MUSING 33: MY NAME IS BOND
MUSING 34: DEBT MUTUAL FUNDS
GAINING TRACTION
MUSING 35: SYSTEMATIC INVESTMENT PLAN
MUSING 36: REBALANCING
MUSING 37: THE CHIMERA OF RETURNS
MUSING 38: PLANNING FOR CHILDREN’S EDUCATION
MUSING 39: SAVING FOR THE SUNSET YEARS
MUSING 40: PENSION AND ANNUITY MANAGEMENT
THE PSYCHOLOGY
MUSING 41: THE ARRT OF CREATING WEALTH
MUSING 42: IS YOUR RECEPTACLE LARGE ENOUGH?
Essential Reading Resources
Foreword
You can mint crores while you earn only in thousands! Yes, you read it right. This illuminating book by Anand Saxena tells you how to play with your Money and score BIG. Managing Personal Finance is generally considered a cumbersome and complex subject and because of this majority of Indians have no or little awareness of it, resulting in self-inflicted deprivation in life and particularly suffering in their sunset years. In an easy and lucid language, author guides us through his musings that how easily one can create his Wealth Empire with little bit of discipline and meager investments. A must read for newbies entering into job market and laymen who have not yet started giving a serious thought to this money minting game.
Qamar Waheed Naqvi
Former Chief Executive Producer, News Channel “Aaj Tak”
Columnist,raagdesh.com
It was with a bit of trepidation that I started reading the book on finance by an Army executive. Normally, one would expect an Army man to write a book on war, extremism, armaments, etc. It was a pleasant surprise to peruse a scholarly work by the author in the field of finance. It was not only an educative reading, but also a very interesting one.
The author, like many of us, has admitted to his failings in managing personal finances. However, his experience, in the form of book would help many young people to better manage their personal finances. The era of assured money inflows in the form of pension after long years of service is almost coming to an end with the introduction of New Pension Scheme of the Government of India. Apart from this, most of the jobs of future shall be in the private sector or self-employment.Thus; youth of today needs some lessons in managing personal finances.
The author has explained complicated financial concepts in a very simple language with a few anecdotes with which many of us would relate. I found the explanations of inflation, return, compound interest and investment avenues very fresh and interesting. The book is an excellent attempt to cover a wide range of topics on personal finance. I believe it would be useful besides the learned ones, for even those people with little financial education.
The effort of Anand Saxena in penning such a useful book is commendable. I am sure this book would go a long way in filling a knowledge gap for especially non-finance people.The youth of the country is surely going to identify with the protagonists of the book- Anshreya and HoneyCool, who teach so many lessons as the book unfolds.
I convey my best wishes to the author for the wonderful effort and wish a great success for the book.
Nirmal Chand
Regional Director
Reserve Bank of India
This book is not only a collection of everyday personal finance concepts, but more importantly, attempts at bridging the chasm between understanding and action. The book takes a very practical look at management of personal finances, delivered through a conversational style, which can be used as a primer by a person in any age group, let alone young adults. I remember my early financial decisions being contoured by a simple one hour conversation with my favorite uncle-26 years back!
This is not a book which should be read at one go – take time to relish the thoughts, let the ideas swirl around in your mind, absorb the ideas as if for the first time, and I can assure you, it will lead to taking prudent decisions and actions.
The deep research of the author is clearly visible in the book as also his passion to impart the alchemy of wealth creation. I wish Anand Saxena all the best for the success of his book which will be the success of precepts of common sense investing-the underlying theme of this wonderful book.
Vikas Mittal
Deputy CEO
Magma HDI General Insurance Company Ltd.
As the popular adage goes, “Money isn’t everything but happiness alone can’t keep out the rain.” So, financial security in the age of inflation is paramount. And as one grows older it becomes imperative to build strong financial assets and plan for the future.
But there is no school whe
re one can learn where to invest. Anand Saxena’s paperback-“Musings of a (financially) illiterate father” offers a hands-on experience with simple illustrations on how one can manage personal finances. A simple outlook on the complex web of personal finance one can easily ace that skill through his myriad experiences.
A must-read for any Indian especially the youth who can learn simple tricks to get their finances in shape. I would recommend every person to read this book once in his lifetime for learning and implementing wealth creation in day-to-day life.
I wish him the very Best.
Hussaine Kesury
Chief Category Officer
Pepperfry.com
Acknowledgements
I must commence my acknowledgements with my parents— Sri Harish Kumar Saxena and Mrs. Sundari Saxena whose steadfast support and love has made me reach where I am in life today. I hope I have made them proud, for they deserve nothing less.
My soulmate Deepika has not only made me a better person in life in last twenty-four years of our togetherness but has brought in sunshine and laughter in our home. Her unflinching faith in my endeavours is simply amazing. This book frankly, wouldn’t have been written, but for her constant motivation. I know she has sacrificed a lot in the last one year of writing this book when I could not give her adequate time, but she has never complained.
My lovely children, Anshul and Shreya consider their Dad a hero, not realising that they themselves are their Dad’s heroes. Amazingly grounded, they provided me with a reason to write something which they could benefit from along with other children of their age. One of my protagonists, Anshreya, is my tribute to my children.
My Brother-in-law, Sri Umesh Saxena, a senior Bank Officer and co- brother Gagan, a finance sector executive, provided me with the technical inputs that proved invaluable.
My dear friend Amit Bhardwaj, an entrepreneur par excellence actually concretised my dream of writing a book by his indefatigable efforts.
And finally, my third child, my pet Cookie who provided me with unadulterated love and affection by being with me while writing during unearthly hours, when the entire family was asleep.
Prologue: What Makes Me Qualified?
One would expect a book on financial wisdom containing great investment mantras helmed by a rich business tycoon or a successful entrepreneur or a stock market wizard. I clearly fit into none of these descriptions even remotely. Indeed, whatever I have achieved financially over last three decades is rather modest. Why then am I bothering you to even read what I have to tell you about financial wisdom? If I had this wisdom wouldn’t I have done better financially myself? Please read this book to learn what I did not do towards my personal finance or did too late to give me peace in life. I am not uneducated, in fact far from it. I hold triple masters degrees—Master of Science, Master of Philosophy and Master of Management Studies, where one of the subjects was financial management. But I consider myself ‘financially uneducated’ as I could not translate my theoretical knowledge into tangible personal financial outcomes. This book thus, is my cry of anguish, a lament of what I could not achieve financially despite having the wherewithal for financial freedom at my disposal, a steady pay check, all these 30 years.
It is also not my argument that money is the be-all and end-all of all things good in life, definitely not. A rich and fulfilling life can be enjoyed even without being rich, as long as one sets one’s life goals appropriately and enjoys a good family life and health. I have been singularly lucky to have an amazingly supportive family who have never faulted me for not being able to give them more, at least materially, than what I could. However, this guilt remains in me that I could have done more, much more for them as also for the society, if I were better off monetarily.
Having a decent sum of money liberates oneself to pursue one’s profession and passions in life without bothering about the next meal (in extreme cases) or the next pay check. I will recall Maslow’s hierarchy of needs theory here: It is difficult to work with self-esteem and achieve self-actualisation without meeting one’s basic needs of Roti, Kapda aur Makaan (food, clothing and home.) My financial naiveté has to a great extent been my handicap which any decently educated person should endeavour to eradicate.
The seeds of future victory are invariably found in past defeats; one just needs to analyse the root causes of defeat and try to chart a new course without reinforcing the trends and habits of the past. I must confess that I was always casual about money even to the extent of not knowing my basic pay despite being a government officer; leave aside my financial responsibilities towards my family and myself. I lurched from one financial mistake to another without really learning any true lessons. The monthly pay used to come like clockwork— fruits of having a government job, and then go away as easily, without leaving a trace of any tangible asset that one created out of it. I had no idea about how and where the money was being spent over the course of the month and the year. In a way, I was not managing my money; rather the money was managing me. The monetary crisis always used to start around middle of the month and then the struggle was to somehow get through to the next pay check which used to meet the same fate. It was not that we were indulging in luxury vacations, dining and shopping, far from it. We were living frugally, or so we thought, and yet running on a financial treadmill, which did not cover any real distance on ground. The pay used to rise every year, but so did the expenses and I found no way to arrest this vicious trend.
It is not that I did not plan for my finances, I did, but not always very wisely or methodically and ended up making a series of mistakes like choosing my financial advisers incorrectly, never following through with whatever half-baked plan was at hand and jumping from one financial instrument to another. I wish to share these investing mistakes with you along with the blueprint or the path I would follow if I were to live my life all over again. I hope and pray that the seeds of your financial victory will be found at the altars of my financial naiveté and mistakes.
The greatest weapon in life is knowledge and its effective utilisation. However, unfortunately, in our country, there is no institutionalised system of teaching a child the basics of personal financial matters in schools or colleges. At home, in most of the families, any discussion on finances in front of children is forbidden. So how does a child learn about finances? The hard way, like I did: through trial and error. The problem with this approach is that most of the times one gets the wrong kind of advice to act upon and secondly, one loses precious time of investing in life, a commodity which can never be replaced whatever one tries subsequently.
Since the time I realised that I was in a financial soup and needed to change my attitude towards money and finances, I decided to arm myself with knowledge and wisdom. I read books by financial masters, gobbled up articles and magazines on personal finance, chatted at length with people who had done well financially and tried to evolve some fundamentals, which if followed scrupulously by a youngster or indeed anyone at any stage in life, would result in financial peace and freedom. The problem with most of such financial literature, however, was that it was written in a language which is difficult to be understood by a high school student, the right stage in life in my mind, for a child to get educated on personal financial matters.
Consider these statistics for a 25-year-old youth who starts to earn ₹50,000 per month (net of taxes and deductions,) with a nominal 10 percent raise in income each year and retires at the age of 60 years. In 35 years of his earning lifetime, more than ₹16 crores would have passed through his hands. It is a humongous amount which if invested intelligently can make this youngster seriously rich. But for this to happen, the youth must be taught the tenets of personal finance.
I hence decided to simplify the financial jargon to a language that a 20-21-year-old could understand, internalise and apply. Of course, I have included all the resources in the bibliography for those who wish to go deeper into the concepts and arm themselves even better. However, even if one has t
o just read this book without the additional resources mentioned, the benefits are still going to be significant. I have on purpose, kept the chapters bite-sized so that they could be tackled one or two at a time and thus incrementally add to the financial wisdom of the reader. To that extent, it is important that one goes through the entire material in sequence without trying to jump forward out of curiosity. The chapters are more in form of concepts which need to be understood and applied rather than the factual data which is liable to change over time.
The book is in the form of musings which I wish to communicate to my children as an (financially) illiterate father who embarked upon the journey of financial wisdom and knowledge and having acquired it, wishes to leave this as a legacy for them or indeed for any child. I am conscious that at my age I may not be able to financially recover adequately to leave them with huge financial assets. But then, who knows?
We will be traversing this journey along with our two protagonists – Anshreya, a girl and HoneyCool, a boy.
I will end the prologue by reiterating that whatever follows in this book is attributable to some financial master whose name I have mentioned in the footnotes and have quoted their pearls of wisdom liberally. If inadvertently, I have omitted to cite someone, it may be purely out of an oversight for which I apologise in advance. But as the book is meant for the benefit of the society at large, I hope this small error of mine, if there is, will be forgiven. So let us together embark on this journey of financial wisdom and peace.
INVESTING ESSENTIALS
MUSING 1: DON’T EVER SAVE
Your Piggy Bank Eats Money: Let’s say you get attracted to a really cute dress at H&M (Hennes & Mauritz) at the nearby mall but don’t have the money to buy it because it costs ₹5000. Your fiscally prudent parents ask you to save your pocket money in order to buy the dress after some time. So you start saving ₹500 out of your pocket money each month and keep putting it in your piggy bank. After 10 months you rush to the H&M outlet to buy the dress but find that you fall short by ₹500 since the dress costs ₹5500 now. What happened? Did your piggy bank eat ₹500 over last 10 Months? Or, did the price of the dress go up by ₹500 in this intervening period? It is a bit of both. Yes, your piggy bank actually eats money. No kidding.