Some time back, I came across some incredibly simple Financial Planning advice from none other than Scott Adams, the legendary cartoonist and creator of the Dilbert series. At first, I thought – “what on earth is a cartoonist doing, dispensing Financial Advice?” Later, though, I was taken aback with the profundity of it. In less than 100 words, Adams had dispensed enough Financial Planning “advice” to cover most of one’s bases! Here’s the verbatim transcript:
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 (Individual Retirement Account) to the maximum. Buy a house if you want to live in a house and you can afford it. Put six months expenses in a money market fund. Take whatever money is left over and invest 70% in a stock index fund and 30% in a bond fund through any discount broker and never touch it until retirement.
Here are seven takeaways from the above abstraction, from the context of Indian savers.
Will your Assets
Estate planning is one of the most oft ignored aspects of Financial Planning. You don’t need to be a multi-millionaire to need to have a will in place. Regardless of whether you’ve got 10 lakhs or 10 crores, dying intestate can lead to your hard-earned money and hard-won assets landing up where you least intended it to.
Reduce High Cost Debt
High cost debt – such as credit card debt or expensive, unsecured personal loans, can eat into your savings and prevent you from ever getting wealthy. Hence, your first priority (before accumulating assets or making investments) should be to zap outstanding credit card debts, if any. Start with a clean slate, and only spend on your card what you can comfortably pay off by the next cycle thereafter. Don’t fall prey to overspending to keep up with the Joneses – if you lack self-control, reduce the limits on your cards and limit your number of credit cards too.
Get Term Life – but only if you need to!
We Indians are famous for buying clunky, low return traditional life insurance policies -and for the wrong reasons. Notice how Adams advises us to buy “term life if you’ve got a family to support”: the catchphrases here being “term life” and “if you’ve got a family to support”. If you don’t have dependants, there’s no point purchasing Life Insurance. And if you do – stick to a pure risk plan.
Take your Retirement Seriously
Putting off your retirement planning until the penultimate moment can lead to an inescapable mess that’ll lead to much strife in your twilight years. Instead, start early and fund your retirement account to the maximum. The goal itself may seem light years away, but delaying can end up costing you significantly.
Buy a house – but for the right reasons!
Adams jocularly advises us to “buy a house if you want to live in a house and you can afford it”. I was struck by the sagacity of this advice. The key takeaway here is that one should not go broke in their efforts to acquire a house – for instance, by taking on loans that’ll completely exhaust one’s monthly surplus and leave little room for other savings. In addition, it’s always better to acquire a house as an end user and not with the intention of flipping it in a few months or years – especially if you’ve taken a home loan to acquire it.
Set up an emergency fund
Adams wisely advises us to prioritise setting up an emergency fund over making other investments. Emergencies (a job loss or a medical emergency for instance) don’t come announced, and having six months’ worth expenses in an easily retrievable money market fund with no exit costs should be a top priority from a Financial Planning standpoint.
Invest for your long-term goals aggressively
“Invest 70% in a stock index fund and 30% in a bond fund through any discount broker and never touch it until retirement”, says Adams. There are two key takeaways here – one, your long-term savings need to be channelizes into aggressive, high risk – high return assets, even at the cost of volatility. Unfortunately, this is a far cry from what most of us do – which is, deploy our long-term savings into low return instruments such as Life Insurance, Fixed Deposits, fixed income-heavy NPS or PPF! Adams also urges us to invest through a “discount broker” – implicitly advising us to avoid high cost, high front load investments that only serve to create value for intermediaries through exorbitant commission pay outs!
“This article was contributed by Guest author, Aniruddha Bose, Editorial Consultant with BW Businessworld and was posted on www.businessworld.in.”