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Sundar is a Google Software Engineer and has been selected to IIM, Bangalore’s PGP this year. He had some very interesting questions on personal finance. He wanted to know why people do a shoddy job when it comes to financial planning among other things.

Read my interview at компютриCoffee with Sundar

I enjoyed answering those interesting questions.
Thanks Sundar

Personal Finance is a “threatening” concept and most people phase out when money/ savings/ investing/ tax/ stocks/ insurance/ funds are discussed. After tackling them over the last one year on my blog and website , I hope to construct an easy-to-digest, friendly e-book that people want to read and understand!

This e-book is only 21 pages and will not take more than an hour to go through. No matter who you are and what you earn, my feeling is that this one hour can help you understand money and change a lot of things for you, for the better!

Personal Finance is about managing your own money. There are scores of books and courses to manage the finance of your business or a Company. Then there are books on finances of the Government (Monetary, Fiscal Economics).

But are there enough for managing your own finances? Which is equally, if not more, important for all of us. And moreover it’s simple and not rocket science!

Download the eBook

I scored 19/20 in the Investment IQ test by MoneyControl !! I would have scored less than 10 some months ago before I started this blog.

Use this tool to evaluate whether you should manage your investments yourself or whether you should approach/ use a professional manager.

This evaluation will consider your temperament, aptitude and technical knowledge. It should take you between 5 and 8 minutes to answer the 20 questions.

Scores on temperament(5), aptitude(5) and technical knowledge(10) are taken. The qualifying score( 15) is a Moneycontrol recommended benchmark and it refers to the minimum you need to score if you want to manage your money independently.

As I said, I wouldn’t have scored 19 if I was not doing this blog. In fact I was very miserable with all this personal finance. But I have learnt that finance is not rocket science and I owe it to my family that I manage our finances better.

Maybe you score less than 15. But does it mean you should start finding a professional manager? Or should you try and build your financial literacy (backgrounder) levels. Choice is obviously yours!!

I need to go through a financial literacy programme and I am making that effort. So do you, dude.

I’ve hated finance. Maybe because I was not able to understand the jargons and the maths. But I guess ignoring personal finance worsens the situation. And the only way to get maximum out of your personal finance is to look it into its eye and grapple with it. You will come out stronger.

If you think it’s too early for you to bother, let me tell you that the first principle of investing is to start early and see the magic of compounding. College grads, fresh MBAs and guys under 25, the smart thing to do is to start now.

Do you think that you have mastered the basics but are not able to use it to your advantage, it’s time to put your thinking cap on and review your strategies. Learn from your failures. Often we tend to get stricken by some deadly internal enemies which Kartik Jhaveri details here.

Some of you guys would be rich enough not to be bothered about these mundane things. But have you ever given a thought that you are in a position to contribute to the nation’s economy by being more efficient about your finances. Wealth has the unique ability to create more wealth. Are you using that power?

Before I move on, let me articulate the background to this financial literacy programme that I am so smitten about. The following facts and questions keep on humming in my mind:

1. Equities give the best returns and you are putting your money in a professionally managed corporate organisation. Compare this with your insurance products which give much lesser returns and your money is invested in the Government which is inefficient with your money, to say the least.
2. However the total AUM under Mutual Funds is about Rs 3.5 lakh crores while LIC alone manages funds worth more than Rs 6 lakh crore. Yes it’s true that LIC has been there for over 50 years and has a huge distribution reach. But it has hardly tapped the huge insurance potential that India has.
3. Financial experts scoff at ULIP saying that it’s very expensive compared to Mutual Funds. But LIC collected more than Rs 25000 crore in 2006-07 and it’s total fund under ULIP is approx 40000 crore which is more than UTI’s AUM of approx 39000 crore (since existence)

All this and more points to widespread financial illiteracy at all levels. Be it college grads, software geeks, MBAs, Engineers, even CFA/Economists( they are experts at business finance or government finance) and even Financial advisors (they rarely have a holistic view), everyone needs to be literate about his personal finances.

And there are over 700 mutual funds, 5000 stocks, 300 insurance policies and hundreds of other financial products to choose from!!

Interested! And the literacy programme that I have in mind will have the following details:

• Financial planning basics.
• Financial markets.
• Financial products like Mutual Funds, Stocks.
• Research reports, Financial analysis, technical analysis.
• Insurance : Basics, Company review, product review.
• ETF : Basics, Company review, product review.
• Bonds : Basics, Company review, product review.
• Tax Planning : Basics, product review.
• Retirement Planning : Basics, product review.
• Children’s education. : Basics, Company review, product review.
• Calculators :Budgeting, Networth, Loan, Asset allocator, Risk analyser,etc.

Any suggestions. And if you are interested why don’t you subscribe to my RSS feed or by email. And tell your friends too. I’ll cover them one at a time. [ I need to learn them and then only I can share it with you ]

Btw, if your eyebrows are tensed up and you are thinking why I am making so much effort working on this financial literacy programme, I’ll tell you my secret. It’s for the website I dream of every day and night!! The site launches in August’07.

This post links to a treasure trove of information on personal finance. Actually, April was National Financial Literacy Month in the US and JDR (GetRichSlowly) has the ultimate collection of posts covering everything on Personal Finance.

Other than the 20 posts linking to the literacy drive, he also links to his popular articles and the websites which provide such information. Maybe it’s all dry information, but you can do well to bookmark that post and keep coming back to it. It’s dry, but important for you. Why? Look at the following questions and then decide.

How much do you know about money? Have you learned about the power of compounding? Do you know how the stock market works? What is a bond? Can you tell the difference between an Income Statement, a Balance Sheet, and a Cash Flow Statement? Do you even know why you would want to?

Do you know how to keep a budget? Do you understand how your taxes are used and why we pay them? Do you know what it takes to purchase a house? How much insurance do you need?

Head on to this treasure trove. Even though some posts are US specific, the concepts are useful and important to learn.

Simple maths tell us more about the power of starting early and investing regularly rather than any rants. Check out this simple calculator by Hugh where he gives an option to compare two savings/investing options.

I have taken the following case:
Case 1: You start now with a yearly investment of Rs 1000 and stay invested for 40 years.

Case 2: You start after 20 years from now but invest Rs 2000 instead for 20 years.

In both the case, the amount invested is Rs 40,000. Assuming a common growth rate of 10% in both the cases, in case 1 , the accrued balance works out to Rs 442,593 . The accrued balance in case 2 is Rs 114,550.

Why don’t you work it yourself and take away your learnings.

Getting rich is in your hands, nobody else’s . So get started with working hard or smart (depends on you again), adding to your finance knowledge and generally taking responsibility for yourself. Get Rich Or Die Trying.

If Financial decisions look like rocket science to you and Investing is even more daunting, here are some baby steps for you.

This one is from Deborah Fowles, Guide to Financial Planning in About.com Seems very elementary but I doubt how many people are scoring more than 5/10. Here it goes, the top ten:

1. Get Paid What You’re Worth and Spend Less Than You Earn : Hey, I get less than what I deserve and so do you!! And I’ve not done any budgeting so that I may be sure of the second part.

2. Stick to a Budget : I’m ashamed, no budgeting exercise for myself, not to speak of sticking to one.

3. Pay Off Credit Card Debt: Thank God, I finally get a score on this one. I’ve managed to stay clear though I’ve had to suffer with the agonising interest calculations earlier.

4. Contribute to a Retirement Plan: I do have a pension plan but I’ve never cared to figure out whether it is sufficient! Will give 1/2 for that one to me.

5. Have a Savings Plan: Yeah ,I’ll be partial to myself and give some score here too! I do save about 15% of my income though it’s a recent phenomena. Better late than never!

6. Invest! : Pretty straight forward. But few people manage to find an hour for that in a week. They’ll rather watch TV(Big Boss is on these days!)

7. Maximize Your Employment Benefits : A meeting with your HR guy!! Brace yourself. I have no hope with my guys.

8. Review Your Insurance Coverages: Putting a finger on that is important from the family point of view. Those of you without that responsibility can breathe easy on that count. But I get full marks here!

9. Update Your Will: Never thought about that up till now. Bless Ms Fowles.

10. Keep Good Records: I will, as part of my New Year resolutions. But I’ve yet to get started on that. Next Monday, I promise.

Phew!, I score about 4/10!! So much potential to improve!!

But before I sign off, for guys who suddenly want to get started with their budgeting exercise, here are percentages of major spending categories from the US Bureau of Labor Statistics (2003) Consumer Expenditure Survey. May not apply to you and me but it’s an interesting statistic anyway. Gives you an idea where you stand and where you can increase/decrease your expenses.

Food at home 7.7%
Food away from home 5.4%
Alcoholic beverages 1.0%
Total food and drink 14.1%
Housing 32.9%
Apparel and services 4.0%
Vehicles 9.1%
Gasoline and motor oil 3.3%
Other transportation 6.7%
Healthcare 5.9%
Entertainment 5.0%
Personal care products and services 1.3%
Reading .3%
Education 1.9%
Tobacco products and smoking supplies .7%
Miscellaneous 1.5%
Cash contributions 3.4%
Personal insurance and pensions 9.9%

Work on your Budget sheet for two hours and it’ll tell you a lot about yourself. Look at it as a personality test!!

And yes, Taxquery wonders how any financial planning can be successful without tax planning. He’s dead right. Go to his wonderful blog for tons of info on Taxes

This news can make you feel that it should have been started in your time. The Government is thinking of starting a course on Investing in the schools in Std. XI/XII.

For me the first principle of investing is “better late than never”. But actually it is to “start early”. And when it comes to making money by investing, time is on the side of the youngsters.

Investing and the stock market will play a vital role in the future, irrespective of what the youngsters choose to do with their life.Whether they want to build a career in business, be a freelance artist, or whatever, knowing about managing their own money will give them freedom and choices in life that they wouldn’t otherwise have.

Actually investing is no rocket science that it is made out to be. Agreed that it is a bit complex, but the important aptitude too have is to “spot trends” and to “break away from patterns and convention”. And our youngsters excel in that.

Moreover, you don’t need to be a car mechanic to learn driving. Operating a car and servicing them may need an effort to understand the mechanics of the car. But you need to understand the functions of the steering, gear, clutch and accelerator only to learn driving. Like investing, it may appear daunting for the newbie. But leave him on the steering for a week and there he goes.

The ideas behind investing are really very basic. And you don’t need to know everything before you start putting some money. For the teenager, the biggest enemy is `inertia ; the tendency to do nothing’, says Bamford. To combat this, take a few steps to learn about investing, and then take a few steps to actually do it! “These can be the most profitable steps you’ve ever taken.” Janet Bamford in Street Wise from Bloomberg Press (www.bloomberg.com). “The great thing about investing is that you can start slowly, bit by bit, and get more deeply involved as you learn more.”

Critics might argue that teaching teenagers the nuances of financial markets is putting too much pressure too soon. But being protective of our children may hinder their growth. Throwing the baby into the swimming pool and letting him learn swimming might seem heartless. But it actually helps the child.

Ultimately it is important for all of us to take responsibility for one self. Managing your money is critical in the game of life. And instead of learning theory of history, civics, etc, investing will be one practical aspect of our education. And maybe it will help the youngsters to face the “fear” of stock market and the “greed” that it brings along, and make them better investors than us.

Bring on the course fast, GOI.