Expert advice

Sep 28, 2011,19.27 IST

The ten financial commandments for all seasons

By Lovaii Navlakhi

This is not a pontification by any stretch of imagination. What I seek to deliver is a bunch of simple, ready-to-use tips which will apply possibly to each one of us, irrespective of the year we are in.

Commandment One: Pay all credit card bills on due date in full

In case you do not pay the entire bill amount on the due date, interest is charged from the date of spending, and not the due date for payment. That factor alone can push up credit rates to over 40% per annum; and this makes it probably the most expensive form of credit. Kill the credit with a personal loan if required -- and follow the discipline of no more rollover of credit henceforth.

Commandment Two: Close all unnecessary bank accounts

How many of us open new bank accounts with each new job, and havenít even checked the balance in the dormant ones in the past one year?

Commandment Three: Keep a maximum of one monthís expenses in the bank account

As you may have realized, the bank pays interest on your savings bank account at a rate lower than that of inflation. Thatís not to say that the rest needs to be invested for the long-term: I am only stating that you can earn a bit more through fixed deposits or short-term mutual funds for funds needed more than 30 days later.

Commandment Four: Buy life insurance

You buy life insurance for your loved ones, not yourself. Buy the cover that you need today Ė remember to get the term plans first so that the sum assured is adequate for your familyís needs.

Commandment Five: Ensure all your nominations are in place

Make sure all your bank accounts, investments, insurance policies, have up-to-date nominations in place. Review this at least once a year.

Commandment Six: Start investing early

The power of compounding is phenomenal. A 25-year old investing Rs. 10,000 per month for 20 years, and then letting the money stay invested, all at 10% p.a. accumulates Rs. 3.3 crore at the age of 60. A person starting ten years later (at age 35) needs to invest 2.5 times the amount (Rs. 25,000 per month) for 25 years to reach the same corpus of Rs. 3.3 crore.

Commandment Seven: Invest regularly

Systematic investment where the long-term trend is upwards (as in India) is the best way to eliminate risks of investing in equity markets. Those who continued doing so in 2008 and early 2009 when the chips seemed down and out have more than seen value in this investment philosophy.

Commandment Eight: Make a financial plan

Determine your financial goals. Locate a certified financial planner. Get a plan made to help you reach your financial goals, based on the risks that you can take; not just the risks that you wish to take.

Commandment Nine: Stick to the financial plan

Financial plans result in arriving at an asset allocation which takes into account risks, returns as well as liquidity. Ensure that the allocation is reviewed periodically and balance it so that you can cut risks when the market is over-heated and enter boldly when all others are dancing barefoot on a hot tin roof!

Commandment Ten: Review the first nine commandments regularly

Discipline is the key to managing your money better. Go over these commandments and add others. The more the merrier. I wish each one of you a very prosperous future. 

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