I know nothing about finance, where do I start? – Part 1

by Manshu on November 5, 2012

in Investing for Beginners

This is a question that comes up often, and one that I find quite difficult to answer. First, I think it’s useful to start by just defining what you mean by finance, and spending some thought on that.

I think it is useful to narrow down finance to personal finance because that’s what people are really interested in when they say they want to learn about finance.

I think of personal finance as the following:

Managing your cash flow to build wealth.

I think this is simple enough to understand and covers the essence of financial planning or personal finance.

The idea is to build wealth so you can meet your life’s financial goals and have enough money during the days of your retirement.

The way you build wealth is by saving money and investing it.

This is not an “either or” thing, you have to do both to really make it work. Spend wisely, and invest intelligently. Doing one but screwing up the other will nullify whatever good work you’ve done in the other area.

I think life and health insurance are also an important parts of this equation, as they help you protect your wealth when you face an emergency.

What is personal finance?

So, in that context I think everything that you talk about in personal finance will be covered under one of the blocks above and you have to understand not only things within each box, but their interplay as well.

For example, frugality is something that a lot of personal finance blogs focus on (unfortunately not this one so much), and they have tips to save money and manage your credit card debt etc. and that’s really important because if you’re paying 2% per month on your credit card, then there’s no point in making a fixed deposit of 9% on which you will pay 30% tax.

On the other hand you need to understand what inflation does to your wealth or the benefits of compounding to building wealth without which you will never fully appreciate why fixed deposits alone will not do the trick for most people if you want to build solid long term assets.

Life insurance and medical insurance are important because they help you deal with life’s uncertainty and ensure that one event doesn’t ruin your life’s savings.

Investing is where it gets really interesting because that’s the area where you have unlimited products to invest in and you can spend a lifetime understanding it but still cover only a small percentage of products. Luckily for us, understanding a few products are enough to get by, and even do well.

I feel that tax is also a part of investing because the goal of investing is generating most after tax returns, and to that extent your tax planning is part of your investment planning.

I haven’t spoken about economy here because while it’s good to know what CRR is or how much external debt a country has, I feel it’s not necessary to know micro or macro economics to manage  your money. If you keep a general tab on what’s going on in the country by reading newspapers then that should be sufficient.

At a high level, if you don’t know anything about personal finance, and don’t know where to start, then I think this is the way to start, defining it and understanding what it means.

You now know what you don’t know and I’m going to build a series of posts to cover each of these topics.

I’d really be grateful if you give me suggestions on what this series should contain as well as the sequence, for example, what should the next post be about?

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{ 11 comments… read them below or add one }

Vimal Raj November 5, 2012 at 10:31 am

Good one Manshu. Hope this series helps people.

Suggestion: You can suggest how much percentage of monthly income can be allocated on expenses, emergency need funds, life / medical insurance, investments, etc.,

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Manshu November 5, 2012 at 6:19 pm

Thanks for the idea Vimal. I think you have covered all the big categories quite well and I’ll see if I can write a post about the percentages – thanks!

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Manikaran Singal November 5, 2012 at 7:13 pm

Manshu/ Vimal, there are some financial health checks which generally be performed in a financial planning approach just to check whether the current financials of the client is in order or not. You may go through this link to have some idea http://www.marvelinvestments.com/tools.html.
Today’s tribune also carries one article by pankaj Maalde on the same topic
http://epaper.tribuneindia.com/c/489371

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Manikaran Singal November 5, 2012 at 12:08 pm

Very interesting post manshu and I would like to add some points here. According to me understanding personal finance is all about what one does with his money , one needs to do with his money, one want to do with his money and one like to do with his money. Its all about understanding your relationship and how you behave with your very close friend ” Money”. Understanding fiscal deficit and blaming on government for mismanaging the country’s finances may be very easy but pinpointing one’s grey areas in managing own finances is very difficult. So go take the first step – buy a small pocket diary and start writing down your each and every expense in that, which can be as small as paying for rickshaw, paying to press wala, having Kulche chole/vada pav etc. and as big as payment for buying ration, petrol, electricity bill, going on movie, eating out etc. And then try to differentiate between your need and wants in the shape of discretionary and non discretionary expenses. Along with this do also write down your sources of income too. Do this every month to deepen your relationship with your own Money.

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Manshu November 5, 2012 at 6:15 pm

Thanks Mani! Is this something that you get your clients to do? Don’t you face resistance from them saying it’s too much work? I have wanted to do this several times over the last few years but always gave up thinking it is too much work.

Now with credit cards, it is a lot easier to look up payments but even that feels like a lot of effort to me.

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Manikaran Singal November 5, 2012 at 6:30 pm

Manshu, i have never faced any resistence from clients. Infact many come to me with all these figures and those who don’t they actually feel excited working on this. I know it’s not easy but if you do this exercise sincerely for 2-3 months then you will surely figure out the loopholes that needs to be fixed. Its easy to fix onto some goals, but its difficult to arrange money to save for those goals. That’s why we say that Financial planning is just like working out in a gym , you have to work hard to be fit. Its just like maintaining your books of accounts which you expect every corporate, government should do.
Credit cards can be of help but there are many expenses which needs to be paid in cash. And moreover using credit cards itself needs discipline.

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Manshu November 5, 2012 at 9:35 pm

I have never done this and maybe I should also give it a try, let’s see if I can gain any insights out of this too. I can rely on the credit card bill because all of my purchases are on the card. It’s the fifth today, so let me start today and see how it goes.

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Narayan November 5, 2012 at 7:11 pm

thanks for the post.. i am very keen on reading more about finance. I am yet to start decent savings schemes.. and wondering how would I start .. where and when etc.

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Manshu November 5, 2012 at 9:38 pm

So when you say savings schemes, can you elaborate that a little please? What do you mean?

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Karthik November 6, 2012 at 10:49 pm

Hi manshu . You are doing good job for india . Well done mate

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bemoneyaware November 14, 2012 at 12:10 pm

We would not allow one to drive a car without getting a driving license yet we allow people to enter the financial complex world without any financial education.
A beginner story is like:
Swayam was now the king of the world . He had got a job. He was excited, on top of the world. But…His father was telling him to save money. His cousin was advising him to invest in stocks. His uncle was asking him to buy an insurance policy through which he could save tax. The finance department in his office was asking for his tax savings. He was confused. He just didn’t understand what to do? Swayam realised that though he has studied in school and had a college degree his financial knowledge was tending towards zero
An uneducated individual armed with a credit card and access to a mortgage can be just as dangerous to themselves and their community as a person with no training who is given a car to drive.
Catch is where to begin from..unlike english “ABC” or music “Do re me” we don’t know where to begin learning about personal finance. One mint is doing in great job in explaining financial topics in simple words. Keep up the good work.

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