Some good ol'advice

Basics of saving and investing from Reader’s digest March, 2007 India edition. Most of this is common sense but still better to write it down. (Some of the comments are my own)

·         Anybody with a job earns money but investing wisely to make those earnings grow is a very different game. And the earlier you start investing the more your money is likely to grow in your lifetime.
·         Saving: Start saving as soon as you start earning.

·         Fixed Deposits (FDs): Public sector FDs are safer than private sector FDs. Choose wisely. Avoid FDs and chit funds offered by various traders. Avoid cooperative bank FDs as they tend to  go under very often  although they might offer high interest rates

·         Equities: Invest only after studying companies. Invest in financially sound companies whose products are well known.

·         Taxes: Section 80 C of the Income Tax act allows you to save taxes by putting aside up to Rs 1 lakh in, among other things, life insurance, PPF, employee’s provident fund, and some equity mutual funds. Tax deductible expenses should be credible. So maintain a record of your expenses, including bills and receipts where possible.

·         Debt: Debt can be “cheap” as well as “expensive”. But most people are not money managers or experts to use leverage to their own advantage. So they should stick to reducing debt and using only the money they have to make purchases. Ideally one should not use credit cards as most charge very high annual rates. Never get into debt if you have the money to pay for the purchase, even if it’s a so-called “zero interest loan”. There are always hidden costs and processing fees. Equally important, if you are in debt, sit down and analyze why you got there in the first place and try and change your lifestyle. If you don’t your troubles could only deepen.

·         Life Insurance: Although most people think life insurance is also a good investment. But for financially prudent people it is best not to mix the two. Buy “term” life insurance (TI) policy. TI is pure insurance, and because it doesn’t return any money unless the insured person dies, you’re offered the lowest premiums. With other kinds of life insurance you might get some returns but they will not match prudent investments in shares or mutual funds. Insurance agents don’t usually tell you about TI, since their commission for selling TI is much lower than that for other plans. So you have to ask. And the earlier you take TI, the less you pay.  How much life insurance you need depends on your HLV (Human Life Value) or your total potential working- life earnings.

·         Taking advice: One should remember that advisors, planners, analysts, they always make their money whether or not you do. They can’t foretell the future any better than you can.  (Analysts get paid by clients for making set number of recommendations each year. Also in the current scenario very few analysts give disclosures of the stocks they are holding forget planning to buy in the near term. Hence buy and sell recommendations of these people are best when ignored).  So in any case it is best to rely on yourself unless you know someone personally whose advice you can trust. If you want to make your own decisions then one must read a lot. Make reading at least one business paper your habit. Also subscribe to a good business magazine if possible.