MONEY MATTERS- THE FIRST STEPS Managing money has been made in to a very complicated business. None of us seem to be able to agree upon either the path or even agree on common definitions. Words like savings and investments are used interchangeably and at the end of it all, the lay person is confused about the whole thing. Planning money for future has assumed greater importance with the breaking down of the joint family system. In the joint family system, one did not have to worry about life after employment. Today, with the families going nuclear (remarkable, that the word can be jumbled up to read as ‘unclear’) it is each one for oneself. Emotionally it may sound disturbing, but India is surely going the western way. Children want to migrate. Once having gone there, those who have spent formative years in India, wish to return at some point. Those who are born abroad and study out there, have no intention of even visiting India, forget relocation. With all this, the pressure on current earnings to provide for oneself and for one’s children becomes intense. Too many demands on current earnings do leave us without a sense of being in control and we tend to take hasty decisions. I would say that ‘savings’ are the amounts needed to meet fixed or known outgoings that are committed and deemed to be essential (as opposed to desirable. A car may be essential, but a Porsche is not). For these, we put aside money that we cannot afford to take risks with. I would call them as ‘savings’. Savings is money kept aside for spending at a later date. Typically savings are needed to meet inescapable milestones. So we cannot afford to risk our “principal’ amount. Savings can be put in to some form of interest bearing investment only. Whether it is a Liquid Fund of a mutual fund or a debenture or a PPF a/c depends on when one needs it and the tax situation. Unfortunately, savings have a tendency to give returns below inflation, unless one can avoid or minimise the tax outgo on that. Typically, we have to use a combination of ‘savings’ and borrowings (housing loans, vehicle loans, education loans) to meet most of our ‘needs’. As a rule, what amount is needed as ‘savings’ should never be put at risk. This money should not be in equities or real estate or commodities, since they suffer from problems of liquidity as well as market uncertainties. Even mutual funds that invest in equities are subject to the same vagaries. The key thing in savings is that you work on the power of compounding. At an eight percent annual return, your money doubles every nine years. If the economy does not get in to a hyper inflation, this rate might just about beat inflation. Once you fulfil all your basic needs, you can afford to take some chances. Some equity, some real estate or commodities can be considered. We are now entering the ‘investment’ zone. The key about an investment is that you cannot plan an exit in terms of value and time. You can fix one but not the other. Whilst your time objective is easily attained, it is possible that the value objective is never achieved. You principal can be at hundred percent risk. In logical order, my first building block would be the Public Provident Fund. This I would keep towards my retirement corpus. If I start off at age 25 and can invest a lakh every year, by the time I am sixty, the amount accumulated would be Rs.186 lakh!! The key is to start early. The more you delay, the worse off you are. For instance, starting five years late, would end up in your corpus at the age of sixty being just Rs.122 lakh. A five year delay has meant a Rs.64 lakh difference!! In addition to PPF, you may have your company provident fund / pension fund. This should form your first and most important building block in your financial planning. PPF is tax free. In fact, one of the best things you could do for your child is to have a PPF account opened for her/him at the first possible opportunity. Start with savings and graduate towards investment. That will leave you without stress about money. The main thing is to understand what each type of investment can do and how to use it effectively so that we can maximise our options, without too much risk. Of course, I am not talking to those who have all bases covered and simply need to dabble in money for the sake of it. For them, the prescriptions do not matter. In the next part, I will navigate through the various investment vehicles as we progress through life.