WARNING: This section of the wiki needs an overhaul and the information presented in this section may not be up to date or reflect the current state of affairs. However, the concepts presented in this section should still hold true and valuable.

If you're interested in making this section better, send us a message on our Discord server.

Intro : Level Zero 😊

You're at level zero, if you've basic idea about bank accounts, or maybe some idea about FD, have heard about SIP stuff, and that is it.

Otherwise, we'd assume you're a well-earning professional, protected by parents. Who are also likely to not have great ideas about money management.

These are some common ideas you probably hold dear

• Buy your house first

• Real estate is the best investment

• FDs are the best, even better if you invest in FD in your spouse's name ,to save tax

• Gold is the best hedge against inflation, it always goes up

A Basic Question ❓

Let’s start with the most basic question.

Why do you earn money?

Why have you studied so much (12+3+2 or 12+4+/-2, we have added MBA level to a graduate or engineering graduate). Even longer, if you're in medicine.

In short, 17-18 years of studies. Plus add 2/3 years of working. And yet, there are not equal minutes to have really read and understand how to manage all that money that has been earned and will be earned in the future.

We earn money as professionals, because that is what our parents / peers / society etc. have trained us to do.

That is what has been passively shaped by everyone around us, but not by us internally. Our environment gives us ideas about how to get a good earning career, or how to have a good CV to get into a good company, how to shape our personality, etc.

And then how to save or invest, etc. Everything passive, bombarded by messages from all around us. The result is, if someone asks us anything about it, we even feel proud that we don’t know anything about money management.

Where to even start? 🤔

Since we don’t know anything about it, and when we are starting to dip our toes in this ocean of information about money management, it's scary.

It turns into an analysis paralysis - since I don’t know what to do, I'll do nothing.

Some will keep kicking the can down the road, without taking any money management decisions themselves. Some would do what their bank RM or LIC uncle tell them to do. Most would continue to find topic of money quite boring and mundane, something they'd prefer never have to deal with.

If you want to buy things you want, you have to save.

This was our first lesson in savings and investment.

Baby Steps 👶

We'll be writing about someone who has got some amount but don’t know how to start managing it. Rather than someone who is about to start.

Bank Account: The earned amount is sitting in the savings account and earning a measly 3%-3.5% (tax free up to 10-15,000 – whatever govt has limited, as such the amount is small). This money is relatively safe. Relatively, because in today’s world of online banking and debit cards, the risk is non-zero.

So where to start?

Let us first understand some basics:

Savings Options are FD/RD (Fixed Deposit / Recurring Deposit), NSC (National Savings Certificate), PPF (Public Provident Fund), private companies FD (like Shriram finance, Bajaj Finance, and others) and mutual funds categories which deal with bonds (also known as debt papers).

All these are called Debt instruments. Basically, you give your money (called principal amount) to the other party (govt, bank, private company), and they promise to give a certain percentage of returns over and above the principal amount. So, you give them P (principal) and then give back P + I (principal and interest) after a period of time.

An example of FD: you give the bank 10,000 today. And the bank promises to give you 10,000 and 7% (700) after 1 year.

An example of RD: you give the bank 1,000 every month, and the bank promises to give you 12,000 (1,000 x 12 months) and around 400 additionally as interest. This is back of the envelop calculation.

Moreover, you have to pay income tax on those 700 and 400 rs. Just try to understand how difficult it is to earn money on the savings amounts and which when subjected to tax, comes out to how little. In this case, if you are in 30% bracket, then you are getting only 490 and 280 rs finally, after you have saved that amount of money for 1 year.

The corollary is since you have not been investing at all, you are not even getting that amount till now. Not even those measly 490 and 280 even all these years.

I will cut short the other options, because they are as pathetic for someone of your condition.

The “best” option right now to move that money out of the rut is to put majority of money into a liquid mutual fund.

Why that thing? Because they are:

• Diversified Basically, Liquid MFs keep money into a large number of different areas, so that if one area goes bad (recent news like IL&FS, or CoVid crash), then your entire corpus is not in jeopardy all at once. The more diversified the money is kept, better is the protection (this is a general rule, but there are exceptions, which we'd get to later).

• In general, you can earn more than FD, both as amount of interest as well as with less tax, if you keep the money in there for >3 years. (Update: Starting from 1st April, 2023, debt funds will no longer provide long-term tax benefits if held for >3 years. However, they are still better than FDs as taxes are only accrued on redemption and not annually)

• Third and most important, the money withdrawal is flexible. You want to redeem only 5,000 INR, you can. You want to take out 1L, you can (of course, you should have more than 1 lakh invested). You want to remove the entire amount and see it in your balance, you can do that as well

Solution: so, for that person with 24L, we advised him to keep 3L in savings account (he had been seeing that huge amount in his account statement, so just could not ask him to remove everything. It would have been a shock to him), keep three 1L FDs of similar maturity and rest 18L in ICICI Prudential liquid fund.

We're giving a specific name here, because there are so many options in that category, that it again causes action paralysis of which one to choose.

Other one which we can recommend is Parag Parikh liquid fund (because they have put most of their portfolio, mostly in the SOV-rated RBI papers; which if you don't know what is, know that it's the safest piece of debt instruments out there).

From other analysis available on the internet, Quantum’s liquid fund is a good idea.

Now that we want to park the money into a more flexible instrument, we can proceed to next options. You focus on what can go wrong and take care of it first.

Part 2A is Health Insurance.

Take a decent amount of health insurance (more correctly called Sickness Insurance, since what it means is that when you get sick and get admitted in a hospital, then you get part or all of the medical expenditure you did).

To shortlist the options, I checked coverfox.com with the following options:

1. Amount – 5L

2. Age – I put in 30 years for husband and wife, just to have an idea.

3. No room rent limit (many policies have sublimits like 1% of cover for daily room, etc. This means for a 5L policy, the daily limit for room would be 5000 a day. Anything above will not be paid to you back). So avoid such sublimits. More about this in the comment in this old writeup.

4. No copay. This means you will have to pay part of the whole bill. Avoid.

5. No Maternity benefits. Even if you are planning to have kid, avoid plans with such benefits because they are much more expensive and it is better to pay such expenses from the pocket rather than get them reimbursed.

6. No restore / refill benefits. Please ignore.

7. Pre-existing disease coverage – this is not important. For young people, this option is not important.

8. Ignore options like Day-care treatment, Home care, Annual checkups, Ambulance expenses, Dental treatment, Spectacle care (I mean these are a thing nowadays!).

For more research, please check into some of the resources mentioned in [Freefincal's Free Resources Page](https://freefincal.com/select-the-right-health-insurance-policy-with-these-free-resources/). Do read the policy documents for the exclusions and also the list of hospitals in your area. And buy it ASAP (max 3 days research, or 1 weekend).

Part 2B is Life Insurance

What is life insurance? Basically this is an income replacement insurance and not a “life” insurance. The life of a person is invaluable and cannot be replaced by money. What we want is to have a lumpsum amount of money when the bread-winner dies, which can substitute for the income lost due to his absence.

Sidenote: Yes, in today’s world, both husband and wife earn and are equal/unequal bread-winners. But because of socially accepted more responsibilities of the wife, I do feel that husband should have higher coverage than wife’s. The importance of the wife in the family is so high that she cannot be replaced while I expect the husband to be more financially savvy, so if the wife dies, the husband can manage without that lumpsum due to life insurance of the wife. But if you want, have coverages for both husband and wife.

Buy pure term insurance. In simple words, this plan/policy means that the company will pay you an amount X (called Cover amount), if the policy holder dies within a defined term (10-40 years), and for that it will ask you to pay the insurance amount (called Premium) every year. Typically, the amounts range from 500-1000x.

Eg. If you are a 30 year old male, non-smoker, and you want a 1 crore life cover for 30 years, then you would need to pay around 10,000 a year. This makes to an amount of 3,00,000 over 30 years to be paid if the person does not die. While you die anytime from the start of the policy, then the family gets paid 1,00,00,000 (= 1 crore). If you don’t die, then those 3 lakhs have gone to the insurance company and it is your loss. Please ignore this loss. Let this loss occur, since I am pretty sure, no one wants to die!

Any other option than pure term insurance is more expensive. And ignore all such options like life return of premium, money-back, step up, step down, investment-insurance, etc. With the kind of marketing prowess of the insurance companies, there are so many terms that it is much easier to ignore all those things.

An example of a money-back policy will be with the same conditions of 30 year old male, 30 year policy of 1 crore would have a premium of 2-3lakhs per year, yes per year.

These days, most of the companies have some form of Direct plans in which you can buy the policy directly from the company instead of through an agent. Going through an agent usually adds up about 10-20% in the premium at the least. Prefer going direct.

What not to do?

1. Don’t buy anything which is not Term insurance.

2. Take the term till 60 years at max and not beyond that, even if there is an option. Basically, you don’t want to continue to have a need for income replacement at 60 years. That just means that your investment plan lacks because you don’t have enough money even at 60 years.

3. State the details asked in an honest manner. If you are smoker, then state that. If you are hypertensive (=high blood pressure), please state that. Etc.

4. If the company asks for a medical test, let them do it. If they don’t ask, then don’t force it. Let them do it in the way they want.

Cover Amount:

What is your NET Annual Income? Annual income = This you can get by multiplying monthly income x 12.

· If you are below 35 years, multiply it with 15.

· If you are between 35 and 50, multiply it with 12.

· If you are over 50, multiply it with 10.

There are multiple ways to do it, but for a Zero Level person, above is a decent thumb rule.

Some good companies to go to are Aegon, ICICI, HDFC, Kotak.

Work done till now:

1. Start a mutual fund account with one/two AMCs and put money in the liquid fund.

2. Got health insurance.

3. Got life insurance.

Now to the question of how to go forward about the monthly fixed/variable salaries.

The most basic rule of Saving/Investing is Earn more, spend less. If you are not doing that, no investment plan is going to get you off the ground. You are digging a hole faster than it can be filled.

Some more Terms:

1. ATM card (=automated teller machine card). Basically, a historical thing. It was used in an ATM machine (please, I am not going to tell what an ATM machine is!!) to transact. Not available anymore, in a working condition.

2. Debit card (ATM card functions plus Can be used at merchant’s outlets namely stores, hotels, and online purchases). Since it has ATM card functions also, can be used freely at ATMs.

3. Credit card (this is not an ATM card but can be used at merchant’s outlets).

4. To use in ATM machine: please use Debit card ONLY. Never a credit card.

5. To use for shopping: please either use Cash or slightly prefer a credit card than a debit card. Basically, cash > credit card > debit card.

How they function:

Debit Card: your card is associated with your real bank account number. And the amount currently in your bank account is the limit for that debit card. So, if the account has 5,000 rs, then you can either withdraw cash up to 5,000 or make a shopping purchase for up to 5,000. If you accidently tried to do a shopping of 5,001, then it will be rejected on the spot.

Credit Card: your card is associated with a virtual account, which has a limit. This limit is decided by the bank/credit card company (yes, American Express is an exclusive credit card company without an associated bank, while ICICI bank has both services). This virtual account works like a postpaid mobile bill. Whatever purchases you make are added up and you are presented a bill at the end of month. You are given 20 days to pay up that bill. If you pay within those 20 days (before last date) AND, this is really important, if you pay either the full amount or any amount more than the bill, then GREAT. You managed to use extra money from the bank at zero cost to you practically. Continue this always.

Never pay only the Minimum Amount Due or even 1 paise below the bill amount. If you do that, you will incur heavy charges at the rate of 40% per year (which is at least 10 times your savings bank account interest rate).

Better still, don’t own a credit card till you are financially savvy enough. Use Cash and be merry.

Rules of Thumb with all those Sales advertisements and Big Annual Sales days

Rule 1: If you get an impulse to buy something, put a 72 hour rule between the urge to buy and the actual buy order.

Sidenote: New scientific studies have shown that the serotoninergic receptors take up to 72 hours to absorb the excess serotonin secreted when that buying urge gets triggered. I could have linked up those studies, but then this is all just scientific mumbo-jumbo to really convince you about the 72 hour period! There isn’t any such study known to me. Just kidding.

Rule 2: Please delete all those shopping apps from your smartphone, namely amazon, flipkart, myntra, etc.

Sidenote: You just need one app – Headspace for meditation during those buying impulses. Again just kidding.

Rule 3: Start automated investment setups, so that your money goes away from bank account before you can even think about spending.

Flexi Rule 4: How much to Save?

Now that we have curtailed spending and have easy setup for investing, the basic question is how much you should save?

The basic idea is Save as much as you Reasonably can. If that is 60-70%, good (Pattu does that, I do that). If it is 30%, well and good. If it is 10%, again decent, since it is better than 0%. Once you start seeing results of your savings, you will get better. With better incomes, and lesser spendings and more focus, the rate of savings will increase. Don't get limited on to 10%, since that is what I have seen most recommended - that amount is seriously insufficient.

How to go about putting the money which has been allocated for savings/investing?

How to decide how much to put where?

We will create two categories or my preferential term Baskets (or Buckets).

Basket 1: Money which can be needed in next 5-7 years

Basket 2: Money which is needed after 5-7 years.

Why 5 years? Because that is the cycle of our national elections! Just kidding. It is just an arbitrary number but 5-7 years is a reasonable. If you like 7 years, keep it 7. Say if you like India (5 letters), keep it 5 years and if you like Bharata (7 letters), then keep it 7 years.

​

Basket 1

Aim: money which is needed within 7 years.

What to use: If you are using ICICI Liquid Fund - Direct option. Then, a good option to use here is ICICI Prudential Banking and PSU Fund - Direct option. It is a conservative debt fund with very low chances of reduction in value. If you are using Parag Parikh Liquid - Direct option as your goto Liquid fund, then a good choice for this Basket would be their Parag Parikh Conservative Hybrid - Direct fund.

Basket 2

Aim: money which is needed at least after 7 years.

What to use: Now this is a little more complicated, so we will go step-by-step.

Part A: Some terms explanation needed first (The whole post is Here). I have put it here again, because I fear that a link may be distracting.

Cash - The money is with you physically. The closest equivalent is a Current / Savings account in a bank.

Bonds - You are giving your cash to someone who will provide you regular payouts at fixed intervals and give you back a predecided lumpsum at the end of the period. Sometimes, you can skip the payouts and ask for them to be given at the end of the period (eg, compounded growth option of fixed deposits or bonds). When you invest Rs 1000 in a 9% FD for 1 year , you are basically giving 1000 now with the promise that the bank will give you 1090 at the end of 1 year.

Depending upon the quality and return-back capability of that someone, the net lumpsum and payouts vary. A govt backed bank / agency will give you a lower lumpsum with a higher degree of probability that it will return you the money than a small private business.

Stocks/Equities (=something related to Sensex/Nifty) - You are giving cash to someone to hand over to you a part of a company so that you can get the payments (called dividends) declared by the company. There are no guarantees of the amount or the interval of these payments. There is no fixed time interval or a lumpsum at the end of a time period (effectively holding period is infinite).

To assess these payments, a higher level of understanding is required (higher as compared to above options) to assess the quality and probability of the company to provide those payouts in the future.

Part B:

For long term money (>5-7 years in this case), I will just cut the complications and suggest to put money in a single fund. That would be ICICI Multi-Asset fund - Direct option. The reason is that this fund will give you a 65% minimum equity, some gold, some real estate investment exposure and reasonable bonds. Plus, the biggest benefit is the built-in rebalancing inherent in this style of fund. As an alternative, Parag Parikh Flexi Cap fund - direct option would be good choice too in this basket group. Just one single fund with predominant Indian equities and 20-30% foreign equities.

More terms:

SIP (systematic investment plan) – this is a way to invest a fixed amount of money on a particular date periodically. They can be applied to any mutual fund, and is not applicable only to equity funds. They can be started for the all the above funds.

Mutual Fund – please refer to this post.

More Questions:

1. How long to continue the above combination? For 3-4 years at the least. Ideally 5 years.

2. Should I increase the money when I get a raise next time? Of course. When your income rises to say 60,000 then increase the amounts to 15,000; 7,500 and 7,500 per month.

3. Which date should I put the SIP date on? Put it 7 days after your normal salary day. So, if you receive your salary on 1st, then put SIP on 7th. Why? Because sometimes the salary gets delayed, and then your SIP will get skipped. Don’t worry, they will not charge you money for that skipping.

4. Why equal divisions? I am smart enough to calculate the exact ratios. Well, if this series has woken you up to that level of smartness, indeed do those calculations but do start investing within this month onwards, rather than doing all those calculations only. Stop the action paralysis and get a decent start NOW. Rather than an optimum start some months/years down the line.

5. Why these funds only and not any other? Because I am saying these funds are good enough for long term holding. I have personal experience with each of them. Pattu can vouch for them as well.

6. What if I need to plan out 80C investment also? Opt for Parag Parikh's taxsaver or ICICI Prudential Long Term Equity fund - direct option (their taxsaver) and use it for complete usage of 80C limit. No need for PPF or SSY or any of the moneyback / endowment / insurance plans. Keep it really simple.

To summarise the approach (across 4 posts):

1. Have 1 bank account with netbanking enabled.

2. Keep some amount of money in that account, while rest of the money should be moved to a liquid fund. Or FD, if the tax rate is less for you (10% bracket max.).

3. Get a health insurance, if not done yet.

4. Get a life insurance.

5. Do less spending.

6. Don’t get a credit card. Have a debit card and use cash.

7. Target a savings amount (50%, 30%, 10%, whatever and gradually either increase that or increase income and keep that ratio intact).

8. Put 2 SIPs, 7 days after salary credit into account, for the relevant amounts.

9. Do this for next 3-5 years.

Ping me after 5 years for what to do next!!

Addendum:

Why such a plan combination? This is for those who want to know more intricacies of the choices.

1. We have got 3 funds which correspond and take care of respective baskets, across 1/2 AMCs. Much easier to start and manage. Eventually, when there will need for switches between these funds, then it remains easy.

2. Till 1-2 crores of amounts, I don’t see any real need to have more funds than these.