Book Review — 16 Personal Finance Principles Every Investor Should Know

I read this book a few years ago. It had an impact then, and I thought it was time for a refresher. I managed to speed read this within a week.

As it usually happens, when I read a book again after a long gap, its easier to identify the parts that are more interesting and important to remember.

Given below is a summary of key concepts with examples from my own life.

Compounding — Although I’ve been an avid mutual fund investor for more than 10 years, I don’t have any investments that are older than 10 years. In the past, I’ve had a tendency to bag my positive returns at 30%, 50% or even 80%. I thought I was cashing in at the right time. Only now, I’ve realized that I could have made a LOT MORE, had I stayed invested.

Invest early and stay invested

This doesn’t mean that one should be invested in equities forever, but can you stay invested in equities for at least 10 years without disturbing it? To be specific, without disturbing “componding”? Its a lot harder than it sounds.

Insurance — Like everyone else, I fell into the trap of buying an LIC endowment policy during the initial years of my career. I laughed at the concept of term insurance — why would anyone want to invest in something that doesn’t give anything back? Thankfully, I learned my lesson quickly.

The best life insurance is term insurance

I see many youngsters at my workplace, falling into the same trap of LIC endowment policies. I managed to save one of them because I overheard her conversation. Another one told me she already had 4 LIC policies thanks to her parents. When I asked her, she told me that since she’s already invested, she has no choice but to continue.

This is commonly referred to as the sunk cost fallacy. More than a decade ago, I made a decision to close one of my LIC endowment policies with a 50k premium after its first year. Sure, I lost money, but had I not done that, I would be paying that premium till this date.

Goal Setting — When it came to investing, I used to shop for products, find what’s exciting and invest. Thanks to moneycontrol & valueresearch, information was easy to find. Goal setting was the last thing in my mind. As it turns out, I’m not alone in this approach to investing. Although it feels natural, unfortunately its not ideal.

The ideal approach to goal based investing works something like this -

1) Set a goal (my daughter’s college education)
2) Set the target date (12 years from today)
3) Set the target amount (₹50 lakhs)
4) Calculate the investment amount (₹1.5 lakh every year)
5) Choose a financial product with the appropriate risk (PPF)

What’s important to remember is that everyone’s financial life is unique. So what works for me, may not work out for you. Our risk appetites are different, and hence the choice of financial products will also be different.

Simplifying — I used to enjoy the process of researching mutual funds & finding the “best” one to invest. Few years later, I ended with more than 20+ mutual fund investments. Suffice to say, my financial life was a mess. I finally decided to consolidate and trimmed down my mutual funds to a handful. My financial life has remained a lot simpler since then.

Less is more

Automation — There was a time when I went back to school to do my MBA and stopped working. My wife had taken some up some consulting assignments. Unlike before, monthly income was neither regular nor consistent. So I had to adapt my investment strategy and this is what I came up with.

Basically, I invest in a liquid fund as and when I get income, while I have a steady Systematical Transfer Plan (STP) to invest in equities. To get things going, I invested a lump sum at the start by breaking some other investments, so that the income was just a top up. This approach helped me weather the storm until I got back to the industry. What’s more is that even today, with regular & predictable income, I still continue this strategy.

When things are on autopilot, we tend to let them become part of our life

Teach your spouse & kids — My wife typically stays away from investments. Recently, I shared my annual financial review & have been spending 15 mins a week helping her get a better understanding of where our money is invested. There is still a lot of work to be done, but with steady progress, I’m sure we will get there.

How do you teach your kid about banking basics? Lets say you give her ₹500 per month for pocket money. Allow her to keep a portion of that with you to earn 10% monthly interest. Not only does this illustrate compounding, but it also teaches your kid about delayed gratification. My daughter is 6 years old and probably too young now, but I can’t wait to try this out someday!