Let’s talk money — Part 0 (Why!!?)

7 min readSep 4, 2020

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This 3 part blog series is intended for someone

Who is interested in personal finance but have no idea (students starting their careers)
Who has some idea on personal finance but doesn’t have knowledge on various financial instruments

And is not recommended for someone who is looking for “Get rich quick” methods

If you are not interested in personal finance or afraid of it, continue reading this part. If you have already decided to put your money somewhere else (other than savings account) but have no idea where to put, you can jump (Underlined headings are links) to Part 1 or Part 2 i.e

Link to second part: Let’s talk money — Part 1 (Where?)

I try to give a brief introduction to various financial instruments such as insurance, mutual funds, stocks etc;

Link to last part: Let’s talk money — Part 2 (Saving taxes)

For people who are recently employed, this is the biggest question and there are already tons of resources available answering the queries.

What I had done in this series is to catalog several resources that I found useful and addressing common queries.

This blog series is inspired from the book **“Let’s talk money”** by Monika Halan, an editor for LiveMint. It covers most of the financial instruments and is a good read for beginners. The importance of personal finance has to be stressed in today’s world and thus I felt to catalog various sources at one place in my own words. No particular product/company is intentionally endorsed in the book and the blog.

**Note:** In finance world, there will be lots of thumb rules such as the **50–30–20 budgeting rule** which says “From your income put 50% to your needs, 30% to your *wants* and 20% to your *savings.”* Those numbers are for easy understanding and you can change based on your lifestyle (**Source**: Pinterest)

Debunking myths

Why do I need to do personal financing or financial planning? My money is in savings account and it’s 100% safe. Isn’t that enough?

To understand why, one needs to understand the term inflation. In layman terms, it’s “Tomorrow’s value for ₹100/- < Today’s value for ₹100/-” Everyone of us had heard stories from our grandparents on how they used to run house with just ₹100/- and we might had pondered what will we get with ₹100/- now!! Indirectly, that’s because of inflation.

Technically, inflation is “The reduction in purchasing power of money”. Your parents bought a bike for let’s say ₹10,000/- Now, if you want the same bike, you maybe spending more than ₹50,000/- Inflation is one of the reasons for this to happen.

Summarizing the effect of inflation. In short, the power of ₹100/- came to ₹1.2/- within ~ 60 years

The Government of India decides what should be the inflation rate (an example report) based on various factors. A non-technical, naive example is as follows (might have flaws, it’s for basic intuition):

Assume the inflation rate is 6%. A normal savings account gives an interest of 4% (while writing this blog, all the interest slabs were further reduced because of Covid, GDP decline etc;). Suppose you place ₹100/- in savings account on 1st Jan 2019. On 1st Jan 2020, your account balance will be ₹104/- But whatever you can buy on 1st of Jan 2019 with that ₹100/- goes to ₹106/- (thus you are actually short of ₹2/- to buy that product). Here I assumed that “Reduction in purchasing power →Increase in prices of goods”

Now just assume a larger amount for a larger period of time to understand the real effect.

So, one’s motto should be to place money somewhere which beats inflation.

I don’t believe in stock market. It’s just based on luck, so I am not interested?

Okay. First of all, “Personal financing != Investing in stocks”. Stocks are just a part of it. So, if you don’t like stocks but want to do personal financing, it’s perfectly alright.

To answer your question, obviously there’s luck factor associated with stocks. But it’s not like throwing dice i.e stocks won’t work purely on luck. People will do a lot of research on companies (fundamental analysis, technical analysis, mispriced opportunities) before investing and it’s a whole different world.

An example illustrating Ponzi scheme (**Source:** Link)

Note: But if your concern is that stock market is a Ponzi scheme, do check out this video and technical blog for more details. Beginners can totally avoid this note.

I am afraid that wherever I invest money, it will be taken by someone?

Yes, it’s true that our country had witnessed some scams like Harshad Mehta (1992), Satyam scam (2009), Vijay Mallaya (2017), Nirav Modi (not relevant to stock market) and so on. The regulations had improved a lot after every blow it had faced and it’s almost safe to choose investments in Stocks/Mutual funds because it is monitored by Government of India (through SEBI — Securities and Exchange Board Of India, the board which regulates market)

Is there anyone who controls all these prices so that only a minor group gets benefited?

For starters, this is a perfectly genuine question because most of the time we hear anecdotes regarding many people who lost money in stock market. But you can be sure that neither one person nor one organization (including SEBI) can control the prices of each and every company.

Yes, big companies like Reliance, Infosys has major pie in Indian Market which drives the overall flow of money but it doesn’t mean that someone out there is sitting in front of a system and changing prices. Customers are the real controllers.

I believe I might need money immediately incase there is an emergency. So, I plan to place all my money in savings account

Monika Halan offers a suggestion from the book “Let’s talk money”. If your salary is Rs. X/year, try to save 2–3X in your savings account labelled as emergency i.e you should use it only in case of emergency. Once you are done saving there, you can start investing and can forget about emergency.

Why it works? In short, human psychology. Once we strongly label something, we don’t intend to use it for other purposes.

In the book, Monika suggests that once your salary credits (probably 1st of every month), split it into 3 parts and transfer to 3 separate accounts which are used for daily use (Blow), safety (Mojo) and investment (Grow). Use the money only for it’s labelled purpose. If you feel that having 3 accounts is messy, just imagine that it is a one-step process for next 30–40 years and this helps in clearing confusions about where your money flows in long run. (Source: Link)

I will invest when I have lots of money because now I have loans to repay and monthly expenditure.

You need to invest because you want to end up having lots of money. It’s like saying, “I’ll start dieting/exercising once I become fit”.

Investment → Increase in money, with risks involved (not the other way around)

“You need to feel and live at the moment (Carpe Diem), not spend everything you have at the moment” — Reduce your expenditure based on your income

Regarding loans, you might opt for EMIs (because loans do offer tax benefits, more on last part). But again, it’s your personal call.

Suppose, one day I wake up and see that the company I had invested in just disappeared (or gone bankrupt). What happens then?

As funny as it may sound, this is a possible scenario and had occurred several times in the past. For starters, the Govt and SEBI will take care (though you might not get your entire capital). If you want more about this, check this video.

The good part is, one can easily avoid this scenario with simple practices such as “Don’t put all your eggs in one basket”

What about Fixed deposits (FD) and Recurring deposits (RD). They offer good returns right!!?

If you are following news, very recently the Government has declared in reduction of interest rates for most of the bank instruments including FD and RD. Though it’s 100% safe, the returns are also nominal.

Okay, I will invest in stocks. Do you (or someone) provide any form of guarantee?

A big NO. If someone says they provide guarantee, there’s some serious issue. The only rule in finance is “Higher returns ← → Higher risks (So, advised to stay for longer duration)”. So, if you are ready to take high risks, go with stocks. If you are not comfortable with high risks but are interested in investing in stocks, go with Mutual Funds (more in next part). The key is to find the right company (in case of stocks) or right scheme (in case of Mutual funds) and invest in it. And when I mean by right company (or right scheme), it’s based on perspective such as:

I want the highest possible returns, I am okay with high risks and can stay in market for a long time
I want my capital to be safe and if possible more returns compared to FD
I want high returns, but can’t take that much risk and can stay only for few years

In short, you are responsible for all the decisions and risks involved in any sort of investment. Financial advisors can guide you, but no one can guarantee.

Check the next part explaining various financial instruments

Link to second part: Let’s talk money — Part 1 (Where?)

I try to give a brief introduction to various financial instruments such as insurance, mutual funds, stocks etc;

Link to last part: Let’s talk money — Part 2 (Saving taxes)