Good Money Habits

Abhishek: Welcome to the Kotak Money Watch, a podcast series where we talk about finance and how it affects you. This topic deals with the money that we spend. To talk about it, we have K V S Manian, president, Kotak Mahindra Bank (Consumer Banking), and he has coined an acronym – BIRDS – which is his mantra for savings, etc. Hello!
KVS Manian:

What is ‘BIRDS’?
KVS Manian:
BIRDS is an acronym which signifies five key investment or money habits.
‘B’ stands for Budget. You must have your budget in place. ‘I’ stands for manage your investments well. ‘R’ is for plan for your retirement. ‘D’ stands for manage your debt. ‘S’ stands for secure your family.
These are the five key mantras -- five Good Money Habits – that will help you manage your money better.

Okay, let’s look at budgeting. How do we start?
KVS Manian:
I’ll go back to my hostel days. My dad used to send me Rs 200. At the time, Rs 120 a month was enough. I spent it on food and some Rs 20 for tea. So I had a budget. It’s important to have a budget where you say this is my income and this is what I can spend. You can be rich by making more money or spending less. You must have a reasonable, realistic budget, and you should avoid impulsive purchases. In your budget, you can put aside some money for fun. Having a budget is the first good money habit,

How do you keep track of the budget?
KVS Manian:
There are lots of tools available, like Money Manager, money management tools, etc. We at Kotak too will soon launch a personal financial management tool that will help you manage money better. Also, ensure that you use whatever loyalty points you earn on various cards and all discounts available from service providers. You can save a lot of money this way.

What about your second acronym, ‘I’?
KVS Manian:
You know I talked about impulsive purchases, I think credit cards land up encouraging impulsive purchases because you need not have money in your pocket and with plastic, you can just use it to make a purchase. So I think cards are a dangerous thing if your are inclined to be impulsive. So I think you must control that. It's easier said than done, I understand that but I think it’s a very important money habit. Part of the budget process is also to avoid being impulsive as we said and I would suggest that people should not look for much higher limits on their cards. One of the things that aid impulse is that you ask for a high limit on your card and therefore it increases your ability to spend and therefore impulses are kind of given  momentum. So I think to keep the limits reasonable is important. So I think, cards, you must have because they are convenient but at the same time you must keep the limits low.
Managing your investments is about setting the right, realistic goals. So the first point is to set goals. Second, avoid investing into complex instruments. You must decide an investment allocation based on your risk appetite and stick to it, irrespective of the market.

Is there a formula for this allocation?
KVS Manian:
Yes, the rule of 100. Deduct your age from 100, and that would be your ratio between debt and equity. The thumb rule is that the younger you are, the longer you have to plan your investments and therefore the higher should be you equity allocation. Debt is supposed to give you steady returns in the long run but equity can give higher returns.
So if you are 25 years old, and you put 75 percent of your money in equity, it is expected to grow well. Coming back to risk appetite, if you have aggressive risk appetite, then you would invest more in equity: in which case even 80 percent investment in equity is good. But if you are a conservative type, even 10-20 percent is high.
Investment is as important as your health, so it is important to consult an investment advisor to help you gauge your financial health and to keep from harming it. The advisor helps you plan your investment, helps set goals, looks at your risk appetite, helps make allocation and then advises you to stick to it.
Thus, ‘I’ stands for managing investments and all these things put together. It’s a good idea to have an investment advisor.

Moving to ‘R’ for Retirement. How soon should one start thinking about it?
KVS Manian:
The earlier you start the better. Many people think that you need a lot of money to plan for money later. I will just give you a small example. If you had a sum of Rs 1 lakh today and you invested it for 20 years at 10 percent interest, it will rise to Rs 7.5 lakh. But you can get the same result by saving Rs 1,000 for the next 20 years. So, you need not have a lump-sum right at the beginning.
Saving regularly over a period of time and starting early are the most important things.
If you plan for retirement, plan for long-term goals. Retirement is one of the biggest goals. The idea is to invest regularly, save regularly – here instruments like recurring deposits, systematic investment plans, insurance, etc come in handy.
There’s one more thumb rule: the rule of 72, which tells how to double our money. This rule of 72 is not perfect, but it points a person in the right direction.
Say, you want to double your money in 10 years. Then, your rate of investment should be 72 divided by 10: that is, 7.2 years. Similarly, if you are getting 10 percent returns today, it will take you about 7.2 years to double your money.

Talking about interest rates, should we wait when we read in the papers about high inflation, etc? Or is there a mantra you suggest?
KVS Manian:
One of the mistakes lay people make is that they try to time the market. When we talked about regular investments, having an allocation and sticking to it, we meant that there you will not time the market. Every month just put Rs 1,000 in equity (shares), Rs 1,000 in RD, etc…. Just keep doing the right thing.
There’s a lot of data to prove that very few people succeed in timing the market and hardly ever the common man.
Also, the common man should take note of the power of compounding. Einstein once said that the biggest force on earth is that of compounding. That’s how Rs 1 lakh turns into Rs 7.5 lakh in 20 years: all because of compounding, where your principle earns interest, and the interest too earns interest.
The habit of saving regularly is an extremely Good Money Habit. But trying save when possible does not work, it loses the power of compounding. But the moment you are disciplined about saving, you maximize the power of compounding.

Let’s now examine the fourth alphabet, ‘D’. So how do we plan our debt knowing that we need to buy a house, a car, etc?
KVS Manian:
Yes, ‘D’ of the BIRDS is about managing your debt, as debt can be a killer.
Let’s take an example: you have one rupee, you borrow Rs 9, and then invest the Rs 10 into something that gives you a return higher than the cost you paid. Meaning, let’s say you borrowed Rs 9 at 10 percent. So you invest your Rs 10 at the rate of 20 percent. At the end of one year, you would have earned Rs 2. When you get back this interest and your principle, you get Rs 12 back. After you replay the Rs 9, you have about Rs 3 left, minus the interest you pay for the debt. So effectively, you turned Rs 1 into almost Rs 3.
But the reverse could happen too, where you borrow at a higher cost and are able to earn less than that on your investment.
And such a situation can actually bankrupt you instead of tripling your money.

So one must never borrow and invest, right?
KVS Manian
: Debt is dangerous, so take it only for constructive reasons, like buying a house.
Now let’s look at credit cards. You spend money and then pay only the 5 percent minimum that is required on your card payment. This is debt. Rates on credit cards vary between 24 and 36 percent, while a typical home loan would cost you about 10 to 11.5 percent. So cards add up debt for wrong reasons, unlike a home loan which is for a good reason.
So control your buying impulses, control the card expenditure and don’t stack up debt on cards. Also, repay the debt as early as you can. Because compounding works in reverse too. The best thing to do is to repay your debt before doing anything else.
For example, if you get Rs 100 as salary, you should not take up debt which will cause the EMIs or repayments to go above Rs 40 a month. And credit scores are also very important.
There are agencies that score you for how creditworthiness. CIBIL is one such agency. They track your repayment record; even payment of phone bills, electricity bills, etc.. all of which impact your credit score.
So if you pay on time, your score will be high.

Now we move to the last part, ‘S’, the security of our family.  how do you propose people should approach this?
KVS Manian:
It’s extremely important to plan for any eventuality. For instance, when you have a house in a corporative society it is important to have a nominee or the house should be in two persons’ name. Even investments: fixed deposits, bank accounts, etc should have either nominations or joint holders, because if something were to go wrong, the process of getting that money becomes much easier for the family.
Second, everyone should have a will, so that your property (whatever you have; you needn’t be rich) can be amicably divided.
Third, insurance: you must have life and medical insurance. Also, if you have debt, make sure your insurance policy will pay off your debt. To leave behind debt to the family would be very, very cruel.
Any insurance policy you take should protect at least 60-70 percent of your current income, because protecting the family if something unforeseen happens is an extremely important part of Good Money Habits.

You spoke about some tools used to track our income or money or savings. Could you quickly take us through what that the Kotak tools are about?
KVS Manian:
We are launching a personal financial management tool which allows you to consolidate all your stuff:  you can put in all you have in multiple places, multiple banks, multiple mutual funds… All that you can put it in one place and then first it gives you a single view of all your things and all your investments and all your financial assets.
That is always the first challenge in managing your money knowing that what is where. So first the tool does that.
Second, it gets everything together. It has many calculators to help you too.
Third, it gives you graphs that have been made very easy for common people to understand. We have simplified everything. De-complexed finance, so to speak.

Is it available online?
It will be available on the internet.