004 All the financial advise you will ever need

Scott Adams, creator of Dilbert, set out to write a book on personal finance. He subsequently was able to fit most of the advise that works for almost every American in a few bullet points. These are:

• Make a will.
• Pay off your credit cards.
• Get term life insurance if you have a family to support.
• Fund your 401k to the maximum.
• Fund your IRA to the maximum.
• Buy a house if you want to live in a house and can afford it.
• Put six months worth of expenses in a money-market account.
• Take whatever money is left over and invest 70% in a stock index fund and 30% in a bond fund through any discount broker and never touch it until retirement.

These concepts are universal, and hold up well even in the Indian context. We may need to tweak this a bit to reflect India-specific investment options, and that could be a good framework to plan for your own financial freedom:

• Make a will.
• Pay off your credit cards in full, every month.
• Get term life insurance if you have a family to support.
• Fund your NPS Tier I account to the maximum.
• Fund your MERA to the maximum.
• Buy a house if you want to live in a house and can afford it.
• Put six months worth of expenses in Fixed Deposits.
• Take whatever money is left over and invest in a stock index fund through the direct route and never touch it until retirement.

I intend to expand on most of the points above, so we can optimize our financial situation with patience, over time.

Notes on the deviations:

1. The Indian consumer does not have as bad a problem with Credit cards as the American does:
   1. 65.6% of Americans have at least one credit card, whereas only 3% of Indians do
   2. 92% of Indians pay a greater amount than their minimum due, compared to 89% of Americans
   3. However, the average American carries over USD 6,000 of credit card debt at an APR of 16%.
   4. More importantly, 78% of Indians ‘usually pay off their full balance, whereas 55% of American card holders do not pay off their balance each month.
   5. At 3% penetration, Indians shy off credit card usage altogether. This, however, is suboptimal, as Credit Cards are useful to build your credit history.
2. The National Pension Scheme (NPS) is modelled along the lines of the 401k scheme of the US, as a market-linked investment vehicle with penalties for early withdrawal. These investments are EEE (Tax exempt at Investment, Accrual and Withdrawal) when used as intended.
3. I borrow the concept of MERA (My empowered retirement account) from Capitalmind. This is a very good suggestion and I hope those in power can come up with something similar to enable Indian retirement planning.
4. If you are employed, you are already investing in debt through your Employer’s Provident Fund (EPF) account. You would not, typically, need to invest in debt funds over and above your PF investment.