When to call in a financial planner?
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InvestmentYogi attended a talk in Silicon Valley, California, by the bestselling author, Ramit Sethi, who recently wrote I Will Teach You to be Rich. His book was published in 2009 and became an immediate Amazon #1 bestseller.
Ramit is an American citizen of Indian origin who was brought up in California by Indian parents who inculcated values of savings, thrift, bargaining, and having fun once in a while.
He says his studies at Stanford in technology and psychology helped him understand the psychology of people and their money.
We summarise Sethi's talk while giving an Indian bent to the advice.
Please note: The Indian market advice adaptation is ours, USA recommendations are his.
Photographs: Investmentyogi and Rediff Archives
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Sethi started out by preaching simplicity in finances. "Don't try to save by cutting down on Lattes", he advised, "Look out for the big things and if you are on track there, don't sweat the small stuff."
He claims average people can have success by automating their investments, using psychology to help them save and aiming for a system where you get "85 per cent right."
He repeated several times not to try hard to save every penny and not to get stressed out and use up all one's will power. The idea is to set up automatic investing plans, like SIPs, maximise company savings plans and focus on the big picture. He suggests setting up multiple savings sub accounts to save for specific goals, like say marriage, buying a car, or spending on a vacation.
He spoke of 401K plans, the USA version of the Provident Fund.
In India, the Provident fund is primarily invested in Government debt (although the Government is making efforts to bring in professional fund managers and link it to the market). In the USA you can choose from many funds, risk levels, debt, equity and more. He fears the system is too confusing for most.
"When people have too many choices, they make no choice at all but put it off. Better to stay simple but be invested."
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His investing advice boils down to this:
- Max out your 401K (this is the Employee Provident fund equivalent. You should always be paying the maximum contribution since you get matching and it is a tax-advantaged account).
- Pay down debt
- Be sure you are properly insured
- Max out your Roth IRAs (closest equivalent is the public provident fund, another tax-advantaged tool)
- Then, if there is money left, invest in taxable accounts
How to become rich?
This advice must be adapted a little in India because here the Provident Fund provides only debt investment. We all need some equity to avoid our savings getting reduced by inflation and to keep up with the economic growth. So be sure to have your investments outside of the PF as well. Some good equity funds should be a part of your portfolio preferably through SIP (Systematic Investment Planning) route.
He advises "Earn More." He suggests doing side jobs, increasing your income at your job and making sure you are earning sufficiently. This may not be easy to follow in India as part time jobs are hard to come by.
Where to invest?
In the USA he suggests both lifecycle and index funds which tend to have low costs and are simple and straightforward. Fortunately India has some good Index Funds like Nifty Bees and Franklin Templeton India has such "LifeCycle Funds" also called "Stage of Life" funds.
They have different funds for people in different stages of life like 20s,30s,40s etc. Balanced Funds or Hybrid Funds in India also serve a similar purpose.
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