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D. Murali

IF you think that engaging a Big Four to advise you on money matters will cost a fortune, Ernst & Young has a solution.

Its counsel, packaged as Personal Financial Planning Guide, and written by Martin Nissenbaum, Barbara J. Raasch and Charles L. Ratner, is now into fifth edition and out from Wiley (www.wiley.com).

Don't look at planning as `a dry document that gets tucked away to gather dust in a drawer,' the authors exhort. To them, plan is "a continuous system for staying on financial track as you pursue your goals and dreams."

Okay, plans are important, but aren't most of us struck by `financial paralysis'? If you are "unsure of where to begin, or even fearful of making mistakes," take charge of the planning process by first determining `where you are financially'. For this, the book offers a `net worth worksheet'.

Take heart, therefore, and identify your financial goals. Are you one of those who make financial decisions as each new situation arises?

If yes, the book will lead you onto a new path and help you list your financial concerns - such as to minimise income-tax, to accumulate a sizable estate to pass on to your heirs, and so forth.

To reduce debt, reduce expenditure. If you're asking how, the authors ask back: "Do you really need to maintain as high a standard of living as you currently have? Is it possible that some of your `needs' are really `wants' instead? Can you find places to trim expenditures even on items that are necessities? Would moving into less expensive housing, for example, ease the financial pressures in other areas of your life?"

In chapter 2, you'll learn how to build wealth! First lesson, save. "Unless you inherit a fortune, win the lottery, or simply earn so much money that you have all you'll ever need, you simply won't succeed at building wealth unless you save." Remember that `compounding' compensates `the pain of saving'.

On investments, a golden advice is that no single investment is right for everyone. Which is why, what ranks third in "10 big mistakes in investing" is `jumping on the bandwagon'. Also, it's naïve to expect one investment to accomplish all of your needs and goals. Draw up your `personal investment profile' factoring in your age and stage in career, need for liquidity, risk tolerance and so on.

Learn to let go when investing in stocks. "Some securities will never `come back'," point out the authors. "Even if they do, the rate of return you receive in the meantime may not rival what you would have gotten on an alternative investment." Another blunder is `timing the market', because "it doesn't work", according to the book. "The opportunity cost of investing in cash investments tends to exceed market losses over time."

No discussion of financial planning is complete without including insurance. In this sphere, the worst fault will be "knowingly underinsuring any major risk that you could cover inexpensively."

Another common gaffe listed in the book is to calculate life insurance needs by rules of thumb rather than by assessing your actual circumstances.

When you have an estate to pass on, you may ask, "Where should I place my will?" The authors answer: "It may be best to leave the original with the attorney who drafted the will. You should also keep copies of the will in your safe deposit box and in a safe place in your home so that it's quickly available when needed" and you're not around! The book discusses `sophisticated asset transfers' but the ideas, such as most other law-specific ones, are US-biased.

Get married in chapter 14. Puzzled? "No matter how rich in love, a couple that ignores its money matters will undergo stresses that another couple may well avoid by keeping their financial house in order." Marriages may be made in heaven, but expenses are incurred on the Earth. Beware: "Simply tracking income and expenses can grow so much more complex that even the accounting tasks involved may lead to disagreements and quarrelling." A fact that explains why accountants are said to make bad spouses!

Parenthood changes your finances, because a key decision you may have to make is about whether to earn one or two incomes. "Two incomes mean more money but more complexity in child-care arrangements." A caveat that may be appropriate to many couples is: Don't fall into the trap of letting your standard of living rise to meet the increased income when your spouse too starts earning.

The book helps you to cope with divorce also, something statistically common, but financially and emotionally devastating. On `dealing with parents' and `losing your spouse' there are separate chapters, looking at the financial dimension of what are usually relegated to the realm of sentiment. A get-wise-quick book!

BookValue@TheHindu.co.in

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