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Tuesday, February 14, 2006

Things parents wont tell you about money

1. Sometimes debt is good

"Never borrow!" These words were drummed into me since I was little. Debt was always a four-letter word with my folks.

But now I realise that at times, debt makes perfect sense. The key words: at times. Not always.

One instance where borrowing makes sense is Home Loan. This one is a dire necessity.

And, you get tax benefits on the principal repayment and interest payment.

2. The stock market is not only for gamblers

Horror stories of naive investors losing their shirts (and a whole lot more) in the market are a dime a dozen.

And, so are those of savvy millionaires.

You could lose all your money in the stock market. Or, you could make a fortune.

Equity may be intimidating. But over time, it offers THEE highest return compared to all other investment assets.

When you invest in shares, you do not invest in the market. You invest in the equity shares of a company. That makes you a shareholder or part owner in the company.

Since you own part of the assets of the company, you are entitled to the profits those assets generate. Or bear the loss.

Owning shares, therefore, means having a share of a business without the headache of managing it.

As the business does well and profits increase, the value of your stock goes up. Hence, you can make phenomenal profits and tremendous losses too. After all, businesses are risky.

The trick is not to get greedy and to be prepared to stay in for the long haul. You lose out when your sole intention is to make a fast buck.


3. Credit cards can actually work for you

Yes. Credit cards does not necessarily be an evil thing.

One can get great insights into one's spending habits by scrutinising their monthly statements. It promptly tells if you are spending too much on eating out or shopping.

Also, it helps one access interest-free credit. You don't have to pay for anything right away. You pay your bill when you get it at the end of the month. And the time frame from the repayment of one bill to the next is around 45 days.

This is great if I have to make a heavy purchase. I make it at the start of the billing cycle and repay it later when my salary gets credited to my account.

The trick, of course, is never to spend so much that you owe your bank money. That is when they begin to benefit from the card.

How do credit cards work

4. Jewellery is a lousy investment!

When you regard something as an investment, it should fetch you a higher amount when you sell. Unfortunately, jewellery does not always do that.

There is always a great amount of sentimental value attached to a piece of jewellery that makes selling difficult.

Even if you overcome that hurdle, you will face another. This time, with the jeweller.

He will talk about the design being old fashioned and outdated and nobody wanting to own such piece. That means a drop in resale value. Then he will check the purity of gold.

Don't be too sure that the jeweller from whom you purchased it has not cheated you. He may have stated the purity as 18kt while in reality it may be much less.

In India, it is safe to assume that most of jewellers sell jewellery with lower karatage than stated. Would you be any wiser?

Only when you go to sell it will you find out that you were cheated.

A jeweller buying a piece from you will not take your word for its purity. Even if the purity is mentioned, he will not go by it. He will test the piece himself.

And, if it is below the karatage you state, then you can be sure you got ripped off when buying it.

Jewellery is an accessory. A great accessory! But, a BAD investment.

5. The bank is not the best place for your money

Granted. Some amount of money should be kept in a bank for liquidity and safety.

Instead of keeping all of it in a savings account, put some in a fixed deposit. Some banks offer deposits that are linked to the savings account. Which means that the money earns a higher rate of interest and when you can withdraw it when needed.

Check out fixed deposits and bonds of other corporates and financial institutions. You also have post office saving schemes and the Public Provident Fund to consider. Liquidity may be a problem, but safety should not.

For liquidity and safety you can even look at cash funds.

Cash funds are mutual funds that invest in money market instruments such as treasury bills, commercial paper, call money and short-term bank deposits.

These are very safe (issued by government agencies, banks or reputed corporates) and have very short maturity periods (unlike those of PPF and post office schemes).

While the returns are much lower than equity and debt mutual funds, it is higher than a savings account and as safe.



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