This post outlines the basic steps in getting started on Personal Finance in India. If you have already covered one or more or all or more than what I outline here, Congrats! If not, please read on.
When we talk about Building Wealth, I mean it in perfectly legal ways. Meaning, you keep the Financial Records straight for yourself and the Government. You pay the taxes that you have to, while taking full advantage of all legally available breaks.
My definition of Wealth includes Health. One without the other is usually pointless. I am sure you don't want to spend sleepless nights, spoiling your health, hoarding money from the Government, and/or anticipating Income tax raids.
Here are simple things you should get started on, specially if you believe in doing things Online:
If you are the traditional kind and/or prefer to call up your broker, or get your maid to pay your bills, you can conveniently skip the parts relating to the Online/software stuff.
1. Get your PAN (Permanent Account Number). This is required for you to file your income taxes. PAN is nearly equivalent to SSN in the US. Now a days, it is not only desirable, but mandatory for even the most basic things in India (like opening a bank account).
Please visit http://www.incometaxindia.gov.in/PAN/Overview.asp for more details
2. Open 2 Savings Bank (SB A/C) accounts each with 2 (types of) banks. (1) A Nationalized bank like State Bank of India, Indian Bank, Bank of India or whatever (2) A private bank like HDFC or ICICI or foreign bank like HSBC. Make sure to get ATM Cards, check books and above all, access to Online Banking.
2a) Confirm if atleast 1 of the above banks supports Recurring Deposits (RD A/Cs), and understand how to open 1, on the fly, ideally Online or in Person (later). If they don't support RDs, then consider another bank. Recurring Deposits are important vehicles for Building Wealth. More on this topic later in a separate blog.
(For the uninitiated, Recurring Deposits are those that support depositing a fixed amount of money every month. The interest is compounded periodically, and you get a bulk amount that equals the principal + interest at the end of the term)
2b) Confirm if the bank supports opening Fixed Deposits (FD A/Cs) online, from your savings account. HDFC Bank supports this feature.
2c) Please make sure that atleast 1 bank supports Free Bill Pay Service.
2d) Understand all the Terms & Conditions and Fees. Make sure that there are no unreasonable fees for ATM use, check book privileges or draconian overdraft policies. Ensure that the interest rates are reasonable and in line with the general market. Ensure that this is a bank that respects you and treats you well in every aspect.
(For those from US, savings bank accounts in India, are the equivalent of checking accounts in the US. You can write checks against these accounts. The interest rates of savings accounts, are lower than other types of accounts, but are still way higher than the US)
The reason I recommend opening with 2 banks, is mainly to avoid risks. Not with your money itself, but your ability to access it everyday.
Although Govt/Nationalized banks are getting more efficient and they sometimes offer superior products/interest rates, they are notorious for their tendency to go on strike once in a while (e.g. if the employees or unions get upset with the Government regarding their pay).
With private banks you get efficiency and great Customer Service, but certain products are simply unavailable or not comparable with Nationalized Banks.
You open 2 types of accounts to hedge your bets. I have my account with HDFC Bank and I have enjoyed their service. The only flip side I have observed is that the number of ATMs in smaller cities and villages are low.
Note that your money in most commercial banks is backed up by the Reserve Bank of India (RBI) to the extent of Rs. 1,00,000/- per depositor per bank. For details, visit the RBI Site at http://www.rbi.org.in/Scripts/Cn_FAQs.aspx?Id=64 .
3. Open an investment/demat account with one of the above banks (Preferably private) so that when you buy shares or mutual funds, you can usually see them all in 1 website (portal). Plus the funds transfer between your savings account and the investment account is seamless. E.g. When you buy shares or mutual funds, money goes out of your savings account to your investment account. When you sell, the reverse flow happens. On top of it, your dividends (if any) flow to your savings account automatically without your having to do anything or deposit checks.
3a) Make sure the investment account also supports SIP (Systematic Investment Plan). SIP is a great vehicle to ride over and average out smartly, irrespective of Market Ups and Downs. More on this later.
4. If you don't already have a PC or laptop or a Mac (with all Virus Protection, Firewall, Malware/Spyware protection enabled), please get one. Please install broadband connection at Home, and install a secure browser. Another obvious one is to get a gmail or yahoo or hotmail e-mail id, which I am sure you already have.
I view these as investments (specially PC and broadband), as these will pay off in short order.
(I'm assuming that you don't abuse the PC or Internet for something else or spend most of your time downloading movies).
The Savings you are going to accumulate, in simply avoiding trips to banks and other places through the power of online banking, bill pay and certain other facilities will offset all your investment costs. In fact, handsomely.
For browser, I prefer and use OpenSource/free comparatively secure FireFox latest edition available for free download from their official site http://www.mozilla.com/en-US/firefox/personal.html .
For free virus protection, I use AVG Antivirus (Their basic free edition, not the paid one). As of writing, Microsoft is coming out with their free antivirus software Morro. Beta edition available for limited downloads from June 23rd 2009 at : http://www.microsoft.com/security_essentials
5. An office Program with basic spreadsheet capabilities (tracking expenses, doing calculations, reports, graphs etc.,). If you have MS Office installed, Great. If not, there are several comparable, competitive, sometimes better free/open source options available. I personally use (and love) Open Office available for free download at http://www.openoffice.org .
Another free and good one is Lotus Symphony available at http://symphony.lotus.com/software/lotus/symphony/home.nsf/home
6. Watch videos or demos or review manuals or get trained by the bank personnel on how to do basic operations on the online site. These concepts differ from site to site, bank to bank, and there's no way for me to generalize and teach you.
e.g. At a minimum, learn the following regarding your savings account:
(a) How do I review my a/c balance, review the checks posted, get recent statements or any period statements, transfer money to another a/c within the bank or outside the bank
(b) How do I order a DD (Demand Draft)?
(c) How do I use Bill Pay
(d) How do I open an FD, RD online?
(e) How do I contact the bank online?
(f) How do I change my statement delivery options?
(g) How do I change my personal profile, passwords?
(h) How do I call customer service?
(i) What happens if I forget my id or password?
Regarding your investment accounts, you should know the following
(a) How do I buy, sell shares/mutual funds?
(b) How/when does the money get transferred to my investment accounts?
(c) How do I review the list of shares/mutual funds I own?
(d) How do I review, know the value of my stock, MF portfolio?
(e) What is the brokerage commission on buying/selling shares?
(f) How do I call customer service?
With the above baby steps completed, I think you are in a very good position to Invest in various vehicles.
I'm getting concerned a little bit now. Before you get too excited and jump right in to invest in stocks, I strongly recommend that you read and understand certain important Personal Finance Concepts from good blogs and excellent Personal Finance literature. These will teach you about relatively risk free and smarter, ways of Investing.
As an alternative or In addition, you can wait to watch my own blog here for some sage advice shortly.
Important Note: If you prefer to do online banking, certain important security requirements are in order:
(a) Create Strong Passwords. Store your ids and passwords in a secure place or using encrypted /password protected software.
I use Opensource, Highly Secure and Free "Keepass", but there are several other options available that you can Google or Bing for.
(b) Don't reveal your user ids and passwords even to your close relatives and friends.
(c) Don't fall victim to phishing scams and/or reveal your id/and/or passwords to strangers or even bank reps. Most banks have a clear policy about what they can and can't ask you. Be clear.
(d) Frequently backup your hard drive to an external media, specially with all your online bank statements, passwords, sensitive personal data etc., and secure that also.
CAUTION: Don't take your Personal and Sensitive Data and Privacy Issue lightly . You could lose all your money and assets, just by being careless about your Sensitive Personal Information. Learn and adopt all the security steps and precautions thoroughly before you consider online banking.
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