D. Murali

MERE literacy is not enough to keep you out of the poorhouse unless you're also financially smart. This is the straight message of G. Cotter Cunningham in Your Financial Action Plan, from Wiley (www.wiley.com). The book outlines `12 simple steps to achieve money success,' to impart `financial literacy' through `practical guidance', even as you are "walking around the financial jungle with paper bags on your head."

Money doesn't buy happiness, you may philosophise. True; yet, nothing prevents you from buying peace of mind by managing money effectively, the author reminds. "Those who are financially savvy are much more likely to be satisfied with the state of their personal finances and much more in control."

What comes first is a discussion of `rainy day funds and sunny day savings' to prepare you for the bad times. Rule of thumb from Cunningham is this: "Stow between three and six months' worth of income in someplace where it earns interest until you need it." Don't touch it for minor hiccups but reserve it for the really rough patches. Remember, "Saving is not just about putting money aside; it's about collecting interest." Which means, you're not stashing cash in the mattress or the freezer!

A diversified portfolio reduces volatility and offers good return, but don't make the common mistake of expecting your stocks to perform consistently year after year. The author recommends `systematic rebalancing', or a review of asset allocation, at least once every year.

Lest bills give you the chills, "gain control of your expenditure." Be honest, and ask yourself how many times you've suffered interest and penalty for delayed payments. An alarming quote is from Robert D. Manning's Credit Card Nation: "The average household pays $1,700 in interest a year." Plug that US data alongside another statistic for 2003, that 1.65 million "declared bankruptcy", and you'd understand cause and effect.

Grandpa wisdom from the author is direct: "People who pay their bills as they come in are more satisfied and less stressed than those who do not. Just the simple habit of paying each bill as it arrives can make a big difference in your quality of life."

`Budget' is for the economy and also for you and me. "Do you have a monthly budget? How fastidiously do you follow it?" If the answer is `no' for the first question, the second becomes irrelevant, though you may academically acknowledge the importance of budgets. Cunningham's advice is plain: "If you make more than you spend, it's time to plan what to do with the excess. If you spend more than you make, figure out how to trim the fat." He counsels categorisation of expenses into fixed, variable, and discretionary.

"Even if you have no financial threats on the horizon, the process of drawing up a budget can be eye-opening. You could discover that you are spending more than you thought on gizmos and gadgets and less on things that give you real, lasting pleasure."

Own house adds to your security but "don't wait for the perfect home" because as you wait, market prices may be climbing. Expert opinion is that you grab the home that meets 90 per cent or more of your requirements. Keep aside at least one per cent of your home's purchase price "in a household fund for emergency repairs". Be warned: "Ignoring small problems (such as a leaky toilet) easily can lead to big, costly ones (a rotted floor, termites, and mold, for instance)."

Retirement is a reality, and so be prepared for it, at least in four ways: Shuck off debt. Pay down your mortgage completely before retirement. Do not count on government welfare to provide for you. Do not forget to consider long-term care insurance.

Brace yourself for the next question: "Do you read your bank account statements regularly?" Reading is not enough; reconciling is a must, because "banks frequently make mistakes." Else, are you one of the many who "do not even open the envelope with their bank statement inside"?

On insurance, three Cs to remember are coverage, convenience, and cost. "If you're the sort who considers a 99-degree temperature good reason to take to your bed, you may be better off paying a higher premium and paying less for each doctor's visit," is a line for the hypochondriacs. On credit cards, sage counsel from the book is to avoid using the plastic for meals, vacations and other `perishables'. Also, get rid of cards you don't need.

Have the will to make a will, though you may be "too busy living to think about dying," unless you wish to belong to the majority who die intestate. The author's solemn tips for the financially literate are: "Name a guardian for your children and for their money and possessions. Name an executor to make sure your wishes as stated in the will are carried out. Stipulate where the money to pay taxes, debts, and your funeral should come from."

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