Financial Primer Ebook by Money-Wizards

Money-WizardsTM
Financial Literacy Primer
Design & Illustrations by Money-Wizards
2011, Money-WizardsTM
Self publishing
info@money-wizards.com
ALL RIGHTS RESERVED. This book contains material protected under International and Federal
Copyright Laws and Treaties. Any unauthorized reprint or use of this material is prohibited. No part of
this book may be reproduced or transmitted in any form or by any means, electronic or mechanical,
including photocopying, recording, or by any information storage and retrieval system without express
TM written permission from Money-Wizards
Table
of Contents
Table of Contents 1
Preface to the Third Edition 5
Preface to the Second Edition 7
Preface to the First Edition 9
Chapter 1 -Your Money Personality 11
Chapter 2 - Your Financial Identity 15
Permanent Account Number 16
Credit History 18
Questions 20
Chapter 3 - Banking 21
Savings Bank Account 22
Facilities that Savings Banks provide 22
Paying Money through Banks 22
Cheques 23
Standing Instruction/Direct Debit/ECS 24
Demand Drafts 24
Receiving money through Banks 25
Fixed Deposit Account 25
Questions 28
Chapter 4 - Electronic Money 29
Net Banking 30
Credit Cards 32
Understanding the Credit Card 33
How to use a Credit Card 34
Paying Credit Card Bill 36
Interest on Credit Cards 37
Applying for Credit Cards 37
An investor education initiative by Principal Mutual Fund Money-Wizards 1

Debit Cards 37
Mobile Money 39
Questions 40
Chapter 5 - Borrowing 42
What is Student/Education Loan? 44
How much loan can you get? 44
Repayment 44
Benefits of a taking a Student Loan 44
Other types of Loans 45
Questions 46
Chapter 6 - Investing 47
About Stock Markets 48
How do Stock Prices change? 49
Difference between Trading and Investing 49
Understanding common terms 50
Investing through Mutual Funds 50
How to Invest in Stocks 51
Investing through SIPs 53
Advantages of Investing through SIPs 53
Questions 53
Chapter 7 - Time Value of Money 55
What is Compound Interest? 56
How to calculate Compound Interest 56
Longer the Tenure, greater the impact 57
More frequent the Compounding, higher the impact 58
Higher the Interest Rate, higher the impact 58
Greater the Periodic Amount, higher the impact 59
Power of Compounding 60
1. Start Investing Early 60
2. Pay Debt as soon as you can 60
3. Be aware of Inflation 61
Questions 61
2 Money-Wizards An investor education initiative by Principal Mutual Fund

Chapter 8 - Insurance 63
Understanding Common Terms 64
Types of Insurance 65
How Insurance works 66
Questions 66
Chapter 9 - Taxation 68
Why do we have to pay Taxes? 69
Types of Taxes 69
Do YOU have to pay Income Tax? 69
How is tax collected? 71
What is "Tax Deducted at Source"? 71
What is Advance Tax? 71
Rights of a tax payer 72
Obligations as a tax payer 73
Conclusion 73
Questions 73
Chapter 10 - Getting started on the road to financial freedom 75
Your First Pay cheque 76
Saving a part of your income 76
Investing 101 76
Chapter 11 - All About Aadhar 78
How Aadhar can simplify your money life 79
Chapter 12 - UPI and You 80
And Finally 82

Preface
to the Third Edition
Dear Reader,
For once, very exciting things are happening in India. The Aadhar is a truly world class and
revolutionary scheme and is soon set to be a platform that has a billion users. The UPI (Unified
Payment Interface) takes the Indian payment system to a completely new level, something that is the
envy of even the developed world. In the third edition of this primer, I cover the basics of Aadhar and
UPI and explain how they can be useful to you.
On a different note, last year the primer and the YMO reached over twelve thousand readers! The third
edition that you hold in your hands is set to help over fifteen thousand readers.
Happy Reading!
-Venkatesh, Founder, Money-Wizards

Preface
to the Second Edition
Dear Reader,
The first edition of this primer received an overwhelming response. A lot of you got back to me with
several good questions on the first steps towards financial independence. Indeed, it is very heartening
to see today's youth showing interest in planning their finances and aspiring towards financial
independence.
There is a new chapter Getting started on the road to financial freedom, where I specifically talk
about the benefits of ELSS for the young first time investors. With tax saving and capital appreciation
benefits, the ELSS is best suited for people who will be earning their first salary over the next few
months.
Happy Reading!
- Venkatesh, Founder, Money-Wizards

Preface
to the First Edition
Dear Reader,
You must be looking at the title of this book and you may have many reactions. You could be Oh!
This is interesting! Let me have a look. Or you could be - Oh no! Not another book! As if college
books were not enough.
If you belong to the first category, let me not stop you. You can go ahead to the first chapter. Welcome
aboard. Happy reading.
For the rest of you, here's why you should read this book. You are probably a twenty-something, or
younger, enjoying the prime of your life. Very soon you will complete college, get a nice job that you are
dreaming of and then get settled. Or, you are probably not even thinking of the future.
Whether you are thinking about it or not, the future will happen. And not always in the ways that you
expect it to happen. Especially not in the ways you expect it to happen. I am sure you have received
advice from many people on what matters in life. Do not worry, I do not intend to add to the list of
advice.
I do, however, wish to tell you something: that college does not teach you about many things that really
matter in the real world. For example, you may learn some theory, some fancy terms that will help you
crack interviews and exams, but not beyond that. Do a simple Google on what they don't teach you in
schools and you will find lists compiled by experienced, wise and smart people who have figured out
things by themselves which they wish schools had taught.
One of the most important failings of the school system is that while it teaches you how to earn money,
it does not teach you what to do with the money that you have earned. One of the most important
lesson for life is in money matters and schools do not equip us adequately with this.
Learning about money is like learning to drive. It is not difficult to drive, but it is difficult to drive well.
So it is with money. Everybody manages, but few manage well. Just as the way to learn to drive is to just
hit the road and start driving, the best way to learn about money is also to start using it right away. Just as
it is dangerous to drive without learning safety precautions, it is also dangerous to dabble in money
without understanding the basics. You could end up losing everything you have earned and acquired if
you don't manage money well.
What this book attempts to do is to show you the basic building blocks of money management. What
they do, how each of them work, and also some tips for managing your hard earned money well. In
simple terms, this is like a driver's manual, and not a technology book for engineers. One does not have

to know about the mechanical details of a car to drive it. Similarly, this book presents the essentials of
money management in an easy way without the frightening technicalities behind it.
I want to spend a moment here to make the distinction between personal finance (which is what this
book is about) and business finance. When we talk about money lessons, here we talk about what are the
right things to do with the money that you as an individual make. How to make your dreams happen,
how to provide the best for the people you care about. Business finance, on the other hand, is about how
companies and organizations manage their capital. How to account for that, how to raise money, how
to use it efficiently, and so on and so forth. Some principles are common, but there are several
differences.
The most important distinction between personal and business finance is in that one can afford to skip
learning about business finance. If you do not want to take a job in the finance industry or not run your
own business, you can conveniently afford to overlook business finance, without being affected. Sadly,
the same cannot be told of personal finance. All of us, whatever subject we choose to study, whatever
job we choose to take, however different we may be in terms of earning levels and spending patterns,
each one of us needs to know the basics of personal finance.
This reader is a very simple, elementary introduction to some aspects of money. Hopefully, this will
trigger a desire to actually get hold of a steering wheel and start driving. Or, get you interested and to try
to learn more about money. Hopefully, you will come up with your own strategies to manoeuvre your
life when to speed, when to slow down, how to apply the brakes, how to handle steep curves, so on
and so forth.
If this reader arouses your interest, and you get intrigued and wish to learn more about money, there are
plenty of resources available. At Money-Wizards we have many programs that would satisfy your
appetite. Please do contact us.
We will start the book with a little fun ride. A simple questionnaire that will help you identify your
money personality in Chapter 1. Just for kicks, you could try it on your friends too. We will then talk
about your financial identity in Chapter 2. We will cover aspects like your Permanent Account Number
and your Credit History. One of the most critical aspects of owning anything is maintaining it, and a
bank is used to maintain your money. We will understand types of bank accounts and the facilities they
offer in Chapter 3. Chapter 4 will help you understand the latest technology in money. We will talk about
electronic money, plastic money and mobile money in this chapter.
Once we have familiarised ourselves with the basics, we will continue with learning, possibly the most
important lesson in personal finance, time value of money, in Chapter 5. Chapter 6 will talk about
borrowing and loans. In this, we will learn about student loans in detail and also briefly touch upon
some other types of borrowing. Chapter 7 is where the fun starts. We will talk about investing and the
stock markets and also about the basics of investing in stock markets.
We will wind up with briefly talking about two very important aspects of your money insurance and
taxes, in chapters 8 and 9.
Happy Reading!
- Venkatesh, Founder, Money-Wizards

Chapter 1
Your
Money
Personality

For a bit of fun, answer a series of questions to find your personality type. We think that will be a
revelation, to many of you this will highlight your own personality in managing money!
1. When friends are coming round to dinner do you

a. order a takeaway
b. buy some ready meals from the supermarket
c. see what you've got in the fridge
d. get out your recipe books
e. ask your friends to bring something with them
2. How do you feel about money?

a. I don't think about it
b. I manage to get by somehow
c. I think I should think about it more
d. I keep pretty good control
e. I always end up with more than I started with!
3. Saving money is
a. not something I'm interested in
b. really hard to do
c. something I aim for
d. something everyone should do
e. the most important thing about money
4. What are you doing to save for the future?

a. I'm too young to think about that
b. I will get round to it one day
c. I try and save a little every month
d. I have a plan and I'm sticking to it
e. I save as much as I can for the future
5. How often do you borrow money?

a. Always
b. Sometimes
c. Not often
d. Never
e. People borrow from ME

6. When you go to the shops...
a. I buy whatever I want to
b. I get distracted by so many things to buy
c. I make a list but don't always stick to it
d. I stick to my list
e. I buy what is cheapest
7. When planning a holiday, I

a. book the best holiday I can
b. make a choice at the last minute
c. shop around for a bargain
d. use the internet and adverts to find the best deal
e. stay at home and save the cash
8. When you feel a bit down, shopping makes you feel

a. happier
b. it takes my mind off things for a while
c. it doesn't make any difference
d. I wouldn't go shopping if I was upset
e. spending money makes me feel worse
9. What is your financial goal?

a. I don't really have one
b. to be able to afford whatever I want
c. to have enough to enjoy myself
d. to always know how much I have
e. to save as much as possible
10. At the end of each month I have

a. no idea what I spent
b. got further in debt
c. just about got by
d. planned next month's spending
e. saved a fair bit
Now that you have answered the questionnaire, let's see how you have scored.

Mostly 'A's?
You're a debt collector's dream! You have very little awareness of your money and this could lead to
trouble. If you carry on like this you risk getting into serious debt problems. It would be a good idea to
learn more about controlling your money before it's too late.
Mostly 'B's?
You're a casual debtor. You like to live for the moment and you don't think much further ahead than
lunchtime. You usually don't know how much money you've spent or how much you've got left. If
you're not careful you could become a perpetual debtor. A little bit of planning can make your money
work better for you and help you avoid stress.
Mostly 'C's?
You're a Smart Spender! You enjoy spending money but not wasting it. You are reasonably in control
but could benefit from a little bit of help. Getting a better grip on your money would make you feel
more at ease.
Mostly 'D's?
You are a careful spender. You know pretty much what happens to every penny. Unexpected expenses
can cause you a real headache. Learning more about money management will help you stay in control.
Mostly 'E's?
You're a Super Saver! The one thing you enjoy the most is having a tidy sum saved away for a rainy day.
That's not a bad thing but don't let it hold you back from enjoying what your money can do for you.
Copyright 2005 by Randy Glasbergen.

www.glasbergen.com
What good is online banking if you cant

download free money from the Internet?

Chapter 2
Your
Financial
Identity

You can do most of your normal activities without worrying about proving your identity. When you
take some important steps in life, you will need documents to prove you are who you claim to be. For
example, in your school, before applying for the board exams, your school might have wanted to see
your Birth Certificate. When you got admission in college, you had to submit your mark sheets. When
you take up a job, you will have to submit your college certificate, your school mark sheets and so on.
Your employer will need those documents to make sure that the person they have hired, that is you, is
actually the person you has written the exams and cleared them.
In a similar way, when you make some important financial decisions, the person on the other side will
need to verify that you are the person you claim to be. You might have come across this requirement
when you applied for a mobile connection. Most commonly, they would want to see some proof of
identity and some proof of residence. Today, there are many documents that you could produce as
proof of identity and proof of address. Commonly accepted proof of ID are Driving Licence and
Passport. Commonly accepted proof of address are Ration Card, Utility Bills (like EB bill, Gas bill,
Telephone bill, etc).
All banks and mutual funds require you to complete KYC formalities. KYC stands for Know Your
Customer and the controlling authorities have made it compulsory for Banks and Mutual Funds to
know their customer well. This means that these agencies will require you to submit proof of identity
(to prove you exist) and proof of address (to prove that you reside in a particular place).
In addition to the above documents of ID proof and address proof, many financial transactions will
need you to produce what is called the PAN card. PAN stands for Permanent Account Number, and it
is issued by the Income Tax Department. The main purpose of the PAN number is to identify key
financial transactions to curb tax evasion. This is done so by tracking the monetary transactions of
individuals. This number has been made mandatory for all major financial transactions such as opening
a bank account, receiving taxable salary or professional fees and even sale or purchase of assets above
specified limits.
In the section below, we try to address some frequently asked questions about PAN:
Permanent Account Number

1. What is PAN?
Permanent Account Number (PAN) is a ten-digit alphanumeric number, issued in the form of
a laminated card, by the Income Tax Department.
A typical PAN is AABPS1205E.
2. Why is it necessary to have PAN?
Many documents require you to mention PAN. When you are file the Income Tax return, you
have to quote PAN. Any correspondence with the Income Tax Department, whether you are
paying taxes or are disputing something, needs to go with the PAN.
It is also compulsory to quote PAN in all documents pertaining to financial transactions. Some
such transactions are sale and purchase of immovable property or motor vehicle or payments

in cash, of amounts exceeding `25,000 to hotels and restaurants or in connection with travel to
any foreign country.
It is also mandatory to mention PAN for obtaining a telephone or cellular telephone

connection. Likewise, PAN needs to be mentioned for most transactions exceeding `50,000
like opening a fixed deposit, or depositing cash, or mutual fund investment.
3. How does the Income Tax Department ensure that PAN is quoted on transactions
mentioned above?
It is statutory responsibility of a person receiving document relating to economic or financial

transactions to ensure that PAN has been duly quoted in the document. For example, when
you apply for a mobile connection, it is the responsibility of the person taking the documents
to ensure that you have mentioned the PAN.
4. Who must have a PAN?
In continuation with the above logic, if you correspond with the Income Tax department, you
need a PAN. If you perform any of the above transactions, then also you need a PAN.
5. Can a person obtain or use more than one PAN?
No. Obtaining or possessing more than one PAN is against the law.
6. What documents and information have to be submitted along with the application for
PAN?
a. Individual applicants will have to affix one recent, colour photograph (Stamp Size: 3.5 cms
x 2.5 cms);
b. Any one document must be supplied as proof of 'Identity' and 'Address'; and
c. Designation and code of the concerned Assessing Officer of Income Tax department will
have to be mentioned in Form 49A.
7. Which documents will serve as proof of 'Identity'?
Copy of school leaving certificate or matriculation certificate or degree of a recognized

educational institution or depository account or credit card or bank account or water bill or
ration card or property tax assessment order or passport or voter identity card or driving
license or certificate of identity signed by a MP or an MLA or a Municipal Councillor or a
Gazetted Officer.
In case the PAN applicant is a minor, any of above documents of any of the parents or
guardian of such minor shall serve as proof of Identity
8. What is proof of 'Address'?
Copy of electricity bill or telephone bill or depository account or credit card or bank account
or ration card or employer certificate or passport or voter identity card or property tax

assessment order or driving license or rent receipt or certificate of address signed by an MP/
MLA/MunicipalCouncillor / a Gazetted Officer.
In case the PAN applicant is a minor, any of above documents of any of the parents or
guardian of such minor shall serve as proof of address.
9. Do you need to apply for a PAN when you move or transfer from one city to another?
Permanent Account Number, as the name suggests, is a permanent number and does not
change during lifetime of PAN holder. Changing the address or city, though, may change the
Assessing Officer.
Such changes must, therefore, be intimated to nearest IT PAN service centre or TIN
facilitation centre for required correction in PAN databases of the Income Tax department.
These requests will have to be made in a form for 'Request for new PAN card or/ and changes
in PAN data.'
Credit History
Your financial identity should help establish not just who you are, but also how creditworthy you are.
For example, as a kid, you might have gone to the friendly neighbourhood store and bought chocolates.
You might not have had the money, but the shopkeeper might have given you the chocolates anyway
because he knew who you were (son/daughter of so-and-so). Well, he might have known every kid in
the neighbourhood, but he would have given the chocolates on credit only to some kids. He would do
so to those kids whose parents, he knows, will pay him without any problems. That is called credit-
worthiness how worthy you are of being lent to.
On winning the Nobel Prize for economics in 1994, John Nash, the illustrious American
mathematician said, I hope that getting the Nobel would improve my credit rating because I really
want a credit card. Humorous as it may sound, this Nobel laureate's statement emphasises the
importance of credit scores, not only for getting access to credit, but more so as vital reputational
collateral.
Credit History is something that has recently become very important in the financial lives of people.
There is a Big Brother that keeps track of all financial transactions that you do, especially those that you
do on credit (that is, not with your own money) and shares that information with anybody else who has
a stake in that information.
Let me help you understand what credit history is. It's a little bit like relationship history. Let's say you
have a crush on your classmate, and you want to take it one step further. You could of course, go ahead
and do what needs to be done. But more often than not, you do a little digging up. You ask around is
your classmate seeing somebody else. Has s/he had any relationship in the past? Who was it? When did
it start? How long did it go? Why did it break up? Was the breakup smooth and painless? With all this
information, you try to understand what can I learn from this? Does that history pose a risk? You will
then be able to take an informed decision.

When you go to borrow money from somebody, that somebody does pretty much the same thing. He
does a little digging up. Have you borrowed money in the past? How much? From whom? For what?
For how long? Did you pay interest regularly? Did you pay principal regularly? Did you have any
disputes with the lender? Based on this information, he decided whether or not he can go ahead and
lend you money.
You wouldn't really like it if a thousand people went about asking another thousand people about how
financially sound you were, would you? This is the issue of sensitivity. Because financial information is
sensitive, there is one organization which collects all this information from all your lenders, and
converts it into a numerical score. This score is then shared with anybody else from whom you intend to
borrow. This organization is called CIBIL (Credit Information Bureau of India Limited), and the score
is called a credit score.
In countries like the US and Canada, if you don't pay up your rent or electricity bills, even that gets
reported and gets factored in your credit history. India has not yet reached that level of sophistication
yet, but it is only a matter of time until it becomes a reality. In India, most of the banks which participate
in CIBIL give and get information from CIBIL.
So, what is this credit score and what does it mean? The credit score is a number between 300 and 900.
The higher, the better. A person with a credit score of 750 is considered more creditworthy than
another person with a credit score of 600.
Where is this used? When you apply for any fresh loan, your lender will ask CIBIL for your credit score.
This information is used in two ways. The first is to decide if they should at all lend to you. People with a
credit score of less than a certain score will not even be considered for lending. Banks will reject your
application without assigning a reason if they find your credit score bad.
The second is deciding what rate of interest they should charge you. Yes, that is right. If you have a bad
credit score, you will be charged a higher rate of interest. This works both ways. If you have an
exceptionally good credit score, you will be able to get a really good rate of interest too. This is because
someone with a good credit history is considered more reliable and less risky. So the bank is willing to
accept a lower rate of interest than usual. The difference between interest rates based on credit scores
could be as high as 1.5% to 2%; that means a 10 to 20% difference in the interest amount.
What do you need to do if you want to have a good credit score?

1. Pay your loans on time. Every time. Especially credit cards.
2. Keep credit card balances well within the credit limit given.
3. If you are not able to pay the full amount (for whatever reason), pay at least a little more than
the interest amount.
4. Resolve any disputes with credit card companies at the earliest.
5. When you pay off any loans or close any credit cards, make sure you get a No Dues
Certificate from your banker. This could be an important document in your support if you
have to resolve any dispute.

Don'ts:
1. DO NOT over-borrow on your credit card. If possible, keep your balance less than 50% of your
credit limit.
2. DO NOT apply to multiple lenders at the same time. It reeks of desperation, and all of them will
seek CIBIL reports at the same time. This will lower your credit score.
Did you know that no history is not the same as good history? No history means simply that. There is
no history. There is no information to know whether you are likely to default on your payments or not.
If you are looking at taking a housing loan or a vehicle loan in say, two years or so, it makes sense for you
to take a credit card with a small limit now. Build up a good history with that card by making full
payments on time. This will help you to get good rates on your loans.
Questions
1. Who among the following needs to apply for a PAN?
a. Person making a fixed deposit of more than `50,000
b. Person having taxable income
c. Person applying for a telephone connection
d. All of the above
2. If you have never borrowed any money from a bank or never owned a credit card, it
means you have an excellent credit rating.
a. True
b. False
3. To demonstrate credit worthiness, a person should:

a. Pay bills on time
b. Use ATM card several times a month
c. File income tax returns
d. None of the above
4. A record of borrowing and repaying on credit is called a:

a. Loan sheet
b. Credit history
c. Balance Sheet
d. Income statement
5. If someone's credit worthiness decreases:

a. Their tax rate could increase
b. Their debit card charges could increase
c. Their salary could decrease
d. They may have to pay more interest on home loan

Chapter 3
Banking

After the advent of money, the earliest financial innovation was banking. Banking helped increase
economic activity, trade and business and therefore wellbeing and prosperity.
Did you know the earliest banks in the world date back as far as 2000 BC? In India, there is evidence of
banking from the Vedic Period 1750 BC.
Your first introduction to the financial world will also most likely take the form of a Savings Bank
account.
Savings Bank Account

It is called a savings bank account because it achieves two things one, it helps you save and two, it
provides banking facilities. SB account is the most common type of account that you, as an individual,
can hold in a bank. There are other accounts like current account which businesses use. Banks provide
you the convenience of not having to carry around cash everywhere to do your transactions.
Facilities that savings banks provide

The most important facility the bank provides is a safe place to keep your money. Whatever money you
earn or get, you can keep it in the bank and have the convenience of taking it whenever you need. The
bank has a duty to pay you your money any time that you ask for it (of course within normal working
hours). In that sense, the bank asks as a custodian of your money.
The next most important facility that a bank provides is that it acts as a person to carry out your
instructions. When you tell the bank to pay someone money, the bank will do that for you. When you tell
the bank to receive money from someone, the bank will do that for you. You could do that in many ways
through cheques, through netbanking or through standing instructions.
You would earn a small interest on the money you keep in your SB account. The interest rate for SB
account in most banks is 4% to 5% per annum.
Paying Money through Banks

Cheques

One of the most commonly used instruments in money related transactions is a cheque. When we say
banks will carry out your instructions, how exactly do they do that? They need it in a standard format.
When you instruct the bank to pay someone your money, you need to do that using a cheque. So, when
you want to pay your mobile bill, you can issue a cheque to your mobile service provider, say Aircel, for
the bill amount. When you do that, you are asking the bank to take your money and pay Aircel. The bank
will take the cheque as an instruction from you and pay Aircel. A cheque looks like this:
It contains certain very important details that help the bank make sure that it is actually you who has
given the instruction.
1. The name of the bank and the name of the branch so that Aircel knows whom to go and ask
for your money.
2. Your Account Number A bank branch will have several hundreds, if not thousands of
customers, and therefore will not be able to recognize an account by your name. So each
account will have a unique number. This way the bank will know exactly who has given it
instructions.
3. A written statement (pre-printed) that states in words that you are instructing the bank to pay
somebody (the payee) a certain sum of money (amount).
4. There are blanks that you have to fill.
a. The name of payee the person whom you intend to pay.
b. The amount the sum of money that you would like to pay. You have to fill it up in both
numerals and in words.
c. Date to tell the bank when you have given instructions. The bank will not pay a cheque
that it gets before the date on the cheque. For example, if you give a cheque dated the 14th
of February 2013 and your friend takes it to the bank in December 2012, the bank will not
accept your instruction.
d. Signature Now this is the most important part. Most of the cheque is pre-printed anyway,
and all the blanks can be filled by anybody. So the one way the bank knows that it is you
who are instructing the bank is through the signature. The bank verifies the signature on
the cheque with that you have submitted to the bank when opening the account.
5. There is something called crossing the cheque. We'll talk about that in a while. But if you do
cross a cheque, you would be drawing two parallel lines on the top left corner of the cheque.
Crossing the cheque

It doesn't matter if you want to pay your friend some cash and because you didn't have any cash, you just
told him Hey you know what, I need to go to the bank and take out some money. Why don't you do
that yourself ? I will give you a cheque. So you give your friend a cheque, and he takes it to the bank, and
the bank will give him the cash. One thing you have to do, in that case, is to also sign on the reverse of the
cheque.

Of course, it is ok for you to do that with a friend. But when you give a cheque just like that, anybody
(read even a thief) can take the same cheque and go ask the bank to pay him. The bank will happily pay
him because the bank thinks that he is the person that you wanted to pay.
So, if you want the additional security that the money you are paying is going to the right person, you can
get that by crossing the cheque. That means, you draw two parallel lines near the top left corner and
write A/c payee only between the lines.
When the bank sees this sign, it will not give out cash; instead it will take money out from your account
and put that money in another account that is there in the name that you have mentioned on the cheque.
So, if you have made a cheque in the name of Fernandez, the bank will transfer the money to an account
in Fernandez's name. So, Fernandez will then be able to take out the money from his account. But, if a
thief has stolen the cheque and tries to ask the bank to pay, the bank will still put the money in
Fernandez's account and the thief will not be able to scoot with the money.
What happens when you issue a cheque without having enough money in the bank? It is a bad, bad thing
to do. When your payee presents the cheque to the bank, the bank will check your account. In case there
aren't enough funds for the bank to pay the cheque, the bank will return the cheque. It is also called a
cheque bounce. In case a cheque is returned by the bank, your payee will obviously be upset. You will
lose all credibility with that person, be it family or friend or utility companies. Not only that, the bank
will also levy some charges for cheque return. In addition to that, phone companies or electricity
companies may also levy an extra fine for cheque return. So please always make sure that you have
enough money in the bank when you issue a cheque.
Standing Instruction/ Direct Debit/ ECS

Let's say you have to pay your rent every month to the landlord. Of course, you could give your landlord
a cheque every month. Alternatively, you could issue what is called an SI (Standing Instruction). For e.g.,
you can instruct the bank, that on the 5th day of every month, for the next 11 months, the bank can take
`2000 from your account and send it to the landlord's account. You can set up SI not just for fixed
amounts, but also for say utility bills such as electricity and telephone bills. You can instruct the bank
that, on the 5th day of every alternate month, the bank can take whatever the amount of the bill that the
Electricity Board sends, from your account and send it to the EB's account.
Demand Drafts
Many organizations, especially colleges, insist that you pay fees in the form of a demand draft. What
exactly is a demand draft and how is it different from a cheque? A demand draft is also called a banker's
cheque. What that means is that, a demand draft is a cheque issued by the bank, as opposed to a regular
cheque which is issued by you. Your college will be confident that a banker's cheque will not bounce, so
they may insist that you pay only by DD.
How do you get a DD? A Demand Draft is something that you instruct your banker to give. There is a
form that asks for details such as name of the payee, place at which payable, amount of the demand
draft. You need to fill out that form, sign it, give a cheque for the amount, and the banker will issue the
Demand Draft. The bank will charge a small fee for issuing a DD, by taking out money from your

account. You don't necessarily have to have an account to get a DD issued. You could walk into any
branch of any bank and pay cash and get a DD issued.
Receiving money through banks

Just like banks offer you the facility of paying through them, you could also instruct banks to receive
money on your behalf. Usually, it takes the form of cheques. When someone issues you a cheque for
money that they want to pay you, what do you do with the cheque? Of course, you could go to the bank
(the issuing bank) whose cheque you have in your hand and ask for the payment. Alternatively, you can
instruct your bank to do the job for you. You can go to your bank and deposit the cheque for
collection. The bank will then present the cheque to the issuing bank, get the money for you and
deposit the money in your account. Just remember that this process usually takes a couple of days more
if the payer has issued an outstation cheque. So if you do have a cheque you have received from
someone, do deposit it for collection right away. It will be at least 3-5 days before the money is made
available for your disposal.
Receiving money online is simple enough. You do not need to do much. You need to make sure that you
give the details like your name (as in the bank's records), account number, IFSC code of your bank.
Once your payer makes the payment online, the amount will be available to you in a few hours.
Fixed Deposit Account

A Fixed Deposit Account is similar to an SB account in the sense that it helps you save money. It is
different in the sense that it does not give banking facilities. It is purely an instrument to keep your
savings. If you do save up some money and want to keep it safe for a certain period, you can ask your
banker to keep it safe for you in an FD account. Unlike an SB account, you cannot withdraw from or
keep adding back to your FD account. It is fixed for a certain period. What's more the bank will also
pay you an interest for the amount deposited. This interest is typically higher than savings bank interest.
For e.g., if SB accounts give you 4% per annum, FD give you anything between 8% and 12% depending

on the period of deposit. Typically, if you keep it deposited for a longer period, you will earn a higher
rate of interest. A 3-year deposit will fetch you say, a 12% rate of interest, while a 6-month deposit will
earn say, a 9% rate of interest. The rate of interest is always per annum, so on a 3-year deposit, you will
earn 12% every year. So it will work out to a little more than 36% overall, what with compounding and
all that. On a 6-month deposit, you will earn 9% per annum; that means about 4.5% on the amount
invested.
The chart below shows the rate of interest offered by ICICI Bank for different maturity periods. As you
can see, the interest rates are higher for longer periods of deposits.
Banks provide you with a Certificate of Deposit for the amount that you have deposited. It is also called
an FDR a Fixed Deposit Receipt. An FDR looks like this.
It will specify in whose name the deposit is held, the amount of the deposit, the date of the deposit, date
of maturity, the interest rate, amount payable on maturity, what to do with the interest and what to do

with the principal at the time of maturity. These days, most banks just pay the interest and the principal
into the linked SB account at the time of maturity.
Some banks also offer the facility of opening a deposit online. In the internet banking portal of banks,
some banks give you the facility of opening a deposit at literally the click of a button. They will then
send you the FDR by courier or post. When you do take a loan against FD, you will have to deposit the
original FDR with the bank.
So is it impossible for you to take out your own money before the end of the period for which you have
invested? Well, not entirely. Banks provide you an option of a loan against deposit. Let's say, you have a
deposit for `10,000 in a bank. When you ask for it, the bank may give you a loan of say, `8,000. They will
give it to you in one shot not allow you to keep taking out say, `1,000 at a time. It is a loan, and what
that means is that you have to repay it at some point in time and you also have to pay interest on it. The
loan on your FD will carry a higher rate of interest than what you will earn on the deposit itself. So, if
you earn say 10% on your FD, the loan on the deposit will be charged about 12-13% interest. We will
talk about why it may be beneficial to pay more interest than you are earning. It may sound stupid, but
you will see why it makes sense. We will talk about it in the 'borrowing' section.
Terms commonly used in Banking

Deposit A deposit increases your bank balance.
Clearing When you issue a cheque to somebody, and that somebody deposits your cheque in his bank,
his bank will present the cheque to your bank for Clearing. If there is enough money in your account,
your banker will clear your cheque.
Credit Any transaction that increases your bank balance is called a credit. When you deposit some
money, it will be reflected as a credit in your account. Cash deposits, cheques received and deposited,
interest received are all examples of credits.
Debit Any transaction that decreases your bank balance is called a debit. Cheques issued, cash
withdrawal, interest paid are all examples of debits. QAB Quarterly Average Balance The Quarterly
Average Balance is the amount that your banker will expect you to maintain in his bank for the services
he provides. This amount will vary from bank to bank and also the level of services provided. The QAB
could be as low as `500, or even as high as `10 lakhs.
Pass Book The Pass Book is your copy of transactions carried out in your bank account. While the
bank will maintain its own records in its own format, when you ask for it, the bank will update your
passbook. It shows how much money you have, what payments have been made, etc.
Tenure This term is used in the context of fixed deposits. A fixed deposit is fixed for a certain duration
called the tenure. The interest rate is fixed according to the tenure.
Maturity Maturity is when the fixed deposit comes to an end. It is similar to tenure. You typically
receive the amount of the deposit along with the interest on maturity of the deposit, or at the end of the
tenure.

Cumulative Deposit A cumulative deposit is similar to a fixed deposit. The main difference is that you
receive the interest periodically when you have a fixed deposit. On the other hand, if it is a cumulative
deposit, the interest will get added to the principal amount and will earn further interest. In other words,
fixed deposits receive simple interest, while cumulative deposits earn compound interest.
Questions
1. What is a Pass Book?
a. It is an document you need to enter the bank
b. It is a document of transactions carried out in your bank account
c. It is a document laying out various schemes offered by the bank
2. If you break your fixed deposit before maturity:

a. You will have to pay a penalty
b. You will still get the interest amount for the entire tenure
c. You can withdraw money before maturity
3. When you cross a cheque:

a. Your bank does not pay out cash and will only do account to account transfer
b. It means it is a cancelled cheque
c. Your bank is obliged to pay cash to whoever presents the cheque
I think the key indicator for wealth is not good grades,

work ethic, or IQ. I believe it's relationships.
Ask yourself two questions: How many people do I know,
and how much ransom money could I get for each one?
-Jarod Kintz

Chapter 4
Electronic
Money

How do you normally pay for the fruits that you buy, let's say, from your neighbourhood street vendor?
Normally, by cash. The amounts involved in such a transaction would not normally exceed more than a
hundred rupees and that is an amount that we normally carry in our wallet. But, let's say you are going to
buy jewellery, costing couple of tens of thousands of rupees? You can of course, carry large amounts
of cash with you to the store. But for many practical reasons, it is not advisable to carry large amounts
of cash in person. It is risky and cash that is lost can be rarely recovered.
To avoid such difficulties, banks have launched various products and services for the convenience of
the customers. Main examples of such products and services include Net Banking (Internet Banking),
Debit cards, and Credit cards. These are convenient, faster and easy to use and with adequate
precautions, can be safe too.
Net Banking
These days, most banks have the facility of operating and accessing our bank accounts through the
Internet. This is called Net Banking. Other terminologies by which these services are known include -
online banking, internet banking, virtual banking, anytime banking, etc.
So what are the advantages of Internet Banking? Several: First, it eliminates the need to physically visit
the bank premises. For example, we may need to visit the Bank for various purposes such as: requesting
a cheque book, opening a fixed deposit, etc. With Internet Banking, such requests can be made by
directly logging into your account using Internet. This also means that you have access to your bank
account, 24 hours, 365 days a year and not just during the physical opening of your bank branch.
Second, you can place these requests wherever you are. Since Internet can be accessed globally, you can
access your requests even while you are traveling. For example, you can do an electronic fund transfer
from your account to any of the beneficiaries, from wherever you are in the world.

Usually, there is no additional fee charged by the banks for accessing the Net banking services. As an
existing bank account holder, if you want to avail Net Banking, you might need to give a separate
application to your bank branch for requesting Net Banking access. On the other hand, if you are
proposing to open a new account, then you can opt for Net Banking access at the time of opening the
account itself. Once your Net Banking request is approved by the bank, the login and password details
for accessing your account would be sent to your registered mailing address.
Using Net Banking, we can virtually perform any tasks without physically visiting the bank branch.
Exhibit A below indicates a screenshot of ICICI Net Banking, which gives a list of various requests that
can be done through the Internet. The first column on the left indicates the various money transactions
that can be performed through the Internet. For example, the account holder can do a transfer of funds
within his different accounts in the bank or can transfer funds to any third party beneficiary's bank
account through this. Earlier, when you had to pay anybody, you withdrew cash and paid them, or gave
them a cheque. Now all of that is pass. You can directly transfer the amount to the account of the
beneficiary - without the fear of the cheque getting lost over mail.
Today the banks have incorporated adequate safety mechanisms to minimize frauds. For example, if
you want to send somebody money, or pay a bill online, you will need to have a transaction password.
For most banks, this is different from the login password. Like the Login Password, the first time
around, the bank will send you the Transaction Password, which you can reset it after the first time you
use. Sending money online is usually a two-step process.
Firstly, you will have to register the payee (the person to whom you are sending the money it could be
an individual, like a friend or family member, or could be a company, if you are paying bills). Registering
a payee is a onetime process. Once you have registered the payee, you can make several payments
without having to re-register the details. For registration, you will have to obtain the following
information about your payee:
1. Name of the payee
2. Bank and Branch Name
3. IFSC Code This is important for electronic transactions. But do not worry, this information
is easily available on online. Just do an online search giving details of the bank name and branch
and you should be able to get the IFSC Code right away.
Most banks also have an added security feature at the time of registering the payee they may send you
a OTP (One Time Password) on your mobile by SMS and will ask you to enter it on the website. This is
to make sure that the registration is authorized by you.
Once registration is complete, the second step is when you actually make the payment. This is very easy
and you can just select the payee, enter the amount you want to send, authenticate it with your
transaction password and it is done. You will be able to make payments or transfer money virtually
round the clock, from the comfort of home or office. In fact, if you have a smartphone such as an IPad,
you can even do your banking while in a bus or a train. Online transfers have the advantage of the
amount being available to your payee instantly. If the payee's account is in the same bank, the amount
reaches the payee's account immediately. If it is in a different bank, the amount will reach the payee's
account in a few hours.

An important thing to remember in Internet Banking is not share your account details such as login and
password to anybody, not even to the employees of the bank, under any circumstance.
Tips for safe Internet Banking

Making financial transactions through internet is fast becoming the most common route for banking.
Such popularity also means the online banking system is constantly prone to attacks. As hackers design
inventive ways to steal sensitive information and access your money online, it is important that you
secure your online accounts. A little effort and some basic knowledge of computers and the Internet
can help you stay safe.
Virtual / On-screen keyboard
This would be the easiest way to protect your password from being recorded by key-loggers, especially
at public terminals. All banks have this option available to input username and password. A key-logger,
which can be hardware or an application installed on the computer, records and passes on information
about the keyboard taps you make. Using this information, it would be easy to find your username and
password. While software loggers are hard to spot, hardware loggers will have to be an attachment to
the terminal. However, know that an on-screen keyboard is not fool-proof by itself.
Random Passwords
Use a combination of random numbers and letters; try adding special characters (@ for at, $ for s) or
capitalising a letter (not the first) to improve password strength. Also, make sure to change your
password from a secure terminal after you use a public terminal.
Do not follow links
Always type in the web addresses (URL) to access your bank's website. Never click on a link from an e-
mail you get. That is how 'phishers' work: they re-direct you to a malicious site resembling your bank's
portal and use the information provided by you to access your account.
Credit Cards
What is a credit card, you might ask. Let's start with a simple example. Let's say your family is a regular
customer at the corner provision store, where you shop for all your monthly provisions. Since you
might be going there very frequently, the shopkeeper knows your family well. To make it convenient, he
offers to maintain an account of all you have purchased for a month and the bill can be paid at the end
of the month at one shot. By giving this credit for the month, the shopkeeper is taking a risk because if
you do not pay him at the end of the month, then he would suffer a loss. But since he knows your family
very well, he is convinced that he is not going to get cheated. Since he would like to retain good
customers like your family, he offers to give this credit so that it is convenient to you as customers.
As a customer it is convenient because you do not have to take cash with you every time you make a
purchase. Further, any sudden shortfall in funds in the middle of the month might not affect your
consumption, as you need to pay only at the end of the month.

However, the shopkeeper is willing to give the credit in this case only because of the familiarity with the
customer. Otherwise, the shopkeeper is not going to trust the customer. But since credit can benefit
customers, banks (and other financial services companies) have come out with a credit card product. In
this scenario, the banks act as an intermediary between the shopkeeper and the consumer. While the
shopkeeper might not trust the customer, he is more likely to trust the bank that has issued the credit
card. The bank will pay the shopkeeper for the purchases made by the consumer (credit card holder),
which will in turn get the payment from the consumer. The bank assumes the risk of non-payment by
the customer and not the shopkeeper.
That is the reason the banks take a lot of care before issuing a credit card. Banks would issue credit cards
to only those customers who it thinks would not default on credit card purchases. When any such
default happens, banks share details of such consumers to CIBIL, which is then available to all banks.
Therefore, for habitual defaulters, getting a credit card from any of the banks in the future would
become very difficult.
Credit cards are a form of plastic money. It can be used to pay for goods and services, instead of paper
currency. It is also very commonly used to shop online. When you book tickets online, shop from an
online store or recharge your phone online, you can use a credit card to make the payment.
Understanding the credit card

A credit card is a small rectangular piece of plastic designed to fit in your wallet.
Credit cards have a few important details:
Credit Card number this 16-digit number is a unique reference number. There is only one active card
in the world with that number.
Valid from date: This is the date from which the card is active
Valid through date: This, also called the expiry date, is the month until which the card can be used
Name: The cardholder's name is embossed in block letters.

Issuing bank: The name of the issuing bank is displayed on the card HDFC Bank, ICICI Bank, SBI
Cards, etc.
VISA/MasterCard All cards are usually attached to one of these two payment networks.
If you turn the card over, you will find a magnetic strip that contains all this information. When
shopkeepers swipe your card, all the information embedded there will get captured by the machine with
the shopkeeper.
Beneath the magnetic strip, you will find a narrow strip where you need to sign. This is a sample
signature, and shopkeepers use that to verify your signature. It is a protection from fraud or misuse, so
make sure you sign on the back of the card before you start using the card.
CVV There is a 3-digit number that is there right beside the space for your signature. This is an
important number, and you should keep it a secret.
How to use a credit card:

In stores/restaurants:
When it is time to pay, instead of cash, you can give your

credit card. The merchant will swipe your card on a
machine that looks like this. He will also enter the amount
that you wish to pay.
The machine will take the information embedded on the

magnetic strip. The machine will send the data to
Visa/MasterCard, where the amount will be cross-
checked with the credit limits on your card. If you have
enough credit limit left, it will send an approval message,
else it will decline. When it gets approved, the machine will
print out a charge slip that looks like this.

The merchant will then give you the charge
slip for you to sign. He will then verify that
signature with what is there on the back of
the credit card to ensure that it is the
cardholder only who is using the card.
Sometimes, he may ask you to furnish some
other ID proof (something which contains
your photo and your name) to confirm that
the rightful owner of the card is using it.
When the merchant swipes your card for a

specified amount and the card issuer
approves it, two things happen. One, the
amount for which your card has been
swiped gets added to your credit card bill.
Two, that amount gets reduced from the
credit limit on your card.
Using credit cards online to

make payments
When you purchase something online, you
have to pay using electronic money only.
You could shop online for books or
electronics, or you could buy an antivirus product online, or you could pay your phone bills over the
internet. In all these cases, credit cards are one of the most convenient and commonly used options to
pay for such goods and services.
After you have made the purchase, you will be guided to a page where you can pay through credit cards.
Typically, the following details are asked for: In some sites, one or two of these details may not be asked
for.
16-digit Credit Card Number
Is it VISA or MasterCard
Name on the card
Valid through date
CVV Number
Once you have entered these details, there is an additional security step before the amount is charged to
your card. VISA cards have a VBV (Verified by VISA) step and MASTER cards have a SecureCode
step. Whatever it is called, you are redirected to another site, where you will have to enter a password
that you have earlier set it yourself for this authentication process. Some card issuers may have another
security question that you may have to answer. Once you enter the password right, the payment will be
made, and your card will be charged with that amount.

Using credit cards to withdraw cash
What? Cash? Using Credit cards, you may ask. If you do ask, we commend you, because using credit
cards for cash is something we thoroughly discourage. And we'll tell you why, in a bit. But if you ask is it
possible to do so, the answer is yes. Very much so. All you need is your credit card, and an ATM PIN
(Personal Identification Number). Armed with these two, you can walk into any ATM and withdraw the
amount required.
Why do we discourage using credit cards for cash? Because it is THE most expensive source of
borrowing. Yes, using credit cards itself is borrowing, but when you use it for withdrawing cash, you get
charged exorbitant rates of interest on the amount you withdraw. Not just that, it will reflect badly on
your credit history. More on that later. For now, just remember that you should never, ever withdraw
cash using credit cards. If you want immediate access to some funds, you should discuss it with your
bank, who may be able to provide you short term loan facilities very quickly at much cheaper rates.
Paying credit card bill

Now, we will talk about something very important. Credit card is a form of money, it is a substitute for
hard currency, but, there is an important distinction when compared to hard currency. The distinction is
that credit cards a form of borrowing. You are using money that you do not have, at least not right there
right then. So it is your rightful duty to pay it back in full, when asked for it. And ask for it, they will.
Every month. In the form of credit card bill. Every month, on a specified date, the issuing bank will add
up all the amounts that it has paid for on your behalf, and demand that you pay it up. You have to pay it
up within the due date. The due date is typically about 15-20 days from the bill date. That is how much
time you have got to pay your bill.
You can pay your credit card bills in a number of ways. You could go to the bank and pay cash, you could
drop a cheque for the bill amount (there are places called drop boxes where you could just literally drop
the cheque). You could also pay it online, from a bank account that you have.
What happens, you may ask, if you miss the due date, and pay it a couple of days later? Well, your mom
will definitely frown. Well, apart from that? Apart from that, you issuing bank will charge you heavily. It
will charge you anything between `250 and `1000 as late payment fees, even if the payment is delayed
by one day. Even if the total amount due on your bill is less than `500. So, please do pay your bill on the
due date.
Now there is something on your bill that says total amount due, and something else that says minimum
amount due. You have to pay at least the minimum amount due on the card before the due date, if you
want to avoid the late payment fees. So why pay more when you can get away with just the minimum?
Two reasons, really. The first is that, it is your moral obligation to pay for the things and services you
have enjoyed already. The second reason is that, if you don't pay up, you will pay heavy interest on the
amount that you have spent. Needless to say, this will definitely affect your credit history.

Interest on credit cards
Did you know that credit cards carry one of the highest interest rates on borrowings in the country?
They charge as much as 3% per month, on some cards as much as 3.5%. Translated into annual rates,
this works out to 36% pa to 42% pa. Compare this to the 11% housing loan interest, or the 14% vehicle
loan interest, and you will know what we are talking about.
Let me explain this interest in a different way. Let's say you spend `1000 on buying something, and you
don't pay up the full amount. You will be paying `35 per month on that in the form of interest. Let's say
you don't pay that also. There will be interest charged on the interest, and in a year, you will be charged as
much `425 in a year! Almost half of how much you spent!
Applying for credit cards

We have talked about how to use credit cards, how to pay up for it, and what happens if you do not pay it
up on time. What we have not talked about is how does one get a credit card in the first place? This part
is a little more complicated than the rest of it.
Most banks will give you a credit card once you start getting a steady income. If you can prove that you
get a steady flow of money in the bank every month, you can apply for a credit card. Banks these days
are prepared to give credit cards on the basis of an offer letter, and three months' pay slips.
Banks typically fix a credit limit based on your earning. This credit limit indicates the amount up to
which you can use the card. The swipe machine will decline your transaction if you try to cross that
limit.
Debit Cards
Debit cards are again a form of plastic money, and it is a recent technological invention. When you do
have a Savings Account in the bank, instead of issuing a cheque or issuing currency, you could use a
debit card. You could also use the card to withdraw currency from an ATM. The money will be instantly
removed from your bank account. While a debit card could in theory, be different from an ATM card,
these days, the card is an ATM cum Debit card.
We saw, in the previous chapter, how we could instruct the bank to pay somebody else on your behalf
using a cheque or a DD or issuing an instruction through the internet. An easier and handier way of
instructing the bank is through the use of a debit card.
A debit card is called so, to distinguish it from its cousin, the credit card. Because they are cousins, they
are similar in very many ways, and we'll see how. However, there is a very important distinction. A debit
card is just a convenient way of using money that is yours sitting in the bank account. A credit card, on
the other hand, is using money that is not yours. When you use the credit card, you are borrowing from
the bank and you have a legal and moral duty to return the money to the bank.
Just like the credit card, a debit card can be used to pay a merchant when you shop, to withdraw currency
from an ATM, or to pay when you shop for stuff online. We talked about ATM withdrawals very briefly
when we talked about Credit Cards. We will talk about it in more detail, here.

An ATM is short for a boring term Automated Teller Machine. A Teller is the person in the bank who
gives out cash. This machine does that automatically, hence called the Automated Teller Machine the
ATM. An ATM stores cash, and gives it out automatically to the right people when they ask for it. How
does it know who are the right people. According to the machine, the person is right if he holds the
card, and also if he knows the password to use. Hence it is very important that you keep the card safe
and also keep the password unique and secret.
We are going to discuss a few practical questions when it comes to withdrawing money from the ATM.
Let's do that Q&A style.
How do ATM cards work?
When you use the ATM and instruct it to withdraw say, `500, it will first verify that the passwords
match. Once that is established, it will (electronically, of course) inform the bank that you want to
withdraw `500 from the ATM. The banker will check your account balance and if you do have that
much money in the bank, he will give permission to the ATM to give out the money.
If I have an account with State Bank of India, should I use only the State Bank of India ATM?
Can I use any other bank?
If you did have an SBI bank account, can you go to Canara Bank and ask for your money? Of course
not, right? How will Canara Bank know who you are, how much money you have in the bank and more
importantly, why should it help you at all? Well, you are right. If you did have an SBI cheque, the only
place you should go to is an SBI branch. But a debit card works just as well in a Canara Bank ATM as
well. That's because all the information is available electronically. Once you have established that you
are the right person (by using the right password for the right card), your banker will give permission to
the ATM to withdraw the money.
As to why Canara Bank should help you at all, the answer is that it does so for a fee. Most banks will
permit you to use other bank ATMs free of charge for up to four times in a month. Beyond that, your
banker will charge you a small fee for using somebody else's ATM.
I used another bank's ATM to withdraw money. It didn't work. Why?
ATMs may not work for many reasons it may have run of cash, there could be a technical problem or
you may not have entered the PIN right. These could happen in an own bank ATM as well. However,
specifically in other bank ATM, there is one more thing you need to watch out for. Your card will say
VISA Electron or Maestro, and that is similar to VISA or MasterCard in Credit Cards. You will need to
verify if the other bank ATM accepts cards from the network that you are with. Most bank ATMs
process VISA Electron and Maestro without any problem; however some banks accept one and not the
other.
Will I be charged for using the ATM?
In most other countries, cash withdrawal from an ATM entail a service charge. In India, thankfully no.
You can withdraw as many times as you want from your own bank's ATM without any charge. However,
if you were to use another bank's ATM, your bank may choose to charge you for that.

Why do I need debit card if I have a credit card?
You may not be able to use credit cards everywhere. Many shops, especially smaller ones, do not have
the facility to allow payment by credit cards. So, if you were to suddenly run out of cash, you can go to
an ATM and withdraw money. Conversely, you can always ask, why do I need a credit card if I have a
debit card? Well, you don't. There are many people who always pay in cash. And you can always use your
debit card in places that you can use your credit card. However, some people prefer to use credit cards
for online transactions. That way, if you suspect the merchant of fraud after the transaction goes
through, you can ask your banker to hold the payment. You may not be able to do any such thing in case
of debit cards. Once the money is out of your account, it is out.
Mobile Money
You might have seen advertisements in recent days on how one can send money through mobiles that
can be used as currency to pay for goods. How exactly does that work?
Here, your mobile service provider acts as your intermediary. All you need to do is load money on your
phone this is different from the recharge that is used for you to make calls or use the Internet. Once
you have loaded your phone with the money, you can then use it to make some payments. For e.g., if you
have registered for Airtel Money, you can use the money to buy tickets (with some service providers),
pay utility bills (again some registered billers). Not just making bill payments, you can also use the Airtel
Money to send money to a friend who uses Airtel money as well. This way you can instantly send money
to your friends, who can then use it for spending on those options.
To register for this service, you will have to submit proof of ID and proof of address. Once registered,
you can use it somewhat like a bank account. What you cannot do, however, is use it to withdraw cash or
make payments to shopkeepers and other companies who are not registered with Airtel Money.
There are other tools available to transfer money through mobiles. Take IMPS for example. Interbank
Mobile Payment Service (IMPS) is an interbank electronic instant mobile money transfer service
through mobile phones. IMPS service helps you access your Bank Account and transfer funds instantly.
The beneficiary account is credited immediately when a Fund Transfer request is made through your
Mobile phone / Internet Banking. This service is available 24x7, throughout the year including Sundays
and any bank holiday.
However, banks may charge for this service. For example, ICICI Bank charges anywhere between `2.5
to `25 per transaction depending on the amount while Citibank does not charge anything at all. Also,
there is a cap of `50,000 per day on mobile transactions
So, who can use IMPS?
All bank account holders who have registered mobile numbers can send and receive money using
IMPS.
What beneficiary details are required to send money using IMPS?

Beneficiary's mobile number as registered with his/her bank
Beneficiary's Mobile Money Identifier (MMID)

What is MMID or Mobile Money Identifier?
Mobile Money Identifier (MMID) is a seven digit random number issued by banks to their customers.
If you wish to send money using IMPS, you should have the mobile number and MMID of the
beneficiary (person whom you wish to send money to).
If you wish to receive funds using IMPS, you should generate an MMID for your account and share this
with the remitter (person whom you wish to receive money from).You can generate one MMID per
account.
Questions
1. The term mobile banking denotes:
a. Banks that move their operations to another country
b. Doing banking via a mobile phone
c. Making purchases while traveling
d. When a line in a bank branch starts to move
2. Debit cards:
a. Are tied to your savings account
b. Are a form of borrowing
c. Have a credit limit
3. Debit cards are accepted as payment:

a. Most places where credit cards are accepted
b. Only places where credit cards are accepted
c. Only places where credit cards are NOT accepted
4. Which number would be best to use as your debit card PIN?

a. Your mother's phone number
b. Your birth date
c. A random number
d. Your address
5. Credit card is a form of borrowing.

a. True
b. False

6. Which of the following is NOT a secure way of banking over the Internet?
a. Using virtual keyboard
b. Logging in at a cyber caf
c. Logging in through a link sent in an email
d. (b) and (c)
7. Which of the following can you do using Internet banking?

a. Open a fixed deposit
b. Order a demand draft
c. Pay your telephone bill
d. All of the above

www.glasbergen.com
I'd like you to consider a bold new strategy
The hardest thing in the world to understand

is the income tax.
- Albert Einstein

Chapter 5
Borrowing

You might say why do I need to borrow money at all? I should not spend if I do not have the money.
While this may be true, you will find it impossible to fulfil all your goals without some form of
borrowing. And we are here to tell you that it is okay to borrow and that not all debt is bad. One example
of good debt would be student loan. If you are taking a loan to get a professional education which can
increase your future earnings, you would have no trouble repaying the same in future. However, if you
are taking a loan to buy a car you can barely afford, that's not very wise.
A loan is a sum of money borrowed that is expected to be paid back, usually with interest. In this
chapter, we will primarily discuss student/education loans. But first, let's understand the various
common terms you will come across when you go for a loan.
Principal This refers to the amount that you have borrowed from the bank.
Interest Rate This is the rate of interest that the bank will charge you for using their money.
Tenure This is the period for which you have taken the loan. In other words, you have to repay the loan
along with interest by the time your tenure ends.
EMI Also known as Equated Monthly Instalment. EMI is the sum of money that you repay every
month during your tenure till your loan is fully paid back. EMI consists of both principal and interest
portion. The EMI is fixed but not the components. The component of interest amount is higher in
initial years and decreases over the years. The component of principal amount is lower in initial years
and increases over the years.
Collateral Security The bank may ask the borrower to furnish some asset/investment just in case he is
not able to repay the loan. For example, the bank may ask you to deposit your National Saving
Certificates (NSCs) as security. It is not necessary that the security you offer has to be of the full value of
loan.
Third-party guarantee This is a guarantee by a third party (other than the borrower) that the loan will
be repaid even if the original borrower defaults. Many banks insist that student loans are guaranteed by
the parent.
Repayment - Education loan repayment normally starts six or 12 months after course completion or
after gaining employment, whichever is earlier.
Moratorium - Moratorium Period is a holiday on repayment. In terms of education loans, the course
term is a moratorium, when only the simple interest on the amount disbursed is payable. Some banks
allow a moratorium on payment of interest. This means that you can defer payments of even the
interest during your study period.
Margin This refers to the amount that you need to pay from your pocket. In India, most banks do not
ask for margin on education loans up to `4 lakhs. But, for loans beyond 4 lakhs, banks may demand
margin of 5 15%. For example, you want a student loan of `6 lakhs and the bank is asking for margin
of 10%. This means you will have to pay `60,000 and the bank will give you the remaining `540,000.

What is Student/Education Loan?
Some of you may have taken a student loan. Others may be considering taking one in the next 1-2 years.
Either ways, this section is a brief overview of what is involved in taking student loans.
Most banks in India offer loans to students who want to pursue higher studies, either in India or abroad.
With expensive professional education becoming mandatory for people across the country, a student
loan seems the most effective way to tide over these expenses. Most students expect to land high salaries
at the end of their professional training and are likely to be in a position to repay these loans over a
period of time.
Management students are among the top choices for most of the banks. Technology students from the
country's premier institutions can also get student loans from Banks and Medical and engineering
college students.
Banks don't provide loans for courses where employment prospects are less (as per Bank's own
evaluation); loans are sanctioned on the basis of the parents' income.
How much loan can you get?

Loan for Studies in India: Most of the Public Sector Banks in India have categorized Student Loans in
two categories. For Studies in India, students can borrow up to `4 lakhs without providing any security
or margin. A loan amount of `4 lakhs to `7.5 lakhs can be availed against a third-party guarantee. This
loan comes with a 5 percent margin. The third-party guarantee can come from an uncle, neighbour or
friend standing guarantee for the full amount.
Overseas study loans: Amounts worth `7 lakhs and above are usually sanctioned against fixed deposits,
NSC certificates, property worth the loan amount and a margin amount of 15 percent.
You can avail a maximum study loan of `20 lakhs.
Repayment
Repayment on the loan starts one year after the completion of the course or six months after getting a
job, whichever is earlier and the loan must be cleared within five to seven years.
Benefits of a taking a student loan

1. You can reduce the interest paid on student loan from your total income while calculating your
taxable income. So, student loans help in saving taxes.
2. You do not have to repay principal amount during your study period. Repayment starts only
one year after the completion of the course or six months after getting a job whichever is
earlier.
3. You can take charge of your finances even before you start earning and do not have to become
a financial burden on your parents.

Other types of loans
Having discussed Education loans, let's also briefly touch upon other types of loans.
1. Personal Loans: These are loans that you can take for any purpose. You can avail of this loan if
you want to go on a holiday, buy an expensive item, repay loan to someone else and so on.
The good news is that you don't need to keep anything as security with the bank to obtain a
personal loan. Depending on your credit history, eligibility and payment capacity, you can get
anywhere between `25,000 and `15 lakhs, or even more.
The bad news is that these loans are expensive. They come at an annual interest rate of 18-
25%. Compare this to the interest you will earn on your Savings Account of 4%, or an FD of
12%. You can also compare it to the interest on home loan of about 11%, and you will realize
how really expensive personal loans are. You have to pay a processing fee, usually 0.5-2% of the
borrowed amount. If you want to pre-pay before the term gets over, you will be slapped with a
prepayment penalty of 2-5% of the outstanding balance. And don't forget the service tax of
12.36% per annum. So, if you borrow `1 lakh for three years at 12.5% per annum with a
processing fee of 1%, you will pay `20,433 in interest and `1,000 as processing fee. This is a
whopping 21.5% of the principal that you will end up paying.
2. Home loans: Home loans are available for buying a house or a flat, or even for renovation,
extension and repairs to your existing house. The main eligibility criterion for home loan is
your income. Higher your income, higher is the loan amount that you can get.
Banks offer fixed rate as well as floating rate of interests on home loans. In fixed rate
loans, the interest rate is fixed either for the entire tenure or for some part of the tenure.
Floating rate loans determine interest rates according to market. As market interest rate goes
up, the interest rate on your home loan will also go up.
Home loans offer several tax advantages. We have discussed the same in the taxation chapter.
3. Vehicle loans: The terms for vehicle/auto loans differ from lender to lender. Some banks may
finance only new vehicles while some banks may finance only four-wheelers. Usually, the bank
will disburse the loan amount to the tune of 2.5 to 3 times the annual salary for salaried
professionals. On the other hand, some banks may disburse loan amount depending on the
price of the vehicle. For example, banks may agree to finance only 90% of the price of the car
or bike.
4. Loans against Fixed Deposits:
With lending rates rising steadily, you would think twice before taking any kind of loan. In fact,
in case you really need the money, you would think of liquidating your assets first instead of
paying high rates on, say, a personal loan. But there is one asset that you wouldn't want to
liquidatefixed deposits. Also, it is definitely cheaper than a personal loan.
You can look at various websites to compare the interest rates, terms, tenure of auto loans and
decide on your lender accordingly. Some of these websites are www.bankbazaar.com/car-
loan.html and www.deal4loans.com

Questions
1. What is a moratorium?
a. It refers to waiver of loan when the borrower dies
b. It refers to the period where repayment of loan is deferred
c. (a) and (b)
2. If you are availing a loan of `10 lacs and your bank is asking for a margin of 20%, how
much money do you have to put in to get the loan
a. `10 lacs
b. `8 lacs
c. `2 lacs
d. `20,000
3. On which of the following can you get a tax benefit?

a. Principal paid for house loan
b. Interest paid on Credit Card bill
c. Instalment paid on vehicle loan
d. Instalment paid on personal loan
4. Fixed interest loans

a. Always have lower interest rates than floating rate loans
b. Are tied to fixed income securities
c. Protect the borrower from sudden increases in interest rates
d. Are better when interest rates are expected to fall
5. Student loans typically offer

a. Low interest rates
b. Moratorium period
c. No pre-payment penalties
d. All of the above

Chapter 6
Investing

Investing means putting money in something with the expectation that you will get more than what you
have put in. Saving is different from investing. Saving is merely 'not spending'. When you invest the
money that you have saved, you create the potential of growing your money.
Now, you may ask why should I invest at all? The answer is simple to meet your financial goals. But
I don't have any goals. Well then, it's about time you made a few. For example, you should ask yourself
the following questions:
How am I going to fund my higher education?
How will I buy a house?
How will I fund my marriage expenses?
How will I buy a car?
How will I take care of my expenses once I retire?
As you may see, these goals come at different times and require different amounts of money. For
example, you may decide to pursue higher studies in 2-3 years but may need money to buy a house only 8
10 years down the line. What we are trying to say here is that your financial goals will help to determine
what investment options you choose.
Investment opportunities are plenty and one will have to carefully evaluate the various options to come
up with the best choice for you. In this chapter, we will attempt to touch on some of the aspects of a
commonly misunderstood investment tool the Stock Markets. Other common investing avenues are
real estate, gold (and other commodities) and debt instruments.
About Stock Markets

You might have heard people say markets are up, or markets are down. I made so much money in the
stock market. I lost everything when markets tanked. Many many such stories. What exactly is this?
What is the stock market? What does it mean for me as an individual?
Let's try and understand first what the stock market is. When a company wants to raise money for its
business, it may take several routes. It can borrow money from someone, let's say a bank. Or it can ask
someone to invest in its business. When someone invests in the business, they get shares as a
document for their investment. As far as that someone is concerned, he could have lent the money or
invested. The main difference is that when he invests he becomes an owner. When he lends, he becomes
a lender. An owner makes money when the business makes money; a lender makes money whether or
not the business makes money. So when an investor invests money in the business, he gets shares.
The awesome thing is that he can change his mind. Once he has become an investor, he need not be an
investor for life. If he decides to change his mind, he can quit being a shareholder. Well, he could go to
the business and say, hey, give me back my money. I don't want to be your shareholder anymore.
Unfortunately, it doesn't work that way. Businesses will not keep paying back shareholders when they
change their mind. But, if this investor guy finds another guy who wants to invest in this business, he
could do something very simple. He could just sell his shares in the business to this other guy who's
interested. And this selling and buying of shares happens in a market, not unlike the vegetable market.

A stock market is a place where shares of a company are bought and sold. Bombay Stock Exchange
(BSE) and National Stock Exchange (NSE) are two most active stock exchanges in the country.
Now let's understand what it means for you as a person. You could be that investor. You may decide that
you like the way a particular company is doing business and you think that it will be successful. You can
buy shares in that company. As and when the company makes profits, it will give you a share in those
profits. It is called a dividend. Also, if the company grows in the way you think it will, after a few years,
the company will become more valuable. If you decide to sell the shares then, you will fetch a nice sum
of money, perhaps much higher than what you initially paid for it.
How do stock prices change?

In the stock market, prices rise and fall every day. When you invest in the stock market, you are hoping
that over the years, the stock will become much more valuable than the price you paid for it. Having that
goal in mind, it is important to understand how stock prices change.
Stock prices change depending on supply and demand. In simple terms, it means that if more people
prefer buying a stock (demand) than selling it (supply), then the price will move up. Conversely, if more
people prefer selling a stock than buying it, there would be greater supply than demand, and the price
would fall. While the most important factor affecting the stock price is the earnings and the financial
performance of the company, in reality, many other factors affect stock prices as well. For example,
adverse news on the product of the company, adverse news on the management of the company, a
competitor company doing better than expected, etc can also result in decline in stock price. It is
impossible to know for sure what factor is really driving the stock price on a day-to-day basis. This is the
reason why most experts believe that the best way to make money in stock market is through long-term
investing rather than day-to-day trading.
Difference between trading and investing

Investing refers to buying a stock over a long period of time, say a few years. A long-term investor
usually studies the fundamentals of the company earnings over the last few years, business model,
competition, and so on. On the basis of this, he tries to assess whether the business will be profitable in
the long run. The benefit of investing is that since it is done over a longer time horizon, investor need
not be concerned with short-term fall in stock prices. Stock prices may fall due to some piece of bad
news or even because that's the general direction where the stock market is going; but if the
fundamentals of the company are strong, stock price will go up over a longer period of time. However,
on the down side, your money gets locked up for a long time.
Trading, on the other hand, refers to buying and selling stocks for shorter periods of time, typically less
than a few months. Assessing good trading opportunities usually makes use of trading systems or chart-
based techniques, often known as technical analysis, to detect short-term patterns. In order to trade
in stocks, it is important to constantly monitor the price, volume, news, etc. Most people who are new to
stock markets do not have the expertise or the resources to analyse the trends. Moreover, while trading
provides the opportunity to make money quickly, traders often sustain huge losses as well. Therefore,
people who are risk averse would do better investing for a longer period rather than trading in stocks.

Understanding common terms:
Sensex
This is a term you would often hear and see in the news. It is nothing but an index, like a thermometer
that tells you the temperature. If you were told, that the temperature today was 30 deg Celsius. That
itself means nothing. But if you knew that, yesterday it was 36 deg C, and then you know maybe there's
something there. You then find out what is causing this dip in temperature, whether it affects you and
what you should do. Likewise, the Sensex is an index of stock market activity. It is a number based on
the prices of the top 30 companies traded in the country. If that number goes up, it means that prices of
these companies are going up. And vice versa.
Nifty
Nifty is another index that is commonly referred to. It is the index of companies traded on the National
Stock Exchange. This is based on the prices of the top 50 companies.
Share/Stock/Equity
Owning the share of a company means you own a part of the company. You can buy a share either
through the stock exchange where it is traded or you can buy it in an Initial Public Offering (IPO) by the
company.
Dividends
The shareholder becomes an owner, a part-owner of the company. So, if the company makes profits,
the shareholder gets a portion of the profits. This is called a dividend. The more number of shares you
own, the greater is your stake in the dividends. But it is important to note that a company may not give
dividends every year it is a decision which rests with the management of the company.
Initial Public Offering (IPO)
In an IPO, the shares of company are sold to the general public for the first time. Unlike in normal
trading through stock exchange, in an IPO when you buy shares, the money goes to the company. After
the IPO, when shares trade on the stock exchange, they are bought and sold by public investors.
Trading
In common parlance, trading refers to buying and selling shares in the stock market.
Investing through mutual funds

Do I hear you saying, all this is fine, how do I identify this company that is doing well? How do I know if
it will continue to do well? You are asking the right question. Learning to invest is a science in itself and
we do not intend to go into that much detail in this booklet. Let me just say that there are professionals
who will do the investing on your behalf. Those professionals are called Mutual Funds.
A mutual fund (MF) is just the connecting bridge that allows a group of investors to pool their money
together and then the MF invests that money on their behalf. There are many such Mutual Funds in the

market, and they all have their theories on which stocks to invest it. That is called their strategy. Before
investing in a mutual fund, you should go through its prospectus to ascertain that your goals and their
investment objectives are aligned.
Who invests the fund money? Every MF scheme has a fund manager who is responsible for investing
the fund money. These fund managers are typically professionals with rich educational qualification.
Not only that, they do this for a living. They study companies and stocks and markets, often for tens of
years. The profile of the fund manager is also usually provided in the prospectus, along with his success
history. That way you will be able to make an informed decision of whether you can trust the manager
with your money.
Mutual funds offer several advantages over stock-specific investment. Firstly, even those people who
do not have the knowledge or time to monitor stock movements can benefit from the returns offered
by stock markets. Secondly, it provides the advantage of diversification. Consider, for example, an
investment that consists of only the stock issued by a single company. If that company's stock suffers a
severe fall, your portfolio will sustain the full brunt of the decline. So, by splitting your investment
between the stocks of multiple companies, you reduce the potential risk to your portfolio.
On the down side, there are additional costs attached with MFs. The Asset Management Company
(AMC) which manages the money of the MF scheme charges a fee known as LOAD when you buy or
sell the units of a fund. These additional charges reduce your return on investment.
How to invest in stocks?

You need a broker to invest in stocks. You will never know WHO you buy from or sell to - the stock
exchange takes care of those details. What you do is place an "order" to buy or sell shares and the
exchange looks for people on the opposite side willing to deal with you at that price. The order is
automatically completed if the prices match. You can't deal directly with the exchange, so you use a
broker who is registered with the exchange. The broker will place an order on your behalf and the
shares will be moved once the order is complete.
In order to invest in the stock market, you are required to have a Demat account and a trading account.
When these two are combined with your savings bank account, it is called a 3-in-1 account.
Demat Account
To understand what a Demat account is, imagine a locker room in the Railway Station. You could give
your belongings to the Cloak Room for safekeeping. Not only that, you can also instruct the person
there to give your belonging to someone also. A Demat account is like a locker in the Cloak Room. You
could buy shares and ask the seller to put the shares in your Demat account. You can sell shares that you
have, and have the buyer take the shares from your account.
Trading Account
A trading account is like a container of money that you give to your broker to invest in the stock market
for you. He is not allowed to use the money however he pleases. However, when you want to buy a
particular share, you instruct your broker to do so. He will take money from your trading account and

use it to buy the shares. When you sell the shares, he will put the money in your trading account. You can
also instruct your broker to take the money from, and put the money into, your linked savings account.
Source: www.jagoinvestor.com
Opening a Demat and trading account
Many banks offer a brokerage service, whereby you can open Demat and trading accounts and trade
online through the brokerage arm of the bank. There are several standalone brokers, like Sharekhan or
MotilalOswal, who also offer online trading. Just like opening a bank account, you will need to submit a
few documents (ID Proof, Address Proof, PAN) and sign long agreements with the broker,and you are
all set to go.
The broker will typically give you a User Name and a Password. Both these are unique and should be
kept secret. You will also be required to change the password very frequently (once in 14 days).
Brokerage
You will be charged some money to let you buy and sell shares through them; this amount is called
brokerage. Most brokers charge you a percentage of the total amount transacted with them - this is
typically 0.5% of value, or what is called "50 paisa" - the amount you get charged per `100 of
transactions.
Transaction charges
Both NSE and BSE charge you transaction costs - there's something called "stamp duty" and "turnover
tax". This again varies for the type of transaction (F&O, intraday, delivery). You will also pay "Securities
Transaction Tax" (STT) when you buy and sell equities. This is fixed by the government but is different
for different types of transactions.

Investing through SIPs
A Systematic Investment Plan (SIP) refers to periodic investing in mutual funds or stocks directly. Every
month or every three months, the investor will have to commit to putting in a fixed amount. This will go
towards the purchase of units.
Let's say that every month you commit to investing, say, Rs 1,000 in your fund. At the end of a year, you
would have invested Rs 12,000. If the NAV on the day you invest in the first month is Rs 20, you will get
50 units. The next month, the NAV is Rs 25. You will get 40 units. The following month, the NAV is Rs
18. You will get 55.56 units. So, after three months, you would have 145.56 units. On an average, you
would have paid around Rs 21 per unit. This is because, when the NAV is high, you get fewer units per
Rs 1,000. When the NAV falls, you get more units per Rs 1,000.
Investing through SIPs offers several advantages

It instils the discipline to make small but regular savings. Most investors give a standing instruction to
their banks to debit the SIP amount every month. As a result investors have to ensure that there is
enough balance in their bank account.
It does away with the need to time the market (buying at lows and selling at peak). Since an SIP invests
every month, an investor ends up investing sometimes at the peak of the market and sometimes at the
bottom and helps investors to bring down their average purchase price over the long term.
You may notice that while we have talked about what stock markets are and how you can use the stock
market for investing, we have not talked about how to pick the right stocks to invest in, when you should
buy and when you should sell a particular stock. At Money Wizards, we offer short term courses to help
you figure out how to invest.
Questions
1. A stock market can rise and fall in:
a. A day
b. A Week
c. An hour
d. All of the above
2. Which among the following is an example of diversification?

a. Buying real estate in different countries
b. Buying shares in 100 largest companies
c. Investing money in different types of assets
d. Putting money in different banks

3. If you are earning 9% interest annually on your fixed deposit and the inflation for the
year is 10%, what is your real return?
a. -1%
b. 1%
c. 9%
d. 10%
4. Investments that are difficult to convert to cash quickly have a high ______ risk
a. Inflation
b. Economic
c. Income
d. Liquidity
5. When you buy shares in a company, you buy

a. A guaranteed share in profits of the company
b. A guaranteed share in the assets of the company
c. A part of the company itself
When I grow up
I want to be
A Visacard

Chapter 7
Time
Value
of Money

In the previous chapters, we have talked the nuts and bolts of finance in enough detail. We have
discussed banks and how they are useful for us, we discussed the role of technology in making financial
transactions easier for us. In the next few chapters, we are going to discuss some aspects where we use
the tools. We will talk about borrowing and investing. But before we move to that, we need to
understand one very important concept in money, called the time value of money. If after reading the
whole book, you remember nothing except that time has value in money; we would consider ourselves
having done a great job.
Ask yourself this would you rather have `10,000 today or one year later? Most of us would want the
money today either because we want to spend it or we want to invest and get more than `10,000 a year
later. In either case, we acknowledge that money today is more valuable than the same amount in future.
Why is money more valuable today?

1. First and foremost, money has earning capacity. If you put this money in a fixed deposit or
even a savings account, it will earn interest and you can have more than `10,000 in future.
2. Secondly, what you can buy with `10,000 today, you may not be able to afford a year later. This
is because of general price increase (also known as inflation).
3. Finally, if you want to buy something today and you have to borrow `10,000 for that, you will
have to repay much more than `10,000 in future. This is because borrowing comes at a cost
(more on that in the chapter on Student Loans).
Before we get into more detail on that, let's do a small flashback.
What is Compound Interest

Albert Einstein famously said, Compound interest is the eighth wonder of the world. He, who
understands it, earns it ... he who doesn't ... pays it.
We have all learnt about Compound Interest in school, in Mathematics. Simply put, compounding
refers to the re-investment of income at the same rate of return to constantly grow the principal
amount, year after year.
How to calculate compound interest

If you want to see how your investment has grown at the end of your investment period, you can use
the following formula:
Pn = P0*(1+I)n
Where,
Pn = Value at end of 'n' time period
P0 = Value of capital at the beginning of the period

I = Rate of interest (in decimal, not percentage)
n = No. of years for which investment is made
So, if you invest `20,000 today at the rate of 10% compounded annually for 30 years, you will have
20,000*(1+0.10)^30 or `349,000, at the end of 30 years.
You can also use Microsoft Excel to compute this for you.
What is also more exciting is an extension of this formula. It is called annuity. That is what is most
commonly used in practical matters. For example, if you invested `1000 every month for the next 10
years, that is `120,000 over 10 years at a rate of say, 12%, what would it amount to?
Or, if you have borrowed `100,000 from a bank at say, 15% pa, and you had to repay it in 5 years, what
would your EMI be? Or, if you paid `5,000 as EMI every month, in what time will you be able to repay
it?
We will not get into the mathematics of that. Suffice it to say that this is very easily doable in Excel. What
is important to understand is this.
Longer the tenure, greater the impact

An amount invested for 5 years will work out higher than an amount invested for 1 year, and an amount
invested for 30 years will work out much higher than that invested for 5 years. The following chart
illustrates how.

The chart above shows `10,000 invested at 10% pa compounded annually for 20 years. As you can see,
the longer you invest the money, higher will be the growth in your investment. Compound interest helps
to grow money exponentially but you will see the benefits of this only if you allow your money to grow
over 10 20 years.
More frequent the compounding, higher the impact

Your investment will grow faster if compounding is done more often. This is because the interest
earned gets reinvested more often. Let us consider the case of `10,000 invested at 10% pa compounded
monthly, half-yearly and annually for 20 years. As you can see in the chart below, your money grows
fastest when interest is compounded monthly. Of course, the impact becomes more obvious as you
increase the tenure.
Higher the interest rate, higher the impact

Let's consider two loans, one at 12% and one at 14%. A difference of `2 for every 100 rupees that's
not much, would you say? Consider the following chart:
If you borrow `100 for 20 years at 12% interest you will have to return `861 at the end of the 20-yr
period but the same amount borrowed at 14% interest will become `1,206. So, just a 2% difference
significantly increases your liability.

Greater the periodic amount, the higher the impact
Let's say that you were able to save and invest `1000 every month. By some careful planning of your
expenses, you are able to save just a bit more `1,100. Can you take a guess as to what that difference of
`100 every month will translate into, if you were to invest it for 30 years? `2.3 lakhs! So, remember,
regular savings can go a long way!
Power of Compounding
There is a story about an Emperor of China who was so excited about the game of
chess that he offered the inventor of the game one wish. The inventor replied that he
wanted one grain of rice on the first square of the chessboard, two grains on the
second square, four on the third and so on through the 64th square. The unwitting
emperor agreed to the modest request. But two to the 64th power is 18 million trillion
grains of rice - more than enough to cover the entire surface of the earth!

Power of Compounding
Understanding how interest works and the power of compounding can have several implications on
your financial life.
1. Start investing early
So, if you are planning to save crores for your retirement fund, then start as early as possible, with your
first salary or at least by 25 years of age. So, when you retire at the age of 60, you will be sitting on a
comfortable pile of money. For example, if you set aside a sum of say `5,000 every month from the age
of 25, at an interest rate of 10%, by the time you turn 60 years you will have with you funds worth about
`1.7 crores. However, if you start at 40 with the same amount and rate of interest, the retirement fund
will amount to only around 35 lakhs. So people who start late have a lot of catching up to do!
Consider the following example: Suppose you invest `10,000 today at a rate of interest of 10%
compounded annually. This means at the end of first year, you would have earned `1000 and your total
investment will stand at `11,000. So, at the beginning of next year, you will invest `11,000 at 10% which
will earn `1,100 as interest. So you see, not only your total investment is growing but you are earning
more interest with every passing year. Now that's the power of compounding.
Year Start with ` Interest Earned

0 10,000 1,000
1 11,000 1,100
2 12,100 1,210
3 13,310 1,331
4 14,641 1,464
5 16,105 1,611
6 17,716 1,772
7 19,487 1,949
8 21,436 2,144
9 23,579 2,358
2. Pay debt off, as soon as you can
The same principle of compounding applies when you borrow money as well. The longer you borrow
the money for, the more you have to pay. Consider the following example:
You have borrowed `100,000 at 12% pa for 5 years. Your EMI works out to `2,224 per month. So, by
the end of 60 months, you would have repaid `133,467 on your original amount.
Now suppose you marginally increase your EMI to `3,000 per month. In this case you would repay your
entire loan in 41 months shelling out only `122,246. Your total cash outflow has come down and you
are debt-free 19 months in advance!
Now, if you decide to increase your EMI to say, `5,000 per month, your loan will be fully repaid in 23

months and total cash outflow will only be `112,129. So by doubling your EMI you have reduced your
tenure by two-third!
3. Be aware of inflation
All of us understand that inflation is the general increase in prices of goods and services. You might
have come across the term WPI (Wholesale Price Index) Inflation in newspapers. When a news report
says that The WPI inflation for the month of October 2012 was 7.45% it means that the average price
of goods in October 2012 is 7.45% more than that in October 2011.
So, how does inflation affect us? While we all understand that higher inflation results in more expensive
goods, few people think about inflation while taking their investment decisions. As discussed earlier,
the whole idea of investing is that our capital should increase over the long-term. However, if inflation
is more than what we are earning, we will end up eroding the value of our capital. For example, if you
have invested in a 1-yr fixed deposit earning 9% per annum and the inflation during the year is 10%,
your real or inflation-adjusted return will be -1%. What this means is that your income is not
growing as fast as the prices of goods are increasing, and as a result you will not be able to afford to buy
those goods in future. So, you should be careful while investing in assets which offer a fixed return as the
interest you earn might be lower than inflation.
So, how can you beat inflation? Well, consistently beating inflation would require you to invest in high-
return assets (for example, stock markets). While that may have the potential to give you high returns it
increases your risk exposure as well. So, the best strategy is to have a mix of assets. If you just want to
leave your money in a savings account earning 4-5% interest because it is safe, you must remember that
your money is eroding in value.
Questions
1. What would be the difference in interest earned if you invest `10,000 for one year at 10%
annual interest rate compounded quarterly and if you invest the same amount at
simple interest?
a. `250
b. `788
c. `38
d. `188
2. The power of compounding refers to

a. Difference between annual and quarterly interest
b. Reinvested earnings that grow over time
c. A combination of fixed and savings account

3. If you have put money in your savings account, you will only be earning simple
interest.
a. True
b. False
4. Your money will grow fastest, when the interest is compounded:

a. Annually
b. Quarterly
c. Monthly
d. Doesn't matter how often it is compounded

www.glasbergen.com
LOAN
Do you have any other collateral

Besides this e-mail from a Nigerian prince?

Chapter 8
Insurance

Theft. Loss. Accident. Death. These words are likely to evoke fear amongst most of us. Simply because
these events are uncertain, and obviously unpleasant. However, it does not mean that you cannot plan
ahead and be prepared. In fact, anticipating future events and their probable outcomes is an essential
part of financial planning. This is where insurance comes into picture. Insurance is designed to help you
out in times of your need.
Insurance, in simple terms, is a safety net or protection against a risk or an unfortunate incident. This
incident may take the form of an accident involving your vehicle, physical injuries, theft or death. There
are different types of insurance which cover these incidents, for example, vehicle insurance, medical
insurance, property insurance, life insurance and so on. By taking insurance, you transfer the risk of a
loss to the company providing insurance. It gives you the security that in case of any such incident, your
financial losses will be covered. Before we discuss the different types of insurance, let's first understand
the common terms in this context.
Understanding Common Terms

Insured The person taking insurance is known as the insured or policyholder.
Insurer The Company providing insurance is known as the insurer. There are many insurance
companies in India Life Insurance Corporation of India (LIC), Oriental Insurance Company Ltd,
United India Insurance Co Ltd, etc.
Risk Probability that an insured event, such as loss, injury or death, will happen while your policy is in
effect. Insurer's assessment of level of risk determines the premiums and terms of policy.
Premium Insurance premium is the money charged by the insurer to provide coverage to the insured.
These premiums can be paid either on a monthly, half-yearly or annual basis depending on the
agreement between the insurers and insured.
Sum Assured This term is usually used in the context of life insurance. The sum assured is the amount
of money an insurance policy guarantees to pay up. In other words, sum assured is the guaranteed
amount the policyholder will receive. For example, if you take a life cover of `50 lakhs, your dependents
will receive this amount in case of your death. The claim is paid out to the person chosen by you while
taking the policy. Such person is also known as a nominee.
Sum Insured This term is usually used for all types of insurance other than life. Sum insured refers to
the maximum amount that an insurance company will pay out in the event of a claim. For example,
suppose you are moving from one city to another and have hired packers & movers to shift all your
household goods. In this case, it would be advisable to take a transit insurance policy which covers the
value of your belongings while they are in transit. In case of an accident or damage to your goods, the
insurance company is liable to pay, at most, the value mentioned by you while taking the policy.
Deductible - In an insurance policy, a deductible is the portion of any claim that is not payable by the
insurance company. It is generally quoted in fixed terms. For example, you may have seen an overseas
travel insurance policy stating that in case of loss of passport the insured will get $500, subject to
deductible of $50. So, if the policyholder's passport is lost and the loss assessment process conducted
by insurer arrives at a loss of $250, the insurer will pay $200. Put simply, the maximum an insurer will

pay for a loss of passport is $500, provided the policyholder pays the first $50 towards the loss. In a
typical general insurance policy insuring car, home, health or overseas travel, a deductible clause will be
applicable to claims arising from damage to or loss of the policyholder. The deductible applies
irrespective of the cause and with no bearing on whether the policyholder is responsible for such a loss.
As a rule, higher the amount of deductible, lower the premium and the other way round.
Claim A claim is the product that insurance companies pay for. For example, if you have taken a
vehicle insurance policy and your vehicle is involved in an accident, you can claim the amount covered
by your insurance policy from the insurer. However, it should be noted that each claim is processed by
the insurance company to check for its validity. If the company has reason to believe that the claim is
not genuine or not covered by the policy, it can refuse payment.
Insurance Policy It is a contract (or an agreement) between the insurer and insured, which determines
the claims which the insurer is legally required to pay.
Types of insurance
Any risk can potentially be insured, provided they fulfill two criteria
1. It should flow from an event which is uncertain
2. The loss arising from the event must be quantifiable
There are various types of policies depending on the event against which insurance is taken. Some of
these are detailed below
Life Insurance: This is the most common type of insurance and most people have heard of it. Life
insurance provides monetary benefit to your dependents in case of your death. It is important to
understand that the main reason why anyone takes a life insurance is to protect their family from any
financial hardship. So, if you have no family, or your family is not dependent on your income for their
survival, you don't need life insurance. The premium you have to pay for life insurance depends on a
number of factors, but primarily your age and the sum assured. How much life insurance you should
take is a personal decision. However, most experts believe that your sum assured should be at least 10
times your annual salary.
There are two types of life insurance (1) Term policy, which is pure insurance coverage and has fairly
low premiums; and (2) Endowment policy, which is more expensive as it essentially bundles insurance
and investment.
So, which one should you pick? We would suggest picking a term policy with adequate cover to provide
for your family's needs in case of your death. Most experts believe that insurance and investment
should be kept separate for the simple reason that insurance does not make for a very good or profitable
investment. Most people find endowment policies more appealing as they have offer a guaranteed
return at the time of maturity. However, you have to pay a heavy premium every year. Also, don't forget
the time value of money we discussed earlier. The money you receive at maturity (say, 25 years later) may
sound like a lot of money right now, but it won't be worth much then.

Vehicle Insurance: Under the Motor Vehicles Act, it is compulsory that every vehicle should be insured
for third party risk. This includes all third party users knocked down by the vehicle and also
occupants of commercial vehicles. The second type of insurance is comprehensive / package policy
which covers not only the above but also occupants of private vehicles and the insured vehicle itself.
Health/medical Insurance: Health insurance is insurance against the risk of incurring medical
expenses. The most common form of health insurance is Mediclaim. It is a reimbursement policy
where the amount of expenses incurred during your hospitalization or pre & post hospitalization
according to your policy will be given back to you. This might be cashless i.e. the insurance company
will pay the hospital directly and you will not have to shell it out of your pocket. If there is no claim
during the term as defined in the policy, you will not be entitled to any money. Mediclaim gives you a
wide coverage and includes not-so-critical diseases such as accidental insurance coverage, expenses
incurred on cataract operation, etc.
Property insurance: Property insurance provides protection against most risks to property, caused by
natural or man-made disasters. The policy may cover the house itself as well as consumables/goods
inside the house.
How insurance works

You pay a fee called a premium, and in exchange, the insurance company agrees to pay you a certain
amount of money if the event you are insuring against is covered and happens during the term of the
policy. The details of insurance protection, such as exactly which events are covered and for how much,
are defined in your insurance policy.
How are insurance companies able to provide such huge amounts of money? Essentially by pooling
premiums paid by thousands of policy holders. While thousands of people buy insurance policies
every year, few of them actually suffer a loss. So, the loss of those few people is covered by the members
of the pool.
Having said this, it is important to maintain at least 3 6 months of cash reserves for emergencies. Even
if you have insurance, it takes time to process claims and actually receive money in your hands. Also,
there are plenty of cases where insurance companies refuse to pay the claim if there is a disagreement
regarding the event insured against.
Questions
1. Assuming similar income levels, who among the following needs life insurance the
most?
a. An single man whose parents are working
b. A married man with a kid and whose wife is not working
c. A married man with a kid and whose wife is working
d. An elderly retired man

2. Property insurance can protect you from:
a. Legal issues with landlord
b. Decrease in your value of property
c. Loss due to damages caused to property or theft of items
3. When someone with life insurance dies, the claim amount is paid to:
a. The government
b. The creditors
c. The beneficiaries
d. The employer
4. In insurance policy, what is sum assured?

a. The amount you pay every year to keep your policy alive
b. The amount you pay to the insurance company before they pay you the amount due
c. The amount an insurance policy guarantees to pay up in case the event insured against
happens
5. If you have a life insurance policy, the insurance company is obliged to pay the money
irrespective of when you die.
a. True
b. False

Chapter 9
Taxation

Benjamin Franklin once said, In this world nothing is certain but death and taxes. And how right he
was! If you are earning either through way of salary or house rent or interest on fixed deposits or if
you have your own business, you are liable to pay taxes to the government.
Why do we have to pay taxes?

The tax paid by us is the basic source of revenue for the government. The government uses this money
to provide roads, water and electricity. It also uses the money for public safety armed forces and
police. The government also needs money for providing free education, free or cheaper food, etc. The
government is able to pay for all this, because it collects taxes. Most of the things you do, the
government takes a cut.
Types of Taxes
There are basically two kinds of taxes, direct taxes and indirect taxes.
Let's talk about the indirect taxes first. Indirect taxes are so called, because you pay them indirectly, that
is, without knowing that you are actually paying tax. Confused? Well, don't be. A good example of an
indirect tax is service tax. Let's say you go to a restaurant. You order a pizza for `399. But when the bill
comes, the person at the counter will actually demand `450 or so. If you look closely at the bill, you will
see that the bill contains a charge for service tax. This is something that the pizza company collects
from you and pays to the government. The pizza company is providing you a service, and the
government levies a tax on the service. It is the pizza company's duty to pay the tax, and he is charging
you for it. In other words, you are indirectly paying his tax.
Other examples of indirect taxes are VAT this is charged on products, customs duty this is charged
when you try to bring a product from outside the country.
Direct taxes are charged directly on a person, and the same person pays it. One of the most important
direct taxes is the tax on income. What the government is saying is this if you are earning money, you
need to pay it a tax. So, what is income? Any form of 'earning' is called income. If you are employed, and
you receive money in the form of salary, then that is income and therefore taxed. Likewise, you could
have made investments in property and you might be receiving rents. Or you would have lent to
somebody and are earning interest. Or you are retired and you earn a pension. Whatever be the mode of
earning, it is called income and is chargeable to tax. In this chapter, we will learn more about income
taxes.
Do YOU have to pay Income tax?

Now let's deal with the next most important question
Well, that depends on how much you earn. In India, Income Tax is levied in slabs which are subject to
change every year. Whatever income you earn from any source, be it salary, house rent, interest on
investments or profit made on sale of investments, profit from business, etc are clubbed together to
arrive at your total taxable income. In India we follow financial year so, any income that you have

earned from April 1 to March 31 will be taxable. Currently, the tax slab rates for individuals are as
follows:
Annual Income Tax Rate

`0 - `250,000 0%
`250,001 - `500,000 10%
`500,001 - `10,00,000 20%
Above `10,00,000 30%
Cess of 3% will be charged on the total tax
These tax rates are applicable on income earned by a person between April 1, 2015 and March 31, 2016.
For example, if your annual income is `11 lakhs, your total tax will be:
(250000*0%) + (500000-250000)*10% + (1000000-500000)*20% + (1100000-1000000)*30%
= `155,000
A cess of 3% is charged on this tax amount = `155,000*3% = `4,650
So, total tax payable comes to `159,650
Now, if this looks like a lot of tax, don't lose heart there is still hope. Your entire income does not get
taxed. You are allowed to reduce expenses which you have incurred in earning that income.
What can be reduced from Income?

Any expense that you have incurred for the purpose of earning that income can be reduced. For
example, if you have run a shop of provisions, and in a year you sell goods worth `10 lakhs, the entire
`10 lakhs does not get taxed. Firstly, you are allowed to reduce the cost of buying goods, rent paid for
the shop, electricity charges for running the shop, salary paid to any assistant employed in your shop,
etc. Only the balance income will be called as taxable income.
If you own a house which you have let out on rent, and you receive `10,000 per month as rent; `120,000
will be your income from house property for the full year. However, you can claim certain deductions
from this. For example, government allows a flat 30% deduction on house rent income for the purpose
of repair and maintenance of your house, irrespective of whether you have actually spent any money
or not! If that's not enough, there is more good news. Read on. If you have taken a loan to purchase this
property, you can reduce the interest on that loan from your rental income!
Now, let's consider the case of a salaried person. Irrespective of how much your salary is, you can claim
deduction for amount spent on commuting between your home and office. The maximum amount you
can claim for this is `800 per month (or `9600 per annum). This means that if your employer pays you
more than `9,600 for conveyance for the full year, you can claim only `9,600 as deduction. Also, if your

employer reimburses any amount spent by you for your medical treatment, it is not taxable to the extent
of `15,000.
How is tax collected?

For most of us, our first encounter with tax usually happens when we receive our first pay check. The
two main tax-related entries we find on our pay check are professional tax and income tax. These
taxes are deducted at source and you receive your salary after these deductions have been made.
What is Tax deducted at source?

It is a smart way for the government to collect taxes. If the government told you that every year you had
to pay taxes, you could always say that you have no money left to pay it because you spent it all. To make
things easier for itself, the Income Tax Department says that you will get your earnings only after taxes.
In case you draw a salary, the department fixes this responsibility on the employer. If you earn interest,
the bank will deduct tax and only pay you the rest. So on.
The concept of TDS basically comes from the principle of pay as you earn. TDS offers several
advantages like:
It facilitates sharing of responsibility of tax collection between the Deductor and the tax
administration.
It ensures regular inflow of cash resources to the Government.
It acts as a powerful instrument to prevent tax evasion as well as expands the tax net.
So, if you are employed with a company which is deducting tax from your income, it becomes the
responsibility of the company to pay that money to the Income Tax Department. In such a case, you
don't have to pay anything other than the TDS already deducted.
What is advance tax?

Advance Tax is also a mechanism for the Department to collect taxes. For example, you may be
employed with some company, and you will be paying tax on that salary through TDS every month. You
may also be receiving some money through say, advertisement revenues on your blog. You will have to
pay tax on that too. But when? You should not wait till the end of the year to pay it. You have to pay it
every now and then. The Department has mandated how frequently you need to pay taxes.
The Income Tax Department has also made it compulsory that every person whose tax liability (after
taking into account TDS) is more than `5000 for any year has to pay advance tax.
Instalment Percentage Due date

First 30% 15th September
Second 30% 15th December
Final 40% 15th March

Please note that your tax liability has to be more than `5000 after taking into account TDS. So, if your
total tax liability is `30,000 and your employer has deducted `30,000 as TDS, then you don't need to pay
anything more.
Rights and Obligations as a Tax Payer

Let's discuss your rights as a tax payer first.
It is your right to save taxes. Saving taxes is not the same as evading taxes. Evading taxes, meaning not
paying tax when you are required to, is a crime. But reducing the amount of tax you need to pay, by doing
certain things that the government tells you to do, is perfectly legal, and is your right. You could take
advantage of the various tax saving opportunities that the government offers. These offers change
from time to time, depending on the government's priorities.
Most of these offers arise from the government's priority to promote the savings habit. Through tax
exemption schemes, the government provides you with the incentive to save. Some of the common
instruments that can be used to save on taxes are:
1. Public Provident Fund This is a savings instrument, where you keep contributing to a
government-run fund, and it cannot be taken out of the fund for about 15 years. You get tax
deduction for the amount that you invest in this fund, and the interest rate is also attractive at a
tax-free 8.5%.
2. Insurance Policies Used to promote protection against risk, the government incentivizes
purchase of insurance policies by providing tax deduction for the premium paid on the policy.
3. Fixed Deposits You could also choose to invest in a long-term (5 years) Fixed Deposit and
avail a tax deduction on the amount invested. The interest you earn, though, will be subject to
tax.
4. Home Loans Originally offered as an incentive to enable the common man to acquire a
home, home loans are one of the most commonly used tax-saving instruments. Taking a home
loan helps in two ways one, the interest you pay on it can be reduced from your total income
(even if you do not earn any income from the house), and you will also avail a tax deduction on
the amount of principal you pay.
You have a right to declare the tax saving options that you have availed of, to your employer, so that you
reduce the amount of TDS. The employer has the responsibility to compute your tax properly and
deduct tax accordingly.
You also have the right to claim refund, if you have paid, through advance tax or TDS, more tax that you
ought to pay. Moreover, if there is a delay in processing the refund, you are also entitled to get interest
on the refund amount!
As a taxpayer, you also have the right to question what the government is doing with your money. This is
provided through the Right to Information (RTI) Act.

Obligations as a Tax Payer
It is YOUR duty to apply for a Permanent Account Number and obtain it.
It is YOUR duty to assess your income for the current financial year, compute your tax liability and pay
that amount to the income tax department. Ignorance about tax rules is not an excuse for non-payment
or even delayed payment of taxes.
It is your duty to pay your taxes on time. If you are earning taxable income, and enough taxes are not
deducted at source, you need to pay Advance Tax. If you made a mistake in estimating your income, you
need to rectify it as soon as possible and pay taxes at the earliest.
It is also your duty to file your tax return on time. This funny word, return, is actually a document that
details out how much income you earned and how much tax you have paid. There is a standard format
for tax returns, called SARAL, in which you need to submit your details. This can be done online. The
due date for filing income tax returns in 31st of July every year, for income earned for the year ending
that March.
You will also need to inform the department of changes in your personal details address, phone
number, etc.
Conclusion
We have talked about the basics tenets of taxation what is taxed and how tax is collected. We also
talked about the rights and obligations of the taxpayer. There is a lot more detail to taxation in terms of
the detailed provisions governing each of these items, which is beyond the scope of this booklet.
Questions
1. If your total taxable income in financial year 2012-13 is `10 lacs, what is your tax
liability?
a. `130,000
b. `133,900
c. `100,000
d. `154,500
2. If you are repaying home loan every month, what can you claim for tax benefit?
a. Only Principal
b. Only Interest
c. (a) and (b)

3. If your total tax liability in a financial year is `4,000, how much advance tax are you
required to pay?
a. `4,000
b. `1,200
c. `1,600
4. If you have filed your return of income on time, and then you realize you forgot to
claim deduction for your PPF, what can you do?
a. Nothing, you have already filed the return
b. Depends on the amount of claim
c. You can file a revised return
5. Which of the following insurance premiums can you claim for tax deduction?
a. Auto insurance
b. Life insurance
c. Property insurance
The arithmetic makes it plain that inflation is a far more

devastating tax than anything that has been enacted by our
legislatures. The inflation tax has a fantastic ability to simply
consume capital. It makes no difference to a widow with her
savings in a 5 percent passbook account whether she pays
100 percent income tax on her interest income during a
period of zero inflation, or pays no income taxes during years
of 5 percent inflation.
- Warren Buffett

Chapter 10
Getting started
on the road
to financial
freedom

We have covered a lot of ground over the last several pages. But how do you put to practice what you
learnt so far? Where do you begin? In this chapter, we will tie the loose ends and see the best way to start
on the road to financial independence.
Your First Pay cheque

Your first pay cheque is a special one. When you graduate from college and get your first job, it is time to
celebrate. Nothing comes close to the feeling you get when you receive your first pay cheque.
Overnight, you are an independent person who has become economically productive. It would be
tempting to spend the money that you earn on a lot of aspirational things. At the end of the day, you are
young and life is long, right? Wrong! Before you know, time flies by and if you are not careful, you may
wonder where all your income went.
You will soon realize that your spending goes up along with your salary or income. The more you earn,
the more you spend and very soon it is easy to get caught in the treadmill of earn and spend. As you age,
you will take on responsibilities like getting married, starting a family and taking care of your parents.
Saving a part of your income

Make it a habit to save at least 10% of your income. This is the very minimum that you should look to
save. For those of you without the responsibility of supporting your family, you should aim to save at
least 25%. Sounds impossible? Well, this is not difficult if you do it the right way.
A lot of people find it difficult to save any money, regardless of how much they earn. They have every
intention to save a part of their income, but they take the wrong approach. They spend on a variety to
things, essential and nonessential, and hope to save whatever money is left over in the end. This is a
wrong approach to saving. The right way to do this is to first set aside the amount that you want to save.
Then you spend the rest of your salary or income. This will discipline you to live within your means.
Secondly, this habit will ensure that your savings grow month after month.
Investing 101
One of the best ways for a novice investor to get started in the game of investing is to start with ELSS.
What exactly is this ELSS? Well, ELSS stands for Equity Linked Savings Scheme. This is a powerful
vehicle for getting tax breaks and growing your capital. It works as follows.
Under the ELSS scheme, you get to reduce your taxable income to the tune of Rs 1,50,000/- per
annum. This tax exemption can be claimed under section 80 C of the income tax act. What this
means for you is, by investing up to Rs 1,50,000/- per annum under the ELSS scheme, you will get
to reduce your taxable income to the tune of Rs 1,50,000/-. If you are in the highest tax bracket,
this could result in a tax saving of Rs 50,000. And that is not all. ELSS falls under EEE tax rule
(Exempt-Exempt-Exempt). No taxes are applicable during Contribution-Accumulation-
Withdrawal phases. Investments get tax deduction under Section 80C, so you don't have to pay tax
on the amount invested in the ELSS fund. The capital gains generated by the fund are also exempt
from tax, as the investments are not withdrawn. Finally, withdrawals are also tax-free because there
is no tax payable on long-term capital gains from equity-oriented mutual funds. The Employee

Provident Fund and the Public Provident Fund are the only other investment options that enjoy
the EEE tax treatment.
How do you go about investing in ELSS and where is your money ultimately invested?
ELSS is a type of diversified equity mutual fund that is qualified for tax exemption. It comes with a lock-
in period of 3 years. As the name suggests, the ELSS funds invest at least 65% of the corpus in equities.
Over long investment horizons, equities give returns that are a lot higher than fixed income instruments
like bank fixed deposits.
One of the best things about the ELSS is that it takes only Rs 500 to get started. You can do a SIP
(systematic investment plan) on ELSS by contributing only Rs 500 per month.
With the tax advantages and low monthly SIP amounts (minimum investment), ELSS should be one of
the first investing decisions that you take once you start earning money.

Chapter 11
All About
Aadhar

What is Aadhar Card? Well, a simple answer is Aadhar card is a 12-digit unique identity
number issued by the Unique Identification Authority of India (UIDAI) is a central
government agency of India to each resident. It is considered the world's largest national
identification number project.
How Aadhar can simplify your money life

1. You can e-verify your income tax returns using the Aadhar card. This eliminates the need to post
ITR-V acknowledgement to the I-T department's Bangalore office, making the return-filing
process paperless.
2. You can invest in mutual funds online using Aadhar, even if your PAN is not KYC-compliant.
3. You can buy an insurance policy, without submitting the KYC documents
4 You can open a bank account with the Aadhar card, as Aadhar is accepted as proof of identity and
address.
5 Aadhar facilitates simple, paper-free and quick opening of an NPS account
6 Aadhar enables you to store all key documents electronically in one place, using a digital locker.
This ensures ease of access and eliminates threat of losing them
7 Aadhar helps government pensioners in getting a Jeevan Praman digital certificate. This obviates
the need for the pensioners to produce a life certificate every year.
So, What are you waiting for? Have you applied for your Aadhar card yet?

Chapter 12
UPI and You

So, What is UPI and why should I care?
UPI is a payment system that allows you to transfer money between any two parties.
So it is like NEFT/RTGS/IMPS?
Well, it is actually a lot more standardized than the above mentioned payment systems. Therefore you
can initiate a bank account transfer from anywhere with a few clicks.
Nice, but what's the big deal?

Well, UPI allows you to pay directly from your bank account to different merchants without the hassle
of typing your card details, or net banking/wallet password.
Does it require the 2FA?

Yes, the 2FA is mandated by the RBI and is therefore part of UPI. However, it uses MPIN as the 2FA
instead of an OTP.
What is this MPIN?

An MPIN is given to a banking customer once they register for Mobile Banking support. Chances are
you have one already, but have never used it.
How is it better than just using my Card?

Cards are a hassle to type on phones, and transmitting card data brings its own security problems. UPI
bypasses all of these.
But won't the merchant get my Bank Account Details?

UPI brings this awesome idea of Virtual Payment Address. You only give your merchant this address,
and they can store your payment details against this. They never even get to see your bank account
number.
What about refunds?

Refunds are currently not part of UPI and the authority for all arbitrations lies with NPCI.

And Finally
We hope you found this booklet useful. We have made
an attempt to introduce all the aspects of financial
planning. And we hope after reading this, you would
agree that planning your finances is a very important
task which should ideally start with your first pay check!
While the whole process may seem daunting at first,
please understand that this is an ongoing activity. You
should constantly make an effort to assess your goals
and the demands that your changing lifestyle is making
on your savings. If you do that, there is no reason why
you should not be able to fulfil all your needs and save
comfortably for your retirement days as well!

Notes

Notes

Notes

Notes

Financial Primer Ebook by Money-Wizards

Caricato da

Informazioni sul documento

Titolo originale

Copyright

Formati disponibili

Condividi questo documento

Condividi o incorpora il documento

Opzioni di condivisione

Hai trovato utile questo documento?

Questo contenuto è inappropriato?

Copyright:

Formati disponibili

Financial Primer Ebook by Money-Wizards

Caricato da

Copyright:

Formati disponibili

Money-WizardsTM

Financial Literacy Primer

Design & Illustrations by Money-Wizards

An investor education initiative by Principal Mutual Fund Money-Wizards 1

2 Money-Wizards An investor education initiative by Principal Mutual Fund

An investor education initiative by Principal Mutual Fund Money-Wizards 3

An investor education initiative by Principal Mutual Fund Money-Wizards 5

An investor education initiative by Principal Mutual Fund Money-Wizards 7

An investor education initiative by Principal Mutual Fund Money-Wizards 9

10 Money-Wizards An investor education initiative by Principal Mutual Fund

An investor education initiative by Principal Mutual Fund Money-Wizards 11

1. When friends are coming round to dinner do you

2. How do you feel about money?

4. What are you doing to save for the future?

5. How often do you borrow money?

12 Money-Wizards An investor education initiative by Principal Mutual Fund

7. When planning a holiday, I

8. When you feel a bit down, shopping makes you feel

9. What is your financial goal?

10. At the end of each month I have

An investor education initiative by Principal Mutual Fund Money-Wizards 13

Copyright 2005 by Randy Glasbergen.

What good is online banking if you cant

14 Money-Wizards An investor education initiative by Principal Mutual Fund

An investor education initiative by Principal Mutual Fund Money-Wizards 15

Permanent Account Number

A typical PAN is AABPS1205E.

2. Why is it necessary to have PAN?

16 Money-Wizards An investor education initiative by Principal Mutual Fund

It is also mandatory to mention PAN for obtaining a telephone or cellular telephone

It is statutory responsibility of a person receiving document relating to economic or financial

4. Who must have a PAN?

5. Can a person obtain or use more than one PAN?

7. Which documents will serve as proof of 'Identity'?

Copy of school leaving certificate or matriculation certificate or degree of a recognized

8. What is proof of 'Address'?

An investor education initiative by Principal Mutual Fund Money-Wizards 17

18 Money-Wizards An investor education initiative by Principal Mutual Fund

What do you need to do if you want to have a good credit score?

An investor education initiative by Principal Mutual Fund Money-Wizards 19

3. To demonstrate credit worthiness, a person should:

4. A record of borrowing and repaying on credit is called a:

5. If someone's credit worthiness decreases:

20 Money-Wizards An investor education initiative by Principal Mutual Fund

An investor education initiative by Principal Mutual Fund Money-Wizards 21

Savings Bank Account

Facilities that savings banks provide

Paying Money through Banks

22 Money-Wizards An investor education initiative by Principal Mutual Fund

4. There are blanks that you have to fill.

a. The name of payee the person whom you intend to pay.

Crossing the cheque

An investor education initiative by Principal Mutual Fund Money-Wizards 23

Standing Instruction/ Direct Debit/ ECS

24 Money-Wizards An investor education initiative by Principal Mutual Fund

Receiving money through banks

Fixed Deposit Account

An investor education initiative by Principal Mutual Fund Money-Wizards 25

26 Money-Wizards An investor education initiative by Principal Mutual Fund

Terms commonly used in Banking

An investor education initiative by Principal Mutual Fund Money-Wizards 27

2. If you break your fixed deposit before maturity:

3. When you cross a cheque: