Money saved is money earned

Q. How should I manage my expenses?

Expenses reduction should be a goal and everyone should try to achieve it in their own way.It is old saying "money saved is money earned" . Saving the money means reserving the earned money for the future use. Debt is to use money now that have to be earned somewhere in the future. Debt and alcohol have in common that if one enjoy to much of it or get addicted, one gets in big trouble one way or an other

“How do I start ?”

• Take care of your physical and psychical health in the first place !! Keep your personal medical insurance ready to meet any un-fortunate event. i week hospitalization can wipe out your savings of many months. 

• When your money arrives in your account, you FIRST save money (10%), SECOND reduce debt (10%) and THIRD spend money. Otherwise you will find out that there will be almost no money left to save.

• Avoid advertising. What ever they told you, the only purpose of advertising is to seduce you to spend your money on their stuff that you do not really need. Buffett says "If you buy things you don't need, you will soon sell things you need.”"

• Write down each and every expenses daily for 3 months and look at the unnecessary items. 80% of all problems are caused by 20% of reasons. So if you can find out those 20% reasons that make you spend 80% of all your money, it makes easier for you to reduce your expenses.

• Go Offline if you can.When making payments become too easy and painless, we normally end up spending more. Make it difficult. Make it offline. Go to physical stores and buy. This may lead to lesser purchases or not buying things, that we do not need.At physical stores also, we can swipe our cards and buy things easily. This again may lead to buying things that were not in our shopping list. Try buying things using cash. This will help you to remain strictly within your budget.

• Talk to your family i.e. spouse or grown-up children that why you want to save more and reduce your unnecessary expenses. Ask for their suggestions and active participation. It's a family goal after all. Without their support, you are unlikely to achieve it on your own.

Hope this will help.......

Assets Vs Liabilities

Today I received a what app forward. I want to share it with my readers. It reads as.

Asset vs Liability

Son:  Dad, may I speak with you?
Dad: Go ahead.
Son: Among all my classmates, I am the only one without a car. It is embarrassing.
Dad: What do you want me to do?
Son: I need a car. I don't want to feel odd.
Dad: Do you have a particular car in mind?
Son: Yes dad (smiling)
Dad: How much?
Son:Rs 500000
Dad: I will give you the money on one condition.
Son: What is the condition?
Dad: You will not use the money to buy a car but invest it. If you make enough profit from the investment, you can go ahead and buy the car.
Son: Deal.

Then, the father gave him a cheque of  Rs500000. The son cashed the cheque and invested it in obedience to the verbal agreement that he had with his father.

Some months later, the father asked the son how he was faring. The son responded that his business was improving. The father left him.

After some months again, the father asked him about his business
again and the son told him that he is making a lot of profit from the business.

When it was exactly a year after he gave him the money, the father asked him to show him how far the business has gone. The son readily agreed and the following discussion took place:

Dad: From this I can see that you have made a lot of money.
Son: _Yes dad. _
Dad: Do you still remember our agreement?
Son: Yes
Dad: What is it?
Son: We agreed that I should invest the money and buy the car from the profit.
Dad: Why have you not bought the car?
Son: I don't need the car again. I want to invest more.
Dad: Good. You have learnt the lessons that I wanted to teach you.
- You didn't really need the car, you just wanted to feel among. That would have placed extra financial obligations on you. It wasn't an asset then; but a liability.
- Two, it is very important for you to invest in your future before living like a king.
Son: Thanks dad.

Then the father gave him the keys of the latest model of that car.

MORALS:

1. Always invest first before you start living the way you want.

2. What you see as a need now may become a want if you can take a little time to get over your feelings.

3. Try to be able to distinguish between an asset and a liability so that what you see as an asset today will not become a liability to you tomorrow.

Identify yourself
Build yourself
Be yourself...

Setting a Goal in Personal finance and its importance

Have you ever think if there is no goal post then what will happen to a football match? Similarly if we don’t have a financial goal than we will be in some unknown situation. So it very important to set financial goals and plan your cash flow to achieve them. Setting goals and sticking to them is the key to personal finance success. Getting to where you want to be requires Vision , workable plan and discipline to follow the plan. Goal should be realistic.  It should not be a dream. Goal should be actionable, we must have some tangible time line in order to reach there.

Let me give an example to explain how Goal and Planning work. Suppose you want to buy a house. For this you need to make the down payment. So first you need to decide the cost of home. After that how much do you want to make dawn payment the time line for the same. Let us assume you want to make a down-payment of Rs 25 lakhs in 5 years. So this is goal for you. Now you need a plan to reach there.

For 20 lakhs in five year you need to save some amount every month for sure. But the key question is how much money do you need to save, so that you can meet your down-payment goal?  If you expect to get 10% p.a. return on investment, then you have to save Rs.25614 every month. I have not taken effect of inflation. Now if you don’t have these figure then how can you reach the corpus? Make sure that your goals are achievable. It means if someone with salary 30000 per month then this goal is not a realistic goal. In this case he need to change the plan and  increase the time line or reduce the corpus required or both.

Now you have the goal and the plan. Now you need to start to execute the plan and stick to it. While execution you need track your goal on regular interval. At any point of time if you feels that the plan is not going according to the plan the we need to change the plan to achieve the goal. It may happen that your investment is not giving  the expected 10% return or the cost of the house is going to increase and you need some more corpus. In that case we need to rework our plan once again. But if the plan is working as expected then please don’t touch.  For better planning and tracing we should split our timeline to smaller milestone with target. In this case we can review our corpus in every 6 months if it in the line with our plan then go as per plan.

As we have discussed the plan for create corpus we must have plan for exit also. If you don’t have that then it may possible you missed the finish line with a margin. As you reach near to your goal you need to shift your corpus in safe asset class like liquid fund.

As we have discus a goal to make down payment we may have multiple goals. Some of the most discussed goals are

Create an Emergency Fund : An Emergency Fund planning should be our first goal. As an Emergency Fund we must have a corpus equivalent to 6 months expense. This must be kept in risk free and easily accessible asset class as FD or liquid fund.

Get Out of Debt – Completely Or Partially : it is a very important goal in everyone’s financial life. Most of us have one or two loan/EMI. If we reduce the out flow towards the Debt repayment then it will increase our allocation towards investment. This will help us to reach others goal quickly.

Early Retirement : Retirement is a truth for everyone who is  working. So it is better to plan it early. It the best if someone plan it on the day one of his working life. For this you need to calculate the cost of living after retirement with inflation. That corpus need more time to get ready. Most of us don’t like to think about this.

Hope this will help…

Do we need Insurance?

Insurance is a contract between two parties where one pays the premium to other to cover a specific potential financial loss. It is not an investment at all. It is just like the foundation of a portfolio. Any good portfolio is incomplete without a cover. As we can’t think a multi-storied building with a deep strong foundation we should not even start thinking of investing for future without insurance. There is an old say i.e. “safety first” so we should think about Insurance first then Investment.

Most of the time people get confused with Investment and Investment. Most people do not understand that the basic Logic of Life Insurance is to provide security to your Family from an unfortunate event. Insurance should be bought for protecting your financial future and for securing your financial future. It should not be mixed with Investment which should be done for creating wealth for the future. Insurance is an expense or cost to protect our financial future from an unfortunate event. It is always better to avoid mixing your Insurance with Investments.

In India if you look around then you can easily find that maximum number of people pays their premium between December and March just before the financial year end. What does it mean? It means. People buy Life Insurance for the purpose of saving tax which is again wrong thing to do. Just because buying Life Insurance lowers your tax burden it is understood by most people that it is the best form of Investment. These are the money back policies which can give 5 to 6% per year. They offer very small cover too, which will not be sufficient for dependents after her or him.

So what should be done? When it is insurance then we should only have the pure term insurance policy. Here the premium is very less compare to money back policies form same amount of coverage. Rest all the saving should be invested in high yielding instrument like equity or equity related assets. In any time period this combination can give better return than any money back policies. Let me explain this with an example.

Suppose there are two friend Ravi and Shashi. Both are 25 year old. They have decided to save ₹30000 per year for 30 years. Ravi has decided to invest this surplus in a FD which can give max 8% return(on higher side). It will also give the coverage of ₹600000 to ₹700000. On the other hand Shashi buys a term plan with ₹6000 with a cover of ₹2500000. And remaining ₹24000 in Equity mutual fund. Equity has a historic CARG is 17%. But for my calculation I have taken on 13% CAGR return.

Now refer the above table. At any point of time Shashi will get better corpus. One thing I like to mention that equity return will not be so steady. It is going to be volatile but in long run it will beat any fixed return asset class.

If both friends increase the investment by 5% each year then the return will be like this.

You can download the excel file for you reference from here.

Hope this will help……

Should you buy an annuity?

Today I got a call from one of my relative. He needs some suggestions on one of his investment in pension plan. He paid the premium for 10 years. Now he has only two options as withdrawal or invest in Annuity plan offer by same company. Annuity is an product that pays income on regular basis.  and can be used as a part of retirement planning.most of annuities do not provide life insurance cover. Instead they offer you a guaranteed income either for life or for a defined duration.

Retirement is an inevitable stage for every working individual. An annuity provides the security that investor will continue to receive money on regular interval for the rest of your life. investor may choose to receive your fixed payouts at intervals that suit him best - monthly, quarterly, half-yearly or annual. The biggest advantage that annuities offer is that they eliminate the re-investment risk. The risk is that when you go to reinvest the principal, you may get a lower rate of interest.Other monthly income paln such as the Post Office Monthly Income Scheme (POMIS) come with reinvestment risk. But in Annuity plan we have guaranteed the same rate of payout for life or paymnet duration.


While annuities do provide a guaranteed sum of money, and hence security and stability to retirees, they have a few disadvantages too.

According to Irdai rules, pension plan investors have to use 67% of the corpus to buy an annuity from the same insurer they bought the pension plan from. Investors do not have the option of buying the annuity from another insurance company, which might be offering better rates. NPS investors too have to use 40% of their accumulated corpus to buy annuities. The only advantage is they have the option of going with the best annuity provider.

Investor has no access to the capital. Premature withdrawals not allowed in annuities plans. Annuities do not allow premature withdrawal. if there is any emergency then investor must use some other option.

Lower rate of return. The returns (annual) on annuities have not been that attractive(It is between 6 to 7%) as compared to other products. It even less than the bank FD. with this ROI it can not fight inflation. Prices will continue to rise even after retirement.

Diversification is very important aseact of every investment plan. we should not put all eggs in one basket. We should not put all of our retirement savings in an annuity plans. Retirement corpus should be used to have following goals

• Regular income which should Combat inflation.
• Create an emergency Fund to meet emergency or unexpected expenses. 

HOPE THIS WILL HELP

Is saving too hard to Start?

Hi friends, today I start discussion with a simple question as “Is saving too hard to start?” Most of the time, the hardest thing about saving money is just getting started. And once you start I bet you that you will not stop it, provided if you choose the right financial vehicle for it to grow. Money saving is just a habit to achieve some financial goals. Financial goal may be short term as well as long term. Here are some examples of short- and long-term goals:

Short-term (1–3 years)

• Buying electronic gadgets.
• Vacation
• Down payment for a car or Home

Long-term (4+ years)

• Own Retirement
• Child’s education and marriage

Step 1: Track all your expenses: Tracking the expenses is the first and the most important step. We must track all our expenses. All means all. For this you may either use your bank/Credit card statements or any third party mobile app or even do it manually. Once you have your data, organize the numbers by categories, such as gas, groceries and mortgage, and total each amount. Try to outline the over or unnecessary expanding. Try to do this activity at least for 3 months.

Step 2: Make a budget: Now you have an idea of your spending. Now create budgets for each category of expenses. Try to cut the budget for unnecessary items. Please keep budget for items as entertainment and dining out. If you find difficult to budget for all items outlined in step 1 then it might be time to cut back.  

 Step 3: Plan on saving money: Create a Budget for savings also it if not outlined in step 1. Allocate at least 10 to 15 % of you income. 30% is good enough. But if you don’t see this much in savings category then start to trim down the budget form all other categories which have some unnecessary items.

Step 4: Set Your Goals and priorities: Setting the goal and priorities also a very important step. Without this you can’t get the conviction to save for longer term. Can you imagine a football match without a goal post? The goals might be short term or long term as we discussed above. Please consider the future cost for any goal because value of money will fall due to inflation.

Step 5: Choose right financial vehicle to invest: Now you have your fund in your hand to achieve a goal. But money sitting ideal in a bank account losses its value so we need to invest this money to protect its value by appreciation. You should not invest your money with a locking period say 5 years for a goal targeted in 3 years. For short term goal capital protection should be the aim and for longer term goal we should go for capital appreciation.

As I said earlier that Money saving is just a habit so investment must be automated as much as possible. Automated transfers are a great way to save money since you don’t have to think about it and it generally reduces the temptation to spend the money instead. It brings the discipline in our financial life.

OLD Formula:

INCOME – EXPENSE = SAVINGS

NEW Formula

INCOME – SAVINGS = EXPENSE

Nothing big difference in term of numbers but there is huge difference in real life.

Update Contact Details on Income Tax Site

Now it is essential to update contact details as address, mobile number and email address by taxpayers on Income tax e-filing web site. This will enable the income tax department  to serve the notice if any to us in a timely manner. Whenever you change your mobile number or email address you need to update on Income tax website. To do this you need to login to https://incometaxindiaefiling.gov.in/e-Filing/UserLogin/LoginHome.html .On login it will prompt you for address, mobile number, and email address.

Once you update the information click on Continue button.The ITR system will generate OTPs and send to your email and your mobile number.
x

On successful validation, the system will display success message on screen. You will also receive an email with confirmation detail by income tax department.

If your profile is already updated system will not prompt anything on login. In that case, you can Go to Profile Setting and select My Profile tab and see your profile details. Apart from profile detail, you can also see Aadhaar detail and PAN details in My Profile section.

SEBI notification : Categorization and Rationalization of Mutual Fund Schemes

As per SEBI notification a mutual fund company can have only one fund in each of categories like Equity, balanced, hybrid, debt and Solution oriented schemes etc. Mutual fund need to wind up the schemes or merge.

Currently there are 42 Mutual Fund houses and about 2000 Mutual Fund schemes and each have several variants (Regular, Direct, Growth, Dividend Payout, Dividend Reinvest etc). The SEBI circular aims to reduce the number of primary schemes and that too only open-ended Mutual Fund schemes which are about 830 in number.

SEBI has defined the following groups and categories of MF schemes:

1. Equity Schemes - 10 categories
2. Debt Schemes - 16 categories
3. Hybrid Schemes - 6 categories
4. Solution oriented schemes - 2 categories
• Retirement planning
• Children’s future
5. Other schemes
• Category for each index funds/exchange-traded funds (ETF)
• Fund of funds (FOF)

The above circular SEBI also lays the definition of large cap, mid-cap and small-cap companies.

1. Large Cap: 1^st-100^th company in terms of full market capitalization.
2. Mid Cap: 101^st-250^th company in terms of full market capitalization.
3. Small Cap: 251^st company onwards in terms of full market capitalization.

All existing open ended schemes of all Mutual Funds need to follow the rules. Mutual Fund companies have been given 2 months to review all their Mutual Funds and come with a plan to align their various schemes according to the said categorisation. Mutual fund companies need to wind up their open ended schemes or merge them. It will also help us to align our goals with a MF scheme. As an investor we also have reduced list of funds to choose for investment.

Don’t get caught in the monkey trap

The Indian monkey trap is an age old method for catching live monkeys. Here the monkey catcher just used monkey’s curiosity against them. A narrow necked ceramic/clay bottle with a bulbous bottom, similar to a Carafe, is tethered to a stake in the ground or a small tree using a vine or rope fastened around the narrow neck. Various items such as nuts or firm fruit are put inside the bottle or vessel and left in locations where monkeys are known to inhabit. The monkey’s curiosity is aroused by the vessel and will put his hand into the jar to find what is contained, will grasp the bait and will attempt to remove them within their clenched fist. They are trapped by curiosity, and are unwilling to release the contents within their clenched fist. We might consider the monkey foolish, since to escape the trap, all they need to do is to release the bait! 

It seems so obvious to us...just let go of the food, release the bait and run away. It is so simple. 

We as a human think better than monkeys. Do we? 

Look at your financial life, you could easily find the places where you had your hand in the  narrow necked ceramic/clay bottle. The financial traps are

• Home/Car Loan: most us just take loan for home/car which is may not required at all. for a loan 20 years we have to pay 2 to 3 times. I am not say we should not have your own house but we move far ahead and took second home for rental income. here is the trap.

• Endowment Policies: There are many people consider the insurance products specially Endowment or money back policy as an investment. Which should not be the case. In such policies we can only earn 5 to 6 per anum which is actually a - ve return if you take inflation in the calculation. A term plan is the best product if you are thinking to insure yourself.

• Bank FD/RD : Investments in bank FD of banks are widely considered as the wise and the safest option. But the real return after adjusting for inflation and tax applicable is really negative. We feel very safe with the FD but share of same safe bank become very risky for investment.

• Day Trading : Many times we are trying to get some quick money which may not be worth taking risk. You  may make money in trading but not always.Warren Buffet says “If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes”. 

• Blindly Following Big Investor : We are just looking for Multi bagger and trapped in a script following a well known Investor. All we witnessed the movement in JPAssociate. It just jumped to 30 from 15 and again came to 16.

Image Source : Google Image

Cut Your Losses Short

Warren Buffett said there were only two rules to follow with your investments:

• Rule #1: Don’t lose money.
• Rule #2: Don’t forget Rule #1.

As a normal investor, no one wants to sell for a loss or book the loss. Most of the time we are not ready to admit that we made a mistake. The problem is that market doesn't care who we are, what we think or how much we believe in a stock before investment. Market is really cruel in this respect, so keep your ego aside and take a small loss before it turns bigger.

But if a stock drops 15%, 20% or 25% from our initial purchase price, isn’t it simply a better buy at lower prices with same fundamentals? Why would someone actually sell just because the stock temporarily falls? If it falls we should ask ourselves that why it fell? It may fall due to reasons below

• Market correction
• Fundamental changed for the company or industry.

If the stock fall without market correction then it is the time to think about your holding. We have to limit our loss. The limit can differ person to person and sock to sock. Once you decide to limit say 8% or 10% then go for it. If you don’t cut your loss then it will impact your portfolio return.

Suppose you have exited form a stock which has fell 8% from your purchased price and reinvest the sum in some other stock i.e. 92% amount of your initial investment. Then this new investment must earn 8.69% for break even. Similarly if you book your loss at 15% then the next investment should earn 17.65% which is more than double…

Cutting losses is like having insurance so please cut your loss short and invest again.

Sovereign Gold Bond : Buy Gold with Triple Benefits

Government of India launches the 8th Tranche of Sovereign Gold Bond on the occasion on akshaya tritiya. Issue will open from 24^th April 2017 to 28^th April 2017.it comes with three benefits as capable to earn interest, theft proof and guaranteed by GOI. This time we have 50rs discount per gram :)

Key Features :

• SGBs are Government securities denomination in grams of gold (1 unit = 1 gram)
• Issued by the Reserve Bank of India on behalf of the Government of India
• Investor will earn returns linked to gold price
• Additionally fixed interest of 2.50% p.a. Payable semi-annually on the issue price
• Bonds will carry sovereign guarantee both on redemption amount and on the interest
• Minimum investment: 1gram . Maximum investment: 500 grams
• Available in DEMAT & Paper form
• Tradable on National Stock Exchange of India Limited (NSE)
• Tenure: 8 years with an exit option from 5th year onwards
• Issuance through trading members of NSE

Retirement Calculator

As in last post I have discussed about the financial freedom. I have created a excel calculator which tells that if we have saved our 30% of household income then it would be sufficient to replace household income in 15 years. Shocked? But it true that it will be enough to generate income same as our salary in just fifteen years.

For this calculation, I have consider continuous 8% growth in income per year and 15% return on investment per year which quite possible with equity exposure. And I have assume 8% safe return on investment after retirement.

As you can see that I have taken 10000 as starting salary per month in second column. In fourth column there is compounded value of saving assuming we have invested the savings with a return of 15% per year. And in fifth column there is monthly income if we have kept our corpus as 8% per year to generate regular income. And in last column shows the balanced amount need to be generated for income.

You can download the file here.

Financial freedom

Robert Kiyosaki the author of Rich dad Poor dad describes the concept of the "Rat Race” as a self-defeatist cycle:  an employee works hard for an employer to receive a raise or a promotion and as their income increases, their expenses increase as well. As the employee’s debt increases, he becomes further tied to their job and more reliant upon their paycheck. Furthermore, they are forced to work harder for their next promotion to offset their debts.

Now all off already trapped in this rat race. We have increase our debts in the form of Credit Card, Personal Loan, Car Loan and Home Loan. How we get out of this rat race and achieve the financial freedom. This is when your passive income i.e. income generated by your own saving/investment, exceeds what your expenses are. Robert Kiyosaki calls it "out of the rat race".

Once financial freedom is achieved, you don’t need to work for money, you have all the time you need to do whatever you want. That could be continuing to set new lifestyle goals and objectives to achieve them, or service work, whatever.

We can achieve financial freedom with following action points:

• Start Saving and Investing Early and Regularly
• Spend At least 30% Less Money Than You Earn
• Never default on Bills or EMI
• Create Emergency Fund
• Get Life Insurance, Term plan only
• Pay Off Your House Loan Early
• Invest on yourself
• Start second source of income

Thumb Rule of Financial planning

1. 30 % of your income must be used for "monthly living expenses."

2. 30% of your income must be used for "Liabilities repayments", if any..

3. 30% of your income must be "SAVED" and "INVESTED" for your future LIVING.

4. 10% of your income must be spared for "entertainments, vacations".

5. 6 months expenses must be available for "emergency fund" (should be invested in LIQUID FUND, FD Etc)

6. "Home loan" must be registered and apply on both "husband and wife name". (Both can get benefits on Home loan Tax benefits)

7. Buying "second house for investment is not advisable" ( _Survey reports - it will fetch you only around 3% return_)

8. After 45 years of age, not supposed to enter into any "BIG LIABILITIES" (Higher education of children and wedding of children will happen around 45 to 50 only, so plan now for the same.)

9. Have joint Bank savings account.

10. Property must be "registered on both Husband and wife name". (As per legal act – after husband first legal heir is wife, after wife it will go to children only)

11. Regular check on "Nominations at all financial instruments". if not nominated, do it now..

12. Only in insurance policy, Claims payable to Nominee. In other financial instruments legal heirs certificate is must to get back the settlement

13. Must have "Term Insurance" to financially secure future of your dependants..

14. Don’t take any financial investment decisions EMOTIONALLY,  and also Avoid last minute tax saving investment decisions, plan well in advance..

15. Personal MEDICLAIM is must (in spite of Group mediclaim coverage given at office) (After retirement there is no mediclaim coverage, after 50-55 years of age, it's very tough and costly to enter into mediclaim)

16. For your jewelry LOCKER, Only one lakh is payable by bank, if theft or fire happen at bank. Provided insurance done.

17. Like same way Government guaranteed only one lakh for your FD also. (Fixed deposits with Banks upto Rs. 1 lakh only are backed by deposit insurance)

18. Must know all "Tax implications". You cannot avoid paying tax. But you can minimize by way of tax planning and investments..

19. All financial documents must be kept safely and keep family members informed of the same..

20.  Review your portfolio at every six month.

These are general suggestions, personal Finance and investment decisions depends upon case to case.

How does inflation affect your investment?

Money Saved is money earned. This is an old saying. But thanks to inflation the real value i.e. purchasing power of that saved money would dropped day by day. We can't afford to ignore the corrosive effect rising prices or inflation can have on the value of our savings. In just 20 years, 4% inflation annually would drive the value of a 100 Rs. down to 44 RS. It means if you saved 100 Rs. to buy any good and you waited with your saving then you can’t afford it after some time. Thus, any benefit gained from higher saving and investment (due to increased inflation) is virtually erased by the reduced purchasing power..

Inflation works against our investments. When you calculate the return on an investment, you'll need to consider not just the interest rate you receive but also the real rate of return, which is determined by figuring in the effects of inflation. We as an investor should be concerned about the real return on our investment as inflation typically reduces the purchasing power of any currency. We need to understand the relationship between nominal interest rate, real interest rate and inflation.

Real interest rate = Nominal interest rate - Inflation

The interest rate quoted on any particular investment is generally the "nominal interest rate". Hence, the interest rate quoted on your fixed deposit of 8% is the nominal interest rate. And inflation is 10% then real rate is -2% means our 100rs can have value to 98rs after a year.

Clearly, if you plan to achieve long-term financial goals, such as college savings for your children or your own retirement, you'll need to create a portfolio of investments that will provide sufficient returns after factoring in the rate of inflation. An investor should ideally look at options that either generate positive real return for him or at least provide some natural hedge against inflation.