Browse Month: October 2016

Stay fit and Earn a Fortune

“Health is Wealth” is a well known saying. This translates into your health is your wealth. If you look from financial angle, it goes very far.

If you are fit & healthy, you will have less health related issues. If you try to stay fit till old age, you will save a fortune by NOT spending money on health related issues and remember Hospital visits cost a bomb these days.

There are many websites available which guides you on staying healthy. One has to integrate healthy habits in lifestyle so that mind/body/soul stay healthy and one is functional till late years.

Very basic TIPS are

  1. Eat healthy
  2. Avoid drug/alcohol addiction
  3. Exercise moderately and regularly
  4. Do not miss Annual medical checkups – prevention is better than cure.

The savings calculation is simple, even if you save few thousand rupees per year, over 20-25 years they can translate into millions. Plus if you are physically active, you can easy avoid lifestyle diseases which are creeping into the segment that sits and works everyday for 8-10 hours then resort to fast food and partying.

What is an emergency fund? And why you should have one?

In personal finance and money management, emergency fund is the first line of defense against the unexpected problems in life. Financial emergencies can happen anytime, and most of the time they occur without warning.

  • What if your car needs immediate repair?
  • What if you are out of job for a couple of months?
  • What if you broke your leg while playing gully cricket?
  • What if a sudden voltage surge damaged your TV/Fridge/AC and all devices?
  • How you are going to tackle this?

Times are good, you can draw money on your credit card, or you can swipe your card to get new TV/New AC etc. You can take personal loans to pay for the home expenses if you are not in job for a couple of months. But all these options come at a cost. Cost is 18%-24% rate of interest per year.

So, you must have an emergency fund, which is money stashed away in an account which is reachable at a short notice of about 1 working day. Now the question is How Much? There is no thumb rule to it. 3 months of living expenses should be sufficient so that in worst case you do not have to rush out and get money on credit.

You can use a high interest sweep in account of any bank or a liquid / cash mutual fund. Mutual fund option is better as it saves you from the high tax if you are in higher tax bracket. Any liquid mutual funds can be cashed in 1 working day. You do not have to plan to earn huge interest on your emergency fund, but let it sit in some avenue which gives some returns and which is easily accessible.

Power of Compounding

The Magical power of compounding

Albert Einstein is purported to have once remarked that the most powerful force in the universe is compound interest.

In simple terms, compounding is the financial equivalent of a snowball, rolling down the hill and gathering momentum as well as weight. More the ball rolls down, more weight it gathers in terms of the snow that get attached to it and more its momentum increases. By the time it reaches down the hill, it can well translate into a small avalanche. More the distance of travel, more is the impact of snowball.

Almost all personal finance websites/blogs and all financial magazines emphasize on power of compounding. If you start early, use compounding effectively, the end result could be a huge avalanche of money. The key is to start early and remain into the game.

I am not going to give chart of person A starting early and person B starting at later stage in life and the potential gain for person A over person B. But if you start early in life, it makes a HUGE difference.

Same is applicable to the money that you spend on material gains or for momentary gains. If you put the figures in any of the online compound interest calculator available for the money you spend in leisurely sipping cups of tea / enjoying junk food day by day, month on month, you will be astonished to know the amount of money you stand to lose over the years. The loss is two ways, one in terms of actual money you spend and other is the health you stand to lose by gulping junk food.

So gear up and use compounding as an efficient tool to maximize your gains in investments.

A penny saved is more than a penny earned

“A penny saved is a penny earned”

Most of us would have heard this popular saying. In reality, it is different. Is goes like this

“A penny saved is more than a penny earned”. Yes it is more, much more than you think. There are different angles to it.

If you see from taxation point of view, the penny saved is after tax deduction. That means you have already paid the tax on the saved penny. When you earn a penny, you have to pay tax. And for the highest tax bracket, its 33% tax, so when you earn one penny, you end up having only 0.67 penny at your disposal.

If you see from Work angle, you have already put in effort to earn the saved penny. You had worked x amount of time and put in your energy and earned the saved penny. To earn a penny again you have to put x amount of time, energy and resources in terms of fuel etc for commuting.

Hence you are much better off when you save a penny. Save it and invest it so that you can multiply it for your future needs.

Framework to bring finances under control

Taking control of your financial life is not very complicated, nothing like rocket science. The basic principals are simple, easy to practice if you can co-relate them with your day to day life and the expenses you incur.

  • Get a good education, work towards building your career
  • Spend less than you earn – This is the most important part
  • Track & budget your expenses – Any given point of time, you should know where you are financially
  • Invest diligently rather religiously every month towards your goals
  • Plan for taxes; take informed decisions on your regular taxes and taxes on your investments. Optimize them so that you do not end up paying a lot to the government
  • Keep enhancing knowledge to manage investments, budget and taxes. Remember, it’s your money and none else will help you in planning for your goals unless they have vested interests

The above 6 points sums up the key to financial success. And remember, there is no place for debt which can spoil any good retirement plan. Especially the debt meant for buying lifestyle goods. You need to beat inflation as well as lifestyle inflation to beat the financial blues