Browse Category: Finances

Seven Baby steps towards financial freedom

Seven Baby steps towards financial freedom

Do you know how marathon runners are trained?

If someone thinks he should run a marathon, and goes for the run very next morning what will happen? It will be a disaster for him. Right?

baby steps to financial freedom

 

A marathon runner must start small initially with 1 kilometer, 2 kilometers run and so on. He has to gradually attain the 42 kilometers mark. He has to gradually build stamina, develop endurance, have many practice sessions before he hits any competitive race.

All this happens over a period of time. This can not happen overnight. Hope you all agree with me on this. A runner has to set small milestones first like a 5 kilometer run, 10 kilometer run, a 25 kilometer run and so on. Once all small milestones are reached, a runner can confidently go for a full length 42 kilometer marathon.

Same is with financial planning. If you are at ZERO level or you have just started journey towards setting finances in order, thinking about financial freedom will look impossible to you. Journey towards financial freedom is a long journey. You have to create numerous milestones which will make the journey also interesting and you will always be motivated throughout the journey. Achieving these small milestones will also give you a sense of accomplishment in the course of the journey. Not to forget, these milestones will also keep you away from backtracking.

Below are some important milestones you can create in order to stay focused and not to lose interest while journeying towards financial freedom. The order is important as you can not run a full marathon without conditioning yourself for a half marathon. Isn’t it?

 

climb to financial success


Step 1
Start making a budget. Write down all expenses month on month. It is important. It will help you in knowing your spending  pattern.This will also give you an idea about your investable surplus – the money which you can utilize for investments moving forward. (How to make a simple budget)

Step 2
Save about 6 months of expenses in cash or liquid funds. This amount should be easily accessible to you. This is your emergency fund. This is meant only for emergencies like some medical attention or in case you lose your job. This will keep you afloat when you do not have any income to take care of expenses and will help you in not falling in debt trap during any personal emergency.

Step 3
Gradually but steadily pay off all your consumer debt. Consumer debt is considered as a bad debt for an individual. Debt for TV, appliances, vehicles, furniture etc falls under consumer debt. One these debts are tackled, you free up a large monthly investable surplus.

Step 4
Start saving for retirement. Most of us will not receive any pension or annuity. Keep somewhere around 25%-30% of your monthly salary as your investment for retirement. Make a good balanced folio and start investing. Your folio can be a combo of Debt, mutual funds, PPF etc.

Step 5
Start investing for your kid’s education. You can dedicate an equity linked mutual fund for this. Also you can open a PPF account when your kid is born and maximize investment into it every year. A combo of PPF and an equity linked mutual funds can do wonders for your kid’s future.

Step 6
Pay off your mortgage/home loan. This will remove a big burden from your head. It is good to feel debt free. But this is little tough as usually the amount is quite high. But I strongly recommend you to do this as paying off mortgage will free up a huge chunk of money for you as an investable surplus.

Step 7
Keep re-adjusting your portfolio once in a couple of years and enjoy life. Keep reading, pursue your hobby, keep traveling but remember that your money has to outlive you.

These are small steps. You can start any time, at any age. Important is you make a START.

Happy investing !!!

Wealth Mantra: Buy assets and avoid liabilities

Wealth Mantra: Buy assets and avoid liabilities

 

Is there any formula which can make me or someone like me wealthy?

Keep on accumulating assets and keep on avoiding liabilities – This is a fool proof mantra to become wealthy.

 

Asset and liability

OK, but can you elaborate as I can not understand this? The terms liabilities and assets are too technical for me.

Don’t go into too much technical details about ASSETS and LIABILITIES. To keep things simple and easy to understand let’s consider asset as something that generates a positive cash flow regularly. This is something that was explained by Robert Kiyoski in his famous book Rich Dad & Poor Dad. Also, we will consider anything that takes money out of your pocket as liability.

The above assumptions are quite simple as you have a very clear demarcation between assets and liabilities. Let’s scan through some of the common items and check if they add up as your ASSET or qualify as LIABILITY to you.

HOUSE:
I am sure like everyone you also must be having a strong belief that your house is your biggest asset.

Yes, I have a big house with a big monthly payment going out against the home loan/ mortgage I took out to purchase it. It is indeed the biggest asset I have till date.

Keep our initial definition of ASSET and LIABILITY in mind. Let’s go through the expenses associated with a house.

  • You take out home loan/mortgage to buy a house. You pay processing fees, lawyers fee and several other charges while purchasing
  • You pay monthly maintenance charges to Association/Society for the upkeep of the common area and housekeeping charges for the common area
  • You pay sinking fund
  • You pay annual property taxes
  • You dole out money to keep the house in proper shape – maintaining cleanliness inside the house, make sure all taps, fittings, fixtures etc are in proper working condition.
  • You pay money for the repainting job every couple of years


The list can be pretty long. If you see, every single head mentioned above results in money going out of your pocket. Now if we go back to our original definition – it says anything that gives you regular return or puts money back into your pocket qualifies as an ASSET.

Now here we have our house which is not fitting in the definition of ASSET.

Sure, you can say that house price will appreciate in due course. But the appreciation can not match the kind of money that goes out of your pocket month on month to maintain the house.

So the house is a kind of liability. To counter the liability factor, one must buy the house which is of right size. The house which fits your need in terms of space and pricing. The moment you buy a bigger house than you need, money starts going into drain. Here I would like to add that if you have a rental property, then it is your ASSET not LIABILITY.

Oh, I was under the impression that I have a big house and it’s a big asset for me. Your arguments seems to be logical.

Let’s take CAR now:

It is said that the moment a car comes out of a showroom, it loses about 15% of its value.

On top of this, your car consumes money in

  • Fuel
  • Regular maintenance, oil changes, servicing etc.
  • Car depreciate with the passage of time
  • Wear and tear of tyres, other parts
  • Annual insurance premiums
  • Road tax

Here again we see that the car is consuming your money regularly. Hence your Car is also your LIABILITY. The takeaway here is unless you are super rich, don’t buy a bigger, expensive car. Remember a car is a mere tool to take you from point A to point B. So here again buy what you need, not what your neighbor drives. More details can be found here – Your car is not your asset

 

Hmmm sounds right. What about the items I owe like my belongings etc?

Now list down all your belongings. They are your LIABILITIES as they lose value over time. Be it your furniture, appliances, gadgets, books, DVDs, gaming devices etc. All depreciate. We have seen it earlier too here 

liability is bad

You have listed down almost all my possessions under LIABILITY column. I am now curious to know what qualifies as ASSET?

  • Your assets include your investments (FD/RD/ULIPs/Mutual funds, shares, ETF, Bonds)
  • Any commodity (Gold/ ornaments)
  • Collectible items
  • Art (paintings etc)
  • Rental properties
  • Cash you are holding

All the line items listed above generate income over a period of time. They put money into your pocket regularly so they all classify as your ASSET

The key here in accumulating assets is to make financial goals, stay focused and never crib about your income but keep investing regularly.

Now, let’s see something interesting based on the classification of ASSET and LIABILITIES. Let’s see what poor, middle class and wealthy people do.

Poor: They mostly own liabilities and keep spending on feeding their liabilities.

Middle class: They have some assets but they keep on buying liabilities and spend their chunk of income in feeding their liabilities. They avoid investments and usually spend money to buy and maintain things they don’t need.

Wealthy:They generate a lot of income from investments and keep reinvesting. They accumulate good amount of wealth which can be passed to their next generation.

Now financially independent class: This particular class has plenty of good assets and income from investments is enough to take care of all their expenses. They constantly look for investment opportunities and never averse of buying good assets.

Bottom-line is one must keep buying good income generating ASSETS and avoid LIABILITIES like plague. If you stick to this, none can stop you from becoming WEALTHY. As you go on accumulating good assets, you get more freedom to take calculated risk in order to go for higher gains.

 

Happy investing !!!

Delaying investments? It can cost you DEARLY

Delaying investments can cost you DEARLY

When it comes to decision making about finances and investments, most of us like to postpone it to some other day. This stands true not only for decision making about investments but also for evaluating existing finances.

 

delaying your investments

Yes, I agree. Even I have not thought of investments as of now. Somehow I feel it is not my cup of tea and anyways my money is safe in bank, I can always invest it at a later date when I feel the time is right.


Unknowingly, you are ignoring an important fact that there is a REAL cost which is associated with the delay in investments. Most of us tend to get away with this as there are no immediate visible effects of these delays. Nor we proactively calculate the potential damage it can cause. 


Your money laying in savings account gives you 3%-4% returns whereas it can give you 12%-14% if invested in proper channels. Imagine the difference a 9% returns can make on INR10,00,000 over a period of 20 years. As per compound interest calculator – it comes to INR5,604,410


You realize this only when you need funds for a certain life goal. Then you realize that had you invested your money at the right place, you would have got much better returns. Be it while buying a car, buying a house or for kid’s higher education or a wedding in family. If you keep delaying, you need more amount as investment at a later stage to achieve desired funds. The early you realize this, better it is for you. You must know how to use the magic of compounding to your advantage.

 

What could be the possible ways to avoid this delay and properly set the investment cycle?


There could be many things responsible for the delay at your end. You first need to identify the problem which is withholding you. It could be

  • A large sum of money laying around in savings account
  • Multiple savings accounts you have opened over the years – each with certain minimum balance and other service charges
  • Some investments got matured, amount in savings account but no re-investment done
  • Your own belief that “this is not the right time to enter the markets”
  • Not taking any decision to exit from certain bad investment
  • Not nominating anyone for your accounts/ investments


Your reason for postponing investments can be many

  • You are too busy and you do not have time to build and manage your portfolio
  • You think that you do not have enough money to start investing
  • You are afraid of making some wrong investment decision and you fear losing money
  • If someone suggests some investment product and handover the brochure, you find it too technical to read and it seems decoding the product attributes is too complicated job for you
  • You are comfortable with what you know that is you have done some fixed deposits as they are simple and easy for you to understand. For this reason, you do not think beyond fixed deposits.


Rightly said, looks like I am also holding some of my investment decisions because of the points raised above. Now tell me how to break ice ad keep going strong on investment front?

 

You have to overcome your fear. To learn swimming, you need to enter the waters. You then need to test the depth of the water and then swim where you are comfortable. So

  • You think that you do not have enough money to start investing – Investments can be started with an amount as low as INR500 per month. If you keep thinking that you do not have enough money, you will never be able to start investments. Remember – “The journey of a thousand miles begins with one step.”

 

  • You are afraid of making some wrong investment decision and you fear losing moneyStart small. Start with products which gives you fixed returns and keep reading about investments. The only way to overcome your fear is knowledge about investment basics
  • If someone suggests an investment product and handover the brochure, you find it too technical to read and it seems decoding the product attributes is too difficult job for youDo not enter into complex investments. Start with basic and simple products which your bank offers over the counter like fixed deposits, recurring deposits etc.
  • You are comfortable with what you know To diversify and to make an optimized portfolio, you need to add different forms of investments at some point of time. Even if you are comfortable with fixed deposits only, you will still have to gradually add mutual funds, stocks, commodities etc in order to make your folio slightly more stable and to give you returns which are above the market inflation rate.

Do not delay your investments

 

You can take few small steps on how to start investments and be consistent with it

  • The key is planning – You must spend some time in evaluating your current status, identify the problems and plan the corrective actions based on your findings 
  • Study a little bit – Read finance blogs, magazines, read economic times and gain some basic knowledge about investing, mutual funds, equity markets, portfolio diversification etc.

 

  • BUDGET This is the most important step as it will tell you how much investible surplus you have for investments month on month. A simple budget can be made using this link

 

  • Automate investments – Do not wait till the month end to invest the leftover amount after expenses from your salary. Learn to pay yourself first. Your monthly investments should be done within the first week of the month. With the budget thing, you will know how much investible surplus you have for a month. Plan investments based on it and automate your investments. 
  • Review your investments every quarter – If possible, take stock of your investments every month. This will not only motivate you but also will keep you on top of your investments. You will have figures handy about your exact net worth, liabilities etc based on the monthly data you compile. 
  • IF NOTHING WORKS, hire a financial planner – Take professional help. But do involve yourself in planning and execution so that you can learn and you are aware of what is happening with your money. Afterall it’s your money. But make sure that you hire a good professional, not the local insurance agent who is always eager to sell you insurance policies.

 

We at wealth samurai always believe Your money is your money – it is you who has to take care of your money. None else is more interested in growing your money through investments than you. Whoever shows interest will have his/her personal interest attached in helping you. So take charge of your money, your financial investments, your budgeting and work towards achieving financial freedom

 

Happy Investing !!!

Do you often succumb to Financial Peer Pressure?

Financial Peer Pressure

What is Financial Peer Pressure? Do you often succumb to financial peer pressure?
If yes, here is a guide about how to fight financial peer pressure effectively.

 

financial peer pressure

 

What is financial peer pressure ?

Financial peer pressure refers to people developing new habits because of people they hang out with. For example, you start working and you get a new set of colleagues. You may not be regular with your evening coffee but since new colleagues regularly visit cafeteria for evening coffee dose, you also start visiting the tony coffee joint daily for the same.

Financial Peer Pressure in the longer run can suffocate your financial planing and it has capability to put you down morally too.

Looks like same thing happened to me too when I joined my company last year. Can you give some more examples of financial peer pressure so that it’s more clear to me?

 

In our day to day life we encounter many instances of financial peer pressure.

  • We often plan our summer vacations at exotic places with stay at signature hotels just to show off our relatives and friends.
  • Weddings are the place where people love to show their wealth – be it designer clothes, designer jewelry or lavish spending at the wedding functions.
  • People rush to buy latest gadgets just to show off them to their colleagues.

 

The typical financial peer pressure is visible everywhere around us. Knowingly or unknowingly we also succumb to this financial peer pressure.

  • At home

 

    • Financial peer pressure comes to us in the form of holiday trips. We get tempted by the trips made by our neighbors and relatives and try to go to the same places they visited so that we do not feel inferior to them.
    • We often plan a movie at the multiplex followed by the dinner at signature restaurants on the weekends so that we do not feel inferior to our friends and colleagues. And we have good masala updates for our Facebook timeline.
    • We make it a point to visit malls over the weekend to do some window shopping to satisfy the shopper in us. Do read this to know how supermarkets are a big trap.
    • We always look to buy new gadgets so that we can match the standard of our neighbors. If our neighbor buys a 60 inch LED TV, we try to better it by buying 75 inch LED TV.
    • We always look to buy / upgrade our automobile to show others that we have big car and we are no less than others.

We always buy latest toys for our kids, we send our kids to popular summer camps, we send them to expensive schools just to ensure that people see we are doing good financially and for the heck of not feeling inferior to others.

  • At work

 

    • You make it a habit to join end of the day coffee at coffee joint with your team members
    • Weekly lunch outing to expensive restaurants
    • Event celebrations at expensive lounges / resorts like birthdays / anniversaries etc
    • You join regular office parties and snack parties  
    • You keep updating your mobile phones just because your office colleagues have the latest models.

 

financial peer pressure - workplace

Oh my God, the list is long and well diversified. Unknowingly I am also spending a lot of money just to show off others – which is not required. Can you help me out on how to tackle financial peer pressure in day to day life?

The solution to this menace is not that complicated. Below are few points I am mentioning which will help you out in tackling financial peer pressure.

 

 

  • Stop trying to keep up with others

 

      • You do not have to plan your vacations based on your neighbor’s vacation plans or your friends vacation plans. Plan your holidays based on your likes and more importantly based on your budget. Intelligently planned vacations can save tons of money from going into the drain
      • For kids – stop buying expensive toys just because your neighbor buys them for their kids. Kids are more happy when you spend time with them and they are more happy with activity based games.
      • Say a clear no or fix the frequency of the parties your colleagues arrange. You need not to attend every single party. Right?
      • Don’t follow your friends and neighbors and go for shopping sprees. Whenever you go for shopping make it a point to have written shopping list as frequent window shopping can make a big dent in your budget.
      • It doesn’t make any sense to visit multiplexes every weekend to watch the latest movie and have food in expensive restaurants. You can have a movie night at home. Now with Netflix and host of other service providers it’s possible to have movie watching a less expensive affair. Also food tastes much better if prepared at home with entire family pitching in as helping hand.
      • Stop getting into FOMO – Fear of Missing Out. This will make you feel inner happiness in a better way and you can enjoy life more.

 

  • Take experience – Create memories instead of buying stuff

 

    • Kids would love to go out and have a match of football instead of going to the mall for watching movies every weekend.
    • Take kids to museums, parks, forests, outdoors – help them to see beauty of nature, identify plants, birds, insects. This will make them more happy than sitting in VR room playing video games.
    • Plan vacations such that you see places of natural beauty, historical importance in and around your town. No need to go to maldives to experience beaches when you can have same experience in Goa for less than half the cost.
    • Instead of having theme based parties for kids birthday, you can have activity based party wherein all the kids do some activity which interests them. Kids always love doing activities together.
  • Focus on your monthly budget
    Keep track of your expenses. This link will help you out on how to budget for expenses. Make sure you keep an eye on useless expenses like subscriptions, eating junk, mall visits etc and cut them down.
  • Do not get influenced by Social media
    If your neighbor is visiting Switzerland for summer vacations, you need not to visit the same place just to show that you are no less than your neighbor.
  • Learn to draw a line – Learn to say NO
    This is very important. If you master the art of saying no to the things which harms you, you can overcome the financial peer pressure to a good extent.

 

Some good insights and some practical steps which I can take to counter Financial peer pressure. Thank you for elaborating these for me.

Yes, and one final thing – Your life should be driven by you NOT by the likes of others. This will not only make your life better but will improve your finances in long run. Also this can be considered a positive step towards wealth creation.

 

Happy investing !!!

Goal based investing- A must to be successful with finances

Goal based investing- A killer plan which will always succeed

As per experts and veterans in personal finance, GOAL based investing will always result into success.

 

One of the keys to every project or every task is to have a PLAN. Same is with investing .You need to have a proper plan. Setting right investment goals can go long way in developing a proper plan that works for you.

goal-based-investing

 

Why do I need to set Goals for investments? I have money I can directly put that into stocks as they give higher returns and I am done with it. Every month I will keep buying new stocks with investible money.

 

Taking goal based approach will ensure the below

  • With goals in place it’s more likely that you end up saving required money before you reach goal
  • By having goals you have proper time horizon with you. This makes you to utilize proper asset allocation and minimize the risk by spreading investments across multiple assets over a period of time.

 

Why you invest money? You invest money so that in future the same can be utilized for various needs such as retirement, health care, education for kids etc. When you put money for investing, ask yourself a question – For what I am saving this money? IF you attach your investment to some of important goals then you know how much you are investing and for what specific purpose.

 

Ok, what could be the generic goals to begin with for an investor like me who is not seasoned and just starting?

 

Goals for investment can be

  • Retirement
  • A foreign holiday 2 years down the line
  • Buying a second home
  • Kids higher education
  • Kids wedding
  • Buying a vacation home
  • Upgrade of existing car after 5 years and so on

 

Good. but why goal setting is required for me? Kindly explain this to me

Below are some reasons why goal setting is important and required for everyone

  • Goals help you to avoid under saving.
    If you have planned to save INR10,00,000 for car upgrade in next 5 years and you set aside INR15,000 per month for the same, you would be able to accumulate INR9,00,000 after 5 years of term as principal and well over INR10,00,000 including the interest which will enable you to go for the purchase without scouting for money elsewhere.

 

  • Plan ahead for the goals – save less money
    When you plan for a goal like retirement which is say for example 25 years away, you need to set aside small amount per month towards it. You can also take help of equities as the investment term is fairly large. This will give you better returns as equities tend to give best returns over longer duration.  Same is applicable for the other goals too.
  • It helps you achieving the target more practically
    When you start investing keeping a goal in mind with some target amount – you have flexibility to tweak monthly investments towards it if the target amount value changes. This will help you in staying flexible and moreover you will be more realistic in your approach. 
  • Goals help you save for tangible outcome
    When you have goals, it’s more likely that you will achieve them.When you attach a real outcome, it’s more likely that you will work hard to achieve it somehow. Human is more motivated by real things than by some abstract numbers 
  • Your budget never goes haywire  
    With goals in place, you know how much your monthly spending would be. This will help you in doing proper budgeting month on month and you will be in control of spending and your budget will never go haywire

 

  • You can avoid debt using goal based investing
    When you associate goal based investing with every large purchase, you will have actual money to pay for the purchase. This way you can avoid getting into debt and can remain debt free
  • You can optimize your investment portfolio and maximize returns
    With a set target tenure, you get more insight into your portfolio. You Allocate assets based on the tenure and this way you have an optimized portfolio which means you manage the risk well.
  • You have guilt free spending money at hand month on month
    When you allocate your money monthly towards different goals, the leftover money with you can be spent without any guilt, without thinking that spending the leftover money will cause financial problems at a later date.

 

 

Thanks, I got to know a lot of things and with goal based investing I can do my financial planning in a much better way and the most important thing is I can avoid debt.

 

Yes, and above all goal based investing will make you a better and disciplined investor and can optimize your investments

Happy investing !!!

Are you an impulsive buyer?

Do you often drag yourself into impulsive buying?

 

“An impulse purchase or impulse buying is an unplanned decision to buy a product or service, made just before a purchase.One who tends to make such purchases is referred to as an impulse purchaser or impulse buyer. Research findings suggest that emotions and feelings play a decisive role in purchasing, triggered by seeing the product or upon exposure to a well crafted promotional message.”

impulsive-purchase

 

In your day to day life, knowingly or unknowingly you go through instances where you succumb yourself to the lure of impulsive buying. The product companies are out there in every shop, every mall, every online marketplace – blaring adverts, offers, packaged deals to you. We have seen earlier that Supermarkets do extensive research on how to push their products and how to compel buyers to spend more in their stores.


Can you give me some example so that I can relate whether I am buying stuff impulsively? As far as I know i am not into impulsive buying

  • When you go to supermarket to buy monthly grocery, you pick up few ready to eat meals as they are packaged beautifully and kept in the front area of supermarket. They always have “buy one get one free” offer

  • You go to shopping mall to purchase refrigerator and you end up buying that 75inch LED TV also just because there was an offer going on that. You , being a sincere shopper, got charged emotionally and purchased the big TV just because your conscious felt that you are saving substantially on this purchase. You didn’t even give a  thought to what you will do with the TV set adorning your living room which you bought last year in similar fashion

  • How many times you have noticed that you enter mall for grocery shopping with a budget of INR5000 and end up spending INR 1500 on grocery + “something else” which had a GREAT offer?

 

Yeah that’s OK, but sometime you need to grab the offer that is going on else you will miss the boat and God knows when such offer will return?

A seasoned impulsive buyer always suffer with FOMO – Fear of missing out. If you add up all impulsive MISCELLANEOUS purchase over a period of time, you will be shocked to know the amount you have spent on these purchases.

 

Below I am listing few reasons – why people shop impulsively

 

  • Love of shopping – some people simply love shopping. For them shopping is like a therapy. They are always under illusion that few items here and there won’t disturb their bank balance.
  • Some shoppers are always in loss aversion mode. They fear that if they do not buy certain items which are on sale, they might end up at losing a big amount of money.
  • Some shoppers succumb themselves to twisted offer phrases. “Buy 2 get third free” , “buy this and get that free” etc. The moment they see these offers, they succumb to it without further researching about the product, service, and quality.
  • Some shoppers have genuine desire to save more. They succumb to the offers on supermarkets which says “you save INR100” , “Buy & save INR1000”. In order to feel good , they buy these items.
  • Some shoppers always feel that they should have an edge over others when it comes to latest gadgets, latest fashion , latest automobiles. They always pick up items which they feel will make them look cool among their social network.

 

 

Hmm.. Sounds right. I never knew impulsive shopping is such a bad habit and I must admit that I myself must have lost a fortune by now through impulsive shopping.

Yes, impulsive buying is harmful. By the time one realise this, he/she would have lost a huge fortune on it. This could hamper your financial planning, your early retirement, your retirement plan and can pose a big threat to your financial independence planning.

Below I am keying in few important actions through which we can avoid impulsive purchase

 

  • Always make a shopping list when you go out for shopping – AND “Stick to it”
  • Follow a mandatory waiting period if you plan to buy anything. If you see anything which you wish to purchase, wait for 7 days and see if after 7 days do you have the same urge to buy that thing? Most of the time the urge is momentary and it dies down soon.
  • If you already owe the item you wish to buy and you intend to replace it, clean it. Now see if you have the same urge? E.g. if you have a pair of shoes and you intend to replace, clean the old pair, wash it / polish it. If you still feel that you should go for the new pair, then go ahead
  • Remember – only fools rush in. All gadgets, the first edition always have some glitches and service issues. Better to wait and go for later releases. They are relatively bug free and cheaper.
  • List down your impulsive purchases – revisit the list periodically so that you do not make the same mistake again
  • Keep decluttering your house often. This will keep you in check of all the items you have and you will not end up buying them again. This is specially applicable for stationary items and tools.
  • Avoid going for shopping with RICH friends or friends who are spendthrift. Believe me, you will save a lot by doing this
  • Don’t save your credit cards at online shopping sites. If you save then it’s a matter of few clicks and online order gets executed.
  • Buy all items cash. Parting with currency notes is much more difficult compared to swiping plastic cards.

 

 

Great. Very practical points. I am sure I can implement these easily in my day to day life and I can save loads of money by doing this.


Yes, the advice given above is quite practical in nature and easy to integrate in your lifestyle. Always remember it’s your own hard earned money. By avoiding impulsive buying you can use your money in much better way.

 

Happy Investing !!!

Financial success : It’s not about the Stuff you gather

Remember: Financial success is not about the Stuff you gather

Financial Success

If I ask you “What are the the changes you would make in your life if more money starts reaching you – that is you have a better job paying higher salary than existing one?”

Most probably the answer would be

 

  • Buying a better smartphone
  • Upgrading the laptop
  • Buying a bigger house
  • Taking a nice vacation abroad
  • Upgrading your car

 

 

The list would be infinite. Isn’t it?


Yes, that’s true. But I need to buy these things as these things will add comfort to my life. Since I am earning more, don’t you think I deserve these? Others should also know that I am doing well in life.

 

“Too many people spend money they haven’t earned, to buy things they don’t want, to impress people they don’t like.” — Will Rogers

 

It’s easy to spend money to buy stuff, to buy things that make us look cool and gives impression that we are well off financially. But the truth is most financially well off people do not need to show that they are well off. They know very well that their financial success is not indicated by the money they earn and spend it in buying the stuff every year. It is indicated by how much they earn and keep for growing it year on year.

 

Yes, true but I need to buy a decent SUV as I had a dream of buying it when I was in college. True that I can not afford it outright but I am eligible to buy it on monthly payments.

You are looking to buy a SUV which is not meant for city driving conditions and costs you a bomb. Any sports utility vehicle is expensive & comes with a huge list of expenses with it. Expensive car means more monthly payment, more maintenance cost, more insurance premium and expensive spare parts. Moreover, you will not be able to use majority of its features when you use it as a daily commuter vehicle. Instead of buying you can always rent it for a spin or two when you feel so. Read here why your car is not you ASSET

 

Hmm sounds good. But if I am not having a big house, an expensive car and latest gadgets, how will others know that I am doing well. Also I need to justify to myself too

Right but this is your life and why you have to buy stuff to show others that you are doing well in your life? You can not spend your hard earned money simply to please others. Remember, money is merely a tool to attain happiness, money itself is not happiness.

 

True, I agree but how to measure financial success? How anyone can come to know that he is heading towards financial success?

A simple and quite accurate measure of financial success is NET-WORTH. If you have a reasonably high positive net worth and it’s growing at a decent pace then it means you are doing well financially.

 

net worth is really everything you own of significance (your assets) minus what you owe in debts (your liabilities)”.

 

  • Do you have a house which is mortgage/ loan free
  • Do you have a sizable emergency fund
  • Do you have a vehicle which is paid cash
  • Do you have no consumer finance
  • Do you are covered adequately on insurance front
  • Do you have an investment account and you are regularly investing
  • Do you have a positive net worth and a retirement fund which will give you regular income post retirement

If you have “YES” as answer for most of the above points, yes you are doing well financially. Do remember, age also plays important factor in the points listed above. But even if you are young, a positive net worth indicates that you are on the right rack and doing well financially.

 

Remember – you are accountable to yourself. Do a tight scrutiny periodically on your finances, on your investments, on your budget. If you honestly (you can not lie to yourself , right?) find that your net worth is growing, you are heading in the right direction.

 

You have some valid points. But all seems too much complicated. How can a beginner like me can proceed and implement this to my finances?

It is not complicated. You need to move step by step.

 

Always remember

  • Money alone doesn’t bring happiness but it sure can help
  • You only have to take care of your money and ensure that it grows – none else will do it unless they have their own personal interest attached to it
  • Money can not solve all your problems. Yes but it can help you sail through most of your problems

Happy investing !!!

What are money leaks? How to find out your money leaks and plug them?

“A money leak in a simple language is the money you have spent but you don’t know where you spent. “

Money leaks are just like water leaks from a container. End of the day you don’t know that water is leaking and container becomes empty.

“For example you draw INR 2000 from ATM on the way back to home from workplace. You buy grocery for INR 1000 , vegetables for INR 750, stationery items for INR 150  and have a coffee for INR 100. Somehow next day you forgot that you had coffee previous night and you still think you have INR100 with you from previous withdrawal. This FORGOTTEN INR100 is the “Money Leak” for you. So when you sit down to write expenses over the weekend, you are able to account for INR 1900 out of INR 2000 withdrawn from ATM and unable to account for INR 100 you spent on your coffee.”

 

Money leak - how to fix it

 

Ok Great. But I am good at accounts and I can remember what expenses I incur. So Money leak for me is out of question.
Good. but still as the phrase indicates “money leak” is small expense here and there which is tough to account for at a later date. You may not remember or you may not be knowing the money going out for some expense. But these small expenses can add up later and over a period of time can be a big financial disaster for you. If you compute total spend over a large period say 5 years, these leaks can set you back by a huge amount when you consider the principal amount as well as loss of investment potential of the leaked money. It can directly affect your net worth and can play a spoilsport while planning your financial independence.

 

Hmm Sounds scary. Can you list down few other money leaks so that I get more clarity on where else i am losing money to Money Leaks?

 

  1. Paying upfront for a subscription:
    You make a resolution to stay fit on the new year eve. First day of the new year you go to the best Gym in the neighborhood and register yourself. The gym has an offer that you pay for 12 months upfront and you get 13th month free. You succumb to the offer and pay for the 12 months at on go. You are pumped up and start visiting the gym. After about a week or two, you come to know that Gym is about 10 minutes away and by the time you return from work it’s already late evening. You don’t have energy left to change and again drive for 10 minutes to the gym , work out for 30-45 mins and come back late night. Hence you gradually stop going to the gym. This is a big money leak. You have paid for 12 months to the gym upfront and you are not using it

  2.  Not switching off power appliances:
    The electrical appliances at home are always switched on like AC/Heating/Fans/Lights /modem etc and often you forget to switch them off when you leave home. This is the reason why you bang your head every month when electricity bill comes.
  3. Having low rated power appliances:
    Electrical appliances at home are not rated good for energy savings hence they drain more electricity and you end up paying more charges for electricity consumption.

  4. Having multiple bank accounts:
    You have to maintain a certain minimum balance in each of the account which makes your money sit in a low interest savings account. You are losing on investment potential with the idle money.

  5. Buying too big vehicle :
    You do not need a truck type gas guzzling SUV for a nuclear family living in city. You will not be able to use vehicle to its full potential. For a city you need a good mileage vehicle which is small so that you can squeeze it in tight parking spaces. A big car means higher monthly payments, high insurance premium, high maintenance cost and lot of inconveniences when taking it around the city which has usually tight parking spaces.

  6. Buying too big house :  
    For a nuclear or small family you do not need too big house. Bank will always try to convince you to buy the biggest lot available based on your monthly income. Their logic is monthly payments will not pinch you after few years. But what about now? A big house always has higher monthly payments, higher maintenance cost per square feet, higher property tax and not to mention, higher cost of upkeep. It also consumes higher electricity in terms of cooling, heating etc.

  7. Paying your fund manager for frequent switching of funds/stocks through Portfolio management service (PMS) :
    Fund managers will switch frequently but the cost of switching would be recovered from you as an investor. At the end of the day, the absolute returns will tell you that how much the switching has costed you.

  8. Not shopping around while taking any insurance : This can cost you dear as there is a considerable swing in the premium paid from different service providers. If you lock in higher premium, entire life you would be paying higher premium which over the years will result in huge money drain.

  9. Not doing price comparison and proper research before purchasing any expensive item :
    Here again the price can vary from store to store. Best is to compare the prices online and then hit the shop for bargaining.

  10. Having multiple internet data connection at home:
    If everyone in the family has his/her own plan for data connection, there will be money going into drain. Almost all service providers give family plan for voice and data or some group connection which can save tons of money over a period.

  11. A big sum of money sitting idle in savings account:
    This also a big money leak. You lose a good 3%-4% on earnings plus the investment potential of the money.

I can quote a 100 more examples from day to day life where there is money leak. I am sure most of the readers too would not be knowing points mentioned above to a certain extent.

Yes, even I was not knowing few things like letting money sit idle in savings account, choosing insurance premium etc. It’s scary. Now, tell me how to identify and avoid money leaks in real life?

 

Again avoiding money leaks is not a rocket science. It’s more of a common sense. You need to be vigilant about what expenses you incur, make a note of them and review the expense sheet periodically. You are home if you follow this diligently.
Below are few simple steps which you can take to find money leaks and fix them so that they don’t trouble your finances.

 

  • Save all receipts of every payment you make for the entire month and tally them at the end of the month so that you don’t miss out on any ghost expense.
  • Use a budget and STICK TO IT. Click here to know how to make a simple budget.
  • Avoid money leak places. For example when you go to multiplex to watch a movie, avoid food court during the break. The price of food items and beverages there are exorbitant. Nothing can justify the prices they have. A family can be down by a couple of thousand rupees if they snack and drink at the multiplex food court.
  • While visiting malls , do not buy anything expensive just because there is discount on the price. Always compare prices across different places, research the product well and then only buy.
  • Beginning of every year, do review all the memberships and subscriptions. Cancel anything which is not required.
  • Study a little bit on how to invest money in mutual funds, stocks, bonds etc. Trust me it is not difficult and if you know what you are doing, you can save tons of money. Plenty of FREE study material available online and plenty of tools to invest makes it easy for you if you know the basics of investing. Why to pay someone else to manage your money? Do you think they will do a fair job?

 

Again it depends on an individual to what extent he / she is able to identify and plug the money leaks. Ideally one should start with every service provider, day to day shopping, monthly grocery shopping and identify where they are leaking money.

After reading this article I am sure you should be able to identify money leaks and then take measures to plug the leaks. First cycle of identifying and fixing money leaks may take little time but once you are set, it won’t be difficult for you to identify leaks immediately and fix them. Money leak should be tackled on priority as it’s a big hindrance in wealth creation and can cause a considerable delay to your financial independence.

 

Happy Investing !!!

Thumb Rule for any Retirement plan – Remember Your money has to outlive you

“Always remember – Your money has to outlive you”

Interesting sentence. But why do I need to worry about this? All our forefathers never worried about this so why should I break my head over this?

Things were different till last generation. Till a couple of generation back, things were pretty cool. Life was quite easy, you work for 30-35 years with any corporation and you retire with a regular pension amount per month which could take care of your day to day living. Families were joint and there were grownup kids to take care of you during your retirement years. Medical care was not expensive and life was relatively easy.

 

a good retirement plan

 

Yes, you are right. Things have changed drastically in this generation. Can you let me know what else has changed?

  • Life expectancy has increased by about 20%- 25% in this generation. This means you will need to spend more years on this earth and that too of your old age.
  • It doesn’t take rocket science to arrive at the conclusion that healthcare costs have skyrocketed in last few years and they are expected to climb more
  • Cost of living – day to day expenses have increased with more exposure to urban living. Similarly cost of services have also increased at a steady pace.
  • Biggest change is the family structure. Families are no longer joint families. Due to migration to urban areas families have become nuclear families and aged ones does not have a chance to live with grownup kids in their dusk years.

 

This sounds scary. What can I do to tackle this situation and have a comfortable life after retirement?

Yes this is scary for many of us too. As per many research reports, it is said that about more than 50% people who are about to retire are not in position to retire due to insufficient savings in their retirement funds.

There is no shortcut or a quick fix solution to this issue. You need to take comprehensive approach towards your retirement right from the beginning so that you can avoid retirement blues. As an employee you spend your life in helping company to enhance and balance their balance sheets, now it’s time you also think seriously to work on balance sheet of your life.

 

Ok, now help me out and tell me how can I get control over my retirement finances?

Below are several steps to take in order to make your money outlive you. These steps are simple to execute and if one takes these steps then he/she will be able to head towards a comfortable retirement financially.

  1. Make a proper plan
    It is said that planning is the most important task to do anything. If there is proper planning then things bound to fall in place. Plan, Plan and again plan. Also at any stage of life, do not hesitate to go back and re plan if you think a particular strategy is not working. Have your plan written on paper so that you can constantly monitor and update it when required.
  • Plan your investment portfolio
  • Plan the asset allocation at different life stages
  • Plan the savings/investment targets by age
  • Plan your career in order to maximize your earnings
  1. Always aim for a bigger retirement corpus fund than you have planned
    In any pan there is always room for some uncertainties. Always keep a buffer for uncertainties and go for at least 1.25 or 1.5 times of the nest egg you have planned for retirement. This will help you to sail through any hurdles that comes in your path while contributing towards your nest egg.
  1. Plan to work a little longer
    This does not mean to toil even after your retirement. Idea is to work a little more – may be as a consultant on a part time basis for few more years so that the transition from active work life to retired life is smooth. This additional work will also help you to amass little more corpus fund for the retirement.
    BUT consider this only if you feel like working as during the end of professional life very few would like to work for some more time.
  2. Take adequate health cover
    It is easy and cheaper to take health cover at young age. Evaluate various service providers and take appropriate health cover so that you don’t have to shell out money for medical reasons. Remember – health care costs have already skyrocketed and are set to increase further.
  3. Get rid of all debts as soon as possible
    As I had discussed earlier too, try to avoid consumer debt, personal loans and any other loan as it costs money to service loans. Mortgage/home loan also try to complete sooner than its tenure so that you have sufficient free money for investment targeting your retirement. Any debt is a hindrance in wealth creation.
  4. Do not forget inflation in your plan for retirement
    Inflation is a termite which constantly eats up your money and reduces its value. When you plan for investments, retirement corpus fund do consider the inflation. Inflation factor must be considered so that you achieve your target corpus fund without any surprises midway to retirement.
  5. Re-look at your plan every year
    By doing this you can evaluate your progress and take corrective action. Remember for any long term plan you need constant evaluation-feedback-corrective action cycle in order to maximize the chances of its success.
  6. Budget – Budget – Budget
    Note down every expense daily – month by month (how to do it). It doesn’t take much time but it ensures that you plug money leaks. Money leaks can prove deadly and unless you write expenses you will never come to know where your money is leaking. Budgeting also helps in proper funds allocation to investments which in turn will help in creating a good retirement corpus fund.

Once you diligently follow the 8 steps listed out above, you will have a better control over your retirement finances.

If you still find things not getting better at retirement age, do not hesitate to look for reverse mortgage option. You have paid monthly payments for a good period of your life towards your home, why not capitalize it through reverse mortgage. This will give you sufficient money for day to day expenses.

One final word, if you are alone or feel you could be burden to your kids, plan well ahead for a care home for elderly. Plan a retirement corpus fund well in advance which can enable you to move to an elderly care facility where you can have a dignified life.

Bottom line is , it is your life and your money. Only you have to plan it as none else would be interested in doing it for you without any personal interests. So take charge of your life, plan out things, work on a proper retirement plan and early financial independence so that you can spend your golden years in peace.

 

 

Why I need diversification of investment?

Why do I need to diversify my investments?

Very often we come across the phrase “you must diversify your investments in order to save yourself from swinging markets” while going through personal finance articles or during a meeting with financial adviser.

I am new to personal finance. The term “Diversification of investment” sounds quite confusing to me. Why to make my life complicated, if I have a bagful of money, I should go and purchase high performing stock of XYZ LTD and be done with my investments, sit back, relax and enjoy my retirement years? Right?

diversification-of investment

 

I do not know what is diversification of investment?
Diversification of investment is a common practice where your investments are spread across different asset class such that your exposure to any one asset class is limited. In other words you are not dependent on only one asset class to give you returns. This saves you from extreme swings in your net-worth in case of any financial turmoil in the economy

 

Ok, understood. Now why do I need diversification in my portfolio? How it is going to help me?
If you are inclined to stocks for the kind of returns they generate and If you keep investing all your money in stocks then you run a risk of exposing yourself to the volatility of stock market. What if when you need a chunk of money and stock markets crash just when you are about to withdraw? Similarly if you like to play safe and invest all your money in fixed deposits then you are reducing the value of your investments as inflation will eat up your money gradually. Hence you need a balanced approach based on your investment horizon and your risk appetite. You need to arrive at an optimized combination where you are not dependent on one asset class and also you are beating inflation so that your overall wealth increases. Diversification of investment if exploited can help you in wealth creation which in turn will help you in racing towards financial independence.

 

Ok, now tell me what are my options for diversification?
Broadly speaking there are asset class like share market, Government bonds, bank deposit schemes, commodities, real estate.

  • Stocks give high returns but there is a high risk factor associated with stocks.
  • Bonds are safe, they have guaranteed returns but the returns are very low. It is difficult to beat inflation when you are invested in bonds. Also bonds come with lock in and not easy to liquidate.
  • Bank deposit schemes give different returns based on the tenure of investment and the product you invest in. They are easy to liquidate and can be used to park cash effectively.
  • Commodities like gold and silver do not appreciate much but they neither do depreciate. They are usually stable even during market crash and also very safe during economic meltdown and in warlike situation.
  • Real estate is a big ticket investment. It gives you good returns over a period of time. Also the biggest drawback is that you can not part liquidate the investment from this. Though through REIT it’s possible now but if you own a property you can not part sell it.

Based on your risk appetite, you should gradually diversify your investment across all classes mentioned above. There are mutual funds that comes in all sizes and covering all asset classes which you can choose to invest your money. But you need to study a little in order to get yourself acquainted with the asset classes and mutual funds. This is not a rocket science but a study will help you to make an informed decision.

 

I am a conservative investor. How can I take benefit of diversification?
If you are a conservative investor, still you have to plan your investments such that you beat inflation which is the biggest killer of your money. As a conservative investor you need to pick the mix of Bank deposits, bond funds, debt funds based on the tenure of the individual investment. Also you will need a certain exposure to stock market so that you can beat inflation. This can be achieved through investing in balanced mutual funds or a small exposure to diversified equity funds. You can have a folio where you invest 80% in bond funds/ bank deposits / debt funds and remaining 20% in diversified mutual funds. Diversified mutual funds will reduce your risk by investing in a range of stocks across sectors and will give you returns which will make your overall folio beat inflation (hopefully)

 

I am an aggressive investor. How do I diversify?
Being an aggressive investor you should focus on generating maximum returns. Also at the same time you should be careful enough that you do not lose money during economic meltdown or stock market crash. You can have a good 60% – 80% investment in stock market and 20% – 40% investments in bond / debt funds / commodities. Here again mutual funds can help you as within stock investment you can further diversify by investing in diversified equity funds, sectoral funds like banking funds, pharma funds, infrastructure funds etc. You can also use mutual funds as vehicle to invest in bonds and debt funds. This will reduce your risk from exposure to uncertainty of stock markets.

 

Ok, all this is fine but what are major concerns with diversification?
The biggest concern with diversification is “over diversification”. It’s human tendency to worry a lot. If as an investor you worry a lot and over diversify yourself by investing across all asset classes with investments in too many sub-classes like all sectors covered by buying top 10 stocks from them. This will create a huge portfolio which will be difficult to manage over time. And also it is difficult to study each sector and re-balance portfolio if you have too many stocks with you. Also there is a cost associated with buying and selling calls each time you execute. Hence it is always advisable to keep the diversification to a level where you can manage it profitably.

 

To Sum up the diversification of investment
There is no generic diversification formula which you can apply to your investments and run your investments on autopilot mode. There are dependencies on time horizon of investment, risk appetite, investment goals, your knowledge about investment and your experience in the investments. All put together, it’s always better you yourself arrive at the diversification distribution of the asset class for your portfolio.

But one thing is sure, if you diversify well based on your risk appetite you can be sure to create wealth over a period of time and you can cut down the risks of wealth erosion due to economic meltdown or share market swings. This balanced approach will also help you in achieving financial independence quickly.

Happy Investing !!!