Browse Tag: #investment

10 Money goals to accomplish before you turn 40

10 Things to accomplish with money before you turn 40

Money matters a lot in our life. Arguably money is the biggest facilitator in this world for a comfortable life.

midlife investments

When we touch the magical number of 40 years in our life, we can safely consider ourselves as quite mature. Mature in handling personal life, professional commitments and to a certain extent our finances.

Here is the list of 10 milestones or financial accomplishments we should aim to achieve by the time we touch 40. These milestones are also important as 40s are considered as peak performing years in one’s professional life.

  1. You should have a dedicated folio for your retirement savings with at least 10%-15% of your monthly net income going into it. If you are looking at 60 years as your retirement age then by the time you cross 40, you must have 10%-15% of net monthly income going into retirement corpus and that too with a raise in amount every year.
    This ensures that you are not stressed with your finances once you approach retirement age.
    6 Sins people commit when planning retirement

  2. Your investment folio should not have retirement as the only goal. By the time you cross 40, you should have identified financial goals in life and should have started goal based investing.
    A goal could be kids higher education, kids wedding, buying a vehicle 10 years down the line, upgrading your house from 2 bedroom to a 3 bedroom etc. A proper planning makes the execution easy.

    goal based investing

  3. Try and finish paying up your home loan / mortgage by the time you hit 40. At 40, you would already have completed a professional stint of about 15 years. 15 years are good enough to pay off the home loan and free up the property.
    If your home loan is still around, take immediate steps to pay it off ASAP as by doing this you can free up a lot of investable income which can be safely redirected to your retirement corpus.

  4. Clearly establish money and life goals for your later life. Plan your finances around your goals and make them happen. Life goals could be – at what age you wish to retire? Where would you like to settle? How do you look at post retirement life? How to tackle day to day finances when you are at the fag end of your life?
    It’s better to roughly identify such goals and start working on them. This will give you enough time to plan financially for these goals.

  5. Cover yourself adequately with life as well as health insurance.
    Note that more you delay, more premium you have to shell out. Do I need to say that the healthcare costs are skyrocketing. By the time you reach 40, you and your dependents must be adequately insured to tackle any emergency situation.
    Why you need insurance ?

    Why you need insurance

  6. You must try and have a side hustle by the time you touch 40. It can simply be a freelance consulting in the field of your expertise or it can be your hobby which you can monetize. The idea is to have some alternate source of income. This extra income can do wonders to your investment portfolio.

  7. By the time you hit 40, you should have the list of all investments made, all financial details of bank accounts, insurance, nominee details etc handy with you and with your spouse. You should also have regular discussions on investment and money matters with your spouse. This will keep both the spouse on the same page with respect to money.

    investment discussions with spouse

  8. By the time you hit 40, make it a habit to revisit your investments periodically. Not only revisit, but do readjust the investment from asset allocation perspective keeping in mind your life and financial goals. Also you may require to tweak your investments from the perspective of external factors like sudden change in government policies, global cues. Note that these external factors can quickly eat up your gains in your investments so make sure that you periodically revisit your investments.
    In addition to external factors, as you age, you have to tweak asset allocation too in order to align your folio with your life goals.
    Delaying investments can cost you dearly

  9. By the time you hit 40, you must learn the art of staying fit and follow a fitness regime. When you are young, you play a lot, you move a lot. Some of the young lads work out a lot. Once you cross 30, due to professional and personal commitments in life, the exposure to physical activity gets curtailed.  
    Ensure that you create a fitness regime and follow it religiously before you hit 40. Now how does fitness is related to finances? It’s an old saying – HEALTH is WEALTH. More fit you are, longer you can enjoy healthy life.
    Stay fit and be WEALTHY

  10. Last but not the least – Make a will and have a proper inheritance plan before you touch 40. Life is quite unpredictable. We don’t know the future and can not even predict what will happen tomorrow. However with a will and an inheritance plan of our financial assets we can streamline the things a lot for our dependents. By 40 you must finish this task so that you can be assured of a smooth transition of your financial assets in case of any eventuality.

    Preparing a will

Bottomline is that if you plan things well in advance, you won’t get surprises on the course. This is specially true with the financial planning. Since 40s are considered as peak performance years in your professional life, it is advisable to set few things right before you reach 40.

Happy Investing !!!

Why you must Start investing in Equity markets through mutual funds

Why you must Start investing in Equity markets through mutual funds

Most of us are scared of the equity markets. We have some or the other excuse NOT to start investments in equity. For some, it’s risky, for some it’s too technical. Some feel that it’s too complex to understand and they are not qualified enough to understand the nitty gritties of the market ups and downs.

 

mutual fund investments

 

If you have never invested in mutual funds, you are at the right place. This post briefs you on how and why you should invest in mutual funds for various financial goals and milestones in your life.

Search for higher returns on investments make people to look out for investments in equity markets. Investment in equity markets bring “high risk” to the table. Everyone can not be an equity expert to understand the technicalities of the market swings, when to enter the market or when to exit the market. The loss of the principal amount is the biggest threat which keeps most of the investors away from the equity markets.

An equity Mutual Fund is the best tool for common investors to enter into equity markets. It helps them to reduce the risk, earn higher returns and since they are professionally managed, they play fair game.

By definition, “A mutual fund collects money from individual investors and invests the money on their behalf in the stock market, bonds, government securities etc. and it charges a small fees to manage the investment.”

 

investment in mutual fund

 

I am listing down 5 compelling reasons on why one should invest in mutual funds.

 

  1. Equity Mutual funds give higher returns :
    Ultimately every investor aims for a higher return on his/her investments. Equity mutual funds have given much higher returns in the past if you compare it with the fixed income instruments like fixed deposits / recurring deposits / bonds etc. Mutual funds have controlled exposure to the equity markets which in turn gives higher returns to the investors. If you see the returns from equity mutual funds over the last 15 years, most of the funds have given returns around 14%-15% compounded annually. This is much higher than the inflation figures

  2. Mutual funds are professionally managed:
    Mutual funds are professionally managed by qualified and trained fund managers usually picked up from top schools.  Fund manager’s daily job is to study, track the stock markets and tweak the fund’s composition accordingly. Also all the mutual funds in India are governed by SEBI which is a government agency which is governed by the government.

  3. Mutual funds can make you a disciplined investor:
    Mutual funds have amazing concepts of Systematic Investment Plan (SIP), Systematic Transfer Plan (STP) and Systematic Withdrawal plan (SWP). Armed with these plans, you need not have to bother about logging into your account every month and buy fuds, or switch funds. You can set up SIP, STP or SWP and sit peacefully while mutual funds work with your investments

  4. Mutual funds have greater liquidity:
    Unlike some investments like PPF, Government Bonds, mutual funds have an excellent liquidity. Except ELSS – Equity Linked Saving Scheme mutual funds (which have a lock in for 3 years), equity linked mutual funds can be sold and redeemed within 3 working days. Liquid mutual funds can be sold and redeemed in 1 working day. Thus one does not have to worry about liquidity related concerned when he is investing in mutual funds.

  5. Equity mutual funds are highly customizable:
    Equity mutual funds comes in various shapes and sizes. There are diversified funds, thematic funds, sector funds, large cap funds, small cap funds, mid cap funds, index funds, tax saving funds, arbitrage funds and so on. You can chose funds as per your choice and investment horizon. Mutual funds are not rigid like Government bonds or PPF scheme where you do not have right to alter the composition. Also the switch facility from one mutual fund to other givers it more flexibility.

  6. Mutual funds provide you ease of investment:
    Mutual funds are so convenient. No need to stand in long queues to invest your money or no need to do loads of paperwork to park your money. A simple online account can work for you. Usually one can approach their bank to open an online trading account through which mutual funds can be bought and sold by merely clicking mouse.

 

benefits of mutual funds

 

Looking at the historical data, there is no denial that equity mutual funds gives you much better bang for your money. The returns are much higher than the traditional investment avenues. If you want to get rid of earn-save-spend cycle, you have to look for professionally managed schemes which gives you higher returns.

Look no further, make a good portfolio of mutual funds to get better returns and invest money for your future retirement and goal based investment needs.

 

Happy Investing !!!

2018 is here – Simplify your finances in 7 easy steps

2018 is here – Simplify your finances in 7 easy steps

New year 2018 is here. A new year is always a great time to start/restart your life for better. It’s a time to re-haul your life, review and take steps to remove negative components from your life and move towards positive.

One excellent component to re-haul is your financial life. Be it saving for your retirement, saving for marriage, saving for kids education or be it the repayment of debt which is hovering on your head.

 

2018 and finances

 

You can simplify your financial life in 7 easy steps this year. The only effort required from your end is commitment to put your financial life in order. So take charge of your life, use the new year as an opportunity to boost your finances.

  1. Take inventory of all your Debts:
    Be it home loan, credit card balance, vehicle loan, personal loan you took for vacations, loan against property or education loan. List them down in descending order of the interest rates. Once you have the list, start attacking the highest interest loan with extra payments regularly.

    This way you can save loads of money in terms of outgoing interest on these loans. Who doesn’t want to be debt free – so target the same for yourself.

    Consumer debt & personal finance

 

  • Close all the unused bank accounts and cut off your unnecessary subscriptions:
    List down all your bank accounts including ones which you had opened many years ago and you are not using it anymore. Keep one personal account and one business account – close rest all of them. Remember all bank accounts require certain minimum balance and you do not need many bank accounts. With payments going digital way, it’s better you close all your accounts except one.

    This will free up a lot of money for you which can be used for debt repayment or investment. Similarly review magazine subscriptions, newspapers subscriptions etc as in this digital age mostly all publications have online version and that too free.

    This will save you from money leaks and the saved money can be utilized in a better way for further investment.

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

 

Money leak - how to fix it

 

  • Review your insurance needs:
    Be it life insurance, vehicle insurance, homeowners insurance or health insurance. Review all of them, compare premium for the similar sum assured with other service providers. Call them up and bargain for the premium amount – there is always a room for bargain. Look at your age, your other family member’s age and tweak sum assured based on the needs and finalize the most cost effective plan for yourself. Repeat the same exercise for your vehicles.

    You will be surprised to know the amount you can save by switching to different service providers / porting the policies to other service provider.

    Why you need insurance ?

 

 

  • Review and tweak your investments:
    Be it PPF, Mutual funds, Stocks, shares, Fixed deposits, recurring deposits, post office deposits or commodities. Review all of them in terms of gains since you invested in them and what current rates they are offering. You might want to close down some dead investments based on the returns or shift to more fruitful ones. Based on your requirements and goals, tweak the investments in order to gain better returns. It’s always good to do a thorough review of your investments once a year and rejig your portfolio.

    If you have not yet started investments, it is right time to start investing gradually towards your goals in life so that you have enough funds when you reach your life goals.

    Delaying investments can cost you dearly 
    Diversify your investments

 

diversification-of investment

 

  • Make a budget and stick to it for the entire year:
    Budget is one of the major step on the road to financial independence. If you master the art then you can be assured of sealing the money leaks in your month on month expenses. If you are making your budget for the first time, there are good chances that your spending is more than your income otherwise you would not be taking pains to make the budget. Don’t think it is complicated. Keep it simple to suit your needs and it can work wonders for your financial life.

    Once you have data for a few months – say three months you can see and analyze the expenses you have incurred under different heads. This will help you free up money for fruitful investments.

    How to make a simple budget 
    A simple budget can save you from 5 big troubles

 

 

  • Use tax exemptions to minimize your taxes:
    Government runs many schemes which can be utilized to minimize the tax impact by investing in them like RBI bonds, infrastructure bonds. Investment towards PF, PPF is also tax exempted so as investments in equity linked mutual funds and life & health insurance.

    If you are running a business many exemptions are there in terms of expenses incurred towards the business.

    File your returns efficiently, take appropriate steps to pay minimum tax using exemptions. This will help you with more money at hand which can be utilized to invest more efficiently.

 

tax exemption

  • Educate yourself:
    You may not be an expert on finances but basic investments through various vehicles is not a rocket science. A lot of literature is available online which helps you in taking informed decisions. Do not rely solely on the other so called financial experts from your neighbourhood and local banks to help you out with your investments.

    A little reading and self education can do wonders for you. So take out some time from your busy schedule and start reading about personal finance and investments.

 

One final suggestion is to keep a piggy bank at your home to save all the loose change you gather. This will also inculcate savings habit among the other members of your family, especially the kids.

At WS, we always stick to the policy that “your money is your money“. None other than you would be able to manage it better. Others, who claim they can manage better, have their conflict of interest since they would be doing it for their livelihood. When they earn commissions for suggesting you the investment avenues, they can never be honest with you.

Wish you a very Happy and Prosperous New Year 2018 !!!

 

Want to enter equity markets? Index based ETF funds are the safest bet

Want to enter equity markets? Index funds are the safest bet

Most of us do not invest in equity markets because

  • We are afraid of stock markets as we do not know how they work
  • We think we do not have enough money for investments
  • We think that investment is something which is to be done when you are nearing retirement
  • We think we do not have basic education to invest money in stocks  

what are index funds

 

All have investments in mind but we love to delay it due to reasons best known to us. We all know that we have to accumulate enough retirement funds as we need regular income when there is no salary for us. Still we try to avoid investing money.

It has been historically proved that stock market gives the best returns on your investments. If one is looking to create a retirement corpus, stock market can not be ignored as the returns generated through them beat the inflation by a good margin.

If you do not know anything about equity markets, if you have never invested in equity markets / funds, still you have one option which is quite safe and which does not require you to be an equity market expert. It is INDEX based Exchange Traded Funds. Index funds have consistently outperformed markets and so called equity experts if you look at a longer duration. In fact one of the richest fellow in the world and a great investor Mr. Warren Buffet says “Consistently buy an S&P 500 low-cost index fund. I think it’s the thing that makes the most sense practically all of the time. Index funds make the best retirement sense ‘practically all the time’

 

warren buffet on index funds

 

So what are index Funds?

By definition, an index fund is a type of mutual fund with a portfolio constructed to match or track the components of a market index, such as the Standard & Poor’s 500 Index (S&P 500), BSE or NIFTY. An index mutual fund is said to provide broad market exposure, low operating expenses and low portfolio turnover

 

So what makes index funds safe as an investment instrument in equity markets?

  • Index fund is a way to avoid the risk that comes with picking of individual stock: Index fund spreads out your investment into the stocks which are top performing on any equity index. This way you are not buying individual stock, but a set of stocks which are like top performers of any equity market.
  • It helps you to buy not “the top company” but it lets you buy all top companies at a very low cost.

 

Costs matter a lot in the investment scenario. Most of the equity diversified funds charge a fund management cost of 2.5%-3.5% per year. In comparison to this, index funds usually have fund management cost of 0.5%-1% per year. So when you invest in index funds, you are already ahead of any equity diversified fund by 2%-3% and anyone who knows a little bit of arithmetic can say that over a period of 20 years this can make a huge difference in investment corpus.

 

Then why ETFs are not recommended by investment advisors / financial planners?

When you talk to an investment advisor, his or her salary is linked to the income they generate for the fund houses. More the fund management charge, more their salary. So it’s obvious that they would recommend top ranked funds which has more fund management charge than the plain vanilla index based ETFs.

There are no free lunches so anyone unless he has a personal interest can not give you honest advice regarding your investments.

 

about index funds


So what is the recommendation regarding index based ETF?

As pointed out by investment mogul Warren Buffet

  • Start buying index based Exchange Traded Funds (ETF)
  • Buy them every month through Systematic plan
  • Stay invested in them for a very long duration
  • You can bank on index based ETFs for your retirement plan
  • When markets are battered or down – do not panic, keep investing regularly. This will help you average your cost of investment.

 

If you stick to the points mentioned above, you do not have to worry about your retirement corpus.

So with index based ETFs:

  • You are saved from headache of actively managing stock portfolio
  • ETFs give you exposure to the gains of stock market over a long period.
  • You can plan your long term corpus goals for retirement / kids education with ease through index based ETFs
  • You can keep the cost of your investments low through ETFs.

 

Happy Investing !!!

How to save and invest for your Kid’s higher education ?

How to save and invest for your Kid’s higher education?

It’s not a rocket science to calculate how the cost of education has increased in last one decade. Where some of us paid close to nothing for our schooling, we are paying through our nose for our kid’s schooling. I myself studied in a central government school and paid INR5 per month as fees for my entire 12 years of school education. And these days just to buy application form for school admission one has to shell out INR500-INR1500.

 

higher education

 

Now imagine the cost of higher education. The PGP class of the most prestigious B school in India – IIM – Ahmedabad will pay INR19.5 Lacs in 2018 for the two years course. And behold, this amount is 400% higher than what IIM-Ahmedabad charged for the same course in 2007.

 

Almost same is the story with all the undergraduate courses for engineering, sciences and all other subjects. If you extrapolate the fee for the next 10 years, the figures become scary. If you have not planned well for your kid’s education fund, you could get a rude shock. Remember, here we have only talked about the cost of education. I have not even touched the cost of lodging and boarding during the education period.

 

This sharp spike in the tuition fees in last decade or so is a wake up call for parents saving for the higher education of their kids. Through this post I am trying to cover the means by which parents can plan the savings and investments for their kid’’s higher education.

 

The strategy for investment will be different for

  • A new born
  • 5 yrs of age
  • 10 years old kid
  • 15 years old kid

 

Based on which group kid falls, you can choose the strategy for your kid’s higher education.

I am covering very simple means to build corpus fund for higher education. I am not using any complicated investment streams for this.

 

When planning for a newborn

The main benefit of planning at this stage is one get a target investment period as 15-17 years. This target period for investment is sufficient to ride on the equity wave to get high returns and plan for a good corpus without pinching pockets. One can try the below mix

  • Start Mutual fund SIP in 5 equity diversified equity funds (distribute MF investment amounts across 5 different funds). With this you can earn up to 12%-15% gains per annum
  • Don’t fall for ULIP
  • Don’t fall for any child education or insurance plan from insurance companies
  • For a 17 year target, once you reach 15 years, start taking out money from equity mutual funds and start parking in short term debt funds through STP
  • Open a PPF account in your kid’s name and max out the account every year. This gives tax free returns on maturity.
  • Whatever cash gifts your child gets on birthday year after year, use it to fund PPF account. Also there is no harm in asking relatives to give cash on birthdays as opposed to gifts and feed the PPF account.
  • Make sure that you start moving equity investments through equity mutual funds to short term debt funds when target year is about 2 years away. This will safeguard your gains in case stock markets show fluctuations

 

When the kid is 5 years old

In this case, one has an investment horizon of 10-12 years. This is also a good time horizon for using equity as investment tool. The benefit of using equity is generating higher returns. If always gives good returns over a longer duration but returns could be volatile in short term. Below mix can be tried

  • Start mutual fund SIP in 3 diversified equity mutual funds. With this you can earn up to 12%-15% gains per annum
  • Start mutual fund SIP in 2 balanced mutual funds. They have up to 40% exposure in debt instruments so the chances of losing money is little less during turbulent markets
  • Open PPF account and max it out every year. This gives tax free returns on maturity.
  • Whatever cash gifts your child gets on birthday year after year, use it to fund PPF account. Also there is no harm in asking relatives to give cash on birthdays as opposed to gifts and feed the PPF account.
  • Don’t fall for any ULIP
  • Don’t fall for any child education or insurance plan from insurance companies
  • Make sure that you start moving equity investments through equity mutual funds to short term debt funds when target year is about 2 years away. This will safeguard your gains in case stock markets show fluctuations

 

When the kid is 10 years old

In this case, the target investment horizon is 7 years. Equity mutual funds to be used judiciously to generate good returns for close to 5 years and then entire equity investment has to be moved to debt in order to keep the gains safe.

Below mix can be tried

  • Start mutual fund SIP in 2 equity funds
  • Start mutual fund SIP in 2 balanced funds
  • Open RD account (if you are under 30% tax bracket – better to move to debt funds right away )
  • Open PPF account and max it out every year
  • Don’t fall for any ULIP
  • Don’t fall for any child education or insurance plan from insurance companies

 

graduation - higher education

When the kid is 15 years old

In this case, you have only 2 years as investment horizon. You can not rely on equity so all equity mutual funds are ruled out. Your entire folio has to be debt oriented. You can try below mix

  • Invest heavily in short term debt / liquid mutual funds through SIP
  • Open RD accounts (if you are under 30% tax bracket – better to move to debt funds right away )
  • Don’t fall for any ULIP
  • Don’t fall for any child education or insurance plan from insurance companies
  • Liquidate all your investments in physical gold which are in the form of coins/bars and move the money into short term mutual funds.
  • For those who have invested in PPF when the child was just born, they can move the maturity amount in short term debt fund. For them it’s time to consolidate the investments and try to save the gains through moving all investments for kid’s higher education into debt instruments.

 

As a parent one has to take charge and start investing for kid’s higher education. Cost of education is rising and educational loans are an expensive bet. Though it’s good to encourage your kid to part fund his/her higher education through educational loan but since the cost of education is very high, a parent can also chip in some amount with the help of steps discussed above.

 

One final word:

If you start planning and investing when the child is just born or up to 2-3 years old, you have a good time horizon to ride the equity markets. A small amount per month for about 15 years can give you excellent returns without straining your finances. For example if you are targeting INR25 lacs over 15 years, you need to save only INR5000 per month in equity funds. If you delay investing for 6 years, your monthly investment figure becomes INR9200. If you wait for another 3 years, the monthly investment amount jumps to INR23800 and with this you may not be able to take benefit of equity market. So be active and start planning now.

 

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 !!!

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 !!!

Accelerate your NETWORTH , Here’s HOW?

Here is a post on How to accelerate your Net Worth & achieve Financial Independence. Increase in net worth will accelerate your journey towards Financial Independence

Net-worth gives a clear measure of your wealth. In accounting terminology, net worth is really everything you own of significance (your assets) minus what you owe in debts (your liabilities)”. Assets include cash and investments, your home and other real estate, cars or anything else of value you own.

 

how to increasse networth

 

Now when it is clear what is net worth, I am sure you would want it to keep growing at a healthy rate. A healthy growth rate in net worth will give you a confidence in your life with respect to your finances.

Here are some of the methods I am listing down which can accelerate growth in your net worth. All these steps are simple and you can implement them in your financial plan to stay on top of your finances and off course net worth.

 

  • Work towards paying all debts.
    Kill the debt with highest interest first. Usually the personal loan which we take for some holidays or some family function carry the highest interest rate. Same is with the credit card debt. Make sure that you get rid of personal loan and credit card debt. Then focus on getting rid of consumer loan which you took for buying that 85 inch cool TV, auto loan for your cool SUV. The EMI on these loans might look small but if you do that math you end up paying a lot in interest on them. Remember the price you pay for any item bought on these loans are the cost of principal plus the cost of interest. Once you are done with all high interest loans, target home loan. Yes, though you get benefit on home loan but a loan is a loan. The feeling of having freedom with no loan is something out of the world.

  • Increase your contribution towards the Employee provident fund.
    If you do not have PF – Provident fund account with your company, open a PPF account with any public sector bank and max-out the limit of yearly deposit in the first month of every financial year. These account ensures that over a long run, you accumulate enough corpus which can help you plan your retirement years they way you want.

  • Make a budget.
    This article details on how to make a basic working budget. Once budget is made, trim your unwanted expenses. Remember you will not be able to trim your unwanted expenses unless you make a budget. Be on top of your expenses and cut down all unnecessary expenses.

  • Do not let your extra cash sitting idle in low interest savings account.
    If you have huge amount sitting idle in savings account, it is losing its value. Currently savings account give only 2%-3% interest. And the inflation is 6%-7% which means your money is losing its value. Immediately put your money to work harder through mutual funds, sweep in deposits, fixed deposits, stock market based on your risk appetite. The returns in these investment streams are higher than the regular savings account and money in them ensures that you are beating inflation and not losing value of your money.

  • Start building a mutual fund portfolio.
    This is from long term perspective and invest into this through systematic investment plans across a diversified range of mutual funds consisting of diversified equity funds, balanced funds, large caps, mid caps. This does not need expertise, it only requires basic knowledge which is available freely on the internet.

  • Reinvest all the income generated from your investments.
    Do not blow away the gains from your investments. If you keep re-investing, it will help in increasing your investment corpus considerable and that too quickly. Also this exercise of yours coupled with the brilliance of compound interesting will accelerate your net worth growth.

  • Invest a fixed amount regularly, every month.
    Pay yourself first – this should be the mantra. Automate your investments. Suppose you receive your salary in the first week of the month, keep your systematic investment plan SIPs automated for the first week of every month. This will ensure that you keep investing every month without a break. Remember – the one who invests regularly and over a long duration reaps the benefits.

  • Invest all the windfalls you get. Do not splurge.
    Gifts and inheritance money can be very helpful in accelerating your net worth.  Remember more money you put in investment, more your investment corpus would be and more money it will generate.

  • Do not go crazy about new vehicles every few years.
    Remember that vehicles are merely an instruments for going from point A to point B. Also remember there is a huge cost associated with the new vehicles in terms of insurance, maintenance, running cost etc. And it is a fact that a vehicle loses about 20%-25% of its value the moment it comes out of the showroom and it is a depreciating asset.

  • Do not accumulate loans to purchase stuff.
    Every new loan you take is a liability and is a hindrance in your plan to financial independence. Every new EMI / monthly payment added to your monthly income will surely decelerate the net worth growth.

If you follow the above listed steps diligently and track your progress, I am sure you will see a positive movement in your net worth. You need to improve, evolve your approach constantly in order to see your net worth moving northward. Each one of us has different lifestyle, different expenses but what is discussed in this article are basic building blocks to improve your net worth.

Improvement in net worth will result in creating wealth and early financial independence. Don’t you want the same?

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