Browse Tag: #wealth

Plan your wealth & retirement with Mutual Funds – WealthSamurai

Plan your wealth & retirement with Mutual Funds

 

 

mutual fund investments

A young techie sent me a message “I am 24 years old and I need help with my retirement planning . Can you help me out?”.

Amazing, isn’t it? Hardly around a decade ago it was impossible for people like us – early into the professional life to talk about retirement planning and personal finance. The scenario has changed completely. Now a days I see a lot of young professionals lined up seeking early retirement advice and discuss on the ways how they can accumulate wealth. Till a few years ago, these kind of questions were the subject of discussion for people in their late 40s and 50s

The reason behind this is the younger generation is much more aware about the surroundings. Youngsters are more worried about the retirement and investments. They indeed should be as

  • There is no provision of company funded pension schemes in private organizations and even in most of the Government organizations now.
  • It’s unlikely that the kids / family will help the current generation during their retirement times.  Hence they can not even think of relying on them during their golden years.
  • Due to advancement in medical facilities, people are living longer now. This means they have to provide for themselves for few more years.
  • The cost of living, including the healthcare costs are on the rise and one needs money to fund the living.

So how to get around and plan for a decent retirement for yourself? Rather I should frame this question as “How best mutual funds can be used to fund your retirement plan effectively?”

 

investment in mutual fund

A lot of historical data which is available at hand at many online portals / financial magazines indicates that the returns from a small amount invested religiously over many years in equity mutual funds have always beaten the inflation by a huge margin.

What does this mean? When you are investing for retirement you have to make sure that your earnings are not affected by inflation. Say for example, money in savings bank account as of today earns around 3% as interest per year. Retail inflation usually hovers at around 4%-6%. This effectively means that your money is eroding its value when you keep it in savings account.

When you are investing for a long term or a goal like retirement, you must ensure that you go full throttle to increase the gap between inflation and the returns you generate from your investments.

As per the historical data, over last 10 years

  • Large Cap mutual funds category has generated an average of around 14% returns per year
  • Diversified mutual funds category has generated  an average of  around 17% returns per year
  • Midcap / small cap mutual funds category has generated  an average of around 20% returns per year

So we do have some learning from the statistics above. To keep our earnings well above the inflation – we must tap the potential of Equity Mutual Funds. Right? It is extremely important to to earn well above inflation to save our money from eroding its value.

Now coming back to Mutual Funds, all one has to do is to select a mutual fund which fits in one’s risk taking appetite and set aside a sum every month to invest in it. Do it religiously for eternity – you will certainly hit the jackpot. If you are young, starting your career and love to take risks, pick a more aggressive small cap / mid cap combination. Choose the best funds in the category and you are done. Only catch is you have to invest in it month on month for many years. If you keep on investing and do not withdraw your earnings, you are set for your retirement corpus. One more things, invest a sizable amount. My suggestion is you must aim to invest 20%-30% of your take home income every month.

If you are conservative by nature, pick any top rated large cap equity mutual fund and hang on with it till you reach your retirement age.

 

benefits of mutual funds

Believe me, there are no shortcuts of becoming rich. One has to invest diligently over a long period of time and once you give exposure of time to your equity mutual funds investments none can stop you from acquiring a decent retirement corpus. You will be amazed to see the power of compounding.

One word of caution – do not get disturbed or distracted with short term fluctuation in markets. Every few years there will be sharp down turns which can be used to park more funds and earn better during the upcycles.

If you are young, ready to start – I am reachable at wealthsamurai at gmail.com to help you out.

More Reads:
Want to enter equity markets? Index based ETF funds are the safest bet
6 Sins people commit when computing retirement corpus

Happy Investing !!!

 

7 Things about personal finance that none tells you

7 Things about personal finance that none tells you

Everyone who is working knows a little bit here and there about personal finance. Most of us are aware of the fixed savings instruments, investment through insurance, provident fund, share markets. Though not in detail but at least we have heard or read about the names of these investment avenues through television channels, magazines, websites, newspapers etc.

 

personal finance

 

If you look at the definition of personal finance from YourDictionary, it says “Personal finance is defined as the management of money and financial decisions for a person or family including budgeting, investments, retirement planning and investments.”

 

I have started my journey towards personal finance around a decade ago. I have also made my share of mistakes during this journey. I sincerely feel if someone had informed me about certain key things in the beginning, I would have certainly not made some of the silly mistakes.

 

Based on my own personal experience, I am listing down few points which none will tell you about personal finance

  1. Building wealth will always take time:
    Building wealth takes time and persistent efforts unless you get some windfall or some inheritance. If you wish to be a millionaire, you have to plan it well and execute it well too. There are no shortcuts, and one needs to put in sustained efforts.

    Remember, there are no quick rich schemes on the way to wealth creation. My own experience so far says that the journey towards building wealth is fun if you learn to enjoy it.wealth creation in personal finance
  2. Early bird gets the worm:
    The sooner you start taking control of personal finance, you have better chance of wealth creation. We all know the concept of compounding. An early start towards personal finance can make compounding work in favor of you which in turn will help you in amassing wealth.

    Also when you start early, you have the time factor working in your favor. When you give time to your investments, they can grow comfortably and with lesser risk.
  3. Look ways to increase income if you want to save more and invest more:
    Passive income such as income from house, income generated through doing freelance jobs in your field of expertise and through freelance consulting adds up and go a long way in creating wealth quickly.

    Also, a better paying job increases your chance to save more, invest more and move quickly towards wealth creation.
  4. Budget and cut out the excess spending:
    This is one of the crucial step in wealth creation. If expenses are more than income, one will always be in negative month on month. With the help of a budget, once you start listing down your expenses, you will be surprised about the crap expenses taking place in your day to day life.

    I was surprised when I started listing my expenses sincerely. I must accept that budgeting has helped me a lot in freeing up the additional money for investments.

    Here is how you can start working with a simple budget
            
  5. Consumer loans are killer:
    Though they look cheap, consumer loans are big dampener in your wealth creation journey. The “easy monthly installment” syndrome forces one to buy more and more. The thirst to gather more and latest never ends because the loans are handy and CHEAP.

    Try avoiding consumer loans as they are a big hindrance in your journey to wealth creation.
    Read: Consumer loans & personal finance
           
  6. You can not build wealth with a salaried job:
    Yes, you read it right. Most of us somehow pull ourselves out of bed each day and go to job. Because job is the only source of income, you must go as there are bills to be paid for the upmarket home you bought last year or for the swanky new car you purchased. If you do not go to the job, how you will generate money to pay the cost of groceries, household expenses?

    With only one stream of income, it’s tough to build wealth. One must work on creating multiple sources of income. Be it some freelance work in your field of expertise or an additional income from an additional floor of your house. Multiple income sources work favorably when you are out creating wealth.
  7.  Learn the basics of investing and work on your investments:
    No matter how the term “investments” is terrifying to you as a layman, one must start learning the basics of investments. Remember, it is not a rocket science. Surely it will take some time to learn the “know how” but you must do it as it will help you in managing your own investments. You should know and work on your investments as it is your own money which is being invested. If you leave it on someone, they may not be honest in working with your money because of the conflict of interest.Financial agents, bank employees, investment advisers are most likely to recommend what works for them, not what works for you.

    READ:
    Start investing in Mutual Funds
    Goal based investing
    When to start investing in stock markets

your money matters in personal finance

 

Once you make these points a habit, you will reap the benefits in the time to come. If you can work around on certain pitfalls mentioned here, the journey towards wealth creation would be slightly more smooth and joyful.

 

Happy Investing !!!

How to achieve Financial Independence? Explained in simple language

How to achieve Financial Independence? Explained in simple language

Almost everyone in today’s era wish to have financial independence. At least most of the people I have met wish so. Isn’t it?

However most of them have no idea how to become financially independent?

financial independence

 

Oh yes, I have heard this term many times in TV talk shows and have also read about it in the newspapers. It sounds too complicated to me. Can you explain to me what is Financial Independence in a simple language?


Financial Independence is a state which is achieved when you have earned and saved enough money so that you do not have to work anymore to support your lifestyle for the rest of your life. In short, you do not have to work to earn money. Don’t get confused. You still can work even after achieving financial independence. You can do whatever work you like, you can work just for pleasure. Financial Independence means you no longer have to slog that 9-10 hour shift everyday in order to pay your monthly payments, credit cards etc.

 

Wow, this sounds great. Can you throw some light on how can I be Financially Independent?

There is a simple time trusted formula with few set of rules for achieving Financial Independence.

  1. Your spending should always be less than your earnings
  2. Increase the GAP between your income and savings – Earn more
  3. You must invest what you save judiciously

If you follow the above 3 step formula, none can stop you from achieving financial independence.

high-income-1

 

Hmm… looks simple per say but how to implement this into practical life?

Ok, let’s take each step one by one

 

  • You must always spend less than what you earn:
      1. It’s quite possible to spend less than what you earn. If you are able to control your spending habits, you will be able to achieve this equation. First tool to achieve this is Budget. A simple budget can save you from many things. It will tell you where your money is going without you making a note.
      2. Don’t splurge in buying that big house just because you can afford it. Buy the right size house. Home ownership can be a quite expensive affair.
      3. Don’t buy big automobiles. Remember, your car is not your asset. Monthly payments on big cars will never let you move towards financial independence.
      4. Be little frugal in your living. Cook at home, eat out less frequently. This will not only save you money but also save your health in the long run. Stay fit and be WEALTHY.

 

  • You must strive to Increase your earnings:

 

      1. Importance of education can never be denied. If you are well qualified academically, you have a better chance to land a high paying job. Keep working towards increasing your income by augmenting your qualifications, certifications. This will boost your ability to save and invest more towards your main objective, which is financial independence.
      2. If you are good at something, try to earn some income from it. For example if you are good at graphics designing, use your spare time to take up some freelance projects which can earn some side income for you.

 

  • You must invest wisely:

 

    1. Savings are important but savings alone will not make you financially independent. Invest wisely so that your money grows at a healthy rate
    2. Use a mix of equity, debt and use diversification so that your investments remain recession proof.
    3. Invest from day 1 of deciding that you want to achieve financial independence. Do not wait for the right time to invest.
    4. Avail tax exemptions to minimise the loss of money to taxes.
    5. Structure your investments properly and practice goal based investing

 

If you are able to achieve a healthy saving and investment rate month on month and manage your investments properly, you can be financially independent sooner than you expect.


We at WealthSamurai always believe in a healthy savings rate and proper investments as the best tool to take control of your financial life.

That’s really a helpful. But how do I know the details like where to invest, which stock, which fund to buy?

 

Once you start tackling the three points mentioned above you will get more insight into the micro equations like where to invest, what amount to invest, what percentage of diversification is required etc. But important is to take the first step towards financial independence and keep going.

 

Happy Investing !!!

 

6 Sins people commit when computing retirement corpus

6 Sins people commit when computing retirement corpus 

“I will think about investing for retirement when I am a few years away from it. Let me live life to the fullest till then. I want to enjoy my life” – said a bubbly young software engineer staying in the same township where we stay. He is fresh out of college and just started working for an Information technology major.

 

retirement planning


Most of the young Turks working with handsome salaries have the same thing to say. Financial experts say that one must start investing from month one of getting a job. This can save you from unnecessary stress at the fag end of your work life.

The biggest issue with the shortfall in retirement corpus is the delay in investing. Most of the people forget this. They consider the exercise of early investments in their career unnecessary and run short of money in their sunset years.

When you are running a marathon, you have to perform consistently throughout the run. You can not start after 30 minutes and then run faster to take place on the podium. This will end up in a big disaster. If you delay in starting the race, you will never be able to finish it on time. Same is applicable when we talk about creating retirement corpus.

I am going to discuss six issues which people miss out while planning their retirement corpus. These issues are applicable to most of us who are planning to accumulate a decent size retirement corpus. If these issues are tackled, they will help one immensely in planning a perfect retirement corpus.

  1. Not considering inflation:
    Inflation is an important factor while working on any goal based investment like retirement. To keep it simple – if my grocery budget was ‘X’ some 10 years ago, today it is ‘3X’ then I have to keep in mind that it could be ‘8X’ 10 years down the line.

    If you do not consider inflation while planning for retirement corpus, you will end up having less money accumulated when you hit the retirement age. This will result in you outliving your retirement corpus and will surely be a disaster.
    inflation
  2.  Underestimating the expenses in retired life:It’s a common perception that expenses will fall once you are retired. You do not have to maintain a formal wardrobe, commute expenses will not be there, you will be free from monthly payments / EMI etc.This may not be true. The medical expenses skyrocket and same is true for the travel and travel related expenses. And as your dependency increases on others, the expenses related to household help will also increase exponentially. So you must consider this while accumulating your retirement corpus.

    a good retirement plan
    Thumb rule for any retirement plan – Remember your money has to outlive you

  3.   Delay in investing for retirement:It’s a straight equation. If you do not start investing early, you will end up with inadequate money in your retirement corpus. Even if you accelerate your savings after realizing this at a later date, still you will not be able to generate adequate corpus. Late start will deprive you from the benefits of compounding.

    Albert Einstein is purported to have once remarked that the most powerful force in the universe is compound interest. If you start early, use compounding effectively, the end result could be a huge avalanche of money. The key is to start early and remain into the game.Do not delay your investments

    The Magical power of
    compounding

  4.  Not riding equity markets for better gains:
    The thumb rule is that during initial years of professional life have a good exposure to the equity markets through Mutual funds, direct equities etc. But once you approach retirement age, bring down the equity exposure and park money in debt.

    Make sure to ride a good equity wave for around 25-30 years. This long period will give you excellent returns and will also spread out your risk with your investments the equity markets as the long duration will take care of ups and downs of the equity markets.equity markets - bulls and bears
    The Magical power of
    compounding
  5.  Not evaluating and taking advantage of TAXATION:
    Most of us fail to take tax advantages on investments. The money we lose in doing so can be substantial over a period of few years. This results in waste of money and one has to toil few more years to make up the losses.Few points to ponder
  • Income from fixed deposits is taxed as per your tax slab. 
  • Income from recurring deposits and any other fixed deposit scheme is taxed as per your tax slab.
  • Income from savings account is taxed as per your tax slab
  • Income from equity mutual funds when invested for more than 1 year is tax exempted
  • Income from equity / company shares over 12 months is tax free – long term capital gains are not taxedTake stock of the taxation before you invest money for your retirement corpus. You can save loads of money only by investing in proper instrument.

    taxation6. Reckless spending habits can wreck havoc in your retirement planning:
    One should stick to the safe withdrawal rate once the retirement kicks in. Drawing recklessly can drain the corpus much sooner. Remember Thumb rule for any retirement plan – Your money has to outlive you.The solution is to budget. Budget is one of the major steps in 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. This way you can make your retirement corpus last longer.

    budget
    A simple guide to make budget

    To conclude, we at WS always believe that 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.

    HAPPY INVESTING !!!

A high income does not guarantee a RICH YOU

A high income does not guarantee a RICH YOU

Almost everyone among us aim for a higher income. We all work very hard towards achieving the fat pay package which we always dream of. For most of us, it’s a straight equation – more the income – more the bonus and we can be rich throughout our life and can retire rich in peace with loads of money.

high income

 

 

Unfortunately with respect to finances, the equation is not so straightforward and simple. Had it been so straightforward, guys with high salaries would have become filthy rich and all of them would be happy by now.

More money, more income is sadly not the answer to financial woes of human beings.

Don’t get me wrong!

Here I am not denying the importance of the high income for an individual. A high income gives you a head-start in planning personal finances for you. It also gives you distinct advantages in the process of building wealth.

Here are the 5 indicators which points that you can not be rich even with the high income

  1. You are trying to keep up with joneses : This one is a major pitfall. While uncontrolled spending can leave anyone broke, keeping up with joneses will never allow any high income household to become financially responsible. whether  we are working in corporate jobs or living in a tony neighborhood, there is a lot of peer pressure which compels us to own latest cars, expensive homes, latest gadgets, to party every weekend etc. Easy credit availability by the banks also fuels this mentality and the advertising ensures that you feel outcast if you do not buy the latest gadget or the fastest car.financial peer pressure

    Do you often succumb to Financial Peer Pressure?  

  2.  You think investments are to be done only when you are nearing retirement : Many individuals are highly qualified in their respective streams. They did well in studies, mastered the art of their trade and earn a lot. Many are doctors, engineers, designers – earning high incomes. But they seldom pay attention to investments just because of ignorance. Their incomes are high, their expenses are high. Their monthly income is usually equal to their expenses. Since their expenses are met month on month, they do not think of investments. Also they do not feel the need of taking consultancy on the investments.

    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. Unknowingly, one ignores 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.

    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.
    delaying your investments

    Delaying investments can cost you DEARLY 
     

  3. You keep accumulating depreciating assets : When you have a high income, it’s easy to reach your financial goals of life and retire rich with sufficient money. Unfortunately most of us start pouring money towards depreciating assets. We tend to spend money on the asset class which loses its value quickly. We fail to identify these money drains and our money keeps losing its value over time. 

    By the time we realize this, it’s usually too late and a lot of money had already gone into the drain.

    Latest cars, high end furniture, multiple vehicles, latest gadgets, luxury brand accessories are some of the items that comes under this category.
    Car is not asset

    Your Car is not your ASSET ! 
    Financial success : It’s not about the Stuff you gather
     

  4.  Your fixed expenses are very high: If you compliment high income with less expenses, the leftover is the investable surplus. This investable surplus can be systematically invested to build wealth.

    If the income is high and so the expenses, you will not be left with investable surplus. The lack of investable surplus will never let you accumulate wealth. The major expense month on month is the fixed set of expenses. Expenses like home loan / mortgage payments, monthly payments towards car and any other vehicle, utility payments etc.

    A bigger house translates into a higher monthly payment for mortgage, higher utility bills, higher maintenance cost, higher home association charges. Same stands for cars. A bigger car translates into a bigger monthly payment, a bigger insurance premium, a bigger maintenance cost, a bigger wear and tear costs.

    One need to identify fixed monthly costs and try to keep them at minimum. Buy the right house you need, do not overspend. Same stands true for your vehicle. 

    Overspending - hurdle in personal financeOverspending – the biggest block in financial freedom
    What are money leaks? How to find out your money leaks and plug them?)
     

  5.  You do not budget and you think that you are managing money well : Poor spending habits, uncontrolled expenses can be a disaster to your finances. They can even put you in a really bad situation financially.

    But if you are not budgeting and not tracking your expenses, it can also cause a big disaster to your finances. It can not only put financial stress on your retired life, but also your day to day finances can get affected badly.

    Tracking expenses becomes more important when your income is high. In case of high expenses, it’s good to track expenses and find money leaks. If you do not track expenses and budget, you can easily blow up your monthly income and will never come to know where all your money went. This will not leave you with any investable surplus to build wealth and achieve financial independence.

    So, take charge of your money. Do not count budgeting and writing expenses as a burden. If you start budgeting and writing expenses, you can avoid many common issues and problems related to money which you are facing in your day to day life.

    Simple Budget
    A simple budget can save you from 5 big troubles

    Here is how to make a simple budget? 


    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 !!!

 

7 Financial mistakes you will certainly regret when you turn 50

7 Financial mistakes you will certainly regret when you turn 50

 

financial mistakes

For a common man, investment just happen. Every working professional becomes an investor for sure at some point during his / her career. It could be

  • By buying tons of insurance policies just because your father also bought when he was young
  • By becoming elite member of a famous get rich quick Ponzi MLM scheme – where only elite and selected few are invited to join. You join this because one of your highflying and partygoing neighbor has selected you to be a part of high flying life.
  • Opening some fixed deposits and some recurring deposits as one of the senior coworker is doing the same.
  • By buying some land miles away from town, purely going by the words of the land developer that the piece will be worth 100 time after x years

Here we see that investment choices are highly influenced by external factors. This external factor could be our family member, coworker, media – digital / print / TV, so called experts or relationship managers from our bank etc.

A common man, influenced by external factors take financial investment decisions. I am going to discuss a few of the financial mistakes made by common man which he will regret once he turns 50. This common man could be YOU – reading this post.

financial-mitakes-2

These mistakes you will certainly regret when you turn 50

Delaying investments

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.

If you think that you will invest once you have sufficient money at a later date – You are WRONG. Believe me, the later date will never come in your life. The more you delay, more you will lose on the benefits of compounding.

 

Delaying investments? It can cost you DEARLY
The magical power of compounding

 

Not taking any risk with investments

For most of us, investing means opening up a fixed deposit or buying an insurance policy from some relative or a friend. While investing we never check for the real rate of returns or the cost of investment we are making. This ignorance results in the earnings which are far below the inflation rate and highly taxed. Though we do investment, but it results in a loss for us as the net gains usually are less when you figure out inflation and taxes in the earnings.

It is indeed surprising that even young working professionals resort to insurance and term deposits as an investment. When you have age in your favor, you must look to invest into equity through various channels.

Investments in equity will fetch far better returns over a long period compared to the money invested in term deposits and insurance. You can not create a sizeable retirement corpus without the help of equity exposure.

You do not have to be an equity expert to invest in equities.

Want to enter equity markets? Index based ETF funds are the safest bet 
When you should start investing in stocks?

 

Not diversifying the 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.

When you do not diversify, you are unable to take advantage of the better performing asset class. Broadly speaking there are asset class like stock market, Government bonds, bank deposit schemes, commodities, real estate. At any given point of time , certain asset class will be giving better results than the other – based on the market economics. When you diversify, you need not to keep looking at your investments constantly and can sit and relax in peace.

Imagine during a bull run if you place your entire money in stock market and suddenly one day the market crashes and by the time it settles down you are down by 30%-40% on your principal. So no diversification is a big threat to your hard earned money too.

Why I need diversification of investment?

 

Falling prey to dubious / MLM investment schemes

We must accept that we are greedy and our investments are also greed driven sometimes.

We have seen in the past – many ponzi schemes come and go. They do not make anyone rich but most of the investors are left with no money when the scheme suddenly disappears.

Speak Asia, questnet and many such schemes are example where people have invested huge sums and lost their entire investment in no time.

There is no fool proof quick rich scheme which exists. If someone promises this to you, it’s a big trap. This is also true for get rich quick MLM schemes. When you invest, do some logical postmortem of your investment instrument. And always be skeptical about get rich quick and MLM schemes.

 

Mixing investment with insurance

Life Insurance covers your life and safeguard your dependents. Health insurance helps you in emergency situation where in you have to undergo some expensive medical procedure. So the term “insurance” assures you that in case of any unexpected emergency – insurance company will take care of you or your dependents.

The moment you try to mix insurance with investment – you are headed for something which is not right for your portfolio. Insurance linked investments can cost you heavy in the short term as well as long run. The thumb rule is not to mix insurance with investment but still millions of policies are bought every year – just for sake of investments or for sake of taking last minute tax benefits. These policies not only gives below par returns but also force you to have long term lock in. you can not get out of them as the exit costs are very high.

Also by investing in insurance linked investments you are locking your precious capital which can be used to generate much better returns.

Why you need Insurance ?

 

Not taking adequate insurance

Why you need insurance?

You never know what is going to happen in near/distant future. If someone is the only earning member of a family and due to health reasons, he is unable to work, or due to sudden demise of the sole earning member, family goes in no earning mode.

  1. Who will pay the EMIs of home loan, vehicle loan?
  2. How the monthly household expenses would be taken care of?
  3. How to pay kid’s school fee & tuition expenses?
  4. How to pay expensive nursing care? Hospital expenses are skyrocketing these days.

Do not assume that you need to buy insurance policy just because your friend who is a salesman in insurance firm told you to do so. First identify purpose of buying insurance. Assess your requirements, do your research properly and make sure that you are adequately covered with insurance for Your life and your health.

 

money mistakes

 

 

Not having an emergency fund

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

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

One must have a sufficient emergency fund to tackle any emergency situation. This fund can be parked in any accessible liquid mutual fund which can give you good return and you can access it pretty quickly when the need arise.

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

 

So instead of being sorry when you turn 50, TAKE CHARGE or your finances. Be active and start investments for your needs.

Happy Investing !!!

 

 

 

 

 

 

Financial problems with an average family

Financial problems with an average family 

Most of us falls under an average family category. Average family usually comprise of husband & wife with one or two kids. In some cases husband and wife both are working and in some only husband is working hard to run the family and wife takes care of the kids and home.

 

average family

 

Everyone strive to be rich and wealthy whether it’s poor class or middle class. We all would like to enjoy the luxuries of life and we keep working to achieve the goal of becoming wealthy. But have we ever thought what keeps the poor class and middle class struggling to become rich? If everyone is working hard why an average middle class family remains a middle class family ? Why don’t they become rich say after 5 years of slogging ?

Let’s take a look at the financial problems with an average family which keeps it pulling back from realizing its dream of becoming wealthy.
average family

 

  • No financial planning: The single biggest problem for most people is that they just do not plan their finances. It just keeps coming and going. Even if they are not happy about the results they got so far, they do not change the way things are they do in their life.
  • Overspending: Many people with not very high incomes have very high ambitions. This is likely to get them to grief. In the stores too, gadgets and appliances are priced as EMI to lure people. It looks cool to have latest gadget and appliances hence people tend to stretch themselves and overspend. We have seen earlier how supermarkets are big traps?  
  • Not talking finance at home: Children are kept away from the finance topics at the dining table. Finance is perhaps the second most taboo topic at home! So many children grow up without knowing how much of sacrifice their parents have gone through to educate them. This makes children ignorant about finances and they repeat financial mistakes their parents made in the past.
  • Parents spending on education and marriage: There are just too many kids out there who believe that they need to worry about savings, investment and life insurance only when they cross 40 years. This means your father, father in-law or a bank loan has funded your education and marriage. Kids should take on financial responsibility at a much younger age than what is happening currently. Or rather parents should take lead and make their kids financially responsible.
  • Marriage between financially incompatible people: Most marriages under stress are actually under financial stress. Either the husband or the wife is from a rich background and the other partner cannot understand or cope with the spending pattern. Or the spending habits of partners are different. One is frugal and one is spendthrift causing severe financial imbalance in the family.
  • Delaying saving for retirement: “I am only 27 years old why should I think of retirement “ seems to be a very valid refrain for many working professionals! Every year that you delay in investing the greater the amount that you will have to save later in your life. Till the age of 35 it might be feasible for you to catch up, but after some time the amount that you need to save for retirement just flies away. We have seen earlier that delaying investments can cost you dearly. 
  • Inadequate life and medical insurance: With all the risks of lifestyles, travel, etc. illness and premature death are common. We buy vehicle insurance because it is forced upon us, but we ignore life insurance! Imagine insuring a INR10 lakh car, but not insuring (or under insuring) the person who is using the car — and paying for it, that is, you! We have seen earlier that Why we need insurance?  
  • Not prepared for medical emergencies: Normally big emergencies — financially speaking are medical emergencies. Being unprepared for them — by not having an emergency fund is quite common. Emergency fund has now come to mean the credit card.This is good news for the bank, not for the borrower. We have seen earlier that what is an emergency fund and why we need it?  
  • Lack of asset allocation: Risk is not a new concept. However, it is a difficult concept to understand. For example when the Sensex was 10k there was much less risk in the equity markets than there is today. However at 10k index people were afraid of the market. Now everybody and his aunt wants to be in the equity market — and there are enough advisors who keep saying, “Equity returns are superior to debt returns.” This is true with a rider — in the long run. It is convenient for the relationship manager to forget the rider. So there could be a much larger allocation to equity at higher prices — to make for the time missed out earlier. We have seen earlier that goal based investing is a good approach to have proper asset allocation. 
  • Falling prey to financial pitches: The quality of pitches has improved! Aggressive young kids are recruited by brokerage houses, banks, mutual funds, life insurance companies, etc. and all these kids are selling mutual funds, life insurance, portfolio management schemes, structured products, et al. Selling to their kith and kin helps these kids keep their jobs, and there is happiness all around! These kids, themselves prey to financial pitches, have now made it an art when they are selling to their own natural “circle of friends and relatives.”
  • Buying financial products from obligated persons. This is perhaps one of the worst things you can do in your financial life. A friend, relative, neighbor, colleague who has been doing something else suddenly becomes a financial guru because they have become an agent! Charity begins at home, not financial planning.
  • Financial illiteracy: Most people do not wish to know or learn about financial products. They simply ask, ”Where do I have to sign” — so buying a mutual fund is easier than buying life insurance! Selecting products based on the ease and simplicity of buying is a shocking but true real life experience in the financial behaviour of the rational human being!
  • Ignoring small numbers for too long: What difference will it make if I save INR5,000 a month? Well over a long period it could make you a millionaire! So start early and invest wisely. It will make you rich. That is the power of compounding. We have seen earlier the magical power of compounding
  • Urgent vs important: Most expenses, which look urgent, are perhaps not so important — the shirt or shoe at a sale. That luxury item which was being offered at 30 per cent discount is such an example. These small leakages are all reducing the amount of money you will have for the bigger things like education or retirement. We have seen earlier that how to tackle money leaks.

 

financial problems

The list can be long but the points mentioned above can well be attributed as hindrances that are responsible for middle class not becoming rich. So if you want to become wealthy, tackle these issues in your life one by one. I am sure you will be able to cross the fence sooner after tackling the above mentioned issues.

 

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 !!!

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 !!!