Browse Tag: #wealthcreation

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?

When you should start investing in stocks?

When is the right time to start investing in stocks?

Most of the people who start looking to bring their financials in order have a question in their mind. “When should I start investing in high return instruments?”

They are fascinated by high 20%-30% annualized returns from equities. They have some extra cash which they want to invest for some time and even before anything happens, they convince themselves into investing the spare cash in high risk equity markets in order to rush towards achieving financial independence.

 

stockmarket

 

This reminds me of one of my friend, who reaped exceptionally well returns during the dot com boom and used to tell me how easy it was to tame equity market and double your money in no time.

Unfortunately he had invested all his eggs in one basket that is into the stock market and lost big time during the 2008-2009 market crash. This friend of mine had borrowed a lot of money to buy stocks in hope of making big and that too very quickly. But things didn’t work out as he expected.

There are two basic investment criteria of investing in stock which every investor should consider before taking plunge in stock market investing

  1. You do not have high interest loans looming at you:
    This implies that you should not have high interest loans like personal loan, consumer loans, credit card balances and rotation of balance on credit cards etc. The basic home loan is perfectly fine as home loans create assets and the home you bought is giving you shelter. Stock market investments are high risk investments. If you have high interest loans and still you go ahead with investment, you might land in trouble. There is no fixed investment life-cycle in stock markets. Sometimes you may have to remain invested if market conditions are not good. This might affect your loan repayment ability if you are planning to pay off the loan monthly payments from the returns on your investments in stock market.
  1. You have sufficient emergency fund to bank on during emergency situation:
    Emergencies never give you written intimation before they come. Emergencies bring mental trauma as well as financial hardships too. What if you lose your job due to some meltdown and you do not have money to pay for utilities and your home loan? To counter this type of situation, you must have sufficient liquid emergency fund to pay for rents, monthly home payments (EMI), utility bills etc. Ideally you should have an emergency fund to fund your 6 months of unemployment which should take care of all your bare minimum expenses in case of emergency. This fund should be somewhere stacked in liquid fund which can be accessed quickly. Never put your emergency fund in debt funds, equity linked mutual funds, insurance or stock market. Idea is you should not depend on market conditions to take back your money.

Also, one more important aspect you should consider. Being educated, you should know what you are doing. Take charge of your investments as it is not a rocket science to do a bit of arithmetic before taking the plunge. You need not to be an expert but a basic idea on how mutual funds work should be alright to start investing into mutual funds. Central idea is to avoid the risks posed by high risk investments as a naïve investor.

Investing is fun, it can be highly rewarding but to enjoy it you must set your house in order first, explained above in two simple points. This will cover yourself from the risks posed by the high risk investments in equities and you can do proper asset allocation to counter the risks.

 

 

Why you need Insurance ?

Make sure you are adequately insured:

Definition of insurance: A promise of compensation for specific potential future losses in exchange for a periodic payment.

The definition clearly says it all. However, the companies which offer insurance provide a bouquet of products. Whole life insurance, term insurance, endowment plan, ULIPs, health insurance is some of the product categories. However, each classification may have one or many products with slight variation

Why you need 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.

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

    Leave apart human life, what if your vehicle needs emergency repair? If the repair cost runs into few thousand of rupees and you do not have contingency funds at hand for this repair, it will be pain for you to arrange the sum and repair your vehicle right?

Answer to above questions in case of unexpected happening is INSURANCE. Insurance make sure that there are no financial hardships to family if something goes wrong.

Do your own research – A little bit of homework is a must

Do not assume that you need to buy insurance policy because your friend who is a salesman in insurance firm told you to do so. First identify purpose of buying insurance. Insurances can be of few types

  • Life insurance: The only purpose of life insurance is to provide safety net to the people if the person taking insurance dies a premature death. This is for the ones who have people financially dependent on them. This gives them means to offset financial losses in case of their demise. The best or rather ideal route here is to take term insurance policy. This is the least expensive solution and serves its purpose well. There are many online calculators available for calculating premium by various service providers online.Other life insurances like whole life policies / ULIPs are also available but they are usually not worth due to the cost associated with them. The investment returns from these products are poor compared to investments in other options.There is no benchmark formula, but general thumb rule is that take insurance cover equal to your liabilities plus 10 times of your annual income. So if you have a home loan + vehicle loan of INR20 lakhs, your insurance cover should be of INR20 lakhs plus 10X your annual income. 10 times of income will give your family a sustained monthly income to cover the expenses for family members
  • Health insurance: If you go back a little in history and compare historical cost of medical treatment, it doesn’t take rocket science to arrive at conclusion that the cost of medical treatment has gone up considerably. And keeping the trend, it will keep moving upward. You must insure yourself to cover the cost of medical treatment. There are host of factors on which the health insurance premium depends. But it is worth comparing offerings from different service providers and to take the best plan based on your requirements. Health insurance will safeguard you from cost of medical treatment and will save tons of cash for you. Also, a healthy family of four, husband, wife and two kids should have a INR8 lakh family floater health plan to cover emergency medical expenses.
  • Vehicle insurance: Vehicle repairs are expensive. Imagine a situation where your vehicle meets with an accident. The vehicle becomes immobile and you need to fine a tow truck. Then the cost of repairs which can break your back. As per the government rules, it is mandatory to take insurance and people usually opt for a third party cover in order to cover any litigation cost arising post accident. But you must opt for a comprehensive plan as there are a lot of costs associated with repairs once your vehicle is involved with an accident. Again loads of online calculators available and based on your needs, opt for the best plan that suits you.

There are other insurances also like home owners insurance, renters insurance, asset insurance, travel insurance but the most important and must have ones have been covered earlier.

If you are not insured and some mishap occurs, your financial plans will go haywire. Also taking proper and adequate insurance is one of the building blocks of financial freedom and wealth creation. Not taking insurance or not taking adequate insurance can make a serious dent in your investment portfolio.

Bottom-line is that one has to make sure that he/she is adequately covered through insurance, both for life as well as health.

Compound Interest – Let your money work for you

Don’t always work for money. Instead make money work hard for you

“Let your money work for you”

 

compound interest

 

I think we must have read / heard this saying many times in life. This is quite a famous quote often used by investment advisers. This is related to power of compounding which is very powerful tool if exploited properly.

If you are someone who wish to have good returns on your investments, wish to retire early, wish to have financial independence you need to exploit power of compounding and make it one of the pillar of your overall financial independence strategy.
I will just give a small example to reiterate the faith in this strategy. For assumption, I have taken 10% as returns on investment which is quite possible in today’s scenario.

If you save INR1,000.00 per month for 12 months, at the end of the year you will be left with INR12000.00

Year 1
You will earn 10% interest making total amount INR12,000.00+INR1,200 = INR13,200

Year 2
You will earn 10% interest on INR13,200 and total amount would be INR13,200+INR1,320=INR14,520

Year 3
You will earn 10% interest on INR14,520 and total amount would be INR14,520+INR1,452 = INR15,972

Year 4
You will earn 10% interest on INR15,972 and total amount would be INR15,972+1,597=INR17,569

Year 5
You will earn 10% interest on INR17,569 and total amount would be INR17,569+INR1,756 = INR19,325

So in 5 years, your initial investment of INR10,000 turned to INR19,325 – You have almost doubled your investment without doing anything
Now, to show the outcome of consistent investing, let’s take a scenario where you invest INR1,000 per month for 5 years that is 60 months and let’s see the result.

Year 1
You have invested INR12,000 and your total amount after 12 months stands at INR12,665

Year 2
You have invested INR24,000 so far and your total amount after 24 months stands at INR26,645

Year 3
You have invested INR36,000 so far and your total amount after 36 months stands at INR42,076

Year 4
You have invested INR48,000 so far and your total amount after 48 months stands at INR59,110

Year 5
You have invested INR60,000 so far and your total amount after 60 months stands at INR77,911

If you continue this investment for 15 years your INR1,000 per month investment becomes INR4,14,774

If you continue this investment for 25 years your 00 per month investment becomes IR13,19,273


————Here the magic unfolds ————

 

If you replace investment amount by INR5,000

If you continue this investment for 15 years your INR5,000 per month investment becomes INR20,73,872

If you continue this investment for 25 years your INR1,000 per month investment becomes INR65,96,367

So your INR5,000 per month investment for 25 years @ 10% per year will yield you INR65,96,367

This is simply a huge amount and can give you a big shot in your retirement Kitty.

You can use any compound interest calculator and tweak rate of returns and amount to see the magic. You will be surprised.

Idea is to find an avenue which gives you maximum return on investment for your risk appetite and to stay invested for a long time (>15years) to reap the benefits of compound interest. Compound interest works miracle with large sum invested for a long duration. The best part is it’s a passive income for you as your money is working for you.

Start as early as possible -> Make regular investmsnts -> Stay invested for a long duration -> Reap the benefits of Compounding

If you delay by a year, you will loose lot of money. Don’t think that you will loose only first year’s interest money if you delay by a year. You will loose interest of the final year if you delay. Do your basic math and you will come to know the losses.

No doubt great Albert Einstein has summed it up correctly

“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”

 

Focus more on increasing net worth

In the journey to financial independence, the most widely accepted approach is to earn more and more in due course. The formula is quite simple. Earn a good professional degree, gain experience and keep moving up the corporate ladder. This growth will give you thrust in your income too. So more your income is, more you have money.

 

networth & wealth

 

However there is one more catch. What if you are earning INR1, 00,000 per month and your monthly spend stands at INR1, 00,000 per month. This is something which is worrisome. This will be a kind of status-quo where you are placed extremely well in the corporate ladder and earning a handsome paycheck every month. However on asset / net worth front you are ZERO. You will not be able to create any asset which will appreciate and give you good returns in due course.
So, increase in income does not necessarily mean increase in your net worth. On the road to financial freedom, you must focus on increasing net worth and track it month on month so that you have all figures about your financial growth at hand.

It’s great to have a 6 figure monthly income but not focusing on net worth will make you work like a workhorse till you die. Instead of focusing only on increasing income, once must focus on increasing net worth as net worth again will keep increasing thus making a substantial gain on monitory front through investments and asset appreciation. Here you must note that more your income is, more your tax liability will be. However assets you make are taxed in different bracket which is quite less when compared to your tax on income. You are taxed on what you earn, not on what you own.

Off course I am not undermining the importance of increasing income, but if this increase in income is coupled with serious attempts to increase net worth, your hard work will bear fruits much earlier than anticipated.

Why you should focus on net worth:

  • The major component of the tax is computed on the income, not the net worth
  • Higher net worth gives you much more financial security compared to high income levels.
  • High income can be spent easily and loose its value, but higher net worth is not that easy to dilute and spend. This way the assets, equity you create is safe from impulse purchases
  • Net worth always keep growing – the components will keep on working and giving you passive income hence overall net worth will keep increasing

 

How to increase net worth?

  • Practice frugality: This is the first step. This will ensure that your expenses are always less than your income
  • Pay down your debt on war footing: Debts are trap. They suck money in terms of interest. Though monthly payments look small for any debt, especially consumer debt, but if you consider the entire cost of debt, it is indeed a high figure.
  • Track your expenses: This will give you a very clear picture where your money is going month on month. If you keep tracking, it will give you clear alarms about money drains.
  • Have an emergency fund: This will help you in fighting emergencies like car break down, home repairs, sudden job loss etc. You need not to break your fixed deposit or take out money from retirement savings for emergencies.
  • Start investing based on your appetite and with proper asset allocation: This will help you grow your net worth and in turn your wealth. Also a proper investment portfolio gives you a good passive income month on month and is your best buddy in the race towards financial freedom.
  • Find ways to increase your income and keep investing religiously all the raises you get: This will help you in avoiding lifestyle inflation. Believe me lifestyle inflation is the biggest wealth killer. If you divert salary raises towards investments, you are enhancing your wealth in the longer run.
  • Track your net worth month on month: This will give you clear picture of your performance towards your financial freedom. Also this will tell you every month whether you are moving in right direction or not?
  • Look at starting some side hustle, or some side business in addition to your day job: Again this will bring additional money which can be invested again to increase your wealth. Anything which contributes to your wealth speeds up your journey towards financial freedom.
  • Avoid any consumer debt: Again consumer debts are traps. They force you to pay higher amount for the goods and come with processing charges. Plan to pay cash and learn to live within means.

No doubt focus on increasing income is important in creating wealth. But income is only one part of the overall equation which contributes in creating wealth. But focus on net worth will make you an individual with multi pronged approach on creating wealth.

Save TONS of cash with timely home maintenance

A home is usually one of the biggest purchases in terms of price tag one will ever make. Real Estate costs a big chunk of money going in as down payment and a commitment of 15-20 years in terms of the monthly EMI going against the home loan / mortgage.

In addition to this, homes attract various other monthly outgoes such as

  • Insurance premiums
  • Association charges
  • Annual property dues
  • Electricity charges
  • Water supply charges
  • Any other tax imposed by local authorities

 

timely home maintenance

 

If you add up all the above mentioned charges, homes do cost a bomb. But even after paying a bomb, home can be a big drainer of cash if not maintained properly.

Home cannot be “buy and forget”. Instead it must be treated like your car or your bike. You have to do regular maintenance, oil changes, check Tire pressure, do washing and cleaning, fix up damaged parts of your vehicle in order to use it regularly without any problem. If you miss out a couple of cycles of maintenance, your car may stall during an important journey and you may end up spending a huge sum to bring it back in working condition. If you service your car properly, keep it clean, wash it, take care of electrical, change oil as prescribed in manual – you can use it for years and it will never let you down in any of the journey you undertake. Above all you can always get a good resale value. Potential buyers do consider looking at the maintenance record of automobile before striking the deal.

Same is with the real estate/ house.
The list of things which can go wrong if not maintained can go very long.

  • Not keeping bathrooms clean can hamper the outlet of water and can flood your home causing serious damage to your furniture. 
  • Not maintaining AC/Fans can make them stop functioning and can incur heavy cash damage to you. 
  • Not regularly painting the house can make the plaster weak; it may come off and might hamper the resale value considerably 
  • Accumulation of dust particles can take sheen off from the shiny furniture and make them look like scrape material 
  • Not doing regular service / replacement of electrical fittings can cause electrical short circuit and can damage the entire household furniture due to fire 
  • Not taking care of bathroom fittings can damage them and they can start rusting and become useless. Believe me it costs a lot to replace these fittings 
  • Not trimming grass in the lawn will make it look really bad and the sight is not inviting for the visitors at your place. 
  • Unclean flooring can lead to the damage tiles which in turn can decrease potential resale value of your home

There can be n number of line items which can be added in the above list. Bottom line is – the home must be kept well maintained. It gives positivity to your own life plus it increases the life and worth of your home. Later if you wish to upgrade, you can sell your home at good price if you have kept is presentable to potential buyers.

The approach to keep your home properly maintained is very simple

  • However busy you are with your schedule, take time out on weekends, make a schedule and pay attention towards one item per week and make sure on monthly basis you cover all important items from the list once. 
  • This will ensure that your property is safe, appreciates in value and looks good to any visitor coming to your place. 
  • You can plan it in such a way that first Sunday of a month clean all fans, fridge, electrical boards, sockets and check for all electrical fittings. 
  • Second Sunday typically can be spent in dusting your furniture and glass items, arranging your reading interests. 
  • Third Sunday can be spent in cleaning bathrooms thoroughly (apart from regular alternate harpik cleaning) and cleaning of drainage outlets like sinks, kitchen wash basins, balcony outlet for any blockages. 
  • Fourth Sunday can be dedicated to floor cleaning, removing stains, kitchen cabinets/tabletops/counter tops cleaning, and keeping / refilling insecticides and anti rodent. 
  • Make schedule every alternate year to paint the walls and use superior quality of paint which lasts longer. 
  • Exterior painting should also be done at regular interval with superior quality of washable paint. A monthly outside wash can work magic on the exterior looks of your home. 
  • Weeding and landscaping your lawn monthly can make them look better and they will certainly make your house inviting for the visitors.

A small schedule can make your home last longer and can increase its value over time. Above all it can save you tons of money that can go into drain by handling emergency maintenance arising of negligence.

Timely maintenance can also help you in creating and increasing your wealth. more the price of your home, more wealthy you would be.

 

Habits of Financially Successful People

 

financial independence

7 Habits you can observe in financially successful people

I am sure you must have come across loads of successful people around you. It may be through media, social media, print media, or electronic media. I am also sure you must have wondered what makes them so successful. No doubt, there is hell lot of hard work that goes behind anyone being successful, but a successful person inculcates certain habits in their daily routine which makes their chances of succeeding much more.

Just like merely saving money cannot make you wealthy, it is same with success. It’s not only hard work, but smart working and making use of resources around you optimally make you successful.

One needs a proper plan and a proper execution both in order to get successful in any task. If you are preparing for any examination, you should plan in such a way that you cover your entire syllabus systematically and make sure that you do it well in advance of examination date. Also, getting fit and healthy just before during exam time is important which will ensure proper success in the examination.

Same holds true for financial success too. By financial success we mean a stage where you feel financial independence in your life – that is you no longer need to work for money. This is what is called as early retirement, where you “work what you like” – not “Like what you work”. As per some of the major financial planning books and personal finance websites, there are 7 common habits/traits exhibited by financially successful people

 

  1. They live their life “goal oriented”. This means they create elaborate plans for finances and keep changing them as per the external conditions to keep themselves on track. Measuring goals give them a perspective of what they are doing is on right track as per planning or not.

 

  1. They are organized in every aspect of their lives. They plan properly for every task, allocate proper resources and keep measuring the progress. This is true with the work they do at their workplaces as well as their personal lives.

 

  1. They are open to suggestionsplan adjustments. They are capable to adjust their plans with changing dynamics around them. This is must as a good plan has always scope of adjustment in order to achieve the desired outcome.

 

  1. They are action oriented. They take actions, quick in decision making based on facts and accept accountability of their decisions. Same is the quality of a good leader.

 

  1. They are frugal. This is the most common behavior among all millionaires. They stay away from lifestyle inflation. Lifestyle inflation is one of the biggest hurdles in financial independence and wealth creation.

 

  1. They are good team worker. They team up with spouses and near friends to work collectively towards the financial goals and plans. When you are a good team worker, you get inputs from all members and this ensures success of overall plan.

 

  1. They are persistent. They have plans, they work towards achieving the goals and they try out hard to work towards it. They do not give up easily. When a plan is laid out, persistence and perseverance can only guarantee its success. Wealth creation is all about persistence as it cannot be created overnight – except when you win a Jackpot.

 

Financial success is not an overnight affair. It requires a planned approach where you are persistent and it may take few years to take shape or see initial results. You may face many hurdles in due course, but staying put, fighting odds bravely can lead you to financial independence. You have to believe in yourself, stay focused and stick to the basics. There is no rocket science involved.

 

 

 

When you should start investing in real estate?

People when they purchase a place to live in, they consider it as an investment. It is indeed a big investment as the ticket price is very high. With easy credit availability, aggressive advertising and last 10 years of upward trend in real estate market, people start thinking that why not to buy another home/flat as an investment and keep it. The general belief is that the price will increase in proportion with how it has increased in the past decade.

This is a kind of greed which is churning out a category which is house RICH and cash POOR.

real estate investment

Investment in real estate is not a bad idea, but one must have done basic investments rightly and must have enough cash buffer to take on emergencies. Also, the person should factor in the potential extreme property market swings. Since house purchase is a big ticket investment, one must weigh all necessary parameters carefully before taking the plunge.

Purchasing first property for self occupation cannot be considered as a pure investment. Everyone needs a roof over the head. First property provides this roof over the head and even in worst scenario, you will have your house intact – a shelter for you during your bad times.

When you are out to buy your investment property, then a lot of parameters kicks in to be considered before you buy your investment property. You have to safeguard yourself from emergencies, invest certain amount at other avenues which can be cashed in bits and pieces when required. An investment property is a big chunk of money parked and you cannot sell it piece by piece.

Some thoughts on when you should start investing in real estate

  • You are adequately insured (life cover)
    There are plenty of thumb rules and formulas floating around which will give you an idea of how much insurance you should buy. Do a little bit of research and purchase a good term plan to cover your life.

  • You have sufficient funds for taking care of emergencies
    Again as told earlier, property is a big ticket purchase. You cannot sell it at will and money gets locked when you make purchase. So to safeguard yourself, you must create one emergency fund which will take care in case of any emergency.

  • You have adequate medical insurance
    Whether buying property or not, you must be covered adequately for your health. Cost of medical treatment is increasing hence you must take adequate cover for you and immediate family.

  • You have a good Debt folio
    Again in investment pyramid, a good debt investment comes at the bottom stage – that is initial stage. You should invest some amount in instruments like FD/RD/Debt funds/PF/Bonds etc.

  • You have a good asset allocation and a mix of equity into your investments folio
    Based on your age and investment appetite have proper mix of equity and debt. You must have relevant equity exposure to gain from the rising markets.

  • You have at least 40% cash for making down payment for the investment property
    Having 40% as down payment, you save yourself from huge EMI going out monthly against home loan / mortgage. You must aim for maximum down payment so that the EMI doesn’t pinch you and you can have a peaceful life.

  • You have adequate funds to cover schooling of your kids
    Again the investment in property should not leave you with insufficient amount for your kids education. Amount for kid education should be kept and invested into a separate account.

  • After paying off your EMIs you still have 70% of your in hand salary at your disposal
    You should aim to restrict your monthly EMI for home loan to not more than 30% of your monthly take home – post taxes. This will give you a good 70% amount for running house and incurring other expenses. This is a healthy ratio.

  • In case of job loss, you should be able to support your EMIs for a good 6-9 months
    You should have enough in your emergency fund to tackle job loss scenario and you should be able to sustain 6-9 months with your EMI in case of job loss scenario.

If all the above basics are in place, then only one must look forward to buy an investment property. One should not become House RICH and cash POOR, as you have many other costs associated with your life & family.

If you play it too tight, the EMIs will hurt you, you will be broke if you lose your job, you will not be able to pay property taxes /maintenance. The cash flow will hurt you and you will be rich only on paper.