Credo Capital

An article on The Mint newspaper for which i contributed. Old one but the message is relevant ( actual reason is i forgot to post it earlier 🙂

http://www.livemint.com/2011/04/04212641/Four-products-for-beating-infl.html

Oh, if the topic sounds like gobbledygook, dont worry. It simply means bonds that are issued privately among select investors as opposed to bonds that are issued publicly like the recent tax free.  Debentures are fancy word for bonds and non convertible means that they can not be converted to shares at a later date. Why call them non convertible? beats me but that’s how we call it and as we love jargon’s we keep inventing new ones.

A small note on the topic for which i contributed in Economic Time recently published.

http://articles.economictimes.indiatimes.com/2011-12-06/news/30481893_1_private-placement-ncds-public-issue

You can be a crorepati by hardwork or sheer luck and usually a combination of both in varying degrees, the real question is can you stay on as a crorepati and even improve on your wealth. A small article on what to do with sudden gains that seem for many lucky people to disappear even faster.  My discussion on the same in Economic Times.

http://articles.economictimes.indiatimes.com/2011-12-01/news/30463210_1_reality-show-fortune-goa

Part 2 of the previous post on basics of Financial Planning focusing on goals.

Last issue we saw the necessity to first budget our income and expense, then control debt so that our emis are within a comfortable range & having adequate life insurance via a term plan for all earning members of the household and health insurance for all the members of your family. These steps like budgeting, controlling and eventually eliminating all debt except for home loans, being adequately insured for life and health are the foundations and equal to starting on the financial road to a productive work life and a peaceful retirement. Starting without these steps in place is like starting to travel a long journey in a car with little fuel, less money to buy fuel and to top it off the tires not in good condition, it is a recipe for disaster & we should avoid such mistakes in our financial planning journey too.

Let us continue where we left off last time on the road to financial planning.

Tax Planning: Government gives umpteen number of tax breaks to all of us to alleviate the heavy tax burden the working class heroes to some extent. These start from the well known 80C of 1 Lac, the new 80CCC for Infrastructure bonds to tax free investments like PPF to tax break on children’s education expenses /home loan repayments / charity gifts etc. Ensure that this is used to the maximum so not only you save and invest but you get tax breaks on the investments too.  Easiest thing is to ask a Chartered Accountant but the best is to know it yourself by getting around financial planning blogosphere or buy books on the subject.

Finally have your investment papers are in order by ensuring that all your investments be it SB Ac or FD or Shares or Mutual Funds etc have a nominee in place and your spouse knows where these papers / receipts etc are kept.

Now let us start the exciting and rewarding journey of Financial Planning

Saving, Investing and your basic goals in Life

1. Let savings be your first expense: Every month keep aside some money from your salary account by either enrolling in a Recurring Deposit or monthly investment program by which the amount is auto debited. This ensures that you first get comfortable in the act of savings. This should be a meaningful amount starting at least with say 20% of income or more. People who are very good in budgeting and planning even from rural areas save / invest close to 40% of income which is great.
2. Fund your retirement plan: Usually this is done automatically for the salaried class via Provident Fund that is deducted from salary but many of us have the tendency to take loans on it or break it when we change jobs. Best is to transfer the account when we change jobs so that it is actually used for the purpose it is meant to be i.e. to fund retirement. Even with the PF savings it may not be enough for retirement thanks to rising healthcare and other living expense. Recently a news paper surveyed retired people whose pensions are way below today’s expense. It is better to save another 10% of income on this goal and estimate how much would be required month on month for retirement so that this goal is taken care of. For those who are not covered by pension and even to those who are covered but feel it is not enough Public Provident Fund offers the best choice, it is better to max out that first and then look at other options such as equity mutual funds etc.,

3. Home purchase

Many of us would like to own our home as after all a mans home is his castle as the English say. A generation ago there was no concept of home loan so buying  a home was for the lucky few today with higher disposable incomes and tax breaks buying a home is the first investment that people think of once they are married.  There are many important things to consider before you opt for that home loan.

1. Can you afford the EMI? Since owning your home is a once in lifetime decision for many people they rush headlong to sign on the dotted line and worry later. It would be better to check first if you can afford the EMI’s for next 15 or 20 years.
2. Have you saved for the down payment? Typically you need about 15% of the cost of the house as down payment. So you need to save this first, I have seen many people not having saved for this but borrowing down payment money too and end up paying EMI as well as repaying loan taken from friends / relatives down payment and unable to pay the monthly living expense bills on time.
3. Never overextend your home loan – when you see a house the tendency is to overshoot. Many people opt for a bigger house that they can not afford and to top it all spend too much on fixtures etc so that they over shoot their already strained home budget.
4. While buying a home is one of the best investment that you can make as it gives you peace of mind and could act as a retirement funding investment ( via reverse mortgages or letting out the house for rent etc). It should turn into a burden today.

4. Childrens Education

Now any saving beyond this ( I can hear you say what savings but have heart, we are a nation of big savers !!) needs to be funded for other goals such as children’s education

While this is a laudable goal remember that today there are loans available for education and your child would be more responsible in repaying if he opts for a loan, you can pay a part of the fees if necessary. Again many parents overextend this expense too by aiming very high. Good education does not cost much, what costs much is usually not a very good way to educate your child.

It is better to plan separately for this goal, having a PPF account in the name of the children and investing the rest in equity mutual funds via monthly systematic investment plan (SIP) is a better bet in my opinion but you can allocate more or less to both based on your own appetite and tolerance to risk. Most of the child insurance plans etc usually are not a good way to invest since the costs are higher than a mutual fund and naturally returns are lower. Best to have a PPF account in childs name and an equity fund SIP.

Childrens Marriage : This is a goal probably unique to us. We would like to get our children married well if not in style. Marriage costs keep rising higher then inflation thanks to newer line entries that were not done before such as stage arrangement, rich buffett spreads etc. Even a typical middle class marriage today costs a lot and hence it is better to start saving for this goal early on. Best is to set aside some money monthly or to combine with savings for the children in combination of safe and risky but high return long term investments ( PPF+ Equity MFs are my recipe).

There are other minor goals such as Holidays or buying a car etc that we need to account for too. However the above goals are major and hence need to be looked at first.

Checklist

• Do I have enough insurance cover?

1. Life

2. Health

• Do I know what my recurring and non recurring expenses are?

• Do I have some money left after all the bills are paid every month?

• Do I know where I can trim expenses or increase Income? Or better still Both?

Taxes

• Am I utilizing all the tax breaks that im entitiled to?

Invesmtents

• Are my investments appropriate for my goals, time frame and my risk taking capacity or have I bought something that I don’t understand?

Many No’s to the above questions means that you should really take control of your finances better.

Suggestion for planning : Some investment sites offer planning tools, there are also softwares that can take care of budgeting. Actually if we are up to it a spreadsheet can do the job.

The article can be viewed on the magazine’s  site online here : http://www.industrialeconomist.com/January2012/44.html

This is a 2 part series on basics of Financial Planning that i wrote for Industrial Economist recently.

Financial Planning – A beginner’s guide:

Financial Planning is an active approach to taking charge of one’s future and plan for the same. Investors usually fret about market volatility, and  make piecemeal investment decisions. After some time they lose track of what they have done till  now and whether it is helpful for their future.

Destination : The Goal

Financial Planning starts with setting a destination ie a goal of what we want to achieve this could be a short term goal that you would like to achieve in next 1 – 5 years or long term like retirement after 20 years. These should be written on paper with the estimated cost for the goals today and should ideally be placed where you can see it.

Starting Point : Where are you now?

Now its time to see where we are financially. List your assets and liabilities also track your income and expenses so that you get a picture of your assets + monthly savings that you can set aside for your goals. Ensure that you track your income and expenses in  budeget sheet or diary or an online budgeting software so that you can see where the money is going. Most of us are likely not to have a great picture here as far as budgeting is concerned but that is not an issue. Taking up financial planning will improve your picture going forward.

Budgeting is an exercise that many would prefer not to do but it needs to be done and with the technology available today there are many free applications to download and use on your PC or mobile or cloud applications that will help you budget.  Usually by cutting small expense like eating out 2 times a week instead of say 3 times or going to one movie per month etc many save couple of thou sands that they did not know existed before.

The Road : Avoiding traffic jams.

These are the inevitable lemons that life would throw at us now and then. These are unplanned eventualities like Illness, recessions, having to buy a new car etc. While these are inevitable they are not hopeless situations and we can minimize the impact:

1. Control Debt : Ensure that borrowing is the last option, while borrowing for a house is fine as you save on rent and get tax benefits plus the security of having an asset that is your own, taking loans to buy gadgets is a bad idea. So is overextending on the home loan many people end up costlier house then what they can afford to pay for mortgage. This makes what is supposed be the peaceful life of living in one’s own house into a nightmare of EMI payment.
2. Insurance : All liabilities like Home Loans, Education loans need to be covered with a Term insurance  plan so that in case of any eventuality the family does not have to sell the house or be unable to pay.  Beyond this adequate insurance needs to be taken so that family does not suffer for anything and same lifestyle as today is maintained.  Term Life Insurance cost is very low and has to be compulsorily taken, the cost will usually be less than what one spends on mobile bill every month. Health Insurance is also a must for your family so that the entire familys health is covered to a large extent.
3.  Noah didn’t start building an ark after it started raining: Saving for a rainy day is understood by everyo ne what needs to be done is to save for say 6 months family expenses including all EMIs etc and keep the money separately. This will help in any emergency and help us face the emergency without panicking. Though 6 months expense may look big at first, we can start with 15 days  to one month of expense and work upwards. This is a mini goal by itself and many people feel the mastery over their financial future once they attain this.

Next week we will start the trip of financial planning and look at the major goals

You can view the article here : http://www.industrialeconomist.com/December%202011/36.html

You need a budget!

To quote Mr. Micawbers advice to David Copperfield “Annual income twenty pounds, annual expenditure nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds and six, result misery”

But most of think that we are actually saving i.e. we are spending less then we earn but if we ever were to write down our expenses every day we would be surprised surely after 365 days!!

Unfortunately many people think that they are earning well but in reality are not left with much. In advising clients I have seen that there is a tendency to think that they are ‘rich’. However when we try to chalk down what exactly was that they have saved compared to income some find that the savings is very little if at all. In fact in today’s world it’s not enough if we make 20 pounds and spend 19 result is not happiness but only 1 pound left!!

So, how does this happen. When we think about income we know it as salary is stable however expenses don’t happen monthly all the time. School fees are once in 4 months; Power is once in two months. Festivals, Holidays happen a few times a year and then there are the surprises. These are totally unpredictable what we can do is first record them preferably in advance. Here is how it can be done simply: List all expenses be it monthly, quarterly, annually, keep aside a certain amount for unpredictable’s. Now add up all of these and divide by 12. This is my monthly expense approximately.

See my Jan 2012 income and expense Just looking at this I feel happy because im saving 17000. Immediately I think of that great tablet pc which costs “only” 25000 Rs & rush to buy it with my “savings”.

What I conveniently forget is there are school fees due in February and the December Holidays happily spent with a credit card is due too. So when February ends I have only 12000 in hand still not bad but not as great as 17000 savings, right?

Now if we check what is due in March we see that since the old and faithful TV died, we need a new one so off goes another 21000, suddenly 2 big expenses one known ( Gym Fees) and the other unknown ( TV conking off) have now set us back to deficit.

If I had converted all my expenses to monthly then I would have known there is a deficit happening and be prepared for it instead of being negatively surprised at the deficit.

This is much more important for professionals or business persons whose earnings are never the same month on month. So they not only have to contend with jumpy expenses but jumpy income too & what’s more they don’t have an automatic savings plan or medical insurance like working class people do.

This article was published by the Chennai based Industrial Economist magazine in the last issue. Can be viewed online here http://industrialeconomist.com/curr/42.html