Financial Plan.......Is it your New Year's Resolution?

In Goa, schools have a very long break (about 2 months) for summer vacations, and we(my cousins & friends included), as kids used to be very very excited about this.

Here is what I'd do.....

Make a 'to do' list : As the final term exams headed for a finish(with a lot of excitement), I used to make a list of things I would like to do in the vacation. My list included...

1. Playing Cricket/Badminton/Carrom/Football/Table Tennis 
2. Watching TV
3. Playing the TV game(No Play station/WII/XBOX in the 1990's)
4. Eating Softee ice cream(The modern swirl Ice cream from MC Don .......you know!!)
5. Visit relatives outside the city and repeat step 1-4

It was simply because I made the list that I could really enjoy the vacations, otherwise it could have been really boring and a waste of time.
 

Making a 'to do' list or writing your financials goals on paper is how you could start on working on your Financial Plan too. It is essential to be clear about goals, to achieve them in the required time. After all, you need to know where you want to go, before you can decide how to get there. 

Your goals can be:

Short-term — such as paying a credit card debt/prepaying your personal loan in six months; reducing monthly expenses; buying adequate term insurance, creating an emergency fund in 1 yr. 

Medium-term — such as saving for a down payment on a house in two years; increasing your income

Long-term — such as creating a retirement corpus in 25 years, planning for your child's higher education.

1. Write your goals on paper, including rupee amounts and dates.
2. Keep the list in sight so you can refer to it for motivation as you keep working toward your goals.

Financial planning provides a road map for your financial life. It can make the journey less stressful, more fun, and more successful. And, you can start right now — even if its only a few steps at a time.

Let us resolve for a better financial life, I wish you all a very happy and successful funancial year 2014.

Ninad Kamat
CERTIFIED FINANCIAL PLANNER^{CM
www.letsmakeaplan.in}
facebook

Destination............Retiring Rich.

In India, it has been a culture that once the parents retire, the children usually take care of them, financially as well, but things are changing and I am quite sure, we would want to be financially independent, post retirement, and not really rely on our children for financial support(at least).

You may be wondering, why I have this fixation about retirement and retirement planning when I am still just 28 yrs young?

Well, this is why....

"तीन साल पेहले " 3 yrs back........


I was a little surprised when my parents, who were a part of  this great financial industry for 23 long years did not financially plan for their retirement. Of course they had money saved up in different financial and non financial products, but the plan was missing. It was only after I had a discussion with my father(the aggressive investor) that he shared with me the following.....

"पन्नास हजार  तरी  नाका  रे  महिन्याक, रिटायर जातकच? " - that, he'd require something like
Rs.50,000/- as his post retirement monthly expense, and I jokingly asked him ……
"तुमका किदयाक  पन्नास हज़ार, तिस हजार पुरो ना ?" -  Why do you require Rs 50,000 per month, isn't
Rs 30,000/- enough?

Having recently cleared my final exam of  Certified Financial Planner, I was very much excited (like a little kid) to draft a retirement plan for my parents as soon as possible.

Here's how we did it:

1. Emergency Fund: One can debate about the necessity of an emergency fund in a retirement plan, but I feel that this is as important as an investment plan, especially when you have a long post retirement life expectancy of about 20-25 years. So we allocated around 10 months worth of household expenses to this. Further, a part of this was invested in Liquid funds offered by mutual fund companies and the rest was parked into a savings account.

2. Medical Insurance: This was one very important product which was missing in the kitty and also could have cost us a bit because of the higher age. After some research, I came across a very good proposition from a public sector insurance company with an attractive annual premium. We further topped  this up with a Critical Illness Cover, where, only the major illnesses are covered for a fraction of the premium.

3. Investments: This part of the plan was extremely crucial as our priority was to generate a steady flow of income. The investments were streamlined and diversified using various products like debt mutual funds, bank deposits, equity mutual funds, equity shares. Broadly, an asset allocation strategy of 60% debt and 40% Equity was followed which was to be re-balanced every year.

4. Estate Plan: We made sure, nominations were in order so that, in case of an untimely death, transmission of the investments would be smooth. Also, for transfer of Fixed assets, a will was written.(more on this later).

The problem area....
Applying the simple concept of time value of money on their investments made some startling revelations. By the time they were 75, they would have used up all of their retirement savings with nothing left for the remainder of 10 years.


कहानी  में  ट्विस्ट  

"छे महीने पेहले" 6 months back....

Luckily, my father started receiving pension because of his 20+ years of service in a public sector bank and this changed the problem area in their retirement plan. The gap of 10 years in which the fund availability was questionable was now, just filled.

This was an absolute eye opener for me. Not everybody can be this lucky. Now you can understand my fixation for retirement planning. It brings me back to this(simple and self explanatory) image in my first post on friday financials,

So, if retiring rich is your destination, then clearly, the most important thing you need to do is start investing early and let the power of compounding work its magic. Remember, its the little contributions you make initially that really make the difference, rather than the bigger ones made at the end.

Ninad Kamat
CERTIFIED FINANCIAL PLANNER^{CM
www.letsmakeaplan.in}
facebook


* Compounding image source: www.valueresearchonline.com

The Curious Case of an Indian Investor...

Indian investors have been very keen savers for a long time now. Looking at the fact that savings in India are close to 30% of the GDP, one should have a very optimistic feeling about our future, sadly that's not the case. Although we have been very high savers, historically we lack the financial wisdom to chose the right asset class.  

Let me begin by sharing a very simple yet insightful view^ of perhaps the most successful investor, the world has ever seen, also known as the Oracle of Omaha, Warren Buffet.

"Investing is defined as the transfer of your purchasing powers now, to others, with the reasoned expectation of receiving more purchasing power in the future. Simply put, investing is forgoing consumption now in order to have the ability to consume more at a later date.

Let's melt all of the world's gold stock of 170,000 tons together to form a Cube of about 68 feet per side, lets call this Pile A. This pile A is worth about 9.6 trillion dollars. Also, let us create another Pile B of similar value, but with this we could buy all of US cropland (400 million acres with output of about $200 billion annually, plus 16 Exxon Mobils 

(the world's most profitable company, one earning more than $40 billion annually.) After these purchases, we would still have about $ 1 trillion left over for walking around money. Can you imagine an investor with $ 9.6 trillion selecting Pile A over Pile B?

A century from now the 400 million acres of farmland will have produced staggering amounts of corn, wheat, cotton and other crops - and will continue to do so. Exxon Mobil will probably have delivered trillions of dollars in dividends to its owners and will also hold assets worth many more trillion dollars (and remember you have got 16 Exxons). The 170,000 tons of Gold will be unchanged in size and still incapable of producing anything. You can fondle the cube, but it will not respond"

There are many things you could learn from this letter by Warren Buffet but the top 3 that make my list are:

1. All of us consume so many products each day, manufactured by various companies and will continue to do so in the future too, without even wondering where the profits of these companies go. Isn't it silly of us to NOT invest a part of our savings in these companies and be a part of their business success, instead of  just piling money in traditional financial instruments?

2. We own gold and real estate as it has a strong emotional appeal, there is pride of ownership in it, why cant we share the same pride in owning a part of successful, profitable businesses? This "the blind leading the blind" attitude agonizes me to think when an investor comes to seek advice on property and gold by compromising on their major life goals like retirement. 

3.  Most Indian households talk very freely about owning gold and real estate and how these assets have been passed on from generation to generation, especially with our children, do we ever think or talk about owning equity in the same way? Why not? We need to make sure we talk to our children about investing in Equity too, after all they are the future.

With only 3-5% of our savings being channeled into equity asset class including mutual funds, compared to 77% in the US*, 41% in Europe* and 33% in the UK*, our Equity markets are highly undervalued. If this figure moves up to 15% in India, our markets will get a big "push" and reduce dependence on the foreign inflows! 

Remember this performance will ultimately benefit us, if and only if we have the courage to systematically invest and be patient with our investments, otherwise we will still continue to consume, but sadly enough, not be a part of a wonderful and developing nation.

Ninad Kamat
CERTIFIED FINANCIAL PLANNER^{CM
www.letsmakeaplan.in}
facebook

^ Source - Warren Buffet's letter to share holders.

* Source - KPMG report & RBI report FY-2012

Set your Financial Priorities right....

If we could simply accomplish everything we wanted, at once, with the resources we have, financial planning would be unnecessary. It would simply be a world of instant gratification, as needs were satisfied on demand. Of course, in the real world, we can't simply have anything/everything we want whenever we want.

Resources are limited, and as a result financial planning is essentially about trade-offs. We must prioritize which goals are most important to achieve, and allocate resources to them, recognizing that this means money may not be left to satisfy other goals (or wants or desires). Thus, in practice we might say that the essence of financial planning is to help us prioritize trade-offs, and decide what goals will be satisfied first (and which will be second, and which won't be done until third, etc.).

My Final Four priorities when it comes to personal finance are:

1. Leave within your means and create your Emergency Fund:  You only have a limited amount of money, so, to meet your goals you have to reduce expenses and save more.
What this will also do is allow you to create an emergency/contingency fund faster. Typically an emergency fund should take care of 6-8 months of your monthly expenses.
For example if you have invested systematically for a certain goal in the near future and you are in need of funds urgently, you will tend to withdraw from this investment and lose the Power of Compounding on that investment forever.
This wouldn't have been the case if you had a contingency fund in place.  

2. Protect yourself with adequate Insurance:  Most of us have purchased Insurance as an Investment product, furthermore less than 10% Indians are insured medically. If you have dependents to support financially then you obviously need adequate insurance as insurance and not as an investment. If you can do this, then, what it will ensure is that, you can accommodate the much necessary component of medical insurance into your kitty as well.

3. Minimize Debt: All of us want to live debt free, but that's easier said then done. In this age of plastic money, hard to resist offers and online shopping, credit card debt is one area that we fall prey to very easily. In this over hyped bargain we forget that there is a very high rate of interest charged, for every time we pay only the "minimum amount due". Try and minimize the use of credit card, if possible pay off your dues first and then set a spending limit on your card.

4. Plan for your retirement: The biggest retirement planning failure is failing to plan. When I talk about retirement  planning, especially with youngsters who have just started to work, their foremost excuse is " I've just started earning and you want to talk about retirement planning, that is so far off, I'll think about that when I'm around 40".

Simply put, starting early will always help your investments grow with the Power of Compounding.

Conclusion: You can master your financial life by setting your priorities, you could also design your own set of financial priorities, but make sure you stick to them. 

Remember to share your feedback and comments on this article below.