Thursday Trivia ~ Are you Financially Free?

 

Rahul, Divya and Mahesh are childhood friends. Everyone likes to call them  – 3 Musketeers! Right from staying in Mumbai’s suburbs during their school and colleges days to now living in posh locality of South Mumbai, their journey is not less than anything inspirational. Those sleepless nights before exams, traveling in local trains, chai-samosa parties, etc. are some of the unforgettable memories that they relive whenever they meet.

Rahul rose through the ranks of corporate ladder after completing his professional education. Divya became a doctor, she is a visiting doctor to many hospitals in Mumbai. Mahesh established a business while he was in college and has now established into a global company.

As Rahul turns 40 today, he stands on the balcony of his penthouse with Divya and Mahesh next to him reliving those days when they were hustling through life.

‘Life has blessed us with so many fond memories. We used to study till 4 am and write exams the very next day. Not to forget the chaiwalah who used to come at 1 am in the morning and ask us about our preparations for tomorrow. Remember how Mahesh used to confidently say, that we will crack the papers wide open!’ remarked Rahul.

‘Oh yes and we would be worried about whether we will be able to write the paper tomorrow or not,’ laughed Divya.

‘And we did crack the papers every single time. Didn’t we?’ smiled Mahesh.

‘Most definitely we did.’ Divya winked.

‘Seriously, I had to climb the hard corporate ladder and work around my loans for my house and Mercedes while Mahesh has been able to buy three houses and 2 BMWs by now. He seems to have some magic wand.’ Rahul said.

‘I never buy anything on loan. We have a saying in our family, a person works for 12 hours while his interest on loan works for 24 hours. The only loan we take is for business expansion and new product offerings.’ Mahesh replied with ease.

‘WHAT!! You have never taken a personal loan. Then you’re surely missing out on great things of life buddy. See this phone of mine, it’s worth Rs. 1.25 lakhs. I couldn’t afford paying straight away so I got an easy EMI option on it. I just bought my first Audi too and have my bank’s relationship manager working on a house that we are planning to buy in next 6 months. It really improves my image as a doctor, you see.’ Divya anxiously replied as she couldn’t believe Mahesh never ever took a loan.

Mahesh sensed Divya’s anxiousness. He replied, ‘That’s wonderful Divya. I am glad to see you so happy. You are a wonderful doctor but very bad at managing your money.Since you were so busy studying those big books, you never got the time to understand the power of compounding.’

‘I agree with Mahesh. Understanding money and power of compounding is a must, Divya. It’s the 8th  wonder of the World.’ Rahul interrupted.

‘I don’t believe Mahesh at all. Even Rahul took a loan for your house and Mercedes. So what’s wrong with me taking one?’ Divya was getting a little irritated now while Mahesh maintained his composure.

‘Yes, Divya. But then look at what I had to go through. Most of my money was being spent on servicing the EMIs on loans. Though I don’t have any loan on my head right now, I also don’t have any money sitting in my bank right now that will help me retire. If my daughter gets hospitalized tomorrow, I will have to take loan from you and Mahesh to help me out. Next option is credit card.

Technically, I am still a slave to the system. I can’t escape my job. I am still working for money, I just disguise it saying that it’s my passion. But it’s far from truth and you know that.’ Rahul choked while speaking.

‘Divya, don’t get me wrong. But the loans that you are enjoying today are just financial burdens of tomorrow. You still aren’t able to take your personal time off from work. It’s creating a pressure for you when in reality. You want to start a charity for underprivileged since a long time but you aren’t able to because you don’t have time. You are chasing money while dreams are slipping away.’ Mahesh chose his words carefully this time as Divya went into deep personal enquiry.

Silence for 5 mins.

Finally Divya started talking. ‘You guys are right. I have achieved so much as a doctor but there is no freedom in my personal life. I still cannot take 1 week off from work and spend time with my children. Home loans, car loans and now a loan for phone too. There is no money sitting in bank account that can be used if some emergency in family comes up. Retirement is completely out of picture, at least you have even thought about it Rahul, for me it’s a distant reality.’

Rahul got up to get a juice for Divya. On coming back he asked, ‘Mahesh how the hell did you do it? I mean, how did you become financial independent with so much stress from business every single day?’

To which Mahesh replied, ‘I never really took a loan to fulfil any of my desires. Whatever money we made, we continuously invested back in our business all the time. Plus since last 10 years, we have been investing mutual funds as well.

When you own a business, you own a piece of growth. It starts small and slowly compounds over time. Remember the days when you bought your first car and I was still traveling by public transport. I had the option of taking a loan but didn’t want to burden myself. While Divya was enjoying Europe, I was enjoying Kerala. The idea was to let money work for me.

And it took off. In last 12 years, we saw immense growth in our business. Then even our holdings in mutual funds grew and suddenly we were having more money than we had ever imagined. My business makes enough money for me to not work for a few years. My investments have earned me financial retirement. I am happy with my phone which serves the purpose of emails, chats and calls. There is no financial pressure, what more could I have asked for in life?’

Divya was listening with great interest when Rahul interrupted.

Owning a piece of business is so important. I had ESOPs of my company but I sold it off for down payment of my home. Those shares are worth 5x more today. I realize now that I made such a big blunder.’ Rahul almost stopped drinking his juice.

‘That’s in past Mahesh. Now what shall we do?’ Divya looked highly concerned now.

‘Don’t worry. We will crack this paper of your financial life wide open too, just how we did during exams’ winked Mahesh.

‘That’s the spirit boys!’ yelled Rahul with excitement.

Mahesh said, ‘listen to me very carefully now, just don’t interrupt. First and foremost, repay every loan you have. Especially your loan for Audi, Divya. If you don’t need that car then don’t buy. You are not impressing anyone. Just putting too much financial stress on yourself. And for that second home you are buying with loan, cancel that too. Find a nice broker and sell that house. You don’t need an extra house right now too.’

Divya politiely asked, ‘My dearest Mahesh, how do I repay my loans and start investing? I will need someone to guide me through the process. I am not born with mastery in numbers, like you!’

Rahul laughed while Mahesh was gathering his voice.

Mahesh replied, ‘Yes Divya, as always you are right. You need a Financial Advisor to help you through this. Just the way you take care of your patient’s health, your advisor will take care of your financial health. An advisor will see to it that you don’t overspend your income, invest the balance and see to it that you don’t take up unnecessary loans. This will secure your retirement and you will be able to work without having to worry about money any single day.’

‘Wow Mahesh. Do you have anyone in mind?’ enquired Divya with great excitement.

‘We have a financial advisor who will help you out with the process.’ Rahul intervened.

‘What!! Both of you already have one and never told me about it!’ yelled Divya.

‘That’s because you never want to discuss about investments ever with us.’ Mahesh replied.

Rahul replied, ‘Yes. I invest some portion of my salary every month into mutual funds. Also have an emergency fund set up, if I am unable to work for 3-6 months. Since I paid my complete home loan last year, I will be able to gain complete financial independence in the next 5 years. My advisor keeps a very good track of it.’

Mahesh looked at Divya and said, ‘Sit with the financial advisor for a few hours and plan a life of complete financial freedom. Just don’t let your fear or greed get in the way. It’s okay to get rich slowly because ultimately you will get rich. Getting rich fast, never really happens!’

‘Wow. What a speech, can’t get enough of it!. But for now, we are hungry and need food. Right now, we wish to focus on independence from hunger!’ Rahul smiled and thanked Mahesh.

 

Today’s Thursday Trivia has taken its inspiration from the tweet of Mr. Steve Burns. 

The most satisfying personal finance achievements:

  • No credit card debt
  • No car payments
  • Home can be paid off
  • No debt
  • Emergency fund
  • Big retirement account
  • Big trading account
  • Cash flowing assets
  • No financial pressure
  • Financial independence from a job

 

– Jinay Savla

 

Thursday Trivia ~ Commandments of Super Investor Mohnish Pabrai

Last week we had the pleasure of listening to Mohnish Pabrai, the shameless cloner of Warren Buffet at the Morningstar Conference. He started his investment journey after 30 years of age with a little over $ 1 million in early 2000s and now is worth above $ 100 million.

Reading this, many investors would feel that he atleast had a $ 1 million to start with. However, this can also be viewed as he made an investment return of 100 times through his focus and dedication. Another view can be that since he was an active investor, he could make such a return. Agreed. However, being a passive investor – if we can grow our money better than a fixed deposit or a LIC, it would be a good proposition. I suppose.

Mohnish shared his 10 commandments which were more directed towards fund / asset managers, not all of them would be useful to our readers who are passive investors. Hence, we have identified 4 commandments which would be useful to our readers.

 

Commandment #1: Thou shall be singularly focused like Arjuna.

As investors, we control our process of investing. Returns generated by stock market is not in our hands. Yet, most of our focus is to time the market and see if get that 1% extra than our colleagues at work have generated. It feels nice to take a little risk sometimes.

But is it really worth it? Does it always play like that?

Losing out on our investment discipline and timing the market has often generated loss than profit. Nobody can predict the market; they simply have their own theories. Some work, most don’t. Therefore, while opting for a goal based investments, an investor should focus on his process of systematic investment plans (SIP) rather than acting on an immediate tip provided by someone just to make that extra buck.

 

Commandment #2: Though shall never short.

Mohnish made a very interesting point here. He said, the upside or maximum returns to be generated while shorting a stock (selling first, buying later – when it’s felt that price of the company will fall) is merely 100% or double. However, the downside or maximum loss is unlimited.

What? Why? How?

Suppose there is a Company A which has delivered poor results. Hence, the primary feeling in the stock market is that the price will fall. Company A has a price of Rs. 10 at the moment. Now if a trader decides to short this Company by putting Rs. 1,000. He simply sells the stock of Company A at Rs. 10. Now, when the price goes to Rs. 5, he would have made 50% returns and if the price touches 0, the trader would have made 100%. Logic of stock market states that price cannot go below 0. So the maximum returns generated by the trader would be Rs. 1,000 on his previous investment of Rs. 1,000. That’s 100% returns.

Now the TWIST!!!

Now if by any chance Mr. Market feels that Company A, may have delivered poor results right now but it will deliver superior results henceforth and decides to raise the price of its stock. Our trader friend here would be for a shock. At Rs. 15, trader would have made a loss of 50% and at Rs. 20, he would lose his entire capital. Now here comes the scary part. Logic says, price cannot go below 0 but it can go up above 20 right?

So right from Rs. 20, when the price increases – our trader friend would have to arrange money from some other source of income as his initial capital of Rs. 1,000 would have been wiped out anyways.

This is one of the reasons we always hear in our social conversations – do you know Mr. X played in the stock market and has now sold his 5 BHK and shifted to 1 BHK? Now is this the fault of stock market or trader?

 

Commandment #3: Though shall always have a rope to climb out of the deepest well.

This commandment may have a different meaning for different people. For us, it simply means – Asset Allocation. Never invest your entire corpus into high risk equity funds in lieu of future high returns. Diversifying our investments into different asset classes such as equity, debt, real estate and gold results into sound sleep even during stock market corrections. However, an investor tends to unfollow his / her discipline when markets have shown a stellar past performance.

Let’s take an example of recent run up in the market and resulting in a fall. Throughout 2016 and 2017, Sensex and Nifty only inched higher. Because of the recent returns, many investors took their money out of fixed deposits / debt mutual funds to invest into risky mutual funds. Some investors started buying shares of companies based on very little information couples with extremely high conviction – obviously because it was a tip.

Nifty after touching a high of 11,700 has now come down to 10,000 levels. A fall of 17% in a matter of days leaving many investors wondering for the next 2008 crisis. Rather than boasting about their investment returns, they are now asking – what do you think is the bottom? Let some time go, this bottom phishing will also not work. Why? Because they are not disciplined, they are in a state of panic and trying to time the market. And that never works!

 

Commandment #4: Thou shall never be Leveraged. Neither a lender a borrower be.

Many investors tend to take a loan against their own shares / mutual funds to invest more in the stock market. This behaviour is often triggered by high returns generated and overconfidence of the investor to make quick money in no time.

Or when an investor watches their neighbor doing very well and decides to offer him some money to be invested in the stock market at unreasonably high monthly returns. This often happens in the real estate business. Many real estate players promise a 40% yearly interest and after a year are nowhere to be found.

Both of these habits of leverage result in bad outcomes. It poses unnecessary risk to be undertaken to achieve those investment returns. In short, it’s just impossible.

Hence, at Cirlce Wealth Advisors we don’t encourage trading the stock market. Investments with long term horizon, average returns and low risk can make an investor super rich. Compound interest works wonders for those who believe in it and run the course.

– Jinay Savla

Thursday Trivia ~ Easy Steps To Get Your Lost Aadhar Card Online

‘What a pain is this? Everyday someone is shouting over an SMS – Please link Aadhar. It’s frustrating’ Manish said while checking his messages.

‘It’s frustrating only because you have misplaced your Aadhar card. Don’t spill your laziness on everyone.’ Neha said in a mocking tone.

‘Alright. Let me speak to our financial advisor, I am sure he will help me out rather than passing comments’ Manish said while placing a call to his financial advisor.

‘That’s easy Manish. Don’t worry, just a few simple steps and it will be done. I will email you in five minutes’ financial advisor said.

‘That’s great. Email me.’ Manish looked excited.

Manish’s phone popped up with an email notification. A few steps were mentioned, ‘government work usually takes a long time, but thankfully this is not so!’ he thought to himself.

Instructions were as follows :

Go to website – www.resident.uidai.gov.in and select ‘Retrieve Lost EID / UID’

Upon selection, fill in your personal details and request for One Time Password ‘OTP’

Enter that OTP received on your phone. Your Aadhar number will be sent on your mobile.

Upon entering OTP, a new window will open up where you will be able to ‘Download Aadhar’

The link will take you to a new page – https://eaadhaar.uidai.gov.in where you can select ‘Aadhar’ and put in the number received on your phone. 

A couple more details need to be mentioned. Request for one more OTP for the last time.

After you put in your OTP. Your Aadhar Card will be automatically downloaded. Password to open is first four alphabets of your name in upper case and year of birth.

‘That just worked perfect. Thanks buddy.’ Manish excitedly called up his financial advisor. Neha was pleased to see this and both sat for lunch together.

– Jinay Savla

Thursday Trivia ~ New PPF and NSC Rules for NRIs

Who is a Non Resident Indian (NRI)?

Income Tax doesn’t directly define NRI. Section 6 contains criteria to consider Resident in India and provides that anyone who doesn’t fulfil this criteria is considered Non-Resident.

Simply speaking, the status of a person as a resident or non-resident depends on his period of stay in India. The period of stay is counted in number of days for each financial year beginning from 1st April to 31st March.

Who is a Resident of India?

An individual will be treated as a Resident in India in any previous year if he/she is in India for:

  1. Atleast 182 days in that year, OR
  2. Atleast 365 days during 4 years preceding that year AND atleast 60 days in that year.

An individual who does not satisfy both the conditions as mentioned above will be treated as “non-resident” in that previous year.

Old rule for Personal Provident Fund (PPF)

As per the provisions, NRIs are restricted to open a new PPF account in India. However, if they were residents while opening the account and subsequently became NRIs, they were allowed to make contributions into their said PPF account.

New Rule for Personal Provident Fund 

On 3rd October, 2017 Government came up with a notification namely Public Provident Fund (Amendment) Scheme, 2017

“Provided that if a resident who opened an account under this scheme, subsequently becomes a non Resident during the currency of the maturity period, the account shall be deemed to be closed with effect from the day he becomes a non-resident and interest with effect from that date shall be paid at the rate applicable to the Post Office Saving Account up to the last day of the month preceding the month in which the account is actually closed”.

As per this notification

  • When your residency status is changed to NRI, PPF account will be deemed to be closed, hence no further contribution would be allowed.
  • Interest on PPF would be now applicable to Post Office Saving Account which is 4% rather than prevailing interest rate of 7.8% until you close the account itself.

Old Rule for National Savings Certificate (NSC)

Similar to PPF, NRI cannot directly invest in NSC. However, if an NRI is allowed to continue existing investments till maturity date considering the account has been opened while being a resident.

New Rule for National Savings Certificate

When an individual becomes an NRI, his / her NSC account is deemed to be closed. Till the time an NRI actually enchases, the accumulated money in NSC certificate will earn an interest of Post Office Savings Account which is 4%.

It’s important to note that these rules are prospective in nature.

Suppose Mr. Ajay became an NRI citizen in 2014, he would have continued to enjoy the benefits till October 2017. Now after the amendment, Mr. Ajay would not be able to contribute to PPF Account or NSC certificate and his interest income would drop down to 4%.

In cases where, family of an individual also moves to a different country for employment purpose. If they fall into the definition of NRI, then similar rules would be applied for PPF and NSC.

How to withdraw money from PPF Account?

An NRI’s request to close PPF account can be processed by bank or post office only his / her signature is attested by an authority. The attestation can be done by a Gazette officer or PSU Bank officer.

An NRI should send a PPF account closing form to their relatives, friends, parents or financial advisor in India where they have NRE/NRO account. An authority letter must be attached allowing them to do withdrawal process by closing PPF account on behalf of an NRI.

Authorised person after getting attestation of the authority letter either from a Gazette officer or a PSU bank officer should proceed to the bank where PPF account is held. On verifying the authenticity of documents, bank will close the account.

– Jinay Savla

Thursday Trivia ~ What is Recapitalisation and How it impacts you!

What would you do if your child is unhealthy? You will take him / her to a doctor. Medicines will be prescribed. Yet, child continues to remain unhealthy. Now, there will be complete body scan. Upon reports when doctors realise medicines are not enough, they would prescribe surgery. Yes, surgery.

Similarly, banks in India have been unhealthy for quite some time now. So what can government do? In 2008, after Global Financial Crisis banks in USA were bailed out by taxpayers money. However, in India the crisis is not so severe. Hence, government has resorted to Bank Recapitalisation through a transparent financial engineering process.

Need for Recapitalisation

As per the banking norms, for every loan a bank makes it needs to have 10% of it as capital. So if a bank wants to lend Rs. 10,000 to someone, it needs to have a capital of Rs. 1,000 with it. Now, if the loan defaults by even Rs. 200 then it directly affects the capital requirement. Capital reduces (1,000-200) to Rs. 800 as a result of such a default. As a result, for Rs. 9,800 worth of lending, bank now only has a capital base of Rs. 800 which is 8.15% of the capital. Doesn’t fit the capital adequacy requirement of 10%.

At this point, either the bank can call in the existing loan which isn’t possible so they stop lending more. This stops credit take off from it’s very source – banks. Hence, the need for recapitalisation.

Structure of Bank Recapitalisation 

  • Bank Recapitalisation Bonds – Government will issue bonds worth of Rs. 1.35 lakh crores to Public Sector Banks. The banks in turn, will buy these bonds from government. The same money would be utilised by the government to buy shares of public sector banks.
  • Through budgetary allocation (taxpayers money), government will buy Rs. 18 thousand crore worth shares of Public Sector Banks.
  • Lastly, Public Sector Banks will then need to raise Rs. 58 thousand crores from market.

This adds upto a staggering Rs. 2.11 lakh crores. Indeed our public sectors banks are unhealthy.

Impacts on different stakeholders of Recapitalisation

Public Sector Banks

Banks which have already made appropriations for Non Performing Assets (NPA) will now be forced to recognise them as losses. Which in turn would result in erosion of capital. This erosion would be compensated by government by infusing capital by buying shares through bank recapitalisation process. Net effect, banks will be able to erase off their non performing loans while keeping their capital requirements intact. This would make banks healthier in process and would be able to make fresh loans.

Only caveat here is as banks will purchase these recapitalisation bonds, government will have to pay an interest on the same. This will add to fiscal deficit. Experts argue that interest amount of Rs. 10,800 crores a year considering 8% interest rate is won’t affect India’s fiscal health. However, every drop counts.

PSU Bank Shareholders

Shareholders of PSU banks will see a drop in book value of shares they hold.

How?

Let’s look at this example. Mr. A invested Rs. 200 in a PSU bank. Issued capital of the bank is Rs. 10,000. Hence safe to say that Mr. A holds 2% in the bank. Now, government infuses Rs. 30,000 to recapitalise the bank. As a result, Issued capital of the bank becomes Rs. 40,000. However, Mr A continues to hold Rs. 100 worth of shares in the bank. As a part of restructuring, Mr A will now hold 0.8% of the shares of bank. Hence, shares held by PSU Bank shareholders will get diluted.

However, it’s important to note that price of the shares have not been reduced. On the contrary, after the announcement of this scheme, PSU Banking sector index has seen a rise of 33% till date. Which means, shareholders need not worry on this issue.

Depositors

For depositors nothing changes. Apart from the fact that they can now place more confidence on solvency of the bank.

So if you had your fixed deposit in any public sector bank and were worried for a while. Then government will tell you to relax, the invisible hand is there to support you.

Taxpayers

Some of our investors raised an important question pertaining to bank recapitalisation. Central theme of their question was ‘Why should we ‘taxpayers’ bail out immoral and wilful defaulters?’ This definitely is a very important question in this context.

However, it’s important to note that in last year’s budget Finance Minister had made an allocation of Rs. 18 thousand crores for banks from the government for which the provision has already been made. Even with this announcement, no fresh allocation of taxpayers money is allocated. As a result, there is nothing to worry for taxpayers.

Investors

Bank recapitalisation will help to accelerating structural reforms in Indian economy. Infrastructure reforms such as roads, railways, power etc., transport sector will also get immense benefit on the back of proper roads being built plus Goods and Services Tax has already brought down gestation period of tucks at inter-state toll booths, manufacturing companies will be able to not only provide for consumption in India’s economy adding exports will help to put India firmly on global map.

By fixing the credit supply in the system, bank recapitalisation will prove to be a win-win for all stakeholders.

Can consolidation of PSU Banks happen?

The constitution of Alternative Mechanism is a step ahead in their direction. In August, Union Cabinet had decided to consolidate existing PSU banks under this mechanism to create stronger banks. Committee for Alternative Mechanism will be headed by Finance Minister Arun Jaitely.

One question that always strikes our heart is ‘How did situation become so bad in the first place?’ We were such a strong economy on the path to become a superpower but all fell apart.

What happened in the context of Public Sector Banks?

Flashback 2014, then Reserve Bank of India Governor Raghuram Rajan, brought to light the unhealthy state of banks. He pushed for an asset quality review. Till that time, most of us thought ‘all is well’ and then looking at bad assets amassed we were informed that ‘all is really not well’. The numbers  of ‘Non Performing Assets (NPA) ’ (loans given by bank which cannot be recovered) we saw were spectacularly high.

Due to this, banks were not only able to lend more money which is it’s primary source of income but even staying solvent was becoming a challenge. If money is stuck in the system and doesn’t come back to banks, then overall economic growth takes a backseat.

Why did this happen?

FY 2008-2013 was an era of stalled projects, immeasurable scams (2G scam, CWG scam, coal scam) and needless delays in executing projects which resulted into a standstill. Yet, the world was changing. Economic environment had become far more dynamic for India to be standstill. In other words, India did miss out.

So how is it connected to banks?

Companies take loans from banks to execute projects. If these projects get stalled for no reason (Tata Nano, Singur) or Government doesn’t allocate projects (2G spectrum scam) or there are unnecessary delays in obtaining licences to execute project (unease of doing business) then money gets locked. Also, this gives rise to morally incompetent people who float companies just to obtain loan and run away somewhere far in London, England while having their favourite drink. The whole eco system starts to breed unethical, fraudulent and immoral behaviour.

Banks which have lent money has a hard time to recover those loans. Safe to say, unhealthy. As a result, banks cannot make fresh loans to deserving projects or those projects that need of the hour. As there is lack of credit in the system, entrepreneurs are discouraged to take up more projects. As a result, no improvement takes place. Infrastructure and transport remain the same, worse off on a global scale a country tends to regress. Confidence in the system is lost.

This gives rise to a vicious circle.

In such a scenario, banks first need to recognise assets that have gone bad. Which determines the extent of fresh money required by them to start the process again. Now, banks start to look at government (one and only saviour). But, government makes money out of tax collections from citizens. Infusing honest tax payers money to cover incompetent businessmen’s bad loans brings about a negative mood to honest tax payers, especially salaried class.

This has given birth to a new challenge for the government.

If they borrow money from outside, fiscal deficit (revenue less expenses) widens as they have to pay back compulsorily regardless of bank being stable or not. If they use taxpayers money, sentiments are hurt and their chances of being re-elected become grim. So what to do?

Because of unhealthy lending structures, Public Sector Banks have suffered a lot more than Private Sector Banks. Hence, this recapitalisation is for Public Sector Banks only.

Dear readers, if you have any further query on Recapitalisation please feel free to write in the comment section below and we will resolve the same.

– Jinay Savla

Thursday Trivia ~ Financial Thumb Rules To Remember (Part 3 / 3)

After completing his home work on financial thumb rules, Rohan was very excited to meet a financial advisor from Circle Wealth Advisors. Malvika had never seen Rohan so excited before, she nudged him saying, ‘seems like good old times (before marriage)!’ Recognising that sly comment, Rohan simply smiled and looked away.

‘Ting Tong’  house bell rang. Rohan looked at his watch, amazed to find the financial advisor on time. Malvika looked at him and said, ‘you think everyone like you is late?’ Rohan knew, he couldn’t say anything as of now. Malvika was amazed at the professionalism displayed by the financial advisor as they were expecting someone with a lot of forms to be signed.

After exchanging initial greetings, Rohan and Malvika got down to some serious discussion with the financial advisor.

Rohan : The rule of 100 minus age suggests that I should be in 70% equity as of now. Is that viable or should I opt a different strategy?

Advisor : Great question. As you are 30 years old, thumb rule suggests 70% in equity. However, a correct method to look at it would be to have a complete view on your financial health first and then assess what allocation do you require towards equity. It will aslo depend on your financial goals and risk profile to derive the desired equity allocation in the overall investments. Stock markets go through their own cycles, it would also be advisable to look at the valuation aspect at the time of initial allocation.

Malvika : How much should we save and how much should we keep as emergency fund with us?

Advisor : Ideally, your emergency fund should be somewhere between 3 to 6 months of your expenses. It helps to save for short term fluctuations of life. Suppose, there is some event and urgent cash is required or loss of job then at such times, an emergency fund comes to rescue.

Savings should ideally depend on your expenses. With such a dynamic lifestyle, we often find hard to save. However, a family should save around 15-20% of their gross annual income every year.

Malvika : Should all our savings go for Retirement planning? As we are also keen on upgrading to a bigger car.

Advisor : We need to discuss and note down all your financial goals. They are all your short term and long term goals, however big or small. You then need to prioritise those goals depending upon how important and reachable that goal is. For example a dream vacation may be less important than providing for your child’s education. We will work out the resource required to reach each goal and then depending on what is agreed we will start allocating funds to the most important goals.

Retirement planning generally requires a huge capital and hence may constitute a major allocation of your assets and investments.

Malvika : How should we plan for a car?

Advisor : The most popular thumb rule for buying a car is 20 / 4 / 10, which implies that a consumer should make a minimum 20% downpayment and the loan tenure should not be more than 4 years with expenditure (includes EMI, fuel cost and insurance) on a monthly basis should not cross more than 10% of the gross monthly income.

Another way to interpret this rule is that the cost of the car should not be more than 40% of the annual gross income of the consumer. We had written a Thursday Trivia on the same, you could look into that.

Rohan : How much debt we should take a family? Should we stick to 36% debt rule?

Advisor : 36% debt rule is a great rule to restrict us from taking excessive debt. However, we must try to put a goal lower than that. Sometimes, while buying a house, we take on excessive debt as it’s a dream come true. But a question to be asked is, do we really need to take on so much pressure for the same?

Rohan : When is the right time to invest in stock markets?

Advisor : Excellent question. Everyone seems to be wanting to time the markets, but even Warren Buffet refrains from doing so. So don’t worry about it, as I said earlier, it will depend on your asset allocation and risk profile. Once that is done, we will look into how much we should allocate in equity and debt.

Satisfied with those answers, Rohan and Malvika were clear with their financial thumb rules. Rohan had read Part 1 and Part 2 of Thursday Trivia on Financial Thumb rules and this discussion taught him a lot more. As the final greetings were exchanged, both asked the financial advisor to visit them again next week.

– Jinay Savla

Disclaimer : This particular series of Financial Thumb Rules is only meant for educational purposes. We do not in any ways recommend it, as the case may differ for investors per se.

Thursday Trivia ~ Financial Thumb Rules To Remember (Part 2 / 3)

‘Control your excitement. I know how big a spendthrift you are. Just by learning some basics about equity, debt, calculations on compound interest, savings, etc. you think, you will become a millionaire. Money is easy to make and difficult to keep. What about our dreams of owning that house in Goa, a brand new Mercedes and spending our retirement life travelling around the world. Have you even figured that out?’ That was a long lecture from Malvika.

‘Please keep some patience. I am reading that as well. Everyone cannot be as fast a learner like you.’ Rohan did sound a little irritated. Although Malvika had arranged a meeting with professional financial advisor in the evening, Rohan felt he needed to get educated first. For him, it was like a little child in a candy shop. Malvika continued to prepare lunch after instructing Rohan not to disturb her as she had better things to do during the day.

After being overwhelmed by previous Thursday Trivia, Rohan continued his quest for financial education.

Retirement Corpus Rule

This rule states the quantum of money required by an individual to lead a peaceful and financially stress free post retirement life.

Rule : 20 multiplied by Gross Annual Income

With a gross monthly annual of 12 lakhs, Rohan calculated he would need a corpus of Rs. 2 crores and 40 lakhs to live a comfortable and peaceful retirement life. However, with so many expenses coming up, it would be easier said then done for him.

4% Safe Withdrawal Rule

This rule was published originally in 1994 by William Bengen where he proposed a safe withdrawal rate from retirement corpus.

Rule :  (Year 1) Withdrawal Amount = 4% multiplied by retirement corpus

(Onwards)  Withdrawal Amount = Amount calculated in previous year plus Inflation

Rohan was quick on his calculations. 1st year withdrawal amount for him would be Rs. 9 lakhs and 60 thousand. He expected inflation to be around 6% on average. Hence, his withdrawal amount in second year of retirement would be Rs. 10,17,600/-, Year 3 would be Rs. 10,78,656/- and so on.

After being satisfied with thumb rules on his retirement corpus, Rohan decided to learn about his short term goals of buying a house and a car.

 House Affordability Rule

This rule helps an individual to decide the maximum amount to be spent while purchasing a house. There are variations to this rule where the suggested range varies between 2x and 3x. Hence, for simplicity of calculations we will use 2.5x as a range.

Rule : Maximum value of house = 2.5 multiplied by Annual Income

With annual income of Rs. 12 lakhs, Rohan could buy a house with maximum worth Rs. 30 lakhs. This made him determined that he needs to work a lot harder to afford a better house.

Housing EMI Rule

It’s such a fantasy to own a large house in a posh locality. Tax rebates on payments of housing loan provide a further icing to the cake. This rule inculcates a reality check of the maximum amount an individual can budget for housing loan monthly EMI payments.

Rule : Maximum Monthly Home loan EMI =  28% multiplied by Gross Monthly Income

Rs. 28,000/- was the maximum Rohan could afford in his EMIs every month. He noted the same on a piece of paper.

Car Affordability Rule

This rule talks about maximum price an individual can budget for while purchasing of a new car.

Rule : Car Affordability = 50% multiplied by Gross Annual Income

Rs. 6 lakhs worth of car Rohan could afford as of today. To buy that Mercedes he would need to become Vice President of his company. Goals suddenly now looked clear to him.

Car Loan Rule – 20 / 4 / 10

This rule talks about prudent practices to be applied while purchasing a car incase an individual takes a loan.

Rule :

Downpayment – 20%

Tenure of Car Loan – 4 years

Total Expenses on Car (Yearly) – 10% multiplied by Gross Annual Income

Rohan was calculating his total expenses on current car which included current EMI, fuel expenses, insurance, parking rentals and repairs. As he calculated, he realised they were more than Rs. 1,20,000/- a year and figured out he could potentially save here. A smile now shaped up on his face.

48 Hour Rule

Impulse purchases gives a dopamine hit to our brain. It makes an individual feel good about owning them in the short term. In the long term, an individual usually forgets owning them unless they find it during their Diwali house cleaning.

Rule : Wait for 48 hours before purchasing something. If an urge still remains then go ahead with it.

Rohan looked around the house and was horrified by so many impulsive purchases done in the last year which were of no use now. He felt devastated and happy at the same time. Devastated because he had wasted so much money for things that don’t matter now and happy as he knew he wouldn’t repeat the same mistake next time.

But he did commit one mistake!

Rohan went to share this rule with Malvika. I’m sure many of you can guess the impact of this sharing.

‘What nonsense! It’s you who want so many things. Look around the house, 80% of useless stuff has been bought by you. In the blind race of showing your ‘about to be millionaire status’ this whole house has become a godown a useless things.’ Malvika said it with a rigour.

Watching Rohan in absolute shock, Malvika continued, ‘Don’t worry my dear, we have called a personal finance expert from Circle Wealth Advisors to sort all your worries out. Just wait a little and all your questions will find a house of solutions.’

Dear Readers, as Rohan and Malvika will be asking their questions. We invite you as well to share any questions you have in the comment section below or you can write them to us personally. We will surely include them and look forward to get your financial thumb rules organised.

– Jinay Savla

Disclaimer : This particular series of Financial Thumb Rules is only meant for educational purposes. We do not in any ways recommend it, as the case may differ for investors per se.

Thursday Trivia ~ Financial Thumb Rules to Remember (Part 1 / 3)

‘Millionaire! One more time I hear this word from your mouth and you will sleep on couch tonight.’ Malvika was really angry this time. Over the past few days, Rohan had become obsessed with becoming very rich. Not an unusual obsession for someone in their early 30s. However, what Rohan could really not figure out is ‘how to be a millionaire’. He was working in a multinational company with a salary package that was appropriate for his age and experience.

‘But I didn’t say anything. How did you know I was thinking about it?’ asked a perplexed Rohan. Malvika amazed at Rohan’s response said, ‘I’m your wife, I even know the facial expression when you don’t like the food I make.’ Rohan tried to laugh but decided it was not appropriate for the moment. ‘Have a look at this Thursday Trivia, it might help you to get an answer to your million dollar question.’ said Malvika with a smile. Rohan couldn’t believe what he had just heard.

‘Thank you so much my dearest!”, Rohan jumped out of his seat and hugged Malvika.

Like a curious child, Rohan browsed through the blog. He found various articles on personal finance and started taking notes. While his primary objective was to learn about certain thumb rules first.

100 minus Age Rule

This rule tells future millionaires how much of their portfolio should be in equities. Thought behind this rule is as the person gets older, his ability to take risk reduces and would not prefer a large swing in portfolio value with fluctuation in equity markets.

Rule : 100 less (Current Age)

Rohan is just 30 years old. He was happy that he could invest 70% of his portfolio in equities. Being young could mean, he would be able to take more risk and realise his dream faster.

“My favourite rule of thumb is (roughly) to hold a bond position equal to your age – 20 percent when you are 20, 70 percent when you’re 70, and so on – or maybe even your age minus 10 percent.” – Jack Bogle

Rule of 72

This particular thumb rule is used to estimate the number of years it would take to double an investment on expected rate of return.

Rule : Number of years to double = 72 divided by rate of return

Rohan quickly realised that current rate of fixed deposit is 6% on fresh investments. Hence, it would take 12 years. (72 / 6)

Rule of 114

This rule is used to estimate the number of years it would take to triple the investment on expected rate of return.

Rule : Number of years to triple = 114 divided by rate of return

Rohan was now thinking. If he invests the same money in debt mutual funds with 8% rate of return. It would take him approximately 14 years to triple his investment and 19 years if he invests in bank fixed deposits at 6% interest.

Rule of 144

This rule is used to estimate the number of years it would take to quadruple the investment on expected rate of return.

Rule : Number of years to quadruple = 144 divided by rate of return

Rohan got excited. He thought if he invests in equities expecting 12% rate of return, his investment would quadruple in 12 years (144 / 12) compared to debt mutual funds taking 18 years (144 / 8) and 24 years in bank fixed deposits.

36% Debt Rule

This rule states the maximum amount of loan / debt to be taken by a person including housing loan, vehicle loan, credit card loan, any other personal loan, etc. should not exceed 36% of his monthly income.

Rule : Equated Monthly Instalments = 36% of Gross monthly income

Rohan with a monthly salary of Rs. 1 lakhs quickly noted down that his total EMIs should not exceed Rs. 36 thousand.

Emergency Fund Rule

This rule states a specific amount to be set aside incase of any emergency such as loss of job, illness, business problems, etc. The amount is usually set aside in liquid assets such as savings account, short term fixed deposit or simply keeping enough cash at home.

Rule : 6 multiplied by Monthly Household Expenses

Upon listening to this rule, Rohan understood that he needs to keep Rs. 3 lakhs as Emergency Fund in his bank all the time as his monthly expenses are Rs. 50 thousand.

10% Saving Rule

This rule talks about minimum monthly savings a person must do as per his monthly income.

Rule : Minimum Monthly Savings = 10% multiplied by Gross Monthly Income

Rs. 10 thousand was not a big deal for Rohan to save. He had a big smile on his face while his mind was working at speed of light.

Malvika sat besides Rohan all the while noticing his changing emotions. It was as if Rohan had found a hidden treasure. However, she was aware that all these are merely rules and she would require assistance of a financial advisor to guide them along.

Dear Readers, we will continue to explore rest of the thumb rules with Rohan in our next Thursday Trivia. Till then, please do write in any particular financial thumb rule that you would like to learn about.

– Jinay Savla

Disclaimer : This particular series of Financial Thumb Rules is only meant for educational purposes. We do not in any ways recommend it, as the case may differ for investors per se.