Monthly Archives: October 2017

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.