Personal Finance Basics
More ‘PERSONAL’ than ‘FINANCE’
9/19/2014
What to Expect What Not to Expect
What is Personal
finance? Quick ‘make money’ tips
Budgeting and Tracking Stock market secrets
Risk Handling Advanced concepts
Understanding Promoting Products
Inflation, Compounding Convincing you
Goal Oriented Planning
Concept of Tax Saving.
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What is Personal Finance?
• “Managing Money” (efficiently)
• How is it personal? (Answers invited)
• Recall, “Failing to plan is planning to fail”
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Attitude
• Towards Money, Influenced by
– Childhood experiences
(grown up in affluence, poverty, medium level)
– Parents’ attitude
(fearful/comfortable/generous/miserly)
– Friend circle
(savers/investors/spendthrifts)
• Introspect, answer a few questions
• Know YOUR attitude.
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Need for planning
• Start of career: 21 – 29
• x yrs of working: Provide for
– Basic needs of 2x years of living
– Unforeseen events, Lifestyle expenses
– Parents/in-laws may be grandparents!
– Kids education
– Own home: an emotional need
• Evaluate your financial status. Plan. NOW.
9/19/2014
DIY Financial Planning
• For Engineers, it is a cake-walk, because
– No fear of numbers
– More exposure and access to internet
– Finance: More about controlling emotions
– Devising a plan and execution – treat it like project
– Inclination to learn is important.
• For more details, check here.
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Budgeting and Tracking
• Pre-requisite to planning
• Develop this habit early in life
• Track all your expenses for 3 months
• 4th month: allocate the average as budget
• Do not touch the other portion
• Do this for 3 months
• Track, Track, Track every “10 rupee”
• Analyze. Cut down if possible.
• Get your first (and only) credit card if in control
Read these words of wisdom on budgeting by an old man!
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Risk Handling
• Emergency Fund*
– 4-6 months of monthly expenses.
– 1 month in Savings A/C, 2-3 months in FD, Rest in ultra short
term/liquid funds
• Life Insurance
– ONLINE PURE insurance. 22 yr old: 8k/yr for 1 Cr cover
– Be HONEST, Disclose health details
– Educate nominee, keep health records
• Health Insurance**
– Means “Wealth insurance”!
– Keep healthy habits
– Be prompt in informing the insurer
* Read this to know how it helped in need
** www.medimanage.com is a good link
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Power of Inflation
• V = P (1 + r ) ^ n – rings a bell?
• REAL returns = V – P : Wrong!!
• Net gain at nth year, G = P[(1+r)^n – (1+i)^n]
• Net REAL gain % is lower than r-i ! How?
• r < i => G < 0! Means LOSS, became poorer
• No control over r and i.
• Can control P and n, so focus on them.
Note: Govt publishes CII every year, started in 1981 - 100, now – 1024, inflation: 7.3%
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Power of Inflation – Example
• 1000 rupees invested today. After a year get
back 1100. But what costed 1000 rupee today
costs 1090 next year. Still net gain is 10 rupee,
but this 10 rupee next year is not the same as
this year’s 10 rupee. It is only 10/1.09 = 9.1
rupee. So your real return is 9.1 rupee for
1000 rupee invested.
• The simple equation is: 1+real return =
(1+r)/(1+i).
Note: Govt publishes CII every year, started in 1981 - 100, now – 1024, inflation: 7.3%
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Power of Inflation – Example
• FDs at 9%, after tax give 6.3%/7.2%/8.1%
(Fixed Depreciation)
• So, don’t be fooled by how banks present
their interest rates. Would you really love to
save money in FDs if banks all over put
banners saying, “we give -1% real returns”.
• It is just the way numbers are presented
makes us not see the reality.
Note: Govt publishes CII every year, started in 1981 - 100, now – 1024, inflation: 7.3%
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Power of Compounding
• With n, V increases exponentially.
• Assume 1% REAL return
• To reach today’s 40Lakh at 60:
Amount per month, if you start at
– 22: 7,768 Rs 259 / day
– 30: 10,262
– 40: 16,211
– 45: 22,175
– 50: 34,118 - Impossible to achieve real return in 10 years.
Keep on increasing starting amount by inflation percentage.
• Source: Jagoinvestor Calculators
Confusion? 22 yr old guy accumulates 5.23 Cr, 50 yr old 74L. Why?
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Financial Goal Setting
• Goal setting – key in planning
• “To be rich” ?
– Sailing in a ship without knowing the destination
• Goal should be “SMART” (details out of scope)
• List down all the goals.
• Retirement planning no 1.
• Home is a luxury. Go for it only if
– You have surplus after investing for other goals
– You have 60% capital. (To avoid large EMIs)
Nice questions to answer before buying a house
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Goal Horizon
• Focus is on the corpus, returns
• Risk appetite of goal, my risk appetite
– Short term goals (< 7 yrs ): no capital loss
– Medium term (upto 15 yrs ), minimize tax, relatively more return
– Long term (> 15 yrs), minimize tax, beat inflation
• Why these definitions?! Did I hear you say,
“I thought short, medium, long means < 1 yr, <5 yr and > 5 yr!!!”
• To get back money when you need it.
Source: http://freefincal.com/goal-based-investing-calculators/
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Income Tax (Saving)
• Do not invest just to save tax
• Do not get into home loan (just) to save tax!
• ALIGN the tax saving investments with GOALS.
• PPF is good for goal horizon 15 yrs or more.
– Tax free gains
• Equity Linked Saving Schemes (ELSS) for 80C
• Gains tax free after a year
• Just 3 year lock-in, do not withdraw just because 3 yrs over
• Do NOT put in dividend re-investment option!!!
• Worst options: NSC, Tax Savings FDs. Interests Taxable.
• Most Important: Tax Evasion and saving are different
9/19/2014
What Are Mutual Funds
• No time to analyze companies?
• Direct stock buying not the only way
• MFs: A lot easier to analyze, lesser volatile
• 2 options: Dividend mode, Growth mode
• Analyze based on Standard deviation, Alpha etc*
• Confused? There are index funds – simplest MFs
• One point contacts : CAMS/KARVY
– Need PAN Card and Address proof, names matching
*Note: Refer www.valueresearchonline.com for more info on MF
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You Say Market is Risky?
• Risk is doing things
– Without enough study/research/mathematical analysis
– Without diversifying/asset allocation
– Because my father/relative/friend did it
– Because my agent is good, he is my relative/neighbor
– Confusing introductory talks to be recommendations
– Too many short term transactions, without having goal
• Enemy of an investor - his own mind, tame it*
• Inflation and markets are linked in the long run.**
*Check here for investor behavior analysis
** Sensex was 173 in 1981, today it is around 26000, annual returns : 16.4%
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In a nutshell
• Inflation causes -ve real returns
• +ve Compounding is amazing, especially when n is high!
• No option but to take risk (stomach volatility)
– Taking risk is not gambling
– Not having enough for goals does greater damage
• Short term volatility favors
– Disciplined long term SIP investors (How?)
• Investing in MFs: requires just basic study
• Know what to expect. Be realistic on r and i.
• Minimize the damage by inaction on portfolio!
– Invest and forget.
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How to do: Retirement Planning
• Simplify: 35 years of working, 70 years of living
• 20k/pm expense -> 2.13L/pm @ 7% inflation
• Save at least as much as you spend
AND make sure your r >= i. DONE.
• If your r < i ? save so much more than you spend.
• In general, save A = E*[(1+i)/(1+r)]^35
• BUT do you know i or r over 35 yrs!?
– Lead a frugal life, invest as high as you can
– Better to be wealthy and unhappy, than to be poor and unhappy
• Allocation: Upto 60-80% equity, rest in debt instruments
A simple book : Retire Rich
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Medium term: Child Education
• Second to Retirement, because you get education loans
• Start as soon as child is born
• Collect the data
• Estimate the monthly amount needs to be invested
• PPF can match inflation over the long run
• Upto 40-50% equity exposure for a goal 15 years away
• Balanced funds are good enough for this goal
– Same tax treatment as equity funds
– More stable, less volatile due to automatic rebalancing
• Shift in parts to FDs, as goal is approaching
• Find free calculators/goal planners at www.freefincal.com
9/19/2014
Will
• Nomination and will making - not the same
• Will - a must even if no chance of dispute
• Biggest factor: Helps survivors to know the assets
• An unregistered one: as legal as registered
• Can be written in plain words.
• Must have: Executor name, witness signatures
• Please read this write-up on will
• Absence of a will => Chaos
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Summary
Dos Don’ts
• Budgeting and Tracking • Spend Impulsively
• Have Emergency Fund • Get into huge loans
• Have adequate Insurance • Take Pay/NEFT for granted
• Goal based investing • Invest aimlessly
• Invest early • Buy traditional policies
• Aim for real returns • Neglect health
• Minimize tax outgo • Invest just to save tax
• File IT returns promptly • Invest on others’ advice
• Study before purchasing • Evade tax
• Write down decisions • Be driven by fear or greed
• Make a will • See home as investment
9/19/2014
