Asset Replacement Fund
It was about 10 years ago that I suggested an asset replacement fund for a friend. He and his wife were just starting life and wanted to save/ invest in a scheme which would gather enough money to buy assets. Assets in this case were actually expenses (but we cheat ourselves by calling them assets).
So a washing machine, refrigerator, a/c, ….and all the white goods came from that fund. They started with just Rs. 3k per month in HDFC PRUDENCE Fund.
Whenever she wants to buy an asset, all she needs to do is to look at that fund – and if there is enough money just go and buy the asset. I know they increased the amount that they were putting into it..but frankly do not have the full details. I also know that all their white goods came from that fund, and they were happy that assets were being acquired without much argument, tension, etc. The fact that both their salaries went up well, and they are doing well surely helped.
However, they were LUCKY enough to buy some big assets in 2007 (bouyed up by a bulging fund) and SMART enough to keep investing through the market lows of 2008 – and WISE enough to know the difference between the two!
So if you do not know when you wish to acquire your white goods (expense or assets (if you are short of ideas – Kindle, electronic photo album, 600mm lens for your Nikon, Canondale cycle,….the list is endless!!). It works, you know how much money you are willing to spend on white goods (ok ok prices have fallen, but dammit the number of things have gone up astronomically have they not?).
This is not a great new concept. Corporate India has to do it – thanks to ‘depreciation’ and sinking fund kind of concepts, but it makes sense to do it in private life too, what say?
wealthucreate
Subra Sir,
Do you mean to say build funds, the interest generated out of those funds should be used to buy the stuffs? or you mean to say build fund and then buy using the funds?
Ashish
A good idea :). I remember one guy having separate ‘partitions’ (i.e. separate linked deposits) in his e-banking accounts by the name ‘Travel’, ‘Electronics’ etc. And contributed to those sub-accounts. Only when the balance reached his set threshold – he would withdraw and buy that particular ‘asset’.
Naveen
Dear Subra sir,
I liked this idea. It would be great if you could do more posts like these on saving and investing tips. One thing that beats me is how to calculate how much money to save. For e.g. My car is 5 years old and I intend to buy a new car (without any loan, cost < 10 lacs) after another 5 years. How much should I start saving now for this ?
T S Ashok
Very nice one. I try to follow..
bharat shah
nice idea.recently my son bought a family car, i thought of , to provide its depreciation plus finance charge, based on its estimated life,in every year home expense.the same could be applied to residential house by providing its prevailing rent as home expense.however this is better and your hint to go for a balance fund also makes sense.thank you.
Sachin
Something similar – I work for a few hours on Sundays also. We keep the money earned on Sundays separate. Our vacation funds come from this amount. There is still some money left over, which can be used for other purposes.