Can you believe this…if you are a middle class Indian?

I found it a little amusing…but not difficult to believe. When I spoke to him, I just heard some of his expenses – Rs. 3000 for a gift for a colleague’s wedding, EMI on a car, and EMI on a motorcycle. Rented house – supporting his parents so paying Rs. 23,000 as rent.

These were too adhoc, so I did not want to be judgmental. So I asked him to maintain accounts for at least a couple of months before I could comment….and here are the expenses:

i was not as stunned to see this. This guy is about 28 years of age – works as an accountant – and as he himself admits, he is well paid. He is still a bachelor, says he is not a big spender – and has ZERO savings – except for some mutual funds (80C), nsc, and ppf.

I said my life style is very different, cannot comment on yours.

However readers are welcome to comment. He reads my blog….:-)

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This is a question that I am asked quite often.

Let me answer it like this:

There are various financial statements that an individual can make or must make. I will enumerate them here – some of them are MUST BE MADE, some are NICE TO BE MADE and some can make your life smooth:

- Goals statement: tells you your written financial goals, the path, and the time that it will take to achieve the end result.

-Income statement: Tells you what you earn – and from where- your business income, dividend income, interest income….etc. Looks easy on paper especially for a person with a salary income, it can be complicated for a business man!

Balance sheet: shows the asset and liabilities of a person as on a particular day.

Expenses Budget statement:  This tells you what expenses you are likely to incur in the next period – say a month, a quarter or a year. It is the estimate that you will incur – the more detailed it is, it is difficult to make. However when you compare it with the actual expenditure, you will know what you had estimated and what is actually being incurred.

Assets statement: A statement of your assets – could be all your mutual funds, shares, life insurance policies….etc.

Liabilities statement: a statement of all your loans – auto, home, …and what have you!

can really go on and on…all the abovementioned statements are very useful..albeit a little painful to create..

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About the Book : – To most people retirement is an age. It of course depends on your health, the company you work for etc. However in the first chapter I would like to introduce you to the concept that retirement is an amount of money! After all, if you have that magical amount why not retire early?

The second chapter takes you through the steps and importance of planning, and to the dangers of not planning.

Like any financial goal, retirement is also a goal and has to be approached in a financial planning mode. So Retirement Goal Setting becomes a very important and is perhaps the first step in Retirement planning.

How much money is adequate for a person to retire? Here is a generic answer telling you what are the factors to consider while trying to answer this question. This chapter has many pointers and a calculator which leads you towards the answer. Remember this is dynamic.

Can you really retire by investing an amount as little as Rs. 40 a day? The answer is yes it is the power of compounding. If you do have or time on your side, it is possible to create a retirement corpus on an amount as small as Rs. 40 a day. And the fantastic thing is that this small amount can be got by making very simple changes in your life style.

If you have accumulated money for your retirement, you should also know how to withdraw. Here we deal with what is annuity, what are the methods of creating annuities, what options are available, and the works about annuity.

Retirement savings and investments are invested in various instruments. A book cannot really do justice to all the schemes that are currently available- neither has the author attempted that. There are books specializing in information about investment products which are updated regularly – like In the Wonderland of Investments by Mr. Shanbag.

A few chapters are devoted to answering how much and what type of insurance should you look at during retirement, the attitude of the Indian family to retirement, the need to make a will, some retirement blunders, etc.

What is interesting are the tables at the end of the book telling you how much to save and invest – and case studies about portfolio make over for retirement.

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Budget, is normally a word which has negative connotations! If you see saving and investing as “consumption foregone today for consuming at a later date” you might see it in a different light. One of the challenges with proper budgeting is that it has to become habitual to be effective. You can survive without knowing how to budget if you manage to keep more money coming in than flowing out!

Once you set your goals, you should quickly see from where the moneys required for meeting you goals an come from. People often resort to budgeting after they have already been dealing with expenses. This article is about making that first budget and sticking to it.

Emergency Fund

The crux of this plan is the quick creation of an emergency fund. In general, traditional budgeting starts with tracking expenses, eliminating debt and, once the budget is balanced, building an emergency fund. Ideally, everyone should have at least one or two months’ expenses sitting in a money market mutual fund account for any unpleasant shocks. This emergency fund acts as a buffer as the rest of the budget is put in place, and should replace the use of credit cards for emergency situations. For someone who lives in a rented home and has only a modest amount of debt, an emergency fund of Rs. 40,000 may work fine. This is on the assumption that your monthly expenses are Rs. 20,000. If you own a house, a car and other things that can unexpectedly require cash infusions, then your emergency fund will need to be bigger. The key is to build the fund at regular intervals, consistently devoting a certain percentage of your monthly pay toward it and, if possible, putting in whatever you can spare on top.

When to use this fund?

You should only use the emergency money for true emergencies: like a medical emergency, a car breakdown, a house repair, etc. Covering regular purchases like clothes and food do not count, even if you used your credit card to buy them. While it’s true that you would save money if you used your emergency fund to eliminate credit card debt, the purpose of the fund is to prevent you from having to use your credit card for paying for the ugly things that life throws at you. With a proper emergency fund, you will not need your credit card to float you when something goes wrong.

Downsize and Substitute

Now that you have a buffer between you and more high-interest debt, it is time to start the process of downsizing. It is odd that the natural solution to “not enough money” seems to be increasing income rather than decreasing spending, but this backwards approach is very familiar to debt counselors.  The more space you can create between your expenses and your income, the more income you will have to pay down debt and invest. This can be a process of substitution as much as elimination. Although eliminating expenses entirely looks like the fastest way to a solid budget, substitution tends to have more lasting effects. People who cut too deep and end up making a budget that they can’t keep because it feels like they are giving up everything.

Focus on Rewards

Another trick that will help your budget come together faster is to focus on the rewards. If you are constantly looking at what you have to cut and give up, the very act of budgeting will become distasteful. A mixture of long and short-term goals will help keep you motivated. This can be as simple as saving for new curtains or something bigger like buying a car with cash. Some of your long-term rewards may just be benchmarks on the way to your overall goals.  Watching these goals become a reality provide motivation to work harder at your budget.

Find New Sources of Income

Why isn’t this the first step? If you simply increase your income without a budget to handle the extra cash properly, the gains tend to slip through the cracks and vanish. Once you have your budget in place and have more money coming in than going out (along with the buffer of an emergency fund), you can start investing to create more income. It is better to have no debt before you begin investing. If you are young, however, the rewards of investing in higher-risk, high-return vehicles like stocks can outweigh most low-interest debt over time.

Conclusion

Much like the disclaimers that come with exercise tapes promising to make you look like a body builder in just six minutes a day, it is possible that it will take you more than six months to get your budget balanced out. This all depends on your situation, including how much or what kind of debt you have. On the upside, just like people who begin exercising for the first time tend to see results sooner than regulars, you may find that your improved budget has immediate benefits for you. Even if it does take you longer than six months to get your budget turned around, it is time well spent.

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I cannot comment for every one, but too many people I meet are in denial about their financial needs for retirement. Most of us do not want to accept that we will buy 3-4 washing machines, air conditioners, refrigerators, maybe about 2-5 cars, at least one or two houses during our retired life! Imagine you retire at 49 and live till 87. Ask yourself have you ever lived 40 years in one house? have you used one car for 40 years? Ditto for all white goods…so you know what I mean.

And all this buying will happen with our own money – i.e. by selling our mutual funds, unit linked plans, shares, etc. and from our pensions!

Strong financial planning is the key to a comfortable retirement

If you’re planning to spend your retirement in comfort, you’ll need to rely on some pretty strong financial planning. You’ll want to take into account your current financial position and your anticipated retirement income, preparing for contingencies and unexpected expenses along the way. Then you’ll need to develop a strategy for setting aside money on a regular basis to fund your retirement financial planning and choose wise investments so your money will build as much as you need. It’s kind of a daunting task, and it’s no wonder that so many people planning their retirement are worried about the quality of financial planning available in the country.

Benefits of the top financial products for retirement planning – Critical need for Long Term Care Insurance.

There is a critical financial aspect of retirement planning today. If you lose the capacity to take care of yourself and require either in-home assistance or be transferred to a nursing home, all the financial resources you set aside when planning your retirement may be spent in just a few years on the cost of health care. Long term care insurance will cover the cost of your medical needs without jeopardizing the wealth you’ve accumulated for retirement or want to pass on to your heirs. Unfortunately no such insurance is available in India as of now.

From whatever discussion that I have had with a few insurance companies, there is no such plan in the near future also. Choosing the right type of life insurance is also part of planning for the financial circumstances of retirement. If something were to happen to you before you retire, you likely would want your spouse to still have the lifestyle and financial security in retirement you envisioned in your planning, and the right life insurance policy can ensure that.

happy retirement.. Did you know you could ‘Retire Rich Investing Rs. 40 a day?”. I will tell you how….soon!!

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“Whatever I do, my weight does not come down” and “Whatever I do I cannot reduce my expenses” – are commonly heard statements. If you are a doctor, a wealth guide, a financial planner, …you hear both of these statements. Normally people do not write down diligently what they earn, spend and invest. Similarly for reducing weight you need to maintain a food diary which will tell you what you eat…and then you can analyse the same.

Let us see what makes a good budget? In all the budget blunders exercies, the same few problems keep rearing their ugly heads. To avoid them, here are the important features of a successful budget.
1.    Categories that fit your personal situation and your families’ spending habits.
2.    Accurate income projections. Salaried individuals have it easy. In case of self-employed people – they tend to dramatically over/under estimate their incomes.
3.    Enough categories to give you a meaningful picture of where your money goes and where you might be able to cut costs, but not so much detail that tracking is a chore that you’ll soon give up. Breaking up of your medical expenses into doctors’ fees, and medicines is fine. But if you try further breaking up medical expenses into generic and branded – you might give up the whole exercise.
4.    Inclusion of expenses that don’t occur on a monthly basis, such as car maintenance, term life insurance premium, festival expenses, clothes buying, etc.
5.    Regular review of categories to determine if you need more or fewer, review of expenses, and brainstorming about ways to reduce costs in each category.
6.    Cash spending is a big leak in most budgets. Cash disappears quickly and if you don’t write down everything you spend it on, you will not have a clear picture of your spending.
7.    A minimum saving amount – at least till you build your emergency fund.
8.    Realistic written goals. Budgeting is about setting financial goals (saving for a down payment on a house, buying a new car, getting out of debt, saving for retirement, putting your kids through college, travelling, etc.) and finding ways to meet them.
9.    Identification of spending patterns you may not have been aware of when you weren’t tracking your spending.
10.    Most importantly, internal motivation and a positive attitude!

http://www.subramoney.com/book-written-by-me/

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Financial planners talk only of an income emergency. They do not talk about an asset emergency. When your assets crash and you are reluctant to sell at the current prices it is equivalent to not having the asset. For all your requirements in the next three years your money should be in assets you do not mind liquidating IMMATERIAL of the current price. Frankly to me it could include gold, money market mutual funds, arbitrage funds, FMPs, bank fixed deposits, or even in some equity index fund invested over a very long period of time – say 22 years, then, you should be indifferent to today’s price.

For most of your life you’ll want to set aside about six months’ worth of living expenses in the bank. That money covers the EMI, puts food on the table, and pays the kids school fee – should you lose your job. The fact that you’ll earn only about 4% is beside the point. This is a convenience, not an investment. You can’t take the risk. But once you have the basic cushion there is a tendency to invest it, correct? This was the most obvious thing to do. However 2008 makes us revisit this. If your daughter’s marriage is in 2011 normally I would have advised you to start withdrawing in 2010. Now frankly I am as scared as you are – I would happily start withdrawing from 2009 mid and keeping the money in an arbitrage fund with a huge corpus. Forget the returns and risk –YOUR goal is far more important is it not?

IF you were hoping to use your credit card as an emergency fund ask the Satyam employee whose credit limit was squeezed dry. A credit card’s ‘un-drawn balance’ may not be a great emergency fund. It was always the right idea to put money for near-term, big-ticket items in a safe place. But 2008 was a conspiracy against common sense. First, it seemed fussy and old-fashioned to deny yourself leverage and future growth by saving when your house and portfolio were appreciating at 30% a year! For a minute assuming your financial planner had asked you to sell, you may perhaps have changed your planner. It is tough to go against the tide!

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Most of the “killer” diseases have been eradicated or a cure found for. If you are in a household mentioned above, at your age of 72 years, you will still have to worry about inflation!

You will have to worry about – inflation, a long term care insurance (which will take care of your hospitalisation bills, day care, etc.), and a pension that takes care of all your needs – even if it needs a manager to take care of your money. I know one 72 year old who likes to keep all his money in savings accounts and bank fixed deposits. Asking him to invest in any other asset class is a nightmare and another 80 year old who happily keeps all his money in equity – his dividend income is far, far greater than his requirements.

Both may be extreme cases, but a 72 year old has a serious possibilities of living till the age of say 90 – in such a case – inflation is a serious worry.

May God bless his soul, but I hope he dies by the time he is 78, because I expect him to exhaust his savings – and he is not at all keen to take anything from his children.

In the course of my consulting I meet all kinds of people – excessively into equity, and excessively into real estate, debt etc. Please read about asset allocation and go only for a balanced portfolio – nor more than 60% in volatile assets like equities or real estate.

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Particularly when it comes to finances, constantly pinching pennies and saving all your extra cash is pretty darn boring. Which is why so few people do it well. There are too many fun things to spend money on.Yet, unrestrained spending (especially the kind that lands us in debt) is the antithesis to wealth creation.

Too many leaks in our cash pool leaves less to save and can ultimately put the lid on plans for our kids’ college, vacations, or dreams of leisure. A common solution — strict budgeting — scares away many people. Unfortunately, many of us go overboard on the fun stuff during at least one portion of our lives and land in a financial pickle. But you don’t necessarily have to turn to dry roti and onion, bicycle transportation, and radio to meet reasonable retirement goals — a little creativity can give a good balance of gratification now as well as a comfortable retirement later. You need to remember that investments made today are going to help you in consumption later on.

The case of the monthlies

What gets many people in trouble these days is in catching what is called a case of the monthlies. This is the compulsion to sign up for services that are billed monthly at what seems to be a very low rate for all the fun the subscriber gets from the deal.Twenty years ago, your average Indian subscribed to only a handful of basic services — the bare necessities of water, power, and a luxury named telephone. The story is much different today. In addition to the basics, today the average Indian is hooked on extended services such as cellular phones and broadband Internet access, as well as a handful of the many entertainment subscription options — cable TV, digital radio, video on demand, online music stores, etc. — that are all vying for your money. All the consumption is now converted into monthlies – it helps! The car salesman never tells you the price of the car. What he compares is only the EMI (another monthly!). Thus the car looks cheap.

Housing is also a monthly! And while most people hate paying for utilities, paid entertainment at least buys some fun in life. Why even that nice plasma television is only 2k a month! So what if it is 250 months? You also have to be careful about credit cards which allow you to pay on an EMI basis – pay 3k per month immaterial of how much you spend!

The monthlies can cost you dearly.

One way to see just how much of your cash is sapped is to annualize what you pay for services. Viewing it this way, your fairly reasonable Rs.250 a month balloons to a Rs.3000-plus commitment over the life of the contract. Add to this some tax, some add-ons etc. and you may be talking of a small package!It stands to reason that if monthlies are costly for consumers, then they are a boon for businesses offering them. Smart companies know that it’s easier for consumers to swallow a small monthly cost than a large one-time payment. The existence of small payment possibility is perhaps the single main reason why we have seen such a spurt in the mobile phone business. The recurring nature of monthly payments to businesses also makes them attractive to investors due to the stable cash flows.

Simplify and justify For most consumers, the problem is not necessarily in signing up for a lot of monthly services.

It’s more a matter of blowing money on services they hardly use in the first place. To make sure you’re getting the most fun now while saving some gratification for retirement, consider a few fresh approaches to the monthlies:

Avoid contracted services unless you’re certain that you will realize the entire value of the contract. Paying that annual membership contract for years will have you kicking yourself if you stop going after three trips. Know your options, too.

Make the most of trial periods for new services. Test out new entertainment or utility services such as cell phones and cable/satellite television immediately to make sure they’re worth the money before you get locked into payments. If you’re not thrilled, cancel during the trial period.

Periodically question why you are paying for services. You may realize, for instance, that you no longer need to pay for access to download music if you’ve already gathered a large enough collection of songs on your MP3 player.

Consolidate redundant services. Many entertainment options now overlap, so you may be paying several different companies when you could actually pay less to fewer companies for the same services. Another important step is to scrutinize your monthly entertainment and utility expenses. For some, unlimited movie rentals with a library might be a wasteful indulgence. In other cases, however, a subscription may actually save you money — particularly if you rent two movies a weekend at Rs.140 a pop from the local library – making it a smarter choice in the long run.

Keep checking what is your net-worth on a regular basis – go to www.myirisplus.com

Bringing it home

Everybody has different thresholds for justifying their spending — just make sure you’re honest with yourself and that you’ve considered all the options. If you do, you’ll likely find opportunities to cancel a few services and free up some cash. Also, you may find it easier to resist the temptation to sign up for a gaggle of new monthlies.

Of course, all of this effort doesn’t do squat for you unless you complete the very last step — direct extra money into your savings if you wish to build a cash balance and invest if you wish to build a corpus. Cutting out recurring monthly expenses only to squander the cash in other ways defeats all your efforts.

A good practice is to automatically increase savings into your savings or retirement funds as you lop off any monthly expenses — so you don’t even realize you’ve freed up extra cash.

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