Well what are the major ways a person breaks / destroys resolutions? Not sure about the other resolutions – but financial resolutions are destroyed by the following people behaviour:

1. Missing out on the SIP payment: Some people promise to start, but just do not start! Either they wait too long or miss out two or three payments. In some cases the mutual fund house terminates the SIP and then the person does not start it again!

solution: instead of doing one SIP of 3X do 3 SIPs of X each. In case of a cash crunch one or two SIPs will fail…but at least one will go on smoothly.

2. Underestimating their ability to invest: When a person says ‘I can invest Rs. 40,000 in a SIP’ I do not ever say..’Why not 50k?’ . After a few months when i see their Savings bank account and a big sum is accumulated, I tell them “If you had invested Rs. 50k you would not have missed the 10k …see the extra amount lying in your SB a/c!

solution: same as 1. Stretch – if you cannot meet the requirement for one or two months, you would still have stretched for the other 10 months, and created a bigger corpus. As soon as you arrive at a number, just up it by 20%. It works.

3.  Buying on Impulse: Buying things on impulse is normally a sign of not planning. If you cannot control this, go out of the house WITHOUT your credit / debit cards. Just carry some cash…this will prevent a Rs. 30k impulse…but will allow a 2k impulse!

4. Withdrawing on Impulse: Withdrawing cash from the ATM should always be on some particular days – say every Friday you withdraw 12k…this will ensure that all your CASH expenses are within Rs. 48 a month. Please put in your own numbers, but make it a pattern.

5. Having to much debt for all kinds of reasons: Having debt for a house, car, home improvement, European vacation…can hurt even if you are paying all the installments on time. Try to reduce the number of reasons to borrow for, if possible consolidate all the borrowings.

Now go ahead and fulfill all the resolutions – you know what are the pitfalls

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Good job, Surabhi..but I got only the last part of the program…and so will not comment anything about the program content!

However, here are some of my thoughts on debt…

Today it is very easy to live beyond ones’ means. If you take any magazine you will find about 15 advertisements – of this about 14 will extol you to live beyond your means. If you can afford a Ford Ikon, they will urge you to buy a Honda City. If you can buy a Honda City, they will push you to an Octavia.

If you tell a real estate broker you are looking for a house for 6 million, be prepared to shell out 9 million!

All of this is easy – because there is a huge push to make you think in EMI language – not full price language! Sir a Merc is available for “only” Rs. 54,000 p.m. as EMI!

What are the indicators that you are living a little beyond your means? They are as follows:

a. Your cheques are bouncing! This is perhaps the worst indicator that you are issuing “rubber” cheques…so this is not a good idea.

b. Your credit score (currently in India you do not have a copy of this) is falling and the people who have lent or wanting to lend to you are hesitant about default and are increasing the interest rate. Speaking of credit scores CIBIL is the place everybody likes to go to…but there are others and they are FREE. At Cibil you pay some charges.

c. You are saving less than 15% of your salary! This is SCARY, very scary there is little elbow room, beware!

d. You are charging everything to your credit card and are paying only a part of the amount! I hope you noticed Hdfc bank has raised the interest charges to 3.25% p.m. Translate it to a per annum basis and you will not be far away from a number which is half a century!!

e. You have 4 credit cards and you are borrowing from one card to pay the other 3!

f. More than 30% of your earnings are going towards EMI payments – and these are all long term commitments

g. You have no emergency fund, losing your job is one of the nightmares you go through regularly, one small repair like having to replace your car tyres can create hell for you!

h. you are happy visiting your parents for 10 day vacations because you can save some living expenses

i. if you will touch your parents’ kitty for your purchase of car, bike or your marriage expenses

if you have any of the above mentioned problems, you need to set your financial house in order. TODAY.

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Me: Sure..what is it regarding

Caller: a mutual fund NFO

Me: You know my stand…why are you even THINKING of coming…?

Caller: No sir need a favor…

The caller is a small time mutual fund and other financial products distributor who does some general insurance, life insurance, and some miscellaneous work. Since I know him for about 12-15 years, and he does some odd work for me, this conversation went so far.

So he came and said “I need all the 5 names and 5 cheques from your house – Rs. 1000 each in an NFO.

Me: No way how I am investing in one nfo with 5 applications of Rs. 1k…not worthwhile. It is painful to fill the form, issue the cheque, keep track of the application number,….too painful.

He said: Sir I have taken a target at the highest slab. I am getting Rs. 750 per application – this is more than enough to set off the loss that you will make in case there is loss on listing. You need to just sign, my software has all the details and can print out the form – and since you are Kyc compliant, there is nothing to be attached. So Sir, please 5 cheques, 10 signatures…and I will make Rs. 7000….really nothing to lose for you!!

Another successful Mutual fund sales call had been closed. Everybody is happy….so let us all be happy!

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Banks and builders are both looking at softening of interest rates so there seems to be a rush to push the loans to you. Also Diwali is a time when people look to finalize a house so that they can complete the buying, do up the house and shift before the academic year starts. So Diwali is a good time to try to push real estate sales. One builder I know has announced a 10% (Vow!) price rise soon as the Diwali week is over.

In an attempt to hasten closure, builders, brokers and banks are rolling out festival schemes on home loans ahead of Diwali. DCB has broken the 8% barrier mark and introduced a fixed rate of 7.95% p.a. for the first year. Other offers from banks are offering rates and dangling a carrot of allowing a shift from fixed to floating rates in subsequent years. Other lenders like Canara, Bank of and Maharashtra are offering fixed-rate loans for the first five years, and subsequently, linking the loans to their prime lending rates. Some are offering a fixed rate for 2-3 years at teaser rates.  Big daddy SBI is offering fixed rates for the first three years. Competition has ensured a good deal for the end customer. Dena Bank offers a fixed rate of 8% for loans up to Rs 30 lakh in the first two years, while Canara Bank offers 8% in the first year for Rs 30 lakh and SBI offers 8% for the first five years for loans up to Rs 5 lakh.

A few builders have agreed to absorb the processing fee if the client closes the deal within a particular time frame. Now, builders and lenders are making a fresh pitch to push sales during Diwali through limited period offers. Good offers are coming from PSU banks too.

In the home loans and home improvement loans markets the big boys of Indian banking industry – Hdfc, Icici, Lic Housing and SBI have beaten the pants off the ‘foreign’ banks. Thus the Citi, Stan Cs of the world are not in the market at all. Now it is the turn on the PSU banks to announce all the concessions on home loans and home improvement loans.
Bank officials are hopeful that the retail credit growth will contribute substantially for the credit demand in the coming quarter.

Their hopes are greater in smaller towns for home loans and home improvement loans – like auto loans.
Personally I do not think it is a great idea to borrow money for a home improvement need. Clearly expenses like painting the house, making small improvements etc. should be treated as a part of one’s expenses. Money for such expenses should come from current income not from future income. There is an argument even for buying a house from own money rather than from borrowed funds, but home improvement money should come from own income not even from own capital!

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If you belong to that class of employees who gets a bonus at Diwali time, lucky you! Today you would be sitting on that bonus in your hand and the whole family would have a claim on that.

Who are the claimants on this bonus? Lots in fact!

Thanks to the fact that companies want to look good, they may not cut all the income tax that is actually due on the bonus. Thus if you are in the 30% slab and the company has deducted only, say 10% tax, first set aside the balance tax payable in a money market mutual fund or a bank account – this amount actually never belonged to you, so cool it!

Many people anticipate the bonus and spend on the credit card- which means that payment will be due in 45 days. If you have spent on your credit card, pay it off in full, as soon as you get the bonus. Even non-Diwali purchases sitting on your credit card should now be settled in full. Makes sense to pay off the most expensive debt as soon as possible, correct? Even if the credit card amount is due only after 15 days pay it off TODAY!

What is true for a credit card debt is also applicable to a personal loan that you are paying off slowly. Use this money to accelerate the repayment of the loan. In case you are struggling with a floating rate home loan, use a part of the bonus to pay down a part of the loan so that you reduce the tenor of the loan.

If you have decided to make some purchases specifically with this bonus go ahead and do it. Hopefully you have gone on to the net and done your short-listing before you make your actual purchase.

Having said all that, in case you have no liabilities, rejoice! Then you have some better choices with the end use of your money.
When ever you get a lump-sum (I mean post of tax) and you have an urge to splurge – split the amount into 3 parts.

One part you should use for current consumption (Diwali gifts, clothes, sweets etc.) put one part for your deferred consumption (say your pension accumulation) and use the third portion to pay for some shorter term goal – say as a part of the down payment for your car purchase. Thus a portion goes into immediate gratification of needs, one to a slightly deferred gratification of needs and one to a more deferred gratification! Remember that your retirement money is there to feed you when your earning capacity is limited or zero.

It is always nice to work towards a goal – upgrading a car, upgrading a house, having an emergency fund, children’s education, retirement corpus building, repaying a home / credit card loan are all goals towards which most of us have to work. So use your balance money to do any or all of these and the excess money can be splurged at Diwali.  One important thing to remember is that many people in our country cannot afford Diwali expenses – and crackers make many elder people ill. So in case you have been feeling nice about your portfolio going through the roof and feel like giving some money for charity, now is the time.  My daughter’s school and friends have brainwashed her – she says no to all types of crackers – noise, smoke, scares birds, scares animals, etc. – but it is your call!

Yes, this is also the time when you actually have some money to give to charity. Donating some part of this money to a charitable trust would be good. Visit www.akshayapatra.com and make your contribution.

Also remember that when you have money many people would like to take it away from you promising returns that are in the stratosphere. Be careful of these “un holy” kinds of returns. In case you think these returns are too good to be true, you are correct. Be careful. Diwali is also Lakshmi Pooja day – be respectful. Use wealth wisely, protect yourself from cheats – financial education helps!

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Every cheque that you sign is either an expenditure or the purchase of an asset. So your golf kit, car EMI, interest on the home loan, jewellery, your Merc etc. are all expenses. The reason why we call it an asset is simply we do not want to admit (some times to our own selves) that these are expenses! Some of these ‘assets’ are show off assets – buying a house in a vague location, a big luxury car, a bigger house,..are all show off assets.

However if we do a small SIP in a mutual fund, or take a life insurance policy, or buy national savings certificate – these are all non show of assets (I cannot show off my Rs. 20 crore life insurance policy, can I?).

So unless customers meet good financial advisors – and understand the good financial habits part, invest regularly in good  SIPs for the long term….they will have to worry!

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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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Men and women may not be on equal footing when it comes to investing for the future. On average, women work fewer years and earn less than men, but they also tend to live longer. Therefore, women must focus on the concerns that are unique to them when planning for retirement.

Married women do not actively participate or take the leading role in managing family finances.

Problem areas: Pre-marriage money is spent on the wedding!

Many women abdicate money management responsibility to the men in their lives – father, husband, brother, son – and rarely take it upon themselves to manage the money. In most cases they are the primary home makers. So they take a lot of time off – rearing children, looking after the elderly or ill people in the house is seen as a woman’s job. This often means that women have lesser money in the provident fund, less contribution in their public provident fund, – less amounts are available for compounding.

Women on average live longer than men, so they must provide for more years in retirement than their male counterparts.

Women Live Longer
Finally, because women generally tend to live longer than men, – they will spend more time alone in retirement and may have exhausted their money on the health care of the departed partner. There are many reasons why women have to manage their money on their own – being unmarried, divorce, widowhood – are the chief among them.
Recently women have started earning more. However they do not actively invest their own money. Hopefully this could mean that women may start having a greater say. Some women think their husbands are not responsible with money – such women handle their  own money.

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Have you borrowed for your house?

They jump and say yes. My house cost me 93 lakhs – i put Rs. 12L of my own and borrowed Rs. 81 lakhs…or so goes the discussion.

Is this a home loan? They say yes. I ask them what is the security that you gave…they think it is the house. It is not.

You do not get a house loan, a car loan or a personal loan. What you get is a loan against your FORM 16 – it is an assumed capability to create income in the future ALSO.

So your biggest asset is ‘your ability to create the net cash flows which can repay the loans’ – that is your earning power.

What can affect your earning ability / power to bring in the cash flows?

Early death, Critical Illness, Disability – and these are the risks that you run. Thankfully these are all insurable risks.

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Unfortunately, an insufficient secondary market may prevent the liquidation or limit the funds that can be generated from the asset. And in a market with very high transparency and poor liquidity the problem is increased – like a set of brokers who know you are trying to sell a house.

Some assets are highly liquid and have low liquidity risk (such as shares of a listed A group company), while other assets are highly illiquid and have high liquidity risk (such as a house).

A humorous definition of liquidity is – the moisture in your eyes when you look at your portfolio!

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