I meet all kinds of kids – and it is worth seeing their attitude towards money and their parents….

Some kids think that their parents owe them a living! Some kids hate spending their parent’s money – even a farthing!

This is not about their attitude, it is about their ability to communicate with their parents about money. Recently I met one kid who has got admission in an institute where the total expenses are about Rs. 3 million for the whole course – it is a 2 year course.

This boy wanted to know the following:

1. Can my dad really afford this?

2. How much of an impact will it make on his retirement corpus? (father is in service, and will retire in 7 years time)

3. Should I repay this like a loan or is it a gift?

4. If I take a loan will I be able to repay it….and is that a good option?

5. How do I decide whether to do this course at all – personally I do not have so much money to invest/spend?

I was really surprised (actually sad) that this boy needed to ask me (a rank outsider) all these questions! His parents should be answering these questions…..well er…the kid should have already known these answers, right?

For example I knew my Dad’s salary, savings, investments….etc. right in my 12th class. At that stage I could influence his portfolio, now I fashion it!

Then I realised that not all parents are so open about their money arrangement. Not sure if it is a matter of wanting to be secretive or what – but it is nice to let the kids know what they can afford and what they cannot. I knew what my dad could afford – if I had got admission in IIT or MBBS he could have paid the fees without batting an eyelid. I am not sure if I would have asked him to pay capitation fee – but I am sure he could have afforded it. Like a typical Tam brahm family it would have been easy to find Rs. 100,000 (remember 1980 figures!) for an Ivy League education, but would have found it difficult to find Rs. 20 for a movie (LOL)…

Parents should either do a full disclosure or at least tell the kids:

- I have about Rs. 3 crores + a house, and a nice job.

- I will happily pay Rs. 30 L for your education as a gift and am willing to give you a Rs. 20L interest free loan in case you need it, but not a penny more.

- I am not too keen to sign a bank guarantee in excess of Rs. 20 L (instead of the int free loan mentioned above)

- Remember I need to do all this for your sister also . Both my kids share my love equally, but education expenses will be on a NEED basis, subject to the same rules.

- I will pay your medical insurance, vehicle insurance, etc. till you are comfortable in your cash flow (once you start earning)

- If you earn anything up to Rs. 10k a month, it will be all yours – and you can fund all your fun activities…once you earn a sensible amount, I want you to repay the loans that you owe me (edu expenses above Rs. 30L)

- of course, once your salary exceeds Rs. 7 lakhs, I expect you to pay rent, pay for food, and pay for OUR vacations too

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Let us see some comments:

1. At this point if you are afraid of the markets you should shift to a RISKLESS portfolio of debt funds, FMP and bank deposits.

Yuck, yuck, yuck.

If a 24 year old is saving for her retirement – or anything which is 5 years or more duration, this advice is cruelly inaccurate. I would have said laughable, but somebody may actually listen and shift to a debt portfolio.

2. People who do not want to take risks should shift to a riskless portfolio of debt funds, FMP, and bank deposits.

If the speaker/ anchor does not know / realise that getting NEGATIVE RETURNS (especially over long periods of time) is A HUGE RISK, he/she will make such comments. For a person investing for a 3-4 year horizon and the ability to weather storms in the interim period, this suggestion is stupid and obviously wrong.

3. As your age increases, you should invest more in debt funds rather than in equity funds.

My take: yuck again. This is only broadly true – while implementing the total amount available, the total expenses, how well the children are doing, whether there is an indexed pension, all these factors have to be considered. Do not use it like a truism!

All the three pieces of advise can be right for a few people and completely wrong for a lot of people. The way people say it it looks like a statement that is always true. Statements like ‘Sun rises in the East’ – is always true. However these statements are not ‘Always true’. At the time of retirement for example there is NO NEED TO SHIFT EVERY THING TO DEBT. You will need to tackle inflation, ability to withdraw during real bad times, ability to handle stress in a market going down for say 10 years etc….

Please understand the difference between ‘has not happened’ and ‘cannot happen’…- risks of watching the media, perhaps? LOL

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Let us call him M.D.

He bought a house in Navi Mumbai for about Rs. 80 Lakhs, – of this about Rs. 55 lakhs was funded by a loan from the State Bank of India. Over the last 4 years he had paid a lot of interest, but the principal outstanding was still Rs. 52 lakhs.

He was also doing some SIPs which had seen an amount of Rs. 33 lakhs, but now in this market was worth Rs. 30 lakhs – not too bad, but the IRR was not too great. He does not have any debt investments except his LIC endowment policies – and all the policies are together worth Rs. 30 lakhs.

So far fine. He just lost his job with effect from December, 2011 or Jan 2012…..

He will have to find a new job, NOW and immediately.

What is at stake?

Household expenses (including children’s school fees) …….Rs. 100,000

EMI                                                         Rs. 52,000

His needs are as follows:

Rs. 1.5L x 12 = Rs. 18L – assuming he gets a job in 6 months, he will need Rs. 9 L.

He is about 53 years of age – he needs to have his retirement corpus in place. He knows that jobs paying Rs. 25 lakhs and above are almost non existent especially in Sales and Marketing unless you are willing to take aggressive targets. In the bfsi space perhaps it is only a bank that will take him. How does a 53 year old join an aggressive and young bank? Not so easy….

He can always sell his house (he thinks it has appreciated, my take is the appreciation is LESS than the interest paid on the loan..but yes that is a choice. Options are few and far between in the jobs. Most people expect a 53 year old to be holding a technical qualification or an address book of potential clients…he has neither…

What does one do? Looking for answers…

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He talks of his father selling his land. He talks of not having a house to live, but still studying for his IAS.

His father says I would have sold my kidney to make my son an IAS officer. And the son says proudly that his father used to go walking, but insisted that the son should go by auto…because he has an exam.

I quite liked the sacrificing spirit. However, I did not like the video on 2 grounds:

1. The father (and presumably) son duo did not know anything about IAS as a career – except that the guys had tremendous power.  Normally to the normal person authority means huge sums of money (this is a Bihar story, so dowry too).  If he is planning to be an honest officer, is this job of a great attraction? Frankly I do not know or do not have an answer. After all each person has to answer that question for himself / herself.

2. Parents spending on kids is fine, but within limits. For one such ‘success’ of getting into IAS, surely the world is full of IAS dropouts and rejects. How will such fathers recover their investments? I really do not know. Even this kid did not look like a 22 year old. He must have been about 26-7….so there is an opportunity cost also.

Should parents sell off everything to educate their children? Not asking people who have money for EVERYTHING…

Asking those parents who have (say Rs. 5 Lakhs) – should they give it to his FATHER who needs the money for treatment of cancer, or his daughter who wants it for her MBA (or marriage) or use it for his own retirement?

Not easy answers, needs some soul searching and cruel decision making powers. To me it is scary!

3. Also look at the huge risk involved. If the son has an accident (therefore incapacitated to hold a job, or dies) what happens to the father’s old age.

It is easy to applaud the results of a risky journey, it takes a risk manager to understand the risks that the person undertook while doing the trip.

All the best to the IAS officers…and may this kid do well.

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Name:  hidden           Age: 23          Profession: Service
1. At what age do you plan to retire? Have you started saving for retirement?

I plan to retire when I have accumulated enough money for my post retirement life.* And yes, I have started investing for creating my retirement corpus. I have invested in a couple of Systematic Investment Plans – one of which is a tax saving scheme (Elss fund) with a leading fund house.
(the schemes are x and y)

2. Do you know how much you will require after retirement? How have you calculated the amount?
I have attempted some crude calculations – but the whole event is so far away that I do not think the figure is anywhere near accurate! Have not bothered too much about the accuracy – but I hope to accumulate about Rs. 5-6 crores by the time I reach my 50s. This will happen by stepping up my SIP from about 9000 presently to about Rs. 100,000 per month by the time I am in my 50s. Have realized that the earlier I start and bigger the amount, the greater will be the corpus*. My expected returns are in the region of about 14%p.a. – or in any case a rate superior to Public provident fund which will yield about 8%p.a. I have no clue whether I am accurate, but in the past 9 months I have got about 13% on my SIP.

3. What products have both of you invested in for retirement savings?
No products have been specifically earmarked for ‘retirement savings’ but apart from my equity mutual funds, I have a Provident Fund which is a debt product, but my contribution is compulsory. I have a PPF in which I have put Rs. 1000.

4. How much do you plan to save for retirement in a year (please give % break up for different options if possible).

I would like to earmark at least 10% of my net income for retirement – currently the earmarking is in the mind*! As time goes by and I need to withdraw for other goals, I will ensure that the money retained for retirement is sufficient for retirement. Currently all my mutual fund SIPs are in equities and my provident fund contribution is in debt instruments.

*This is the learning from Retire Rich: Invest Rs. 40 a day!

Thank you girl! At your age, I wish I was half as evolved as you are! God bless you…

PS: have seen her for one year….not sure whether she will do it for a few years…to be brutal. However as a friend I hope she does it…good for her!!

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Here are some more resolutions – on the WILL NOT DO side!

1.    I will not buy anything on a credit card unless I can pay it off in full on the due date.
2.    I will not buy any product before I understand the why, when, how of the product.
3.    I will not buy things or services to show off to friends who are also doing the same!
4.    I will not buy a ‘branded’ product unless I can see the Value in what I am buying.
5.    I will not change jobs just to get a higher salary
6.    I will not invest in any financial instrument without increasing my knowledge
7.    I will not buy any asset beyond my means hoping to pay a higher EMI from an increased income.
8.    I will not mix my investments with my insurance IMMATERIAL of how attractive the transaction looks!
9.    I will not marry a person who is financially incompatiable with me.
10.    I will not assume anything in the financial world – will check using present value and future value before taking a decision.
11.    I will not buy a house ‘because it is conventional to do so’. Will buy a house when I am convinced that I am planning to stay in it for more than 10 years at least!

Most important:  Properly stick to all the resolutions!

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· Too many people I meet are Income rich and balance sheet poor: If you earn Rs.1, 500,000 a year, but spend Rs.1.503, 000, you are broke, worse off than the person who earns Rs.500, 000 but spends only Rs.450, 000. You may be income-statement rich, but you are asset poor. Not enough people are able to realize that the amount of money in the retirement or pension kitty and the amount of life insurance is a function of your CURRENT life style, not the lifestyle you had 5 years back. Financial security comes from being able to live off your assets – and not need the job by the time you are 45.

· Start learning about money – it is not a difficult task. Start taking interest in how credit cards work, how to live within a budget, mutual funds, unit linked plans, financial goal setting, making a will, etc. Managing money is not in any academic syllabus at any academic institution, but you still need to know it. So go ahead, and learn. More importantly, for the women who are reading this article please ensure that you learn about money and encourage your friends, colleagues, daughters, daughters in law, etc. to learn about money. Money is not a “man” thing as much as “cooking” is not a “woman” thing.

· Don’t confuse debt with wealth. If you buy a Rs.8 million house with a Rs.7.75 million mortgage, you are not worth Rs.8 million. You are Rs.7.75 million in debt. Last week when my broker bought a car, he did not borrow any portion of the Rs. 14 lakhs that he needed to buy it. His logic was simple; many of the investments that he had made would yield him less than 15% p.a return – including his PPF. His logic was why should you borrow at a rate higher than the rate at which you lend? Most rich people do not borrow because they do not have money. They borrow because their assets are capable of earning much more than the rate at which they borrow. And as Robert Kiyosaki says in his book the rich buy the boring (my terminology) assets first and then use the income from these assets to buy the “luxuries” that we cannot live without.

· Get good advice: And then listen to them. A great portfolio manager manages my equity portfolio – and he keeps giving good results in all kinds of markets. My role in the good performance of my portfolio is simple – I let him be. Financial advisors like doctors are busy and they like involved and non-interfering clients. You may need a financial planner, a portfolio manager, and a banker. Or a simple mutual fund distributor. Once you have found a good advisor, trust her to perform.

· Retire gracefully: Plan for your retirement. Retirement is an amount of money, not an age. If you are a business owner, for instance, don’t assume you will be able to sell it for the “right” price when you are ready to retire. Keep shifting some money from “business” to the “personal” bucket of finances. Rather than put all your eggs in one basket, set aside a percentage of all earnings in conservative assets to help guarantee a secure retirement, no matter what happens to your other assets.

· Protect with life insurance. is the item that people pay attention to only when approached by an agent. Life insurance is a tremendous tool to help achieve distribution goals, all generally income-tax-free. It puts tremendous amount of liquidity and gives peace of mind. I know men who have constantly told their wives “use the life insurance money to pay off the mortgage if I were not around”. I would rather have guys telling their wives “I have a life insurance policy and Saki is our financial planner. I trust her, and so can you. Ask her how to collect the insurance money and consultatively chose an investment option. Use the notes we made at the financial planning seminar we attended”. Ha, that will be the day. If you do all this, will your wealth give you security? Well there are no “assured return” schemes any more. You need to keep learning and trying. However, by addressing the above issues, you can dramatically increase the potential for turning the wealth you’ve achieved into long-term financial security for yourself and for your loved ones.

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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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Psychological Impact of inflation is quite harsh on the investors and savers. Economic theory says when inflation is high, people will tend to spend more – because there is no incentive to save. This is true to a very limited extent. Most people get so scared that they start saving more and reducing their expenses. Let us look at a person who is targeting a post retirement income of Rs. 120,000 per annum. If the retiree is told that this will not be enough, he saves more – instead of looking for an asset class which gives a positive real return over longer periods of time.

It is inflation which makes even ‘evergreen’ schemes like Public Provident Fund look like a bad scheme in the long run!

Ronald Reagan warned us to be ever vigilant of a threat “as violent as a mugger, as frightening as an armed robber and as deadly as a hit man.”
Just what was he talking about?
It wasn’t Iranian terrorists… A Russian nuclear sub… Or Osama!
No. Reagan was talking about the thief that robs us all… Inflation!

What impact inflation has on your portfolio is a function of the type of portfolio that you have created. The savings portfolio (bank fixed deposits, national savings certificate, public provident fund, kisan vikas patra, postal schemes, company fixed deposits, gold, etc) will be eroded by inflation. If returns remain constant, and inflation is positive (which always happens in a growing economy) the returns and the principal are both not keeping up to your requirements in ‘real’ terms.

Investing in shares and trading in real estate are perhaps the only assets which gives you a protection against inflation. Buying one house and living in the same house for a long period of time is a good saving asset, but not a great investment asset. However, if you buy and sell real estate, give it on rent, leverage against the forthcoming cash-flows etc. you will be able to get returns in excess of inflation.

Investing in equity shares – either in direct equities or through mutual funds – protect themselves against inflation.

This happens because in the longer term at least a company’s sales and profits after tax should increase at least at the same rate of inflation. The skill for an investor is to realize that inflation is relentless but equity growth can happen in fits and start – this can test a new investor as well as an impatient investor. The other worry about the income of a company is the income gets overstated during inflationary times. It is important for the investor to know the difference between nominal growth and real growth. Estimating the income of a Information Technology company and seeing whether it is doing well should be done without the impact of exchange rate. Similarly it is necessary to find out the impact of inflation in the results of a company –especially over a long period of  time.

Another problem that inflation creates is that it increases costs – and this slows down the economic development. Higher interest costs increases higher expected returns on the riskier assets. This makes it difficult for entrepreneurs to raise capital – and slows down the capital formation too. Sometimes this leads to a financial contraction – leading to a supply side inflation too.

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However is a good list of resolutions that you can make – it is really useful if you made it already, just reiterate it, and follow it! So here it goes

1. I will write down my financial goals – NOW, IMMEDIATELY.
2. I will convert a big portion of my savings into investments – especially if you are less than 55 years of age.
3. I will live a simple, frugal life by choice – but choose my dream career.
4. I will start saving/investing for my retirement – NOW IMMEDIATELY.
5. I will have regular conversations about money, saving and investing with my colleagues, friends, spouse, kids and parents – all people for whom I feel financially responsible.
6. I will not deal in direct equity with my current level of knowledge of equities.
7. I will increase my financial knowledge – inter-alia by visiting www.subramoney.com, www.myiris.com, www.moneycontrol.com, and such other sites.
8. I will maintain my income and expenditure details diligently and keep reviewing them.
9. I will maintain proper records of my assets and liabilities, understand the risk of each asset class, and do proper asset allocation.
10. I will protect all those people dependent on me. Will review my term insurance, medical insurance and retirement and make sure it is up to date and adequate, and the nominees are current.

Most important:  Properly stick to all the resolutions!

Over the next few days I hope to elaborate on all the above resolutions.

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