Investment Objectives & Advice

8 Steps to put you towards your financial Independence

We have talked about ways to personalize our portfolio to make the most from our investments. Most of us run our life from pay check to pay check and spend our life in this earn & pay treadmill. We get exhausted with our office work because even if we do not like it, we can not leave it due to the expenses. This Dussehra, we will learn about the 8 steps to push us in the right direction to achieve the financial independence. If you follow these steps for next 5-10 years rigorously, it will take you towards a more confident and independent financial life. If we are able to save 20 years of working life by focusing on things we love to work, isn’t that a wonderful thing.

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  1. Start Today: Procrastination is the biggest enemy of our financial well being. We keep on pushing our investment journey due to we are not able to save or we do not know which funds/ stocks to buy, we do not have a trading account, our KYC is not done and so on. Stop delaying it further and start today. What ever is feasible including Recurring deposits or fixed deposits, Make your first investment today. Call your investment adviser in this week/ month to set you up with KYC and start your investment journey. Ample number of times it is told that starting early has many compounding effect e.g. to get 1cr in 10 years you need to invest 43k per month but if you start early then 10k per month can fetch you 1cr in 20 years @12%. Do it now!
  2. Be Money Aware: Lot of people i speak with complains that they are earning less and it is in-sufficient. I always ask them to do one exercise, i am sure you will feel amazed after this. First write down the amount you think is going to be good to have in your bank account today to make you comfortable, be genuine. Then just calculate your life earnings till now, include everything from your first pay check to pocket money you got till the most recent bonus you got. If you are in your 30s or 40s, i am sure you must have earned at-least 40%+ of the amount you wrote in step 1. This shows you have earning capability but just not able to realize it. Do this exercise on a half yearly or annual basis. Write your Total life earning and track it, At the same time also track your own net worth (Total savings including your house, MFs, Deposits, Insurance, car etc).
  3. Understand your cash flow: This is a critical step because now you know “How much you have earned” over years as well as “How much do you have today”. The only piece of the puzzle missing is that where did the rest go. We do have some necessary expenses as well as some lifestyle expenses but there are some unknown holes in our wallet, which we are not aware at all. It can be compulsive shopping of clothes/ books/ gadgets or dine outs. Write down your expenses for few months, just write it down to the last ’00s and tally that you account for >95% of your money at least (Salary – Listed expenses) cash remaining in account should be closer to your calculation. Do this for 6 months and identify the holes in your pocket and plug it. remember that 1K saving for 20 years means 10Lacs. I am sure you will save many more than just 1K each month.
  4. Focus on RoA vs RoI: If you have done the first 3 basic steps, then now we should focus on the common mistakes people make. They make one SIP of 3-5k and put a whole lot of pressure in making sure that this gives them the best returns like 12-15%. if it returns only 10%, people will start asking should i change my fund or move from large cap to small cap etc etc. while their other investments like the real estate/ plot/ Traditional insurance policies/ money put in savings account/ gold jewelry bought etc are giving them 4-6% are still there and continuing. This is the main reason of misery for most people. Overall portfolio of all assets giving 8%+ return is much better than 10% portfolio giving 20% returns. Try to optimize your return on your assets but moving the correct asset categories.
  5. Respect Asset Allocation: When you look at asset allocations, Time in hand can not be the only criteria to decide the asset allocation. It has to align with your risk capacity, risk appetite and market scenario. This should help you determine your allocation to Equities vs Debt instruments. Allocation to gold/ real estate should come out of your debt component. Gold should be used only based on the its requirement like upcoming marriage etc, while real estate can be due to own use purpose or for rentals, make sure the returns are at least better than the debt fund returns.
  6. Don’t give up to Peer Pressure: When we are called social animals, it is primarily because we always look for approvals of our actions from society including spouse, parents, relatives and friends etc. Even when some people know that renting the house will be better than buying the apartment, they still buy due to pressure from society. Make your check points to follow before making this decision. below are my check points. For house buying:
    • You want to stay in the city for long term 5+ years at least
    • Net Real estate (House price – Loan taken) should not form >30-40% of your total assets
    • You should not get Home Loan EMI >35-40% of your net take home salary. You can reverse calculate your budget by If you have 1lac take home monthly, you can take EMI upto 35k per month. Current EMI rate of 881 per lacs@8.7%, you can afford loan up to 40lacs for 20 years. so house in range of 53-55 lacs only. for DINKs it stays 35% hard cut-off
    • Try buying from RERA registered near completion apartments if not already build apartments
    • Check the rental yield of similar apartment and check the PV of the apartment rental with 5% growth and 90% occupancy for 35-40 years period @8.7% should be closer to the apartment value.
  7. Avoid Credit Traps: “With great power comes great responsibilities”, In today’s world when credit cards are in bulk and people are taking multiple cards. The ease with which loans are available, it is unprecedented. {According to the Reserve Bank of India(RBI) data, total outstanding personal loan amount with banks stood at Rs 5.89 lakh crore in May, 2010. This amount rose to Rs 19.33 lakh crore in June, 2018. Consumer durables loans’ as of May, 2010 stood at Rs 8,138 crore, and rose to Rs 20,300 crore as of June, 2018. The outstanding amount on credit cards was Rs 19,579 crore as of May 2010, and grew to Rs 74,400 crore on June 2018. These are all unsecured loans, i.e., you do not have to give collateral to borrow. As of June 2018, the total number of credit cards outstanding was 3.93 crore against 1.76 crore in June 2011.} It is important for us to use the available credit to our advantage, Take credit for building assets. If we use credit card make sure your expenses are always in limit to what you can pay off, do not revolve the credit of card.
  8. Don’t follow the herd: If you have been doing the first 7 steps correctly then you are already on a right track, Now in last you just need to follow a zen model. Educate yourself and do not follow the herd. Do not make your investment buy and sell decisions based on social media but triangulate them as Ray Dalio suggests “Humility and triangulation of great people is an excellent way of raising ones probability of making a good decision.” Identify the three people from your circle whom you respect or want to become like them. Speak to them about your decision and be receptive. You will most likely take the decision which is best for you. You might lose at times on 10x bagger but at the same time you will reduce the probability to invest in decliners to 0 category as well.

These 8 Steps will help you build the sustainable wealth over time. Happy Investing & Happy Republic Day!

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Investment Objectives & Advice

The Story of a Middle Class Investor – Part 2 (Mistakes of our generation)

The current scary economic conditions we are living through make me think about my finances more than usual these days. Every time I switch on television, I see companies going bankrupt, doing retrenchments, freezing their hiring and sometimes not paying wages to their employees. Each time I panic with these thoughts and start checking on my job, expenditure, savings etc. to make sure that am I doing something wrong? Always I try to think that how can I be more prudent? After checking my asset column, I feel satisfied as I know I am well positioned to pass this storm without making compromises if necessary. But what about the people around me?

Most of the people, I hang around with or have acquaintance with, are living a lavish life. All of them are in their late twenties or some in early thirties but most of them earn almost in the similar income range. They own Cars, expensive electronic gadgets like iPod, iPad etc, They spend exotic vacations in India and abroad. Recently I was talking to one such friend of mine and I get to know that he is daily chased by credit card companies. Similarly One another friend is thinking about taking a personal loan to clear his credit card bill as he is not able to pay CC bill along with his education loan.

After these interactions, I reminded of the common lines said in every super hero movie “With great power comes great responsibility”. This is true in case of our generation; we got an extraordinary power of credit from various institutions unlike our parents, who have to struggle for bank loans and end up getting loans from local lenders against heavy collaterals like gold, land etc. I can say it as a fact that most of working class corporate employees receive at least 2-3 calls a week for either a better credit card or pre approved personal loans.

I tried to go one step further with these people to check their contingent financial plans and I was amazed by the responses seeing that not even one of them had planned for their contingencies. This is the point where I thought of writing this note, sharing the basic rules to follow in personal finance learned from my parents to live a better tomorrow along with present:

  • The most important one in all is “To Live within our mean” (“Jitni chadar ho, pair utne hi pasarne chahiye”.  Every time we go for loan or buy something on EMIs, we are allocating a part of our future income which is yet to come. This not only increases the risk on your finances but can get multiplied in case of troubles like a job loss or no pay hike.
  • Try to build a source for future income, in place of future expenditure of income. Whenever we take loans our part of income goes to banks/financial institutions and we keep waiting for our next salary to spend in next month. We should try to avoid loans unless it is necessary and if we taking loans we should make sure the money is used to buy an asset of same value, which is going to increase its value over the period of time like House, Office space, Franchise etc.
  • Be prepared for the emergency/unwarranted situations by using Medical insurance, Life insurance, FDs/RDs to keep emergency cash to fund expenses at least for next 6 months.
  • Keep reading about the best possible ways to manage your finances and making investments.

Happy Investing!!!