Financial planning - Basic rule -8

Taking investment decisions :

In process of Financial planning is is important ot know how we are going to plan our investments, Many of the times it is a very difficult decision. But you have to take it because unless & until you invest your money you may not be able to grow it & may be keep on loosing value.

Let me to share you the truth which I came across talking with many individuals , You take lot of care & even fight for every rupee when it comes to earning however once it is earned the importance of money earned is not there . You don’t take due care of money which is earned to earn money for you the results are like ..............

 Big amount lying idle in Savings a/c since from few months.

 Investments are made with somebody’s free advice where the person was unknown & you don’t know whether he is a qualified to do so or not.

You don’t have any idea where your money is

You had given to broker who claimed to give you high returns but in result you lost all the money.

As per someone’s advice you invested in equity of specific company & since then the share has taken a down trend & one you sold had taken up trend.

 Your investments are creating pressure on you for committed investments.

Etc. etc………………………

Did any time you thought why this had happened ???????????

Let me tell you .

It is because of simple reason that you don’t know what you want from this investment , you invest without goals in Haphazard way. There is no structure at all.

No process is involved in selection .

It might be selected because one of the following reason.

Friends recommendation whose some relative may be an Agent

Advertisement.

Your relative is an Agent

What to do with money let’s do some investment ???

You are been chased by somebody

Tax saving etc etc…………..

So now why you are expecting these investments should help you in completing your financial goals when it don’t know what you expect from it ?

Surprisingly most of the individuals do not have any answer to this !

Let’s see how we can do it better !

You can build a good financial success if you have a plan in place .

It is a proven & accepted truth that if you have a plan then you can plan your strategies & the probability of achieving the goal is high.

Then what we have to do is to simply plan target for each and every rupee we invest & align the returns from it to the financial goals in life.

IF you agree to this may be some part also you should see our next post where We see it into more details !!!

Financial planning - Basic rule - 7

Should I take a Loan ?
how one should take a decision about taking a loan or not ?
Which are the tings he/ she should consider before going for loan ?
How to select the duration of the loan ?
There are many questions in the mind of common man about what to do & what to not.

Taking Decision :

The decision to take a loan is depend on :

1. The need. :
The need is the most important thing which drives this whole world. As I was telling you loans are helpful to optimize your CashFlows if used in right way.
Long term loans help you to acquire things today & to pay later no doubt you have to pay interest & the acquired property remains as a property to lender.
Eg. Housing Loan , You can buy a house on loan which may not be possible you to Buy. as well as you can stay in the house which is actually pledged to Bank & bank is a owner up to clearing of the loan. we had seen a generation trend where people was able to take a home at the time of retirement up to past 20 years, today any individuals who is working for 5 years has a home. this is made possible by optimization of Cashflow by loans.
( this also resulted in to Real estate price boom ).
The need and possible options should be analysed.
Need for 1BHK or 2 BHK or 3 BHK ?
Need for Car or Can we manage by Auto ?
Need to have a bigger home ?
Need to have one more property ?
We really have to differentiate between Real Needs & sentimental needs.

 2. CashFlow position.:
See weather your cashflow are in position to take a burden of loan,

3. Your working span :
You should retire debt free.so while taking loan you have to see that the loan gets over till retirement. so that there is no spill over. if the floating rate of interest is increasing your term over your retirement you should think of prepaying or increasing your EMI.

4. weather to use your own resources or to take a loan ? 
This you should decide on the basis of opportunity available , Your age , time to retire the duration of loan . for the short duration loans it may not have a big effect but for longer duration loan it is.
Eg. you want to Buy a House costing 3500000/- Bank is ready to Fund you 80% @ 11% for 20 years.
You have 3500000/- ready with you no the question is to take a loan or to use your own capital.
In my view if it is a question of long duration you should go for loan. Why ?????
Just work out.
If you take a loan
Loan Amount : 2800000/- @ 11% ( sake of calculation assume it is Fixed )
EMI would be : 28901/- Term : 20 years
Total have to repay : 6936306/- oh a huuuuuuuge interest of Rs. 4136306/- you should save this Right ??? But wait see what you may loose .

IF same amount of Rs. 2800000/- invested for 20 years @ 14% will yield you 3,84,81,772/- if you plan proper asset allocation 14% per year is possible.As well as you money is free for opportunity.

So now what to do ? if your CashFlow permits go for a loan! As well as take a benefit of Govt. Facility on repayment.

Like in today's market the Auto loans from Few companies are available at unbelievable rate of 6 -7 % where it is offered in market @ 12 to 13% . IF there is a need go for it .

How to Fight Inflation ? part 1

How to fight Inflation :

(a good photo on web )

The inflation in India is growing day by day and it had taken a very steep rising curve in last few months. To control this inflation Central bank is rising the repo & reverse repo rate like anything it has risen the rates eleven times and by 375 basis points till since from last 18 months.

What is the result of this ? do there is a control on inflation ? answer is BIG NO !

But yes one result is there it had made a very big impact on the common man in India. For almost s to everything from food to Petrol now he has to pay more money . The basic necessities like Food, Clothes & home is becoming costlier for him. Let’s not get in to the details how it had happened & why it had ?

The main question is to Fight this out because now this is a survival game.

How you can to fight inflation ?

There are two well known ways to fight with inflation .

1.       To earn more  ( How???? )

2.       To spend less   ( Compromise ?????  )

Can we think of any other thing which can be a better option to the above two ?

Yes there is a option & that is planning .

If you really want to fight inflation & be Financially successful then you have to plan you finances.

How you can plan your Finances ?

1}Protect your existing asset : You have to protect your existing asset from getting eroded by unforeseen events, so first comes the protection. Have a sufficient Medical cover to your family to take care of medical expenses which can occur any time without informing you & can give you a big hit in this highly inflationary environment.

If you are a family of four belongs to Middle class with yearly income between 5 lac to 7 lac Family  floater medical policy SA 300000/- is recommended. If the income is above to this then increase  the cover as per your income.

Should have a contingency fund to take care of unexpected eventualities. The pressure on corporate  is also increasing due to high interest rate Debt .

Have a sufficient life cover .

2 } Pay off the loans which are at higher interest rate : There are very few fortunate people who had opt for Fixed rate of interest rate for housing loans 50 basis point more than rate of 7% at that time . Their bet in today’s time turns on their way. But for rest it is like a nightmare, it may not be possible every time to pay off the loans one shot but you can surely make a plan to increase your EMI and link it with increase in Payment. The one which have less tenure & have higher interest rate should have to be settled first.

3 } Stop using credit card : Credit card normally induce impulsive buying . keep Credit card away from your pocked will save you from unnecessary expenses & also can save you from unexpected Debt trap.

 Continue………………….

Should I invest in Gold ?

The common question about every asset class or every thing which is going up and appreciated in past. We always tent to take decisions on the basis of past performance which may not be repeated.
Because Gold has given very amazing returns over last few years every body is loking for the opportunity in to it. But the question comes wherther the same performance can be repeated ?
To get the answer we have to look first on the reasons why gold is appreciated ?
1. The scarcity ?
2. Precious metal ?
3. Indians buy gold & keep on Buying ?

are  the normal reason which most of the people know but in addition to this the main reason of appreciation  is Gold is a Surrogate currency .
If i am not wrong , After second world war US come up as a financial Power in the World & that's why in international market the prices are reflected in US$. US $ is accepted worldwide as a currency of Exchange & $ started appreciating. World over Central Banks converted their Gold reserves ( which was earlier well accepted currency from ancient days .) in to US$ .
but soon after the Sub-prime issue & I wolud say a Financial corruption Faith on US$ drastically reduced world over as a result ,in search of trusted commodity of exchange Gold came again on Radar of central banks world over & demand started building for gold resulted in to Amazing returns of gold in past few years. But position right now is different ,the demand may not be the same what was there in past years as the banks world over accumulated Gold reserves already, there may be a little or no chance for further Huge accumulation.
Then what will happen to price of gold in coming years ? Question still remains .
I personally feels that the price of Gold may go up or may come down in short term but one thing is sure that it will keep on giving inflation adjusted returns on long term.
For short term traders there may be an opportunity to to take advantage of volatility.
For long term investors there is no need to go panic.Keep right allocation of Gold in your investments & for those who may need gold in Physical form in coming years keep on accumulating small small portions of pure gold regular way without thinking of Price.
Pl do not put your major portion in Gold, keep your investments diversified.
I don't think the last few year's performance of gold can be repeated in Future. keep yourself away from Greed.
Happy Investing !

Financial planing - Basic rules - 6

We are continuing from the last post i.e. loans
Let me to share one thing RBI is working on to get more transparency in the business of lending, RBI looking towards wavier of the Prepayment charges levied from bank this may be good for clients so it is like a Number potability in telecom. You may have different options & banks has to compete on the interest rates & the existing clients will not be taken for grated or taken for ride. Good thing.!!!

But do you know today also you can negotiate on the interest rates. Depending on the Financial strength, your salary or income your CIBIL credit report data you can negotiate the rates. Negotiating interest rates means negotiating margin taken by banks or Financial institutes over their basic lending rate .
IF you could able to negotiate 1% also it can have a very positive effect over a period of time on your cash flows.

Normally many people I had seen are in hurry of getting loan disbursed, majorly it happens with long term loans like Housing loan. So when you are in hurry without giving thought on long term implication of loan we just see that the disbursement happens & keep on cursing the Financial institutions rest of the life.
" But be sure that if you are signing any document before reading & understanding it then you deserve to be cheated ".
Ok ! that is not the subject of this post, I was talking about loan interest rates. Before taking any type of loan  :

Do your homework properly
1. Do proper study of the Interest rates offered by Different institutes.
2. Ask your Builder enough time for disbursement of Loan.
3. Try to understand the different conditions the financial institutes is putting on you.
4. Try to find out the possible trap for you in loan agreement.
5. Try to negotiate with financial institutes for interest rates on the basis of CIBIL Credit report & Financial rating.
6. Be ready to take little pain in getting the process done which will payoff very well in long run.
This 1% can be used to optimize your cash flow in Financial planning and can be aligned to your Financial goal. As well as you can claim the Tax benefit as well.

We will put some more focus on loans in next post as well !



.

Financial Planning - Basic rules - 5

We are continuing Financial planning - Basic rules - 4 i.e. the Loans , how it can be used for optimization of Cashflows.
For new people just get a reference .
The Debt income ratio we had seen Now it is EMI servicing ratio. This ratio will tell you about how much maximum EMI you can service .

Including all types of loans the EMI should not be more than 45% of take home salary. Means if you are earning Rs.100000/- per month after tax then you can service EMI maximum of Rs. 45000/- if it is more then you should think of prepayment. IF it is less............No don't go for loan it is Good ! but yes if you are in need of loan & your EMI servicing ratio is less you can take other loan for that maximum limit .
Many of the times question comes from clients why this limit is there ? it is with simple reason
Your household & life style expenses is 35% of income + 45% income is goes towards EMI  then what remains is only 20% . This should be minimum percentage of income you should save for your Future expenses which in Financial planning we call as Financial goals if you can't save today you may not be in position to spend tomorrow.

We will continue it in next post.

Financial Planning - Basic Rule - 4

Financial planning deals with optimization of the CashFlow.
Optimization can be done in different ways some are making wise investment decisions , parking money for opportunity in right kind of instrument as well as taking benefit of the credit facilities available.
Yes what you are guessing is right i am talking about Loans. Loans can be used as a CashFlow optimization tool .
The loans are taken as it gives a facility to have money today & payback it in installments, surely not for free But with Interest. Actually the main business of Financial institutions is of Borrowing & lending.
Banks Borrow money from people & use them to Give loans, it is their business. It means that when you are making a FD in bank, you are lending money to Bank. :), Banks main profitability depends on the spread between the rates of Borrowing & lending.

Loans : In old days when any body is taking a loan was presumed to be a bad sign ! But now a days buying anything directly through Cash may be a bad sign , May be you are not aware about the facilities available in the market like that......................... so the time is changing & if there is any benefit to us we should change !
Taking loan is not a bad sign, not always . the decision about loans should be taken on the basis of Financial position & Debt Income ratio.
Debt income ratio will advice you about how much loan you should take or you can afford.It is calculated in multiples of Yearly income . at the starting phase of the career you may afford to have higher Debt Income ratio however as you move on in your career travelling toward retirement this ratio should go down.

In my opinion one should not have more than Debt equal to 5 multiple of yearly income. i.e. if you are earning Rs.600000/- pa your Loan amount ( Debt ) should not exceed 3000000/- at any point of time. however this multiple should go down as per the progression to retirement & should become Zero at the time of retirement.If it is above this limit you should think of prepayment or increasing your income :).

We will discuss other aspects of Debt in next post.
 
  

Financial planning - Basic rule - 3

Financial planning is about streamlining your cash flows towards achieving your financial goals, then it is important to know the basic characteristic of the CashFlow. 


Expenses : 

Lets start with how we spend : the expenses are the main and the first outflow from our pocket. Many of the clients asks me are we spending too high or very less ? but let me tale you , the expenses depends on how you look towards life. But yes if we have to empower ourselves and to have a Good financial future then we should know what portion of the income we can utilize for expenses majorly Household & lifestyle expenses.
Some people talks about bringing new thinking system for savings which talks about 
Income - Savings = Expenses.
I will not buy this, this may not be a good thing, i feel if you are happy about the today's then only you can enjoy tomorrow, so first be happy today & then think about tomorrow. There are many people who leaves only in Future which never becomes today !
At initial phase of career you may not be getting any chance to save may be 100% of your income is going towards expenses, the same happens when the family member number increases. but ignoring theses some exceptions the expenses should be between 30%  to 35% of income, if it is more than that without the major change in family structure or major exceptional expenses then it should ring a bell !
try to write down & track the expenses.


This is important aspect of Financial planning which make or break you & your financial future .


Any Question ? Ask !!!