‘2020’ can be one year which everyone would like to wipe out from their calendar. Everyone were hopeful that this pandemic will end within two or three months. But as time went by everyone realised that’s not going to happen. That’s when the financial ramifications of this pandemic started hitting everyone. Read More
Emergency !!!!! there is only one thing going around in News, Social media or in any conversation, we have with anyone now a days. – Coronavirus or infamously known as COVID – 19 has wreaked havoc in everyone’s life. In fact now people are scared even to sneeze or randomly cough in public in fear of being ostracized. Along with the health concerns, the financial ramification of this virus is also worrying everyone. Moody’s predict that we might never come out the economic ramification of this virus. And top leaders of our country passing statements that we will be going back by 21 years in this 21 days lockdown, definitely dampens everyone’s spirits. With countries being in lockdown and markets and businesses being shut down everywhere, there is an almost certain global recession looming large in the future. These are exactly those emergency times for which Financial Planners warn people to be prepared for.
We can’t do much about the medical emergency of this virus, but we can definitely create a plan for the financial emergency which we are facing today and for the uncertainty looming about our near future –
Assess your current situation – with businesses shutting down, it is hard times for all of us for a foreseeable future. Assess your financial situation. How much liquidity do you have with you right now and how much will you need in the near future to tide over this crisis? With government announcing Three Months Moratorium you might say nothing to worry. But would disagree as if you have liquidity would recommend to continue your loan and not take moratorium. And even if you opt for a moratorium trust me this problem is not going to vanish overnight. It is always best to be prepared. You need to be prepared for at least the coming three months. So make a list of your mandatory expenses –
- EMIs of loans or Rents
- Insurance premium
- Utility Bills – electricity, water and phone.
- Daily essentials
- Credit card dues
You need start accounting for these above expense heads and multiply it by times 2 or 3 and then assess whether you have enough funds to cover these basic expenses for at least the next 2-3 months.
Talk with your bankers (or Landlords)– everyone were relieved when RBI announced a three month Moratorium that is from 1st March to 31st May 2020. ( What is a Moratorium – A legal authorisation to debtors to postpone payment.) Moratorium of the loans which includes all types of loans including credit card dues. But you need to understand that your interest is getting accrued and will be payable either as EMI or your tenor will accordingly increase along with slight increase in your EMIs. Do check with your banks as to how are they planning to give the three moratorium and how are they planning to collect these dues. Same goes for credit card dues. Penalty will not be charged but interest will keep on accruing. If you have liquidity with you do not take the moratorium. Keep on paying your loans and finish it off. If you have limited liquidity would recommend to finish off credit card dues. Remember even if you opt for moratorium it will not affect your credit ratings. Same way talk with your landlord for rent payments. In a few states landlords are requested to go easy with rent. Talk with the landlord and work out a payment schedule.
Investments continue hold or sell – many an investors do not know what to do with businesses on hold and for how long no one knows. If you have Systematic Investment Plans (SIPs) going on analyse your situation and take a call as to whether you want to temporarily stop them or you can continue without any strain on your finances. But please do restart them once your finances are back on track. Same goes for all your investments. Do not let this detour from financial independence path become a permanent detour. Once your life is back on track better to do a complete financial check up to see where you stand and the way forward.
Do not panic sell – remember do not panic sell your investments. In case you are short of liquidity then it is a different scenario but please avoid PANIC selling.
Check with your insurance agent – check with your medical insurance agent regarding the diseases covered in your medical insurance. If not how much is covered and what can be done. Again, be it whatever do not let your insurance lapse. Be sure to pay the premiums on your insurances.
Involvement of family – do not bear the stress of finances alone. Sit down with your family. Discuss your finances with your family. This exercise has a dual advantage – 1 – sharing helps with your stress and you can work as a family to lessen your financial burden. 2 – In case you fall sick, your spouse or family member is updated with all the financial matters and can take it in their hands.
Emergency funds – last but not the least if you already have an emergency fund or liquidity in place then you do not need to panic. But if you do not have one, then although a little late but not everything is lost. With talks about extension of lockdown its still not late to create an emergency fund. How much should your ideal emergency fund be? After calculating your existing finances and expenses, we would recommend to keep aside at least two months worth of sum equivalent to your EMIs of loan and insurance premium and utility bills and any unforeseen expense that can arise during this period. Even if you have taken moratorium of EMIs but still after three months the load will be there. (Although you need to keep aside cash equivalent to all the above heads mentioned but if liquidity crunch then even keeping aside money for EMIs and utility bills and insurance premium.) Ideal is three months but with the entire economy at halt and would recommend to start with two months. Once you are through this rough patch, always remember to keep aside an emergency fund. A word of caution – ‘ Your emergency fund is not an investment, it is an insurance with one purpose – to protect you and your family’ as rightly said by Dave Ramsey an American, show host, businessman and author. Do bear this in mind.
Remember always be prepared for emergencies, as emergency itself means something which is not in our hands. Be safe everyone – Physically and Financially !!!!
Budget should you worry or invest wisely
With budget around the corner and a sluggish economy, everyone is worried and eagerly waiting for the Finance minister to dish out something exciting or wave a magic wand and make everything oki!! Everyone is hoping for a tax cut or some other similar gifts. But the irony is without tax income how do you expect the government to increase spending for infrastructure and how to do you expect the government to infuse much needed money into the economy.
So how does Tax revenue affect growth?
The last two years, that is 2018-2019 and this current year, the tax revenue has decreased considerably. In fact this year for the first time in two decades, there has been a fall in the direct tax collection. Direct taxes account for almost 80 percent of the total tax collection. As per reports as published by the Economic times – The Income tax department has been able to collect Rs 7.3 trillion till January 23rd which is 5.5 percent below the amount collected same time last year. The Government was targeting at collecting Rs 13.5 trillion but with the decrease in the businesses cycle, this target looks unachievable. The effects of this can be seen on government spending as well. In the current scenario, without government spending, the revival of economy seems difficult. Also, indirect taxes are out with coming of GST whose committee meet every month to analyse and bring out reforms as and when they seem necessary which has been far and wide and with time, the GST reforms are settling down and hence less changes happen over time.
What has tax collection should concern you regarding your investment decision?
PROBABLY NOTHING. Although decrease or increase in income tax affects investments amount but tax rate cuts or increase should not affect your investments decisions. Why –
- Achieve goals – why does a person invest? Reasons can be numerous like buying a house, car, retirement, children or in general being rich. SO your investments are decisions which are based on achieving these goals and not on budget.
- Insurances – an individual will always require medical and life insurances; budget or no budget, slow down or no slow down. You already have a tax benefit for this category and trust me, no finance minister is going to take away tax benefit on insurance premium paid. So an individual planning on renewal of medical insurance or buying new policy, should not be waiting for the budget but should just go ahead.
- Emergency funds – emergencies come unannounced and one always has to be prepared for it. How – by keeping at least three months worth of cash’, equivalent to your mandatory expenses, aside in liquid assets. In other words, funds that are readily available. Will budget change your decision about keeping aside emergency funds?, Even for selecting the liquid asset for investing, budget should not be a factor in your decision.
- Retirement – retirement planning is a long term planning, especially for individuals in their 20s, 30s or 40s. You should be looking for something like a long-term Systematic Investment Plan (SIP) or investment in assets like real estate. This decision should never be based on budget, as you cannot predict every years budget’ and the changes it will have on your asset class, and churn the portfolio accordingly. In fact you will stand to lose out more than gain with such a strategy.
- Investments – where to invest, what to invest in, how long to invest, these are all variables which are in your control and which has to be aligned with your needs and goals and not with external factors such as Budget.
This years budget is much awaited and hyped due to slowing economy and there is hope that there will be certain announcements that will make business environment more conducive to growth and consequently result in better cash flow in the our hands.
That being said, Budget is not a magic pill that can solve problems overnight. These are problems that plague the world and are not just ours. It will take time to get back on its feet. Till then we have to more concerned about our own financial goals and needs and undertake investments based on these and not what the Budget has to offer.
A very close friend of mine is the Chief Investment Officer of a very big and reputed Mutual Fund. But he is always complaining that every time someone meets him the first question they ask is where should I invest? He gets really bugged by this. One cannot just go about giving random advises.
Just imagine if he gave random advise or names of some random Mutual Funds and stocks or for that matter any other investment advice without understanding When they need the money and for what purpose or goal. Is this fair for the investor? I know it’s not right to just dish out random advice but the investor does not understand. Time and again it has been proved that investing on random advice is DISASTROUS!!
Despite all this I am sure by now most of you will be like get on with the article and just tell us which product should I be investing in?
Contrary to what anyone says or writes there are just this many asset classes – Equity, Debt, Commodity like Gold and Small Savings schemes. All the investment avenues fall under the above mentioned asset classes. There are sub classes which fall under the above mentioned asset categories. New funds get added or new bonds get released no new asset class.
So what would my advice be for 2020 –
INVEST AS PER YOUR GOALS AND NOT AS PER YOUR NEIGHBOURS OR A RICH FRIEND OR RELATIVE
What is right for your neighbours, relatives or friend may not be right for you. If you need money in another three years you should definitely not be looking to invest in Equity. Or if you need the amount for a goal which is 10 years away you should definitely not be looking to invest in Fixed Deposit or Debt products.
So list down your goals with the time frame you want to achieve and then accordingly plan your investments –
- If your goal is 2 to 3 years away – definitely look into debt products like Short term debt fund or fixed deposit or Fixed Maturity Plans.
- If your goal is 5 to 7 years away – then you can have a mix of balanced funds (with more exposure towards equity), Fixed Maturity plans, if good AAA rated Company Fixed Deposits then can consider investing in that.
- If your goals are more than 7 years away – then you can definitely invest in good Equity Mutual Funds, direct equity or ELSS.
- Gold – I always advise to invest at least 3 to 5 per cent of your total portfolio in Gold or Gold based Mutual Fund as its one of the most liquid asset in the world and can be liquidated anywhere in the world. Do bear in mind buying jewellery does not count as investments.
- PPF – a must. Its tax free with deduction available under section 80C.
- Small saving schemes – a good investment product for senior citizens.
It is not that I am stopping from investing in good Investment product, but just a way of bearing in mind that if I am investing in Direct equity then I know that my money can get stuck and I have other liquid asset to help me with my need.
Plan wisely and Invest Smartly!!!!!
With Valentine’s Day just around the corner, many of you would be thinking of embarking on a relationship. Also, with the marriage season just over, many of you might have already started on a wonderful journey. But if I have to ask just one question, ‘How many of you have discussed your finances openly with your spouse/partner?’ I am sure the answer would be ‘not many’.
While it is okay to overlook this aspect during your initial period of companionship, things change when you get married.
In India many women are still housewives where most of the times, they have no clue as to how much their husbands earn or how much debt they have or where they have invested money or how much is the family or their husbands are insured for. Many of you would be able to relate to this. But is it good? Definitely not.
In fact, recently, I came across a couple with severe financial trouble where the husband had lost a fortune while trading in the stock market. Before he could realise, he was neck deep in debt. To clear off his debts, he took loans. But he could not cope with repaying that too and soon moneylenders started knocking on his door. That was the time his wife realised that there was some trouble.
When things got really out of the hand, her husband finally confessed. The wife said if she had known about the problem earlier she would have somehow forced her husband to take professional help or at least put an end to his trading habit or even taken up some job to help with the finances.
We often hear this. It is an unfortunate scenario wherein husbands do not involve their wives in financial matters.
But why is it important to discuss finance and be financially compatible? Here’s why:
Financial personality: One partner can be a spender whereas the other can be a saver; or both the spouses can be spending heavily or both can be savers. If a couple knows each other’s financial personality well, it helps in charting a financial plan to save them from a lot of trouble in the future.
Goals: Every individual has goals in life. When a couple embarks on a journey where they spend their entire lives together, it is very important to set their financial goals well in advance. Every individual is different from another and so are her/his goals. Therefore it is very important that they discuss them and then set the goals, and chart a route to achieve them. Always remember to divide the goals into three parts: Needs, responsibilities and dreams and work towards achieving them.
Budget: This is the base of any financial decision or plan. “Our day-to-day expenses are common and hence I discuss them with my wife and plan for them accordingly,” says Kunal Shah, 34, a businessman who, is into the 5th year of a happy marriage.
While preparing a budget it’s necessary that both spouses sit down and discuss their expenses. Very important since they will not miss out on budgeting for any expenses but also stick to it if they have prepared it together.
Communication: It’s the key to any successful relationship. Communication between spouses also includes discussing financial matters. As seen from the above example due to lack of communication from the husband’s side, both the partners faced problems from which they will take a long time to come out of.
“Communication is probably one of the most important aspect for a successful marriage. Because these days women have an important role to share in financial responsibilities, and it is obvious that when they do it they want to participate in financial planning,” says Paolomee Adani, a 30-year-old IT Professional.
Financial structure: One of the other important reasons to discuss finances before marriage or at the start of a courtship is that you know how you are going to utilise your hard earned money. Say if the husband’s income is utilised for meeting daily expenses then the wife’s income should go into saving for their goals or future.
Many a times, husbands do not feel comfortable asking for financial help from their wives (ego problem?), which should not be the case. This understanding helps avoid any financial harm later.
Money management: Generally financial literacy of both the spouses/partners is not the same, hence the need to decide who will manage the money. In India, generally, the male in the family handles money even if he does not have the time, from his busy working life, or the knowledge to do it. This can lead to mismanagement of your money and in turn financial problems. If the couple feels it is difficult for both of them to manage their own money they should seek financial advice.
Whether you agree or not, the truth cannot be denied that money does form a very important part of everyone’s life. When you start a new life with someone you expect to understand all there is about him or her. So why should monetary aspect be any different?
Arise, Awake and stop not until your goals are achieved: so aptly put forth by Swami Vivekananda. And that is what financial planning is all about!
It is about planning your money to achieve your goals within a given timeframe. Why do people toil away from morning till evening? So that they can achieve their goals! Goals can be different for different people at different times. For some it can be striving to provide for the basic necessities of life. For others it can be buying a luxury car or going for a world tour. And you can’t achieve these goals without financial planning.
The only problem is that many individuals tend to confuse financial planning with investment planning. Once they know which fund or script or investment avenue to deposit their money into, they are relieved and consider their financial planning as over. This indeed is a very big blunder.
What about insurance? Are you adequately covered or is your health insurance enough or what about retirement or emergency funds?
How we wish financial planning was that simple by doing a few simple investments your goals would be met. But the path towards our goal is never that easy. There are steps to follow and blocks to build before achieving your goals.
Investment planning is just one part of the entire financial planning exercise. Just like a building where a strong foundation is led first and then the next levels financial planning too has to have a strong foundation.
Let us have a look at the building blocks of financial planning wherein we will learn to build each block one by one. We will start with the foundation and then gradually move upward from the foundation to the next level to build a strong financial plan. So you are financially prepared for all events in life; be it any medical emergency or your child’s education or marriage or your own retirement or health problems.
The building blocks of financial planning
Just like a building where you start with the foundation and then move upwards towards the first floor, second floor and so on, the financial planning building has five blocks to scale. The first two blocks are the foundations and then the next three levels where you actually experience the benefits of a strong foundation.
Let us have a look at these blocks, what they are and how to go about their planning:
5. Estate planning (Will planning)
4. Retirement planning
3. Investment planning
2. Insurance planning
1. Contingency planning
You might be wondering why the reverse order? Just as I mentioned we have to build the foundation and then move upwards. The foundation starts with contingency planning and then you gradually move up.
The first two blocks: contingency planning and insurance planning is known as risk management. Also in a layman’s term, it is the foundation of a good financial planning. Once this is in place, you are not worried as it takes care of all your emergency situations (contingency planning) as well as your insurance requirements (that is your health insurance, life insurance and other insurance).
Once your risk is managed, you can then safely move on to the higher levels to plan for your goals. The next two levels are investment planning and retirement planning collectively known as goal planning. The last but not the least is estate planning or will planning.
Let us start with the foundation and the first of the two levels in risk management.
Also known as emergency planning. It has been emphasised time and again that a contingency plan or an emergency plan has to be in place before starting to plan for other goals. Why? Emergencies can come anytime or anyplace especially when we least expect it. We cannot predict it or even prevent it but what we can do is buffer ourselves against it so that our life does not go for a toss due to the emergency. It is basically saving for a rainy day. So once that you have planned for any untoward or unpredicted eventualities, you can safely move ahead to the next level of the financial plan.
How to calculate?
All your mandatory monthly expenses which you have to meet by hook or by crook have to be taken into account. A list of all mandatory expenses have been given below:
Fixed mandatory expenses (which are fixed every month) include:
- Mortgage installment
- Car loan installment
- Other loan installments
- Life insurance premium
- Health insurance premium
And variable mandatory expenses (which are mandatory but vary every month) include:
- Miscellaneous (unavoidable) expenses
The above expenses have to be calculated on a yearly basis and then divided by 12 months so as to arrive at an average monthly figure.
How much to set aside?
At least three months of your average monthly expenses have to be kept aside in the form of emergency funds since it is generally observed that three months worth of funds are enough to meet most emergencies and come back on track. People nearing retirement should try and keep aside at least five to six months of mandatory monthly expenses as contingency fund.
Let us take an example: Say your yearly mandatory expense is Rs 350,000.00. Hence your monthly average expenses will come to Rs 29,167 (3,50,000/12) (rounded off). You need to keep aside Rs 87,500 (29,167*3) that is your three months’ average monthly expenses as contingency funds to meet any eventualities.
It is not necessary to keep the entire amount in cash. You can keep aside Rs 20,000 in cash and the balance you can split between savings account, fixed deposit, or liquid funds. Why? Because all of the above mentioned products have liquidity, their biggest advantage, which is a very important feature in case of any emergencies. Also, remember that in case of usage of these funds always remember to replenish it.
Now that we have covered the first level of a financial plan, we can boldly move towards the second level that is insurance planning which will be dealt with in the next article… Till then think how best you can build your first block — a strong foundation — on your journey towards a strong financial plan.
Sam Ewing, a former baseball player, best described inflation thus: Inflation is when you pay 15 dollars for a 10-dollar haircut you used to get for five dollars when you had hair!
How many of us can relate to this? Most of us!
Believe it or not but reports last year suggested that salaries in India would increase by 10 per cent in 2019. Salary hikes are followed by better lifestyles, by buying the latest and most expensive mobile phones, electronic gadgets, designer clothes… the list goes on.
Many Indians now have more than one car per household in comparison to hardly one car just 10 years ago. Restaurants which saw crowds only over the weekends are now seeing 70 to 80 per cent occupancy even on weekdays.
Moviegoers flocking to multiplexes after buying tickets as high as Rs 500 or more without batting an eyelid, have also increased.
So what is lifestyle inflation?
Lifestyle inflation means the increase in one’s spending in proportion to an increase in income. In short, salaries have gone up, spendings have gone up and savings have gone down.
Isn’t this what everyone has been doing?
In the current economic gloom, maintaining the existing lifestyle is becoming more and more of a challenge.
Just recently, a friend of mine was quoting her husband, owner of a small business, ‘There is severe liquidity crunch. I am not getting payments on time. We better cut down on our expenses. Think twice before you spend.’
My friend was like, ‘Where do I cut down?’
The only thing she could think of was to stop going out for dinners and coffees as often as they used to.
We are so used to this exorbitant lifestyle that cutting down or lowering one’s lifestyle just doesn’t seem possible.
There is no harm in buying materialistic things but that has to be within limits. Recently, quite a few big names have filed for bankruptcy or have been facing a financial crunch. Besides demonetisation, the other big reason is over-borrowing. The same is happening with individuals who get caught up in a debt trap to maintain their lifestyle.
So how can we avoid lifestyle inflation?
I am not asking you to be frugal but here are some pointers to bear in mind to avoid falling prey to this inflation cycle. First and foremost, remember:
It can affect anyone: India’s gross savings rate was at 37.8 per cent in 2008. Since then there has been a steady decline, with gross savings rate reaching 30.5 per cent in March 2018. So where is the money going?
In coping with lifestyle inflation, taking exotic vacations, eating out, etc. In the current economic scenario everyone is feeling the pinch, and hence first prepare for rainy day then spend.
Luxury has become a necessity: Over the years, with an increase in earnings, luxury items like smartphones, designer clothes have become necessities. There is no harm in indulging yourself but all these should be after you have had your insurance policies, emergency funds and savings in place.
Don’t give in to the charm of every new product that catches your eye. All material things lose their appeal after a point. Learn to differentiate between what you fancy and what you need.
Indians have started travelling abroad, which is fantastic as it broadens one’s perspective towards life. But many young couples do it on borrowed money which is where the problems start. Learn to keep your borrowings under check lest it come back to haunt you.
Beware of offers: Of late, you are bombarded with a plethora of messages from big clothes brands, electronic brands and the automobile sector trying to lure you with lucrative deals. Human mentality leads us to buy these things thinking that they are actually making us save money. Remember, ‘SALE’ means the company wants to make a sale; it’s for them, not for you.
In fact, sometimes you end up spending more than your initial budget and after coming home you realise there are many items which ideally you do not require and now lie unused.
Spending to maintain the state of happiness: Hedonic treadmill, or Hedonic adaptation, according to Wikipedia, is the observed tendency of humans to quickly return to a relatively stable level of happiness despite major positive or negative events or life changes.
Just like humans binge on food when they are depressed, they also tend to shop for instant gratification. which is just temporary. In the present economic turmoil, please do not fall into this trap.
Maintaining a particular lifestyle for the benefit of others: One of the richest men in the world, Warren Buffet, still lives in the same house he has been living from the time he started investing. Although I am not saying you have to deprive yourself of new belongings, the point is, just to show off your wealth or to compete with your friend who has the latest car or has just been back from an exotic vacation you don’t need to spend or, much worse, borrow to spend.
Social media has made sure everyone can peep into other people’s lives. Please avoid spending your money based on other people’s expenditures.
Last and the best way to avoid falling into lifestyle inflation trap:
Cash flow statement: Always maintain an expense sheet. Once you start maintaining an expense sheet on a daily basis, you will automatically tend to be more cautious while spending. You need to maintain the following fields:
- Your earnings from all sources
- All your mandatory expenses
- Your outgoings for any savings/investments you are doing
- All your voluntary expenses (this is where you have scope for controlling expenses)
Even if these fields are not maintained on a daily basis, at least a monthly expense sheet is a must. Not only will it help you in controlling your expenses but also to chart out a sound financial plan.
Be a mindful spender. Save wisely and spend wisely!