As millennials we are often given a lot of investment advice- save early, take advantage of mutual funds and employer savings accounts and get rid of high-interest credit cards. But research has shown that one of the best ways to build up that retirement nest-egg is by investing in a house. According to leading financial advisors, purchasing a home is a great investment because the property is ideally protected from inflation and it is a physical asset that theoretically does not crash or disappear as stocks do.
Why should you invest in a home?
“Buy land, they’re not making it anymore.”– Mark Twain
Any investment you make comes with its own set of risks so it is important to do thorough research into the advantages and drawbacks before you dive into a single investment. In many countries, especially India, buying your dream home is seen as an important investment as it is the place you create your happiest memories with family and friends.
In other countries such as the US, there has been a dip in home purchasing in recent years due to the volatility of markets and an increase in the cost of living but it is worth noting that the millennial generation represents the largest percentage of first-time homebuyers.
Purchasing a home is a life goal for many and the number of people investing in real estate is slowly picking up as more people recognize its many benefits. Here a few reasons why buying a home is a great investment:
Buying a home is a safer investment
When compared to all other forms of investments such as stock and gold, buying a home is a safe and stable investment. Unlike the stock market, the housing market does not face high volatility. But although it is a safe investment, you still need to be diligent and weigh the pros and cons before you invest in a home.
You can become smarter about your expenses
When you decide to rent a home, all your rent payments go straight into the landlord’s pocket while eating into a large proportion of your income. But mortgage payments or loan payments towards your home are an investment for the future. The monthly payments you make will reduce the amount you owe on the house while your home equity increases. It is a much better solution to make payments towards a home in place of short-term rent expenses that will not provide any value in the future.
It is a great way to save your money
Buying a home these days has become an accessible goal for many young people as salaries have increased and the ability to procure a loan is much simpler. In order to ensure that you are not spending your hard-earned money on unnecessary things, a great option is to invest in a home. Not only does investing in a home lock up all your savings in one asset but it also generates a lot of revenue if you have invested in property in the right location. In India, the Central Government has a PMAY scheme which provides first-time homebuyers with a subsidy of 2.67 lakhs.
The emotional aspect of homebuying
Homeowners are more motivated to form relationships with the people in their community than those who rent. The people in the area you live in can create a dependable support system. Although this may not be a tangible benefit, buying a home brings a sense of pride and accomplishment for homebuyers. Many people view homebuying as accomplishing a milestone in their lives. Moreover, this home can be passed on from generation to generation as a family inheritance.
Buying a home can help augment your retirement income
Due to the high costs of healthcare, funding your retirement is not as simple as it once was. If you choose to buy a home earlier in your life, there is a good chance that your home will be paid off by retirement age. The equity of your home can help supplement your retirement income. It provides a safety net against the rising costs and will give you the added benefit of not having to pay rent every month.
While many people think that investing in stocks is a better way to save for retirement, it is important to remember that any return on stock comes with an added risk. There is a further risk that your stock may lose its value when you reach the retirement age, or worse, it could be wiped out completely. Investing in a home is a safer alternative for funding your retirement as the value of the investment is more stable.
It provides a safety-net
There can be many unexpected twists and turns in your life both professionally and personally. An investment in a home provides a safety net in those instances as you have something to fall back on. In a situation where you lose a source on income or there has been a surge in rent prices or an emergency that requires a lot of money, your property, which is essentially your savings locked up in a single place, can serve as a source of income.
The stability of home-ownership
Owning a home provides a sense of belonging and kinship. Moving houses frequently is often tedious and emotionally taxing, especially for children. As you become older, moving houses becomes more difficult as you begin to form a close relationship with the people in the area you live in. Owning a home is therefore important as it provides a sense of community and helps avoid the emotional discomfort of moving.
There a many benefits to owning a home and it is one of the best investments millennials can make. However, it is important to study the housing market in the area you decide to invest in and weigh the pros and cons before you make a decision. It is recommended to talk to real estate brokers who can give you more details on the real-estate marker along with a loan officer who can provide information from a financial perspective. Do your homework and play it safe before buying a home.
It goes without saying that investing in commercial real estate is a huge decision. Therefore, it is important that you are well informed before you make any money moves.
Investing in commercial real estate gives you the chance to dip into a new customer base and develop your business interests. It is quite different from investing in traditional real estate and requires some additional considerations. Patience is a virtue when it comes to commercial real estate as the cycle is longer and the investor needs to be well aware of trends in the market and economy.
Here are some key points to keep in mind when investing in commercial real estate:
Location Location Location
It’s all about the location when it comes to investing in commercial real estate. In every city, there are those areas that are in high demand (macro markets) and other micro-markets that are not so favorable.
When it comes to buying commercial property, there are many factors that come into play such as accessibility to roads and public transport, distance to neighboring cities and infrastructure projects currently in development in the area.
But as an investor, you need to be vigilant about emerging markets that are created as a result of the infrastructure developments. These are great areas to invest in because not only will they be in high demand but it also guarantees capital appreciation in the long term.
The property’s marketability
In addition to a great location, it is important for the property to create a steady cash-flow for the investor. The property needs to remain marketable and be able to withstand a large number of tenants and future growth. This means that you need to invest in property that is modern with trendy architecture.
Properties that encourage ‘green living’ and are eco-friendly will add to the attractiveness of the property. Other factors to consider are environment-friendly utilities, maintenance of the common spaces and good building management.
The amenities available can add value to the property and these benefits tend to override the cost. Amenities can include many different things that can increase efficiency for the tenants on the property such as extra parking spaces or a food court if the commercial property is used for a campus or office space. These amenities can enhance the space while increasing the marketability of the property.
While assessing the property, it is important for the investor to ask about who usually does the interior fit outs for the property. Traditionally, the tenant receives a bare space and installs the fit outs such as air-conditioning, lighting and sensors but some tenants may ask the building developers to install such fittings and pay an additional fit out rent.
Tenants who install their own equipment are likely to rent out the space for a longer period of time to cover their expenses.
The property’s risk
The assessment of risk bears a different meaning when it comes to commercial real estate as each property is different. While residential properties that are right next to each other face more or less the same risks, commercial property risks can fluctuate independently. Hence, it is important for investors to understand the potential risks of their investment.
These risks can include a variety of things such as zoning changes that can cause a commercial property to become residential as new suburbs develop in the area. Additionally, having similar commercial properties can create an oversupply in the market, that could drastically reduce demand. Infrastructure projects in other commercial areas can drive potential tenants away from your property.
The market dynamics
Investing is always a numbers game so it only makes sense that you keep up with them before investing in commercial property. It would be helpful to understand trends in the market along with customer’s changing wants and demands. You also need to study the historical market performance over the last three to five years to identify any anomalies or potential for reduced demand in the future.
Along with this, you should plan for the future and map out details about the tenant profile, the rent roll out, the lease contract (expiry date) along with any other information that will provide more clarity on the financials of the property. It would also help to talk to a real estate agent to discuss the details before making any big decisions.
The lease structure
Commercial leases are structured very differently from residential leases. They are either a 3+3+3 or a 5+5+5. This means they could either be a 9 year or a 15 year lease with increments in the rent every 3 or 5 years respectively.
The tenant has the freedom to vacate the property without notice, while the owner of the property cannot ask them to leave until the lease period is complete. They can, however, have a lock-in period in the contract of 3 years, during which the tenant cannot vacate the property. It is important for the investor to understand the lease structure of the property as they are often inherent risks involved. A lease with a long lock-in period is great for the investor.
As an investor, it is important to perform due diligence and carefully analyse all title documents, permits and taxes associated with the commercial estate along with the presence of any mortgages. It is recommended to have all documents examined by a legal authority.
If you plant to rent out the space, it is important that the lessee understands their duties and obligations as per the contract. This will reduce the chance for any future errors. In addition to the legal documents of the property, the local area may have local laws that property owners need to abide by. You should have a thorough understanding of all the rules and regulations related to the property and the area it is located in.
Investing in commercial real estate can certainly add immense value to your portfolio but it is a decision that needs to be taken after a lot of thought and consideration. You need to conduct a thorough market analysis of the property while taking into consideration the factors listed above.
While the process of investing in commercial real estate is very time-consuming, it is unquestionably beneficial to an investor in the long-run.
If you are a non-salaried person, you may understand the phenomenon of uncertain earnings. Unlike ‘salaried’ people who earn a regular income from their jobs, ‘non-salaried’ people are those whose expected annual earning is a little difficult to guess.
In general, the non-salaried people are those who earn their living by doing some business, engaging in a part-time profession or carrying out freelancing. They do not receive a monthly paycheck from their company or bosses. Moreover, this irregularity in the income of the non-salaried people is dependent on several factors like demand, workflow, competition, technical innovation, regulations, and technical know-how.
Anyways, when we talk about financial planning, for most salaried people, the health insurances and retirement funds are somewhat taken care of by their employers. However, for the non-salaried people, they need to plan all these by themselves. And that’s why financial planning for the non-salaried person is a must.
In this post, we are going to discuss how non-salaried people can plan their personal finance effectively. Let’s get started.
Financial Planning For Non-Salaried People
Last Sunday, I met my friend Aditi for a coffee. We met after a long gap of three years. She told me that she has been working on a food blog for the last two years and making decent money from it.
After talking on a few causal stuff for some time, we started discussing her finances. She told me that although she was making good money as a freelancer, however, she is struggling a little as her income as they are very irregular in nature.
If we look into her finances, in general, whatever she saves, she deposits the same in her Savings Bank Account. She has also bought a Life Insurance policy and pays her premiums quarterly. Nonetheless, she was feeling a little clueless regarding how to come up with effective financial planning that can help her meet her future financial aspirations.
As a personal finance enthusiast, I tried to help her in my own way. So, we discussed in details regarding the four pillars of the financial Planning- Emergency Fund, Insurance, Retirement Fund, and Passive Income.
Firstly, I advised Aditi to build an adequate Emergency Fund. This fund should be big enough to protect her for at least six months in case her income declines or comes to a halt in the nearer term. By Emergency Fund, what I actually meant to say was that Aditi should have sufficient money in her Bank Savings account to run her expenses for a minimum of half a year.
Therefore, Emergency Fund = 6 times Aditi’s expected monthly expenses.
Anyways, these days Bank Savings Accounts do not offer a high interest on the deposits. In fact, the saving interests are not even good enough to beat the current consumer inflation rate in our nation. Therefore, I suggested Aditi to park her savings in a liquid Mutual Fund, which will not only help her in forming a good Emergency Fund but also boost her savings appreciate at around 7 to 8 % per annum.
Next, we discussed Insurances. Aditi already mentioned earlier that she has a life insurance policy. However, when we started discussing it in detail, I came to know that her insurance was in the nature of “Term Plan”.
According to me, although Aditi does not have an extremely high standard of living, still her Life Insurance plan should cover a minimum of 15 months’ expected annual income. So, I told her to review her policy once and in case she feels she is under-covered, she should give a thought to take another Life plan.
Another important point that I came to know was that Aditi didn’t have any Medical Insurance coverage at all. For a self-employed person, Mediclaim is an essence. I told her that it should cover a minimum of 5 months’ expected monthly income. Here, please note that many people prefer to go with Life Insurance policies in the nature of the endowment plan. For the risk-averse investors, as endowment plans provide decent insurance plus investment option.
After discussing insurances, I asked Aditi how long she is willing to work as a freelancer. In other words, when does she plan to retire? To this question, Aditi answered that she would like to work at least 25 to 30 more years from now.
When talking about the retirement savings, I must tell you that it does take an immeasurable amount of time to build an adequate fund. By the immeasurable amount of time, what I mean to say is that you might need to wait for around two to three decades to build a substantial Retirement Fund which could help you maintain a similar (or even better) standard of living after you finally stop earning from an active source.
If you ask me what should be the desired retirement corpus, my answer would be that you need to build a corpus which should be at least twenty-five times the expected annual expenses. Nonetheless, the big question here is how can you build such a huge corpus from around 25-30 years from now.
Don’t worry, the answer is not very complicated. Here, I will suggest you to consider investing in Equities or Equity Mutual Funds. Yes, of course, Equity investing is a little risky in the short term. However, if you opt for value investing, it can aid you in creating a huge corpus in the long run.
As a non-salaried person, Passive Income can help you to support your basics expenses as your earnings may be filled with ups and downs.
In meaning, passive Income is that income which does not require your active time. Once your passive income mechanism is set up, you don’t need to do anything to earn that income. Moreover, Passive Income can be stable and act as your secondary source of income. A few examples of Passive Income can be your rental income, dividends, and Interests from Equities and Bonds etc.
Apart from your emergency and retirement fund, you need to build a few consistent passive income sources and to add them as other income in your financial planning.
There is no doubt in highlighting the fact that non-salaried people are subjected to more financial risks compared to the salaried people. For all the self-employed people out there, like Aditi, effective financial planning can help you manage and mitigate the financial risk of your irregular income.
And therefore, as a non-salaried person, you should take your financial planning seriously and start working on your Emergency Fund, Passive Income, Insurance, and Retirement Fund.
That’s all for this post. Today, we tried to cover how a freelancer, business owner or an independent professional, can manage their personal finance effectively. We wish you all the best for your financial investment journey ahead. And Happy Investing!
Crude Oil. You definitely have heard of this word, right? Crude oil is a naturally occurring unrefined petroleum product. It consists of organic materials and hydrocarbons. When the crude oil is refined, first it is heated until it starts boiling. Then, the boiling liquid is separated into various liquids and gases. These liquids are further utilized in making petrol, diesel, paraffin, and other petroleum products.
The products and by-products of crude oil are used in direct or indirect consumption by the end users. They are also used in manufacturing several commodities by a wide range of industries. Crude oil is also traded in the commodity market like gold, silver, etc. This results in the global price of crude oil to fluctuate. In India, only one-fifth of the crude oil requirements are met from domestic production. Therefore, we are heavily dependent on the US, African, and Middle East countries to support our nation’s demand for petrol and diesel.
How the prices of diesel and petrol are determined?
The Oil Marketing Companies or OMCs take crude oil to the refinery houses to generate petrol, diesel, kerosene and other products. After that, they dispose those products to the dealers of the same. In India, 90% of the share of oil marketing is owned by Indian oil corporation Ltd (IOCL), Bharat petroleum corporation ltd (BPCL) and Hindustan petroleum corporation ltd (HPCL).
Here is the exact process of how the price determination of diesel and petrol takes place in India.
First, an OMC imports crude oil from an oil producing nation like UAE. The cost and freight are the initial costs incurred on the same. Import charges (plus insurance charges, losses due to transportation and port fees) are further added to the same. Next, the Government of India adds Customs Duty on such crude oil, after which they are carried to the refinery houses.
The refineries charge Refinery Transfer Charge for their work. After that, such refined oil is sold to the dealers by the OMC at Depot Price after incurring inland freight on the same. So the total desired price is the result of all the Cost & Freight charges, Import charges, Refinery Transfer Price, Inland Freight, OMC’s Marketing costs, and Profit margin.
In addition, the Central Government of India adds Excise Duty on the Depot Price and the State Governments add State VAT on the same. Further, the dealers also add their commission which is calculated on the basis of per liter. So, after adding all the costs and taxes, we get the Retail Price that a consumer pays for buying a liter of petrol or diesel.
If you compare the prices of diesel and petrol in the South Asian nations, you would find that the prices in India are always the highest. This is because our Government regulates the prices by imposing taxes. Ironically, when you would see the prices of the crude oil dropping, Indian government increases the Excise Duty and State VAT to not let the retail prices of diesel and petrol fall. On the other hand, when the prices of crude oil rises, here the Government doesn’t reduce the said taxes so that the prices of the fuels in the nation don’t undergo fluctuations.
Besides, there is no doubt in stating that the prices of diesel and petrol would vary from one state to another in India due to differences in commission pattern of OMCs and transportation charges.
Petrol & Diesel price history in India
Now, let us have a look at the price history of diesel and petrol in India over the last few years. Given below is a table which shows the petrol prices per liter in the four metropolitan cities in India.
Petrol Price history in India:
As you can see from the above table, generally the petrol prices have been on the higher side in Mumbai. However, Delhi witnessed the most reasonable petrol prices in the last few months of 2018.
Further, here is the historical petrol price movement in the big four metropolitan cities in India.
When you look at the longer time period shown by the above table, the picture looks similar as well. Anyways, one comparable takeaway is that, in every metropolitan city, the petrol price has consistently gone up at the same rate in the last one and half decades. (Note: You can find the latest prices of petrol in India here).
Diesel Price history in India:
Now, let us talk about the historical prices of diesel per liter in India. Here is a short-term view of diesel prices in the four Indian metropolitan cities:
The table given above shows that in the last few months of 2018, the diesel prices first have gone up and then they showed consolidation at the beginning of November.
Next, here is the long-term diesel price history in India. If you look at the table shared below, it is easily understood that the diesel prices in the said four Indian cities have actually witnessed consistently rising prices in the last fifteen years.
Quick Note: You can find the latest price of diesel in India here.
Difference between prices of Petrol & Diesel in India:
Below is a table shared for your reference which shows the price gap in diesel and petrol in the Indian metro cities during the mid of the year 2016.
Diesel Price /Liter
Petrol Price /Liter
Rs 6.18 / Litre
Rs 7.51 / Litre
Rs 9.55 / Litre
Rs 8.23 / Litre
Further, here is another table that would give you an idea of the price gap with regard to diesel and petrol during as of November 2018.
Diesel Price /Liter
Petrol Price /Liter
Rs 3.89 / Litre
Rs 7.16 / Litre
Rs 5.1 / Litre
Rs 5 / Litre
From the above tables, it can be clearly noticed how substantially the price gap has been narrowed down within the period of around two years.
Consequences of petrol and diesel price hike
As you might have observed from the above tables, the fuel price in India has undergone a significant hike over the last multiple years. So, what does it imply? Does it mean that the overall cost of living in India has gone up too? If you look back in 2018, the rate of consumer inflation in India was around 4.75%
When the price of fuel increases, in general, it narrows down the gap between disposable income and expenditure of the consumers. It means that the consumers will try to reduce the consumption of luxury commodities like automobiles and electronic equipment in order to manage their necessities comfortably.
Hike in fuel price also has a direct adverse effect on the revenues of a few industries like tyres and fertilizers as the retail prices of their outputs shoot upwards. However, if you look at the financials of oil producing companies in India, there is no doubt in saying that they do enjoy a gala time during such period.
Further, you might think that only those companies which produce crude oil based products suffer during the fuel price bull run. But, the fact is that most of the companies in our nation (belonging to diverse industries) suffer as a result of the price hike. Even if you consider the FMCG industry, the cost of its products goes up considerably as a result of the upward movement in the prices of diesel and petrol. This happens because transportation costs go up significantly.
Now, what kind of impact can you expect to see in financial markets during fuel price hike? Well, when the price of diesel and petrol goes high, not only people will try to cut down their unnecessary expenses but they may even reduce financial investing. In order to finance their necessities, people would refrain from putting their money in the financial markets.
Therefore, will the banks have adequate funds to advance the businesses? Not really! Can the corporate organizations listed in NSE and BSE comfortably raise capital through IPO and FPO? Certainly not! Will the Asset Management Companies of Mutual Funds have an adequate corpus to pour into the market? No, my friend, they won’t have!
The hike in the global price of crude oil depends primarily on the demand-supply theory that we study in Economics. However, it also depends on other factors like the trade war, geopolitical tensions, and willingness of oil-producing countries to charge a higher price. As we had already seen earlier that hike in crude oil price results in inflation. So, to fight against the same, the Central Government charges more taxes and duties on diverse stuff. For a similar reason, the RBI also instructs the commercial banks to increase their interest rates on loans so as to squeeze money supply in the Indian economy.
Further, the price of petrol and diesel can be controlled if we lay emphasis on a few points. Firstly, price controlling mechanism has to be adopted either partially or fully. The half of Retail Prices of fuels in India consists of taxes and duties. The government (both central and state) does need to look into the matter. It would also be great if the OMCs can try to witness some of the price burdens that the ultimate consumers have to bear in our nation.
Finally, the consumption of petrol and diesel in India in terms of US Dollar is even higher than the GDPs of many small nations across the globe. And that’s why the government and the people need to consider petrol and diesel price hike in India seriously.
Since childhood, we are taught to save money. “A penny saved is a penny earned.” And the idea of losing money is something which we are not psychologically programmed to opt for.
When you invest in stocks, there is a probability that its value may decrease if you have made the wrong investment choice. Unlike most other investment options like Fixed deposits, Gold, Real estate, bonds etc, the stock market is a place where your invested amount can fluctuate a lot within hours. And these daily fluctuation of prices ignite the fear of losing. And trust me, no one likes losing, especially their hard-earned money.
Moreover, when you invest in stocks, there is no guarantee that it will give you good returns. Even the safest stocks may decline in value because of unforeseen reasons. And that’s why, a majority of the population tries to keep a safe distance from the stock market.
But, there’s one thing that most of these people forget.
You are already losing money!!!
When you are not investing, you are losing the value of your money. How?
The old common answer- “Inflation”
Inflation can be described as a continuous increase in the general level of prices. And when the price increases, obviously the purchasing power of your money will decrease. The money in hand that you have ‘today’ is not of the same worth in ‘future’. Therefore, no matter how much safer you are keeping it in a vault or bank account, you are losing your money.
Currently, the predicted inflation rate in India is +4.89%. Therefore, if you are not making interest on over 4.89% on savings, this means that you are not beating the inflation and in other words, losing money. Frankly speaking, most of the savings account in India do not offer such high-interest rate. And in the worst case, if you are keeping cash, you won’t getting any interest at all.
Historically, stocks have out-performed all other investment options.
Traditionally, people in India used to invest in gold and property. The came savings, fixed deposits, bonds etc. And finally, since the stock exchanges became more active in India, the next investment options were stocks and mutual funds. Anyways, history says that the returns from the stock market has out-performed all the other investment options.
You can reduce the risk while investing in stocks.
Although you cannot completely get rid of the risk, nonetheless, you can definitely reduce it by following a few simple rules. And when the risk reduces, it will also decrease your fear of losing money. Here are a few methods which can help you reduce the risks while investing in stocks:
Diversify your investment:
It’s true that no one cannot correctly and precisely predict the future returns from any stock. However, you can increase the chances of being correct by making multiple good bets in different companies.
Even if two out of ten doesn’t perform well or fails miserably due to whatever reason, if the other eight stocks are performing decently, you can get decent returns and minimize the harm done on your overall portfolio. Portfolio diversification is the easiest approach that investors can follow to reduce the risks while investing in stocks.
Blue chip companies are large and well-established companies with a history of consistent performance. These companies are financially strong (usually debt-free or very low debts) and are capable to survive in the tough market situations.
Most of the blue-chip companies are the market leaders in their industry. A few common examples of blue chip companies in India are HDFC Bank, ITC, Asian Paints, Maruti Suzuki etc. These companies are comparatively safer to invest vs mid or small cap companies who are associated with high risks.
This is the easiest approach that people anyone can follow to minimize the risk without limiting the investment options. If you do not have time to study or research stocks or your own — hire a financial planner for making your investment decisions instead of you.
Now I understand that most people are reluctant to hire investment advisors or financial planners. But think of it in this way — If you can hire a doctor for taking care of your physical health, why cann’t you get the help of an investment advisor to take care of your financial health?
Ovearll, if you find investing by your own boring or do not give sufficient time to research in order to make the right investment decisions, then hire a professional.
Apart, a few other ways to reduce risk in your stock investments are rupee cost averaging, investing in index funds and having a big margin of safety.
It’s a fact that the fear of losing cannot be completely detached when you are investing in stocks. However, the ability to overcome this fear to make wise decisions is necessary skill to learn for the individuals if they want to build good wealth. Therefore, mind these three words and make sure that ‘fear of losing’ is not the actual reason why you are losing money.
Hi, I am Kritesh, an NSE Certified Equity Fundamental Analyst and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting
We cannot minimize the explosive effects of inflation. High inflation has the ability to topple governments, ruin nations and reduce economic growth. It discourages savings and reduces the overall productivity in the country. In its creepiest form, inflation can reduce the purchasing power of people, this means the pensions and savings of people can now buy less than it did before.
In response to this, governments have many powerful tools they can use to control the rate of inflation in the economy. These policies have been discussed in detail in this article.
What is inflation?
Inflation can be described as a continuous increase in the general level of prices. In some cases, inflation can be used to encourage spending in the economy. However, this is not always the case as inflation can often get out of hand and the purchasing power of people drastically decreases. The government will then have to intervene to create balance in the economy.
Inflation can be measured using the Consumer Price Index (CPI). The bureau of labour statistics chooses close to 500,000 products from more than a 100 categories which are included into a ‘basket’. The prices of the goods are used to calculate the price index.
Effects of inflation
Inflation, depending on its severity, has the ability to disrupt economies. There is an uneven distribution of income that can affect many sectors in the economy. They are discussed as follows:
— Effect on various economic groups- If there is low inflation in the economy, job seekers can benefit from this as increased demand will lead to a rise in employment. However, an unhealthy level of inflation can be disastrous for the economy as people pull their money out of financial institutions and their purchasing power reduces.
— Government spending- During inflation, the government, like individuals, have to pay more for wages and supplies. In order to raise more revenue the government can increase taxes but people will may have the ability to pay for them and some groups will be affected more than others.
— Savings and Investment- If inflation is on the rise, it is not a great time for savers as the decrease in the value of money reduces the value of savings. Many people move their investments to stocks and property during inflation. It is a favorable time for borrowers because the value of the money they owe reduces.
How Does The Government Control Inflation?
If the rate of inflation in the economy goes beyond a rate that is uncontrollable, the government has to intervene with policies to help stabilize the economy. Since inflation is the result of too much expenditure on the economy, the policies are created to restrict the growth of money. There are three ways the government can control the inflation- the monetary policy, the fiscal policy, and the exchange rate. They are discussed as follows.
— The Monetary Policy
Monetary policy is a tool used by the government to control the amount of money circulated in the economy. This includes paper money, coins and bank deposits held by businesses and individuals in the economy. Monetary policy uses interest rates to control the quantity of money in the economy.
— Open market operations
When there is high inflation in the economy, the amount of money created by financial institutions needs to be restricted. The Federal Reserve Bank lowers the supply of money by selling their large securities to the public, specifically to security dealers. The buyers pay for the securities by writing checks on the deposits they hold in the commercial banks. This is an effective way to control the supply of money as the deposits of the commercial banks at the Federal Reserve Bank are the legal reserve for the banks. With the sale of securities, the banks are forced to restrict their lending and security buying, therefore reducing the quantity of money in the economy.
— Increasing the reserve requirement
The reserve requirement refers to the amount of money that the commercial banks are required to have on deposit with the Federal Reserve Bank. A low reserve requirement means banks have more money to lend out which can increase the money supply. But when there is high inflation in the economy, the government increases the reserve requirement which restrains the growth of money and even reduces it.
— The rediscount rate
The rediscount rate is the rate of interest charged by the commercial banks. The commercial banks borrow from the Federal Reserve in exchange for a promissory note. In exchange, the Federal Bank increases the deposit of the bank. The rediscount rate controls the cost to banks for adding additional reserves. When inflation is high the bank increases the rediscount rate, which makes it more expensive for banks to buy reserves. This cost is usually translated to customers in the form of high interest rates on loans borrowed from commercial banks which ultimately reduces the supply of money in the economy. In order to control the supply of money in the economy with the monetary policy, the rediscount rate is used in conjunction with the reserve requirement and sale of securities.
— Fiscal policy
The Fiscal policy uses government spending and taxation to control the supply of money in the economy. The policy was designed by John Maynard Keynes who studied the relationship between aggregate spending and the amount of economic activity in society. He also claimed that government spending can be used to control aggregate demand.
— The decrease in government spending
Sending by the government constitutes a large part of the circular flow of income in the economy. During periods of high inflation, the government can reduce the spending to decrease the amount of money in circulation. In many instances, high government spending is the root cause of inflation. However, it is often hard for governments to differentiate between essential and non-essential expenditure so, the spending policy should be augmented by taxation.
— Increase in taxes
An increase in the level of taxes reduces the amount of money that people have to spend on good and services. The effect of the tax can vary with the kind of tax imposed, but any increase in tax would reduce spending in the economy. An increase in tax combined with a decrease in government spending can have a double-barrelled effect on the supply of money in the economy.
— Increase in savings
Another theory derived by Keynes was his belief in compulsory savings or deferred payments. In order to achieve this, the government should introduce public loans with a high rate of interest, attractive saving schemes and provident or pension funds. These measures lock people’s income into savings accounts for an extended period of time and are an effective way to control inflation.
Inflation can have a major impact on the economy and can affect the government, investments and the purchasing power of people. A high rate of inflation for an extended period of time can lead an economy into a recession. Fortunately, the government has the ability to use the monetary and fiscal policies to help control the supply of money in the economy. When used in the conjunction, the policies can help achieve a lower rate of inflation and a more stabilized and balanced economy.
Retire early, get financial freedom and travel the world!- It’s the common cubicle dream. But there are in fact many ways a person can make this a reality. Joining the FIRE movement which stands for ‘financially independent, retire early’ is not that hard provided you make the right financial moves while working a 9-5 job. FIRE has defined early retirement as not just leaving work but as gaining the financial freedom to pursue your passion projects and follow your dreams.
Retiring early, however, takes a lot of work and therefore many people find it challenging to achieve this. Contrary to popular belief, you don’t need to work in a certain high-salaried job or industry to retire early, anyone who has the long-term goal of retiring early can make it happen. With strong resolve and the right strategies, you can turn your dream into a reality. The key steps to early retirement are discussed below:
Track your expenses and make the necessary changes to your budget:
One of the most important things to do in order to meet all your financial goals, be it early retirement or buying a new home, is to analyze your current spending.
No matter how you look at it, you need to make changes to your current spending in order to achieve your dream of retiring early. This could even mean drastically reducing your spending. There are a slew of apps today that can help you track your expenses such as LearnVest or Penny. Most people with the goal of retiring early, aim to spend less than 50% of their income and put the rest into savings.
There are many ways you can work towards increasing your savings. If you are in debt, work towards aggressively paying off the loans so that any income you make in the future can be put directly towards savings. In addition to this, you can also cut back on unnecessary expenses such as that excessive coffee or those frequent restaurant dinners. You can also try and increase your income through side gigs or freelancing opportunities. If your goal is to retire early, frugal living should be your motto.
In other words, invest aggressively! The longer the amount of time, you allow your money to grow, the greater the rewards. Hence, it only makes sense that you start investing at the start of your career. Early retirement essentially means that you have a shorter amount of time to save money but a longer amount of time that the money has to last you so make investment your best friend.
Design your portfolio in a way that will generate long-term returns. While stocks can be a risky investment, in the long-term they produce very high returns. If you look at the historic analysis of the Indian stock market, taking into consideration its various downturns, the market barometer NIFTY 50 has averaged a little higher than 10.84% annually since inception. This means if you put a majority of your savings into an index fund, there is a good chance you’ll receive an annual return of 10.5%.
Many people assume you should look for low-risk investments options when investing for the retirement fund. But this is an inaccurate assumption. Investing in low-cost investment funds is recommended when you are near the retirement age, as you need to move some of your money into more liquid investments so that you don’t have to worry about the investments selling options when you need it.
Calculate how much money you need for retirement:
Planning for the future is the most important strategy when it comes to retirement. That is you need to estimate what your retirement spending will look like. To do this, you should analyze your current spending and look at what expenses will go up, down, added, subtracted or eliminated completely.
A few things to consider are your health insurance and rent. Many companies offer health insurance as part of the employment package, but for retirement, you need to make sure to factor in this expense. Another large expense is your monthly rent. If you hope to own a home before retirement, this should not be a problem but if you plan to rent, you need to make sure to include this in your retirement expense.
The earlier you start saving money, the more you would have accumulated when you decide to retire. Hence, if you start putting money away from the start of your career, there is a higher chance you can exit the workforce earlier. There is a rule of 25 that states that you need to have 25 times your planned annual spending when you retire. That is if you plan to spend $35,000 during the first year of retirement, you need to have a total of $875,000 when you retire.
The second rule of saving is the 4% rule which states that you can take out 4% of your invested savings during your first year of retirement and continue to draw out that same amount adjusted for inflation for the following years. This strategy was developed in the 1990s and was based on historical market conditions.
While neither of these strategies is fool-proof, they are considered reasonable when it comes to saving. Moreover, it is imperative to remain conservative with your savings when it comes to retirement.
The FIRE (financially independent, retire early) dream may seem a distant reality for many but with a little planning and smart financial moves, it can become a reality. But it also helps to rethink what early retirement means, it’s not always fancy cruises and dinners. For some, it could mean spending more time with your grandchildren or significant others.
Whatever it may be, as long as it is important to you to live by your own schedule and not that of the employers, you should diligently work towards getting out of the workforce early using the strategies listed above. Remember to start saving early because running out of money means running back to work.
Debt investment- this topic has been into a lot of contest since people started investing in the financial world, especially when people compare it with other investment options like equities or real estate. Although equity investments are known for their higher returns, however, investing in debt investments have their own benefits.
In general, if you have some idle funds and looking to invest in the financial market, you have two broad options. The first is to purchase something for a specific value and hope to dispose of at higher returns in the future. Such investment options include Stocks, Mutual Funds, Real Estates, Commodities, and Derivatives.
The other choice could be to lend your savings to some other person (or organization) and keep earning interests until you get your corpus back. This includes Bank Savings Account, Bank Fixed Deposit Account, Corporate Bonds, Government Bonds, and Debt Mutual Funds.
In this post, we will discuss what exactly are Debt Investments (focusing on debt mutual funds), types of debt funds, their benefits and more. However, before getting into that, let us first understand the basics of lending.
Basics of Lending:
The process of lending involves two parties. The borrower borrows the money from the lender as the former is in need of that. The former pays a specific regular payment known as “interest” to the latter for using the funds.
The loan is closed when the borrower repays the entire amount due to the lender. Here, ‘loan’ is also referred to as ‘credit’, ‘debt’ or ‘bond.’
Such instruments are called ‘fixed income securities’ because everything here is predetermined like the interest rate, maturity period, debtor and creditor.
How do Debt Mutual Funds work?
If you invest in a Debt Mutual Fund, you are simply giving loans to the issuing entity. Through Debt Fund investing, you can earn income in the form of interest and capital appreciation. You earn a pre-decided interest on Debt securities for a particular duration after the end of which such debt instrument will mature. Debt securities are also known as ‘fixed-income’ instruments as you are aware of what you will be getting.
In the case of Debt funds, the Fund Managers make investments across diversified securities. This gives ample scope for the Debt Funds for earning decent returns. Although no one can guarantee the returns for the same, however, debt fund yields return to fall in a predictable range. This makes the conservative investors interested in Debt Mutual Fund Investing.
The underlying assets of a Debt Fund usually consist of financial securities having a higher credit rating. The Debt Funds investing in higher-rated financial products will tend to be less volatile in comparison to low-rated securities.
An important thing to note here is that the duration (maturity) of the underlying depends on the Fund Manager’s investment strategy and the rate of interest prevailing in the economy. If the interest rate in the market falls, the Fund Manager may shift the underlying investments from short-term securities to the long-term ones and vice versa. The key differentiating factor among the varieties of Debt Funds is nothing but the maturity period of the underlying investments.
Types of Debt Funds
– Dynamic Bond Funds: In these funds, the Fund Managers keep altering the portfolio composition in accordance with the changing rate of interest in the economy. This fund’s average maturity period keeps fluctuating as the underlying portfolio is churned according to the rise and fall in the interest rates in the economy.
– Income Funds: These funds are similar to Dynamic Bond Funds but on most of the occasions, the underlying portfolio of Income Funds consists of securities having long-term maturity period. This gives more stability to the Income Funds as compared to Dynamic Bond Funds.
– Short-Term & Ultra Short-Term Debt Funds: These funds invest in the instruments having shorter maturity periods. Owing to their short-term nature, they are likely to be less affected by movements of interest rates.
– Liquid Funds: These funds invest in the fixed income securities which come with a maturity period of not exceeding 91 days. These funds seem to be a better option than keeping one’s liquidity in a savings bank account. This is because the former provides similar liquidity but at higher returns.
– Gilt Funds: These funds invest in only government instruments. The Government instruments are having high credit rating thereby come with low credit risk. Therefore, Gilt Funds are ideal investment products for the risk-averse investors who also prefer investing in the debt instruments.
– Credit Opportunities Funds: These funds aim in earning higher returns by taking a call on credit risks. These funds aim in holding lower-rated bonds that come with higher interest rates. The Credit Opportunities Funds can be riskier than any Debt Mutual Funds.
– Fixed Maturity Plans: These are closed-end Mutual Funds, which come with a lock-in period and invest in the debt securities. You can invest in Investments FMPs during the time of the initial offer period. An FMP is very similar to a fixed deposit, which yields excellent tax-efficient returns but it does not provide any guarantee for the same.
Who should invest in Debt Mutual Funds?
If you are a conservative investor, Debt Funds are an ideal investment option for you. You can even invest for a short-term period ranging from 3 months to 1 year. Debt Fund investing can also be of a medium-term which can range from 3 years to 5 years.
If you want to invest for a short-term where liquidity is your concern, then investing in the Liquid Funds could be more profitable than parking your money in a Savings Bank Account. Investing in the former would give you almost double the returns that you Bank Savings Account can yield for you.
For medium-term investing, you can go for Dynamic Bond Funds. Investing in such type of Debt Fund will fetch you more returns than a Bank FD of 5 years. For earning a regular income, you can look to opt for Monthly Income Plans (MIP).
What are the benefits of investing in Debt Funds?
– A perfect starter: During the early stage of your career, your income might be low and so be your savings. You might be unsure of where to invest your meager savings. Investing in debt fund would be a good starter to your investment journey. Gradually, you would learn more about investing, risk-reward relationship, financial planning and can diversify your portfolio with time.
– Adding stability to your investment portfolio: Debt Mutual Funds usually invest in the debt instruments. Therefore, they are comparatively more stable financial product than the equity investments. Debt Funds can provide some stability to your equity portfolio by diversifying the risk associated with your current investment portfolio.
– Long term growth: Through a Debt Fund investment, you would earn a return of around 8% without taking any significant risk. Further, if you hold your investment for more than three years, your investment would attract the benefit of indexation. Here, indexation allows you to inflate the purchase price using cost Inflation Index. In indexation, the purchase price is increased (adjusted for inflation) and deducted from the sale price to calculate long term capital gain. And obviously, this will reduce your taxable capital gains. In short, if you redeem your investments (partly or wholly) after three years, your returns in the form of capital gain would be more tax efficient as compared to keeping your money in a Fixed Deposit Account.
– Helpful in meeting emergency expenses: You should always have a fund for supporting yourself in unforeseen circumstances. Creating an emergency fund can help you a lot in tough situations. Here, investing in debt funds offer a great alternative to keeping your emergency money in the savings account as it offers similar liquidity, very low risk, and comparatively higher turns.
– Providing you liquidity: Debt Funds give you easy liquidity. You can keep investing your salaries in a Debt Mutual Fund and withdraw your money from such fund anytime. You can park your money in a Debt Funds and liquidate the same if you want to meet any of your needs.
Things to consider before you invest in a Debt Funds.
– Debt Funds are not entirely risk-free: Debt Funds are comparatively riskier than the Fixed Deposits as they are associated with both credit risk and interest rate risk. The Fund Manager might choose low-credit rated instruments for the underlying portfolio which gives rise to credit risk. Further, interest rate risk can be witnessed where the prices of the bonds may go down due to a rise in the interest rates.
– Cost: Debt Funds do charge you for managing your investment. Such fee is called an expense ratio. As per SEBI, the cap with respect to the expense ratio is 2.25%. Although the upper limit of expense ratio might look a little adverse, but over the long-term investment horizon, this would definitely help you in generating even higher money which you have paid in the expense ratio.
– There is no guarantee for returns: The underlying portfolio of a Debt Fund consists of fixed-income securities, but they don’t guarantee you any returns. The Net Asset Value (NAV) of your Debt Fund will fall if the interest rates in the economy shoot up as a whole. So, you would find Debt Mutual Funds attractive to be invested during the condition of falling interest rates in the market.
– Higher the holding period, better are the returns: You can consider investing in Debt Funds for any investment horizon as per your needs. However, this is to be noted that, the longer the investment horizon, the higher is the probability of gaining attractive returns.
– Achieving your long-term goals: Through Debt Fund investing, you can fulfill a plethora of your financial goals. You can make use of Debt Mutual Funds as a passive source of earning for supplementing your monthly salary. Furthermore, if you are a budding investor, you may invest some savings of yours in Debt Funds for meeting liquidity requirements. On the other hand, when you retire after around three decades, you may consider investing the lion’s share of your retirement benefits in some Debt Mutual Fund for receiving a regular pension.
– Don’t forget taxation on capital gains: When you redeem your units of a Debt Fund, you would earn income which is called capital gain. The capital gain is taxable. The rate of taxation of capital gains is dependent on the holding period of your units in such a fund.
The capital gain which is earned by you over an investment horizon of lower than three years is referred to as a Short-term Capital Gain (STCG). On the other hand, the capital gain of yours made by you on redeeming your units after holding them for 3 years or more is termed as Long-term Capital Gains (LTCG).
STCG earned by you is added to your net income which is thus going to be taxed as per your income slab. The LTCG earned by you will be taxed @ 20% after considering the effect of indexation.
Debt Mutual Funds are a wonderful investment option if you are a novice in financial market investing with low-risk tolerance.
As you gradually grow in your career, your earning increases and so does your risk appetite. Your investment keeps increasing and the proportion of Debt Fund in your investment portfolio keeps getting lower. However, when you retire, you would look for a stable source of income and again your financial assets will seem to be debt-heavy. So, your investment journey starts with Debt Fund and ends with the same. Therefore, you can’t really ignore the importance of the same in your professional career.
So, are you a fresher in the financial world and want to invest in low-risk investment options? Have you started investing for your future? If not, then what are you waiting for? Start your investment journey today with investing in the Debt Mutual Funds. Happy investing!
When people are in the best of their physical health, the obvious question among them is why should they invest in health insurance? Especially for the people in their early career when they find themselves physically fit and miles away from any health issues, paying a premium plan for ensuring health may seem an unnecessary expenditure.
Now, there is no denying the fact that investing in the long term wealth generating investment options during your earning career is inevitable. This will definitely help you to achieve your goals and maintain the expected standard of living of yours and your dependents even after your retirement.
However, when you retire, you also become old. It is a fact that old age brings health issues along with it. And hence, it is highly necessary for you to incorporate healthcare planning within the budget of your family financial planning.
What is health insurance?
If you search the meaning of the word ‘health insurance’ on Google, you will get the result as “Insurance taken out to cover the cost of medical care.”
In simple words, health insurance is a contract between you (policyholder) and the insurance company, where you pay a regular premium against which the latter assumes the responsibility in meeting your medical expenses. With increasing medical costs, having a medical insurance policy has become highly important for every family in India.
Although increasing access to advanced electronic media has created awareness among the people in India towards the importance of buying health insurance plans. Nonetheless, the majority of the population in India still fails to understand the importance of getting medical coverage for themselves.
If you have already realized the significance of having mediclaim for yourself and your family members, you are a step ahead from the majority. However, In case you don’t, let us help you explain why you should consider health insurance as an investment and not an expense.
6 Reasons Why You Should Get Health Insurance
1. Being Medically insured can help you avoid facing financial instability in future:
Medical expenses are going up day by day. Moreover, you may need to incur any emergency medical expense at any point in time. If you have not made separate provision for the same, you have to dig into your savings or sell off your assets to meet the medical needs of yours or your family. Buying a health insurance policy gives you the assurance of financial stability during any medical urgency.
2. Medical insurance enables you to get the best health treatment
Shortage of funds could make you opt for a reasonable medical treatment instead of choosing the best of the lot. Having a good mediclaim can assure you the best treatment for overcoming toughest of health conditions.
3. You can get thecoverage of hospitalization charges
In the last few years, not only the medical costs, but even the expenses of the out-patient department and diagnostic tests have also gone up a lot. This has further increased the importance to buy a medical insurance policy. The health insurance policies not only provide adequate coverage of the hospitalization expenses but also enable meeting the costs incurred in diagnostic and OPD tests, earlier and later of a specific time period as mentioned by the policy.
4. The modern dynamic lifestyle demands medical insurance
Over the past few decades, our lifestyle has undergone a plethora of changes. Frequent traveling, busy work schedules, unhealthy eating habits and a rise in the level of pollution in big cities have exposed us to the risk of new health issues. And that’s why medical insurance has become a necessary part of our life.
5. Opting for medical insurance will help in your retirement planning
During the old age, your income may decrease but your medical expenses will be high. However, here if you already know that your health is insured, you can spend on different options of your choice after retirement.
Health insurance plans also come with lifelong renewability features. You can renew your health plans until your death and there is no such age limit for it. This is going to be of immense help in the later stage of your life. Having medical insurance will offer you a lot of flexibility and will also reduce the burden on your kids to take care of your medical expenses.
6. You can enjoy the benefit of tax deductions on your health insurance plan
The health insurance premiums that you pay for yourself, spouse and dependent children are eligible to get tax exemption under Section 80D of the Income Tax Act, 1961 up to Rs 25,000. Moreover, if you or your spouse is a senior citizen (60 years or more), the limit will go up to Rs 30,000. By opting for health insurance plans, you can enjoy these tax deductions benefits. Check out this blog to study further regarding the tax benefit on health insurance as per Union Budget 2018.
Is there any right age to buy a health insurance policy?
Frankly speaking, there is no appropriate age to buy a medical insurance policy.
However, if you buy a health plan in your early age, you need to pay quite less for opting most policies. As you grow old, the premiums which you require to pay for your health insurance policy increase will also gradually increase. The reason being that the associated health issues and risk goes up with time. Medical insurance premiums are dependent on the age of the policyholder, his/her medical history, where he/she lives, etc.
Further, an important option that you need to consider while purchasing a health insurance policy is selecting critical illness medical insurance policy. The critical illness policy offers to pay a fixed amount if you are diagnosed with any critical illness which is under the coverage of that policy. You can either buy only the critical illness insurance policy or you can also opt for purchasing it as an add-on when you buy your regular health insurance. In case you are diagnosed with a critical disease, this critical illness policy does act as a great support to your mainstream health insurance plan. Besides, here are five must know things regarding critical illness insurance plan.
Why is opting for a health insurance plan important in a country like India?
Today, we live in a dynamic India where many of us don’t even follow a healthy lifestyle. It is resulting in a number of health conditions which require a lot of medical attention. A plethora of people in India are suffering from heart diseases and diabetes at an early age due to work stress and unhealthy lifestyle. In addition to that, respiratory issues, infectious diseases, and birth complications are also highly popular in India. Degrading health in India has really heightened the need for health insurance in the country.
So what do you think? Have you given a thought to protect yourself and your near and dear ones from health ailments? The way healthcare expenses are going up, it is getting more and more difficult with time for people to manage such costs. A wonderful way of protecting yourself from such a financial crisis is to opt for health insurance policies. So, why are you still waiting? Go on and get a medical plan for yourself and your dependents today!
In the last few years, Mutual Fund investing has gained immense popularity among the people in India. All thanks to AMFI and their tagline “Mutual Fund Sahi Hai”. However, a significant population in India are still more inclined towards Public provident fund (PPF) compared to any other investment option.
In this post, we are going to discuss what exactly is Public provident fund and why a majority of Indian families has so much faith in it. Let’s get started.
What is a Public Provident Fund (PPF)?
Public Provident Fund or PPF is an investment product which is tax-free in nature and comes with a maturity period of 15 years. PPF yields return similar to the government securities or G-secs. The returns are declared every month. Currently, PPF offers a return rate of around 8% per annum.
Your contributions in your PPF account up to Rs 1.5 lakh is eligible for tax benefit u/s 80C of Income Tax Act, 1961. On top of that, Interest earned is exempt from income tax and maturity proceeds are also exempt from tax.
By now, you have understood the basics of Public Provident Fund. Next, let us discuss some key features of PPF.
Opening your PPF account is hassle-free.
If you are an Indian citizen, you can easily open a PPF account (but not more than one). You can open the PPF account in your name or on behalf of your minor children, being a parent or a legal guardian.
A PPF account can be opened in the post offices or any designated bank branches like SBI and its subsidiaries, ICICI Bank, Axis Bank, HDFC Bank, Central Bank of India, IDBI, Central bank of India, Punjab National Bank, Indian Overseas Bank, Bank of India (BOI), and few others. You can even transfer a PPF account from a Post Office to a Bank account and vice versa.
However, if you are an NRI, you would be sad to know that you are NOT eligible to open a PPF account in India. Anyways, if you have already opened a PPF account in India while you were a resident, then you are allowed to operate your existing PPF account until 15 years with no option for extension.
You can take a loan from your PPF account:
If you are a PPF account holder, then you can take a loan from your PPF account, but only from the third year of investing. This loan facility would be available to you till the sixth year-end as afterward, your account will be eligible for withdrawal.
An important thing to note here is that you can only raise loan up to one-quarter of your corpus generated in your PPF account as per the previous year ending. The principal portion of your borrowing has to be repaid by you within the next three years time span. Further, the loan provided to you will be rated two percent high than the interest offered to you on the balance in your PPF account.
Your PPF account is safe:
The balance in your PPF account is completely yours and no one can take it away from you. Your PPF account is not attached for paying off any of your liability. However, please note that there is an exception to this. The Income Tax authority of India is free to attach your PPF account for recovering their Income Tax dues.
Don’t forget your investment limit:
You can invest in your PPF account either through lump-sum mode or via twelve monthly installments. You need to deposit a bare minimum of Rs 500 in a Financial Year to keep your account active. The maximum amount that is allowed to be deposited in a Financial Year is Rs 1.5 lakhs.
Please note that if you deposit any amount exceeding Rs 1.5 lakh in a Financial Year, such an excess amount will be considered as an irregular investment and the same will not attract any interest.
You can make nominee to your PPF account:
You are allowed to nominate a person to your PPF account. The nominee gets the authority of collecting the money in your PPF account occasion of your death. Being a PPF account holder, you are required to mention the percentage of your share in case there is more than one nominee.
The nomination is disallowed to a PPF account if the same is opened on behalf of a minor. You can alter the nomination to your PPF account at any point of time throughout its maturity period.
Don’t keep any misconception regarding lock-in period:
According to the PPF scheme rules, the maturity period starts from the END of the Financial Year in which you have made a deposit. It is not calculated from the date of the opening of the account. For example- Suppose you have made your first contribution on August 10, 2018. Then, the 15 years lock-in period will be computed from the 31st March of the next year. In this case, the maturity period will be 1st April 2034 (technically 16 years).
You can start partially withdrawing your balance from your PPF account at the commencement of the 7th year, i.e. after completing six years. However, you can withdraw only up to 50% of the available balance at the 4th year–end to the year when the money is being withdrawn or 50% of the closing balance of the previous year, whichever is lower.
After the end of the 15 years maturity period, you will become eligible for complete withdrawal. If you still wish to extend your investment intact, you can wait for a further period of five years before making a complete withdrawal.
If you fail in keeping a minimum deposit of Rs 500 in a year, it can lead to discontinuation of your PPF account. During the occasion of discontinuation of your PPF account, you would get the invested amount along with corresponding interest, but only after the expiry of the lock-in period. The discontinued account will generate interest in every year until maturity.
Facility of withdrawal borrowing is not allowed to you if your PPF account is a discontinued one. For availing such facilities, you would require to continue your account by paying the stated penalty and minimum subscription for such discontinued period. So, please make sure that you are investing the minimum amount in your PPF account every year to keep it in an operational mode.
Indian is an FD centric country and PPF is still a favorite among most of the retail investors of middle-class background.
Moreover, PPF is a safe financial product as it is backed by the Government of India. The underlying portfolio of PPF consists of fixed income securities where no exposure to equities is involved. Therefore, the Public Provident Fund is highly suitable for those investors who are highly risk-averse but at the same time looking for an inflation-adjusted return on a regular basis.
Although these days, Indian youth is getting inclined more towards Stock Market trading and Mutual Fund investing, still they are unable to move their eyes from the luster of PPF. By offering a regular and guaranteed return, support from the Government and reasonably hassle-free investment process, PPF continues to meet the long term financial needs of millions of people in India.
Overall, if you are you a risk-averse individual and want to avail tax benefit on your gross income along with building wealth, then PPF is an astounding option for you!!
ULIP or Unit Linked Insurance Plan is a financial instrument which is a fusion of insurance and investment. Therefore, if you are a ULIP holder, you are going to enjoy the benefits of both insurance and investment at the same time.
Being a ULIP holder, you are required to pay a regular premium for the insurance part. A part of such premium paid by you would get invested in financial instruments (combination of debt and equity) as per your choice of weightage. It is solely your discretion what your investment is going to be consisted of. Your choice is should match with your risk appetite, liquidity requirement, and financial goal.
On the other hand, a Mutual Fund is purely an investment product. The AMC or Asset Management Company pools the money from the investors (also called unit holders) for investing in financial instruments like shares, derivatives, and bonds. Such investments are professionally managed by the AMC through its experienced and knowledgeable fund managers. (Read more about Mutual Funds here.)
After the re-introduction of long-term capital gain (LTCG) tax on equity and equity oriented Mutual Funds in the Union Budget of 2018, people in India have started to discuss whether ULIPs have become more rewarding than Mutual Funds. In fact, many experts have stated that ULIPs have become more profitable than equity oriented Mutual Funds after LTCG tax has come into effect. ULIPs are not subjected to any capital gains tax.
However, it has to be stated here that taxation is not the only parameter that you should consider for selecting an investment product. There are many other key factors which you should keep in mind before selecting any investment product.
ULIP vs Mutual Fund
Here are some parameters that you should consider before selecting one investment product between Mutual Fund and ULIP.
What is your purpose of investing?
Before getting started, you should clearly define your purpose for investing. Having no clarity in purpose or creating vague goals in mind would never help you meet your financial needs in the future.
Suppose, you have set a goal to accumulate Rs. 2 crores in 30 years, you should go for investing. If your objective is to have your life insured, you should think of going for a term insurance plan.
ULIP is not a financial product which can provide you with an adequate insurance cover. If you already have got an insurance policy in your name, then you can consider investing in ULIP additionally. ULIP has an insurance element in it which Mutual Fund lacks.
In short, a ULIP plan is a combo of insurance and investment product at the same time. The premium that you pay on your ULIP plan, a part of the same is meant for providing you with an insurance cover. The rest of your payment is invested in a combo of debt and equity which is as per your discretion.
Further, it is a fact that a mutual fund does not offer any insurance component. But if you’ve planned properly, it is may not be a huge issue. You can start a mutual fund SIP and simultaneously take a term insurance plan alongside. It is going to help you artificially create a ULIP for yourself.
Who is more transparent between Mutual Fund and ULIP?
The disclosures of the underlying portfolio of a ULIP are not as transparent as that of a Mutual Fund because it is not mandatory for the ULIPs to disclose their NAVs on an everyday basis. In addition to that, the exact break-up of load on a ULIP plan is not available, unlike a Mutual Fund scheme.
Apart from the loading, expense ratio which in regard to a Mutual Fund plan is also mandatorily required to be stated clearly in the mutual fund fact sheet.
The Mutual Fund industry in India definitely comes in the list of the most regulated and transparent industries across the globe. From returns to underlying portfolios to sector allocation of investments, one can clearly find all the information in the online platform of an AMC and various other websites.
Furthermore, many analysts track Mutual Funds and publish their analysis time to time. It is not that ULIPs don’t disclose the information on analysis. But, they are not tracked by the analysts in a detailed manner like Mutual Funds.
Which is more tax efficient? ULIP or Mutual Fund?
If you invest in a ULIP plan, the premium that you will pay is eligible for tax deduction u/s 80C of the Income Tax Act, 1961 up to Rs.1.50 lakhs.
However, you won’t be getting this benefit if you invest lump sum or SIP in any equity or debt fund. Only if you invest (whether lump sum or SIP) in an ELSS Mutual Fund (an equity fund), then you can avail the income tax benefit under the said section.
Again, the capital gain from redeeming your investment in ULIP is fully tax-free in your hands, irrespective of whether the investment is in the nature of equity or debt.
However, this is to be noted that you are required to pay 15.6% effective tax on short-term capital gains in case of Mutual Fund redemption. And also, 10.6% tax has been introduced on long-term capital gains with effect from April 1, 2018, from equity mutual funds, in case the aggregate gains cross Rs.1 lakh.
Taxation rate on short-term gains from the redemption of debt funds is per one’s income tax slab, while the long-term capital gains are subject to tax @20% (excluding Cess) after indexation. From the angle of taxability, ULIP definitely seems to be a better choice, provided it yields higher after-tax returns than Mutual Fund.
Note: If you want to learn more about taxation of ULIPs, you can read this article. For studying more on taxation of Mutual Funds, you check out this post.
ULIP vs Mutual fund Comparison on the basis of costs.
If you decide to invest in a ULIP through online mode, you would save incurring significant expenses which are not only limited to administrative expenses and fund allocation charges. On the other hand, the expense ratios of Mutual Fund schemes are a little high, especially for the active funds. Furthermore, you can reduce the expense ratios if you invest in the direct plans.
Both these financial products have their own pros and cons. But, it can still be said that if you compare Direct Mutual Funds with ULIP, the former seems more cost effective.
Mutual Funds are more liquid than ULIP.
One of the most important parameters to look into any investment product is its liquidity.
An investment option should be preferred if you are able to liquidate your investments when you are in need of doing so. Mutual Funds are highly liquid in nature. You can redeem your units at any time and would get the proceeds straight into your bank account at most by 3days.
But, you can’t withdraw your investments from ULIPs unless the minimum lock-in period of 5 years gets over.
For mutual funds, it is only the tax saving ELSS funds where your investments get locked-in for 3 years. Rest other funds can be bought/sold/increased/decreased at any time. But, in case of ULIPs, the lock-in periods is an additional two years compared to even tax saving ELSS’s locking period.
Even after the lock-in period of ULIP ends, if you redeem your investments, it will around a week for your money to get credited in your bank account.
In terms of profitability, who is the winner?
In the case of ULIPS, a significant portion of your premium is actually spent towards costs, in the initial five years. The same gradually gets lower over time. So, even in an excellent bullish market, it will take you around half a decade to break even. Hence, if you look to earn returns which would beat the market in the long run, you require staying invested in ULIPs for at least one to decades.
However, the financial situation is not so complicated in the case of Mutual Funds. Many active mutual funds continuously beat the market and give superior returns to their shareholders since their origin. Furthermore, if you are investing in equity funds via the SIP route, you also be gaining the advantages of rupee cost averaging.
Note: To know more about profitability, check out this blog by Economic Times.
Flexibility – Do you know Mutual Funds offer more flexibility than ULIPs?
Investing in Mutual funds is of more flexibility than ULIPs. You can make a move from one scheme to another within the same fund house or another one. But, ULIPs allow you only to switch your investments from equity to debt or debt to equity but only within the same insurance house.
So, if the fund manager of your ULIP plan is underperforming or resigns from the company, it is going to be a matter of concern for you. You simply cannot move in such an adverse situation to a new insurance company without redeeming your existing investments before the end of its maturity period. A similar situation does not arise in the case of a Mutual Fund.
In this post, we have tried to highlight the features of Mutual Fund and ULIP. We have tried to draw a line by line comparison between these two investment products to help you understand how they both work in real.
Now, let us quickly summarize what we have discussed in this article.
ULIP neither gives an adequate life cover nor offers a great investment opportunity.
A Mutual Fund plus a Term Insurance Plan can comfortably compensate a ULIP.
Mutual Funds are more transparent than ULIPs and also provide more comprehensive disclosures.
ULIP is more tax efficient than Mutual Fund, given the former’s after-tax returns are higher.
Both Mutual Funds and ULIPS investing are associated with several charges.
Mutual Funds are more liquid, profitable and flexible than ULIPs.
From the above summary, it is clearly understood that the Mutual Fund seems to be a better financial product as compared to ULIP.
Generally speaking, the concept of combining insurance and mutual funds into one specific product is against the essence of financial planning. Financial planning means you will buy term policies for covering life risk followed by SIPs on equity funds to grow long-term wealth. ULIPs combine insurance and investment into one financial product thereby making ULIPs prone to mis-selling. This is because it is highly probable that many investors would fail to understand where insurance actually begins and where investing ends.
Anyways, ULIPs have always been more tax friendly as compared to Mutual Funds. On top of that, the introduction of income tax @ 10% on LTCG tax from equity investments, by the Union Budget 2018 has given ULIP more boosts. But, as discussed, you don’t choose an investment product on the basis of one parameter, do you? Mutual Funds do outweigh ULIPs on several grounds like profitability, transparency, flexibility, and liquidity.
Anyways, if you are sloping towards ULIPs, let us first discuss when you should consider opting for ULIPs.
Do you want to have a life insurance cover which comes with an investment opportunity? Are you comfortable with moderate returns? If both of your answers are a yes, then ULIP is suitable for you.
Further, can opt for ULIPs if your risk appetite is low or on the medium side.
Apart from that, if you are looking for a tax saving financial instrument where liquidity is not of much importance to you, then also ULIP would not be an appropriate choice.
Now, let us discuss when you should give a thought to start Mutual Fund Investing.
In case you have a risk appetite of a medium or higher side, then Mutual Fund is going to suit you.
In case you are seeking a pure investment product with high returns, then Mutual Fund is the answer.
And finally, if you are okay with paying a little additional tax on capital gains, but you want your investment to be liquid (Except ELSS), then you can go for Mutual Funds.
That’s all. We hope this article of ours will add to your knowledge and enable you to take a more rational decision with respect to your investments in the future. Happy investing!
Deciding how you want to invest your money is often hard. You need to take many factors into consideration such as risk, returns, taxes, and inflation. It takes a lot of forethought and groundwork to figure out a way to get the best return on your investments.
Yet, there are some investors who choose to invest in companies that are not only financially stable but also make a positive impact on the environment. Socially Responsible Investing or SRI is choosing to invest in stocks that provide a financial gain as well as do social good.
The companies are evaluated based on the ESG index: environment, social justice, and corporate governance.
Although socially-responsible investing is still up and coming in India, it is expected to gain greater momentum in the next few years. Companies have become more aware of the ESG factors and are looking to incorporate more of it into their business practices.
Socially Responsible Investing History
Socially responsible investing began in the early 1700s when the Quakers refused to participate in the slave trade in the U.S. Pastor John Wesley, the leader of the Methodist church claimed it was a sin to make a profit at the cost of your neighbor’s well-being. He stated that it was unethical to gamble and invest in industries that used toxic chemicals.
For many decades after John Wesley’s speech, investors avoided industries such as tobacco and liquor referring to them as ‘sin industries’. This evolved in the 1960s when investors decided to invest their money in companies that promoted social causes such as women’s rights and civil liberty.
Socially responsible investing played a huge role in South Africa during the 1980s when investors began pulling out their money due to the apartheid or the segregation of races. SRI had a prominent role in helping bring an end to the apartheid in 1994.
If you look into the American and European nations, they already a family of indices evaluating the sustainability performance of thousands of companies trading publicly. The Dow Jones Sustainability Indices (DJSI) launched in 1999, are the longest-running global sustainability benchmarks worldwide. To be incorporated in the DJSI, companies are assessed and selected based on their long-term economic, social and environmental asset management plans.
For India, S&P BSE has three main indices that measure corporate sustainability: S&P BSE 100 ESG INDEX, S&P BSE GREENEX, and S&P BSE CARBONEX.
How to be a Socially Responsible Investor?
Here are a few points that can help you become a socially responsible investor:
– Know the difference: The first and foremost important step to become a socially responsible investor is to know the difference between traditional and responsible investing. The difference might be in returns that you get from your investments. The returns from socially responsible investing may differ a little from the traditional one as you might be leaving behind a lot of high return investment options. However, always remember the reason why you have opted for this way of investing.
– Do your research: This is where investors use negative and positive screening to shortlist investment options. In the negative screening, they avoid investing in companies that don’t relate to their social values. Many mutual funds that are socially responsible screen out tobacco and liquor companies. One type of negative screening is divestment, this is where investors take their money out of certain companies because they do not like their business practices or social values.
Along with screening out negative companies, it is also important for investors to choose companies that align with their values. These are companies that strive to bring change to a social aspect that the investor finds important along with their socially responsible business practices. This is also known as impact investing or incorporation of ESG.
– Use your influence as a shareholder: Shareholders not only invest in companies that align with their values but they also use their position to influence the actions of the company in which they own stock. Investors do this by filing a shareholder resolution. This is a document outlining the shareholder’s suggestions for management on how to run the company in a more socially responsible way.
– Invest in the community: This is where an investor invests in companies that have a positive impact on the community. This is usually done in low-income areas where the investment is used to provide loans to people and small-business owners who would otherwise have trouble getting approved for a loan. Community investments also support ‘green companies’ that have a large carbon footprint on the environment.
– Lead by examples: Socially responsible investing is still in the early adoption phase. By making the right investment choices, you can make a real positive impact on the community- along with building wealth. Moreover, sooner or later, social conscious will become the selling point for global companies. And you, being a part of it, can lead the movement.
How to get started with Socially Responsible Investing?
1. Decide what your social principles are-
Before you choose your stocks you need to decide what social goals you want to promote. You should focus on your values and what you want to achieve through your investments.
2. Decide what your financial goals are-
The next step is to decide what financial goals you want to achieve through your investment just as you would with any other investment. You need to decide how much return you need to meet your goals as well as how much risk you are willing to handle. SRI has been shown to provide comparable returns as a traditional stock would.
3. Choose the fund that meets your needs and goals-
Once you have decided what your social and financial goals are, the next step is to find the investment that’s right for you. The most common ESG funds in India include Tata Ethical Fund, Taurus Ethical Fund, and Reliance ETF Shariah BeES.
Social investing has also resulted in the success of micro-finance. This was created by social investors to create an impact on small businesses and has now become an industry worth over $8bn and is now a mainstream financial service.
Socially Responsible investing is becoming increasingly popular in India and there has been a visible shift in the market strategy adopted by many participants as they incorporate social, economic and governance (ESG) factors into their investment process. Stakeholders realize the importance of their role in financial markets to influence sustainable growth.
According to the Indian Impact Investors council ‘more than 30 impact funds have invested in social enterprises in India’. There has been $2billion investment in over 300 companies in India.
While socially responsible investing is still not as big as traditional investing in India, it is still a rapidly growing market. Social investing in India has helped provide basic needs such as housing and education to the poor. Many investors have now realized the power and influence they have to make a positive impact on society.
Goal-based investing, also known as Target based investing or Goal-driven investing has been into a lot of buzzes lately. The name itself defines this investing strategy.
However, still many investors do not know what exactly is a goal-based investment and how to pursue it. In this post, I’ll try to answer the most frequently asked questions regarding goal-based investing. Here are the topics that we’ll discuss today:
What is a goal-based investing?
How is goal-based investing different from traditional investing?
Why goal based investing is the key to long-term success?
How to get started with goal-based investing?
This post may change the way you look towards investing. Therefore, make sure that you read this article till the end. Let’s get started.
1. What is a goal-based investing?
Although goal-based investing is not a new concept and many financial experts have been following this strategy over a long period, however, it started getting fame recently.
Goal-based investing is a new way of wealth management where the individuals focus on attaining specific objectives or life-goals through their investments. Here, before starting to invest, the individual tries to answer the question- “What exactly are you investing for?”.
The best part about the goal-based investing is that here the investors do not focus on getting the highest possible returns. But the aim of this investment is to reach the desired returns that meet their goals.
In a goal-based investment, the individuals periodically measure the progress on their returns against the specific goals. Instead of trying to outperform the market, they try to attain their goals within the desired time horizon.
Moreover, the goal can be person specific like planning for children education, retirement fund, buying a new house or even financial independence. A few factors included while planning goal-based investments are the aim of the person per age, risk tolerance, financial situation, and investment horizon.
2. How is goal-based investing different from traditional investing?
The main motive of traditional investing is to get higher returns and generally to beat the market.
Here, the individuals compare their returns with the index such as Sensex or nifty in order to find whether their personal investments are over or underperforming.
On the other hand, goal-based investing redefines the success based on the individual’s goals and needs, rather than whether they beat the market or not. This strategy tries to shift traditional investing to a personal financial goal approach and helps to invest based on needs and risk tolerance.
The problem with traditional investing is that they do not focus on the individual’s needs. In such a scenario, no matter, how good are the returns, if the individuals are not reaching your final goal, then the returns might not be good enough for the individuals. After all, investing is a long-term activity and NOT a phenomenon of beating the market for a year or two.
Goal-based investment allocates the funds depending on the individuals’ situation and aims. For example- if your goal is retirement, then you might choose a conservative strategy with a majority of investments in debt funds. On the other hand, if your goal is to build a corpus for your children’s marriage, you might choose an aggressive strategy with 50% investment is equity and rest 50% in debt.
3. Why goal based investing is the key to long-term success?
The biggest advantage of goal-based investing is that it increases the individual’s commitment to invest consistently in order to reach their life goals. Unlike traditional investing, here the individuals participate actively and observe the progress towards their goals.
Moreover, having a long-term strategy helps the individuals to avoid making impulsive decisions based on market fluctuations. As the individuals are more focused to achieve their goals, they are less inclined to make spontaneous decisions just with an expectation to get a little higher return. Goal-based investing prevents rash investment decisions by providing a clear process of identifying goals and choosing strategies to achieve them.
Lastly, it also avoids the situation of under-saving (and under-investing). As goal-based investing continuously monitors the progress of individuals towards their goal, and hence they remain updated on how far they are from their goals. In a case where they are under-investing, they can re-improvise their strategy so that they can reach their goal in time.
Although planning a goal-based investing requires a detailed study of the individual’s goals, financial situation, time-horizon, and risk tolerance. However, here are a few simple steps that can give you a rough idea of how to get started.
The first step is to clearly define your goals and the time horizon to attain them. The goal can be building a corpus for buying a new house, savings for children education/marriage, retirement etc. You can even have multiple goals and differentiate them as short-term, mid-term and long-term.
The next strategy is defining your strategy of where you’ll invest and how. Depending on the risk-tolerance, required rate of return and time horizon, you can choose different funds like equity, debt or a combination of both. Further, you also need to decide your monthly, quarterly or yearly contribution to all these funds.
The next step is to be disciplined in following your strategy. To attain your goals, you need to make consistent investments.
Finally, periodically monitor and review your progress towards your goal. If your progress is not in line with your purposes, you might need to revise your strategy and re-allocate your funds so that you can reach your goal in time.
Goal-based investing is a relatively new way to achieve personal needs by investing in a definite strategy. It’s a good alternative over traditional investing which does not focus on the individual’s goals and financial situation.
Most individuals start investing in the market without any goal. There are even a few who invest in the market just for fun and to make a few extra bucks alongside their primary income source. And it’s perfectly okay to start like that. However, with time you need to eventually decide a goal for your investments. It will help you reach them in time and to avoid situations of taking unnecessary risks just in order to get some extra returns.
Besides, another benefit of goal-based investing is that it helps in ‘Guilt-free spending’. Here, as you already know that all your goals have been taken care of, you can spend the additional income on something that you love without any guilt.
Final thoughts, “Investing is good. But it is even better when attached to a goal.”
Hi, I am Kritesh, an NSE Certified Equity Fundamental Analyst and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting
And in this post, I am going to share a few of my learnings regarding what exactly is financial independence and early retirement (FIRE) and why you should sign up for this movement.
I hope you are also as excited as I’m. Let’s get started.
What is Financial Independence and Early Retirement (FIRE)?
Let me start with a question. If I ask you to think about a retiree, what picture comes in your mind? If you are like me, then most probably the picture is of your grandparents.
In general, most people dream of financial independence or retirement only by the age of 50s or 60s. After all, thinking about early retirement might even sound insane to people who are living pay-check to pay-check and have a number of dependents (like spouse, children, parents etc) to support.
However, time and again, a lot of ordinary people with similar financial situations like that of us- have proved that financial freedom can be achieved even at a comparatively young age if people have a definite plan and are ready to put some serious efforts.
“Financial Independence and Early Retirement (FIRE) is a lifestyle movement that aims at reducing expenditures and increasing investments in order to quickly achieve financial freedom and retirement at an early age.”
In simple words, the two terms described in FIRE can be explained as:
Financial freedom — which is a financial situation where an individual does not have to work for the sole purpose of making money anymore.
Early retirement — is a situation of quitting your job/career and pursuing other activities that you’re passionate about.
Anyways, most FIRE enthusiast does not always look forward to quitting their job completely and not working at all. However, after attaining financial independence, one can be picky about their job and choose whether they want to continue working or not. Nonetheless, people who sign up for FIRE targets to become financially free in their 40s, 30s and sometimes even in their 20s.
This movement has got a lot of momentum in recent years. A lot many people are signing up for FIRE- who want financial freedom and early retirement to pursue what they always want to do when they still are young enough to enjoy it.
Does FIRE mean the same for everyone?
Although both financial independence and early retirement are crucial steps, however, both side of the equation of FIRE may not be always balanced for different individuals.
Many people prefer financial freedom over early retirement. Some may even plan to work at the same place when they are financially free just because they enjoy doing it. However, financial independence gives them a choice to choose whether to work or not.
Moreover, how much net worth is required to attain financial independence also varies from people to people. As a rule of thumb, if your net worth is greater than 25 times your annual expense, then you might be financially free.
However, many individuals choose a higher factor just to give a benefit of the doubt in case of unforeseen emergencies.
Who is FIRE for?
In the general population, there is a myth that FIRE can only be achieved by people who earn a lot of money. And I agree to a little. After all, making huge money obviously helps towards the path of attaining financial freedom.
However, this is not the only requirement. In order to obtain financial freedom, one also needs to optimize his spending habits.
FIRE can be more easily attainable for those people who can save money and are willing to follow a disciplined path. Even if you do not earn a huge income, still you can reduce your expenses, build other sources of income and invest intelligently to grow your net worth.
Overall, attaining FIRE depends more on the willingness to develop a financial freedom road-map and sticking to a plan. Moreover, it’s not much difficult if you are ready to make some small but significant optimizations in your life.
The basic principle behind FIRE.
The basic principle behind attaining financial independence and early retirement is very simple-
Spend less than what you make – This is the method used to make a big distance between your income and spending, which most people fail to do.
Invest your savings: By investing intelligently, you can make your money work for you and let it grow with time using the power of compounding.
Anyways, deciding where to invest can be a personal preference. You can choose different investment options depending on your risk appetite like stocks, bonds, index funds, rental properties, real estate etc.
Actionable steps to reach FIRE:
Here are the five actionable steps that can help you to work towards conquering financial independence and early retirement:
1. Figure out WHY you want to attain FIRE.
This might be the most crucial question to ask before you start your journey of financial freedom- Why do you want to attain FIRE?
The reason can be as simple as to spend more time with your loved ones, to travel or to start a long-dreamed business with your pals etc. However, it’s really important that you figure out your why. Having a definite reason will help you keep motivated to pursue FIRE and to stick with your plan.
2. Track your expenses
The next step is to track your monthly (and annual) expenses by looking at your bank statements, credit card statements, and other bills. This will help you out to find how much you are spending and moreover, where exactly you’re spending each month.
Tracking your expenses will also guide you to figure out whether your expenses are meaningful or you are just spending recklessly. Quick Note: You might be a little shocked after calculating your expenses. Generally, it is way higher than what an individual roughly calculates in his mind.
3. Calculate what your lifestyle may cost you per year
After tracking your expenses, you need to figure out how much are your annual expenses and what net income you will require to live a lifestyle that you want to pursue. (Quick tip: Keep in mind about inflation while doing your calculations.)
4. Start working to optimize your expenses and to increase your savings
Once you have figured out your expenses and how much you need annually to start living your preferable lifestyle, then start working to increase your savings. You can cut back the small but significant expenses and optimize your spending so that you can save to the fullest. A few ways to reduce your expenses and save more:
Purchasing used car instead of a brand new.
Lowering your house costs/maintenances
Avoiding frequent visits to restaurants.
Buying monthly groceries instead of frequent visits to the supermarket.
Adding secondary sources of incomes etc
Although these steps are known and quite straightforward, still they are effective to reduce your spending and to increase your savings.
5. Invest your savings
The final step is to spend your savings intelligently in the different investing options which can give you the best possible returns.
Anyways, always keep in mind your risk appetite while selecting the investment option. For example, if you are not much comfortable in taking higher risks, then you can invest in bonds or index funds. On the other hand, if you are young and willing to choose slightly riskier options to get higher returns, direct investment in stocks can give you great returns.
While making decisions, plan your investments in such a way that your future assets should be enough to generate sufficient income for you so that you do not need to work any longer.
Quick Note: Although saving money is considered as the hardest step to attain FIRE, however in actual, the toughest one is to keep patience. After all, it might take years for your money to compound to the level to attain financial freedom. And all that time, you have to avoid the urge to reckless spend your money. And therefore, an individual requires a lot of patience to stick to his plan over long-term.
Although many people have publically shared how they achieved their financial freedom and retired early through their blogs/articles, still FIRE is a relatively new concept in this society which believes that working continuously from their 20s to 50s is the only way to live a successful life.
Moreover, different people have different versions of FIRE. This movement basically means to live frugally and make your money work for you in order to attain financial freedom and to retire from your full-time work as soon as possible. However, not everyone has the same expectations from it. For example, whether one wants to go for a mini-retirements, part-time retirement or permanent retirement after attaining financial freedom- it totally depends on the individual’s preference.
Anyways, although it’s not easy to achieve financial freedom and retire early, however, it is practical and achievable even by people making average salary by building a financial plan and strictly adhering to it.
That’s all for this post. I hope you’ve enjoyed reading it. Finally, if you are also a financial independence and early retirement enthusiast, then spread the FIRE among your friends and family. Cheers!!
Hi, I am Kritesh, an NSE Certified Equity Fundamental Analyst and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting
Hello readers. Many a time, you might have heard that you should keep a high credit score. You should not default that EMI or else it will hurt your credit score.
An obvious question that may come to your mind is what actually is a credit score? How are they measured? Moreover, why should you care whether your credit score is high?
Today, we shall be covering this hot topic in personal finance which we believe is central to addressing the financial health of any individual.
The topics we shall be covering are as follows:
What is a credit score?
Why is credit score important to you?
How is credit score measured?
Where can you get your credit report?
How can you improve your score and how long does it take?
This is going to be a very interesting post, especially for the youngsters. Therefore, let’s get started.
1. What is a credit score?
Credit score is a metric used by banks and lenders to provide a comprehensive risk profile of a borrower. It is provided by four companies in India namely TransUnion CIBIL, Equifax, Experian and Highmark. The most popular agency of this being TransUnion CIBIL which provides the fabled CIBIL score.
The score is basically a reflection of your monetary habits derived from your transaction history upto three years which banks give these agencies periodically.
Every time you approach a bank for a loan or credit card, the bank tries to gauge the risk that comes along with your loan application. Gone are the days when your branch manager used to engage you in a long and mundane conversation asking about everything from your family background to your parents’ monthly pension before sanctioning the loan you asked for. Nowadays, they just send a mail to the credit agencies asking them for your credit score.
Upon receiving this request, the credit agencies aggregate your transaction data from multiple banks to ratify your profile into a scale of 300-900 to give a simple quantified data point for banks to make a judgment. After analyzing your score, the banks decide whether to accept or reject the application for the new credit card or loan, period.
The score bands used by banks for making an inference about your risk profile are as below
Credit score band
You have done great work on your score, make sure it doesn’t dip.
You most likely a couple of hiccups in your payments but that shouldn’t stop banks from rejecting your applications. You could improve your score through minor improvements
Although you may not be able to get loans immediately. You could improve your score within a matter of 2-3 months through planned action.
You have several missed payments and defaults. Most banks would reject you right away.
Since a lot of things in life is unpredictable like the occurrence of disease or death of a family member, it would be beneficial to keep a healthy credit score so that one can always avail a line of credit when needed.
3. How is credit score measured?
The credit score may vary slightly due to the difference of calculation between each of the credit agencies but they more or less look at the same things to arrive at your score.
The following are the different parameters the credit agencies use to judge your score along with the weightage attributed to each of them.
Credit Mix and Duration
Credit History: This is the most important factor in determining one’s credit score. The agencies look at one’s loan repayment data provided by the banks complete with the loan schedules, EMIs, late payments, and outstanding loans.
Credit Utilisation: This basically the percentage of loan one has outstanding to the total loan amount that can be availed. Ideally lower the loan one has outstanding the higher one’s score.
Credit mix and duration: The type of loan you avail also has a bearing on this aspect of one’s credit score, a higher amount of unsecured loan could lower credit score faster than an equivalent amount of secured loans. The reason for this being that secured loans are backed by property or any other asset that the bank can claim in case of default making it less risky than an unsecured loan.
Other factors: These include miscellaneous activities such as the number of hard inquiries made at the bank for loans and credit card applications. The banks often construe this as a sign of a person being under financial stress. This may have a negative impact on the credit score.
4. How can you get your Credit Report?
As per the RBI directive in 2016, every customer is entitled to one free report from each of the credit agencies in a twelve month period. This means that you can get a total of four credit reports from all agencies together. We at Trade Brains advise that our readers avail this every quarter or at least semi-annually from different credit agencies.
Credit Score is the most important metrics banks and financial institutions use to gauge your risk profile. It would be beneficial for an individual to maintain a high credit score so that they can avail a line of credit in times of need.
Although not easy, a credit score can always be improved through planned and disciplined action on the side of an individual. We at Trade Brains hope our readers make the best efforts to maintain a high credit score.
What you earn, i.e. your income is centered, mostly, when it comes to “how much you actually need when you get retired”. But, are you really sure that the math used here is all correct? I am not.
Suppose if you draw a hefty sum from where you work (monthly) but barely manage to save a dime out of it; would you retire rich? I guess not.
On the other hand, if you get to save even a 30% (roughly) of whatever that you earn in a month, you’d definitely be at a much better place than the former you, right? So, the math here needs to be shifted to “savings and expenditure” and not on the overall income.
You’d be surprised to know that still many are sticking to the former notions of 70% of the income but yes, there are loopholes:
You wouldn’t want to get through an entirely miserable young age just to retire rich, would you? – That, sometimes, becomes the case when you try to save 70% of your income.
You are certainly not including the notion of current taxes and increasing health expenses as and when you grow up.
Strategically, therefore, the 70% rule is a decorated bubble. The question is how much do you actually need in order to retire rich? Let’s answer this question carefully in this article.
3 Simple Steps to Save for Your Retirement:
1. When Should You Start Saving?
The best answer to this question would be: “as soon as possible”. You are 21, well and good! 31? It is still not too late to start. You can always jump start your emergency funds whenever you want to. However, being consistent is the only key.
The best part about starting early is the “power of compound interest” even on low proportions of monthly savings. You can save as less as 5000 INR a month and see a huge difference years later.
However, if you are in your 30s or 40s, don’t worry; cutting back on a couple of things would work well for you to get you a feasible retirement fund. As we mentioned, the power of compound interest on your savings, you need to take your picks on where you should invest your money.
Fixed Deposits, Mutual Funds, or SIP? Different people have different priorities based on their own risk-taking capabilities. Choose your own option!
If you are confused what does it have to do with your retirement savings fund, wait up? We have an answer for you: The net sum of income you earn in your first decade of working makes much more impact on your net total of emergency or retirement fund.
Asking for a raise would balance out the money going directly from your bank account to your savings account. In the best scenarios, you could use the raised amount to go into your retirement fund (fully or partially) which would act as an extra cash for you in future.
Research says that about 37% of the employees who get a significant raise annually are those who ask for it. So, the next time, don’t wait up until the annual records of employees are checked but ask for the raise whenever you feel necessary.
When should you ask for a raise?
Honestly, there’s no strict rule for the same. But if you are asking for the possible options then it could be one of those times whenever you have successfully completed a project or have brought a fruitful result for the business you are working for.
3. Does Fixed Deposit always Work?
According to traditional sayings, you should focus more on keeping your savings in a fixed deposit. These days, it is quite controversial to choose where to put all your stakes on?
The greatest advantage that a fixed deposit offers is that it can be unsealed quite easily in case of an emergency. When you choose any other option to put your money into savings, you don’t actually get this leverage. Moreover, you might have to pay an extra unnecessary sum in order to unseal your deposit in case of emergency. True.
However, the rate of interest provided on a fixed deposit is very, very low. In fact, it is incomparable to other means such as mutual funds. Viewing the other side of the coin, mutual funds investments can be quite risky. They are subject to the market risks and what not.
Now, the correct way is to break your proportions into pieces and put them into different means such as fixed deposits, stocks, mutual funds, real estate etc. There is no compulsion or a set of predefined rules to govern the context of retirement savings.
The magic lies in the way how you balance your savings and lifestyle.
Our grandparents would like to reminisce about the days when they used to buy movie tickets for Rs 5-10. Nowadays it will cost you near Rs 200. In near future, it might be double. The simplest explanation for this increase in prices is- ‘Inflation’.
There have been a number of debates on the topic whether inflation is good or bad for an economy. However, before we discuss this complex question, first you need to understand what actually is inflation.
In this post, we are going to discuss what is inflation and why you should care about it. Here are the topics that we will cover today-
What is Inflation?
What causes Inflation?
Effects of Inflation.
An extreme case of Inflation
Inflation in India.
How is Inflation calculated?
Overall, it’s going to be a very interesting post. Without wasting any further time, let’s get started.
1. What is Inflation?
Inflation is nothing but an increase in the general price of goods and services. It is measured as an annual percentage increase. Inflation can also be defined as the decline in the purchasing power of the currency. In general, a two percent increase in inflation shows a healthy economy.
2. What Cause Inflation?
There are plenty of reasons which causes inflation, depending upon the location, type of economy, the status of government in terms of power and influence, and many other different factors. However, broadly here are the factors that are primarily responsible for causing inflation.
Problems with Supply
Inconsistency with growth in agriculture due to climate change or a natural disaster like flood, draught can hamper the supply to make the product. Inadequate growth of industry can also lead to less production of supply which ultimately leads to an increase in prices for manufacturing products. And hence price increases.
Problems with Demand
This is caused when an overall increase in demand for goods and services, which bids up their prices. It’s like too much money chasing too few goods. This usually occurs in rapidly growing economies. So, when there is more money circulation in the market that can cause inflation.
Problems with raw materials
Not all raw materials are produced in one country. In the era of globalization, we depend on many countries for the supply of raw material. So, if the prices of a commodity which we import from other parts of the world increases then it leads to an increase in the prices of the product that is made from it. For example- if the price of oil or corn increase that makes high prices of products that relies on that material.
In some case when central banks govern interest rates, then demand for services can either increase or decrease giving an invitation to Inflation.
3. What are the effects of Inflation?
Here are few of the major effects of Inflation in a country-
1. Cost-push inflation: High inflation can promote employees to demand rapid wage increases, to keep up with consumer prices. In this theory of inflation, rising wages fuel inflation. In a sense, inflation generates further inflationary expectations, which generate further inflation.
2. Hoarding: People buy durable and/or non-perishable commodities and other goods as stores of wealth, to avoid the losses expected from the declining purchasing power of money, creating shortages of the hoarded goods.
3. Social unrest and revolts: Inflation can lead to massive demonstrations and revolutions.
4. Hyperinflation: If inflation becomes too high, it can cause people to severely curtail their use of the currency, leading to an acceleration in the inflation rate. Hyperinflation can lead to the abandonment of the use of the country’s currency
5. Allocative efficiency: A change in the supply or demand for a goodwill normally cause its relative price to change, signaling the buyers and sellers that they should re-allocate resources in response to the new market conditions. But when prices are constantly changing due to inflation, some agents are slow to respond to them. This results in a loss of allocative efficiency.
6. Shoe leather cost: High inflation increases the opportunity cost of holding cash balances and can induce people to hold a greater portion of their assets in interest paying accounts. However, since cash is still needed to carry out transactions this means that more “trips to the bank” are necessary to make withdrawals, proverbially wearing out the “shoe leather” with each trip.
7. Menu costs: With high inflation, firms must change their prices often to keep up with economy-wide changes. Changing prices is itself a costly activity as it will lead to the need of printing new menus, or the extra time and effort needed to change prices constantly.
4. An Extreme case of Inflation-
In 2008, Zimbabwe had the second highest incidence of hyperinflation on record. The estimated inflation rate for Nov 2008 was 79,600,000,000%.
The daily inflation rate of 98.0%. Roughly every day, prices would double. It was also a time of real hardship and poverty, with an unemployment rate of close to 80%.
The situation in India has far been stable as far as the inflation rate is considered. Here is the inflation rate in India for the past few years:
Quick Note: The above statistic shows the inflation rate in India from 2012 to 2017, with projections up until 2022. The inflation rate is calculated using the price increase of a defined product basket. This product basket contains products and services, on which the average consumer spends money throughout the year. They include expenses for groceries, clothes, rent, power, telecommunications, recreational activities and raw materials (e.g. gas, oil), as well as federal fees and taxes. (Source: Statista)
6. How is Inflation calculated?
Part1: Finding Essential Inflation Information
1. Look up the average prices of the several products across a few years: – Inflation is calculated by comparing prices of standard goods across time.
2. Load the Consumer Price Index: – This is a breakdown, by month and year, of the changes in inflation based off of the averages mentioned in step 1. Any time the CPI is higher than the current month, it means there has been inflation. If it is lower, then there has been deflation. Inflation is calculated with the same formula in each country. Make sure the same currency is being used for all numbers in the calculation.
3. Choose the period of time for which inflation will be calculated: –Months, years, or decades can be used.
Part 2 Calculating Inflation
1. Learn the Inflation Rate Formula. This formula is simple. The “top” find the difference in the CPI (rate of inflation), the bottom finds out what ratio of the total inflation that difference represents.
2. Plug the data into the formula. For example, imagine that we are calculating the inflation based on the price of bread between 2010 and 2012. Assume the price of bread in 2012 is $3.67 and the price of bread in 2010 is $3.25.
3. Simplify the problem through an order of operations. Solve for the difference in price, then divide it. Multiply the outcome by 100 to get a percentage. Here, the inflation rate is 11.4%
4. Know how to read inflation. This percentage means that, in current time, your money is worth about 11.4% less in today’s dollars than they were in 2010. In other words, most products cost on average, 11.4% more than they did in 2010. If the answer is a negative number then it is deflation, where a scarcity of cash makes money more valuable, not less, over time. Use the formula just as in case of a positive figure.
Most people complain about the fact that prices of the day-to-day products are increasing too fast. However, they ignore the part that their salaries are also increasing at a similar pace.
Moreover, a little inflation can be sometimes as dangerous as a high inflation. In other words, a modest inflation is always a good sign as it reflects the growing economy of the country. However, the problem arises when the inflation is rising too fast when compared to your wages.
“You are the master of your destiny. You can influence, direct and control your own environment. You can make your life what you want it to be.” ― Napoleon Hill, Think and Grow Rich
We all have heard numerous stories about people who started from scratch and with empty pockets but turned out to be millionaires and billionaires.
What makes these people different from us? Have we really accepted our so-called “pre-written” mediocre fate? Sadly yes. Like it or not, but these behavior and habits do play a life-altering role. To be in a much better place, financially, we have to stick to a previously written set of rules; don’t worry, there are very easy to follow. We can always look for inspirations from those who have gone through similar phases.
In this post, we are going to let you know about some life-altering habits that will make you have a tighter grip on your financial aspects. However, some pieces of advice work for some people while they don’t for the other set of people. In that case, take your pick wisely!
Who’s actually poor?
The notion of being poor is actually quite subjective. But moving forward, we have to establish who we are considering poor?
A person having insufficient wealth to meet the necessities or comforts of life or to live in a manner considered acceptable in a society. (Quick note: Being poor is different than being broke. Poor is a long-term situation. While broke means that you have no money, but it’s a temporary situation.)
Needless to say, nobody prefers to be poor or would want to live a life of misery. But this world is full of terrific examples of people who were born poor but ended up becoming super rich. Fancy!
Nonetheless, if you are not satisfied with your financial mobility/stability right now, you can always move past this phase and search for better opportunities. Always remember; good things come to those who fight for them.
3 Simple Habits To Overcome Poverty and Become Rich
Let us now see what all habit you need to incorporate into your daily life in order to make financial stability follow you.
1. Change Your Mindset:
“The starting point of all achievement is DESIRE. Keep this constantly in mind. Weak desire brings weak results, just as a small fire makes a small amount of heat.” ― Napoleon Hill, Think and Grow Rich:
After a while, you’ll definitely understand that life is nothing but a game of mindset. If you are considering your situation to be the end game then sorry to burst your bubble there, it is definitely not. Even if you have a chance to tilt-shift your mindset, why not focus on positive aspects then? Your financial position is not fixed, it never will be. There’s a simple rule in life that follows everywhere and hence in the financial world as well: change your mindset and see things rolling back to you quickly.
Changing your mindset also does relate linearly to changing your environment. If you are stuck in a toxic environment filled with alcoholics and gamblers all around, you already know where you are lacking. Looking for a solution? Change your location by choosing a better surrounding and environment around you. Simple, right?
2. Be a little Analytical about Your Financial History:
We understand how long a chain of debts can become roadblocks when it comes to having a grip on your financial status. That’s pretty normal even. What’s not normal is not analyzing where your money is going or how long has it been going. The solution is both simple yet tricky; use analytics as an end game.
Every repetitive history has a loophole if it doesn’t seem to work out. Find yours. Keep looking for better investment options while considering the safety factor, of course. Moreover, make sure that you don’t get trapped in the web of “easy money” through illegal sources. It is never, I repeat, never an option. If you look up to someone who manages his/her financial structure quite tremendously, don’t feel shy about striking a conversation with them.
Unload your pressure of debts and other faulty saving scheme and drop out the traditional ways that don’t work well in the current scenarios.
3. Live Within Your Means
Interestingly, if you notice the survey mentioned earlier, luck ties savings in the poll. “Getting lucky through an inheritance or winning the lottery.” tied with “live frugally and save money.”
Earning millions of bucks wouldn’t matter if you wouldn’t know how you can actually put them to use. Let’s statistically give you a harsh reality check; more than 65% of your salary goes into your housing and food expenses. While these two things are certainly the most important things in life, you can save a lot more here. Swear to yourself to not spend more than 25% on your housing and 15% on your food. I know it is more of a rosy picture but you certainly can do it.
Adding to the list never be in one of those never-ending credit card debt loans. No matter how tempting it feels at first, it is going to get your financial account crooked for the longer term. Out of all your expenses, primarily shift your focus to your emergency fund. You can always buy that extra piece of cloth or that extra piece of footwears later.
Till now we just covered the theory. However, this rule gives you a practical formula for spending to avoid poverty. Here is the straightforward 50-30-20 rule.
Spend 50% of your income on your needs: For example- Housing, food, utility, necessities etc.
Limit your wants to 30%: For example- dining out, vacations, entertainment etc.
Save remaining 20%: Final twenty percent should go towards financial goals like an emergency fund, retirement fund, debt repayment, investing etc
This rule of 50-30-20 can be very beneficial if you are just starting out to budgeting. Breaking down the basics categories (percentage-wise) can help you create a balance between your obligations, goals, and extravagance.
Being rich is a goal of the majority of the population. However, most people never get there. Many of us are just one paycheck away from becoming poor.
The hacks discussed in this post are solid and proven methods for overcoming poverty and becoming rich. Nevertheless, there’s a reason why these strategies are called personal finance. Well, personal finance is ‘personal’ and totally depends on how you deal with it. Good luck.
Hi, I am Kritesh, an NSE Certified Equity Fundamental Analyst and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting
Should You Use Credit Card? – Pros and Cons of Using Credit Cards:
The credit card also bears the name of “debtless debt” which makes your catching up with your needs and requirements quite easily. In fact, this is the bottom-line for those who recklessly use credit cards for purchasing things.
The debate that revolves around the propaganda of using a credit card is endless with different opinions associated with different sets of people. Let’s break this rationally by seeing the possible alternatives of using a credit card:
Paying cash – going the old school way,
Using your debit card with instant balance deduction from the bank – a kind of digital money method.
In countries like India (the developing ones), we still have a way to go before we can use credit card everywhere. I am not talking about the online stores or any other huge retailer’s stores but at places like a parking lot or small stores, one can’t possibly choose to pay via a credit card. Therefore, using hard cash is the only way around. But we won’t only stop here stating this argument; let’s objectively view different pointers, pros, and cons of using a credit card as a payment method.
What is a credit card?
A credit card can be acted as a payment option which allows you to buy or purchase things or service on credit until a specific period of time. To put it in simpler words:
If (or not) one doesn’t have cash available at a specific point of time, one can make use of credit card to use the credits to pay at a later date.
The keyword(s) to pull out of here is to “pay at a later date”. For revolving accounts, a minimum balance statement is due on every month end. On the other hand, for a charge card, the full balance to pay is due on every month end.
Various stores and merchants are now dismissing the use of cash as a mode of payment already. In fact, they only accept their fee through credit cards due to obvious security-related concerns. However, unlike the US, there is still a lot of scope remaining with hard cash in India. In fact, one can totally live without a credit card in India.
If you want to steer clear out of troubles, you must never consider credit card as a form of free cash. Remember, whenever you ask a bank for a loan, your credit history is checked thoroughly and it better not be bad to get your loan cleared. The amount you are using your credit card for has to be paid back in time to the bank or else you will be charged with heave penalties.
Thus, contrary to popular beliefs and no matter whatever people say, a credit card is not free money. If you don’t have the money right now, you should never charge your credit card then. Otherwise, it would be very tough for you to repay the amount in time.
Now that you have understood the basics of the credit card, the next big questions- Should you use credit card? Before jumping to any conclusion, first, let’s discuss the pros and cons of using a credit card.
1. Security and Convenience – There’s always a dilemma of “how much to withdraw from ATM?” No matter what, either the money you withdraw is going to be huge that there will always be a fear of theft or else it would be very inconvenient to withdraw money from ATM time and again because you ran out of money. Enter, Credit Card – a convenient mode of payment. You could always leave your money in the safer hands of the bank and can use your card for your purchases.
2. With Credit Card comes Big Rewards – As much as you use your credit card, the points on your card keeps increasing. Additionally, you can get other cash backs on several purchases, gas rewards. Many credit cards offer you free insurance on your air ticket, bus ticket, and hotel payments. Whatever that you save on your hefty payments can be considered as “incoming money” right?
Credit Card Cons – The Red Flag
1. The Free Money Dilemma – With a privilege of having to pay back later, we always end up spending way more than we should. That is where the banks are earning. Always remember, the exciting cash backs, reward points and other benefits that come with credit cards are always issued while keeping the profitability factor in mind.
2. Hurts your Credit Score if Abused – If your credit score is abused, you won’t be able to earn many credits or rather, it would be difficult. This brings your heavy responsibilities of balancing the use of credit card to a normal extent. Moreover, there are times when the credit card issuers don’t clearly state the terms and conditions and trap the users. Be the smarter one and ask for it in the beginning to specify all the terms and conditions.
Obviously, there’s no free meal in this world. If you are using a credit card today, you have to pay back later. However, the use of credit cards provides a lot of convenience to its users. Further, it can be handy in case of a tight budget where it’s better to use credit than to ask for debt/loan.
Whenever you ask any financial expert/advisor that what’s the right amount to invest, they will divert the question back to you saying it depends on your financial goals, risk appetite, investment time period etc..
But most people in India do not have much idea regarding their risk appetite or financial goals. They are just planning to invest because they want to make some additional money from the money they already have. Most Indians do not invest on the basis of their financial goals (like children’s education, buying a new house, retirement etc). They invest just because they need to make more money.
In this post, I’m going to give you a simple answer to the right amount to invest. (And no, I won’t ask your risk appetite or financial goals.)
What is the right amount to invest?
The Traditional Rule
As a rule of thumb, people should invest 10% of their earnings.
Therefore, if you are making an annual income of Rs ten lakhs (after taxes), you should invest Rs one lakh.
An important point to notice here is that you have to keep this percent constant (or increasing). For example, let’s say you got promoted next year and start getting an annual salary of Rs 15 lakhs. Then, from the next year, you should invest Rs 1.5 lakhs.
This is the general rule for the right amount to invest. If you read any popular personal finance books like ‘The Richest Man in Babylon’, you can find this 10% investment rule as the right amount to invest.
“Gold cometh gladly and in increasing quantity to any man who will put by not less than one-tenth of his earnings to create an estate for his future and that of his family.” –The law of Gold, Richest Man in Babylon
The Modern Rule
Although the traditional rule of investing 10% of your earnings is widely popular and effective, however, the modern rule disagrees a little with this rule.
According to the evolved modern rule, you should invest as much as you can afford to invest.
Maybe it’s lower when you’re just starting, say 5%. However, with time you should increase this amount… 5%, 7%, 10%, 15%, 30% & more.
Let’s understand why this rule makes more sense.
If you’re a boy/girl who just graduated from a college and you’re starting your new career, you might have a lot of things to take care first. For example, you’ll be settling in a new city and there will be initial expenses. You might also have to get rid of your educational loans, buy basic amenities-materials, send some money to family/friends etc.
Here, the right amount to invest is as much as you can -without affecting your life. You do not need to invest 10% if your first month (or even first few months) just for the sake of investing. First, get the things settled. You can start to invest with 4%, and then move to 7%, 10%, 15% … in future.
The modern rule says that the right amount to invest totally depends on how much you can afford to invest.
On the other hand, if you’re in your 30s, 40s or above, then the chances are that you already have accumulated a large money to invest and you might have a settled life. Here, you can invest 20% or higher of your monthly/annual earnings (and further increase it with time).
An increasing investment amount and a long time horizon is a powerful combination to create wealth.
The easiest solution to this problem is to live below your means. It simply means that your expenses should be less than your earnings. If you’re making annual earnings of Rs 10 lakhs, do not buy a Mustang priced Rs 65 lakhs.
Moreover, living below your means doesn’t mean living a miserable life. It simply means saving some amount (here and there) when it’s not necessary to spend.
For example, if you’re not earning in lakhs, maybe you can have a Motorola phone instead of iPhone X. Further, instead of dining out every day, you might wanna dine with your friends only two or three times a week. Also, instead of buying a new car on EMI, maybe you can opt for an Ola share or uber pool.
Even saving a little money in few small and big areas can help you save 10-15%- which you can invest.
Automating your investment is the best alternative if you’re not a ‘Saver’. A monthly SIP directly deducted from your salary/savings account at the start of the month is a good option for those who are ‘Spenders’. You can’t spend the money which you don’t have, right? (Unless you take a loan or borrow money from your friends just to spend recklessly…). Automating your investment will help you to both enjoy your life now and have a secured future.
Final Note: Don’t forget the emergency fund
It’s always advisable to have an emergency fund… like next 6 month expenses or more.
Investing in stocks or any other financial assets has little risk associated with them. An emergency fund will help you take care of any unexpected expenses. Further, it can also act as your freedom. If you don’t have an emergency fund and you’re fully invested with no savings in the bank, you’ll have very less freedom to take immediate actions.
Besides, the amount in your emergency fund depends on your personal financial position. For example, if you’re planning to start your own business or startup, then you might want to have an emergency savings worth 9-12 months.
There is no correct answer to the right amount to invest. The best answer is that the higher you invest, the better it is. Most people invest 10% of their earnings (as a thumb rule).
Nevertheless, a better alternative is to start with the percentage you’re comfortable to invest and then keep increasing the amount. Always invest the highest amount that you can afford to invest. Here, time and increasing contribution amount will help you build great wealth to secure your future.
Hi, I am Kritesh, an NSE Certified Equity Fundamental Analyst and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting