Showing posts with label Financial Freedom. Show all posts
Showing posts with label Financial Freedom. Show all posts
Why Claims Of Inflation Being So Important In Financial Planning Are All Bogus?
Inflation is supposed to be the silent killer. It is supposed to be the invisible tax on your returns. However, this claim is more of a bogus than anything else.
First, inflation is measured for a basket of selected goods and services. Your actual consumption may be far away from the basket constituents.
Secondly, if you analyze your expenses, the expenses towards items such as home loan EMIs, rentals, education of your kids, food and grocery purchases, medical needs, consumer durable goods and utility bills taken together would account for a significant percentage of the total expenses.
If you look at the above list of items, few points would strike you immediately:
Inflation is given more importance than it has in reality. Financial planning should assume reasonable returns with some impact of inflation. However, as explained above, in many cases the impact of inflation is simply not there (in case of electronic gadgets, the opposite has happened due to technological and productivity improvements) or it is minimal or is high today but is likely to stagnate and thereby get diluted in the future.
In light of the above, it is clear "Why Claims Of Inflation Being So Important In Financial Planning Are All Bogus?".
First, inflation is measured for a basket of selected goods and services. Your actual consumption may be far away from the basket constituents.
Secondly, if you analyze your expenses, the expenses towards items such as home loan EMIs, rentals, education of your kids, food and grocery purchases, medical needs, consumer durable goods and utility bills taken together would account for a significant percentage of the total expenses.
If you look at the above list of items, few points would strike you immediately:
- House costs went up till 2006 but then tanked and have stayed almost stagnant since then. Also, how many houses would someone in the middle class need to buy in his lifetime? This is an important consideration because if you are rich then inflation and recession would not mean much to you.
- Cost of consumer durable goods and gadgets like TVs, smartphones, etc. have actually come down over the last few decades. 200 dollars can buy a much much better smartphone today as compared to ten years back. And as per time value of money 200 dollars today would be much lesser than 200 dollars ten years back.
- Cost of automobiles has not gone up much since last more than ten years. Again the mileage and features you get in a car today easily offsets the additional cost you may have to incur.
- More importantly. the cost of fuel has crashed from 100 dollars to 40-50 dollars today. So with a more fuel-efficient car combined with very low fuel cost the overall cost of driving has come down significantly.
- Interest rates for taking loans have stayed at reasonably low levels. In fact the rates in the USA have been ridiculously low since last few years starting 2007 when the housing bubble burst open. So even if you have to buy consumer goods and gadgets today, loans at low rates are easily available.
- Food and grocery prices have not actually gone up but have become highly volatile. They may be high during certain periods when there is a demand-supply mismatch. Again, in such cases if you are in middle class you would typically avoid buying such food items temporarily or at least cut down their consumption or use a substitute.
- Cost of food items would never rise too high and the reason is Governments the world over will not allow it to, for obvious political reasons. Imagine a loaf of bread which costs half a dollar In India becoming 100 dollars some day in the future. That would be simply impossible other than currency crashing so much that the Government will have to change the currency.
- Cost for medicines have not gone up too much. Cost of medical treatment excluding medicines have certainly gone up in the last ten years. Again, it is likely to stagnate now given that public health is a touchy issue for the masses and Governments will never allow it to become so expensive that they get out of reach of the entire middle class and those below.
- The above logic applies to cost of education also. Cost of education has certainly gone up but is likely to stagnate. Imagine someone earning 40k INR in India having to dish out 10k INR for the school fees and other expenses every month. This cannot continue long since every parent would want good education for their kids and not many people are getting 40k INR or more per month in India. This asymmetry in the society will gradually turn into a major political issue.
- Utility costs also have not gone up that significantly. Water prices have not gone up too much and electricity charges have gone up gradually in the past but are stagnant now. Gas prices have stayed at the same level for many years (and in fact have come down recently due to the world oil and gas prices crashing). Broadband and telecom services have remained at the same prices for several years now. Again, these are public goods and services and Government will always exercise some degree of control on the prices.
Inflation is given more importance than it has in reality. Financial planning should assume reasonable returns with some impact of inflation. However, as explained above, in many cases the impact of inflation is simply not there (in case of electronic gadgets, the opposite has happened due to technological and productivity improvements) or it is minimal or is high today but is likely to stagnate and thereby get diluted in the future.
In light of the above, it is clear "Why Claims Of Inflation Being So Important In Financial Planning Are All Bogus?".
What If You Loose Your Job Today?
For many people the result of the above will simply be catastrophic. Such people have their job as the sole source of income. And if you fall in this category of people, like most would do, you got to get paranoid about it.
You have to be paranoid about creating multiple sources of income so that the loss of job would not impact your family's standard of living to a significant degree. In addition, in case of any eventuality like major accident, long illness resulting in job loss, cash would still need to keep flowing in for you to have a comfortable life.
Insurance is certainly a good way to mitigate some of the above risks. However, insurance will not be helpful when job loss is due to perhaps the biggest of all reasons - recession in general or mismanagement and adverse business conditions at the company you are working with.
Focus on creating multiple sources of income will ensure consistency of cash flow both in terms of regularity as well as the amount.
Here are some examples of ways in which you can get cash flow:
You have to be paranoid about creating multiple sources of income so that the loss of job would not impact your family's standard of living to a significant degree. In addition, in case of any eventuality like major accident, long illness resulting in job loss, cash would still need to keep flowing in for you to have a comfortable life.
Insurance is certainly a good way to mitigate some of the above risks. However, insurance will not be helpful when job loss is due to perhaps the biggest of all reasons - recession in general or mismanagement and adverse business conditions at the company you are working with.
Focus on creating multiple sources of income will ensure consistency of cash flow both in terms of regularity as well as the amount.
Here are some examples of ways in which you can get cash flow:
- Dividend from stocks
- Interest from bonds
- Rent from real estate
- Royalty from book or another intellectual property
- Commission from business deal
Financial Purpose of Life
The overall purpose of life is very hard to nail down. However, the financial purpose of life is relatively less harder to nail down. The financial purpose of life can be summed as the quest to transition to a state where one's income is resilient to recession from a state where one's income is exposed to recession.
State of income being resilient to recession means one would have multiple sources of income which is generally steady even if one looses employment. This would mean one has, in a sense, become a capitalist.
The advantage of being a capitalist is that money comes not from spending labor but from investing capital. So a capitalist will get an income without working. In fact, a capitalist will not need to have employment and would rather give others employment. Those who get employment from the capitalist would be at the mercy of the capitalist for their employment.
State of income being exposed to recession means one would have no or few sources of income which may not even be steady if one looses employment. This would mean one is, in a sense, a laborer.
The challenge of being a laborer is that money comes from spending labor. So a laborer will need to be employed to get an income. A laborer will depend upon the mercy of a capitalist for employment.
So one has to save some money from the job one has and invest it wisely to transform it into capital. The capital thus formed should be used to get earnings which can then be re-invested to further grow the capital.
Once the size of the capital grows to an amount which can provide returns that would replace the salary received from the job and some more, one can stop working purely for financial reasons.
The capital amount at which one achieves financial freedom is simply the transition point between the state of being exposed to recession and the state of becoming resilient to recession.
State of income being resilient to recession means one would have multiple sources of income which is generally steady even if one looses employment. This would mean one has, in a sense, become a capitalist.
The advantage of being a capitalist is that money comes not from spending labor but from investing capital. So a capitalist will get an income without working. In fact, a capitalist will not need to have employment and would rather give others employment. Those who get employment from the capitalist would be at the mercy of the capitalist for their employment.
State of income being exposed to recession means one would have no or few sources of income which may not even be steady if one looses employment. This would mean one is, in a sense, a laborer.
The challenge of being a laborer is that money comes from spending labor. So a laborer will need to be employed to get an income. A laborer will depend upon the mercy of a capitalist for employment.
So one has to save some money from the job one has and invest it wisely to transform it into capital. The capital thus formed should be used to get earnings which can then be re-invested to further grow the capital.
Once the size of the capital grows to an amount which can provide returns that would replace the salary received from the job and some more, one can stop working purely for financial reasons.
The capital amount at which one achieves financial freedom is simply the transition point between the state of being exposed to recession and the state of becoming resilient to recession.
Why Warren Buffet Doesn't Own Technology Stocks?
Why Warren Buffet doesn't own technology stocks? Well, only Warren Buffet really knows the true answer to this question - "why Warren Buffet doesn't own technology stocks?"
In case one would like to take a good guess at why it is so, then perhaps following reasons could be offered.
In case one would like to take a good guess at why it is so, then perhaps following reasons could be offered.
- Technology landscape keeps on changing rapidly and it is not certain whether technology of today will survive tomorrow and it is next to impossible to project this ten years hence.
- Technology stocks are based on products and services which are not essential to human existence. One cannot live without eating bread for even a few days but one can easily live for as long as one would want to without sending a tweet!
- Technology business is good and one can perhaps make some money as well, when the first product or service offering comes out but as soon as the novelty wears off and lookalikes appear in the marketplace the revenue model becomes weak and loss-prone. For understanding this aspect one just needs to search for "buy xyz online", where xyz could be anything. The number of websites which come up as options to consider are too many that one can be sure that most of them are not going to be making money.
- Technology stocks tend to glamorize and glorify technology over customer and business needs. For example. buying something online should be seen as another way to buy something. However, at times the impression one might get is that buying something online is the only way to buy. The technology behind it is shown to be worth billions of dollars based on the valuations done by certain class of investors (this class would certainly exclude Warren Buffet).
- How can the channel to sell something become more valuable than the thing being sold? Any customer would buy something to get some experience and buying channel is a small part of the overall experience.
- After all, no one can eat an e-bread in case one is hungry. You can e-buy bread but you can never buy e-bread. It is not hard to guess what is more important for human existence - bread or buy.
Analysis of Stock Price Moving Up and Moving Down
It is generally believed that it is tough to recover from the loss on a stock since if the stock price moves down by a certain percentage it needs to go up by a higher percentage to get even.
Though the above is factually true it is not a very relevant factor when one is investing in stock markets. The above is the mathematical effect of base whereby percentage increase for the same quantum would be lower for higher base and vice versa.
Suppose you have 100 dollars. An increase of 10% would mean the price would move up to 110. Now to go back to 100, 110 has to move down by the same quantum. In case this effect is represented as percentage the numbers would be different. While moving up the percentage would be (110-100)/100, which is 10%. And while moving down the percentage would be (100-110)/110, which is -9.1%. The net effect on the profit/loss from the stock doesn't change due to this mathematical effect.
Following table and chart shows this relation quite clearly. It is just a mathematical result and should not be of much concern to anyone involved in stock market investing.
Though the above is factually true it is not a very relevant factor when one is investing in stock markets. The above is the mathematical effect of base whereby percentage increase for the same quantum would be lower for higher base and vice versa.
Suppose you have 100 dollars. An increase of 10% would mean the price would move up to 110. Now to go back to 100, 110 has to move down by the same quantum. In case this effect is represented as percentage the numbers would be different. While moving up the percentage would be (110-100)/100, which is 10%. And while moving down the percentage would be (100-110)/110, which is -9.1%. The net effect on the profit/loss from the stock doesn't change due to this mathematical effect.
Following table and chart shows this relation quite clearly. It is just a mathematical result and should not be of much concern to anyone involved in stock market investing.
Some Thoughts and Tips on Stock Market Investing
Despite the risks and challenges inherent to stock market investing, lot of people have made good money from stocks. Some thoughts and tips on stock market investing are given below. These have to be seen as broad guidance and should be calibrated to suit different conditions.
- Making money from stocks is actually quite simple if one were to consider the revenue model. Buy a stock A at X and sell at Y. Return, quite simply, is Y - X. If Y > X, one makes profit, it’s as simple as that. The thing which is not simple, however, is how to make sure one picks stock at price X so that the likelihood of it going on the upside is almost certain and the likelihood of it going downside is almost nil. This should surely be the case in the medium-term and long-term.
- Choose a certain amount of money, say X, which represents the money per share that one is willing to and can afford to loose on a stock. Don’t buy any stock which has a sticker price above 1%-2% below X. With brokerage, taxes, etc. the final price per share will come close to X. The exact numbers have to calibrated based on the brokerage, taxes, etc. prevalent in the stock market one chooses to operate in. The idea is to cap your loss per share to a maximum of X. Remember a bad news about any stock can lead its market price to drop closer to zero (like in the case of Enron the stock price fell to few cents from 90 to 100 dollars in a few days time)
- Stocks that are picked should be bought in sufficient quantity. Imagine one bought 100 shares of a company at X. So the total investment was 100 X. Assume the stock price goes up by 60% (which means stock price would become 1.6 X). In such a case the investment will grow to 160 X, a profit of mere 60 X which is not much. In fact the real return will be lesser than 60 X. If however, 1000 shares were bought the profit will be 600 X.
- Build position of an amount around A to B in the selected stock, where A to B would have to be significantly large enough. This at the per price cap of X (from point 2 above) would translate to around M to N stocks (which should be large enough so that overall profit is high enough as per point 3 above) . For stocks with lesser price the quantity will be much larger.
- The idea behind taking a sufficiently large position in any stock is that the increase in the price per stock will translate into gains that are significant enough in volume terms in case they are significant in percentage terms. Obviously, this would mean losses will also be significant enough in volumes terms in case stock price declines significantly in percentage terms. And that is what it should be as this is precisely what the game of stock picking is essentially all about.
- Assume one buys one stock by investing an amount X. On the downside, one can loose the entire X, which is the maximum risk per share. However, on the upside, X can become 1..5 X, 2 X, 5 X, 10 X or even higher (a multi-bagger as Peter Lynch would call them). The science and art here is to buy the stock at a price at which the probability of it going further down is minimized which in turn would minimize the risk of loss. If this can be coupled with the analysis of the company fundamentals behind the stock that the probability of the stock going up, if not immediately and in the short-term but certainly in the medium-term and long-term is reasonably high enough it would maximize the de-risking of eventual gain.
- Price of a stock prices move up and down based on news related to the overall economy, industry sector and the specific company behind that stock. Experts in the market distill the news to figure out the direction and quantum of price movement. This change in price can move in the direction to the extent of the quantum thought to be the “needed correction”, over several days, weeks and even months.
- Expectations around the financial performance of the company play a major role in reinforcing the impact of relevant news and in some way are seen as the culmination of the news that keeps trickling in. The actual results on its own as also compared with the expected results reinforce or counteract the direction and quantum of price movement.
- It is commonly understood that if the price of a stock declines by 50% then it needs to rise by 100% to be back where it was at the start. For example, if the price at which a stock is purchased is X and subsequently falls by 50% to reach 0.5 X then to be X again it needs to rise by 100%. This however is due to mathematical base effect, percentage increase for the same quantum of increase declines with the number becoming larger and vice versa. This is not so relevant since theoretically speaking, on the down side stock price can never go below zero but on the upside can reach infinity. It is an interesting thought to consider that if a stock picker is lucky enough in his life to invest a substantial capital in one stock that goes up infinite times, figuratively speaking, he will be infinitely rich, again figuratively speaking
- Suppose a person has 2 Z amount and he invests Z in stock A and another Z in stock B. Assume company behind stock A shuts shop making Z(A)=0, also assume company behind stock B does stupendously well so that Z(B) becomes N X, where N is a sufficiently high number. For an extremely high value of N, the person would have made it in life, at least the financial part of it.
- Trading should be avoided to the extent possible. Assume a person buys a stock at price X and sells it at a price Y. Return from such an investment will be Y - X. However, real return will be much lesser due to brokerage, taxes, etc. Let’s assume this cost is a% of the base cost. So the actual buy price will be X + aX and the actual sell price will be Y - aY. The real return in this case then would (Y + aY) - (X + aX), which is equal to (Y - X) + a(Y - X). As is clear, a(Y - X) is what goes to the broker and the Government. The number ‘a’ can be assumed to 1% to 2% in case one holds the stocks for the returns from it to be considered under long term capital gains. The number ‘a’ would be much higher in case the return falls under short term capital gains.
- Patience to buy or not to buy is very important.In addition, maintaining liquidity is quite important. Having liquidity when opportunity to buy a stock presents itself is so utmost important that it can make a significant difference to the overall portfolio performance. Hence having patience to invest money in a staggered manner is crucial as it allows at least some part of the portfolio getting picked up at the bottom or very near to the bottom. The cheaper one can buy the better off one is. In any case, one should maintain 10% of portfolio as “contingency” amount to be used only when any rarest of rare opportunity presents itself. This by definition would happen but once or at best few times in a stock picker’s lifetime. Patience to sell or not to sell is equally important in a likewise manner.
- Big players have the leverage to cause huge gains and losses over a short period of time, in fact at times within few minutes, hours or one trading day. These big players buy and sell in huge numbers leading to sudden and extreme price changes.
- Select M to N stocks across various sectors. M to N could be 20 to 25 stocks or any number of stocks that can be comfortably managed and depends on how much time one can spend on managing the overall portfolio (Walter Schloss apparently had more than 100 stocks whereas Warren Buffet apparently has fewer number of stocks) . Buy them at the right time, which means at reasonably low price with immense upside potential in the future. Buy in sufficient quantity so that possibility of significant gain is large.
- Read the last two years annual report and don’t invest outside the index. Companies which are in the index are under higher scrutiny from auditors, analysts and authorities. However, they all could go wrong and mislead an investor (think Enron). That is why the cap of X is helpful in case there is a fraud. History tells us this is likely to happen again.
- Buy dividend paying stocks if one wants some tax-free income to come one's way. Dividend are tax free and can be re-invested in the same stock to effectively reduce the price per stock.
- Buy with the thought of holding forever (Warren Buffet style). However, assess the portfolio performance regularly (every day if possible otherwise at least once every week) and if there is a case to sell, don't hesitate to sell.
- Target how much money you want to have so that you can live comfortably. First and foremost try reaching that target. Once one is financially secure, one can make riskier investments that have the potential to earn more. Keep some part of the money in bonds or fixed deposits always. Don't be 100% invested in stocks.
- Avoid mutual funds, unit-linked plans and exchange traded funds, if one can invest in stocks directly. These are designed to generate consistent salary and commission for the fund mangers even if they make loss for the investors. They clearly violate the principle of pay for performance.
- If one has stayed invested in life insurance policies, mutual funds, unit-linked plans and exchange traded funds for several years, one may want to continue. If one wants to exit, it is advised to compute the surrender cost, consider the returns so far and take an informed decision. Don't exit just because experts tell you they are not good or someone tells you the best investment is putting your entire money in stock market.
Why Working Towards Quitting the Rat Race is So Very Critical?
Most of those having a day job are a part of the rat race.
Like a rat scurrying from one corner to another in search of food and safety, corporate rats are scurrying from one day to another, 9am to 6pm, crushing their souls and suppressing their happiness.
Everyday they are braving mad traffic and leaving behind urgent family issues to reach their place of work which they don't love at all to do a job they may not like much or at all!
(Source: http://cliparts.co/clipart/5908)
Most of the employees don't enjoy what they do, have no fun at where they work and have little or no respect for their reporting supervisor.
This is especially true in those cases where the supervisor despite being thoroughly incompetent has been dropped from above by the higher management that loves boot-licking from such supervisors and their absolute loyalty.
Like rats can be caught unawares anytime and thrown out of the house, corporate rats can also be fired at any time.
In any organization except the founders and their loyalists/stooges (in the top management or below) everyone is a rat.
It is critical, therefore, for corporate rats to start preparing themselves for quitting the rat race as early as possible.
Delay can be expensive since as time passes the rats would get heavier (higher compensation and benefits) and hence become a big liability.
In case the business runs into trouble the fat rats are the ones who will be asked to go first.
Corporate rats should work towards saving and investing what they earn in such a manner that they manage to generate enough income to survive in case they loose their job.
Remember, it is harder for a fat rat to come back into the market once thrown out.
Creating financial cushion to see them through life is extremely important for corporate rats.
Life time employment is long gone. Retirement benefits are completely missing or not guaranteed.
And due to increasing pace of change and complexity in the world, rats are highly overexposed and vulnerable.
Remember in the corporate world, retirement is sudden and immediate.
So are you a corporate rat?
Are you worried about your financial security being too much tied to your job security?
Are you anxious that as you live paycheck to paycheck, loss of job would have severe impact on the financial well-being of you and you family?
Are you stressed and afraid about the fact that you may not have a full-time job for very long and certainly not after you turn 40 or 45?
If yes, time is ticking for you, the corporate bomb you call as workplace is waiting to explode.
A smart corporate rat will start accumulating stuff for the rainy days.
Like a rat scurrying from one corner to another in search of food and safety, corporate rats are scurrying from one day to another, 9am to 6pm, crushing their souls and suppressing their happiness.
Everyday they are braving mad traffic and leaving behind urgent family issues to reach their place of work which they don't love at all to do a job they may not like much or at all!
(Source: http://cliparts.co/clipart/5908)
Most of the employees don't enjoy what they do, have no fun at where they work and have little or no respect for their reporting supervisor.
This is especially true in those cases where the supervisor despite being thoroughly incompetent has been dropped from above by the higher management that loves boot-licking from such supervisors and their absolute loyalty.
Like rats can be caught unawares anytime and thrown out of the house, corporate rats can also be fired at any time.
In any organization except the founders and their loyalists/stooges (in the top management or below) everyone is a rat.
It is critical, therefore, for corporate rats to start preparing themselves for quitting the rat race as early as possible.
Delay can be expensive since as time passes the rats would get heavier (higher compensation and benefits) and hence become a big liability.
In case the business runs into trouble the fat rats are the ones who will be asked to go first.
Corporate rats should work towards saving and investing what they earn in such a manner that they manage to generate enough income to survive in case they loose their job.
Remember, it is harder for a fat rat to come back into the market once thrown out.
Creating financial cushion to see them through life is extremely important for corporate rats.
Life time employment is long gone. Retirement benefits are completely missing or not guaranteed.
And due to increasing pace of change and complexity in the world, rats are highly overexposed and vulnerable.
Remember in the corporate world, retirement is sudden and immediate.
So are you a corporate rat?
Are you worried about your financial security being too much tied to your job security?
Are you anxious that as you live paycheck to paycheck, loss of job would have severe impact on the financial well-being of you and you family?
Are you stressed and afraid about the fact that you may not have a full-time job for very long and certainly not after you turn 40 or 45?
If yes, time is ticking for you, the corporate bomb you call as workplace is waiting to explode.
A smart corporate rat will start accumulating stuff for the rainy days.
Saving and investing can go a long way in enabling this.
A smart corporate rat will also watch out attentively, rain can start anytime!
A smart corporate rat will also watch out attentively, rain can start anytime!
Return on Investment
"To invest or not to invest, where to invest and when?" - these are the questions top business leaders must answer on a daily basis.
Return on Investment (RoI) comes to the rescue of business leaders to answer the above questions. RoI simply means the returns must justify the investments.
Mathematically and Economically speaking:
Suppose,
Cash (I) = Cash invested
Cash (Ri) = Cash earned at time point i
Then,
TI (Total Investment) = Cash (I)
TR (Total Returns) = Summation of Cash (Ri) over all i
So,
IF TR > TI by more than a defined percentage
THEN Invest
ELSE Don't Invest
The "more than a defined percentage" is the Rate of Return.
Return on Investment (RoI) comes to the rescue of business leaders to answer the above questions. RoI simply means the returns must justify the investments.
Mathematically and Economically speaking:
Suppose,
Cash (I) = Cash invested
Cash (Ri) = Cash earned at time point i
Then,
TI (Total Investment) = Cash (I)
TR (Total Returns) = Summation of Cash (Ri) over all i
So,
IF TR > TI by more than a defined percentage
THEN Invest
ELSE Don't Invest
The "more than a defined percentage" is the Rate of Return.
Managing Money
Money makes the world turn and go around - all of us agree to this oft-repeated statement. Money has the power to make us materially happy or unhappy (note the word materially... money can't guarantee real happiness!). Knowing the techniques that help us in earning money, spending money and most importantly saving money is what is required for managing money effectively.
Earning Money
Earning money at a personal level can be equated to the earning of revenues by a business organization. It's a measure of cash inflow into Me, Inc.
How much one can earn depends on many factors such as one's educational qualifications, effective job experience, kind and nature of job performed, sector or area of economy where one works, etc. It also depends on the prevailing economic conditions.
In addition to what one can earn through a regular job, one can start individual-based ventures or small business to augment the income.
Some of the ways in which one can earn additional money while continuing in the current job are:
Spending Money
Spending money at a personal level can be equated to the incurring of expenses by a business organization. It's a measure of cash outflow from Me, Inc.
How much one needs to spend depends on many factors such as one's socio-economic status, effective lifestyle, family commitments, personal choices, etc.
In addition to what one needs to spend on a regular basis (on paying utility bills, groceries, travel, phone calls, etc.) one may also need to spend on big-ticket items occasionally such as buying electronic gadgets, buying a car, etc.
Unnecessary and impulsive spending should be avoided completely. Planned spending which includes bulk purchasing, discount shopping and bargain hunting are good techniques to follow in all situations.
Another major area in spending money that requires constant vigil and absolute discipline is managing one's EMI on a big-ticket purchase. EMI becomes part of one's regular spending like the utility bills and deafults in its payment carry heavy financial penalty. Out of all EMIs, home loan EMI is generally the biggest one for most of us and hence Managing Home Loan EMI should get the right level of attention.
Saving Money
This is the most crucial aspect of managing money. One difference between business organizations and individuals is that while business organizations get taxed on the Gross Profit (the amount abusiness organization has at its disposal after deducting the expenses from the earned revenue), individuals get taxed on the Revenue (the amount an individual earns through salary and other means).
Saving money assures that as an individual you can comfortably handle cash requirements:
Earning Money
Earning money at a personal level can be equated to the earning of revenues by a business organization. It's a measure of cash inflow into Me, Inc.
How much one can earn depends on many factors such as one's educational qualifications, effective job experience, kind and nature of job performed, sector or area of economy where one works, etc. It also depends on the prevailing economic conditions.
In addition to what one can earn through a regular job, one can start individual-based ventures or small business to augment the income.
Some of the ways in which one can earn additional money while continuing in the current job are:
- buy residential or residential property and earn a certain income through rent or lease
- start a shop or commercial establishment and hire people to run it for you
- do temping - part-time or freelancing jobs
Spending Money
Spending money at a personal level can be equated to the incurring of expenses by a business organization. It's a measure of cash outflow from Me, Inc.
How much one needs to spend depends on many factors such as one's socio-economic status, effective lifestyle, family commitments, personal choices, etc.
In addition to what one needs to spend on a regular basis (on paying utility bills, groceries, travel, phone calls, etc.) one may also need to spend on big-ticket items occasionally such as buying electronic gadgets, buying a car, etc.
Unnecessary and impulsive spending should be avoided completely. Planned spending which includes bulk purchasing, discount shopping and bargain hunting are good techniques to follow in all situations.
Another major area in spending money that requires constant vigil and absolute discipline is managing one's EMI on a big-ticket purchase. EMI becomes part of one's regular spending like the utility bills and deafults in its payment carry heavy financial penalty. Out of all EMIs, home loan EMI is generally the biggest one for most of us and hence Managing Home Loan EMI should get the right level of attention.
Saving Money
This is the most crucial aspect of managing money. One difference between business organizations and individuals is that while business organizations get taxed on the Gross Profit (the amount abusiness organization has at its disposal after deducting the expenses from the earned revenue), individuals get taxed on the Revenue (the amount an individual earns through salary and other means).
Saving money assures that as an individual you can comfortably handle cash requirements:
- During the times of need – in this context, the insurance premiums are saving towards contingencies such as untimely death, accidents, critical illnesses, etc.
- During the time of major purchases such as home, car, expensive electronic gadgets, household items, tourism packages, marriage of children, etc.
- During the time one is unemployed and retired - retirement is a certainty (especially if you don't have your own business or company) and unemployment is a harsh reality of today's business world.
Savings and Investment
Start saving early and invest your money wisely is an oft-repeated statement all of us would have heard many times before.
Savings are important to take care of the following:
Savings are important to take care of the following:
- Uncertainties of life
- Major expenses like children's education
- Retired life
- Investments
Entering Stock Market
I entered the world of stock (equity shares) market investing in 2006 with an IPO (Initial Public Offering) purchase. My second purchase was also an IPO. I have lost money on both - even today both are in red.
Then I decided to purchase subscription to a Trading-cum-Demat Account. The first Brokerage Firm I applied for lost my documents so I decided to avoid them altogether (lack of professionalism).
And then in 2009 beginning, I managed to open a Trading-cum-Demat account with another Brokerage Firm. Within a week of all formalities getting completed, I had an user-id. For two months I did nothing as I didn't know what to do with the trading terminal! After few e-mail complaints to their customer care someone from the Brokerage Firm came and gave me a demo. And in fact, while the person was there I bought stocks of two companies. Well... both these have been in green so far.
I have started testing the waters more and more. It's still step 1 for me but I guess I have learned enough (and am still learning) how to be an intelligent investor. I have read Benjamin Graham's book also on the same subject. And a couple of other books by "experts".
I will have more to share about 'shares' as time passes... And I hope after a while I can emphatically say "Yes" to the question - "Is investing in Stock Market safe?"
Then I decided to purchase subscription to a Trading-cum-Demat Account. The first Brokerage Firm I applied for lost my documents so I decided to avoid them altogether (lack of professionalism).
And then in 2009 beginning, I managed to open a Trading-cum-Demat account with another Brokerage Firm. Within a week of all formalities getting completed, I had an user-id. For two months I did nothing as I didn't know what to do with the trading terminal! After few e-mail complaints to their customer care someone from the Brokerage Firm came and gave me a demo. And in fact, while the person was there I bought stocks of two companies. Well... both these have been in green so far.
I have started testing the waters more and more. It's still step 1 for me but I guess I have learned enough (and am still learning) how to be an intelligent investor. I have read Benjamin Graham's book also on the same subject. And a couple of other books by "experts".
I will have more to share about 'shares' as time passes... And I hope after a while I can emphatically say "Yes" to the question - "Is investing in Stock Market safe?"
Investing in Stock Market
Is investing in Stock Market safe? Well.. the answer is both yes and no.
No - if you invest in the market without testing the waters, without adequate preparation and without having an underlying strategy (when to buy, how long to hold and when to sell).
Yes - if you do opposite of the above.
Before one enters the stock market, it is strongly advised that one studies and acquires understanding of the basic terms and concepts listed below:
No - if you invest in the market without testing the waters, without adequate preparation and without having an underlying strategy (when to buy, how long to hold and when to sell).
Yes - if you do opposite of the above.
Before one enters the stock market, it is strongly advised that one studies and acquires understanding of the basic terms and concepts listed below:
- CMP - Current Market Price
- Bid Price versus Ask Price
- Stop Loss
- Intraday (Margin) versus Delivery
- Buy, Hold and Sell Strategy
- Short Selling
- AMO - After Market Order
- Brokerage and Securities Transaction Tax
- Technical Analysis - Uptrends, Downtrends, Breakouts, Moving Averages, Highs and Lows
- Fundamental Analysis - P/E, P/BV, EPS, Dividend Payout History
Saving Tax Under Section 80C
As of August 2009 the following investments or expenses can be claimed under Section 80C of the Indian Income Tax (Personal):
- PPF (Public Provident Fund)
- NSC (National Savings Certificate)
- ELSS (Equity Linked Saving Schemes)
- Principal Repayment and Pre-payment
- Infrastructure and Other Tax Saving Bonds
- Premium Payment for Life Insurance Policies
- PF (Provident Fund)
- Children Education Fees (Limited to Maximum 2 Children)
Managing Home Loan EMI
Do you want to track your home loan EMI? Do you want to manage it keeping the following factors in front of you:
1. What if the rate of interest changes?
2. What if you make a pre-payment?
3. What if you want to retire the loan within "n" years?
4. What if you increase or decrease your EMI amount?
For helping you in this, here is an excel-based utility for managing your home loan EMI better. Play with the various home loan variables using this utility.
Click here to download the Home Loan EMI Tracker
1. What if the rate of interest changes?
2. What if you make a pre-payment?
3. What if you want to retire the loan within "n" years?
4. What if you increase or decrease your EMI amount?
For helping you in this, here is an excel-based utility for managing your home loan EMI better. Play with the various home loan variables using this utility.
Click here to download the Home Loan EMI Tracker
Managing Personal Finances
Money is essential to survive and to excel. "Money makes the world go around", as is rightly said.
Managing personal finances or Managing Money is important for personal excellence. Some of the ideas that would be helpful in achieving excellence by better management of personal finances are:
* Maintain a contingency fund equivalent to 6 to 9 months of your monthly expenses in a saving account. You will earn less interest but this amount will be highly liquid for use
* Better still get a premium account opened where the minimum balance is higher but which earns a higher interest. And of course don't consider the minimum balance amount to be a part of the contingency fund
* Save regularly by spending less than what one earns
* Get and remain adequately insured - life insurance, health insurance, home loan insurance, etc.
* Pay the credit card bills in full and by the due date
* Pay all bills by the due date to avoid late payment surcharge
* Pay bills online wherever possible - traveling for bill payment is always costlier
* Create a corpus of savings for post-retirement life - once one reaches a certain age income through employment will generally vanish
* And lastly adopt a frugal lifestyle to the extent possible
Managing personal finances or Managing Money is important for personal excellence. Some of the ideas that would be helpful in achieving excellence by better management of personal finances are:
* Maintain a contingency fund equivalent to 6 to 9 months of your monthly expenses in a saving account. You will earn less interest but this amount will be highly liquid for use
* Better still get a premium account opened where the minimum balance is higher but which earns a higher interest. And of course don't consider the minimum balance amount to be a part of the contingency fund
* Save regularly by spending less than what one earns
* Get and remain adequately insured - life insurance, health insurance, home loan insurance, etc.
* Pay the credit card bills in full and by the due date
* Pay all bills by the due date to avoid late payment surcharge
* Pay bills online wherever possible - traveling for bill payment is always costlier
* Create a corpus of savings for post-retirement life - once one reaches a certain age income through employment will generally vanish
* And lastly adopt a frugal lifestyle to the extent possible
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