Planning For It!

Women and Money Management

Yogi — Mon, 08 Mar 2010 09:39:26 GMT

As women’s day approaches this year once again, women have ample reason to cheer. Thanks to the finance minister for expanding the tax slabs and also the increase in remuneration by employers, women assessees are left with a bit more disposable income than their male counterparts.

Women with taxable income between Rs 2 lakhs and Rs 5 lakhs stand to gain a tax saving of up to Rs 20,600 and those with taxable income of more than Rs 5 lakhs are set to gain up to Rs 51,500 in annual tax savings (The impact on savings for female assessees wrt new tax slabs for FY 2010-11 is provided at the end of the article).

The savings in the form of tax reduction can be utilized in the way you feel fit – live it up today, donate, and/or make your hard-earned money work even harder to help you reach your future commitments.

We at InvestmentYogi have listed out for you some smart money management tips (that you can employ with the coming FY’s tax savings) and also special benefits and offers coming your way this International Women’s Day:-

1. Still deciding on your dream house? Consider booking it NOW - Those of you who’ve been looking for their dream pads may consider booking it with your builder before July this year as the government has proposed to introduce a new tax to be levied on constructed/under construction properties, which may be as much as 3.5% of your cost of property. Booking now will help you save on taxes further. The savings so made can be diverted into other investments and/or financial commitments.

2. Invest before 31^st March, 2010 and save on taxes - As the FY 2009-10 end approaches, it is perhaps the best time to plan your investments that could help you save on taxes too. You may invest as per your future financial requirements and risk profile. For example, if you are risk averse and want to save for your house renovation/repairs in 5-6 years time, you may opt for NSC or 5-yr tax saving FDs, which will give you a tax deduction of up to Rs 1 lakh p.a. For capital growth oriented investors, opting for ELSS may seem rational. A health insurance policy is a must to allow you stay independentand healthy. Click here to know more about tax saving options for FY 2009-10.

3. Go easy on credit cards – As Women’s Day approaches, retailers ensure not to leave any stone unturned and wrestle it out for a share of your shopping bag. Although we understand a new line of Loreal eye shadows has just been released, Lifestyle has announced ‘sweet-16’ offer (offer of 16 % discount for women on apparel till 08 March, 2010) and of course there is an introductory 50% off on Loreal new range of shampoos, we suggest not to go overboard on your credit card splurges. Now we don’t advocate use of cheap products (that damage your body and your confidence!) all for the reason of saving money, but cutting down on impulsive purchases and spending right does go a long way in better management of your finances without having to compromise on essential spending.

Don’t own too many credit cards; they may boost your net worth in the short term but can get fussy and entangle you into the debt trap if not monitored regularly. It is wiser to keep the one with most benefits and trash the rest. This is a healthier way to keep track of your finances too).

Read more on how to use credit card smartly.

4. Do charity – The philanthropic ones may consider using a little of their tax savings to donate for a social cause. It can be upliftment of underprivileged women and children, promotion of the cause of literacy, financial help for poor artisans - the list is endless. There are many trusts in the country for almost every social cause. You can access them easily on the internet. They are just a click away.

Kiran Bedi is roaring for the ‘save our tigers’ cause. Do you want to roar too? Click here to get started.

However, donation (s) need not be money alone. During your free time, you may take up some voluntary work - you can contribute with your expertise, creative ideas; or just spend some time with elderly, children who are terminally ill and animals too! (if you’re an animal lover that is). A small donation (in the form of money or your time) can bring a big smile on the faces of the underprivileged. After all, for women, caring comes with ease.

5. Take note of special benefits for you on occasion of International Women’s day, March 2010 –

(a) Women’s reservation bill to be passed in parliament on Women’s day - The long-pending Women's Reservation Bill will be presented in the Rajya Sabha on International Women's Day on 08 March, 2010 and is all set to sail through smoothly.

The Women's Reservation Bill provides for 1/3rd reservation of seats for women in Lok Sabha and state assemblies, giving more empowerment in the hands of women. The Union Budget has also made a small beginning to support women farmers, another path-breaking initiative.

Special offers for women this Women’s Day -

(b) Jet Airways offering special airfares to women - Effective from March 1 to March 31, 2010, Jet Airways is giving 10 % discount on the base domestic fare and 5 % discount on base international fares for women travelers. The booking has to be made on the airline's website. The benefits would be available for first class, premiere and economy for travel on all routes operated by Jet Airways/Jet Airways' Konnect.

(c) Big Cinemas offering free movies on women’s day - Big Cinemas, a subsidiary of the Reliance Anil Dhirubhai Ambani Group is offering free movies to all women on International Women’s Day 08 March, 2010. (Check out the company website for more details).

(d) Additional offers - easyday Market, the compact-hyper format of Bharti Retail (a wholly owned subsidiary of Bharti Enterprises), has launched special offers on the occasion of International Women's Day for women residing in Punjab, Rajasthan and NCR Delhi. The special offers would be available from 6th to 8th March, 2010 in all easyday Market stores. Many online stores are planning special offers on Jewellery, skincare, haircare, books, special coupons/vouchers etc.

You can make good use of these offers - treat yourself to free movies, take off on a weekend holiday by air, or buy yourself some evergreen gifts such as jewellery, self-help books (suggested book list is given at the end of the article), pamper yourself with skin & hair care products.

So let us gear up for this women’s day. It is time we women make a difference – personally (by realizing our financial goals) and socially (by uplifting our fellow beings from poverty, illiteracy and neglect) and at the same time leaving no stone unturned in having loads of fun.

Note:

You may also consider reading our article on money management tips for working women.
Additionally, you can get a customized financial plan done today at InvestmentYogi to analyze your unique investment strategy to achieve your goals.
Impact on tax savings (for female assessees < 65 years of age) due to change in tax slabs for FY 2010-11:

Suggested Books:

1) Rich Dad, Poor Dad: What the Rich Teach Their Kids About Money-That the Poor and Middle Class Do Not! By Robert T. Kiyosaki

2) The Intelligent Investor: The Definitive Book on Value Investing. A Book of Practical Counsel (Revised Edition) by Benjamin Graham, Jason Zweig, Warren E. Buffett

3) Smart Women Finish Rich: 9 Steps to Achieving Financial Security and Funding Your Dreams (Revised Edition) by David Bach

4) If Your Life Were a Business, Would You Invest In It?: The 13-Step Program for Managing Your Life Like the Best CEO's Manage Their Companies by John Eckblad and David Kiel

5) The Guru Guide to Money Management: The Best Advice from Top Financial Thinkers on Managing Your Money by Joseph H. Boyett and Jimmie T. Boyett

Written by Priya Rao

I will teach you to be rich

Yogi — Tue, 16 Feb 2010 13:43:17 GMT

Talk by Author Ramit Sethi

InvestmentYogi attended a talk in Silicon Valley, California, by the bestselling author, Ramit Sethi, who recently wrote “I Will Teach You to be Rich.” His book was published in 2009 and became an immediate Amazon #1 bestseller.

Ramit is an Indian Origin American citizen who was brought up here in California by Indian parents who inculcated values of savings, thrift, bargaining, and having fun once in a while. He says his studies at Stanford in technology and psychology helped him understand the psychology of people and their money.

The talk, hosted on the premises of Hewlett-Packard, was attended by several hundred Indians from Silicon Valley, eager to hear the financial advice Sethi provides. The hosts were local Indian Organizations NETIP, www.netipbayarea.org, and SIPA, www.sipa.org.

Below we summarize Sethi’s talk while giving an Indian bent to the advice. Please be aware, the Indian market advice adaptation is ours, USA recommendations are his.

Sethi started out by preaching simplicity in finances. “Don’t try to save by cutting down on Lattes”, he advised, “Look out for the big things and if you are on track there, don’t sweat the small stuff.”

He claims average people can have success by automating their investments, using psychology to help them save and aiming for a system where you get “85% right.” He repeated several times not to try hard to save every penny and not to get stressed out and use up all one’s willpower. The idea is to set up automatic investing plans, e.g. SIPs, maximize company savings plans and focus on the big picture. He suggests setting up multiple savings sub accounts to save for specific goals, e.g. marriage, car, vacation.

He spoke of 401K plans, the USA version of the Provident Fund. In India, the Provident fund is primarily invested in Government debt (although the Government is making efforts to bring in professional fund managers and link it to the market). In the USA you can choose from many funds, risk levels, debt, equity and more. He fears the system is too confusing for most. “When people have too many choices, they make no choice at all but put it off. Better to stay simple but be invested.”

His investing advice boils down to this:

Max out your 401K (this is the Employee Provident fund equivalent. You should always be paying the maximum contribution since you get matching and it is a tax advantaged account).
Pay down debt
Be sure you are properly insured
Max out your Roth IRAs (closest equivalent is the public provident fund, another tax advantaged tool)
Then, if there is money left, invest in taxable accounts

This advice must be adapted a little in India because here the Provident Fund provides only debt investment. We all need some equity to avoid our savings getting reduced by inflation and to keep up with the economic growth, so be sure to have your investments outside of the PF as well. Some good equity funds should be a part of your portfolio preferably through SIP (Systematic Investment Planning) route.

He advises “Earn More.” He suggests doing side jobs, increasing your income at your job and making sure you are earning sufficiently. This may not be easy to follow in India as part time jobs are hard to come by.

Where to invest? In the USA he suggests both lifecycle and index funds which tend to have low costs and are simple and straightforward. Fortunately India has some good Index Funds like Nifty Bees and Franklin Templeton India has such “LifeCycle Funds” also called “Stage of Life” funds. They have different funds for people in different stages of life like 20s,30s,40s etc. Balanced Funds or Hybrid Funds in India also serve a similar purpose.

When to call in a financial planner? Sethi suggests when a portfolio becomes substantial and you need help choosing investments. In India this is not so simple, you may need help at an earlier stage. Good news is, in India planners can sometimes cost less and be more accessible to the average Indian.

If you are getting a planner, Sethi advises, make sure he/she is fee only and not commission based. He recommends looking for a planner on the NAPFA (National Association of Personal Financial Advisors) site in the USA. Since most Indians are not members of this USA-based organization, we advise you to look for a Certified Financial Planner on the Indian Financial Planning Standards Board Website: www.fpsbindia.org

Sethi’s talk was upbeat, fun, accessible and entertaining. It resonated with the audience who felt energized to organize their finances and asked many questions. Check out his website for more information: www.iwillteachyoutoberich.com

How to become a Crorepati?

Yogi — Mon, 01 Feb 2010 18:45:42 GMT

All of us dream of becoming a Crorepati and spend a lot of time trying to figure out how to do it. There are 5 ways to do it.

Inherit it from your family
Get married into a wealthy family
Win a lottery or contest
Become a successful film star, sports star or an entrepreneur
Save and Invest

As you can see the first 4 options are better left to luck and many other factors beyond our control. But the 5^th option is for everyone to pursue. Learn to take control of your financial destiny. It is possible to become a crorepati in your lifetime and it’s not a miracle. InvestmentYogi tells you how. It is dependent upon 3 factors:

The Amount Invested Every Month/Year
Rate Of Return
Time Period The Amount Stays Invested

A disciplined approach towards saving and sensible investing choices will take you to your first crore as long as you allow COMPOUNDING to do its magic.

If you were to save and invest Rs 64,000 per year (which is slightly more than Rs 5,000 per month) you could become a crorepati in 25 years. The table below shows the numbers. We have put 12% as a reasonable rate of return over a long period of time.

Similarly if you invest Rs 20,017 per month for 15 years you could have Rs 1 crores as savings:

Let us now take a closer look at the factors which make this happen:

1. Amount Invested Every Month/Year:

It's intuitive that the more you are able to save and invest today, the larger your reward will be down the road. However, research shows that even the smallest addition to your savings each month/year can make a big difference in reaching your targeted amount. The power of compounding is almost magical.

2. Rate of Return:

The rate of return (the amount you earn on your savings) has a huge impact on the amount of money you'll end up with. Different investment vehicles have different expected returns. For example, Indian stocks have historically returned more than 15% per year. Debt (or Fixed Income instruments), in contrast, has a current return of 8-9% per year.

Your goal is to find a rate of return that offers the highest potential for growth, but at the lowest possible potential for risk of loss. Over time, we have found that the most prudent solution is a diversified combination of investment assets (stocks, bonds, cash, real estate, and alternative investments).

Assuming that you could put away Rs 100 just once at 11% per annum, you would have Rs 1,359 at the end of 25 years. However, if you were able to invest Rs 100 at 13% per year, you would have Rs 2,123 at the end of 25 years. You can see that the difference is huge.

3. Time Period Amount Stays Invested:

To illustrate the power of compounding over time, let’s look at the first example: Rs 2,000 were saved and invested each year from age 19 to 26 (for a total of 8 contributions). In the second example, Rs 2,000 were saved and invested each year from age 27 to 65 (for a total of 39 contributions). Assuming that long term rate of return was 12% at age 65, the first example ended up with Rs 20,43,747 (vs. Rs 13,68,020 in the second example), even though the total amount contributed over the 8 year period was only Rs 16,000. It sounds astonishing but just do a simple calculation and you will realize how true it is. Reason? The first example had 8 more critical years to invest at the same rate of return at the beginning of the investment period. That's the power of compounding!

Now you know how to become a crorepati: Get lucky or start on the “slow and steady” journey. Do not wait for the right time or a starting amount. The key is to start and the time is NOW. A financial plan can be of great help in achieving this goal. Now you can also get a FREE Financial plan at InvestmentYogi.

Action Plan:

Get a Financial Plan which will indicate your asset allocation (among other things)
Cut down your unnecessary expenditure to save more
Choose a combination of Fixed income instruments and equity funds
The trickiest part is generating 12% (or the desired return) consistently over a long period. That is where the expertise of our planners is useful.
Start SIP(Systematic Investment Plan) in the chosen funds
Don’t look at the stock market everyday. Do not try to time the market. It doesn’t help.
Stay invested for long periods.

Disclaimer: We have not taken inflation or future value of money into account. The purpose of the article is to demonstrate the power of compounding and the need for saving at regular intervals.

Financial Planning in your twenties

Yogi — Mon, 11 Jan 2010 14:06:00 GMT

India is a young country. Approximately 60% of the Indian population is below 30 years of age. Asian Development Bank estimates India's working age group to top most others globally in the next 2 decades. This would comprise those between 15 to 64 years of age.

The large ‘young and urban’ population (the working population with purchasing power) adds to our country’s economic growth enormously. It is the major driver of consumption as this young population has the ability (disposable income) and willingness to spend due to rising income levels (increasing instances of double incomes in most families). The increase in the number of nuclear families, easy financing options, increase in the population of working women continue to contribute to the increase in the domestic consumption propelling growth.

Meanwhile this ‘young’ segment continues to buy homes and select insurance, loans and retirement plans with little attention and relevant a dvice. For example, very few individuals start retirement planning when they are young.

We agree that planning for your future can be tough for anyone especially in this age of unlimited spending and investment choices.

So we at InvestmentYogi have taken the overwhelming task of financial planning and broken it down for you in few simple steps. With these pieces in place, you'll be well on your way to financial security.

1. What are your aspirations?

Work out what your goals are. It may not always be career or marriage or children centric. A goal can also be something you have been longing to do since a while. Is it trekking the Mount Everest? Is it going on a complete world tour? Or is it attending art lessons in Europe? Whatever your goals are, try measuring them in money terms so that you know before hand their precise financial requirements to help you plan better and achieve them too! Saving for a car or a holiday is a great way to fast-track a sense of achievement — and it sets up an invaluable habit – Saving. Save up ahead of time and you'll be in key position to make the most of your thirties.

2. Understand your money:

Your parents maybe trying to help you prepare your taxes, balancing your checkbook or managing your investments, but they may not be around forever to help you out. While there's no denying that 20s is the time for experimentation, the fact is, you're not a kid any more. Once you start earning, your finances are your responsibility and there may or may not probably be a wealthy Prince or Princess waiting to sweep you off your feet. Why take a chance? Focus on learning the true value of money and how to be responsible for your self. You need to succeed financially on your own.

3. Build an Emergency fund and seek Insurance:

It pays to be prepared for the "what ifs" in life. For any age group maintaining an emergency fund is a must. During the start of your career, investing in Health insurance is a necessity to protect you from the downside of a possibility of an accident, illness or disease which can lay a considerable hole in your pocket. House owners’ insurance and auto insurance also require equal mention. Plus, if you have children, life insurance is an absolute MUST.

4. Stay away from debt:

Debt is one of the biggest financial problems facing young adults. Live within your means. Can't afford something? Don't buy it. Learn to keep spending in check while you're young and you'll save lakhs of rupees over the years -- and save yourself a lot of stress, too. A monthly budget helps keep your spending in check and in the process, frees up money in your budget you never knew you had. Borrow only to build your wealth. Pay off your credit card bills in full every month. Keep tidy financial records. Not only would you need a down payment to buy a house, you would also need an established credit history and a record of on-time payments. Building a good credit history in your twenties will ensure it's ready when you need to use it. Read in between the lines before entering into a contract and ensure you uphold it financially.

5. Think Retirement:

When you are in your 20s, it is easier to focus on immediate and short term needs. However, it's not so easy for young adults to start planning for their retirement seriously from their first job itself. After all, retirement is a long way off. Yet it is the most essential piece to one’s long term financial security. Unlike in the US, in India the government does not provide social security on retirement. An individual has to depend on his own investments for his retirement nest. When you're young, time is on your side. The sooner you start investing toward your retirement, the bigger the amount you accumulate.

6. Increase your social network:

Join or create an online community. Increase your social network and learn from each other. Even if you are a non-finance executive, you can still improve your financial literacy by reading books, searching the web, joining a community or a club or talking to experienced people.

7. Get yourself a financial plan

Financial planning serves very important purpose of bringing discipline and clarity to your investment habits.

An ideal plan gives you a complete picture of your current investments and liabilities, your net worth, cash flow, goals and a specific plan to achieve those goals. When you are young you tend to live for the moment and do things as they come but it's very important to secure your financial future. At the same time it does not have to be at the cost of a good lifestyle.

The decisions you make today about your career, education, debt and retirement will stick with you and shape your future. So, invest in yourself. Start early. Start small. And ignore the typecast.

To end with, a few lines from the poem by Juanita Bratcher:

Life can be enlightening
Indeed it can be challenging, too
It can be a roaring opportunity
But that depends on you

Never throw in the towel because things don't go your way
Just ride the tides of patience
And keep focused on your dreams each and every day

The author, Priya Rao, is a financial planner at InvestmentYogi

Pension Plans: Smart way to retirement

Yogi — Thu, 07 Jan 2010 06:46:35 GMT

Investment into pension plans is crucial to your retirement planning. InvestmentYogi tells you all about it.

What happens after retirement can be rather unexpected if you do not plan for it beforehand, carelessly thinking that you still have plenty of time. One day you might wake up and find yourself on the threshold of retirement without money and any particular plans for the future. In order to avoid such a situation it is better to start planning for your retirement right now.

Why retirement Planning?

Economic prosperity has given more disposable income in the hands of Indians while better healthcare has improved their life expectancy significantly. Today, an average Indian lives well beyond the retirement age of 60 years. While this should be good news for all, people unprepared for retirement will find themselves in quite a fix. More and more now people are starting to realise the importance of retirement planning and the need to be self-dependent even in their old age.

A survey done in late 2008 by Sun Life Financial revealed that when it comes to retirement planning, only about 4-5 per cent of Indian working population, mainly government employees, are covered by a pens ion plan. Rest of them depend on their children or their savings for their post-retirement life. The average Indian also looks for a long working life and estimates the corpus required for post-retirement life to be 100 times their monthly household income at the time of retiring.

How to start?

Retirement planning involves many aspects – start with deciding when you wish to retire and what you wish to do post that. This will help you to arrive at how much you will need when you retire. You can simply arrive at a monthly figure that you will require to meet your needs. This in turn will lead you to ways of building that corpus that will secure your retired life. Inflation devalues money, so it is important to route your savings to vehicles that can provide you with the returns you need to beat inflation and build the required corpus.

Where to invest?

The avenue you choose to invest in will depend on the tenure, your appetite for risk, the returns you require to build the corpus and so on. If you have very few years left to your retirement, then choosing a risky profile like only equities may be a bad idea. On the other hand, if you are still young and retirement is a long term plan for you, then not investing in equities would also be a bad idea. A combination of tenure and returns required for you to arrive at the required corpus is ideally what you should concentrate on.

Some common avenues for retirement planning are PF, PPF, Superannuation, and Gratuity and so on. If you are open to taking risk and if you have sufficient time for your retirement, you could invest in a basket of instruments like PPF, FDs, Bonds, Mutual Funds, Equity, property etc. and gradually move the growth instruments to debt over time. Property may be a good idea at retirement, as it can give consistent rental income. If you start early, the composition can be aggressive initially and can turn more and more sedate when nearing retirement. Early starters need not worry about market volatility. They can weather the storm as they are long-term investors.

Pension Funds

Another popular and much advised investment vehicle for retirement is pension. Pension is a fixed amount of money that is paid by government (in case of government employee) or by Insurance companies (if an individual has invested in Pension Plan) either monthly or quarterly for his/her expenditure. The primary objective of a pension plan is to help you provide for your financial needs in your post retirement years. Pension plans provide with a regular, steady and reliable income that will help you take care of the much needed basic necessities post retirement. It helps you lead a hassle free life after completing years of your working life.

Life expectancy is increasing, medical costs are sky rocketing and cost of living will be much higher by the time you retire. If these aren’t reason enough to start investing in a pension plan, then think of being dependent on your children all your retired life. Pension plans will give you that independence that you are accustomed to all through your working life.

There are 2 kinds of Pension Policies available in market:

The Immediate Annuity and
The Deferred Annuity.

Annuities are periodic payments received for the policy purchased. In the immediate annuity, you will invest a lump sum amount once and start receiving pensions immediately. This is suitable for the people who are nearing retirement. In a deferred annuity, you will start building a corpus at a young age. On retirement, you will receive annuities out of this corpus. This is suitable for the young people who are at the mid of the retirement age. Deferred annuity or pension plans are now offered by both government as well private insurance companies. Depending on your risk profile and tenure left for retirement, you can choose to invest in market linked plans or traditional plans that invest mainly in debt instruments.

Tax aspect

The main disadvantage of pension plans is the taxability of the same. The corpus built through a pension plan is taxable if withdrawn. One third of the corpus or half if you are not in receipt of gratuity, can be withdrawn tax free. The remaining corpus has to be necessarily invested in an annuity plan and the annuities received from this is taxable as income in the hands of the recipient. Even though annuities are taxable, Sec 80C benefit is available for investments in pension plans.

You could invest a part of your retirement corpus (10-15%) in a Pension Policy. Build a corpus that can make you financially independent and that can be used in case of any medical and daily expenses.

The author Lovaii Navlakhi is a Certified Financial Planner and Managing Director of International Money Matters Pvt. Ltd.

Impact of Inflation on Your Savings and Investments

Yogi — Wed, 16 Dec 2009 06:58:56 GMT

Are your investments really earning what you think they are?

Inflation affects your earnings, your investments, what you can purchase and your lifestyle. It may seem like a technical concept best left to economists to discuss, but here’s why you need to know more about it.

In March 2010 various agencies are expected to assess inflation for the fiscal year of 2009-2010 at anywhere from around 6.5% (RBI estimate as of October ‘09 policy review) to 8% (as per Citi economist Rohini Malkani, noted Dec 14, 2009 in the Economic Times).

That means, since the previous tax year, on average goods and services in India will cost from 6.5% to 8% more than the previous year.

With luck, you may have had a salary increase of that amount to keep up with your lifestyle expenses. With the economic downturn, you may not have had the increase.

What about your investments? If you held a diversified portfolio with debt and equity and earned around 15%, you are doing well. You earned money in real terms. Anything more than that is icing on the cake (provided the investment continues to do well, that is, or you sell it). If you held all your money in FDs yielding 6% to 7% or in a cash account at the bank earning 3% to 4%, then you actually lost money this year. You will be able to purchase less for the same price than you could last year.

This concept is hard to accept: you want your money to be safe and stable but in going the totally safe route, you may be losing money long term. Many Debt products can be safe options and return a bit more than inflation. A Provident fund investment (obligatory for many in large companies) earns currently around 8%.

We are not discounting debt and other safe options for your money—it is an important part of every portfolio, giving stability through assured returns, safety through the fact that it is a non-correlated asset (meaning debt won’t decrease in value when shares do, usually it will increase in value) and an assurance that it will be there no matter what. If all the companies that we invest in through mutual funds and/or directly, went bankrupt (obviously not likely), in theory, the Provident Fund and other debt options would still be there to see you through.

Really the best option, however is to be sure you have enough diversity in your portfolio to allow for growth, best captured through equity. Equity tends to grow faster than debt and usually outpaces inflation.

Inflation is more important for emerging markets like India than developed markets. The currency, economy, prices and general economic system are more volatile and growing faster and will generally produce sharp swings in inflation that must be closely monitored. If you watch carefully, invest well and are well advised, you can do well. In a highly inflationary environment, investments will often also earn higher returns to reward investors.

Inflation is often matched by fast growth rates which produce good earnings for companies that people and mutual funds invest in. But it musn’t get out of control. This is why the government closely monitors inflation to make sure it won’t get too high. If it does, watch for fiscal and monetary policies like taxing inflows of foreign dollars, raising interest rates and removing any stimulus measures put in place during the economic slowdown. One impact of the very slow to negative growth we are currently seeing in many of the Western countries is near zero inflation. It corresponds to growth.

This is why inflation is not static. Inflation for assessment year 2007-2008 was 4.5%. It changes all the time and we are not able to predict it with great accuracy. This is why it helps to keep an eye on it.

Another factor to be aware of is how uneven inflation can be. Education costs in both the USA and in India have far outpaced average inflation for many years. At InvestmentYogi in our financial plans, we currently use an inflation figure of 6% (this represents a historical average with future predicted inflation factored in) and an education inflation figure of 10%. This is important when planning your child’s higher education, whether in India or abroad. Food prices worldwide also fall in the higher inflation rates (for November alone increase was 19% as per Economic Times of Dec 14), and are expected to for years to come, while other consumer goods may not have changed prices or may have gone down.

Retirement is a key area to watch out for. You must save large amounts and save early in order for earnings and compounded growth to increase sufficiently to support you in your old age. Think about 7% (if inflation stays there!) per year for the next 40 years. Just make sure that money is diversified in your investments! And for current retirees, they need to have access to “Safe” money but woe to those who don’t hold some equity and are looking at the next 20 years in retirement. That is a long time to make your money last in a world of rising prices. The era of company-offered pensions is declining and one must look out for oneself. Even those with a pension will fast find its value eroding if the pension amount is fixed and the economy is not.

Aside from diversification, there are some other tools to look for. Pension funds you can buy generally track inflation, as do some other investments. This is a sort of guarantee that inflation will not outpace your funds.

Whatever your strategy, be aware of the inflation rate and make sure you are keeping up with it, if not surpassing it, in your investments and other earnings. And be sure to talk to your elders about these concepts, which may be foreign to them. Older people tend to prefer “safe” investments but make sure they are not being so safe that they lose money! Once their earning power is gone, they need the money more than anyone else.

Questions or comments? Email us at advisor@investmentyogi.com.

The author Ariadne Horstman is a Financial Planner at InvestmentYogi

Planning For Your Child’s Future: Education & Marriage

Yogi — Fri, 11 Dec 2009 19:37:23 GMT

Irrespective of where we come from, what we are now or what we want to be, some aspirations common to all are those for our children’s future: a good education and a marriage performed and celebrated well. Further, in these competitive times, a first-class education is a ticket to a great future. Hence, we as parents are all the more keen that we should have enough funds to provide the best education to our children more than any estate or property.

While there are number of ways to accumulate the corpus required for this, the first requirement is to put down a number today for your child’s education. Consider the cost of a professional degree course and a post graduation from a good institution. Apply a rate for inflation on this, you can assume 6% - 7%, if your child’s education is 15+ years away. This is your target – work towards this.

Example: Let’s say an engineering degree from an elite college would cost Rs.10 lakhs ( if my child could not secure a merit seat). An MBA from one of the better institutes would cost Rs.15 lakhs. If my child is 2 years old today, then by the time she is 18, the engineering course would cost nearly 3 times this at Rs. 24 lakhs and the MBA would cost about 45 lakhs.

Now look at a combination of asset categories to build up your funds. Ideally they should have different risk-return patterns so that even if one category is going through a low cycle, the growth in the other asset categories makes up for it. Basically there should be sufficient diversification so that you are not over dependant on any one asset class – a judicious mix of equity and debt so that you have both safety and returns.

Equity should form a significant part of the portfolio. Over a 15+ year period, the returns from this asset class are probably one of the highest, in the range of 12% - 15% p.a. and hence are capable of taking on the double whammy of tax and inflation. So do consider the SIP, systematic investment plan into equities (either through Mutual funds and/or equities).

For most of us earning a salaried income, doing a lump sum investment is not possible. So a SIP offers a lot of advantages the main being the ease of investment. Most fund houses have an ECS facility for this investment and therefore these can happen every month smoothly. Further, since these investments happen at a fixed day of the month and for a fixed amount, one gets the benefit of rupee cost averaging. You don’t have to time the market and invest depending on being able to predict the ups and the downs successfully each time. Instead you purchase units of the mutual funds sometimes at a higher price when the markets are rising and sometimes at a lower price when the markets are falling, such that your average cost works out lower.

Open PPF, Public Provident Fund accounts in the names of your children at the earliest and keep putting money into these accounts year on year. Among the debt category of products, the PPF is one of the most tax efficient and offers a high rate of return at 8%.You can also look at real estate, say a plot or a property and keep this aside for this goal. Over the years once this has grown to good potential it can be liquidated.

For the child’s marriage, it would be prudent to buy gold and silver in pure form (biscuits or coins) from time to time when there are serious dips in the prices/systematically starting today in small quantities so that closer to the child’s marriage these can be converted to ornaments and articles required for the marriage.

Whatever has been discussed above is contingent upon your future earning capacity. Only if you are there and you earn a certain sum will these investments be possible. But what if something was to happen to you and your family is left behind with all these aspirations incomplete. It is for this that INSURANCE has to be a vital ingredient in the asset mix. Insurance will ensure that even if you are not there, your child’s education or marriage will go on as planned. It is the only instrument which can bridge the gap between income and the goals.

So look at an insurance plan. You can either take a ULIP so that you get the benefit of equity returns combined with a life cover. Or you can take a term plan and do most of the investments according to your desired asset allocation.

Lastly, keep evaluating the performance of the various investments to get the best out of them and when the goal is a couple of years away do move most of the assets to cash or near cash form so that any depressions, falls do not erode the gains made so far.

The author Lovaii Navlakhi is a Certified Financial Planner and Managing Director of International Money Matters Pvt. Ltd.

6 Things To Do Before The Year Ends

Yogi — Tue, 08 Dec 2009 06:59:47 GMT

As 2009 draws to a close we present to you some New Year Resolutions for 2010 which will go a long way in making you financially fit. All you need is will power and determination to follow these simple tips.

If you’re like most people, you probably made some resolutions for the next year. These resolutions typically include physical, mental, and spiritual improvement. Some common resolutions include losing weight, eating better, exercising etc.Not many people resolve to reduce their taxes; save for retirement; and taking insurance, but we shouldn’t forget about financial fitness in our New Year’s resolutions.

Make this year different!

What can you change this year? What decisions do you need to make differently to be able to look back on 2010 with a renewed sense of accomplishment? Whatever you need to do, you should get started now. Just taking the first step will feel great.To get started in the right direction, below is list of 6 Financial Resolutions; which will help you make better, smarter financial decisions both for the coming year, and for the rest of your life.

Know what you want

Make sure you have clear and concise financial goals put down. This would help you to shape out how your investments for the year ahead should be. Unless you know what you want and where you want to be, you will not be able to direct your investments into something useful. It is best to list small, attainable goals rather than go for a lifestyle change overnight. By giving yourself simple tasks that you can even complete in five minutes, once a day, you will make headway over the course of time.

Protect Your Family and Assets

This is an area that is omitted from most peoples’ lists, but it should be a top priority - protect your loved ones. What happens in the event of a death or disability? Will the family be comfortable financially? Will the children be able to go college? Most people’s greatest financial asset isn’t their home or investment accounts; it is the ability to earn money. It is necessary to protect against this asset being prematurely taken away.

Create a Budget

Determine your income and expenses for each month by reviewing your bank statements, credit card bills and receipts for the last year. Record actual results regularly and update your plan quarterly. This will reveal where your money is being spent and provide information you need to manage it correctly. This will also help you to provide for big expenses which arise during some months like a festival or a short holiday.

Put your savings to work

Saving early for long-term expenses such as retirement or your kids’ college expenses allows you to capitalize on the most important investing force: Time. Start a systematic investment plan and make sure that your savings are routed in to long term investments. This way, you are forced to save because the cash is drawn directly from your bank before you can get your hands on it.

Be prepared for emergencies

Emergencies arise. Cars break down, ankles are sprained, and jobs are lost. It would be ideal to set aside three to six months of living expenses as a regular reserve. This fund will cover those inevitable, unexpected costs and keep you from borrowing money when they occur. Make sure you and your family has adequate health insurance so that you are not bogged down by a financial crunch during a sudden medical emergency.

Find a good financial advisor

One fails to realize that the wrong financial advice, and thus the wrong financial advisor, could be costing you lots of money every year? Do you know how your advisor is compensated? How does that compare to other advisors? Do they have the expertise you need? Even if you prefer to do things yourself, the occasional check up from an advisor may provide you with some valuable tips.

Granted, it may take more than a year to get through all the resolutions mentioned above, so just start with one. The important thing; it's a new year and a fresh beginning - don't make it just like the last one - unless of course the last one went just right. Start working today on these suggestions and within a year you’ll be well on your way to achieving the financial fitness you’ve always desired.

The author Lovaii Navlakhi is a Certified Financial Planner and Managing Director of International Money Matters Pvt. Ltd.

How to get your credit report?

Yogi — Sat, 05 Dec 2009 10:10:24 GMT

If you are curious to know what your credit score/credit rating in India is and you want to get a copy of your credit report, we tell you how.

Introduction to CIBIL (Credit Information Bureau India Limited)

CIBIL - India's first credit information bureau- is a repository of information, which contains the credit history of commercial and consumer borrowers. CIBIL provides this information to its Members (companies) in the form of credit information reports. It collects commercial and consumer credit-related data from its members and other sources and collates such data to create and distribute credit reports to Members so that they can make better and more informed lending decisions.

Credit Information Report (CIR)

It is the report prepared by CIBIL which contains following information about you:

Basic borrower information like:
- Name
- Address
- Identification numbers
- Passport ID
- Voters ID
- Date of birth
Records of all the credit facilities availed by the borrower
Past payment history
Amount overdue
Number of inquiries made on that borrower, by different Members
Suit-filed status.

However the following information is not revealed:

Income / Revenue details
Amount(s) deposited with the bank
Details of borrowers' assets
Value of asset(s) mortgaged
Details of investment(s)

How to get the CIR (Credit Information Report)?

I. By Email (myreport@cibil.com)

Email the CIR Request Form duly filled in to myreport@cibil.com
Mail self attested hardcopies of your latest Identity Proof and Address Proof documents and Fees3 to P.O.BOX 17, Millennium Business Park, Navi Mumbai- 400710
Once CIBIL receives the documents and Fees, your request will be processed and copy of your CIR will be dispatched to you.

II. Letter (Only through Indian post)

Write to CIBIL with the CIR Request Form duly filled in
Also mail self attested hardcopies of your Identity Proof and latest Address Proof documents and Fees to P.O.BOX 17, Millennium Business Park, Navi Mumbai- 400710
Once CIBIL receives the documents and Fees3, your request will be processed and copy of your CIR will be dispatched to you.

III. Fax: 022-40789007

Fax CIBIL the CIR Request Form duly filled in
Mail self attested hardcopies of your Identity Proof and latest Address Proof documents and Fees to P.O. Box 17, Millennium Business Park, Navi Mumbai 400710
Once CIBIL receives the documents and Fees, your request will be processed and a copy of your CIR will be dispatched to you.

Valid Identity Proof: PAN Card/ Passport/ Voters ID (Mail self attested hard copy of any one of these Identity Proofs)
Valid Address Proof: Bank Account Statement/ Electricity Bill/ Telephone bill (Mail self attested hard copy of any one of these Address Proofs)
Payment terms: Demand Draft (DD) of Rs 142/- (inclusive of all taxes and express delivery charge) , in favour of Credit Information Bureau (India) Limited payable at Mumbai – Non refundable
Click here to download CIR Request Form
Email for queries: consumerqueries@cibil.com.

Credit Score

Yogi — Fri, 04 Dec 2009 06:47:17 GMT

Everything you need to know about credit scores in India and how you can maintain a healthy credit rating to get a good credit report. We also tell you how is it calculated for an individual.

I have often seen my US based friend debating over which card to use for a transaction and calculating how his credit score would be affected but didn’t really understand what this score was and how it affected his life – only that it was majorly important!

Now it is time here in India that I better understand what a credit score is, how is it calculated and how it affects me. Because the next time I apply for a new credit card or a loan, the answer will depend on my credit score.

A credit score takes a ‘snapshot’ of your credit report and through advanced analytics turns the information into a 3-digit number representing the amount of risk you bring to a particular transaction. More simply your credit score sums up for the bank, the credit card company or any other financier, your credit worthiness. It will indicate to these people how risky it is for them to give you the loan or the card that you are asking for.

So if you have been good, and paid your EMIs on time, made credit card payments regularly and not taken too much of credit then you have a favourable score and you can definitely negotiate and get a lower interest rate on your loan and get many more benefits as an individual with good financial discipline. The reverse is true as well, if you have defaulted on your EMIs time to time or delayed card payments, or your cheques have bounced often enough, then your score will reflect this and the bank can decline completely or offer you a loan but at a higher rate of interest.

From the financier’s point of view, the credit score will not only help them reduce defaults but also make loan disbursing faster, improve operational efficiency and bring costs down. Where earlier, they had access to your history only to the extent that you transacted with them, now they have a much more comprehensive and broader view of your creditworthiness, which would enable them to take better decisions.

So what makes up your credit score?

Credit utilization – If your borrowing capacity is Rs.1,000 but you have borrowed only Rs.500, you will have a better score. Alternately, if you have not only borrowed Rs.1,000 but are looking at other lines of credit then you are over leveraged and hence your score will be poor.
Payment defaults – Your history of making payments whether EMIs or credit cards or other bills in a timely manner will be a big boost to your score. But if you have consistently defaulted on payments, run up overdrafts and credit balances then obviously your score is going to be bad.
Trade attributes – How long you have held different lines of credit would impact your score. The longer your history with your bank and your credit card companies, it means a better credit score.

Ultimately a good credit score is good financial discipline of paying your dues on time, of spending well within your means and hence not overleveraging.

As of now it is still early days in India with only CIBIL, The Credit Information Bureau (India) Ltd. issuing a credit worthiness reports by way of a credit score to enable banks and credit card companies to make quick and objective credit decisions. However, there are other companies like Equifax, Experian and Highmark which will soon start operations in this area so that eventually we will have better information gathering systems that weed out errors and streamline the existing systems.

Presently CIBIL gives you a score that lies between 300 and 900 and sums up your credit record. It is inversely related with the risk of your defaulting on repayment for more than 91 days. Hence a score of 750 or 800 is good while a 400 or a 450 would be undesirable.

Getting familiar with credit score and how it works can save you a lot of trouble. Remember to pay your dues in time and keep your record clean. Someone is watching you!

The author Lovaii Navlakhi is a Certified Financial Planner and Managing Director of International Money Matters Pvt. Ltd.

Be your own CFO

Yogi — Tue, 01 Dec 2009 11:18:12 GMT

How is managing money in your household similar to managing your finances in a company? Are there personal finance lessons you can learn and strategies you can apply from the business world?

Investmentyogi tells you how to think like a CFO (Chief Financial Officer) and manage your money professionally.

A company exists to earn revenues by selling product or services, managing expenses and earning profits. The goal of any company is to have more revenue, and lesser expenses thereby maximizing the profits. Most companies of the world have this objective at the very core. Every other strategy revolves around this. A CFO’s role is the following:

Responsible for company’s financial situation
Make investments for the company taking into consideration risk and liquidity
Borrow money at the best possible rate
Maintain a healthy debt/equity ratio
Monitoring and controlling cost, expenses
Forecasting and preparing the company for financial contingencies

What if you look at yourself as a company and try to assign a CFO’s role to yourself? Do you see the similarities here? You will be doing pretty much the same things with your personal finances.

Revenue:

A company earns revenue by doing its business which can be selling a product or some kind of service. You also earn revenue by offering your services to someone else. You are being paid for that every month. This is your top line. Just like a business your aim is also to increase your revenue either by switching jobs or getting a promotion.

Other income

Companies sometimes make money from secondary sources for example their investments into Government bonds, other companies etc. Same is true with an individual. You also have other sources of income like giving out your home on rent, investments into Mutual Funds, Stocks or sale of property.

Fixed cost

A business has certain fixed cost like machinery, office rental, debt repayment etc. You also have monthly fixed costs like home rent, EMIs, school fees for your children. You always need money to make these payments.

Variable cost

Businesses have variable costs which vary from one month to another. For example salaries paid, raw material used, electricity consumption etc. Same is true for you. You have monthly variable costs like groceries, transportation, entertainment, dining out. The figure will vary from one month to another.

Taxes

You have to pay taxes on your revenue (Income Tax) just as companies pay taxes on their profits. You try hard to minimize your tax liability and so does a CFO.

Interest

If a company has taken loan from a bank of other financial institution for factory, machinery or any other operations then a part of its revenue goes into paying back this debt just as you have to pay EMIs for taking home loan, car loan.

Your Capital structure (Debt/equity ratio)

Every company needs money for its operations and for that it takes equity capital from investors (either private investors or stock market) and takes debt (in the form of loans from banks and other institutions). The CFO decides how to borrow and how much. The debt to equity ratio is crucial as it impacts the future of the business. Moreover the right structure is different for different kind of businesses.

If you look at your personal money as portfolio, a lot of similarities can be seen. You have a strike a balance between how you invest in debt instruments (like FD, PPF, bonds, NSC etc) and equity like stocks and Mutual Funds. It will depend upon your income, savings, age, risk profile and future goals. If you think like a CFO it will be so much easier to accomplish this task. You will have to ascertain the right capital structure for yourself. The difference is that companies borrow money using a combination of debt and equity whereas individuals need to invest.

Your Profit and Loss Statement

Prepare your own P&L statement just as the CFO of an organization does. Here is how:

Total Income = Revenue + Income from other sources

Total Expenditure = Fixed cost + Variable cost + Taxes + Interest

Savings (Profit) = Total Income – Total Expenditure

See if you are a profit making company or loss making. Calculate your profit margin like this:

(Savings/Total Income)*100

Ask yourself this question: Are my savings enough to achieve my financial goals? Am I on track? If the answer is yes then good for you otherwise you will have to improve profit margin or savings which can be done either by increasing the Net income or decreasing the total expenditure. Secondly you will have to think of making investments which will have a balance of risk vs return, depending on your particular situation

A financial plan helps you look at your finances from a strategic perspective and transforms you into your own CFO. Take control of your finances today!

5 ways to make your children financially smart

Yogi — Sat, 07 Nov 2009 07:57:44 GMT

1. Make your child understand the difference between needs and luxuries

Children need to understand that they can still go on without cool gadgets, designer accessories but not without essentials like ‘Roti, Kapda aur Makaan’. Hence they have to prioritise accordingly. Sit with your child and help him prioritize according to needs and luxury. Once this concept is clear your child will transform into a better decision maker.

2. Set a goal for your child and help him achieve this through a budget

Goal setting is easy enough in today’s materialistic word. Sports equipment, a gadget or an item of clothing, motivate your child by setting a goal and encourage him to earn this through household and other chores. Make him draw up a budget from what he earns every week and show him how to save from this. Definitely reward him with something extra (besides his goal) the first couple of times, so that he is geared up and excited about the next goal and starts planning – the secret mantra to financial happiness. This will also help your child become competitive in life and be focussed on goals.

3. Understand your child’s money personality

He could be a spender by nature. If so, you can guide him early on to curb this by encouraging him to not keep too much cash and ensuring that it is not easily accessible. If he keeps borrowing money from his friends then this could be a warning signal. Later on he could get into a debt trap. You can counsel him and also understand the source of his needs.

4. Involve your child in day to day financial activities

Entrust him with the responsibilities of paying bills i.e. going to the collection centres and paying the bills through cash or dropping a cheque. If he is not old enough than at least take him along when you are doing this exercise. It is a good way for him to learn that life is not just an ATM machine, you got to pay as well!

5. Open a bank account for your child and make him operate it

Buy your kid a piggy bank when he/she is very small and encourage saving for achieving his little goals. Open a bank account when he grows up. This the best way for him to understand how money grows, what interest is and how financial institution like banks work. You should opt for a joint account as it will give you the ability to oversee what your kid is doing. Step in whenever you think that he/she is going off track and try to rectify the situation by helping him with basic financial concepts mentioned above.

Use this Children’s Day as an opportunity to gift financial literacy to your child. In the long run this will be more valuable than anything else.

Written for Investmentyogi by Lovaii Navlakhi, CFP^CM, Managing Director of International Money Matters Pvt Ltd

Welcome ISB Students!

Yogi — Wed, 14 Oct 2009 14:55:00 GMT

Login or Join to Create Your Financial Plan in 3 Easy Steps!

RESEARCH SPOTLIGHT

Yogi — Wed, 30 Sep 2009 12:30:43 GMT

Applied Planning:

How Planners Screen Investments

By Christina Nelson

Key Points

•Planners are increasing their reliance on tried-and-true investment metrics like long-term performance and diversification.

•They are also taking into account the significant effects of the market decline by increasing their use of volatility metrics and decreasing reliance on lead manager tenure

Many factors play into a financial planner’s decision about which investment allocation best addresses a client’s long-term financial goals.When funneling down to the investment vehicle itselfthough, planners often make product selections based on the technical side of comparing one investment to another by analyzing various screens.The FPA Research Center conducted a Trends in Investing study in 2008 and 2009, asking members the frequency with which they use a laundry list of potential screening factors for investment vehicles. (See Exhibit 1.) We focus here on 2009 results, with regard to most and least important screens in light of market changes with the economic downturn. The survey was conducted in February, when the depth of the decline was evident to most advisers.We also provide comparisons between the 2009 and 2008 studies (the latter taken in January of that year),but because the answer options were slightly different in each survey,1 we only point to percentage differences where stark shifts are apparent.In 2009, the screens either always or frequently used by the greatest number of planners, with more than 80 percent of respondents choosing each, include:

◊ Long-term relative performance (5 years, 10 years)

◊ Diversification (number of positions held)

◊ Volatility measures (for example, beta, standard

deviation)

The screens least used in 2009, with more than 60

percent of respondents reporting they occasionally or do

not use them, include:

◊ Information ratio

◊ Short-term relative performance (YTD, one year)

◊ Tracking error relative to benchmark

◊ Star ratings

What the Results Tell Us

It may be expected that planners will always place greater value on the long-term investment performance screen than on short-term performance, and the survey bears this out, along with other intuitive results. Several interesting findings, however, include the relative increase in importance planners give to diversification in 2009 over 2008. In fact, the iversification screen is the only screen to increase in the percentage of planners who report always using it—from 35 percent in 2008 to 49 percent in 2009. Perhaps overconfidence in the stronger markets leading into early 2008, and therefore more aggressive investing in higher risk instruments, gave way to the more traditional focus on broadly allocating funds among less correlated investments in early 2009.Lead manager tenure was the screen that planners report always using that suffered the largest drop—from 56 percent in 2008 to 28 percent in 2009. Obviously,fund managers across the spectrum of tenured experience posted significant losses during the market decline,and planners adjusted their placement of importance on that screen accordingly. Debate over the value of active management versus indexing—the active side demanding higher costs without always producing higher returns—has certainly been rekindled this past year.Other screens that showed significant drops in 2009, compared to 2008, are absolute performance and alpha. The number of survey participants who report always or frequently using these screens fell by more than 25 percent each in 2009.“The value these metrics provide is questionable given the sharp market decline,” explains Rebecca King, manager of the FPA Research Center.Absolute performance has also lost value since advisers are decreasing their reliance on screens that are not able to fully take into account the market decline, and are instead relying on metrics that provide a more accurate picture.”

…………………………………………………………………………………………………………………………………………….THIRD QUARTER 2009

What to Expect in the Year Ahead

Are planners rethinking what past performance and portfolio structure presage in terms of likely future returns and stability of an investment, given the fact that many of their thoroughly researched choices failed them in 2008?Perhaps. But basic investing factors remained important gauges for investment worthiness in 2009—diversification,expense ratio, long-term relative performance, average credit quality (bond portfolios), volatility measures, duration (bond portfolios), and risk-adjusted performance—with more than a third of planners suggesting they always use these screens when selecting investments.In the year ahead, planners are certain to continue adjusting the level of importance they place on various investment vehicle screens, especially if markets start to show steady gains over several quarters. Any changes in perceived screen value may depend on how confident planners and their clients are heading into the new year.Will an investment’s diversification once again outweigh .its absolute performance in planners’ minds? Stay tuned for what the 2010 survey will reveal!

Christina Nelson is the associate editor for the Financial Planning Association.You can reach her at Christina.Nelson@FPAnet.org

Endnote

1.The 2008 survey did not include an option of “Do Not Use” for frequency of screen use, and participants were allowed to skip questions. The 2009 survey did include a “Do Not Use” option, and did not allow questions to be skipped.

Reprinted with permission by the Financial Planning Association, Journal of Financial Planning, Spolight, September09, Christina Nelson, Applied Planning: How Planners Screen Investments. For more information on the Financial Planning Association, please visit www.fpanet.org.

Top Financial Mistakes

Yogi — Tue, 15 Sep 2009 07:14:24 GMT

1. Lack of goals

“Most people don't plan to fail; they just fail to plan”. A good percentage of people are still not aware of what is financial planning and how to go about it. In simple words, financial planning is taking a disciplined approach to achieving your pre-determined financial goals. A good financial plan is based on strong goals.

Well-articulated goals with a detailed break-up into longterm, midterm and short term, specific steps on how to achieve them and checking the progress periodically are basic ingredients of financial planning. As you can see it all starts with a GOAL.

2. Lack of life cover

Living without life insurance is just like "flying without a net". A financial plan is incomplete without adequate life cover. One major goal of a financial plan is to maintain the life style of your family whether you are with them or not.

A common mistake we make is buying life insurance policies such as endowment plans or money back to save tax, also hoping to reap returns. Remember, returns from such policies are much less compared to traditional investment products such as stocks, mutual funds, gold or real estate. So why not separate investment and insurance completely? Most salesmen will not give you this advice because the commission in plain vanilla term policies is the lowest.

Protect yourself with an inexpensive term policy providing sufficient life cover. The thumb rule for your life cover is your annual income multiplied by 10. You can add family floater mediclaim or health insurance policies for self and family members. It’s a way of making sure that your family will continue to enjoy the current life standard.

3. Lack of investments

Start saving as early as possible. Generally, a person should start saving and investing money from the day of getting first salary. By starting your financial plan at the earliest, you are allowing your money to grow by the sheer power of compounding.

Don’t be over-enthusiastic about it either. Develop a regular and disciplined investment approach. Select a few good equity funds and do a SIP (Systematic Investment Plan). Increase the investment amount as your income increases. Don’t wait for a lump sum amount to be accumulated to invest and don’t try to time the market.

4. Too much of loans and debt

“Don't stretch yourself too much with a mortgage. Buy within your means. It’s not worth the sleepless nights”. It’s always advisable to resist the temptation and control unnecessary expenses. It includes loans, mortgages and credit card expenditure.

House loan and car loan may be necessary but do some analysis about how much you really need and what can you comfortably be able to pay back. Keep a tight leash on personal loans and credit card debt. They can be a drain on your finances as the interest rates are much higher. You must have a plan to reduce the loan and pay off the debt gradually.

5. Only debt/fixed income instruments

Putting your entire investment amount into the debt instrument is like settling for a bonsai instead of a huge teak wood tree which you could have. It's good to be safe but too much of safety will not make your money grow. There are many among us who keep their money in FDs, PPF, insurance policies, National saving certificates etc. It’s good to have them but they should not have all your money. You must have a healthy mix of equity and debt in your portfolio. Equity gives you growth and debt gives safety with peace of mind.

6. Over-indulgence in stocks

By watching too much of business news channel and reading business journals we start believing that we know all about stocks and the way companies work. Listening to equity analysts gives us more encouragement. We think we can beat the market. But the truth is most people fail to make money at the stock market and end up wasting their precious time and wealth. Sit with a certified Financial Planner and chalk out a long term plan for yourself. Remember “slow and steady wins the race”.

7. Owning too many products

“Wide diversification is only required when investors do not understand what they are doing”. The unavoidable risk from over diversification clearly articulated in this powerful quote by Warren Buffett.

The right portfolio should be built by optimum allocation into different asset classes. A good financial planner should be able to tell you the right proportion as per your profile. Within a particular asset class it’s better to do thorough research and put your money in a few select products. For example if you are investing in Mutual funds then buying too many of them is not advisable. Similarly if you are an investor in stock market it’s advisable to pick the right stocks and stick with them.

We keep adding more products to the portfolio because we fall for what the salesmen and advertisements tell us. Do your own research or consult a certified financial planner for such decisions. It’s important to own the right ones and not too many.