Category: Money Matters

I started investing in stocks almost two years back. I wanted to learn the basics of investing (Though I must say I am still learning). But those days were the initial days of fear and small investments from the money I saved which my parents sent for my college studies.

Once I got a suggestion from my friend to buy shares of a Bank ( A nationalized bank in India). He told that the share price is expected to go up in the next three months. Acting on his suggestion I bought the 50 shares @ Rs 32/- per share.

Soon after that my eyes started going to the bottom of any news channel watching the fast moving ticker. I started observing the price movement after every 15 minutes on the college television.

The other effect was that the share price caught a downward trend the day I bought them and after three months it was Rs. 7 less i.e. almost 10% down. Then I stopped bothering about it until today (two years after I bought the shares) when I spoke to my friend.

I told him,” Bank share is still going down! And it’s almost two years now”, “ Its your mistake that you listened to my suggestion”, was his reply and i was shocked. I learnt two big lessons from the whole episode.

• Neither you should suggest nor you should take advice from someone other than you.
• Set upon a loss target that will stop you tracking the stock price every now and then.

You can always get advice with professional money managers instead of going to a friend, who knows nothing or knows something you know too, about investing. If taking tension solves problem then take it, otherwise plan, and follow the plan.

More often than not, ethical issues – in financial areas or other walks of life – are not totally black-and-white. What’s ethical from my point of view, might be outrageous in your opinion and vice-a-versa. However, most of us generally tend to paint things with a broad brush and conveniently ignore all lines of thought that do not match our personal yardstick of what’s “ethical”.

On this subject, here is some food for thought.

There is this particular problem of a railway trolley which is pretty popular among people who study ethics and/or philosophy. It’s not a financial problem as such, but I am sure that such situations arise in the financial world where we (I am including myself here) are quick to judge other people about their ethical (or unethical) behavior. A problem like the one described below has the potential to make us think twice before we become too judgmental. There are numerous versions of the problem, but I will choose just two to make a point.

• Case 1: A railway trolley is rushing towards a group of 5 people who are trapped on the railway track. If the trolley is not stopped or diverted, it will definitely kill all 5 people. You are observing the situation and the ONLY option you have is to press a button that will divert the trolley to a different track. However, there is 1 person trapped on the other track too and he will be definitely killed if you divert the trolley. What would you do?

• Case 2: Essentially the same problem as above, but instead of that 1 trapped person on the other track – there is a person (unknown to you) standing besides you. Now, the only option to save those 5 people is to push this person on the track in front of the moving trolley – a situation in which this unknown person gets killed, but the other 5 are saved (similar to Case 1). Would you push him?

Think over it for a while.

In both cases, there is a cost of action (you will kill someone) and there is also a cost of inaction (again, someone will get killed). Would you try and change the fate of the single person who is not really destined to die, in exchange for the life of other 5? What’s more ethical (or moral)? Do you think Case 1 deserves a different ethical consideration than Case 2?

Also, spend a moment on the mind-games that will result if you change the situation even slightly. For example, instead of 1 person on the other track, what if there were 3? or perhaps even 4? Would you kill 3 or 4 to save 5?

Discuss this with your family and friends and see how their responses differ from each other.

Sometimes, it takes a paradigm shift in your thinking to address many ethical/moral problems (financial or otherwise) – a rigid definition of “ethical” just won’t fit the bill.

You’re probably aware that the stock market fell 400 points last week. How did you handle the drop? Did you panic and sell, or did you hold tight?

Market cycles are normal and should be expected. You shouldn’t allow your emotions to influence your investing decisions. Remember these important points when making investment decisions:

Diversify to reduce risk. Spread your investments among various asset classes (stocks, bonds, cash) based on your goals, time frame and risk tolerance. If your portfolio is properly diversified, a decline in one asset type will be balanced out by a gain in another asset type.

Focus on long term goals and your overall portfolio. Short term blips are insignificant if you are investing for 10, 20 or 40 years. In addition, it’s more important how your overall portfolio performs than how each individual investment performs. Remember, 90% of your investment return is determined by how your portfolio is allocated, rather than the individual investments you choose.

Make market fluctuations work for you. If you are in the accumulation phase, take advantage of a market drop to buy investments. Remember the old adage “buy low, sell high”? The best time to buy low is right after a market drop. If you are close to retirement, use market fluctuations to evaluate your portfolio for appropriate risk tolerance and diversification. If the drop in your portfolio was more than you can tolerate, consider rebalancing to an asset mix that is more appropriate for you – however, don’t make any rash decisions; wait a few days and use dollar cost averaging so that you don’t sell low and buy high.

Do you need extra cash to pay off credit card debts?  To go on vacation?  Just to make ends meet?

Here are five ways to find extra cash today:

1. Adjust your withholding.  Do you typically get a large tax refund?  Instead of giving Uncle Sam an interest free loan each year, why not reduce your withholding so that you get more back with each paycheck?
2. Refinance your mortgage and other loans.  We are experiencing some of the lowest interest rates in our history.  Now’s a great time to refinance mortgages and car loans to lower interest rates.  Lower interest rates mean lower payments and more cash in your pocket for other things.
3. Review your insurance policies.  Do you have too much coverage on older vehicles?  Can you raise your deductibles?  Do you have life insurance policies that you no longer need?  Are you getting all of the discounts you are entitled to (multi-line discount, good driver discount, etc.)?  Reviewing your insurance coverage once a year is a good idea, and it can result in extra cash to use towards other financial goals.
4. Consider dropping your home phone line. Do you really need a home phone and a cell phone?  Many people are opting to drop their home phone in favor of the cell phone.  This can save you an average of $30-50 per month.
5. The Latte Factor – David Bach introduced the Latte Factor in his book The Automatic Millionaire.  The Latte Factor refers to the money we spend each day on luxury items such as premium coffees, going out to lunch every day, and other discretionary items that aren’t necessary.  Think about your spending habits.  What is your latte factor?  Do you go out for coffee every day, do you go to the bookstore several times a week?  What frivolous thing can you take out of your budget?  You may find that you don’t even miss it!
   

Reviewing your spending may reveal many other ways to find cash.  I recommend that you start keeping track of how you spend your money today – you’ll be surprised at where it goes, I promise!

I’m going to tackle one of the most seemingly unsurmountable pieces of personal finance advice out there: you should have an emergency fund. Before you read on further, this is a Devil’s Advocate post, which means I’m going to try to argue the other side even though I don’t believe it. So… before you read on, let me be absolutely clear … you should have an emergency fund, but if you want a few reasons why you shouldn’t… here they are.

First off, let me go over what I consider an emergency fund. It’s money you set aside for a real bad rainy day in a bank account, whether its a high yield online savings account or just a regular old savings account at your local bank; it must be in an account where the principal is protected. Putting it in a brokerage account, that’s not an emergency fund because the principal could evaporate on a really bad stock market day. So, why don’t you need an emergency fund…

Most Emergencies Are Small…
or if they’re big, they’re really really big. So, in most cases the emergency fund you have will either be way too much or not enough to handle the emergencies of life. If I were to guess the number one emergency that pushes someone to dip into their emergency fund, I’d say it would have to be for auto repair. Even if you follow the most aggressive recommendation of three months, a few hundred bucks for an auto repair probably won’t do too much damage to the emergency fund so your money would probably be better served in a brokerage earning market appreciation rates than whatever minimal rates you’d get in a savings account.

Credit Cards Can Get You By
If you go by the rule that you need 3/6/9/12 months of salary, you probably have that much on your credit cards. In fact, when you do face an emergency, it’s probably a good idea to pull out the plastic first even if you have the emergency funds because you can probably get at least 1% in points from it.

You Have Insurance
You probably pay hundreds of dollars a month in auto, home, life, and medical insurance; so why do you need thousands of dollars saved away for emergencies? Bust a tooth? Use dental insurance. Flooding in your house? Home insurance. Crash your car? Auto insurance. While it certainly makes sense to have a few dollars saved away, having a year of your salary sitting in an account earning a sad rate of return is simply not a strong financial decision.

Ultimately, what you want is to strike a balance between having no emergency fund and having too much earning a low rate. Certainly, since this is a Devil’s Advocate post, I think that having an emergency fund is a very strong financial decision (despite what I said in the last reason) and one that everyone should definitely start once you can.

What is passive income?

Even today a lot of people don’t really know the in depth meaning of passive income. If they had any clue about this, we wouldn’t see these young people spending everything they earn. Well passive income is defined as any incoming that is being generated with minimal or no work at all. Sounds funny is it? Well if someone who works hard from morning to night for money, hears about making money without any work, it will indeed sound funny to them. But the real truth that there is a thing called passive income and it is very much possible for anyone to generate such. Passive income is best when it adds on to your active income and make the total income figure look huge.

Most Important Requirement For Passive Income

Have you wondered, what exactly is the most important requirement for generating passive income? Well it is active income. Confused? Let me tell you, if you have no active income, you cannot make passive income that I’m going to talk about in this article. It is the active income, from where you cut out some money and put it to work on generating passive income.

What to do to start generating passive income?

You can start the procedure of making passive money by starting to save money off your active income. By saving I do not mean to put it in your savings account and wait for it to get bigger and then you can spend them all on something big. By saving I mean investing your money into direct equities or Mutual Funds/ULIPs. I would personally go for Maximiser Funds(ULIPS) when starting out. The whole idea is, to start a monthly investment plan (SIP) and start seeing your savings grow bigger.

Facts and Figures (Pure Assumption)

Let us assume that you earn Rs. 30,000 per month. Around Rs. 15,000 per month is your most minimum expenses, that is paying the necessary bills and rentals and you keep around 5,000 more for personal expenses like shopping, dining etc. Now you have around 10,000 per month extra which you can save. We’ll assume that you are putting those 10,000 into a monthly investment plan (Maximiser Fund). Most maximiser funds will give at least 15-20% returns annually for sure, that is if you check out at the correct time when market is at its highs. The investment amount also grows compounded here. We will assume a 15% return annually on an average.

Year 1 : –

• Investment Value – 1,20,000
• Final Value – 1,38,000
• Profit – 13,000
• Monthly Income – 31,000

Year 2 : –

• Investment Value – 2,40,000
• Final Value – 2,96,700
• Profit – 38,700
• Monthly Income – 33,225

Year 3 : –

• Investment Value – 3,60,000
• Final Value – 4,79,205
• Profit – 62,205
• Monthly Income – 35,200

Year 4 : –

• Investment Value – 4,80,000
• Final Value – 6,89,086
• Profit – 90,000
• Monthly Income – 37,500

Year 5 : –

• Investment Value – 6,00,000
• Final Value – 9,30,450
• Profit – 1,21,365
• Monthly Income – 40,100

Year 10 : –

• Invested Value – 12,00,000
• Final Value – 28,00,000
• Profit – 3,63,500
• Monthly Income – 60,000

So you can figure out from above that how we boosted the monthly income from mere 30,000 per month to almost 60,000 per month at the end of 10 years and you even have a total saving of around 28 lakh. You must have got the idea how the money grows year by year. It is very less at the end of first few years but increases drastically later on. Can you imagine the figures at the end of 20 years? I shall leave you to do the calculations yourself. After 10 years, you can even stop saving anything because you’ll notice that 10k amount per month will hardly make a difference to your passive income. You will have so much money saved that you will not need to save anything from your active income and yet continue to make massive amounts of passive income.

Also see that here you only saved 10,000 a month, what if you have a chance to save 20,000 or 30,000 a month? Sounds crazy isn’t it? So are you going to start saving from today?

The 3 most common reasons to why people save money are : –

Children – You are married and you are going to have your first child. After giving a deep thought towards your child’s future, you’ve arrived to the conclusion that yes the time has come to get serious with the saving and all, after all it’s a question of your child’s future and such an important matter cannot be neglected.

Retirement – You are probably in your 40’s and you realise that a day will come when you’ll retire and you will not have a salary anymore thus no active income. You’re worried that if you won’t have any money after your retirement then how are you going to make your living? You sure are a man of honour and will not bow down to anyone, not even to your own children. You’re one such person who believes in taking care of himself whether he is young or old, retired or not. You decide to start saving money from then, so you will not have a problem after your retirement.

Big Fat Purchase – You have planned to buy a costly house or a dashing car and need to save a lot of money in order to purchase that. Perhaps you need a lot of down payment for that and without saving some money it is not possible to purchase such a costly thing. So you start saving from the day you plan to buy such a thing and once you’ve had enough of the saving, you go ahead and spend all of it as planned.

Is that all? The only reasons to save money are the above listed ones? I never understood that how people could neglect the most basic importance of saving money. I’m talking about converting those saved money into more wealth. Always remember these three words – Wealth Grows Itself!

Saved money is nothing less than a money making machine. You invest those money you save into something that generates even more money. The more the money you save the more the money you will earn from it. All you have to do is to create a balance between spending and saving so you continue to get richer as well as enjoy the life.

The beauty of saving from Day 1 of your working carrier is that you really don’t have to worry about safeguarding anything listed above. By the time your children will grow and you will need money for their education or anything, you will already have more than enough money to satisfy their requirements. And by the time you retire, you will have so much money that you will worry more about where to spend rather than if you will have money or not. So start saving from today and free yourself from all such worries.

In my few years of experience managing personal finance, I’ve listened to several kinds of worthless excuses of not wanting to save money from people. Let me tell you one thing, if you ARE willing to save money, you can do it regardless of whatever problems you may have and if you are not willing to save, you will only be looking for excuses of not saving money. A few most common excuses people give for not able to save money : –

I don’t earn enough

There is no such thing as enough. You will never be able to earn “enough”. It is all about your attitude towards saving money. You never make a specific amount as your goal to save but in fact you play on the percentage terms. Say, you should save at least 20-25% of your income every month. Now if you plan to save a percentage of your salary, where does the word “not enough” come into play? Save whatever you can, even if its mere 5-10%, it is still something and this something will make you richer tomorrow.

I’m in debt

Many of us are in dept, still paying house loans or car loans etc. But that does not stop you from being able to save money? And in case you mean to say that paying your debt eats all your salary every month, then you’ve done an extremely horrible financial planning. You have not just financially risked yourself  but also made it sure that you will not be increasing your income for several years in a row. And if this is just an excuse to not save, then stop it and plan on to saving your money. Just manage your debt repayments and savings properly and it should really not be difficult.

I’m young and it’s too early to start saving

Another lame excuse young people give to not wanting to save money. It is never too early to start saving. The earlier you start saving, the richer you will get in future. Wealth grows itself and the faster you start your wealth making machine, the more wealth it will generate for you. I know that you are young and you wish to spend and enjoy your life right now, so nobody is asking you to live a crappy life and obsessively save money. Just save less and spend more for a while till you’re satisfied, then increase your saving later on. Remember, anything you save, even if it is a mere 5% of your salary, it will help you reach your goal of getting rich in future.

I like spending and want to enjoy

Everyone loves to enjoy their life and spend money to live a rich luxury life. If this is your goal, then there is even further need of saving money and putting your money to generate wealth for you. If you’re mistaken that you’re saving for retirement from the age of 20’s, then you’re wrong. You are saving to accomplish your goal of getting rich, not to live a life after retirement. By saving and generating extra income from your investments, you will make sure that tomorrow you have more and more money to spend on luxuries which will not be the case if you do not save.

Savings don’t generate enough returns

Who told you that your savings will not generate enough returns? By investing your money properly, you can get anywhere between 15-30% or even more per year. Isn’t that enough returns on your savings? Stop looking for excuses to spend and plan on making your future more prosperous.

Everytime I save, I end up spending it

A lot of people have a problem of spending their savings. With a lot of courage they save quite a lot of money, but end up spending all of it in buying something huge. They just can’t control themselves with the spending. So I have a nice plan for you. You go for monthly investment plans that come with a locking period. You will be paying a certain amount on a monthly basis and you cannot take it out for 3-5 years. Perhaps the wealth that will be generated from your savings might change your attitude towards saving. The locking period will make sure that you don’t spend your savings at any cost.

The Myth

The biggest myth of stock market investing is “You lose all your money”. I’m sure you’ve heard a lot of negative things regarding stock market investing from such people. These negative people will tell you how bad it is to invest into shares and they will also have ready made stories about how some people risked everything into the stocks and ended up becoming bankrupt. Just because some people invested their money in a wrong way and lost their money, does not mean that you will lose as well. You should try investing into stock market yourself. Go and experience it and don’t believe in such negative reviews regarding stock market.

Risk Everywhere

There is a risk in almost everything you do in life. If you’re driving a car or traveling by rail or air, anything stupid can happen. I mean there is a possibility right? So just because someone narrated you a horrible accident story, should you stop traveling? Sometimes pedestrians get run over by drunk drivers, so should you stop going out of home also? No right? You still do things where bad news circulate. So how did some bad examples related to stock market make you not try it?

Smart Investors

Let me tell you, you cannot imagine how many people out there are actually making so much money from stock market investing. The smart investors didn’t pay attention to the stupid examples of people losing money but in fact they looked up to the guys making money from the market. They learnt from their mistakes, they stood up every time they fell down. They are experienced and they invest their money properly. They know it’s hard earned money and they will not risk into stupid crappy stocks. They don’t think to double their money in a month, but they believe in getting good decent returns from the stock market.

Believe In Yourself

All you have to do is to believe in yourself. If others can earn from the market, then even you can. Don’t let the losers stop you from making money. When I wanted to start investing, I had people telling me how risky stock market is and gave me all sorts of reasons as to why I should not put my money into stocks. If I had really listened to them, I would have not have been able to earn what I do today. I would have put my money in bank fixed deposits and earned mere 7.5% annually. Since I like challenges, negative reviews pushed me more towards stock market investing and now I’m earning much more than 7.5% annually on my total investments. My only advice is to not believe everything others are saying, experience it yourself and only then decide.

I’m going to reveal the most important secret today, the secret to get rich that is. Everyone wants to get rich isn’t it? But most of the time they don’t have a clue as to what exactly to do to accomplish the goal. Most of them think that to get rich, you need to study extremely hard and get a good job, or work so hard in job that you keep on getting promoted. Apparently they are saying that to get rich, you need a high salary or else it remains a dream. I’m here to prove it to you today that even earning not so much, you can play in millions some day. Confused? Come lets do some maths here.

I’m going to consider a few cases where we have 2 persons A and B who will have the same job and same salary but we will see how A beats B in each and every case. We will assume that they both earn 15% per annum as a return on their investments.

Case: A and B starts working at the age of 25 and work till 55. They both earn Rs. 50,000 per month on an average.

Case 1.1: A is smart and he decides to start investing right from the first month of his working carrier. A saves Rs. 20,000 a month till the day he is working. Let us see what he has left at the age of 60. A has 24,00,00,000+ left over at the age of 60 with saving just 20,000 a month for 30 years.

Case 1.2: B thinks A is a fool because he started investing early instead of enjoying his life. B spends everything he had till the age of 35 and then he begins investing. B begins investing 20,000 a month from the age of 35. Lets see how much he has got at the age of 60. B has mere 5,70,00,000 left with him at the age of 60. So much for the fun he had in the initial years of his working carrier. That 10 years of 20,000 a month of extra spending cost him 18 crores of rupees. And this difference is going to widen big time in the years after 60. I leave you to calculate their net worth at the age of 70, unbelievable difference.

Case 2.1: A saves 20,000 a month till the age of 35 and begins to spend everything after the age of 35. Lets see how much he has left over at the age of 60. A has 18.5 crores left over.

Case 2.2: B decides to spend everything till age 35 and then he saves 30,000 a month for the next 20 years. Lets see how much he has left over at the age of 60. Guess what? B has only 8.5 crores left, thats around 9.5 crores less than A.

So you see, even when B decided to save 50% more money than A and for double the time than A saved, B still has 50% less money left over. So much for the 10 years of more enjoyment, you ended up 9 crores less.

So what causes such a huge difference?

Wealth Grows Itself. The more the time you let the money be invested, the more it will grow. It is like a tree, the faster you sow, the longer it will benefit you. If you are smart like A, you will plant your wealth tree from the first day. The earlier you invest, the more money you will have in future.

But what will I do with money at the old age of 60?

Well, I was only giving a figure based on assumption. You don’t really have to keep all the money invested till the age of 60. You can take out your investments at any age you wish. You can also keep taking out small amounts of money to spend on luxuries anytime you feel like. The money that’s invested will keep generating you cash each and every year, you can always take out a part of the investments to spend somewhere and leave the rest invested. It is all about your financial planning. We already assumed in our example that they spend 30,000 a month on average which is a lot. You can save more or spend more. The important point is, you just need to start investing early. You get returns based on what you invest, more the investment amount, more the money. Just plan your spending and saving properly to create a balance.

Did you know that 1 thousand rupees becomes 1.33 lakh in 35 years on a 15% pa? And 1 lakh becomes 1.33 crores? So you see the power of investing early? I started investing from the age of 17. When are you going to?