Personal Finance - Beyond Just Saving and Investing...

Why we fail to keep up our (financial) resolutions and how to change it?

2009-08-25T16:03:00.000-07:00

Have you ever come across the following scenario, frequently or occasionally?

You are inspired by something. Say you read a great article in this blog (or another), or heard a great lecture from your favorite speaker. You are convinced that you need to change to be successful. So you decide to develop a new habit (say track your expenses).

You are sold that, tracking your expenses is a great habit and is your ticket to lasting financial success.

You get all excited, you want to start and today is the day. You adopt a tool or plain old pen and paper to track your expenses meticulously. You are on a roll doing the tracking expenses, surprising yourself for the first few days.

2 or 3 or x days later, you start to back slide. All of a sudden the prospect of tracking expenses, appears too much to do , and not worth the return on investment of your time. Over the next few days, you gradually give up and you get right back to where you started, or worse off than that.

This can also more commonly be observed among people trying to get rid of bad habits (e.g. quit smoking).

It is simplistic to dismiss it as a will power, interest, motivation or genetic (or a lack thereof) issue . You are still interested. It is possible that you still have power, you are motivated in certain other areas of life. but the damn effort seems overwhelming for some type of changes you are about to make.

It has happened to me a lot. I have always looked for a convincing explanation for this phenomenon, when I stumbled upon a possible answer in the book "Mastery: The Keys to Success and Long-Term Fulfillment" by George Leonard.

This is a small yet a great self-improvement book that talks about how one can achieve Mastery of anything in life. Note that it is not a book on Personal Finance.

It explains that Mastery is a continuous journey and process to be enjoyed in itself , rather than a destination or product to be reached. That Mastery is achieved by persistent practice and not by short cuts or hacks contrary to what our consumerist culture preaches us.

Leonard argues that Back sliding is a universal experience and that all of us resist significant change. Our body, brain and behavior have a built-in tendency to stay the same within a narrow limit and to snap back when changed. For e.g. when the body temperature or blood sugar or heart rate change significantly (say + or - 10%), our internal mechanisms tries to bring it back to normal (to avoid fatalities and protect us). This kind of equilibrium and resistance to change is called Homeostasis.

Leonard's contention is that all self-regulating systems from bacteria to humans to family to organizations are characterized by Homeostasis.

As a practical example of homeostasis in non-human systems, consider a simple home heating system, where you have a thermostat that measures the room temperature. When the temperature crosses a set point, there is a feedback loop that tells the heating system to stop the heating, so the equilibrium is maintained.

In the case of humans, the homeostasis mechanism is made up of millions of neurons, that provide the feedback to the Hypothalamus area of the brain, which acts as a thermostat. These neurons pick up the tiniest change in body temperature, or blood sugar, or blood pressure and feed it to the brain. Even social systems (read your friends, colleagues, relatives) and cultures have homeostasis mechanisms that resist significant change.

What is the problem with Homeostasis? The problem is that, it tends to keep things as they are, even when they are NOT good.

Homeostasis is why, when you decide to get fit, and start a jogging routine, after the first few yards , you begin to feel dizzy, sick to stomach, your feel that your heart is about to explode etc., The Homeostatic alarm signals scream 'Warning! Your heart rate has significantly increased, your metabolism is high. Stop what you are doing!'.

As you can see, all changes are resisted. Change for the better is interpreted as a threat. So you give up jogging, and decide to adopt another method.

Note that smaller changes are easier to accept. Homeostasis is fine with it. However if the change is not within your comfort zone,you'll meet with Homeostasis sooner or later. You might sabotage your own efforts.

How to work around Homeostasis to keep up with our resolutions?

Leornard suggests the following ideas:

Be aware of Homeostasis: First recognize and accept that Homeostasis is normal for everyone. When Homeostatic alarm signals go on, it doesn't mean you are crazy or lazy. Take it as a signal, that life is changing. Don't panic and give up at the first sign of trouble. Expect resistance from friends, family, co-workers. Note that the entire system changes, when a part changes. People who you love start to covertly or overtly undermine your self-improvement.

Be willing to negotiate with your resistance to Change: This is key. Negotiate your way through on everything. Don't back off or bull your way through. If you ignore warning signals, you risk daring the system (which is not sustainable). If you bull your way through, you are almost sure to back slide. Stay alert. Be prepared for a serious negotiation on the magnitude, frequency and/or schedule or any other aspect of change.

Develop a support system: Try to team with other people with whom you can share the joys and perils of the the change you are making. Tell them what you want to achieve and seek their support. Seek mentor ship and mutual support from relevant people. Your mentors will brace you up when you back slide. For e.g. ask that your friend at the Gym to be a whistle blower, when you don't show up for more than 2 days in a row. If you are alone, ask for other people (close) to support you and be your conscience.

Follow a regular practice: Here Leonard gets in to his pet theme for Mastery, but this topic is very relevant for making a change. By regular practice you gain stability and comfort on a regular basis. Any regular practice provides a sort of underlying homeostasis, a stable base during the instability of change. So, get ready for regular practice. Successful athletes, and artists, are great examples of the power of practice.

Dedicate to life long learning: Leonard exhorts us to continuously educate ourselves for our entire lives. To learn is to change books, body or behavior. Don't stop education at college or at age 40, 60 or 80. The best learning of all involves learning how to learn, i.e to change.

I would like to add a few things to this list that can make the process of making change easier and permanent. That way you are likely to honor your resolutions more often than not.

I have observed the following things to be very helpful in my personal life

Accept change as inevitable and prepare for it ahead of time (Change is the only thing that remains constant)
Take on changes in baby steps, instead of as giant leaps
Reward yourself when significant milestones are reached
Choose appropriate tools depending on one's orientation and preferences (for e.g. if you are a visual person, you are not going to enjoy audio lectures about a change you want to make)
Champion the benefits of change to others.

What do you to making permanent changes in your life? How do you change your bad financial habits in to good ones , or good ones to better ones? Let me know your comments.

Green Behavior, Health and Wealth - The Not So Apparent Connection

2009-08-20T15:23:00.000-07:00

Building Wealth can get very boring if you think of it in terms of stocks, Mutual Funds, Bonds, Investments, Savings and Personal Finance Only. There are several other dimensions to it, that are not so apparent, yet very important. A Sustainable Environment is one such an important dimension to wealth.

Flash back to the 1990s. I graduated out of St. Joseph's College Trichy. It is a Great Institution that not only taught academics, but opened my eyes to the real world issues. Helped me develop a broad perspective on real life issues and more specifically the importance of nurturing the planet we live in.

Prof. Arulsamy of the Dept of Chemistry was a great influence on me, specially when it came to environmental issues. Figuratively, he planted the seeds of Green Behavior in me. He would deliver fine lectures about how our ancestors lived a nature friendly life, and how in the name of becoming modern and industrial, we were indulging in behaviors that started causing a big dent to the planet.

He would elaborate on how the green house effect, has started poking holes in the Ozone layer exposing ourselves and our posterity to harmful UV radiations, increasing our exposure to cancerous diseases, and causing dangerous shifts in weather patterns causing natural disasters and catastrophic societal issues like drought.

His views on the importance of living a simple life, leaving a smaller carbon footprint, using the earth's resources in a minimal and sustainable manner, planting greenery around our environment, and protecting natural resources and species had a profound impact on me as a young man.

He took students (like us) through several tree planting initiatives in surrounding villages, and we could see for ourselves what kind of simple living our people in villages happily lead. It was a humbling experience. (I think every institution should be mandated to carry out such education and practical experience in Green initiatives)

Protecting the environment and living a sustainable life got engraved as one of the core values, deep in my brain.

I planted several saplings around my ancestral property, that are trees now.

Flash forward to today, I don't have to tell you how polluted our cities and even towns have become. We are depleting the forest cover rapidly, emitting toxic chemicals in to the environment with our automobiles, A/C, landfills and such. We are destroying our trees to make way for concrete flyovers and not compensating for it by planting more trees elsewhere.

We can directly feel the impact. Our life, water and air quality are deteriorating rapidly. We are causing climate change and global warming.

Our summers are getting hotter, our winters colder, our water resources are drying up.

We are losing our health with hitherto unknown diseases, cancer and such. We are beginning to make the same mistakes as Americans by orienting ourselves in to a consumerist society and mindlessly accumulating stuff (whether we need them or not). We may make more money, but lose much more to hospitals to fix our health issues (year on year).

Before you despair, I want to let you know that there is a ray of hope. Some smart people have started to wake up to this reality. They are doing many things about it. You can do your bit for the environment too. You can participate in many Green Initiatives, by just contributing your time. Not even money.

First to get a handle on how we are wreaking havoc on the environment by accumulating "stuff", check out this cute movie "The Story of Stuff" by Annie Leonard. It was eye opening to me.

Annie explores where these stuff come from , and where they go to. She explains the system in crisis as a linear system on a finite planet, and how Corporations are systematically depleting the natural resources to make stuff (for money), how we are indirectly responsible for hurting people and natural resources in the process.

Root cause? Our mindless accumulation of "Stuff". By our adopting mindless Consumption as a way of our life.

I believe that her message applies not just to Americans, but to all of us equally (specially the city dwellers in India), as we get more and more globalized with every passing day.

Please watch this movie, and show it to your kids, your friends and relatives. Spread the awareness. Annie does not only cite the problem but shows practical things that we can all adopt. Subscribe to her blog if you like.

Dear Readers, what Annie shows as solution is not new to us. This is how our ancestors lived by design or default ( a nature friendly way). Paying respect to the forces of Nature and living a sustainable life. We just got lost somewhere along the way. We just need to get back to our roots.

Another good site that you want to check out is "No Impact Man", that talks about environment issues and what we can do to end the crisis, and lead a happy life.

I am not saying we go back to the stone age or give away all our modern day conveniences or technology . Just requesting that we be more mindful of the environment and incorporate simple practices that make a tremendous impact when carried out by all of us.

What Green Behaviors do I adopt in my practical life?

(1) I have reduced accumulating"stuff": Before I decide to buy any thing (not needs), I sit on it for atleast a month before I buy. Only if I am convinced after 30 days that I still need it, I go for it. The waiting period of 30 days is enough in many cases to deflect me away from impulsive shopping or duplicating products that I may already have. I make sure the products I buy are least hurtful to the environment. Stay away from plastic as much as I can.

(2) I recycle my "stuff" . When I finish using stuff that is in decent condition, I donate away to charity or friends, and make sure not to dump it in trash. That way I extend the life of the stuff.

(3) I try to use my car as little as I can. If I have to go somewhere alone, I tend to use public transportation or walk or use my bike. I ensure that my automobiles meet the latest emission norms.

(4) I buy things locally, from local markets. For example I buy my vegetables or fruits from local/street vendors, who are farmers or source it from directly from farmers. I minimize what I buy from retail shops and chains, which have a longer supply chain.

(5) I try to minimize the use of paper as much as I can. I try not to print papers unless absolutely necessary.

(6) I watch less television than I used to ( < 1 hour a day, and no TV on week ends).

(7) I minimize the use of electricity, and even lesser use of A/C. I switch off lights and appliances when and where they are not needed.

(8) I talk about the environment with my friends and family and encourage 'Green Behavior' in them also.

(9) I drink water and naturally occurring fluids like milk and coconut water. No Soda Pop. Sorry.

(10) I avoid any form of processed food like plague. I don't smoke or drink alcohol.

What are other things that I plan to do?

(1) Plant a little garden in my home (that I'm building now)

(2) Participate in atleast 1 Green Initiative in Bangalore that contributes in a remarkable and visible way to the society, that resonates with my Green Beliefs.

(3) Continuously educate myself on issues with environmental impact and what we can do about them.

In a nutshell, No environment, No health. No health, no Wealth. What's the point of Wealth without Health?
Green behavior is simple to adopt, mostly congruent with frugal behavior and is also gentle on your wallet. I am saying mostly congruent with frugal behavior, because in some cases, your upfront investment (e.g. solar technologies) may be higher, but the overall total cost of ownership comes down with time.
That is our only hope of leaving the world a better place for our posterity, than when we came in to.

Do you subscribe to any Green Behavior? Do you believe in it? What do you think? Let me know your comments.

Why now is the best time for buying or building your house?

2009-08-14T13:45:00.000-07:00

Buying a house is one of the Most Important and Biggest Decisions that you may ever make in your life. It has huge implications on your finances, and can make or break you.

There is always a holy war between the buy vs rent lobbies, when it comes to housing. I'm a "buy" advocate, specially when you are buying a house for the first time. Finance apart, the idea of owning my house gives a kick out of me.

Once you buy a house, it is for you and your posterity for ever (unless you get in to any kind of a financial mess because of it). You can protect yourself and family with a roof above your head. You are not at the mercy of a land lord. You are protected from rental inflation. Once the house is paid for, you are protected from any changes in interest rates also.

Timing wise I think this is the best time to buy a house. Here's why:

In the current situation, I feel that the house prices have bottomed out to a large extent (in India), there's not much scope for any more reduction.

The overall improved sentiment from the US Fed Reserve , points to the beginning of an economic recovery in the US atleast by 1st quarter of 2010. (This despite the discouraging unemployment rate numbers in the US). Like it or not, the Indian sentiment is directly tied to the US recovery (although we are not technically in a recession).

Any signs that the US economy is recovering, is very likely to heat up all our down beat markets (stocks, jobs, real-estate etc.,). It's better to buy your home in a down beat economy (now) than in a overheated economy (that is likely in 2010).

In addition , the Indian Government has also introduced some fiscal stimulus measures, to kick start our economy.

The housing loan interest rates by banks are also very competitive now. I don't expect it to stay low for too long. When the economy heats up, interest rates tend to rise.

Hence you can save a lot of money by going for a housing loan and leveraging on low interest rates now. This will which directly translates to low EMI payments atleast for the first few years.

Recently SBI started this (low) interest rates war by offering loans of Rs. 5 lakhs at 8% p.a for 5 years and cutting 50 - 75 basis points (i.e reduce interest by 0.5 to 0.75%) for loans from Rs. 30 lakhs to Rs. 50 lakhs. Other banks are feeling the pressure and following suit. As a smart customer, leverage it.

Comparison of housing loan interest rates across 3 big banks

	For floating rate home loans for amount of Rs 30 Lakhs to Rs 50 Lakhs.
	1st year (%)	2nd Year (%)	3rd Year (%)	4th year onwards (%)
HDFC	9.00	9.00	9.00	9.00
SBI	8.00	8.50	8.50	PL-275bps
ICICI	9.75	9.75	9.75	9.75

(Source: Newspapers and websites of respective HFCs/banks. Rates of SBI and HDFC are after the recent cut in interest rates)

Before you take a plunge note the following:

(A) Make sure to exercise due-diligence on the property you want to buy and the price you are willing and able to pay. Don't get carried away by the sales pitch of legitimate or illegitimate housing companies. Know and get all the paper work and ensure they are originals. Get a legal opinion without fail. Get multiple opinions from experts. Satisfy yourself, that what you are paying for is reasonable market prices (do comparisons, market research, peer checks of prevailing market rates), the property exists, it is legally being sold, free from encumbrance, and the seller is legit.

Reputed builders are safer but not guarantees. They can take your money and keep you waiting for months if not years, before they deliver the project.

Understand that buying a property is both an art and science. Hence your emotions and intellect should both play a crucial role in the selection of a property.

If you are careless, you can get cheated big time and very easily.

(B)Ensure that you can afford the housing loan. First take stock of how much down payment you can afford. More the merrier (say atleast 25%).

Banks will do their due-diligence, on your affordability of the housing loan and the property itself, even before granting you a loan. You shouldn't however be counting on the banks to do it all for you. After all, banks are in the business of making money out of you (as interest on the loan). If you aren't careful and lose money on the property or lose the property itself, the bank will come after you anyway for the loans.

A rule of thumb is that a housing loan shouldn't exceed any more than 2.5 times your annual gross salary. The EMI should not be more than 25% of your take home pay. Shorter the duration of the loan, the better. If for example you make Rs. 5 Lakhs an year, the ideal bank loan is Rs. 12.5 Lakhs (worst case Rs. 15 Lakhs - which is 3 times your annual gross).

(C) Read the Fine Print: Don't get carried away by the interest rates alone. Look critically at all hidden costs. Some of the banks charge 1% processing fee, some mandate some form of insurance etc., Understand any prepayment penalties (ideally none to 2%). Most banks don't offer fixed interest rates now, but you may want to compare them with floating rates (if available). Know that most fixed rates are not truly fixed rates in the sense that the banks can under circumstances still increase the interest rates.

(D) Don't count on tax breaks on housing loan interest as an incentive for taking a housing loan. Although the tax breaks exist today, to the tune of Rs. 1.5 Lakhs, in the proposed new tax code the Government is planning to do away with that tax break. The party is coming to an end.

Good luck with your Housing decision, and let me know your comments.

New Tax Code - Pay 10% income tax up to Rs. 10 Lakh - Dream Come True for the Indian middle Class!

2009-08-12T10:13:00.000-07:00

I was pinching myself as I read the report in the "Economic Times" that the Govt. is rationalizing the income tax structure, and reducing the overall tax burden on individuals.

Please read the full article here.

In a nutshell, here's what is proposed for Individuals:

Other highlights:

Increase in the tax deduction on savings of Rs 3 lakh and all perks to be added to income for taxation purposes. Currently under section 80C, we get an exemption of Rs. 1Lakh only.
For corporates and multinationals there are some tax sops but I leave it out since it doesn't concern individuals as much.
The part I didn't like that much is this: With regard to PPF and other pension fund schemes, the code said the government should continue the tax exempt status to withdrawals of amounts accumulated up to March 31, 2011. After this time, it is proposed that the withdrawals from Personal Provident Fund (PPF) be taxed. This is not good news.

Folks, please re-read the table above, until it sinks in to you . This is GREAT NEWS for Tax Payers and specially the middle class ones. As smart individuals, we should maximize our contribution to PPF, Pension Plans (e.g. NPS), ULIPs and other tax saving instruments to the tune of Rs. 3 Lakhs!!.

If you plan your taxes wisely, this proposal can result in savings from ranging from a few thousand rupees to a few lakh rupees. That's a lot!!

Note that this is not law yet, and the bill is proposed to be passed during the winter session of the parliament. I hope no one in the parliament dares to challenge such a great Income Tax reform benefiting the Indian public, that is long over due (48 years to be precise).

At a strategic level, this is a huge win for the government, and I'm sure it will help broaden the tax net, reduce the black money circulation.

Kudos to Pranab Mukherjee and P Chidambaram!

Hip hip! Hurray !!

The Exit of Entry Load - Burden of Exit Load - Mutual Funds in India

2009-08-07T15:08:00.001-07:00

Recently SEBI had passed a regulation to ban entry load (being charged to individual investors) by Mutual Funds, effective Aug 1st 2009. I didn't write any post cheering this move, because I knew that the fund houses would find a backdoor entry to charge the investor back.

My suspicion has been confirmed.

In a bid to counter the No-Entry load rule, which became effective from August 1, many fund houses have increased the exit load and the tenure for the inapplicability of exit load to 3 years.

This means you (the investor) will have to stay invested in mutual funds for 3 years if you wish to avoid paying exit load. Earlier the exit loads were applicable if the investor redeemed within a year.

This can impact you in two ways:

(i) This will prompt you to stay invested for the long haul, which is important while making equity-oriented investments.

(ii) You should watch out for distributors who can coax you to churn your portfolio too often, in order to earn commission through exit load. Distributors are entitled to receive a maximum exit load of 1%.

What is a sensible approach? Couple of rules that I have decided to to go by:

(i) Always choose a fund, which is capable of meeting my objectives and matches my profile.

(ii) Stay invested in the fund as long as they serve that purpose.

(iii) Invest in Index Funds, where the overheads are generally low.

To research mutual funds before I invest, I go to Mutual Funds India. This is an excellent, comprehensive portal to research all available Mutual Funds in India. It shows the historic performance, NAVs and simply all information that you want around various types of Mutual Funds .

Check it out before you take a plunge. More on this site later.

How to detect fake currency (Rs.100 and Rs. 500 notes)?

2009-07-30T18:10:00.000-07:00

The Times of India carried an alarming headline on 7/31/2009 titled "Watch out, your Rs 500 note could be fake".

In a nutshell the report claims that currency to the tune of Rs. 169,000 crore is in circulation in the Indian system (Not sure how they precisely estimate this. Or is it sensationalism at its best?), and that even banks and establishments are struggling to tell the original from the fake.

If this is true, it can be devastating to the economy and individuals. If you are like me, and would like to avoid dealing with cash as much as you can, then you have less to worry about. You can write checks or use debit cards or credit cards, and forget worrying about this issue.

Nevertheless, in India it is impossible to lead a life without handling hard cash. Most of the vegetable vendors or news papers or even certain shops require the use of cash. Most establishments have a minimum spend limit within which you can't use any of your cards.

I thought, it would be a good idea for common people like you and me to know and detect fake currencies to the best of our abilities. We don't want to carry fake currencies or get arrested for our negligence.

As I was searching around, I was able to find films officially produced by RBI, in public interest in their site itself.

Out here, you find very short films that describe the security features of Rs. 100/- and Rs. 500/- notes.

For some reason, I was not able to view the movies on my FireFox browser (ver 3.5), but it worked fine on IE V7.0.

What better way to learn this than from the RBI, and that too in audio-visual format? Check it out and let me know.

What methods do you adopt to detect fake currencies? I'm curious to know. Let me know your comments.

How to select the best money transfer service and get the best exchange rate for your money?

2009-07-24T11:50:00.001-07:00

If you say you simply go by ads and claims, then you need to do more homework. You're smarter than that. Aren't you?

All money transfer services tout themselves as the "best money transfer" service to India. They guarantee security of the service, 24 *7 customer support, no fee, any bank to any bank in India, secure transactions, 4 day delivery and what not.

No doubt your money's security and other attributes like speed of transfer are important. But what about one of the most important attributes "exchange rate"? Everyone claims theirs to be the best in the world. You get confused. No wonder then you go back to what your friends do and just choose that service.

Remember when you get an exchange rate that is low, you are potentially losing a lot of money. For e.g. if your service pays Rs. 0.30 lower (than standard) per $ or #, even if you are transferring $1000, that translates to Rs. 300/-. With increasing amounts and frequency, you can win or lose money depending on the service you choose.

Many times you don't care to check, and the service makes money big time. How then can they cover their cost?

The tricky thing is from the moment you initiate the transfer, your service will pay the exchange rate 2 or 3 days later. They publish their daily rates in their own sites. DO NOT trust this rate as a good bench-mark.

There really is a much better way to measure your money transfer service provider. Here's how.

Everyday, the RBI (Reserve Bank of India) , publishes a reference rate for all major currencies against the rupee. This is a standard rate that the RBI expects the bank to provide to customers. It's usually published in the home page itself. I am providing a screen shot for reference. Check the exchange rate on the RBI Site on the day of you initiate the transfer and for the next few days.

Compare what's in RBI site on the day with what you get from your service provider. If you are within + or - Rs. 0.15, then your exchange rates are decent, and the service provider is reasonable. If it is outside this range, then you need to call up the service provider , show the data and ask him what's going on. If you don't get a comfortable response or remedial action, don't hesitate to ditch the provider for another.

Although there are popular service providers like Remit to India and Money to India, my experience with them was not positive. Sometimes I got lower exchange rates, sometimes delayed remittance, sometimes poor customer service when there was an issue, sometimes all of the above.

I have been using State Bank of India's Online Money transfer service, for the past 6 months or so. Online SBI offers competitive exchange rates (validated against RBI rates) and all the other security features without much ado. The portal is very simple and user friendly to use. You don't have to have an account in SBI in India or in US, to use their services.

All in all, I'm a very satisfied customer. Note that this is not a paid ad or anything. Just my personal experience.

Who do you use for money transfer? What's your experience? What tricks do you use to get the best exchange rates?

One Habit that will help you make Sound (Financial) Decisions

2009-07-21T14:44:00.000-07:00

David Ramsey in his popular book “The Total Money Makeover” makes an excellent point. Personal Finance is 80% behavior and 20% head knowledge.

I couldn’t agree more.

I have experienced this multiple times in my personal life. I have made some bad investment choices in life and many good ones too.

As I pondered about it, I came to the conclusion that although there are a lot of good qualities that are important, a key behavioral quality ranks highest, in making good financial decisions (from my own personal decisions).

And that is: “Asking the Right Questions” before you invest or spend your hard earned money.

Think about this. You earn money the hard way, spending months or years. With poor financial decisions, you are blowing away not only money, but all your efforts, energy and time that you spent on earning it. Remember you are emotionally invested in it already.

Answer honestly.

When it comes to savings and investments: How many times do you act hastily on financial tip-off from friends, relatives and media? How many times did you thoughtlessly plunge in to stocks and mutual funds that plummeted in value soon after or sold investments that skyrocketed soon after? How many times did you buy insurance policies clueless about the coverage or details, and whether you really need it? How many times have you been sold investment products that you have the faintest idea of, that have given you poor or no returns or blew your principal away?

When it comes to spending: How many times did you spend on products that you didn’t quite need or want? How many times did you have to throw out the products because you didn’t have space to store them or because another product that you had already addressed the need more effectively? How many times did you feel remorseful about buying wrong things, or overpaying for those and/or not being able to return or exchange them? How many times did you buy software when a comparable one was available for a free download? How many times have you made impulse spending decisions that you couldn’t even resell at a lower price?

Did you ever wonder Why? I think it is because you are not asking the right questions. You are either not asking anything or asking wrong questions or dumb questions.

How does “Asking the right questions” lead to good decision making?

(a) You do the research : In order to ask the right questions, you need the knowledge. Right? Hence you start doing the research before you invest or spend money. If you want to invest in stocks, for example you get to know the industry, the economic and business context, the business model of the company you want to invest in. What is their revenue? How profitable is the company? What is the P/E Ratio? What is the market capitalization? How does it stack up against competitors? Is it a growth or value stock or neither? How long has the company been around? Etc.,

Similarly before you spend, you begin to do the research. You begin to ask if you really need this or want this, if you can afford this, by how much are you postponing your goals achieving your financial or other goals, or if you have something already that can serve the purpose, what comparable products exist in the market, price comparison, reviews, quality comparison, Is some one giving away for free or cheap in Craig's List, or free cycle? You cover the whole nine yards.

You get invaluable information out of the research that will help you make a better decision.

(b) You take time to make decisions: You need and take time to do the research. That psychologically detaches you to an extent from the decision you are likely to make. With the additional time, you tend to get more rational than emotional or impulsive. You are not a kid in the candy shop any more. The time taken itself improves the quality of the decision. Even if you lose a specific opportunity because of the time taken for research, you are still better off, because you will be prepared the next time.

(c) You become an organized planner: You begin to realize that to make use of investment opportunities and to make the right spending decisions, you need time and research (as above). To do the research, you get the right tools. To not get overwhelmed you begin to prioritize and organize. You start planning ahead of time, set goals and milestones to measure yourself. In short, you organize your life smarter,

(d) You turn off bad advice, and attract good company: Because you are not naive anymore your bad friends and influences begin to retreat, knowing that you won’t listen or act on what they want you to bite off. They realize that you are not gullible anymore. You have developed some good habits and continue to build them. You have gone through a profound personality change with this habit.

On the hand, you attract people who share your philosophy. You are in the company of people who are sensible, and financially well-behaved. Your ability and chances of cultivating good habits are much higher.

You build synergy that leads to very wise investment decisions. All by Asking the Right Questions.

What is your experience? If you have to list One Key Quality or habit for better decisions what will that be? If you were to choose 1 good Habit what will it be? What’s your experience?

Credit Score and Credit Bureau in India - The Chitragupta of your Credit Karma

2009-07-19T13:42:00.000-07:00

You have a great relationship with your bank. Say you built it over a period of several years. You have been paying your credit card dues well in time. Your rent, bills, EMI have never been late. No impulse spending. Your credit situation is well under control. You want to apply for a new housing loan at your bank.

Let us say your neighbor next door has a questionable credit record. Say you know it. He doesn't pay his credit card bills in time, or has too much debt. In India, it is not hard to know it. There are several sources. Let us say, he also wants to apply for a new housing loan at your bank.

Today, more likely than not you both will get the same interest rates. Same terms and conditions. No discrimination. This is unfair, of course. Although we all may know your neighbor's credit problems, the lending institution may not know. The bank may not know the gravity of the problem, unless your neighbor confesses it to the bank. Which is unlikely. Hence you both are the same to the bank.

The Good News: This is about to change or changing already. Each one of us are going to be assigned a Credit Score in India.

A Credit Score is a three-digit number that will be used to evaluate your credit worthiness by lenders. If you have a good score, you can get lower interest rates for loans. You can get better credit cards more easily.

In the US, for example, where credit scores range from 300 to 850, a person who has a score of anything above 750 is likely to get loans at a rate that is about 1.5 percentage points lower than somebody with a score of about 600. This directly translates to a lot of savings every month in the mortgage, or other forms of loans that Americans have. In fact, many employers do a routine credit check of their employees in the US, and can even use it as a ground to deny employment, if the history is not good.

The Credit Score is based on a set of criteria that includes, among other things, past loan history, number and amount of loans taken, number and amount of loans defaulted, filings for bankruptcy, credit card payment delays, balance outstanding in various loans and the like

The concept of Credit Score has taken off in India. Thanks to CIBIL . i.e Credit Information Bureau (India) Limited. This is a credit bureau that is going to track your credit card and EMI payment history, your car loans, your banking history in India. Think of it as the equivalent of a Chitragupta for your day to day Karma.

CIBIL is jointly owned by a consortium of banks as of now, and more and more banks are joining it. As of writing, SBI, HDFC, HSBC, ICICI, GE Capital, PNB, Standard Chartered bank, Citicorp etc., have varying stake in CIBIL.

The good news is for responsible consumers and banks. Those that pay their bills in time, every time. Those that don't take on loans, that they can't afford. Those that take financial responsibility seriously and get them all organized properly. Those that have a good Credit Karma. There is a clear incentive for such responsible behavior. The rewards for those folks are easier loans, better interest rates, better credit cards and endless other benefits.

The banks stand to benefit because they can precisely know the credit worthiness and risk profile of the customers before they make key decisions like granting loans, issuing credit cards or selling any products or services. Banks can know with a reasonable and objective level of confidence, as to how likely a customer will (or not) pay his EMI or other loans.

The bad news is for people who are not responsible, because every action is getting tracked meticulously and can very well form the basis of their eligibility for future credit.

I must mention a few other shortfalls of the current system before I sign off:

(a) Unlike the US, at this point, the Credit Score can't be obtained by individuals (like you and me) directly from the CIBIL. Only the banks , where you apply for loans or open deposits can pull this from the Credit bureau and share it with you

(b) There are some unpleasant experiences of individuals who got a bad credit score because of the misinformation from lenders and possibly the CIBIL itself regarding customer's records. In order to dispute or fix these, you to deal with the concerned bank that gave wrong information about you to CIBIL and can't directly approach CIBIL. It's therefore bureaucratic.

(c) The algorithm or formula for computing the Credit Score is not transparent to individuals and is proprietary to CIBIL. This can lead to bad credit scores and possible misinterpretation. Individuals won't have a way of knowing what kind of behavior is rewarded and what is not. For e.g does your credit score improve, when you have a few or more credit cards? when you have a home loan or not?

(d) It's not transparent as of now, how they track the information about individuals. Is it based on PAN Number, or Passport Number or what? What if some one doesn't have anything and still has a credit card and/or paying an EMI? How are multiple names, formats in India reconciled and ensured that the credit record of the correct individual is updated? This is an implementation difficulty unique to India, where the concept of SSN (like the US) doesn't exist.

Despite these and many other issues, I welcome the concept. The kinks will get worked out. Over a period of time, the system will get better, specially with the entry of additional players like EquiFax in to India. No system is perfect on day one.

To overcome the above issues, at an individual level you can do a few things. Be conscious of the importance of maintaining your identity private, consistent and unique. Identify theft can lead to very bad results. A separate post on this later.

Choose the same name (formats) all over and stick to it. Not one name in your PAN and one for your passport.

Pay your bills in time, and don't have any debts looming over your head. Don't default on any payments.

For additional information, please visit CIBIL's web site. They also have a comprehensive FAQ section that answers many questions that you may have.

We really have to feel proud, that a system is falling in place to track and reward good financial behavior. As the saying goes, A Good beginning is Half Done.

Remember the Chitragupta is watching your financial behavior now.

All about the New Pension Scheme (NPS) in India

2009-07-16T13:37:00.000-07:00

Salient Features:

Eligibility: Any Indian Citizen can invest

Minimum Investment per year: Rs. 6000/- Maximum: No limits

Tax Exemption: Up to Rs. 1 Lakh under section 80C

Term of the investment: Suitable only for the long term (Pension), for average, individual investors. Not recommended for short-medium term investments or speculation.

Risks: Investment subject to market risks, but cushioned to an extent by the investment in GOI Bonds and the % exposure (not to exceed 50%) in equities.

Who is the Regulatory Body?

Pension Fund Regulatory and Development Authority (PFRDA)

The investor's account will be maintained by a record keeping agency appointed by the PFRDA.

Who are the Fund Managers?

The fund will be managed by six fund managers, appointed by the government at annual fees of 0.0009% of the invested amount, which is less than one paise per Rs 100. The fund managers appointed by the PFRDA are SBI, UTI Asset Management, ICICI Prudential Life Insurance, Reliance MF, IDFC Mutual Fund and Kotak Mahindra.

How/when do I get the investment back?

Money invested in the pension fund during the your working life will come back partly as a lump sum and partly as an annual payment or pension.

How are my funds Allocated and Risks Managed?

The fund gives investors the option of deciding what level of risk they want to take, given the fact that higher returns are typically associated with higher risk investments. The fund will be invested in three kinds of assets — equity, government bonds and corporate bonds — and it is for the investor to decide how much should be invested in each of these.

Investment in equity is, however, subject to two significant constraints.

(1) It cannot be more than 50% of the amount in the investor's account.

In my opinion, This clips the level of risk exposure but it also can be found to be very conservative and limiting specially for people who are young and who can afford to take more risks.

(2) Fund managers cannot invest in shares of individual companies, but only in index funds linked to the BSE's sensex or the NSE's Nifty.

In my opinion, this is really a great idea. It has been historically and consistently proven that over a real long term (say 25-30 years), Index funds have outperformed other types of funds consistently, although they are vulnerable to all market risks. Very low overheads and fees are involved in Index funds, which means more of your money goes to work efficiently. In fact, they are the best vehicles for average investors wanting to invest in stocks.

For those who would rather leave it to experts to decide what the balance should be, there is `auto choice' option. Under this option, for those aged 18-36, 50% of the amount in their pension account will be invested in equity, 30% in corporate bonds and the remaining 20% in government securities. From age 36 onwards, the proportion of investments in equity and corporate bonds will decrease annually while that in government securities will increase till the mix reaches 10% in equity, 10% in corporate bonds and 80% in government securities at age 55.

How do I open a pension account?

Approach the branches of any of the 22 `point of presence' (POP) service providers selected by the authority. These include State Bank of India and all its seven subsidiaries as well as ICICI Bank and Punjab National Bank. PFRDA.

Who will I have to deal with for my day to day transactions?

You (the investor) will need to interact only with the POP, where you can deposit your monthly, annual contribution.

What if I want to change my fund manager?

You have the option of shifting from one fund manager to another, merely by instructing your POP to do so. The POP will inform the same to the record keeping agency, which will shift the fund to the new fund manager, selected by you.

What if I have additional questions?

Please contact the nearest branch of SBI or affiliates, ICICI, UTI Asset Management, ICICI Prudential Life Insurance, Reliance MF, IDFC Mutual Fund or Kotak Mahindra.

Top 10 signs that your Personal Finance Situation is in Trouble

2009-07-14T12:44:00.000-07:00

1. Your idea of Savings is what (if anything) is left out of your paycheck after all your expenses for needs, wants and wish list items are taken care of.You park it in your checking account, for easy "liquidity"

2. You believe that Financial Analysts, some of your friends and media are clairvoyant specially when it comes to accurately predicting the stock market trends, stock prices or mutual funds' NAV. You base your stock picks wholly and solely on their tip off (and not based on any research).

3. The only context in which you hear a goal is football or a sport like that. The only context where you have heard of bond is when it is prefixed with James.

4. You firmly believe that planning is for businesses and corporates, expense tracking and budgeting are for accountants, expert research and investing is for financial experts and impulsive spending is all that is for you. And You do it systematically.

5. Your source of long term education funding is your parents.You believe that they totally owe it to you (and even your children) any time.

6. You believe that any form of debt is like Good Cholesterol (HDL), the Higher the better. Minimum payment due is like Bad Cholesterol (LDL), the lower the better.

7. You don't have the time to go through ever increasing pages of credit card statements. You choose to view and pay off the minimum payment due instead.

8. You believe that friends, relatives and credit cards are the only and fully trusted sources of emergency funds.

9. You firmly believe that you are going to live healthy for the next 100 years, and hence it is too early to start "spending" on health or life insurance premiums, or any time taking care of your health.

10. Your idea of retirement planning is to bet on winning a lottery or counting on an inheritance.

Interest Rates Comparison Sites in India?

2009-07-09T17:50:00.000-07:00

An NRI Friend of mine returned to India recently, after a prolonged stay in the US. He was complaining about the lack of comprehensive comparison information sites about interest rates across various banks.

In the US you have www.bankrate.com that does a great job of getting the best rates of interests in a comparison format so you can make informed choices about where you invest your money, or take loans from.

I took up the challenge, researched on this topic to help my friend. I came up with some interesting findings with respect to comparison sites that I thought would be useful for you as well. As you invest in various products in various banks, you definitely want to have a good idea of prevailing interest rates in the market, and how your bank stacks up.

I am a huge proponent of simplicity and sticking to 1 or 2 bank accounts. However when the amount to be invested is higher, it does a make difference to know if someone is offering a higher rate of interest, and be open to going with them. This also applies in the case of Home Loans or Credit Cards. You can get the best deal by comparing the banks and pitting them against each other. That will directly contribute to your savings. The higher the money and the longer the term, the greater the savings.

If you don't want to go with the respective bank or institution, you can use the information as a negotiating lever with your current bank to get a better rate.

Two Sites came close to Bank rate in the US.

Disclaimer: I am in no way affiliated, employed or have any fiduciary interests in these 2 sites below, and it is for informational purposes only. I don't own any shares of these 2 sites. This is not a paid advertisement also.

Here they are in no particular order:

(1)Ecompare:

The Home Page looked as below.

I chose Fixed Deposits 1-10 years, and the site showed me results with about 38 banks (private, foreign and nationalized banks) and their interest rates. I have shown a small subset of the results for convenience only. You can check it out yourself. The gray highlighted column shows highest interest to lowest interest rates (descending order) across banks.

I didn't check out the other portions of the site like Credit cards or loans. That is the home work for you. The site didn't ask me for the types of banks I'm interested in, or any other criteria like whether I'm a senior citizen or what was my location.

(2) Ratekhoj.com

The home page showed up as below.

Unlike eCompare, this site let me chose the types of banks, that I was interested in, location and certain other details like whether I was a senior citizen. It also gave me the option to compare with Company FDs and Post Office Products.

I chose the location to be Bangalore, restricted the search to Nationalized banks, and it listed about 39 banks (small subset shown for simplicity) as below.

Boy, I would have no way predicted that State Bank Of Patiala would be the bank with the highest interest rate for this group. I didn't know it even existed. It also showed links to the terms and conditions, premature withdrawal rules, finding location etc.,

As far my friend, I'm sure he is convinced the capabilities exist. I'm not sure if he's going to use it or not, but I'm sure you will give this a shot, before your next deposit in to any FD or shopping for the next housing loan or credit cards.

What sites or methods do you use to determine , compare the interest rates? Please share your experiences.

How to find the Best Financial Adviser?

2009-07-07T21:05:00.000-07:00

You might wonder if you really need a Professional Financial Adviser. It depends on your financial situation and psychological makeup. In some cases, you may not afford one. Or you may truly believe that you can afford one, but (you also believe) that you have the experience and knowledge in Personal Finance. In some cases, you may simply be uncomfortable sharing your financial situation with a III Party , even if a professional PFA.

In either cases, you can be your own best financial adviser. In fact, there can be none who can work as much in your best interests other than you (strictly speaking). I suppose you have minimal conflicts of interests with yourself (unless you self sabotage yourself), and best interests of yourself in mind.

If you are a high net worth individual and/or you believe you need expert advise on Personal Finance matters, it is definitely recommended that you have one. I mean a Good one. If you are convinced that you need one, you want to obviously exercise due-diligence in selecting a good one.

Unlike other professional relationships, you have to recognize that a Personal Financial Adviser (hereinafter PFA) is in for the ongoing possibly lifetime processes, and the stakes are quite high. This person is going to know and help you with possibly confidential Financial situation, and for the long term. Hence you want to build a long term relationship based on trust and good will.

In today's market, the word Financial Adviser is pretty loosely defined. How do you recognize a genuine PFA ? Can your PFA be a fee only planner? A qualified stock broker? Life Insurance Underwriter? A registered investment adviser?. The right answer could be one or more or none of the above. Here are some possible options

Reference from your other professional relations or friends or colleagues: E.g. Your attorney or accountant may recommend some one. Probe as to why they like the PFA.

Interview Potential Candidates as if it is a Job Interview. It is. Ask them a lot of questions. Here are some examples (in italics). You should add things specific to your situation.

(a) How long have you been in the Personal Financial Planning Industry, who did you work with previously, and for how long? Can I reach out to some of them to have a discussion? You should get multiple references and do thorough background checks on their credentials and follow through. You don't want to trust some one on face value and regret later. It could turn out to be a costly mistake.

(b) How many clients do you have? Note that you don't want to be a drop in a bucket full of clients. You run the risk of not getting much attention if the PFA has too many clients.

(c) Describe some of your clients (without names of course), their income, net worth and occupation. This is to get an idea whether or not you are a typical customer profile for your PFA.

(d) What is your investment philosophy? What type of vehicles do you invest in? What is your experience with life insurance, MF, Stocks, Real Estate, Tax Planning, Business Planning, Retirement Planning, Education Funding (and whatever other areas you are interested in) ?. This is to understand the breadth of skills of your PFA. Broader the better.

(e) What have been your highs of your career? How much wealth did you build for your typical client (without names), and/or how much did you help manage?

(f) What is your approach to black money? This will give you an idea of their overall personality and integrity.

(g) What are some magazines and journals/periodicals you follow? How do you keep with the latest trends? What are technologies you use?

Questions for background check with references:

(a) How long has the PFA handled your affairs?

(b) Is the PFA related to you or your personal friend? If so , for how long?

(c) In a scale of 1-10 how happy are you with her services and how would you rate her? (1 worst- 10 best)

(d) To what extent does she monitor your investments How frequently do you have reviews?

(e) Does the PFA call with good investment or ideas? Changes in tax laws up to date? What do you believe her investment philosophy to be?

Look for experience AND education: A PFA is not meant to just tip you with the hottest stock of the week. It is about committing you to a program and accomplish your objectives. They should be well rounded in various areas like education funding, retirement, business succession planning, gifts, insurance and investment management. You don't want an educated kid with no experience offering you theoretical advise. A PFA should have atleast a decade worth of experience before they are on their own to help you. As far education , a CA, CFA, MBA or some grounding in Finance is recommended. With a plethora of courses these days, there may be several others that may qualify.

Ask about compensation and fees for services: Some PFAs get paid for study,reviews and investment management on commission basis or fees. Fee only planning refers to planning only. These folks gather the information and present to you their findings and recommendations on an hourly basis or a flat rate based on your portfolio.

Fee based planning for example can be up to 2% for Rs. 1Cr. 1% for up to 10 cr. and 0.5% above that amount. The % should decrease with increasing portfolio size.

Commission based planning: These folks charge nothing for planning, but charge for product purchases through the planner on a commission basis. They may have arrangement with brokerages.

Some may be flexible about the payment terms. Make sure you truly are comfortable with the compensation model and amount.

Concentrate on building relationships: A PFA should be someone who will place your needs above their own. They have to be fairly compensated for their work but should not be someone who will wait to make money out of you no matter what.

Don't ever buy an investment over phone from someone you don't know. Do business with those who you choose to. At earlier stages of relationships let the business be done face to face only. If your comfort level improves, you can consider doing some business possibly on the phone.

Don't give anyone authority to trade your account other than your trusted Professional Invest manager with whom you have a written contract. Even then, retain the final decision making authority to yourself.

Focus on relationships, not the speed of transactions: Relationships, Integrity, Trust and sound principles are more important than the speed with which they execute your transactions.

If you are not fully convinced about your PFA, don't go with him/her. If you are partially convinced, and would like to proceed, expose a part of your portfolio and make a final decision based on how they manage that slice of your portfolio.

These are just some suggestions and starting points. By no means, these very specific questions are exhaustive. You have to build on these. Do your own research, and let me know who you find. Good luck!

Why it pays to Organize your Finances? - Baby Steps to Organization

2009-07-03T15:03:00.000-07:00

Last week my wife and kid were down with viral fever. Friends pitched in with food. I didn't want to bother them much. The prospect of getting food from restaurants didn't appear healthy, nor did I have the time for frequent trips. Therefore I decided to put my culinary skills to test.

I have decent skills in cooking from the past. I know a limited set of Indian recipes. However, I make it a point to prepare those limited items well . Plus I never hesitate to learn new things or improvise my cooking "on the go".

I must mention that it has been quite a while since I cooked full-fledged meals.

My wife is a fairly organized person. She takes great pride in keeping the kitchen clean. Despite all that, I still had to wake her up frequently and ask her a lot of questions about where the ingredients were placed in the kitchen. I felt bad to ask her for too many things when she was sick, but I wasn't patient to search also, plus I was making blunders. Although she knew where things were, it was not intuitive to me.

No wonder an impatient newbie like me, couldn't spot things easily in the kitchen (whether it was sugar or cashews or turmeric). Hence I used the marker to put labels on those containers for added clarity, and used certain other organizing hacks to improvise it a little better.

Anyways, within a day, I learnt the ropes and I was buzzing in the kitchen. I couldn't but help appreciate her ingenuity in the placement of groceries based on her need and style. And whether or not it because was my food, my family got well in the next couple of days.

When it comes to Personal Finance , things are no different from a kitchen. The more organized you are, the easier it is for you to focus on important Financial issues without feeling overwhelmed. You will feel a sense of control and purpose. You will feel secure in the belief that you know where you stand on Finances, know what your priorities in life are, where you need to invest your time and money in , where you need to cut down and make realistic decisions that are in your best interests.

You will not make stupid financial mistakes like paying overdraft charges, paying late payment fees, choosing wrong financial products or services. You name it . Above all, when something happens to you (even if temporarily), your loved ones can run the show.

If your Personal Finances are cluttered up, you will find it very uncomfortable and your loved ones will have a hard time sorting things out in your absence (should a need arise). Your bad organization skills will cost you and your family dearly and financially.

What are the essential steps in organizing your finances?

Eliminate : Before you try to organize your Personal Finance , you should really focus on eliminating redundant or unwanted accounts. Too many accounts are overwhelming to maintain. Plus by consolidating them in to 1 or 2 accounts, you are (a) reducing your administrative fees, (b) saving yourselves the pain of reviewing multiple statements and (c) address your minimum balance needs more effectively. You get a better leverage and customer service with the 1 or 2 banks.

Can you cut back to just 2 bank accounts (instead of a dozen that you may have)? Can you keep just 1 or 2 credit cards and close all others? Can you reduce the number of brokerage firms to just 1 and/or see if your bank itself provides investment services? What are other things that you can cut back on without losing the service? Please be ruthless about elimination.

Automate: Make sure to automate your payment infrastructure. When your pay gets deposited on a given date (say 1st of every month), provide online or standing instructions to let the money flow in an automated manner for various savings and expense buckets.

For e.g. Designate and move a certain % to Recurring Deposits meant for various purposes, a certain % to SIP (Systematic Investment Plans). See more in Organize section.

Make sure to schedule online bill payments for your service providers (electricity, water, gas, telephone, maintenance etc.,). You shouldn't be wasting your precious time standing in a line to make payments

Organize and Keep it Simple: Do some basic organizing. Open separate Recurring Deposits within the 1 or 2 banks for various things. As an example, you want an RD A/C each for your home maintenance, for your house construction, for your Personal Provident Fund A/C (for the next year) . Open 1 or more SIPs for a mutual fund and funnel some money in those (monthly) as well. Open Fixed Deposits where you don't need the money for the medium term (2-5 years).

Setup online access to these accounts, that consolidates and shows you all the various types of accounts in 1 portal. As an example, here's how my HDFC Bank portal looks like.

As you can view in the screen shot, this portal shows me my various types of accounts (RD, Fixed, Savings) on the left hand side navigation. My scheduled bill payments, HDFC Credit cards, Mutual Funds and Demat Accounts (for stocks) are available in the various tabs (to the right).

A portal like this, makes the process of getting a snapshot of your stocks, MFs, Savings, Fixed Deposits, RDs, SIPs all in 1 place consolidated. Simple. I believe most Indian banks provide this level of functionality and flexibility.

As another important step, get your statements delivered online to your personal e-mail id, instead of through regular mail.

Create separate folders for the various banks by various months and store the statements in those folders.

While the above will give you a reasonable idea of your Net Worth, it doesn't include your real estate holdings, gold and certain other types of investments like insurance.

If you are old school, then buy the necessary stationery (like folders, binder clips, post it, label maker etc.,) from an Office supply store and organize the physical statements. These statements should be stored in the respective folders, for your reference later, with an index page that states which statements reside in which folder. These come in handy, when you apply for loans, or file Income Tax returns.

In one of the later posts, we'll illustrate a simple spreadsheet that shows an approach on how to go 1 step further, and consolidate all your investments in to a single view. For now, this should be adequate.

As far as your stock, Mutual Funds Portfolios if you are not happy with what is offered by your banks, you can also setup your portfolio in portals like finance.yahoo.com using your yahoo id. The screen shots below show an outline of how to accomplish adding stocks to your portfolio step by step, so that you can easily track the performance of your stocks or MF since you bought them.

Payments:

For your bill payments , if you don't get your bills by e-mail , or get an e-bill, then please setup reminders in your google or yahoo or plain old traditional calendar to alert you for payments. (You can save loads of late payment fees and feel very good about it).

For your investment payments a similar approach will help. Get the reminder early so you can plan for the payment ahead of time.

Receipts:

I personally don't enjoy this much, but it is important for tracking your expenses and for income tax purposes. If you are a tech geek, then you can use a camera or scanner to scan the receipts, and store them electronically (by month). If you are old school, clip and store the physical receipts and retain them atleast for 1 year.

Educate and improvise Continuously: Keep your eyes and ears open for sites, books, people that keep you educated on how to simplify and organize on a continuous basis. If you have a spouse or loved one who may need to be educated on where your holdings are and how to view, access them, you must keep them informed and educated as well.

Remember, all human beings are mortal. It's important for family to move on with financial life after our life.

At the same time, there is not a single system that can fit all our styles. If you don't like to do it the way I outlined above, by all means develop your own. But don't ignore this important aspect of Personal Finance.

Invest in PPF - Tap the Combined Power of Compound Interest, Tax Savings, Safety and Simplicity

2009-06-25T15:29:00.000-07:00

An equally good title for this post could be: How to convert Rs. 5833.33 a month to Rs. 20.5 Lakhs in 15 years?

I heard of PPF (Public Provident Fund) accounts in my thirties. That's sad in a way, but good in another way. I'll explain.

We have seen in our earlier post on Asset Allocation , that Fixed deposits and safe instruments are an essential part of any investor's portfolio.

PPF is a safe (backed by the Govt. of India), but long term investment, not suited for short-term. But a quick primer on PPF first:

The Public Provident Fund was established by the central government. Any Indian citizen can open one. You don't have to be a salaried individual, you could be a consultant, contractor or non-earner also.

Any individual can open a PPF account in any nationalized bank or its branches that handle PPF accounts. You can also open it at the head post office or certain select post offices.Note that Private banks can't help you with this account.

The minimum amount to be deposited in this account is Rs 500 per year. The maximum amount you can deposit every year is Rs 70,000.

The Interest rate is 8% compounded annually. The accumulated sum is payable to you after 15 years.

The entire balance can be withdrawn on maturity, that is, after 15 years of the close of the financial year in which you opened the account.

It can be extended for a period of five years after that. During these five years, you earn the rate of interest and can also make fresh deposits. The amount you invest is eligible for deduction under the Rs 1,00,000 limit of Section 80C.

On maturity, you pay absolutely no tax. There are some provisions to withdraw up to 25% of your deposits starting the 3rd year, but I'll leave for you to do the research.

In my mind, whether or not you are a risk averse investor, you should have this in your portfolio, and max it out also.

You should ideally invest the max. amount i.e. Rs. 70,000/- every year by April 1st week to get the maximum interest benefits and tax savings. Note that this account is a once in life time opportunity for all individuals .You can't open multiple PPFs in your name at multiple banks.

Hence it is better to be aware of this account, but open it when your earnings are such that you can max out Rs. 70,000/- every year (as otherwise, you may not realize the full interest and tax savings). Which is why, I don't regret knowing about it in my 30s.

I sat down to do the math and came out with the following calculations that explains how your money grows (picture below).

The power of compound interest is evident with the passage of time. Just observe the interest column (every year).

In the initial years the interest is somewhat low, but towards the end of the maturity period, you get more annual interest than even your payments

For example, in year 10, you pay Rs. 70,000 but you accumulate Rs. 81,125 in interest. In year 15, you nearly earn Rs 1.5 Lakhs in interest itself. Bear in mind, it attracts 0% taxes. Hence the effective yield is nearly 12%. So much for the snowball effect.

A smart strategy is to open up a 1 year RD A/C in the prior year and invest Rs. 5,833 every month. At the end of 12 months, your RD will mature to give you Rs. 70,000 + some interest. You can use Rs. 70,000 for the subsequent year's PPF deposit, and the interest for something that you want for yourself. If you make the monthly RD Payment as an automatic deduction from your salary account on your pay day, you won't even notice the difference.

Imagine receiving a lump sum of Rs. 20.5 Lakhs tax free after 15 years. Isn't it exciting?

Note that these calculations assume that you systematically invest Rs. 70,000/- every year at the beginning of April . If you make lower yearly contributions or make them at a later time period (than in April itself), then the interests and maturity amount will vary (to a lower amount) correspondingly.

Aren't you headed to the nearest SBI or postoffice yet?

How does the stock market work? A Cute Movie from 1952

2009-06-24T18:45:00.001-07:00

How does the stock market work? A (20 mins?) cute and simple animated movie from 1952 titled "What makes us tick", tries to present a simplified model of the stock market. It's available in the publicly available collection of movies from Prelinger's archives .

It is set in 1950s . The story unfolds, as seen as through the eyes of a typical worker living in a typical neighborhood in a typical city or town, Mr. John Q Public and his dreams. A fictitious company called Oil Drum Manufacturing company is shown as growing from a small company to a publicly listed company in NYSE.

It shows a simplified model of the role of investment bankers, SEC, NYSE, brokers, buyers, sellers, Board of Directors and how the trading happens from end to end. From the time a buyer in Colorado orders shares till he gets it executed on the floor of the exchange.

The John of the movie can be any Ram or Shyam in India . Substitute SEC (Securities Exchange commission) with SEBI (Securities Exchange Board of India), and NYSE with BSE or NSE. This can very well illustrate the Indian story, even though we are way smaller in scale. It shows how public participation of the stock market can fuel the growth of a Nation to economic prosperity, while leading to individual prosperity.

The movie closes with a caution on risks, and exhorts you to Get the facts before you put your money to work. Couldn't agree more!

Critics pick on the movie and indicate that this is an oversimplified model, confines to manufacturing (and not services), and presents an idealistic scenario of Capital Markets.

So what? We didn't foresee or anticipate Enron or Satyam scandal at those times. A short movie can only pack so much stuff without mixing up the messages

If you would like to teach your kids about stock market, here's a very good way. Please check out. I simply loved it. What do you think?

Asset allocation, Diversification and Risk Management

2009-06-22T14:30:00.000-07:00

We all intellectually know, the all too obvious Personal Finance Equation:

Savings = Income - Expenses

It is obvious that in order to increase savings we need to Increase our Earnings and/or decrease our expenses.

With the savings that we got, if we don't invest it properly, Inflation will ensure that we are poor for the rest of our life.

As an example, a flat (apartment) that costed Rs. 30 Lakhs 5 years ago near our locality, costs more than Rs. 90 Lakhs, in this downbeat economy today (in 2009). That is more than a 300% increase. Remember, we are talking Bangalore.

Let us say, that I had Rs. 30 Lakhs 5 years ago. If I had invested in that property, I would have made close to 300% profit before taxes. Of course, this is not a guaranteed return, and there are years when house prices drop big time. This doesn't factor the depreciation costs for the house also. These 5 years just happened to have been good overall.

If I had parked the money in the bank as a Fixed Deposit @ 8% for 5 years, that amount would have become approx Rs. 44 Lakhs, before taxes (assuming compounded interest).

If I had let it stay in a savings account @3.5% interest, it would have become Rs. 35 Lakhs in 5 years.

If I had invested it in stock market, depending on my portfolio and the state of the economy, the amount could have gone up by a certain % or it could have gone down in value also. It's hard to predict the exact return.

The message is clear. Greater the risks, greater the reward.

The more conservative you are, the returns are somewhat predictable, but may not keep with inflation. If the inflation in the past five years is 4%, then even if you get a guaranteed 8% annual return in a Fixed Deposit, your effective actual return is only (8 - 4 = ) 4%.

Inflation explains why and how your great grand parents who were getting a few hundred Rupees a month or year were able to lead a decent life, save and were even able to afford housing in their lives. It explains how You, having an exponentially higher income than them, still end up solving the same (or more) problems that they were trying to solve.

Asset allocation: We all allocate in our day to day life in some shape or form. If you are a home maker, you allocate your budget for the kitchen across groceries, milk, vegetables, fruits and meats. If you are a professional, you allocate time for work vs family, you allocate money for entertainment, education, groceries,kids etc.,. If you are a student, you allocate time for studies vs. play vs rest.

Asset allocation is similar and simple. Given your age, investment potential and risk tolerance, how do you allocate your investment as to get maximum or optimum returns, especially over the long term? Asset allocation is determining the right mix of asset classes for your investments. One that balances risk and rewards.

Is there a standard rule of asset allocation that will fetch maximum returns ? No. Are there some rules of thumb/guidelines? Yes.

In the US, the rule of thumb they apply is to subtract your age from 100, and invest that much percentage of money in stocks. Going by this formula. if you are 25, you can invest up to 75% in stocks, and the remaining in relatively safer instruments.

The reasoning is that when you are in your 20s, you have a longer time horizon. Therefore you are better able to withstand even wild swings in the stock market, and are not in a hurry to sell when the markets are down. As you get older, your risk tolerance reduces and hence you move to relatively safer instruments like Fixed Deposits that give you more guaranteed but lower returns.

But India is not a developed market. We are not a fully capitalist society. The stock market is much more volatile. I tend to use 75 instead of 100 (to factor in fluctuations and risks). For e.g. in my world, if you are 25, you can invest up to 50% in stocks/mutual funds.

If you are more conservative than me, then use 60% or even 50% depending on your preference and risk tolerance. But have atleast 20-25% of your money invested in stocks and mutual funds atleast until you are 50. If you are more aggressive than me, by all means stick to 100 - your age formula.

Asset Classes: There are too many asset classes that keep popping up every day for me to list all of them (e.g. commodities) in a blog. Granted some of them are confusing and risky to invest in, unless you are a pro.

In general, I have the following rules: If I don't understand or believe the ingredients of a food, then I don't eat the food. If I don't understand or believe the investments, then I don't invest in them.

What you see in the picture at the top, are broadly the asset classes, that you need to be aware of. We'll discuss them at length later. For now, just the concept is sufficient. Note that I've deliberately not provided any % of allocation, as it depends on your age and risk tolerance.

Diversification: This is very closely related to Asset Allocation. It represents one more level of how you spread your investments within each asset class so as to minimize and spread your risks.

For e.g. within Real Estate, you can invest in Residential and/or Commercial Real Estate. Within Stocks, you can invest in various classes of stocks. E.g. Technology, Manufacturing, Health Care, Retail, Automobile, Bio-Tech are some examples. Within Fixed Deposits, you can invest in Post Office deposits vs. Bank Fixed Deposits vs. PPF.

What if I allocate but don't diversify? You ask. Back in mid 1990s, many of friends invested heavily in NASDAQ (US Stock system that tracks technology stocks). Being techies, they thought they knew Tech stocks.

They enjoyed a great ride for the most part of 90s, when many technology stocks split and/or provided great returns (sometimes as much as 100% or more).

But then when the dot com bubble bust in 2000-2002, several tech stocks went belly up. Many of them lost incredible amount of hard earned money, sometimes their principal.

If they had diversified and invested in other types of stocks also (in addition to technology stocks), their overall return might have been lower, but their returns would have atleast been protected by the upswing in other types of stocks like manufacturing or health care. At the very least, the losses would have been lower.

The point of Diversification is that, when the stock markets go down, the bonds, and short term, Fixed deposits may hold up well, protecting your overall portfolio and thus giving you the required financial and emotional strength to ride over the rough patch.

When tech stocks down, for example bank stocks may do well that particular day offsetting your losses. If the entire stock market is down, bond markets may be up or gold may be up. Atleast they may not be all down by the same magnitude. When residential real estate may be losing value, commercial real estate may move up and make your day.

Risk Management: Many of us wrongly assume that the stock market is risky or real estate is risky. Fixed Deposits feel safer. I would like to emphasize that this is only a feeling and not so much truth.

Risk is only a relative term. Granted that your principal is safer in many fixed term instruments like NSC (National Security Certificates), or Fixed Deposits.

However if the inflation is high year after year, your buying power goes down significantly with time. If your investments don't earn handsome returns as with bank deposits, you really lose money in inflation, life style terms. Is that not a huge risk in itself?

In the flat example quoted above, if I had left the money in any other instruments (than buying the property in 2004), my position to buy a flat in 2009 would have been much weaker than in 2004. (Let me remind you. I didn't have 30 Lakhs, and I didn't invest it anywhere. The flat price is true though ).

Stock markets sure go through wild swings. It is scary to see your portfolio's value go through wild gyrations (specially if you are one to watch your portfolio every day). However, if you are invested for the long term, stock markets (on the right kind of stocks or indexes of course), have historically been proven to produce exponentially higher returns than relatively risk free securities/ Fixed Deposits.

In their white paper about ,The Equity Premium, published by Rajnish Mishra of UC, Santa Barbara and National Bureau of Economic Research , they argue the case for the above fact and produce the following figures, based on RBI Data:

Real Terminal Value of Rs 1 Invested
Investment Period	Stocks (BSE 100)	Bank Deposit	Ratio
1984–2004	Rs 19.25	Rs 1.28	15.04
1991–2004	Rs 4.68	Rs 1.18	3.97

I hope this puts the definition of Risk in its perspective and convinces you to consider the stock market favorably, as a significant part of your Investment Strategy.

In other words, you can't eliminate risks by staying away from the stock market altogether. But you can manage the risks, by applying serious thoughts on asset allocation and diversification. And then once or twice a year, say during your birthday and/or Diwali, you should review your portfolio and re-balance if necessary.

Note that I'm not discounting Fixed Deposits or PPF or NSCs or arguing against them. In fact, you very much need those as well.

The question is in what ratio you allocate and diversify your various assets. The answer depends on a lot of factors including but not limited to your age, risk tolerance, investment objectives (do you want to turn a millionaire by 40 and/or do you want to save for your kids school and/or do you want to plan for your retirement? etc,.), the priorities of these investment objectives, your commitments in life, your values etc., That's something you can get addressed for your specific personal situation, by reading up good Finance Literature and hearing from Professional Financial Planners and/or Experts, that don't have any vested interests in selling you any specific product. They should genuinely care about you and your Financial Welfare (More on that later).

What if I don't have that much money to invest in all these asset classes? you ask. We'll see the detailed answer later, but you have mutual funds, Systematic Investment Plans, Recurring deposits that can get you started with as little as Rs. 500 a month. You need to have the grit, knowledge, discipline and willingness to take a plunge.

I want you to note one thing. You may mistakes in the process of following these strategies. You could even lose some money. Warren Buffet has made mistakes. No one is immune to losing money or making mistakes.

Rest assured, the learning out of these mistakes are invaluable. You should do it in such a way, that you minimize your losses and maximize your gains. You should do it such that in the long run, you are able to meet or beat your objectives. That's the whole objective of Personal Financial Management and that's one of the reasons I started this blog.

Getting started - Baby steps to Manage your Personal Finance in India

2009-06-18T13:28:00.000-07:00

This post outlines the basic steps in getting started on Personal Finance in India. If you have already covered one or more or all or more than what I outline here, Congrats! If not, please read on.

When we talk about Building Wealth, I mean it in perfectly legal ways. Meaning, you keep the Financial Records straight for yourself and the Government. You pay the taxes that you have to, while taking full advantage of all legally available breaks.

My definition of Wealth includes Health. One without the other is usually pointless. I am sure you don't want to spend sleepless nights, spoiling your health, hoarding money from the Government, and/or anticipating Income tax raids.

Here are simple things you should get started on, specially if you believe in doing things Online:

If you are the traditional kind and/or prefer to call up your broker, or get your maid to pay your bills, you can conveniently skip the parts relating to the Online/software stuff.

1. Get your PAN (Permanent Account Number). This is required for you to file your income taxes. PAN is nearly equivalent to SSN in the US. Now a days, it is not only desirable, but mandatory for even the most basic things in India (like opening a bank account).

Please visit http://www.incometaxindia.gov.in/PAN/Overview.asp for more details

2. Open 2 Savings Bank (SB A/C) accounts each with 2 (types of) banks. (1) A Nationalized bank like State Bank of India, Indian Bank, Bank of India or whatever (2) A private bank like HDFC or ICICI or foreign bank like HSBC. Make sure to get ATM Cards, check books and above all, access to Online Banking.

2a) Confirm if atleast 1 of the above banks supports Recurring Deposits (RD A/Cs), and understand how to open 1, on the fly, ideally Online or in Person (later). If they don't support RDs, then consider another bank. Recurring Deposits are important vehicles for Building Wealth. More on this topic later in a separate blog.

(For the uninitiated, Recurring Deposits are those that support depositing a fixed amount of money every month. The interest is compounded periodically, and you get a bulk amount that equals the principal + interest at the end of the term)

2b) Confirm if the bank supports opening Fixed Deposits (FD A/Cs) online, from your savings account. HDFC Bank supports this feature.

2c) Please make sure that atleast 1 bank supports Free Bill Pay Service.

2d) Understand all the Terms & Conditions and Fees. Make sure that there are no unreasonable fees for ATM use, check book privileges or draconian overdraft policies. Ensure that the interest rates are reasonable and in line with the general market. Ensure that this is a bank that respects you and treats you well in every aspect.

(For those from US, savings bank accounts in India, are the equivalent of checking accounts in the US. You can write checks against these accounts. The interest rates of savings accounts, are lower than other types of accounts, but are still way higher than the US)

The reason I recommend opening with 2 banks, is mainly to avoid risks. Not with your money itself, but your ability to access it everyday.

Although Govt/Nationalized banks are getting more efficient and they sometimes offer superior products/interest rates, they are notorious for their tendency to go on strike once in a while (e.g. if the employees or unions get upset with the Government regarding their pay).

With private banks you get efficiency and great Customer Service, but certain products are simply unavailable or not comparable with Nationalized Banks.

You open 2 types of accounts to hedge your bets. I have my account with HDFC Bank and I have enjoyed their service. The only flip side I have observed is that the number of ATMs in smaller cities and villages are low.

Note that your money in most commercial banks is backed up by the Reserve Bank of India (RBI) to the extent of Rs. 1,00,000/- per depositor per bank. For details, visit the RBI Site at http://www.rbi.org.in/Scripts/Cn_FAQs.aspx?Id=64 .

3. Open an investment/demat account with one of the above banks (Preferably private) so that when you buy shares or mutual funds, you can usually see them all in 1 website (portal). Plus the funds transfer between your savings account and the investment account is seamless. E.g. When you buy shares or mutual funds, money goes out of your savings account to your investment account. When you sell, the reverse flow happens. On top of it, your dividends (if any) flow to your savings account automatically without your having to do anything or deposit checks.

3a) Make sure the investment account also supports SIP (Systematic Investment Plan). SIP is a great vehicle to ride over and average out smartly, irrespective of Market Ups and Downs. More on this later.

4. If you don't already have a PC or laptop or a Mac (with all Virus Protection, Firewall, Malware/Spyware protection enabled), please get one. Please install broadband connection at Home, and install a secure browser. Another obvious one is to get a gmail or yahoo or hotmail e-mail id, which I am sure you already have.

I view these as investments (specially PC and broadband), as these will pay off in short order.
(I'm assuming that you don't abuse the PC or Internet for something else or spend most of your time downloading movies).

The Savings you are going to accumulate, in simply avoiding trips to banks and other places through the power of online banking, bill pay and certain other facilities will offset all your investment costs. In fact, handsomely.

For browser, I prefer and use OpenSource/free comparatively secure FireFox latest edition available for free download from their official site http://www.mozilla.com/en-US/firefox/personal.html .

For free virus protection, I use AVG Antivirus (Their basic free edition, not the paid one). As of writing, Microsoft is coming out with their free antivirus software Morro. Beta edition available for limited downloads from June 23rd 2009 at : http://www.microsoft.com/security_essentials

5. An office Program with basic spreadsheet capabilities (tracking expenses, doing calculations, reports, graphs etc.,). If you have MS Office installed, Great. If not, there are several comparable, competitive, sometimes better free/open source options available. I personally use (and love) Open Office available for free download at http://www.openoffice.org .
Another free and good one is Lotus Symphony available at http://symphony.lotus.com/software/lotus/symphony/home.nsf/home

6. Watch videos or demos or review manuals or get trained by the bank personnel on how to do basic operations on the online site. These concepts differ from site to site, bank to bank, and there's no way for me to generalize and teach you.

e.g. At a minimum, learn the following regarding your savings account:
(a) How do I review my a/c balance, review the checks posted, get recent statements or any period statements, transfer money to another a/c within the bank or outside the bank
(b) How do I order a DD (Demand Draft)?
(c) How do I use Bill Pay
(d) How do I open an FD, RD online?
(e) How do I contact the bank online?
(f) How do I change my statement delivery options?
(g) How do I change my personal profile, passwords?
(h) How do I call customer service?
(i) What happens if I forget my id or password?

Regarding your investment accounts, you should know the following
(a) How do I buy, sell shares/mutual funds?
(b) How/when does the money get transferred to my investment accounts?
(c) How do I review the list of shares/mutual funds I own?
(d) How do I review, know the value of my stock, MF portfolio?
(e) What is the brokerage commission on buying/selling shares?
(f) How do I call customer service?

With the above baby steps completed, I think you are in a very good position to Invest in various vehicles.

I'm getting concerned a little bit now. Before you get too excited and jump right in to invest in stocks, I strongly recommend that you read and understand certain important Personal Finance Concepts from good blogs and excellent Personal Finance literature. These will teach you about relatively risk free and smarter, ways of Investing.

As an alternative or In addition, you can wait to watch my own blog here for some sage advice shortly.

Important Note: If you prefer to do online banking, certain important security requirements are in order:

(a) Create Strong Passwords. Store your ids and passwords in a secure place or using encrypted /password protected software.

I use Opensource, Highly Secure and Free "Keepass", but there are several other options available that you can Google or Bing for.

(b) Don't reveal your user ids and passwords even to your close relatives and friends.

(c) Don't fall victim to phishing scams and/or reveal your id/and/or passwords to strangers or even bank reps. Most banks have a clear policy about what they can and can't ask you. Be clear.

(d) Frequently backup your hard drive to an external media, specially with all your online bank statements, passwords, sensitive personal data etc., and secure that also.

CAUTION: Don't take your Personal and Sensitive Data and Privacy Issue lightly . You could lose all your money and assets, just by being careless about your Sensitive Personal Information. Learn and adopt all the security steps and precautions thoroughly before you consider online banking.

Developing Sound Financial Habits - The Foundation of Building Wealth

2009-06-15T11:03:00.000-07:00

I grew up in India. When I was a kid, my uncles used to visit us during summer vacations. During their visits, we used to have a good time. We used to go out to watch movies, eat out in restaurants, visit parks, zoos, temples and such.

My uncle Raghu was a little different. Aside from the fun, he would probe as to what kind of magazines I was reading regularly, whether I was even aware of Ren & Martin and what my vocabulary level was. He would even ask me some pointed questions in English Grammar, and General Knowledge. If you haven't guessed yet, English is not my first language.

He would emphasize and encourage that I regularly read magazines like "The Hindu" (English News Daily) , Reader's Digest and Frontline, to develop myself . I didn't cherish the idea. Not just because they were not interesting to read (at that young age), but they had certain words that required me to keep the dictionary by the side for ready reference. It effectively doubled the time required to learn and appreciate the content.

I used to feel uncomfortable and sometimes even intimidated, secretly hoping that he would return to his place sooner than later.

His constant prodding however had a surprisingly great side effect in me. Just before his visits, I used to pick up the magazines in question and come up to speed, lest he should find me dumb. It sure meant that I had to drop watching a few episodes of "Ramayan" or "Mahabharat" or to cut back on certain other magazines and activities, that were not totally "productive".

Although I didn't initially cherish the idea, I started learning certain new words, better grammar and pronunciation. I was able to spontaneously put them to better use in conversations at school. I got good grades in English. I got recognized and appreciated for the same. I even got my "Letters to the Editor" published. Seeing my name in print and that too in a National Daily gave me a kicker.

There was a certain momentum that started building. In due course, I started picking up and finish reading good books and magazines out of my own interest, rather than for uncle Raghu. I found reading good books to be a passion. My world view started changing dramatically. My perspective broadened and deepened.

I could clearly visualize and validate the benefits of learning English and Reading. I developed a habit out of reading. I haven't looked back. Today, I find it so hard to not read a good magazine or book in a given day atleast for 30 mins a day. I thank him, to this date for his prodding at that age.

You get the underlying message and the method. Good Habits are hard to learn and take time. Good Financial Habits take even more time. But with practice, they can be made to stick. Humans resist change, naturally and automatically. You have to overcome them. I found the following steps useful in developing good habits:

(a) Identify a good habit that you want to badly adopt and develop. Set it as your goal. Visualize the advantages of the Good habit. Be completely sold on it.
(b) Determine the time commitment needed for this good habit (Is it 15 mins or 30 mins daily or weekly?)
(c) Deeply analyze as to what bad habits can be kicked out to accommodate a good habit, or to make way for the time required. (Can you stop watching that favorite Soap of yours (free up 1/2 an hour a day), Can you curtail your daily pointless chit chat with that friend? (free up 15 mins a day)? Can you delegate that weekly shopping trip to your spouse? What are other things that you can cut back on?)
(d) Adopt the habit for at least 30 days continuously. Make efforts.
(e) Have a check point review on the 31st day. How did it go? Have you started to see some benefits or do you want more time to adapt this habit?

If you have seen benefits, by now you have already incorporated the habit in your life. Congrats!

If you haven't seen any and would like more time, continue with adopting the habit for some more time. Have another checkpoint. If after a few iterations, you don't develop this habit or don't have a passion for it, then it is OK to move on.

Here are some Good Financial Habits that form a solid foundation for Wealth. I compare these to good workouts for the physical body. Just as you can't build muscles without physical exercise, you can't build lasting wealth without building some good financial habits.

(1) Track your expenses and review them regularly. It can be on an excel sheet, or a fancy software, or plain old pencil and paper. But you should clearly know where your money goes every single month. Review your bank and credit card statements. That's the first step in finding out where you stand on Finances and spending. Even if you don't do a single thing about it, just make it a habit to watch it regularly. It'll cause magical changes in your spending patterns (for the better).

(2) Make it a habit save at least 25-40% of your net income every month (higher if you can). This may sound way higher than what the western authors recommend (which is typically in the 10-20% range). I will have a separate post on why you have to and how you can save higher in India. Automatically withdraw money from your savings account to a Fixed Deposit or Recurring Deposit or Systematic Investment Plan, every month. In India we commonly call this as "Standing Instructions" to the bank.

(3) Periodically assess your Net Worth and review against your Financial Plan. Every month just list your assets and liabilities and see how they stack up. Subtract Liabilities from Assets. That's your wealth.

Build a Financial Plan spanning short (1 year), medium (1-5 years) and long terms (> 5 years), that outlines where you want to be in terms of Net Worth, assets and liabilities. Don't feel intimated, just make up a simple list of assets and liabilities.

Compare your Net Worth against your Financial Plan, and see if you are on track. If not, make course corrections.

(4) Follow at least 1 or 2 good financial news magazines for 15-30 minutes a day. I tend to follow The Economic Times . But there are several other good ones. The Hindu Business Line, Financial Express to name a few. Choose the Online or Print Edition. Choose what suits your style. You may not get the meaning of all the news items and articles instantly. I personally found many articles to be Greek and Latin when I started. Over the course of time, I was able to get 99% of the information clearly, specially after I started investing. If you have to kick out reading some other magazines, please do. (Disclaimer: I don't work for, or own any stocks of any of the news magazines I recommend)

(5) Regularly follow good blogs on the subject. I personally like JD's blog (Get Rich Slowly) , Trent's (The Simple Dollar) , Ramit Sethi's ( I will teach you to be Rich). There are scores of other good blogs too. Visit them regularly. They are very enlightening and practical. If you use an RSS reader, please subscribe to their RSS Feeds without fail.

(6) Practice donating a small % of your income for charity or some good cause. This may be hard for some of us, but this is a must have habit for the truly wealthy. We'll have a separate blog on this topic later. If you can't start with a 5% goal, can you start with a 2% giveback to a charity or a good cause that aligns with your values?

As we know, poverty is widespread in India. There are people who are much worse off than those who can read this blog. It's easy to point fingers at Government or someone's respective destiny or Karma, but I think we all need to do our bit. It will simply feed your soul. It can only be experienced. I have made it a habit over the past few years, and my favorite cause is orphanages for children and old age homes. You can select your own cause.

(7) Read at least one Personal Finance or Self Improvement book in a month. I started my self-improvement journey with Dale Carnegie's "How to Win Friends and Influence People", and "How to stop worrying and start living". My personal finance favorites in no particular order are:, Robert Kiyosaki's "Rich Dad Poor Dad", David Bach's "The Automatic Millionaire" and David Ramsey's "The total Money Makeover".There are scores of others which we'll refer to later, but this is a good starting point. Create your own wish list of books to read, and go to the nearest library. If you have to pay to become a member, I would consider that a good investment (so long as you intend to develop a habit)

(8) Make it a habit to ruthlessly Simplify every aspect of your life: Contrary to popular perception the wealthy are very simple not just in their appearance and dressing, but in their mind. Review every aspect of your life critically and see what you can cut back on, to free up time, money and energy for what you truly want.

For e.g. Do you have too many bank accounts, and/or credit cards, and finding it hard to manage them? If so, can you cut them back to 1 or 2? Do you have too many cars and not using them, but paying for fuel, maintenance and insurance? Can you cut back to 1 ? Do you have too many books or clothes or CDs or DVDs that you have bought that you don't need or use any more? Can you donate a few to some who really need it?

(9) If you have kids, make it a habit to teach them the value of money and investment at as early an age, as you can. Lead by being an example yourself. Children don't do what you tell them to. They do what you do.

One of the best things you can do to your kids, is to educate them and make them financially responsible at an early age itself. We'll look at specific tools and techniques later in this blog.

(10) Make it a Habit to stay in the Present Moment and have fun. The goal of Personal Financial Management is to continuously improve your financial behavior, to let you reap the fruits of True Financial Freedom. It doesn't mean that you have to rob yourself of all fun things in life. It's not always about being miserly or delaying or denying gratification to a point where you lose the charm of life.

The goal is to have fun in a balanced manner. In such a way that your fun today doesn't become an obstacle to your freedom tomorrow. As you make progress, stop and thank yourself for making the progress and give yourself and your loved ones some rewards. Just ensure that you don't overspend or over do it!

What are good financial habits that you think are important to your building wealth? What would you add or delete from this list? What do you think?

Can I be Financially Independent?

2009-06-15T10:53:00.000-07:00

I was born and raised in a small town in India. My family was essentially lower middle class. My father was in Government Service and my mother was a stay at home mom.

State of Personal Finance in India in the 80s and 90s:

When I grew up in the 80s and early 90s, the concept of Finance was non-existent in many parts of India. India was not the same. We didn't have the technology or Internet or mobile. A land line telephone required a wait of 2 years, and was considered a luxury. To call long distance, we had to book what is called "Trunk calls". It was expensive.

Mom and dad utilized Dad's pay, spent for essentials (and sometimes non-essentials). They were as frugal as possible in avoiding wasteful spending. Whatever was left was saved in a bank account by default. Fortunately We didn't have any debts.

Sometimes we bought jewels for sisters. We didn't buy any stocks or real estate, or invest in anything. We didn't worry as much about retirement planning or investments because most employed were in government service, which was pensionable anyway.

The primary financial goals of families (to my knowledge) were to get the daughters married, and sons decently educated. A luxurious addition was a roof over one's head. The Opportunities for an average salaried person in a town in India was low. The awareness was even lower.

People who were above average, had the courage to invest in UTI (Unit Trust of India) for their mutual funds. Those living in big cities had share brokers, who helped them buy shares. Real time stock quotes were not for everyone.

Personal Finance in India in the 21st Century:

Flash forward 20 years: India as a country has made giant strides despite all its challenges, thanks to globalization, Internet, Technological and Other Innovations. Foreign investment started pouring in to India thanks to the liberalization policies of the governments starting in 1991 . Proliferation of TV Channels, Internet Media, Foreign banks, Broadband and Even mobile Internet are available even in remote villages, at affordable prices. Valuations have skyrocketed to ridiculous levels (specially cities). Cell phones have made ubiquitous communication not only possible, but very cheap also. As an example, Our servant maid , auto driver and news paper boy can all be contacted easily only by mobile phone.

The magnitude of changes that India went through over the past 20 years is perhaps higher than any other country in the world in the corresponding period.

I find that a few enterprising people (especially in cities) have taken some commendable initiatives to grow their wealth.

A majority haven't even thought about it, although they have equal facilities and access to technologies and communication.

Most salaried people still seem to be busy fighting daily issues, oblivious to financial risks of poor or non-planning. Many are working hard yet not getting anywhere financially. Most of the jobs are non-pensionable, yet people don't seem to take notice or plan for their life after retirement. Credit card debts are climbing, yet people seem to use it more regularly than cooking oil.

Those that are only saving but not investing, are silently falling prey to Killer Inflation.

The basic financial objectives of many, have not kept pace with time. They seem to be the same as 20 years ago. Get my kids educated, and get my daughters married. Not that these objectives by themselves are bad, they are just plain inadequate to address the complexities posed by today's challenges (financial and societal).

Many other questions that beg an answer are still open. Will I be even able to pay for my kids' higher education? What about my post retirement life? What after my kids get educated? What if they turn too busy to care for us?

Are the gold ornaments possibly the best gift for my daughter? What if something catastrophic happens to me or anyone in family? Can the remaining lead a decent life ?

I don't mean to point fingers at anyone here. Just that this is a reality that I find. Personal Finance Education is not taken up in schools and colleges with a level of seriousness it deserves.

OK. Back to my personal story.

When I completed my education and got a job in IT , and my income was considered higher than average. However, years later in to my job, I realized that although I had some savings, I had not invested.

I was not even keeping up with inflation. This struck me quite hard when I searched and could not even afford to buy a decent apartment in Bangalore, despite foreign trips. I had made some poor decisions in the stock market. I lost a good chunk of money.

I realized that I had not been very different from my parents and ancestors when it came to Personal Finance, although my earnings and exposure to technology were significantly higher than them. As I thought deeply about this topic, it hit me hard, that I am not even eligible for a pension. I was not positioned well for the financial future.

I was foolish to not even give retirement a thought leave alone other difficult questions I posed earlier in the post.

My ancestors didn't have much opportunities to invest in those times, and hence they didn't invest. The general awareness was low. It was conceivable that they were that way.

In today's world, we have so many opportunities and access to technologies and information. Yet I didn't take advantage of them. I blew those opportunities with missteps, due to lack of fundamental Personal Finance Education. What I did, was worse than them.

I wanted to turn the situation around, and I knew I could. I took expert guidance and mentoring in Personal Finance from savvy friends and well-wishers. I got exposed to some excellent Personal Finance literature, Concepts and applied sound fundamental principles to reduce debts, save money and investing it meticulously. I developed good Financial Habits. I persevered and to this date I do.

Ever since this realization, I have come a long way in the past few years. I have learnt some hard financial lessons that I wanted to share with you and in the process learn from you.

I am not a millionaire or even anywhere in that league, but I am happy with my progress. I am in reasonable control of my Financial Destiny. I am closer to Financial Independence than I used to be years ago (when I didn't even have it as a goal).

I am sure some of my hard learnt lessons, must be very encouraging for you, and save you ample time, money and frustration. You shouldn't have to make the same mistakes that I made. That's my intent of starting this blog.

I learnt that Growing Financially Independent

Is not necessarily linked to having a High Personal Income. While higher income helps, Personal Discipline is a more important Factor.
Requires radical thought process AND behavioral changes. If you continue to do what you have always done, you will get what you have always got. You have to show willingness to make these changes, but you can do it.
Requires deep passion, commitment, ability to set and realize goals and perseverance. You have to badly want to be Financially Independent. If not, your results could be mixed (at best) to dismal (at worst).
Takes time in learning and applying sound principles consistently. Reading good literature consistently is a very important prerequisite, but it is fun.
Requires action. You can't sit idle and hope to be wealthy by magic.
Requires you to take calculated risks, and the realization that you can't be 100% right all the time. The best learning is when you mistakes. You can cut your losses in those situations by using time tested principles.
Requires you to discover your own personal goals and chart your destiny. You can't adopt some one Else's path, and assume that you'll get similar results in similar time lines. Every one's situation is different. It's like a tooth brush. You can't borrow some one Else's.
Requires flexibility on your part to make course corrections as required. You can't adopt a one size fits all approach, invest and forget.
Doesn't mandate the use of high-technology. But you have a significant advantage if you are tech savvy in some basic technologies, and use of software. Prosperity can be more easily built with at PC and a broadband connection at home.

Although fundamental principles of investing are the same across the globe, implementation of principles in the Indian Market has some specific nuances that you need to be aware of.

You have to tailor the advice of Western Financial Experts, to suit the Indian needs.

I also learnt the following:

If an investment scheme to make you rich sounds too good to be true, it perhaps is.
It's impossible to get sustainably rich overnight unless you are a victim or perpetrator of a Ponzi Scheme.
Credit cards require a certain Financial Maturity. If you are not sure you have it, you are better off without credit cards.
Day Trading, and speculation are not for everyone. It won't make you rich specially if you have a job or business as a main stay.
Shortcuts can make you temporarily rich but potentially and very likely broke.
Not planning your Finance is a very bad idea. It could devastate you and/or your loved ones.
Although saving is good and a lot better than spending, it is not good enough. You need to learn to invest in the right instruments. Inflation is the worst enemy of savings.

In summary, I think to answer the headline of this post, it IS VERY possible for you or anyone with even an average income to build wealth with time by learning, planning and applying sound Financial Principles. You can Be Financially Independent. In fact you can turn wealthy.

It can't happen overnight. You can have a good answer for some of my disturbing questions . Personal Finance is a discipline much like Engineering or Medicine that takes time. However it is not complex. If you can do basic math and show willingess and ability to apply the principles, you can master it.

Those are some of my lessons. That's what I plan to share with you, as my experiences through this blog. They may not be all 100% correct, but they will get your thought process started in the right direction.

What are Personal Finance Topics that are of interest to you? What would you like me to write about? Please let me know your comments.

Gigantic Disclaimer: I am NOT professional when it comes to Personal Finance. I am not a certified Financial Planner. I don't work for any financial institution or any brokerage. I don't have any vested interests in promoting a particular share or institution.

The intent behind this blog is to share what I personally learnt over the years, and continue to learn from myself and others. I think there is a good potential that others can benefit out of it.

I'll try and keep the focus more on the general concepts than on individual stocks or mutual funds or other investments. I want to demystify and make certain complex Personal Finance topics easier and actionable,so that you can get started on your own way to Financial Independence. My goal is to share some concepts that I have learnt and applied.

My goal is not to turn in to a Personal Financial Adviser to you, or to tip you off on that hot stock that's taking off today or a mutual fund that's going to go bust.

Take my advice, and experiences at your own personal risk if you like it ! If you apply these and you are not successful, just discard it. If you are successful, please come back and post your comments!!