Rupee Money Cash

Learning personal finance made easy

2011-07-12T18:00:00.002+05:30

It is not quite common to find tools which simplify the process of learning personal finance. A blog by Carl Richards has simplified personal finance to the extent that it can be explained on a napkin is very interesting.

Visit Behavior Gap to view the various sketches to understan the various concepts of personal finace quite easily.

Learning from the financial mistakes of others

2011-07-11T15:58:00.000+05:30

The smart man learns from his mistakes. The wise man learns from the mistakes of others. Read on for a close look at the mistakes of five individuals. These are things we might have done in the past, however we can learn from these mistakes and recover our personal finances.

The article published in the Economic Times about How small investors can rectify their financial mistakes

How much do you need to retire early

2011-06-29T00:20:00.000+05:30

Most of us would love to retire early, but are worried about the savings we would need to build up to be able to realize our dream of retiring early. There is a simple thumb rule which provides us with insights on how much savings we need to invest in low risk instruments to be able to fund our retirements.

Calculate your annual expenses. Multiply this by 25. Is it lower than your net worth? If yes, congratulations, you are financially independent and historically speaking you can go for a few decades without a job. Now multiply your expenses by 35. Do you still qualify? If yes, then historically, you could go on forever.- Early Retirement Extreme

The thumb rule is assumes that your savings are interested in low risk instruments yielding 3%-4% annualized returns. however, the rule does not account for inflationary environment where the value of rupee keeps on devaluing with time.

Three things money cannot do for you

2011-05-28T06:00:00.012+05:30

While we all are aware of the power of money, there are certain things which money just cant do. Some interesting insights from an article which says that money can only make us rich. Beyond making us rich money, it can do anything else. It cannot change our attitudes towards ourselves an life in general.

Interesting excerpts from HBR (Harvard Business Review) Blogs

Money truly can't buy happiness, especially if you're unhappy to begin with.

"If you are worrying about vegetables now, you'll be worrying about yachts then. You're a worrier. It's in you, not the money. Life, except for the obvious physical needs, is not so much defined by the external situation as by the inner one. Having money won't change your internal makeup. If you're an anxious sonofabitch without money, you're going to be an anxious sonofabitch with a lot of money."

Being rich does not make you smart — especially about things other than money.

"I met a guy who worked his way up from zero to a half-billion dollars," the philosopher noted. "I asked him, 'What was the most surprising thing you discovered when you got rich?' He said, 'Everybody asks my opinion about things because they think I know something. All I really know is how to make a lot of money.' See, this guy wasn't fooled by his money. That's the key.

Being rich does not automatically lead to a rich life.

"There is a difference between money and success. To be totally engaged with all my functions, all my faculties, all my capacities in life — to me that would be success. I grew up around the Yiddish language, and in Yiddish there are about 1,000 words that mean "fool." There's only one word that means an authentic human being: mensch. My grandmother would say, "You've got to be a mensch," and that has to do with what we used to call character. To be successful means to have developed character... You should be looking for the joy, the struggle, and the challenge of work. What you bring forth from your own guts and heart. The happiness of hard work. No amount of money can buy that. Those are things of the spirit."

How to read the fine print before buying a financial product

2011-05-27T06:00:00.001+05:30

It is not an uncommon situation where we feel cheated by the fine print in many of our purchases. This is quite common in the case of purchase of financial products given the rampant misspelling of such products. There are just two rules which one needs to religiously follow to avoid situations of feeling cheated on buying the financial product. These rules work well for not only financial products but also for all type of products.

The rules are read the documents thoroughly before you sign on the dotted line. The techniques to reading the documents better are

Read backwards: Start reading from the end of the document. This is where a lot of things are hidden.
Read the notes: Anything which has a an asterisk needs to be given additional attention.

These rules have been take from the pointers given in the Intelligent Investor - Benjamin Graham on how to read accounting statements better

Read backwards. When you research a company’s financial reports, start reading on the last page and slowly work your way toward the front. Anything that the company doesn’t want you to find is buried in the back—which is precisely why you should look there first.
Read the notes. Never buy a stock without reading the footnotes to the financial statements in the annual report. In the other footnotes, watch for disclosures about debt, stock options, loans to customers, reserves against losses, and other “risk factors” that can take a big chomp out of earnings. Among the things that should make your antennae twitch are technical terms like “capitalized,” “deferred,” and “restructuring”—and plain-English words signaling that the company has altered its accounting practices, like “began,” “change,” and “however.” None of those words mean you should not buy the stock, but all mean that you need to investigate further.

These techniques are common sense techniques which are helpful when buying any kind of product

Expectations and reality

2011-05-22T06:00:00.000+05:30

We all start a new investment plan with great hope an enthusiasm which later on fizzles out as things don't turn out as expected. There should be no surprise when we get to know that reality does not meet up to expectations. It is the way of life. The learning should be to avoid unrealistic expectations.

Never the twain shall meet

"Oh, East is East, and West is West, and never the twain shall meet." - Rudyard Kipling

Similarly when it comes to our financial lives expectations and reality, never the twain shall meet.

Just a high income may not be sufficient

2011-05-21T06:00:00.001+05:30

Many a time I used to wonder, why people with fat salaries end up having money problems. Over time I understood that a big salary is not the answer to all the problems in this world. What we do with our fat salaries is more important. How we mange our salries is what decides financial outcomes in our lives.

The ability to save in proportion to our salary is what saves us from financial troubles.

Its best to avoid the scary situation of a high income, but a low or no bank balance.

Seven cardinal sins of budgeting

2011-05-20T06:00:00.000+05:30

We are all to familiar with the situation where budgeting just does not work for us. While we may refer to unique personal circumstances which lead to the budgets not working for us, the reasons are actually quite simple. These are the cardinal sins of over and under budgeting which lead to budgets not working for us.

To avoid situations where our budgets don't work for us we must avoid these cardinal sins of budgeting

Spendings = Under-estimate
One-off expenses = Not planned for
Emergency expenses = Not planned for
Unpaid bills = Under-estimate
Income = Overestimate
Savings = Overestimate
Income from assets = Overestimate

These cardinal sins are equally relevant for an individual as they are for a nation.

Three ways to buy things

2011-05-19T06:00:00.002+05:30

We all love to buy things. Not many activities give us more pleasure than the buying things. However there are good and not so good ways to buy thing.

The best way to buy something is when our assets fund our purchases, for e.g. the interest earned from our fixed deposit is used to buy something.

The desirable way to buy something is when we save for many months to buy something we had been wanting for long. This is oldest way to buy things, employed by our previous generation when there were no credit cards.

The avoidable way to buy something is when we don't have the money it. We take on loans use the credit to fund our purchase. We buy in an instant by swiping our card but spend months repaying the loan. This is the most popular way to buy things these days

For the good health of our personal finances the avoidable way to buying things is something we need to stay away from.

The insurers who are stealing your money

2011-05-18T06:00:00.022+05:30

Someone who I know was looking to buy a life insurance on policybazaar and could not help but wonder about the low premiums at which Aegon Religaire was selling its life insurance policies when compared to LIC etc.

I too could not figure out the mystery behind the low premiums unless I read an interesting article on how insurance companies like Aegon Religare, Future Generali, DLF Pramerica and India First are selling cheap policies with low premiums but then get even with the insured by rejecting their insurance claims.

Insures to avoid:- Aegon Religare, Future Generali, DLF Pramerica and India First

Insurers to consider:- LIC, Star Union Dai-ichi, Kotak ING Vysya, HDFC Life

Read the interesting article in full by The Economic Times

What you should not focus on while working towards your financial goals

2011-05-17T06:00:00.000+05:30

Money is a subject which is generates intense emotions of envy and greed which leads to comparisons. It leads to comparing the lifestyles, purchases of our friends, family and colleagues. While it is good to learn from others by observing them, however it may not be such a good idea when it comes to our financial life. For a successful financial life it is best to set goals for ourselves and measure success against achievements against those goals, rather than focusing on what our friends, family or colleagues may be doing. Paying attention to what others are doing will leads us on a downward slippery slope of failures against our financial goals.

It does not matter if your friend bought a new cell phone, or some in your family bought a house or if your college went to a exotic vacation abroad. It is bets to set financial goals for yourself and measure achievements against those goals.

Focusing on others will be injurious to your financial health

The message is simple, we need to focus on what our end goals are. We should observe others to see what they do and not what what they have. We can learn from what they do to incorporate the good things in our financial lives. We could also observe and learn the blunders of others which need to be avoided in our personal finances.

Valuation Tracking Tool for Nifty Stocks

2011-05-16T06:00:00.010+05:30

It is very easy for a professional trader with their sophisticated trading tools to track the valuations of various stocks in their portfolio. However, tracking of valuations of various stocks is not a simple exercise for the retail investor. To help the retail investor a simple tool using Google Docs has been created to track the valuations of each of the fifty stocks in the Nifty.

The valuation tracker for all the Nifty stocks is available at the this link. If this link does not work you can copy and past the following link in the address bar in your browser.

https://spreadsheets.google.com/ccc?key=0Apr6wDMoV1fVdFpGYmV5SzczZmstN3lGZW80cDN1MWc&hl=en

The valuation tracker contains information under the following columns

Company Name = Name of the company which is to be tracked.
Google Finance Symbol = The symbol by which the company is tracked in Google Finance.
Price = market price of the stock.
PE = the Price-to-Earnings ratio for this stock
EPS = the earnings-per-share for this stock.
high52 = the 52-week high for this stock.
low52 = the 52-week low for this stock.

The valuation tracker can be modified to track you individual stocks be it from the Indian stock market or any other stock market of the world. I have modified this tracker to contain stocks in my portfolio along with the stocks I am tracking. I track the valuations using visual filters, for e.g. in this valuation tracker, stocks with an EPS of more than 25 are colored in red while stocks with EPS less 12 are marked in green

You can build a tool for filtering stocks based on your specific filtering criteria by referring to the information provided by Google Docs on how to use the Google Finance functionality in a spreadsheet. Additionally you can view this video to understand how to use Google Docs to carry out stock market research

If you need any help on this tool, please feel free to reach out to me and I would be glad to help you out on this.

Petrol saving tips for each day of the week

2011-05-15T06:00:00.005+05:30

Petrol prices are up again by Rs 5, the ninth hike in nine months. What can we do other then crib about it? Yes we can surely do something about it! There are many ways to manage our petrol costs so that it does not send your monthly budget for a toss. I am sharing seven simple tips to reduce our petrol costs. If we follow at least one tip every day, we will end up saving up on petrol every day of the week.

Use public transport at least once a week.

In the big cities the public transport system is decent and efficient and it would be good to switch more of our car trips to public transport. The Volvo a/c buses in Delhi, Mumbai and Bangalore etc are good and should be used more often. The middle of the week could be a good time to switch to public transport when you are not hit by the Monday morning blues.

Carpool on Friday's for work and use the weekend to carpool with neighbors

We can work out ways to share our trips to office with colleagues in our neighborhood. We can combine weekly grocery shopping trips with your neighbors. Not only will we save on petrol, we will also reduce wear and tear on your car. The additional benefit is that we will get time to connect with colleagues and neighbors. Fridays can be a good day to carpool to work. Weekends can be a go time to carpool with your neighbors sharing your car trips for grocery shopping. The shared car trips will make the traffic less irritating.

Plan trips to include at least three tasks per trip

We can plan our office trips, grocery shopping trips better. We can club our trips together so that we can reduce the total number of car trips per week. We should shop for grocery once a week. Food staples like rice, sugar, tea etc should be purchased once a month. If possible we should club trips to meet friends with the grocery shopping. We should plan our trip so that we can complete at least three tasks in a trip.

Check your tyre pressure at least once a week

Improper tyre pressure will reduce the mileage of our car. We could get our tyre pressure checked every time in the week we fill up petrol. If we are lazy, then getting our tyre pressure checked at least once in fifteen days is a must.

Improve your driving habits

It is good to drive slowly and maintain a constant speed. It is difficult to do in the start and stop in the city traffic. However, maintaining a constant driving speed avoiding frequent use of the clutch , accelerator and brake will definitely improve our car mileage.

Dump the excess baggage

We should not treat our car as a moving cupboard or a dumping ground with stuff lying in the car. We may be carrying old newspaper, magazines, bags from various shopping trips, papers from our office etc in the car. All these items increase the weight or the load the car engine is hauling in every trip. The increase in the weight the car engine is hauling reduces the mileage of your car. Keeping the car free from unnecessary clutter will definitely improve the mileage of our car. Those who are interested in the research behind this theory can read the research .

One day of the week, avoid stepping out of the house

For those of us working five day weeks, Sunday could be a good day not to step out of the house. If we finish all your chores and fun trips outside the house for the week by Saturday, we could then stay in or invite friends or family over on Sundays. Not only will we save on petrol and other associated costs with stepping out of the house, but more importantly we will get to spend quality time with our family and friends. The petrol costs will go down but the quality of the relationship with our family will surely go up.

I am sure we all can find many more ways to save on petrol costs. It is better to spend time figuring out ways to save on our petrol costs rather than just only complaining about it.

The virtuous cycle in our personal finance

2011-05-14T06:00:00.000+05:30

Conceptually, all of personal finance can be encapsulated in to three very simple concepts namely earnings, savings and investments. If these three elements work in harmony, they kick-start a virtuous cycle of never ending savings in our personal finances.

The virtuous cycle in our financial life can be initiated by generating savings from our earnings and investing them with great care over the long term. The earnings from the investments add to the savings which can then be reinvested to generate greater returns and thus starting a never ending virtuous cycle where returns from investments are re-invested which keep on building greater savings.

Creating a virtuous cycle in our personal finances

One cant help but notice the smiley type of shape in the lower half of the chart. I guess, a virtuous cycle in our personal finances apart from the earnings should also generate lots of smileys.

Six reasons why the ability to take a loss is a virtue

2011-05-12T06:00:00.000+05:30

Whether we like it or not, quite often we end up making mistakes while buying stocks. We cannot take a loss and start hoping that we will get lucky and one day when the market will help us break even and we will recover our money. The ability to quickly close out your loss making positions when you realize that you have made a mistake is the only way you can hope to be successful in the stock market over the long term.

Why is the ability to accept and take losses quickly when a mistake is made so important?

The mistake could become worse while you keep hoping that things will become better
You will protect yourself from the urge to average your costs
Accepting your mistake gives you the learning's which will help avoid future mistakes
You would have done better research then ext time you go out to buy
You can stop spending time hoping for a miracle, instead you can focus your energies on the next opportunity
Though not a good reason, you could still net the losses against your gains and optimize taxes

The ability to accept mistakes and cut losses is the only way to increase your chances for success over the long term.

How much of our total income should be passive income?

2011-05-11T06:00:00.009+05:30

The importance of building assets along with the importance of passive income in our income profiles for us to be wealthy is evident. However, this leaves us with the question about the amount of contribution of passive income to our total level for it be considered a healthy situation. The answer to this question lies in our age and nothing else.

The book, The Millionaire Next Door: The Surprising Secrets of America's Wealthy has set a thumb rule that for an average accumulator of wealth, the net-worth of that individual should be one-tenth of the product of the individuals age and total pre-tax income.

The formula for calculating the net-worth of an average accumulator of wealth is logically extended by assuming that the individual earns a return of 10% per annum on the net-worth. On the basis of the rate of return, the passive income for the can be easily calculated. Once we have the passive income we can easily arrive at the contribution of passive income to the total income as per the calculations given below.

Contribution of passive income to total income

For a person with healthy personal finances, the percentage contribution of passive income to total income should equal to the individuals age.

If one changes the rate of return one can earn on the net-worth, the contribution of passive income to total income could become less than your age. However, irrespective of returns earned on net-worth, in a healthy personal finance scenario the contribution of passive income to total income is proportional to your age.

Income profile of a wealthy person

2011-05-10T06:00:00.003+05:30

Since we know that assets and not our income will decide whether we will be wealthy it would be interesting to discover the impact of asset ownership on our wealth. Assets generate passive income which alter our overall income profile. The overall income of any person consists of two components active income and passive income. The interplay between active and passive income as person becomes wealthier provides an alternate view on the same fact that assets and not our income will decide whether we will be wealthy.

Contribution of passive income to the total income stream

As a person becomes wealthier, assets increase and so does the passive income from the assets working for us in generating cash flows. Over a period of time the importance of passive income keeps on increasing in the overall income stream.

So the formula to being wealthy is a simple concept, i.e build assets to generate passive income streams. Though as simple concept it is not as simple a concept to execute on.

Frugality beyond a point does not help

2011-05-09T06:00:00.002+05:30

A significant portion of literature on personal finance is devoted to the benefits of frugality. Being frugal is good, something we should all aspire to be. However, while aspiring to be frugal one must keep in mind that frugality in itself will not solve all our personal finance woes. Frugality only works in specific scenarios. Hence, one must review our financial condition carefully and be open to considering approaches other than frugality.

Strategies to manage different income and savings scenarios

At times we could go into denial about the fact that our current financial situation may be an outcome of poor professional choices which is leading to poor income and hence a difficult financial situation. In such scenarios frugality can only ameliorate a bad situation. The only way out is to look internally and review the poor professional choices we have made which lead to a poor income.

How to avoid unhealthy attitudes towards money

2011-05-08T06:00:00.006+05:30

Our attitudes towards money determine the quality of our personal finances. Be it a casual attitude towards money or be it with an obsessiveness towards money extreme attitudes are not very healthy. We need to identify the unhealthy attitudes towards money which could afflict us in our life and avoid them at all costs. There is a simple approach which looks at our current financial position and assesses our attitude towards money. This approach provides us with a mental map of commonly occuring unhealthy attitudes towards money which are to be avoided.

Unhealthy attitudes towards money

We should avoid situations where we feel money is the end all and be all in terms of measuring success and start either worshiping moneyed people or money itself. At the same time we should avoid living in denial where we start deluding ourselves that financial success is also not a measure of success.

While being financially successfully is an aim we should all aspire towards, however it is not the measure of success. Other than just money, there can be many more dimensions to success. As long as we maintain a healthy between the financial and non-financial aspects of life, there is nirvana to be achieved.

The anatomy of personal finance

2011-05-07T06:00:00.016+05:30

While we have all heard and read about personal finance but am not sure if we can clearly articulate what exactly is personal finance. At least till some time ago, I was unable to clearly articulate what exactly is personal finance. Trying to exactly define personal finance though a seemingly simple exercise is quite a confusing one. I was able to distill my confused thoughts into a simple pictorial which clearly identified the various elements of personal finance and the interplay between them.

Personal finance can be explained by a simple equation. The left hand side of the equation represents the inflow of cash via

Salary (for salaried folks) or income from active business (entrepreneur) net of taxes
Passive income for e.g. interest earned from fixed deposits net of taxes
Cash inflow from any loan

The right hand side of the equation represents the usage of cash

Expenses e.g. day to day expenditure; living expenses etc
Interest payout for balancing the cash inflow from the loan
Savings which represent the leftover from the inflow of cash and the usage of cash

Anatomy of personal finance

The interplay between the two sides of the equation takes place in two ways

Conversion of savings into assets generates cash which leads to creation of passive income e.g. money deposited in bank
Balancing of inflows from lons via interest payments e.g. cash from a home loan used to purchase a house creates EMI payment

Managing ones personal finance is all about balancing the left and right hand sides of the equations. To optimize the balancing process one should take the following actions:

Maximize = Salary; Passive Income; Loans for fund asset creation (e.g. home loans); Savings; Asset
Minimize = Taxes; Expenses; Loans to fund expenses (e.g. interest on credit cards); Interest

The most important lever of our personal finances

2011-05-06T06:00:00.000+05:30

While most discussions on personal finance are focussed on spending, saving and investing; not adequate attention is given to the topic of earnings. Your cannot save more than what you earn and you cannot invest more than what you save. So the most important lever to improve your personal finances is to focus on your earning.

When it comes to our earnings, I am not sure if it would be easy for us to find many who would be happy with our earnings. For the majority of us the key questions to ask ourselves is the simple questions:

Do people know what we are really worth?
Are we really worth what we believe ourselves to be?

At times the answers to these two simple questions can be uncomfortable. However if we can address these two questions most effectively, we will be maximizing the impact of the most important lever which will improve our personal finances.

While we keep talking about spending, saving and investing but one must not forget the impact of our earnings on our personal finances.

The first rule of personal finance

2011-05-05T06:00:00.000+05:30

After reading about the urgent important approach to financial planning quite a few people who had spent very little time and effort on their personal finances told me that while the approach looked good, it was a bit advanced for them. They wanted to know the basics, the ABC's of personal finance. It got me thinking about the first rule of personal finance. It is ridiculously simple, but I have never articulated this before. The first rule of is the basis for all the the theory and practice behind all of personal finance.

The first rule of personal finance

If one doesn't spend less than what is earned then in your personal lives their cannot be any other discussion on our finances. For all discussions around personal finance to be meaningful, the underlying assumption is that one has saved i.e. spent less than what has been earned.

Mastery over the first rule will build a very solid foundation for our personal finances.

The intelligent way to spend your pay hikes

2011-05-04T06:00:00.000+05:30

The economic environment in India is looking good working professionals are looking forward to generous pay hikes in 2011. The Annual Salary Increase Survey by Aon Hewitt forecasts a 12.9% salary increase for India Inc. in 2011. While the salary increase in India looks good, one must not forget that inflation is key contributor to the salary increases. What it means that a significant portion of the pay hike is going to go away in managing rising prices. However, some of us will still have a surplus to either spend or save. So what does on one do? Upgrade our lifestyle life, buy a new cellphone, laptop or a car! While these are fun ways to spend the surplus from the pay hikes, there are other intelligent ways to do it.

The most intelligent approach to spend the surplus from your pay hike is not to upgrade you lifestyle. The inteligent approach to spend the money from your pay hike is to follow the following priorities

Pay/ reduce high interest debt
Pay/ reduce high value debt
Save for the short term
Invest for the long term
If you still have something left over, then have fun, upgrade your lifestyle if you can

How to spend the surplus you have from pay hikes

Following this priority should lead to following actions in the reducing order of priority

Do not upgrade your current life style
Pay/ reduce high interest debt

Pay/ reduce credit card debt, if any
Pay/ reduce personal loans from banks, if any
Pay/ reduce auto loans, if any

Pay/ reduce high value debt

Pay/ reduce education loans, if any
Pay/ reduce home loans, if any

Save for the short term

Pay off money borrowed from family, friends etc
Build an emergency fund equivalent to at least 6 months of your current income and park it in liquid assets like cash, liquid mutual funds
Buy health insurance

Invest for the long term

Invest to take full benefit of various tax saving instruments
Invest for retirement
Buy life insurance
Start building a corpus of funds which could enhance your safety net or form the down payment money for a high value purchase like home, higher education, children's marriage, car etc

Have fun

There are infinite ways to have fun. If you want to maximize the fun you derive from spending money the read the post, Eight rules to get more happiness from the money you spend.

This approach goes against our normal behavior of first celebrating a pay hike and then doing anything else with the extra money. This approach puts celebrating at the end. Its a matter or individual priorities.

Is this a good time to start investing

2011-05-03T06:00:00.003+05:30

When is a good time to start investing. Is today a good time to start investing or should we wait for better times. In my book of investing there are only two times one should invest and these times come either now or when there is blood on the floor.

Irrespective of market tops and market bottoms, now is the time to invest because now is when time is on your side and you can fully leverage the incredible strength of compounding. Investing now should be done with with discipline and care.

The best of times to start buying

The next best time to invest is at times of great panic when there is fear all around. This is the time when both rubbish and value is available cheap. The smart investor is able to buy in the panic focusing on the value and avoiding the rubbish.

What we do know, however, is that occasional outbreaks of those two super-contagious diseases, fear and greed, will forever occur in the investment community. The timing of these epidemics will be unpredictable. And the market aberrations produced by them will be equally unpredictable, both as to duration and degree. Therefore, we never try to anticipate the arrival or departure of either disease. Our goal is more modest: we simply attempt to be fearful when others are greedy and to be greedy only when others are fearful. - Warren Buffett

Nothing could get better if now is a time of panic and one is buying value and avoiding rubbish. This would be a sure shot way to great successes.

The most popular posts for Apr-11

2011-05-02T06:00:00.007+05:30

Some of the blog posts for the month have been enjoyed more than the others by the readers of the Rupee Money Cash Blog. Read on the most popular posts of the Rupee Money Cash Blog for Apr-11:-

If you have enjoyed reading the Rupee Money Cash blog keep coming back for more ....