Time to Focus on Short Term -

How to manage our money over next three years

The greatest impact of Covid-19 is the tremendous uncertainty about the future. 
Today we are talking about our habits and beliefs before Covid-19 & after Covid-19 and trying to address the area of focus for next 3 years.

1. Before the corona virus breakout - we were habitual of investing for Long term say 10 years and more. Also, in each ups & downs we just keep on adding money for future goals.

Current time has come to focus on and reorganise your income, loans, investments and savings.

2. Earlier we were lazy to invest and review annually. We thought that frequent tracking of portfolio isn’t a good idea.

But looking towards future uncertainties, we need to change our portfolio according to the changes in the economy.

Current economy’s structure is changing in many ways and we need to focus on doing tactical asset allocation of our own by deciding below three things:

a.    Which asset class is suitable for me?

b.    How much allocation in each asset class?

c.    What are the right entry & exit points?

3. Before the corona virus breakout, we had a fixed lifestyle. Fixed amount of Loans, Investments and spending on social events, birthdays, weddings, vacations, outings, etc.

Now we have to try and save every penny we can. We need to focus on understanding our own financial position and review it quarterly.

4. Earlier we believed that 3 to 6 months’ expenses are enough to be kept liquid. 

After Covid-19, we have realised that one has to create survival fund (size depends upon earning and spending style of each family) for future uncertainties.

We need to focus on converting illiquid assets to liquid funds for future opportunities and let it act as a cushion against future risks.

 

 Time to Focus on Short Term -

How to manage our money over next three years

The greatest impact of Covid-19 is the tremendous uncertainty about the future.
Today we are talking about our habits and beliefs before Covid-19 & after Covid-19 and trying to address the area of focus for next 3 years.

1. Before the corona virus breakout - we were habitual of investing for Long term say 10 years and more. Also, in each ups & downs we just keep on adding money for future goals.

Current time has come to focus on and reorganise your income, loans, investments and savings.

2. Earlier we were lazy to invest and review annually. We thought that frequent tracking of portfolio isn’t a good idea.

But looking towards future uncertainties, we need to change our portfolio according to the changes in the economy.

Current economy’s structure is changing in many ways and we need to focus on doing tactical asset allocation of our own by deciding below three things:

a.    Which asset class is suitable for me?

b.    How much allocation in each asset class?

c.    What are the right entry & exit points?

3. Before the corona virus breakout, we had a fixed lifestyle. Fixed amount of Loans, Investments and spending on social events, birthdays, weddings, vacations, outings, etc.

Now we have to try and save every penny we can. We need to focus on understanding our own financial position and review it quarterly.

4. Earlier we believed that 3 to 6 months’ expenses are enough to be kept liquid.

After Covid-19, we have realised that one has to create survival fund (size depends upon earning and spending style of each family) for future uncertainties.

We need to focus on converting illiquid assets to liquid funds for future opportunities and let it act as a cushion against future risks.

Let`s play a Game of Investing.

We all are investing in something .

It may be in relationships, It may be in Marriage or a career.

It means different things to different people.

And Life is all about doing something to reap benefits in the future.

Teaching Children about money is most important

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In real Life child is exposed to money ever since s/he is born.

S/he observes their parents taking out wallet and making payment for vendor, milkman, newspaper boy....and then after money being given to purchase small candy, toy, comics etc.

Few things which we can do with our children -

1)   Concept of nurturing wealth -

We can made s/he sow seeds in a pot. And inspire them to water the plant regularly. Over a time nurtured seed converted into plant.  And slowly we can increase the plants.

2)   Inflow out flow concept -

We can give s/he a chocolate bank like piggy bank. Inspire  them to collect chocolate into that and eat it twice a week.....can fixed a day .(Wednesday & Sunday) .Deposit of chocolate increase the number & eating chocolate reduces the number that helps them to learn inflow outflow concept.

3)   Concept of Bank & setting goals -

Give children two piggy banks -

First piggy Bank - Purchase piggy bank whose shape is like Bus. Whenever elders of the family give them money on various occasion, parents should inspire them to put money into Bus piggy & can tell them the story of Bus going to Bank.

Second piggy Bank - This you can purchase shape of transparent bottle. Beside transparent bottle put a picture of Toy which kids want to purchase from that saving.

One piggy bank teaches them long term saving and second piggy bank teaches achieving short term goals.

4)   Delay gratification - On every month on their birthday date make habit of purchase the gift of their choice. But it is with condition of no buying throughout the month. And in case S/he wants larger gift then S/he has to miss gifts for 1 to 2 months.

5)   Budget learning - Kids learn from parents. If they observe you to write down your expenses they also demand small diary to write down their expenses. If you as a parent aren`t willing to do family budget your child won`t develop the habit.

In reality there are four aspects of Money ......Income, Expenses, Asset (Investments), Liabilities (Borrowings) Our children are already expose to spending power ......slowly give them the power  of other 3 aspects of money.

Asset allocation- 

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Health and Wealth ...... well balancing keeps us Healthy & Wealthy

Our daily food habits keep us healthy. If we take care of our regular diet proportions of  

Carbohydrates, fat, Dessert, Protein, Vitamins, Minerals .......and if review our diet plan we remain fit always.

 Like that to remain financially healthy we should take care for proportions of

 Fixed Income, Real estate, Gold, Alternative investments, equity, Insurance & Loans.

v  Fibre (Green vegetables, Sweet corns, Carrots, Broccoli, Fruits) / Fixed income (FD, Post MIS,EPF,PPF, Debt MF, NSC, Bonds & Debentures)

Fibre in the diet keeps the stomach in good shape as fibre rich diet won`t make us fat.

Fixed income is like Fibre in the portfolio.

Low risk debt investments give us stability but never bit the Inflation.

Too much allocation to Debt won`t create sufficient wealth.

v  Protein (Milk, Yogurt, Oats, Almonds, Eggs, Dates, Beans)   / Equity (Diversified Mf  Equity Funds -Large cap, Mid caps, Multi cap, Value funds, Small  caps)

Protein builds muscle & helps the body grow.

We need it most when we are young & the body is developing.

As we grow older, we can reduce, but not completely eliminate, our intake of protein.

Equity act like protein in our portfolio, building wealth & adding its growth.

Focus on them when we are young & watch our portfolio grow.

Whether we invest directly or through   Mutual funds can give the higher returns.

v  Carbohydrates (Whole grains, Bananas, beetroots, Apples)  - Real estate ( Home, Land, Commercial) Carbohydrates are instrumental in the digestion of fatty foods.

Real estate gives stability to our portfolio and accounts for the big investment in terms of value. However, if we have too much of real estate, all other investments get force to leave from the portfolio. This can suddenly change direction of the portfolio and generate disappointing returns. 

v  Fat (Cheese, Dark Chocolate, Peanut Butter) - Gold (Physical, Gold ETF & sovereign Gold Bond) everybody needs to consume fat. It provides energy and gets stored as reserve in the body.

Yet, too much fat in our diet can make us unenergetic and lead to several health problems. 
The yellow metal is the fat in our portfolio. It also acts as a cushion to fall back on during an emergency.

But too much gold will drag down our portfolio returns. so allocation shouldn`t be more than 10%.

v  Vitamins- Insurance (Life and Health insurance)Just as we need vitamins in our diet to safeguard our health and improve immunity, we need insurance to protect our finances against unforeseen circumstances.

Don't depend on the insurance that comes along with an investment. Take a dose of pure insurance, much like the vitamin supplements that doctors prescribe. 

v  Minerals – Loans

Loans are like the small minerals in our financial diet.

They help in building assets but excessive intake can lead to complications. They are good for your portfolio if taken in moderate amounts. 

v  Review 
Even the healthiest of diets will not have the desired result if the individual does not exercise. Our portfolio should also not be fixed.

Ensure that we move it around regularly. Rebalance it once a year. Review your Assets & Investments.

v  Allocation 
As we grow older, our diet undergoes a change. Similarly, our asset allocation alters as we add on years. Make sure we follow a disciplined asset allocation and  we will never make a wrong investment.

Net worth

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Net worth is the amount by which assets exceed liabilities. (Assets – Liabilities)

Another way to say this is, it's the value of everything we own, minus all our debts. 

Net worth is a concept that can be applied to both individuals and businesses, as a measure of how much they are really worth.

A consistent increase in net worth indicates good financial health; conversely, net worth may be depleted by a substantial decrease in asset values relative to liabilities.

While calculating our net worth following are the assets to be considered

v  Liquid Assets – May be cash or money in savings account

v  Debt Assets – PPF /EPF, Bonds/Debentures, Debt mutual funds, Insurance policies

v  Equity – Shares, Equity oriented mutual funds, Unit Linked Insurance Policies

v  Real Estate – Land / Plot (Commercial), Second Home etc

v  Gold- Physical (in the form of coins/ bars), Sovereign gold bonds/ Gold ETF’s

v  Personal Assets- Home, Jewellery, Vehicles

Liabilities to be considered are –

v  Home Loans – Loans for our dream home / may be renovation of our home

v  Vehicle Loans – Loan for two wheelers/ Four wheelers etc

v  Personal Loans – Taken from banks, money lenders, or family members/ friends

v  Gold Loan – Through banks or non banking institutions

v  Loans Against Securities – Loan against shares, mutual funds, PPF, real estate.

Hence, net worth calculations include each and every aspect of our assets and liabilities

Net worth is the mirror of our financial health. It shows our real worth.

Check the Financial Ratio's

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There are few financial principles / ratios for tracking good financial health.

1.   Emergency Fund    = Liquid Assets

                                      Monthly expenses

·      This is the provision for unexpected expenses like job loss, medical treatment, marriage or any other requirements in family

·      A lower Ratio means you run a risk of not having adequate money & too high ratio means not making money to work hard for you

·      It is in the form of Cash + Saving Account Bal + Liquidity and Flexi Deposits

·      People with more stable income may need a lower ratio than those who are having irregular income.

·      Idle Ratio should be around 3 to 6 months of our total expenses  

2.   Savings Ratio = Amount invested per month

                                     Take home part 

·      We need to have Healthy saving ratio to protect our Future

·      As our life span are increasing, job spans are reducing so we have to built a large retirement corpuses

·      But too much saving at the cost of not enjoying the life is also bad idea.

·      This Ratio differs from person to person but it should be minimum 20% to 30% of our take home pay

3.   Debt /Loan coverage Ratio = Total loan EMIs per month

                                                   Per month take home pay

·      Easy availability and lower interest rates induces us to take a personal / home / vehicle loans, credit card outstanding balance etc.

·      In case of uncertainly in life due to job loss, accident etc it would be advisable that as your age increases you should try to make your ratio zero .No loan into your retirement

·      It should not be above 30% to 40% of our take home pay

4.   Net worth = Assets (Minus) – Liabilities

     This is the most important indicator among all ratios which shows progress of financial health

 5.  Life insurance coverage Ratio = (Net worth + Today s life cover)

                                                             Annual take home pay

Ø  This ratio takes care of the life cover needs for the earning member & will   determine how many years the family will sustain if something happens to earning members.

6.  Expenses to income Ratio = Total monthly expenses

                                                 Monthly take home pay

Ø  Total monthly expenses /Monthly take home pay (House hold + Lifestyle)

Ø  It should not be more than 30% to 35% of our take home pay.

7.  Net worth growth Ratio = Net increase in net worth

                                             Net worth at the beginning of the year

·      Which indicates Net worth growing rate and our net worth should increase minimum above inflation

“Every financial worry you want to banish & every financial dream you want to achieve comes from taking tiny step today that put you on the path towards your goal.” – Suze Orman

Make sure our investment beat inflation

Inflation is the rate at which the general level of prices for goods and services is rising and, hence, the purchasing power of rupee is falling.

Are we considering inflation while investing our hard earned money?

Let's see the chart of living cost of middle class family.

In Year 1920 cost of living was Rs 1/-

In Year 1940 cost of living was Rs 10/-

In Year 1960 cost of living was Rs.100/-

In Year 1980 cost of living was Rs 1,000/-

In Year 2000 cost of living was Rs 10,000/-

And In Year 2020 it will be Rs. 1,00,000/-

So when we make investments, we’ve to be cautious that as our investments grow, the silent monster of inflation also catches up.

Hence, our overall portfolio should earn at least an amount over & above the inflation, or say a positive real return.

How to achieve that?

·      By including some amount of equity in our portfolio as per our comfort level.

·      While fixed income investments like FD and debt funds give stability, equity MF in the portfolio will bring the much needed growth so that our portfolio beats inflation in the long term.

Don’t plan the future on today's value, always consider the factor of Inflation and Tax.

We can reduce the stress of impact of inflation on our returns by balancing our portfolio smartly.

“Inflation takes from the ignorant and gives to the well informed” – Venita Vancaspel                                                                   

Power of Compounding in Investments

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In very simple terms, the process of earning, “income on income” is termed as Compounding.
The beauty of compounding lies in the fact that: 

a.  It is a very powerful force to multiply money.

b.  It is a very simple idea to understand. 
c.  It is a very easy tool to implement. 

Let us understand compounding effect with the help of following example:

An investment of ₹1000/- pm for 30 years generating returns of 6%, 10% and 15% amount to ₹10 lakhs, ₹22 lakhs and ₹70 lakhs respectively. The difference can be seen in the graph below. 

From the graph above we understand that in the short term the difference in growth may not be more, but in long duration, there is a drastic difference in growth due to the magic of compounding, which is the reward for patience and consistency.

“Compound interest is the eighth wonder of world.He who understands it earns it, he who doesn’t pays it.” -Elbert Einstein