Category: Blog

Sanjay and Akshay began their corporate careers together. They both dreamed of owning a luxury car.
Their salary had increased significantly in 2017.

Sanjay was considering an Audi A4. Sanjay decided that now would be a good time to purchase the Audi because he could comfortably afford the EMI. The car would cost him 41.5 lakhs. 
He applied for a car loan for 80% of the car’s value for 5 years with a 20% (~8.3 lakhs) down payment. Each year, he spent almost 8.2 lakhs on EMIs.

Akshay had different ideas. He did not want to go for a luxury car right away. He purchased a high variant of Maruti Swift Dzire for 8.3 lakhs approx. He invested the 8.2 lakhs each year, that Sanjay paid in EMIs, into the Nifty index over a five-year period.

Sanjay finished repaying his loans at the end of 2021.

At the same time, Akshay was hoping to purchase the identical Audi A4. Today, he would have to pay 46 lakhs for the same car.
However, considering the post-tax returns from the nifty over the previous five years, his assets had increased to roughly 58 lakhs.
Without taking out any loans, he was able to finance his dream car and had an extra 12 lakhs or so.

In these five years, Sanjay’s car value decreased by 50%. In a few years, he should start looking for a new vehicle.

He is currently unable to escape this lifestyle trap and is once more considering taking out EMIs to buy a new luxury car. This cycle goes on.

Planning and Patience pay off in the long term.

#luxury #Merc #Benz #Patience #planning

When it comes to investing, there are several things that are not in our control as investors. The economic conditions, events triggering changes in the market, how the market reacts to such conditions and hence the returns in the near term, and so on.

But there are still some things that we (the investors) can influence.

1.           The amount we can put into investments

2.           The time period of our investments

In the Compound Interest formulae, out of three factors namely, invested amount, interest (returns), and the number of years invested, we focus more on the returns, while the other two also influence the overall growth of the investment fund.

Here is an illustration where Amit and Ajay begin investing Rs.1 lakh each year (about Rs.8000 per month) into a well-researched product. As soon as he received his raise, Ajay made a conscious decision to raise his investments by 10% annually.  Both of them continued to invest for 20 years without redeeming at any time during the period.

Here are some observations from the 20 years of their investment journey.

At the end of the 20 years period, Ajay had made more than 100% of what Amit made!

Amounts highlighted in ‘Blue’ are where additional 5 lakhs were achieved. During his fourth year, Amit earned his first “5 Lakhs.” His subsequent “5 Lakhs” was made in under three years. He started making “5 Lakhs” every year after 13 years of consistent investments. This is the magic of compounding!

Ajay achieved the same even sooner than Amit.

After all, we are making an investment toward our goal, and achieving that goal is our first priority. Hence, it is prudent to take advantage of the factors we have under our control rather than solely relying on external factors to build investments.

#Consistency #Compounding #Investment #planning

Have you defined the goals for your investments and savings?
Have you got a clear idea of what you want to achieve with the money you are investing?

We have all traveled. From where do we start the travel?
‘Where are you going?’ Until you can answer that question, you can’t say that any one route is better than another.
Any road will get you to where you want to go.

Similarly, when you define your purpose for the money like Retirement, Children’s education, a world tour, a beautiful home, etc., you can look at where to invest to achieve the above.

Not having a direction, not having a goal, not knowing where you are going, it’s all the same. You go nowhere.

Without direction, without a destination, without a goal, how do you pick a direction, choose a road, or choose an investment avenue to get “there”?

Where are you going? or, for what are you investing the money? Answering the question is important.

If the answer to the question is anywhere, you’re probably already there. #goals #investment

Rome was not built in a day but the brick was laid every hour.

This popular quote by JohnHaywoord is applicable to various aspects of life, especially finance. Regular savings and thereby, investments are important to build wealth.

Meticulous, planned, and regular investment into known, understandable financial products fetch better results than identifying and understanding new financial products and investing randomly.

After all, wealth is not built in a day or rather a year but by saving(read as investing) pennies each day.

#saving #investing #rome #colosseum #discipline

Amit desired to renovate his home. He had planned to spend between Rs. 7 and Rs. 8 lakhs on the project. 

He had gotten quotes from a few good architects and settled on one whose price matched his expertise.

While the renovation was going on, Amit was advised to renovate his bathrooms and attic as well. It seemed reasonable. He wouldn’t have time to do this later.

He considered purchasing new furniture after the renovations because the ones he had, looked old in the new house. The house now appeared to be posh and lovely.

Amit had already exceeded his budget by a few lakhs, to Rs.15 lakhs for which he went for a top-up on the home loan. He didn’t give it much thought at the time. But this caused a dip in his overall monthly savings.

What he didn’t realize was that this extra expense had a cascading effect on his finances.

They took a planned international vacation the following year. To achieve his goal, he needed to take out a loan of about 5 lakhs. Again, his EMI payment towards the vacation brought down his monthly savings.

His son graduated a few years later, and they were planning a post-graduation abroad. Because of the drop in monthly savings, there is once again a significant gap between his investments and the planned budget for his son’s higher education. So he had to go for an education loan.

He does not want to burden his son with a large EMI as soon as he finishes his education. As a result, he contributes to the EMI on his education loan.

Again, all of this has an impact on his retirement corpus.

As a result, he is forced to work for a few more years to retire safely. His dream of retiring early and pursuing his passion post-retirement is crushed.

When it comes to goals other than retirement, total spending can be flexible. (i.e) Spending on furnishings could be forgone, vacations could be taken closer to home, education loans could be paid off by the child, or college choices could be more cost-effective. However, retirement expenses CAN NOT be compromised.

Prioritizing one’s financial goals always aids in budgeting for expenses. If one’s goal is to be financially independent after retirement, saving for retirement should be the TOP priority.

Any big spending should be aligned with long-term goals.

Amit has been trying to save for retirement for several years. However, whenever the corpus grows large enough, there is an expense. He had to spend a significant amount last year on house repairs, maintenance, and new furniture. He wishes to enforce discipline in his retirement investments.

He has been investing in PPF and has received some tax breaks under Section 80C. However, interest in PPF has been steadily declining.

He has now researched mutual funds and discovered that equity mutual funds provide higher long-term returns. However, he is not an expert in selecting the best mutual funds. There are simply too many funds on the market.

Anand, his friend, then advised him to invest in NPS. National Pension Scheme (NPS)

The National Pension Scheme (NPS) is a voluntary retirement benefits scheme introduced by the Government of India.

Any investment in a Tier 1 NPS is tax deductible under Section 80C. Amit can claim an additional deduction of up to Rs.50000 under Section 80CCD(1B) because he has exhausted the deductions under Section 80C (Rs.1.5 Lakhs). Amit can also claim an additional tax deduction of up to 10% of his basic pay if his corporate employer contributes to NPS (for the benefit of the employees) under section 80CCD(2).

This suggestion from his friend Anand could solve most of his retirement savings problems.

Because NPS can be done systematically through monthly contributions, it will not be a burden on his finances.

He can also invest in equity mutual funds at the same time. Depending on his risk tolerance, he can also allocate his exposure to corporate bonds, government securities, alternative investments, and equities.

The 30% that he saved on taxes on the additional Rs.50,000 (~ Rs.15,000 p.a) and 10% of his basic salary (~Rs.1,00,000 p.a) is again earning him a good return, compounding year on year.

He would not be in a dilemma to utilize this fund for some other financial goal. The NPS fund can only be used for his retirement because the funds are locked in until his retirement (age 60) or voluntary retirement after the age of 55. He can receive up to 60% of the total investment at the age of 60, tax free, with the remainder distributed as pensions.

Amit intends to invest in NPS for his retirement and has finally found a solution to his problems. #pension #retirement #NPS

Anand and Amit joined the company shortly after graduating from college.

Anand’s father had asked him to contribute an extra Rs.8000 per month (~Rs.1 Lakh per annum)to his Provident Fund. He agreed because he was only paying a portion of his salary and getting to spend the rest. Amit had not considered this addition at the time.

Anand took out a loan a few years later and planned to use the Rs.8000 to repay his loan. So, he couldn’t contribute further. By then his corpus in the PF had grown considerably.

This is when Amit realised the power of a meagre Rs.8000 savings. He later began investing an additional Rs.8000 in the provident fund.

They have both invested around 10 lakhs in their twenty years of corporate experience, but their returns are not the same.

The rate of interest ‘r’ and the time in years ‘n’ are two important factors that influence the compounding effect of investment. While we are focused on the returns, we often overlook the importance of time.

The longer the duration of the investment, the greater the return.

The Illustration assumes an 8% interest rate. Person 1 – Anand and Person 2- Amit

#compounding #investment #financialplanning

By making some lifestyle modifications, we want to make our lives more comfortable.
From an Android to an iPhone, an apartment to a villa, a hatchback to an SUV, and from one car per family to two. In our daily lives, we don’t give much thought to these changes.

Over time, every adjustment we make to our lives has an effect on our finances. Understanding the effects of these changes can aid in making decisions about what expenses to add and what to cut, what is affordable and what is not.

Whether we should spend the additional income now or save/invest for the future is a question we should ask ourselves.
An increase in income with relatively minor lifestyle changes will accelerate the process of accumulating wealth.

For one to decide on buying a second home, let alone the first, a self-enquiry will be the first step.

A few of the reasons usually are:-

1. As and when the family grows, one needs to look for a larger home.
2. Choosing to be near work/school.
3. Well-planned and Conscious Upgrade of lifestyle.
4. As the family nest becomes empty, wanting to move closer to relatives/children. Hence need for a change in location.

Unless there are valid reasons supporting the purchase of a second home, it should be viewed at par with other investments like Equity stocks, Mutual Funds, and NPS (Tier I and II).
If one decides to buy a house as an investment, there are a few questions to ask oneself:-

1. Will the rental yield from the investment justify the purchase?
2. Will one be able to take care of the maintenance of the property without much hassle?
3. Who will look after the house, when one moves to another location/country?
4. Will the next generation have an interest in the property?
5. Will one be able to liquidate the investment as and when required?
6. Will any other investment give better returns without the overheads of owning a real estate property?

Before purchasing a home for investment, it is always better to compare it with various other forms of investments and then arrive at an informed decision.

#secondhome #investments #homeloan #realestate

When I talk about ‘Retirement’, people assume it as old age income. So I changed the word to ‘Financial Freedom’. Now, they think, it is about securing a big wealth to rest on a Hammock by the beach side.

By ‘Retirement’ or ‘Financial Freedom’, what do I actually mean?

1. Having the time to do what you deem as priority today. Be it child care or health care.
2. Having the courage to pursue what you want to do.

As someone who loves to meet people and listen to their stories, I hated corporate life that made me sit on a chair for hours.

Financial freedom is just not wealth building activity. Financial freedom will provide an Economic Independence.

It provides the freedom to pursue anything not for money but for the sake of happiness and mental peace.

How can this Financial freedom be achieved?
As the saying goes, ‘Rome was not built In a day’, Financial Freedom requires your thoughts, actions, knowledge all aligned to a pre planned financial goal.

I will be post more on this topic in the following weeks.