Category Archive : Basic Concepts

Characteristics of Investing

Investing has the following characteristics:-

1] Buy & Hold –

While money may be tight, young adults have a time advantage. Investing requires only two things: the reinvestment of earnings and time. The longer money is put to work, the more wealth it can generate in the future. Gradually build wealth over an extended period of time through buying and holding a portfolio of stocks and also mutual funds.

For example, if an investor had bought shares of HDFC Bank Limited stocks at its closing price of Rs. 213.49 per share on 11th July 2008, and held onto the stock until 6th July 2018, then the stock was worth Rs. 2,114.05 per share. The share price has been increased by almost 11 times.

2] Compounding –

Magic of Compounding Explained returns are extremely powerful over the long run, and the earlier you get started the greater your chance is to take advantage of this. Regular investments in an investment portfolio or a retirement account can lead to huge compounding benefits. Investors enhance their profits through compounding.

3] Long Term –

Investments start giving results after a period of time. Holding the investments for the long term is important. Some are in a hurry and sell their investments before it starts giving actual results. Investments made with long term perspective are always beneficial. Investments are held for years or even decades.

4] Focus –

While investing, minor fluctuations are ignored. These fluctuations have no real impact on the investments in the long run. Focusing on long term goals that are set and are to be achieved is important. Short term fluctuations do not deviate investors from their long term goals.

While investing, there are some factors that can be controlled and some that cannot be controlled. An investor should always focus on things that can be controlled. The markets cannot be predicted as there many factors affecting it simultaneously. And therefore, focusing on factors that can be controlled is crucial. While investing an investor should focus on three basic things that can be controlled, which are – what we buy, how much of it buy and at what price we buy.

 5] Fundamentals –

Investors don’t give much importance to information which is qualitative and not quantitative. Investing focuses on past as well as future (forecasts), but more importance should be given to future. Investors are more concerned about fundamentals such as PE ratio and management forecasts.

But this is wrong. Fundamental data is given in a standard format, so analysis made by anyone from this data would be the same. Results from standardized data are of use as they don’t reveal anything new or interesting. This means that for successful investing an investor needs to look for data or information which most people don’t see. People think that fundamentals provide a sense of security, which is exact opposite, i.e fundamentals are dangerous.

The image below shows data on where and how much do people in India invest their money.

Financial assets of the household
benefits or featurs of investing

5 Money Mistakes to Avoid in your 40’s

Ways of handling and approach towards finances changes with age. In 40’s, following money mistakes should be avoided:-

1] Buying more number of Homes than You can Afford –

When your income finally feels stable and strong for the first time in your life, it’s tempting to upgrade your lifestyle. Many people choose to do that in the form of new houses, often signing up for a big fat loan along the way. This is a big mistake.

Avoid expensive homes until you’re at a financially secure point where you don’t have other debts you’re facing and can easily handle the extra expense even if you were to lose your job, is advisable. Many people don’t realize the true cost of homeownership and find themselves in financial trouble after they’ve taken that step.

It’s tempting to opt for more square footage, a larger garden, and a developed neighborhood. But this means a bigger home loan, increased maintenance costs, and high property taxes. Houses aren’t great investments, so you should be realistic about your budget and avoid tying up all your savings in your home.

Here are few reasons why Real Estate is not a great investment option –

  • Difficult to sell when the need arise
  • Very low rental yield (3-4% max)
  • Low liquidity
  • A litigious asset class
  • Difficult to track the value
  • Difficult to manage

2] Overspending on Your Kids –

Parents tend to overspend on expensive cribs, bottles, clothes, and nursery accessories. You want to raise your child in a comfortable environment, but there are bound to be unexpected costs to arise.

Its hard to say no to everything your kids’ desires and you really do want to provide those things — not just because you love your kids, but because their friends’ parents are your friends and neighbors, and there’s pressure for you to fit in. Sometimes peer pressure and keeping up to social standards are the main reasons for overspending on kids.

For example, deciding a certain budget for your child’s birthday gift but buying gift almost double the budget just because your child asked for it and you could not say no or could not explain the reason for not buying the gift. This could lead to become a habit, not just in terms of gifts but in general spending patterns, which will have sever effects on your finances in the long term.

This is a good time to reassess your money values and teach your kids about creating their own value system. That way, the whole family is spending money and time on what really matters to each of you.

3] Not Saving for Your Retirement –

After decades of working hard, you’ll be ready to retire. If you’re in your 40s, then you should probably start saving for retirement.

This is actually a great idea because the earlier you start saving for retirement, the more money you’ll earn on your deposits due to compound interest on your savings. Another great option is to invest your saved money in instruments that suits you and gives you desired interests.

If a 40 year old is planning to retire at 60 and is expecting Rs. 50k/month (today’s cost) expenses every month after retirement – then he/she will need approx. Rs. 5.5 Crore corpus at the age of retirement!

4] Not having a big Emergency Fund –

Emergencies can strike any time. With an emergency fund in place you will be financially better prepared to face such situations. Although, there is no thumb rule, a sum equivalent to 6-12 months of expenses should be kept in the emergency fund. The fact is that emergencies really do happen, even if you don’t own much and you’re healthy.

As your family and commitments grow, so does your need to plan for unexpected emergencies. You have increased responsibilities and your emergency fund should reflect that. Adjust the size of the fund corpus and plan to have about six month’s worth of living expenses, including loan payments, put away in a safe place that you won’t be tempted to take back from.

5] Not Writing a Will or Doing Estate Planning –

People have to lunge through their parents’ estates while grieving their loss. It’s essential to create a plan for supporting your family, if you pass away or are injured and can no longer work.

Doing the work now will spare your spouse and children a lot of pain. Work with an estate attorney to create a will, and consider the best ways to leave money to your heirs or charitable organizations. It’s important for both spouses to be active participants in their family’s financial planning.

Some reasons why writing a will and estate planning is important –

  • Avoiding Conflicts & Fights
  • Protecting the Beneficiaries
  • Reducing Estate Taxes
  • Protecting Assets from unexpected Creditors

Your 40’s can be a wonderful time of life when your family grows, alongside your income, travel, household items and future possibilities. By making sure you avoid these common money mistakes, you’ll quickly take charge of your finances and still have plenty of time to achieve your financial goals.

5 money mistakes to avoid in your 40s

5 Money Mistakes to Avoid in your 30’s

Handling your money in a proper way, right from the start is very crucial. Some money mistakes that should definitely be avoided by the people in their 30’s are as follows:-

1] Not Saving as Aggressively as you can –

Methods like save at least 20% of your income, or contribute enough to your PF’s to get an employer match, is just a starting point. You should aim to save more aggressively as your income increases.

You should contribute maximum into your PF’s (up to maximum limit allowed). Taking advantage of pre-tax retirement accounts is essential in your 30s and beyond, as it allows you to lower your taxable income and hold onto more of your money.

2] Not Protecting yourself with Disability & Life Insurance –

If you have a family and dependents, you need to think beyond your savings and get life and disability insurance to give protection if something happens to you. One should put in time to research insurance plans, or talk to a trusted adviser.

One type of insurance that gets neglected more so than others is long-term disability insurance and not having it can be extremely risky. Disability insurance is meant to provide income in case you get disabled and are unable to work, which is more likely to happen than many of us may think. Disability insurance will help keep you financially afloat if you’re sick or injured and can’t work for a time. Life insurance will provide much-needed money to your spouse or dependents in case of eventuality. You may get disability and life insurance through your employer, but if not, you can purchase individual policies.

3] Having Kids Without Preparing for Expense –

If you are planning for kids in the next few years, begin preparing financially today.

The cost of child care can come as a shock. And as your kids grow, they’ll be involved in after-school activities, go on field trips. You might need to buy a bigger home or a home in a better school area (which often results in higher loans or costs).

The decision to have a kid, or have more kids, is as much an emotional choice as it is a financial one. But kids completely change your financial picture and priorities in ways you can never predict before you have them. You should always be prepared.

4] Not Discussing Finances with Your Spouse –

Too many couples avoid talking about money until they absolutely have to. It’s not a fun or easy conversation to have, but discussing your financial plan, personal finances and spending patterns with your spouse is important. Couples often have this conversation too late in the relationship (or not at all). The conversation must happen, and the earlier the better.

Sharing information and control of your finances with each other builds a lot of trust and helps uncover any trouble spots. Finding a way to deal with spending or budgeting issues together may be a bit uncomfortable at first, but it’s essential to a harmonious and honest relationship. It’s important for your partner to be aware of your savings, income, debts, and investments, and how you plan to pay for these things while contributing to your shared household and goals.

5] Not being Thoughtful about Your Career –

30’s isn’t the time to get complacent in your career. Keep learning new skills, keep looking for growth opportunities, and if your current job offers neither of those things, find a new job yesterday. Switching jobs is a great opportunity to negotiate a significantly higher salary for significantly more responsibilities.

As you weigh job offers, look at the benefits companies offer as well. Benefits like health insurance, disability insurance, life insurance, and PF matches make up a large part of your overall compensation. Consider work-life balance and travelling distance, too.

5 money mistakes to avoid in your 30s

6 Money Tips for Young Earners

Young earners should take on the following tips in order to take better control of money and their finances:-

1] Make a Budget & Start Saving –

Budgeting is a simple task of comparing the income with the expenses, and this must be your initial step. Make a note of your monthly expenses. The objective is to find out how much you spend under different heads. Tracking of budget is important not only to identify mandatory and optional spends, but also ensure that you don’t overspend.

Once you’ve identified the outgoing amount, put away 20-30% of your salary every month before you start spending. If you don’t know where to put it, start with your bank account. This will help inculcate a lifelong saving habit and make sure that you money starts to work for you immediately.

2] Define your Financial Goals –

Now, you’ve started saving, but will it be enough to reach your goals. People have a tendency to save aggressively and then invest with extreme drive, but they do so blindly, harming their financial goals. It is a mistake which is common to most investors, regardless of the age group. Make sure to define your financial goals and make way for achieving them.

Don’t just make a mental note of the things you want to finance, but write these down in detail. Split your goals into three categories: short-, medium- and long-term goals. Then list each one clearly, along with the number of years to achieve each, and the exact amount you will need. Once you have written down your goals, you will be able to determine how much and for how long you will need to invest.

3] Take a Term Insurance Plan –

There are several types of insurances in the market. Term Insurance Plans are such insurance products. Term insurance policies offer guarantee returns to the policyholder at the time of maturity. So, assess your needs before you choose the right insurance policy.

4] Maximise your Tax Savings through Salary Re-structuring –

Tax savings is not the main concern for most of the new earners as their salaries may not be too high, nor their knowledge with respect to taxability of various instruments. It is advisable not be obsessive with investing for the purpose of saving tax.

You can save tax by negotiating with your employer for a tax friendly salary structure. The basic, probably the chunk of your salary, includes basic pay, HRA and often dearness allowance (DA) and special allowance. Apart from HRA, every component is fully taxable. An easy way to reduce tax liability is to cut basic pay and adjust it as perks or long-term benefits. If you have a special allowance component, adjust it as a tax-free component.

5] Build an Emergency Fund –

The new earners typically forget the preparation for financial emergencies. Be it the sudden loss of job, medical emergency or sudden financial support required by a family member, you will need to be ready for contingencies. So the first thing to do, even before you start saving for smaller, short-term goals, is to build an emergency corpus. The best and the easiest way of achieving this is by automatically divert some portion of the earnings into a bank savings account.

Emergency fund should be equal to 3-6 months of your household expenses, and should also include any loan repayments and insurance premium obligations. This amount should be invested in such an instrument that it is easily accessible and is not subject to market fluctuations.

6] Avoid taking Personal Loan –

Given the ease of securing a personal loan with pre-approved amounts, it is easy to give in to the urge. Know that personal loan is one of the most expensive forms of loan after credit cards and charges very high interest. Avoid these at all cost.

6 money tips for young earners

5 Most Important Things to Complete in New Financial Year

Here are 5 things that you should do from a personal finance perspective in the New Financial Year:-

1] Income Tax Returns Filling before Due Date –

The start of the New Financial Year is also the time to file your tax returns for the previous year.

From this year onwards, rules for not filing on time (by 31st July 2017) have changed and there are penalties. Delay in filing a tax return for AY 2017-18 will attract a penalty of Rs 5,000 if filed by Dec 31, 2018, and Rs 10,000 if filed later. Such fee will be restricted to Rs 1,000 for small taxpayers with income up to Rs 5 lakh. For AY 2017-18, one can go online to file ITR if eligible for the new one-page simplified ITR-1 for salaried class and people having income from one house and interest totaling up to Rs 50 lakh.

2] Complete your Section 80C and other Tax Saving Investments –

Don’t postpone your tax saving investments till the last few days of the financial year as you might not be unable to claim the tax benefit for the year despite making the investment. This could happen because of various reasons. In such a case, your investment may go through later on a retry but will only happen after March 31. Consequently, you would not be able to claim the tax benefit in the current financial year.

To claim tax benefit of an eligible tax-saving investment in any given year, the date of the investment needs to be within that particular financial year, i.e., from April 1 to March 31.

3] Match your TDS entries in Form 26AS –

While the tax deducted by your employer will reflect in the Form 16, check out your Form 26AS online to make sure that all other taxes (advance tax, TDS on investments and other direct taxes) have been rightfully credited to your PAN. If there is a discrepancy, notify the deductor immediately and get it corrected before the tax filing season starts.

4] Do Annual Review of your Portfolio –

If you haven’t reviewed your portfolio for a while, there is a good chance that relative market performance of asset classes in last one year has changed your investment mix, causing your combination of mutual funds, stocks, bonds and cash to drift away from your plan. Procrastinating reviewing of your portfolio can add risk, which might cause portfolio to experience larger losses than you are comfortable with in the event of a down market.

Look for underperformers and switch them with good performers after considering their long-term performance. Review consistency and performance of the investments every 24-36 months to take corrective actions.

5] Top up your SIP –

Top up your SIP at the start of the financial year, itself. One might forget to make SIP payments later on. Sometimes an investor wouldn’t have enough money left with to make SIP payments as the investor moves forward through the financial year. One can even think to increase the SIP amount, which always is advantageous.

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