Category: Psychology and Wisdom

The Threshold Point – a simple way to achieve your goals

Posted on by Jagoinvestor

There is so much you need to achieve in your financial life and you are stressed! Correct?

I have seen investors getting overwhelmed due to the pressure of financial goals in their financial life. You have one life – in which you have to cram multiple financial goals. A house, a car, a corpus for educating your children, a regular stream of money each year to pay for school fees, vacation funds, occasional large expenditures, funds for your retirement and several other items which are too numerous to even list here!. Out of these – some things you want immediately, and some you label as your long-term goals.

threshold point in financial life

However when you keep thinking about these goals and amount of money you need to accumulate in your financial life, you get worried, stressed and feel lost. You doubt if you will ever be able to achieve it and that demotivates you and then you just ignore handling your financial life and go with the flow! – leaving everything to fate! However that’s not the solution!

what’s the solution?

I can’t give a solution, but I can suggest you something which we practice a lot of times when we deal with our financial planning clients. Let me share with you that simple yet powerful concept which Nandish Desai came up with in our early years of handling clients. Years back – we noticed that a lot of clients financial life was so messy and confusing that it was unplannable! Also they were so overwhelmed that we could not do their planning the usual way. We needed to suggest them some plan of action which was lighter and which looked more achievable to them.

So to those clients, we asked to slow down (listen to this powerful 16 min audio on slowing down recorded by us personally) and ask them to forget about all their future goals. This is because many investors are not able to make a powerful play for their financial goals with empty pockets. To play for your financial goals powerfully you need to first cross or reach your THRESHOLD POINT. Yes! – That’s the concept I am going to unveil today. The concept of threshold point helps an investor to lighten his worries and to be more focused.

Now, what is this threshold point?

The threshold point is the milestone, which when reached in your financial life, gives you a strong sense of achievement. You feel like you have taken that first step and you are a winner in your own eyes. It’s not the final achievement, but a mini-battle that you have won. A threshold point could be generating some lakhs of rupees, having a loan free home, achieving an income level, getting debt free, or combination of these.

All your energy has to be focused on reaching that threshold point. Everything you do in your financial life has to be driven by just one motive in life, and that is reaching that threshold point. If you have to spend money on something, you have to ask first – “Will spending this money help me move towards my threshold point?”

threshold point

You need to get obsessed with your threshold point so much, that naturally you will achieve it much faster than you had planned. And when you reach your threshold point in some years – you then play a much bigger money game. The threshold point gives you a sense of some freedom, some relief and extra dose of energy.

Some Examples of threshold points

Example 1 – Ajay’s Story

My friend Ajay is unmarried and lives in Varanasi. He was anxious about his future prospects because he does not want to get into a regular job, because he is kind of moody person and leaves his job the moment he does not like it. This creates problems in his cash flows. While he wants to do lots of things such as buying a home, buying a 2nd home, saving enough to roam around the world etc., he told me he does not think it’s POSSIBLE to achieve all this. The truth is he was overwhelmed and could not think what he should do next ! .

I asked him to describe his ideal situation – one that would remove all this worry. A situation that would make him feel more at ease and help him plan his financial life ahead in a better fashion. He said that if he were to start receiving a regular income of Rs 10,000-12,000 per month without working – he would feel far more relaxed. That’s it. That was his Threshold point.

Threshold point – Generating Rs 10,000-12,000 per month income

This is something he now needs to focus on. We found out that if he could generate 20 lakhs in a few years, he could put it all in a Fixed Deposit and get an interest income which will act as the regular income. It would take few years, but once he would reach that point, he would be a winner in some sense. He has already saved quite a few lakhs, and is now on his way to reach his threshold point. He now travels by train, rather than by air, because that takes him closer to is threshold point. He does not spend more than what is required on clothing and saves every extra bit and puts it back in his bank account – all of which takes him closer to his threshold point.

Example 2 – Tarun and Reema from Pune

This couple (Names changed) approached us to avail our financial planning service. We looked at their financial data, their financial goals and their exact situation. They were worried about their future goals like retirement, educating their children etc. Their net worth was less than 3 lakhs and their goals were big-ticket goals.

Threshold point – To generate first 15 lakhs

First, we asked them to eliminate their future. Yes, our future is an illusion that human beings live in. A lot of investors are either worried about their future or they regret their past mistakes, but they are never fully in the present year. I told them, as an investor you can’t step into 2014 or 2012 – you are in 2013 and that is a reality. We then asked them to define their threshold point, an amount that would fill their pockets so that they would have the power to face big future goals. The amount they came up with was 15 lakhs.

We simply asked them to forget everything and focus completely on their threshold point number, which was 15 lakhs. We then helped them to re-structure their cash flow and helped them to devise ways by which they would reach their threshold point soon. Now in this situation they didn’t had multiple goals which scared them, all they had was a SINGLE Goal and that was to generate 15 lacs.

Example 3 – Ramanna’s Story

Ramanna was employed in a big I.T. company in Pune. His aim was to start his farm – as he loved nature and his dream was to run a big venture related to it. But that would only happen when he would have taken care of his expenses each month because starting something of your own is a big risk. Which meant he had to handle rent, bills to pay, monthly expenses to incur at home etc. etc. So he defined his threshold point and it was to own a home and also have sufficient savings to pay his regular bills.

Threshold point – A home and 60 lakhs corpus to get a regular inflated adjusted monthly income of Rs. 35,000 per month to start with

Prior to defining his threshold point, Ramanna was just a regular employee, but the moment he defined it, his mind started actively focusing on it. The song of “I want to achieve my threshold point” was playing constantly in his head!. He was aware that he wouldn’t reach his threshold point very soon, and it would take at-least 10 years to get there. But now he was more focused and targeted.

He was sure if he could travel to the U.S. and work abroad for a few years, reaching his target would be a cinch. From that day, he became a superman at his workplace. His commitment level at work increased because he expected to be moved to the U.S. office on the strength of his performance. He also explored other options to move abroad for a few years. Within the next 2-3 years, he saved money and also managed to get an offer to move to the U.S. office due to his exceptional performance at work. This was 2001.

However, his savings were at that point not sufficient to make a down payment on his house. Undeterred, he moved to US, worked for a year, saved obsessively, and returned to India just to make a down-payment and apply for substantial loan. He took the risk, because getting to the threshold point was his obsession by now. There was no other option, he wanted it any cost.

Over the next 8 years, he earned enough money, saved enough money, lived frugally, constantly worked towards his threshold point. He made sure to communicate about his future vision and goals to her better half when we was getting married. He made sure he didn’t do anything stupid which would open new streams of expenses in his life, which will make it difficult to stick to his plans of leaving the job and starting something of his own. So at the end of 10 yrs, he had 2 houses in Pune, one without any loan and the other with a small outstanding loan (thanks to dollars he earned and powerful savings).

He came back to Pune, sold one house (which fetched him more money) and kept it all into a Fixed Deposit with quarterly interest option and the other house was for self-consumption. He is now free of debt, has no rent to pay and his interest income takes care of his expenses.

He had arrived!

What is your Threshold Point ? Have you ever thought about it ?

If you are low on net worthh or you are a new investor, instead of setting huge financial goals, start to play for your threshold point. This will reduce your stress levels and will help you to enjoy the process of wealth creation. When we do financial planning for some of our clients, a lot of times we avoid giving a very long term plan to them, because we know the plan will sound unrealistic.

A plan has to be realistic for any investor to own it. Then we help them define their threshold point and help them plan for that. We tell them, go achieve that threshold point first and then think ahead. Don’t waste your time and energy in worrying about future for now. The same way, you need to think of your threshold point.

I want you to tell me in comments section about it. Write down and declare your threshold point and if possible your plan to get there! I am waiting to hear back.

Why Investors are from Mars and Financial Advisors are from Venus

Posted on by Jagoinvestor

This article is a must read for every investor and financial advisor. The best part of this article is that it is about YOU (the investor) and it is about them (financial advisors). I and Nandish always discuss how financial advisors cant live without investors and vice-versa, but still their world are very different from each other. Both Investors and Advisors think very differently. It is extremely important for both to understand each other’s world and that is what today’s article is all about.

Right now I think advisors and investors both share love and hate relationship and the world of investment is structured in such a way, that they are inseparable. Even if they want, they can’t avoid having interaction or association with each other. Their thought process are at times very different, they view the game of investment from completely different place. Just imagine How magical the world can become if these two entities engage powerfully?. What can happen if they come on the same page and start to respect each other’s world. Such oneness can spread prosperity all over.

Before I write further, I want to make one thing clear that the world right now is full of good and bad financial advisors and investors both.

Step into Each Other World

Unless both Investor and Advisor step into each other world, its really not possible for help and co-exist with each other in a happy way from long term basis. This article is like ticket for both advisor’s and investors to step into each other’s world, it is an opportunity to embrace each other’s world and to accept their mistakes or the damage that they have done to each other’s world.

From last few months, We have closely observing and interacting with both advisor’s and investors community and have come-up with some differentiation. Some of the observations, you might agree and some of you might not. No need to react to them, but just see if you agree to them or not.

Investors and Advisors difference

The intention of this article is to help you get in touch with each other’s world. Let us know what you think about this ?

Why “Forced Investing” is really good for your financial life ?

Posted on by Jagoinvestor

A big reason why some financial lives are messed up is because there is no “accountability” factor in those financial life, you are not answerable to anyone, you are not required to report the progress of your financial life to anyone like you file your income tax returns each year. Because of this fact, most of the investors have to depend on their “will power” and “commitment”, but truly speaking – in real life it does not work! . Just promising yourself that you will “stick to your plan” fails like anything. Whats the solution here?

In my opinion, the solution is simple and amazingly astonishing – you take decisions which “forces” you to invest from time to time, you surrender to a situation which makes you pay due to some fear and compulsion, where you cant come out of it so easily.

Forced Investing is good

There are various decisions like Buying a House on EMI, Starting a SIP in a mutual fund, opening a Recurring Deposit, Buying a Policy which forces you to keep paying premium or installment over the years/months help you save money by “compulsion”. The product design is such that you get into a structure or an arrangement that makes you feel – “I have no option” . Most of the people will not be able to save any money if they do not rely on these “compulsive” investments and each month their money from saving bank account keep reducing the same way I saw audience disappear every minute while watching “Lootera” movie this Weekend (It really looted my Rs 400 bucks) .

Let me point out some scenarios which will make this point clear.

1. Forcing your brother to pay for Education Loan

Imagine, you have a spoilt brother/sister, whose mindset is not designed by God to “save” . Now you or your father have the money to fund the education cost for college. But instead of that, you tell him/her that there is no money and education loan is the only option, which he/she will have to pay back later once he gets a job. Now there is “compulsion” to pay this EMI, there is no escape from it. Out of whatever he/she earns, they will be forced to pay away with the EMI part and only the rest money will be there for them to “enjoy” and you can be sure that it will all vanish by the end of the month, which would have happened anyways even if there was no “compulsion to pay EMI”.

2. Taking Home Loan

This is Interesting , A lot of people are afraid of committing themselves home loan because they feel the insecurity of jobs or no potential salary hikes in future etc and because of this risk factor, they have not taken a loan till now, and the worst part is they neither have any money left with them over the years (which they might have paid in EMI, where has it all gone ?) .

A lot of people who took courage in the start and took home loan even if it meant stretching their financial life, would be able to confirm that because it was mandatory for them to pay the EMI each month, they did everything and anything to make it possible. The compulsion of paying the EMI over years brought some discipline and seriousness in them about their financial life.

3. Recurring Deposits & SIP’s

Try opening a Recurring Deposit of Rs 1,000 per month (option 1) and try to drop two Rs 500 notes in a piggy bank at home each month at the end of the month or the start of the month (option 2) and then see the results after 1-2 yrs. The compulsion and automation which a Recurring Deposit brings in your financial life can never be achieved by a piggy bank, simply because of the passive nature of recurring deposit or a SIP in mutual funds (the money goes and you are not even asked for it and some times you are not even aware that it happened). However, with the Piggybank model, each time you have to consciously take that action, and since you are Human, you fail at it. Any decision where “you” have to take “manually” take some “action” eventually have very high chances that it will not happen (on a consistent basis).

4. Investing in Child & Endowment Policies

I was arguing with a Certified Financial Planner on how one has to avoid those endowment policies and child plans which they feel are amazing financial products. He asked me – “Manish, I know that these policies are not going to give the best returns, but do you know most of the investors want some short term pleasure to invest. These endowment/ULIP/child policies give tax benefits and because they have penalty for discontinuing – there is a compulsion to pay each year and that makes them invest each year.”

Just saying – “SIP is better and Mutual fund is amazing” will create short term excitement for them, but at the end of the day they will not take any action because Mutual funds and other powerful products are highly liquid and investors fall to this and can not control themselves in front of short term requirements which comes in front of them”.

This made me realize , that most of the time policies which are illiquid can be good for investors (who are weak in controlling themselves) because they need some compulsion and fear to continue. You can see people redeeming their Mutual Funds to upgrade the car, but hardly anyone does that with an LIC policy. Right?

Try to incorporate “Compulsion” with every decision

The biggest take away from this article for you is that wealth gets built over years only when you are consistent and disciplined and there are financial decisions which can bring that “compulsion” element. It’s in your interest to take decisions which bring some kind of compulsion in your life. So next time you decide to save some money at home in a piggy bank or in your almirah, ask yourself will it bring any accountability, compulsion, and automation (where you are not involved manually), or should you open a Recurring Deposit or a SIP which will help you on those factors. You might want to have a look at our full-fledged paid video program on “Automation in your Financial Life” on our Wealth Club

If you are still wondering why these compulsive decisions help you grow wealth, understand the advantage of bringing compulsion in your financial life is that it changes your financial life equation from “Saving = Income – Expenses” to -> “Expenses = Income – Saving” . You first “save and invest” and then spend !

Let me know your views on this topic?

How prepared are you for these 4 bad situation in your financial life?

Posted on by Jagoinvestor

Are you ready for the bad phase in your life which might come anytime? How prepared are you? We should not be pessimistic in life and always look forward to thinking positive, but that does not mean, we should not be prepared for bad times. Bad things happen in life and you must have seen many bad things happening in others’ lives. We don’t prepare for these bad times, because we have somewhere believed that we are more lucky or privileged than others (if you don’t agree, ask yourself what are changing of your accident, and you will surely say, much lower than 95% of other people on earth).

are you ready in financial life urgent situations

Are you ready for these 4 situations?

When something bad happens in our life (or financial life), we suffer, our families suffer, lots of confusion arises (and many times we are not there to fix it back) and if we are alive, we regret about not preparing for small things which could have eased the situation. So let’s see how much prepared, are you? I want you to not just read, just keep asking at every point if it’s true in your financial life or not?

Situation 1 – What if you die?

Someone asked me a few months back to not use such direct words, but unless I do that, no one reads seriously. Now ask yourself

Does your family know how to take out money from your bank accounts? Do they know your ATM password? Will they be able to access everything you have in your head right now from passwords to remember how much money you need to get back from a friend, to where exactly your whole net-worth lies? Will they be able to arrange for the next 1 yrs of expenses if you are gone? What about the next 30 yrs? Have you prepared a BlackBox emergency kit for your family?

Situation 2 – If you lose the job?

I want you to imagine you lost your job right now at this moment. Now – Can you pay your next 6 months EMI? Will you have the guts to take your family out for a late-night movie and a nice dinner costing 3k Or will you tell them – “Its a flop movie, we can watch on a laptop ?”. Can you sleep well after you are rejected in your new interview ? Will you be able to say – “Sorry, I am forced to take this job because … “. What if the job does not match your liking, will you still have that power to say NO to the next job? Now your answer for all these things can be YES or NO, and its a clear indication of how well prepared are you for these situations. Its time to think about it?

Situation 3 – If you need Rs 5 lacs suddenly?

Lots of people I know cant arrange Rs 1 lac given some emergency situation, can you? If yes, then what about Rs 5 lacs? If I give you 24 hours or 1-month deadline, then can you do it? Have you been preparing for this kind of nasty situation in your life? Now, why would you need 5 lacs? There can be many things which can happen like – some medical emergency situations in the family, or because you found your dream home and have to make down-payment.

So, If you cant arrange for 5 lacs, then ask yourself how much you can? 3 lacs ? 1 lac ? Rs 50,000 ? The good news is that you don’t need 5 lacs at the moment, but the situation can come anytime? Start working on it.

Situation 4 – If you were to be hospitalized?

If you were to meet an accident and hospitalized, things would still be in control, if you are conscious, because you can guide your family on what is to be done and from where to arrange for money and where are your health insurance documents, but Imagine you are unconscious and can’t communicate to your family – Does your family know how to arrange for few thousand rupees to start with ? Do they know where is your health insurance card or how to access your emergency fund? Do they even know the name of your health insurance company, how about the TPA phone numbers? Have you ever stored an ambulance service number on their mobile or , your mobile which takes not more than 1 min exactly!?

Do you have any black box kit prepared for your family which has some useful information for them in financial life which makes their life easy? In my 2nd book – “How to be your own financial planner in 10 steps“, In the last chapter, I have discussed this matter at length and also told the importance of documentation for a stronger financial life, do order it right now, just takes few hundreds of bucks.

Are you getting ready now?

You don’t have to feel overwhelmed because you are not ready, A lot of others are also in the same position, you are lucky to realize this now and have lots of times on your side to work on it. Do not look for perfection and strive to complete 100% of what is asked, but at-least identify core issues in your financial life and situations which you feel you should be ready with?

By the way, how many months can you survive without a job? Tell me in the comments section and how you feel about it?

Simple vs Complex Financial Products – Which are more powerful ?

Posted on by Jagoinvestor

I was talking to one of my distant relatives and told him this – “When you want to increase sales of a financial product, make it complex, and if you want sales to boost a bit more, increase the complexity a bit more!”. Because the moment a financial product is “complex”, investors perceive them to be more valuable and worth investing. When a product is simple, it does not look powerful to them. Let me break this myth to you today.

If you look at any financial product, it will either be simple product or a complex product. Let’s see what they are

Simple vs Complex Financial Products

1. Simple Products

Simple Products are those which are very very focused, with one intention and true to focus, they are easy to understand. Some examples are Fixed Deposits, Term Insurance, Mutual Funds, Health Insurance, Motor Insurance, Recurring Deposits, Govt Bonds etc.

2. Complex Products 

Complex products on the other hand are those kind of financial products, which are built by combining two or more Simple products functionalities. Some of the examples are ULIPs, Endowment or Money-back plans, Fixed Maturity Plans, Child Plans , ULHP (unit linked health plans) etc. You will see that its much easier to sell complex products because they offer more than one feature and people feel that they are such an excellent products with some magic, but the truth is that they just have features of more than one Simple product.

For example if you take a ULIP, its just offers the functionality of term insurance and mutual funds. You can get life cover and also enjoy market linked investments, & just like that a endowment plan or money-back plan also offers the functionality of a term plan and a bond.

Simple Products are Powerful

If you have been a regular reader of this blog from some years, you would have realized by now that simple is powerful and that holds true for financial products also. All you need are simple things like a term plan, a health insurance policy, a SIP in mutual funds and an emergency fund and you are pretty much have completed your financial planning. You don’t need much more than these simple products. In my 1st book – “16 personal finance principles every investor should know” , I have stressed upon several simple concepts, which will how you how easy is the game of personal finance.

Complex Products have high CHARGES

I am not commenting on the usefulness of complex products, because they can also offer a great way of investing your money, but the one thing that’s really clear is that a complex product can charge higher fees just because someone has taken the pain of creating those complex products. Now because customers feel they are special, they will also be ready to pay high fees … and that’s exactly what happens. When you perceive something as powerful (complex seems to be powerful to many), you will be more ready to pay higher fees.

Do not look beyond Simple Products

For a common investor, I would say that most of the times Simple products are enough. When they come across a financial product, they should see how simple it is and what core functionality it provides. If it tries to do a lot of things and you are lost in its features, its probably a time to say NO to it and move on.

A lot of people have created more wealth by wrongly investing in Simple products that those who correctly invested in complex products. A simple law of Design is that “simple is powerful” and it’s true for most everywhere, including personal finance.that this article does not mean to say that all the complex products are bad and are not worth looking, we are just talking about a general principle!

What do you think about this simple principle and do you also observe the same thing?

Envelope budgeting system – A simple way to control your expenses

Posted on by Jagoinvestor

Some months back, when we were working with a Mumbai based client of ours, we noticed that one of his expenses of “Eating Out” was extremely huge. Their explanation was they were never able to control the number of times they went out. So we thought how about limiting the amount spent somehow ?

Envelope budgeting system

Today I am going to share Let me share with you all a simple and effective budgeting system which has been in use for centuries – worldwide! . It’s called the “Envelope Budgeting system”.

The common problem across families is that they keep spending money on various things from a single card or pool of money. The basic idea here, with this system is to label your different expenses, categorize them if you will,  and keep an envelope with money dedicated to that category, in it.

When you need to spend on a category, voilà, you take the CASH for its respective envelope and spend. Let me give an example. Suppose your expenses are as below.

[table]

RENT Rs 10,000
GROCERY Rs 6,000
VEG+MILK Rs 3,000
BILLS Rs 3,000
MAID-SALARY Rs 2,000
MISC Rs 1,000
Total Rs 25,000

[/table]


envelope budgeting system

5 Simple points regarding Envelope Budgeting System

1. Once it’s gone, it’s gone

When you take some money out of an envelope, and spend it, it’s gone! You will be left with some remaining amount for that particular month. Now all you have to spend that month is the leftover. So spend it wisely.

If you still want only spend more than what the envelope contains, you just break the system. Better stop following it then. It’s not for you :)

2. Don’t transfer between envelopes

Just because you have some money left in some category, does not mean you can spend it on another category. This system is all about controlling your expenses in individual categories. Whatever is left in some envelope should go to your investments. It’s like a bonus leftover.

3. If you fail to follow, invest 10x the amount as penalty

It’s human to fall off the wagon. At times you will deviate from the plan and spend more money other than you allocated. In this case, you should penalize yourself for breaking the rule, by investing 10x the extra amount into some investments. For example, you have Rs 3,000 allocated to “Eating Out”  you spend Rs 5,000 in a month. Then you are using an extra Rs 2,000. You should penalize yourself by investing Rs 20,000 (10 times) in some thing to offset this crime. This will be a good spin on just desserts!.

4. Emergency expenses, but settle later

Ideally your expenses should be planned and the money should come from the envelope, but you will have to spend sometimes on your credit/debit card (read various credit card cashback offers), which is fine at times, but make sure you settle things back when you are back at home.

5. Guilt-free shopping

The thing I like about the envelope budgeting system is the “guilt free spending.” Once you have allocated the money to different categories, then you can spend up to the limit, without thinking much. That’s the best part.

TIP : Libin informed me in comments section that there is an Android app called Easy Envelope Budget Aid (EEBA) for this envelope system ! ..

Real life examples of its Effectiveness

Harpreet shares –

I feel so proud to say that I follow this system.

Yes, many times I feel bound but I know what I have got by following this system. Be it getting rid of a loan (worth Rs.2 lacs), renovation of my home (worth Rs.2.5 lacs), be it car (Alto), money for Jewelry (worth Rs.1.5 lakhs), 40 k cash as gift to near & dear ones in a span of 6 years. Right now I am saving for my daughter’s school admission.

I agree that I never spent for grocery, maid salary & rent being in a joint family but still I wonder that I was able to achieve these targets when my present salary is just around 26k and when I started following this system 5 years back, it was much less.

I started this as I had no choice, but believe me I am now addicted to this system.

It’s not for everyone

A lot of people use this envelope system and are pretty successful in following it for months and years. However many people start this, but fail somewhere in middle and are not able to continue. Its all about how serious you are about controlling your expenses and being disciplined. Do you think this Envelope system will work in your case ?

Example of mis-leading financial product advertisement

Posted on by Jagoinvestor

Does False and Misleading Advertisements come under the heading of “Mis-Selling” ? Have you ever saw a financial product advertisement where numbers are tweaked and framed in such a way, that the financial product looks very attractive and not-to-miss deal ?

You see the advertisement and nothing looks wrong to you and you just concentrate on numbers like 15% or 17.45%, as advertised ! . What about mis-selling by big financial institutions who are considered to be too-big-to-fail?

I came across the following advertisement (printed here only partly) in several media including the Company’s website.  Even before that, one of our investors, was also flummoxed by the high yield indicated and asked us to explain how it is possible?

Well, a bit of creativity and lot of embellishment seems to have achieved the desired results.

Below is the snap shot of that advertisement which shows the amazing effective yield of the product.

SBI-Fixed-Deposit-advertisement

This advertisement in question is about a 5-year deposit from one of the biggest PSU banks in India, which is also eligible for exemption under section 80C of Income tax act. No wonder, tax saving season has just arrived!.

Tax Saving Fixed Deposits, lets you invest a certain amount, on which you will receive tax exemption subject to maximum of Rs.1 Lakh.  This would translate to reduction in your tax out go, depending on the tax bracket in which you will fall under – it may be either 10% or 20% or 30% and the cess applicable thereon.

A simple and straightforward situation.

Since it is a bank deposit, it is perceived to be safe.  There is an additional layer of safety, because the bank in question may be bracketed under the category of government owned (major share) and it is too-big-to-fail.

What is the problem with this advertisement?

There are so many of these kind of advertisements, enticing you to invest in them because it is the tax planning season.  In your interest, if there is little bit of embellishment of the numbers what is wrong with that?

Anyway, you need to be ‘sold’ something, otherwise you will end up paying lot of tax to the same Govt. Instead, just listen to the advertiser and put the moolah where the message belongs to.

At this juncture, let me make it clear the meaning of mis-selling and quote from one of the recent regulations by SEBI Securities Exchange Board of India.

For the purpose of this clause, “mis-selling” means sale of units of a mutual fund scheme by any person, directly or indirectly, by –

a) making a false or misleading statement, or
b) concealing or omitting material facts of the scheme, or
c) concealing the associated risk factors of the scheme, or
d) not taking reasonable care to ensure suitability of the scheme to the buyer.”

If we go by this definition of mis-selling, let us see where does the subject advertisement stands.

1. The advertisement does seem to make a false or misleading statement. While calculating the effective yield at 16.64% or 17.39%, it does not adjust the effective yield for income tax. Even though it says the return is pre-tax, it just stops there.

Why is it important to adjust the return to taxation?  Because to arrive at Effective Annual Yield, it has assumed that the investor falls in the category of 30% marginal tax rate and hence he or she is eligible for “B. Immediate Tax Savings” of Rs.3,090/- which is 30% + 3% Cess thereon on Rs.10,000/- deposit.

When such being the case, how the advertisement can conveniently ignore the taxation on the interest income? Interest on bank deposits is taxable as “Income from other sources” either on cash/receipt basis or on accrual basis depending on the method of accounting followed by the investor.

It is a convenient forgetfulness on the part of the advertiser.

2. The advertisement appears to attempt concealing or omitting material fact such as taxability of interest income earned by the investor.  It has also not highlighted the tax deduction at source applicability in case the interest income is beyond a certain threshold.

3. The advertisement (in its full form) also has not highlighted the risk factor of possible default or delay in payment of interest in time and the capital.  Since bank deposits need no rating, no one bothers about the underlying risks.

4. The advertisement (in its full form) does not highlight the suitability of the scheme to the buyer.  It brings in to its fold all investors under the category “Others”.

Therefore, it fails by all the four counts that are applicable for lesser mortals, such as mutual fund manufacturers and advisers.  Of course, you can not apply one regulator’s dictum on others in letter; what about the spirit? Just because RBI is the regulators for bank, should bank not follow what is in interest of investors ?

What about Bank Social responsibility ?

What would be the state of mind of the investor, when she sees such a highly enticing advertisement?  In the absence of a super-regulator or dialogue between various regulators, different regulators seem to have different yardsticks about mis-selling or mis-representation. But who cares as long as it is a big govt. owned entity?

It used to be the same case when govt was running a mutual fund business from early 1960s till late 1990s.  The mutual fund scheme was also guaranteed by the Govt (remember UTI), was eligible for tax exemption and the fund house was considered to be too-big-to-fail in its time, even though such a coinage was not fashionable in that period.

Finally the mutual fund business did collapse under its own weight and thousands of investors lost their hard earned money.  Even though the government stepped in to arrest a free fall, the sheen of guarantee was lost.  No lesson seems to have been learned from then to now.

What is the actual situation therefore in the present instance?

Below are the various possible scenarios:

SBI Fixed Deposit Returns tweaked to fool and mislead investors

As you can see the effective annual yield in all the above scenarios is nowhere near the one mentioned in the advertisement the moment you take in to account the taxability of the interest income.

How many of the investors who are already in the marginal tax bracket of 30% would have the limit left to invest in this fixed deposit scheme and also would be able to receive tax exempt interest income?

They will be definitely in minority or possibly no one would meet both the conditions at the same time.  What can one say about the tactics of highlighting a scenario applicable in minority cases to all investors?

Misleading or partially true advertisements

Why should you as an investor and we as financial planners be worried about such misleading advertisements?  Are we not immune to such misleading illustrations by many of the financial products manufacturers already?

In fact recently the Finance Minister of the country mildly chided one type of financial product manufacturer not to mis-sell the products.  He attributed the consistent fall in the market share of such a product to the past sales practices.

Herein lies the crux of the problem that investors are floating in a sea of distrust and when very big names keep publishing such misleading or partially true advertisements,  the distrust would keep growing and that is not good for the saver or investor and in turn to the economy.

Already some of the insurance products and mutual funds have become the victims of mis-selling, perceived or otherwise. I am really surprised that such a big institution is indulging in a highly embellished communication of doubtful veracity when there is no need for such gimmicks.  I am also worried because I and my family have our banking relationship with this too-big-to-fail entity.

About the Author – The article is written by Narendra N Kondajji, A bangalore based CERTIFIED FINANCIAL PLANNERCM (CFP) . His website is  www.procyonfp.com and this article was originally appeared on his blog here

Why Women dont ask for their Share in Inherited Property and Wealth ?

Posted on by Jagoinvestor

Let’s talk about Women and Inheritance today. Our Indian culture, has for thousands of years treated men as someone who lead families and be the heads of next generation and women as someone who will go to some other family after marriage and start a new life. This has been deeply rooted in all our minds for years and years. This is one big reason why women in India are not aware about inheritance laws and their rights in property.

Women and Inheritance in India

Some families, where there are sons and daughters both, do not even raise the point of dividing the property equally among all of them equally. Daughters who are married are not even in picture at the times, the wealth is divided and it’s considered  natural and something that makes sense. Women on the other hand also do not take any lead or don’t bother asking for their fair share in the family wealth.

Brothers do not share wealth with Sisters

You must have seen cases like these and might be experiencing them in your family as well.

Case 1 : I know a family which had 1 brother and 3 sisters and who had a huge property in Mumbai at a central location, lots of shares, mutual funds and bank accounts, When the father died, people cried and after a month every body was back at home, all 3 daughters who are married didn’t even think for a second that they have a huge 25% share in the wealth, which is a decent amount by today’s standards. All 3 daughters are not so well off  and struggling day in and day out, but they are just not considering the option to ask for their share. Legally if they want, it would be just a matter of a  few months or years and some bitter experiences, but they might reach their financial freedom if they go to court. But they are too emotional to take that step and worry about relationships and the problems which arise out of it.

Case 2 : In another case, there are 2 brothers and 2 sisters (all married), and after the father’s death, the brothers are fighting with each other for property “Father spend so much on your education, my career was affected because of that, So I should logically get more now.” Fair point logically, but from legal point of view, it does not matter much how father treated whom . The sad part of this story is that brothers are fighting for their share and also sharing their plight with their sisters, but not for a second do they think that even sisters are legal heirs and should also get their share. (Incase you didnt knew – Hindu Succession Law is applied when a WILL is not written)

It’s not Fair!

Just because now they are part of another family, they are not seen as valid heirs. I am raising this point today because this is wrong practice. Women now have to raise their voices and ask for their share from their parents and brothers. If required, ask for it legally. Just because father has spend lot of money on wedding of sister and given her gold does not mean she can be cut off from the family wealth sharing.

If father writes a WILL saying that he wants to give his wealth in some specific proportion, then it’s fine, it’s your father wish. But if a WILL is not present, then you are a valid legal heir, you should ask for your share and you will get it.

Look at it as part of your Financial Plan

If you are a man, your wife might be entitled for her share of wealth from her parents’. In today’s world where money has become so important, see if you can convince her to ask for her share. It might get her valid share of money and can help you in leading a better financial life. I am not saying this because you should be money minded, but because its a fair thing to ask for.

We have created a 2 part video program for Women and Money for our wealth club members. If you are a member there, please show this video series to your spouse.

Do you have any personal experience like this? Can you share?

How you CHOOSE to mess your financial life and never realise !

Posted on by Jagoinvestor

Do you make a choice or take decisions in your financial life ? A lot of people have not taken lots of important actions in their financial life, which they should have taken long back!. You have to understand that you are making a choice by not taking those actions. When you take some action or do not take an action, deep down you are actually making a choice in your financial life, which we will see now.

decision-vs-choices-in-financial-life

Let me give you some examples

1. Buying Endowment & Moneyback Policies

Most of the people who take the decision of buying endowment and moneyback insurance policies , they say that they are buying it because they trust the company and want safe returns. Now that’s their decision, however they have to be understand that deep down they are making some choices which are unspoken …

  • They are choosing to get below inflation returns on their investments
  • They are choosing to put money in something which is illiquid and might not help them in emergencies
  • They are choosing not to cover their family with a higher life cover

2. Not buying a Term Plan

“I don’t think I will die” or “It does not give back money at the end” – this is the general reasoning behind not taking a term insurance plan by many people. Now, again, it’s their decision based on their belief, but deep down they are making some choices which are

  • They are choosing a life of struggle for their family, in case they are no more in this world
  • They are choosing to pass on all the debt and tension to their spouse and children in future
  • They are choosing that their children and family might not lead a great comfortable life in future if they are not around.

3. Not buying Health Insurance

“I will take is next month” and “I drive carefully and I am healthy , so I don’t need it” are the top most reasons given by those who avoid taking health insurance. Again, they feel it’s a right decision and I am not commenting if it’s right or wrong, but surely they are choosing few things in their life and for their family …

  • They are choosing a situation where their entire wealth accumulated till date, might wipe out in health related expenses someday
  • They are choosing to get into a situation where they might have to run around for money to fund health related expenses
  • They are choosing to constantly worry about big ticket health related expenses if any

4. Not creating a WILL

It’s a decision taken by almost all of us. “We are still young”, “I will do it once my net-worth is at least 1 crore” etc., are the common reasons behind not making a WILL. However deep down you are making few choices and you have to accept them …

  • You are choosing a lot of frustration, chaos and running around for your legal heirs
  • You are choosing, that your family will have to meet lawyers, go to courts and spend lots of money and effort to get what they deserve
  • You are choosing to create a confusing situation, where your legal heirs fight with each other and try to justify who deserves what

5. Not hiring a Financial Planner (when you really need it)

“I can do it myself, I was a bright student all my life”, “They charge a lot for what they do”, are some of the reasons given by investors for not hiring a financial planner for themselves. It’s their decision based on their beliefs, but deep down you are making some choices …

  • You are choosing to still do trial and error and play with your financial life
  • You are choosing to not organize your self and get into a dedicated structure which can improve your financial life
  • You are choosing to focus on what you will spend rather than what you will get out of the whole exercise.
  • You are choosing to delay your actions and rely on yourself for taking actions and get disciplined which most  fails most of the times

6. Over spending right now like there is no tomorrow

“Life happens NOW”, “If I don’t spend, whats the point of earning well”, “I will earn more in future, let me enjoy today” – These are the top most things you will hear people saying who over spend (more than they should). One can comment easily if it’s right or wrong, but let’s not get into it, it’s their decision and there is nothing wrong in it, just that these people need to understand the choices they are making without realizing them

  • They are choosing to have a struggling financial life in future in case tomorrow does not turn out to be like what they imagined
  • They are choosing to have a better today at the cost of tomorrow
  • They are choosing to be working for more years in future, because they will not have wealth when they are old.
  • They are choosing to have a less comfortable life later in life, when responsibilities increase and opportunities decrease

Conclusion

At the end of the day, you always choose something in your life out of the decision you make. This is true for all the aspects of life, including your financial life. So understand that you are fully responsible for what you get.

Can you share your story in short and share what choices have you made in your financial life ?

How a newcomer should start his financial life – 4 steps

Posted on by Jagoinvestor

Today we will talk about how a newcomer or a fresh investor start his investment journey. We will see 4 steps which a newcomer can follow to start his invstments. I see a lot of new people on the blog asking things like

Hey Manish

I am totally new to this world of investing, I just joined job 3 months back and it seems like I have no idea how to start. I can see my friends who have been in job already, but they have messed up so much in their financial life. I do not want to be that way and want to do best. Can you tell me where should I invest?

In today’s world of over communication and an environment where things look complex it’s no wonder, a new person is confused. While there cant be a one strategy that fits everyone, we can still propose a generic 4 step rule, which can help most of the fresh candidates and these 4 steps becomes more important these days because most of the people mess up hugely in the first 5 yrs of their financial life and they have no idea how important starting years are in financial life. So today, here’s a look at the 4 steps, I feel will be applicable for most of the people.

How a New investor can invest

Step 1. Enjoy for the first year – Spend !

Almost everyone who starts a new job has this feeling for a long time  – “Once I start earning, I will buy things for my parents! I will buy a bike! I will roam places! . I will buy that awesomely cool mobile which I could not afford when I was a student! . I will do this! . I will do that! I will go here! I will go there!” . Everyone goes through that feeling and when I started my first job, even I had those same kind of excitement.

You know what? This is totally acceptable and a 100% correct!

The moment we enter the world, we become the part of the rat race (remember 3 Idiots?)  We get good grades, we get into best school, study hard to get into college, and then finally land at job, assuming its the end of the race. At this point, if someone tells you – “Start Investments Early!”, what would be your reaction ? I would say that as a statement, its a great thought, but to a young guy (or girl), who is yet to get comfortable with the environment, it’s a foolish statement, distant from reality and kinda crushing the emotional side for their ‘desire to spend’ .

The only thing which makes sense at this point is to let all those wishes come true! Let the guy spend!. Let him or her spend on those things which he or she ever wanted. Let them splurge! . Buy things which they dreamt about for years . Let them travel! . Buy gadgets! . Shop for clothes and phones and whatever they wish to! .

I’d say, go for it!. Let it happen for the full 1 year in the start. After a year, the person should have done most of what he or she wanted, in that time, he or she should be more settled in the first job. He/she would have got a taste of “earning money” . Now! This is the good time to talk to him about finances.

Step 2. Start a Recurring Deposit and Start learning

The next step is to get started, to get into the process… The biggest issue which I feel with newcomers is that they do not have this habit of “regular investing” . Lots of people, when they start their financial life, want amazing returns immediately! . They hear about SIP from media, they hear about stock markets and real estate markets and suddenly the only thing that plays in their mind is “high returns”.

First, they need to work on their “habit of investing.” They should first understand, what it means to save regularly, they should first get a feel of how money grows over time. A person is mostly raw  in the beginning and needs some serious understanding of basic concepts and how everything works!  The need of the hour is “habit” and “education”. For anyone new to investing and who has just started his career, should read my first book “Jagoinvestor” where I talk about few fundamental principles of personal finance. From most of the people who have read it, they told me that it was an eyeopenor for them. If you want to get a understanding of what it looks like download this sample 1st chapter of my book and read it . It also has tons of reviews from other people who have read it already.

So coming to the point, what can this new investor do at this step once he is ready to take the plunge ?

I can think about 3 things here.

a) First, open a Recurring Deposit in your bank for a big amount which you can save. It can be 10,000 , 20,000 or even 50,000 depends on how much are you saving! . This will make sure that a part of your salary is now getting invested in a Recurring Deposit on a regular basis for next few months atleast. You can see some money regularly invested and get a feel of how money grows over some months. The money will also be safe.

b) This is also a serious time to start exploring and learning about the other kind of investment options. You can learn from all kind of websites, blogs and books written on personal finance and more. Ask questions if you have any doubts on our Q&A platform (we already have 4,000 questions and 20,000 answers on it). This phase will act like the preparation for rest of your life. The clearer the concepts and fundamentals to you, better it is. At this point, you should concentrate on learning things. Your money is getting accumulated anyway in the recurring deposit and is safe. So nothing to worry about there.

c) Apart from the above points, you can also start the background documentation & processes which will be required in the future. You can apply for your PAN Card incase you dont have, start a demat account, get your KYC done for mutual funds investing. If some document is missing, apply for it, & open more bank accounts if you think you would need them. It’s like, you’re getting all your weapons ready for the future.

For those newcomers who like to learn through Video’s – we have a 37 min course called Basic Concepts of Personal Finance on our Jagoinvestor Welath Club.

Step 3. Complete Most Important and Primary Tasks First

Now, you are ready & educated, have a good understanding of everything, gotten a taste of investing money and are ready for the next step. Now in any financial journey, there are few steps which you should take right at the beginning. These are like the “first things first” tasks. I see people on this blog, who have not completed these important early tasks even after 5-10 years of their first job. There are few things like

These are mostly one time tasks. Once you complete them, They are complete ! . You might have to pay a regular premium for few products, but the main task of taking actions in those areas are complete, which most of the people struggle with. Understand that, if you delay these most important tasks, they will just get pushed for “future” and it will take ages to complete those when you actually need them.

Remember, these one time activities complete a major part of your financial life. After this, you mainly have to just review these each year from time to time, and mostly concentrate on your “investments part”.  After you have completed these tasks, your primary objective is wealth creation. A lot of people I see are still lost in these primary, first level tasks even after years and years , just because they didnt do it in start and now when its time for concentrating on their wealth creation, they are still stuck in these primary level tasks.

By this time, you will be more comfortable investing in new avenues like Equity mutual funds, Real estate, ETFs, Stocks, and other investments. To start with and to get a taste of mutual fund investing, start SIPs in a a balanced fund like HDFC Prudence or HDFC Balanced or if you are too risk averse, you can also start SIP in Montly income plans (MIP’s) or some debt mutual fund.

4. Design your financial life and explore more

In the end, after  you’ve completed the 3 steps mentioned above, you can see, how easy it would be to extend your actions. I’d say the above 3 steps will take anywhere around 2-3 years depending on what kind of person you are and your circumstances. In those 2-3 years, you must have accomplished these things

  • You must have done a good amount of spending and fulfilled most of your wishes
  • You must be educated well about financial matters and have good clarity about your future.
  • You must have completed the primary level of basic tasks which any financial life needs
  • You must have saved a respectable amount through recurring deposits and other investments.

At this moment, you can plan the next 5-10 years of your financial life. Clearly define and prioritize your financial goals in life, and start investing aggressively for your wealth creation. Even if you feel like applying for a loan to buy home or car, you should be able to handle it in a much better way after the first 3 steps. Because you know about his future premiums outgo, & your aspirations more clearly. At this step, if you feel you need some kind of external help to get a better clarity, you can also hire a financial planner for yourself and work with him to get more clarity. A small investment for your financial life can prove to be worth.

You can see that with these 4 steps, the actions one will take will be more defined and realistic, rather than the random events, that push you & which gives an unwanted shape to your financial life.

Conclusion

You can see that these 4 steps are just about giving more meaning and a better shape to any financial life. It focuses on slowing down and then slowly moving forward in your financial life. Any new person is very excited about his life ahead and there are great chances to mess up. These 4 steps will help a person to move forward in his financial life. Good luck!