At the beginning of New Year 2013, we shared with you our thoughts not only relating to finance but in general as well, in the form of a Mind Map on “Life Worth Living”.

As the new financial year starts, here we once again share a few tips in making our clients’ financial lives easier. 

Financial Year 2013-14 Resolutions:

• I will collect my statements relating to Income generated in 2012-13 in April 2013 itself:I will submit all the above information to my Tax consultant in the month of April 2013 itself.
  • Form 16, Capital gains statements, Rent receipts etc
  • Income Tax Section 80C eligible investment proofs like ELSS, Insurance receipts, Housing loan statements, updated PPF passbook etc
  • Medical Insurance premia receipts which are eligible for claiming Income Tax Section 80D benefit
  • 2012-13 annual consolidated bank statements for my all single as well as joint bank accounts. (Savings bank interest upto Rs 10,000 p.a. is tax free.)
• I will do my Tax planning for the year 2013-14 in the month of April 2013 itself, instead of waiting till March 2014 end.
• I will pay my PPF contribution latest by 5^th May 2013 to get interest@8.7% on this contribution for 11 months.
• I will review my Medical Insurance sum assured and see whether this amount will be enough after 10-20 years to meet any medical emergency.
• I will review the terms and conditions of my medical insurance to check whether this policy has any sub-limits or expects me to bear a portion of the claim amount (Co-pay condition) and last but not the least, whether I can renew it for life time.
• I will make an analysis of expenditure pattern in the previous year 2012-13 and categorize them into ‘Essentials’ and ‘Luxury’.
• I will plan my expenses for 2013-14 on the basis of the above categorization.
• I will allocate my increments, bonuses and windfall gains received in 2013-14 in three baskets: ‘Loan repayments,’ ‘Investments’ and ‘Indulgences.’
• I will start the process of preparing a ‘Will’ in April 2013 itself. 
• I will implement the recommendations given by my Financial Advisor within 15 days.

DIYers

Mr. Patel has been dabbling in stocks for the last 25 years. He also sporadically invests in Mutual Funds. His TV is constantly on and he surfs all the business channels. He is known amongst his group of friends as the stock market guy and many times they also seek his advice on stocks. He boasts a lot about the profits he makes on day trading and occasionally on his investments. Curiously, he is most active when markets are bullish and becomes very low key when the sentiment is bad. It appears like he is investing when markets are high and not when they are low, then how does he make money. A closer look of his portfolio reveals that most of the stocks he has are duds accumulated over a period of time because he had bought them as trading tips but he could never make a profit on them. Rather than sell at a loss and admit his mistake he preferred to hold on to them saying, “some time in future they will rise and I will get out of them”.

With a plethora of financial news and views now available in newspapers, TV and internet, a no. of people feel that they understand finance and can take informed financial decisions on their own. They can speak the jargon and sound knowledgeable. Due to this their colleagues, friends and relatives look up to them for advice and the feeling is strengthened. These are what are commonly known as “Do It Yourself”ers or DIYers.

There is another set of DIYers who would sporadically take financial decisions based on the need of the hour e.g. tax saving. They too would typically consult their friends or colleagues.

Busy Executives

Rajiv, a friend complained to me that his bank manager sold him a regular premium policy with a yearly premium of Rs. 2.5 Lakhs, blatantly lying that it was a Single premium product. It was an easy sale because the bank manager knew that Rajiv had a Rs. 6 Lakhs balance in his account. Rajiv just signed on the dotted line. He came to know about the lie next year when the insurance Company sent him the renewal premium notice. He went to have a fight with the bank manager over the blatant fraud. He encountered a different manager who sympathised with him but expressed inability to rectify the situation. The ironical part is Rajiv did not even know the life cover that policy provided or what type of investment it was. 

Rajiv is one of the busy executives/businessmen who do not have time (and inclination?) to look at their finances. Consequently, the idle money in the bank keeps growing and they do feel guilty about it. 

In such situation what happens? The first agent/”advisor”/”consultant” that comes along with a “great” product hits the jackpot. The agent is happy that he makes a sale and the investor is happy that he has done his financial/investment/tax planning. Some agents would claim to the investors that their product does all three.

Dangers of DIYs

1. They take investment advice from their CAs who are more focused on tax savings. In the process diversification may be sacrificed.
2. Their other advisors are their own colleagues who will boast to them of how one of their smart investment decisions made them a pile of money (Other Mr. Patels. These colleagues never disclose their failures).
3. Some do not think beyond real estate.
4. They are vulnerable to get rich quick schemes touted by various agents.

Guys, you need a Financial Advisor.

It is my experience that it takes a lot to persuade these people to seek the services of a Professional Advisor so instead of doing that I will list a few steps by which they can take control of their own financial management. 

Write down your Goals: 

• Making money is not a goal. Money is the medium to achieve and enjoy your dreams and goals.
• So the first task would be to write down your goals when you want to achieve them and what would the amount required be. Give free rein to your dreams and list out as many as possible, but be realistic.
• The above statement may appear paradoxical but the message here is if the goals are far off enough, you start immediately and commit to and stick to your regular savings and investment strategy you will be surprised what power of compounding can do for you.

Create an investment strategy: 

• The first step towards this is to make a list of your current investments. Check if you are overly invested in one particular type.
• Go through your expenses and check how much you can save on a monthly basis. A check of expenses will show you if you are spending too much on your discretionary expense heads. An easy way to do this is total all the withdrawals from your bank passbook for the past year (I hope you don’t have too many bank accounts), deduct the “one off” expenses and divide the remainder by 12 to arrive at average monthly expense.
• If you have any outstanding housing or any other loans, I assume they are already taken care off by monthly EMIs, which should continue. Never ever avail of minimum pay facility on credit cards or take personal loans. They carry very high interest costs.
• Commit to a monthly investment program for this saving (first create a emergency buffer in your bank account equivalent to 6 month expenses).

Devise an asset allocation: 

• There are 2 broad classes of assets:

Growth assets like stocks, equity funds and real estate

Income assets like Bonds, FDs, and debt funds.

• The thumb rule to follow is that for goals, which are short term, say less than 5 years, investments should go in Income Assets. Anything longer term should be in growth assets.

Remember when you think equity or real estate think not in years but decades.    

Stick to your Plan

This is the most difficult of the steps and there are hundreds of reasons why it could derail.

There are so many self appointed advisors urging you to go for the sure winner stock or scheme. They could scoff at your own investment plan coming up with ill informed reasons for its failure. Sometimes to continue an investment, certain paperwork needs to be completed and due to sheer lethargy that may not happen.     

Those of you who like to be hands on may really enjoy doing all the above steps but if you think it is too much hard work you are better off consulting a professional advisor. 

                        – Yogin Sabnis

Parents want their kids to have all the best things in the world and they think if they can afford it, why not? In fact, many parents are tempted to give money to their children out of guilt. The guilt of not spending enough time with kids is compensated with money. Eventually, kids get adapted to a spendthrift lifestyle and sometimes resort to emotional blackmail if their demands are not met. Not to mention, the peer pressure building up on kids makes them a bit insensitive to the value of the hard earned money of their parents.

Our present educational system does not include a curriculum on personal money management. So whatever our kids learn or observe about money matters, good or bad, is mostly at home. Parents need to be pro-active to teach their kids about the value of money, particularly in this age of consumerism.

Here are some tips you can teach your kids.

1. Teach kids about money management through allowances:

Offering a periodic allowance (weekly or monthly) is a prudent way to teach kids about finances. Through such payment, you will be introducing to your kids the concept of money management. Give them an allowance when you feel they are old enough to manage it. More importantly, how much allowance is to be given to the kids needs some thought too. This should preferably cover the bare minimum expenses like food, transport and probably clothing and entertainment once they grow a little bit older. They need to be clearly instructed that the allowance is meant for a stipulated period and cannot demand an extra amount for anything else.

Initially, give your kids the liberty of decision-making about how to spend the allowance. Let them experience the impact of their decisions, good or bad. Resist the urge to offer them more money before the end of the period. It may take a while for children to understand that once the money is spent they cannot have anything else, but they will eventually learn. This approach would ensure they realize that some things are more important than others and that it is impossible to have everything. Once they start differentiating between their needs and wants, they will automatically become calculative and learn to prioritize for spending it.

2. Take your kids shopping:

A shopping mall or grocery market could be the best real-life class room where your kids can learn about money. For starters, your kids can understand how the buy and sell transactions take place and the basic math behind them. This is likely to make their mental calculations sound. As the children grow up, they can be involved in the shopping. Remember, you would have to set a good example for them. This can start by involving them in preparation of the shopping list to budgeting. This exercise would aid them in decision making, bargaining and sticking to a budget. They are likely to avoid impulse shopping which they would realize can throw budgets out of gear. The children can be rewarded with the money saved and this would act as a motivation for them in future dealings.

3. Encourage your kids to save money for high price items:

Make your kids realize the future benefit of saving. Gift your kids a piggy bank which will park the saved money. This is one of the most conventional and time-tested tool to teach kids about money management. The money saved can come from allowance or the money saved from shopping or cash given by relatives on certain occasions. Teach them to put the accumulated savings in a bank account which would avoid the temptation of impulse spending. It would also teach them the concept of money earning money in the bank instead of keeping it idle.

Encourage kids to define their big-ticket goals like purchase of a bicycle or some electronic gadget. They can set aside a portion of their saved money to eventually meet the goal. However, children should be made to understand the importance of savings not only for meeting goals but also for saving for a rainy day.

4. Encourage your kids to donate:

As quoted by Henry Ford “The highest use of capital is not to make more money but to make money do more for the betterment of life”.

 The best way kids can learn about the value of money is when they experience the joy of giving. Charity can begin at home. You can encourage your kids to donate their old clothes and toys to your maid’s children.

One of the best occasions is their birthdays. You may make it a yearly ritual to take them to visit NGOs and encourage them to donate in cash or kind to the less privileged children. During summer vacations, you may encourage your kids to join a NGO for volunteering. Such activities are likely to sensitize your children towards the less unfortunate. They would also be able to cope with peer pressure better when it comes to spending and not squander away hard earned money.

5. Open a bank account for your kids:

Open a bank account for them. Give them the liberty to operate it, visit the branch, interact with banking people, etc. This is likely to ensure that your kids not only become savvy about the basic retail transactions but gradually become aware of the various investment options right from a young age.

6. Teach your children respect for money through work:

We always tell our kids about the struggle we went through to reach a secured stage in life. While kids understand this, they will not really realize this fact unless they themselves go through the hardship in the practical world. Even peanuts earned on their own would make kids realize the value of money more than anything else in the world. Encourage and help your kids to put up stalls in school exhibitions/fairs and get involved in buying selling transactions. Your kids would be thoughtful enough to spend the small profits earned out of such ventures. Such activities also instill the entrepreneurial spark in your kids right from a young age.

The period between18-24 is a golden period for children as they lay a strong foundation for their long term career. Encourage them to do part time jobs in their college days and teach them to invest the money. They are likely to inculcate this habit even after having a regular job. Further, temporary jobs would help them figure out their strengths and weaknesses and help them define their long term career goals. It also aids in their overall personality development and makes them street smart.

Conclusion:  

By teaching your kids about money management, you will be sowing the seeds of a good value system early on in their life. One of the best ways to teach is by example. Practice what you preach as children tend to emulate their parents on spending habits at home. As Warren Buffet pronounced “You should leave enough for your kids so that they can do something, but not so much that they have to do nothing”.

Financial planning is a process which goes beyond numbers. In the preparation of a financial plan, we ask a lot of qualitative questions to clients, which go beyond investments, insurance, tax & retirement. For instance, one common query we have for clients is whether they have prepared a will.  We ask clients about the nomination status for their immovable property, bank accounts, bank lockers, demat accounts, investments, provident fund, etc. Additionally, information about the location of their important documents including medical policies is asked and whether these are known to family members.

As a part of the financial planning process, practicing financial planners usually take care of these basic and small steps of due-diligence for their clients. These issues otherwise are commonly ignored by the general public. The main objective behind these queries is to ensure that in the absence of the client, his family members do not have to go through the financial and legal hassles.

A letter from a widow, who recently lost her husband in a road accident has been circulated by all financial planners on a forum. This letter describes her struggle in coping with financial and legal matters in his aftermath and offers lessons, which she has learnt the hard way. We are sharing this letter with our clients to highlight the importance of financial and estate planning.

- Yogin Sabnis

Few things I learned after Mithun:

We always believe we will live forever. Bad things always happen to others.

Only when things hit us bang on your head you realise…Life is so unpredictable…

My husband was an IT guy…all techie…And I am a chartered accountant…Awesome combination you may think…

Techie guy so everything is on his laptop…his to do list…his e-bill and his bank statements in his email…He even maintained a folder which said IMPWDS…wherein he stored all login id and passwords for all his online accounts…And even his laptop had a password… Techie guy so all the passwords were alpha-numeric with a special character not an easy one to crack…Office policy said passwords needed to be changed every 30 days…So every time I accessed his laptop I would realise it’s a new password again…I would simply opt for asking him ‘What’s the latest password’ instead of taking the strain to memorise it.

You may think me being a Chartered Accountant would means everything is documented and filed properly…Alas many of my chartered accountant friends would agree that the precision we follow with our office documents and papers do not flow in to day to day home life…At office you have be epitome of Reliability/Competent/Diligent etc but…at home front there is always a tomorrow…

One fine morning my hubby expired in a bike accident on his way home from office…. He was just 33…His laptop with all his data crashed…everything on his hard disk wiped off…No folder of IMPWDS to refer back to…His mobile with all the numbers on it was smashed…But that was just the beginning…I realised I had lot to learn…

9 years married to one of the best human beings…with no kids…just the two of us to fall back on….but now I stood all alone and lost…

Being chartered accountant helped in more ways than one but it was not enough…I needed help…His saving bank accounts, his salary bank accounts had no nominee…On his insurance his mom was the nominee and it was almost 2 years back she had expired… but this was just a start…I didn’t know the password to his email account where all his e-bill came…I didn’t know which expenses he paid by standing instructions…

His office front too was not easy…His department had changed recently…I didn’t know his reporting boss name to start with…when had he last claimed his shift allowance…his mobile reimbursement…

The house we bought with all the excitement…on a loan…thought with our joint salary we could afford the EMI…when the home loans guys suggested insurance on the loan…we decided the instead of paying the premium the difference in the EMI on account of the insurance could be used pay towards prepayment of the loan and get the tenure down…We never thought what we would do if we have to live on a single salary…So now there was huge EMI to look into …

I realised I was in for a long haul…

Road accident case…so everywhere I needed a Death certificate, FIR report, Post Mortem report…For everything there were forms running into pages…indemnity bonds…notary…surety to stand up for you…No objections certificates from your co-heirs..

I learnt other than your house, your land, your car, your bike are also your property… So what if you are the joint owner of the flat…you don’t become the owner just because your hubby is no more… So what if your hubby expired in the bike accident…and you are the nominee but if the bike is in a repairable condition…you have to get the bike transferred in your name to claim the insurance…And that was again not easy… the bike or car cannot be transferred in your name without going through a set of legal documents…Getting a Succession Certificate is another battle all together…

Then came the time you realise now you have to start changing all the bills, assets in your name…Your gas connection, electricity meter, your own house, your car, your investments and all sundries…And then change all the nominations where your own investments are concerned…And again a start of a new set of paperwork…

To say I was shaken…my whole life had just turned upside down was an understatement…You realise you don’t have time to morn and grieve for the person with whom you spend the best years of your life… because you are busy sorting all the paper work…

I realised then how much I took life for granted…I thought being a chartered accountant I am undergoing so many difficulties…what would have happened to someone who was house maker who wouldn’t understand this legal hotchpotch…

A sweet friend then told me dear this was not an end…you have no kids…your assets will be for all who stand to claim…after my hubby’s sudden death…I realised it was time I took life more seriously… I now needed to make a Will… I would have laughed if a few months back if he had asked me to make one…But now life had taken a twist…

Lessons learnt this hard way were meant to be shared…After all why should the people whom we love the most suffer after we are no more…Sorting some paperwork before we go will at least ease some of their grief…

1. Check all your nominations :

It’s a usual practice to put a name (i.e in the first place if you have mentioned it) and royally forget about it. Most of us have named our parent as a nominee for investments, bank accounts opened before marriage. We have not changed the same even years after they are no longer there with us. Even your salary account usually has no nomination…Kindly check all your Nominations…

-        Bank Accounts
-        Fixed Deposits, NSC
-        Bank Lockers
-        Demat Accounts
-        Insurance (Life, Bike or Car or Property)
-        Investments
-        PF & Pension Forms

2. Passwords:

We have passwords for practically everything… Email accounts, Bank accounts, even for the laptop you use… What happens when your next in kin cannot access any of these simply because they do not know your password… Put it down on a paper…

3. Investments:

Every year for tax purpose we do investments… Do we maintain a excel sheet about it…If so is it on the same laptop of which the password you had not shared…Where are those physical investments hard copy…

4. Will:

Make a Will…I know you will smile even I would…had I not gone through all what I did…It would have made my life lot easier…a lot less paperwork…I wouldn’t had to provide an indemnity bond, get it notarised, ask surety to stand up, no objections certificates from others…

5. Liabilities:

When you take a loan say for your house or car…Check out on all the what ifs…what if I am not there tomorrow…what if I loose my job…Will the EMI still be within my range…If not get an insurance on the loan…The people left behind will not have to worry on something as basic as their own house…

My battles has just begun…But let us at least try and make few changes so that our loved ones would not suffer after we go…We do not know what will happen in the future…But as the Scout motto goes: Be prepared…

                   – Mr.Yogin Sabnis

Financial problem usually is one of the prime stress factors for individuals today. This may be due to buying the wrong financial product, a huge debt pile-up, over spending, inadequate liquid funds during emergency, etc. Some simple and prudent personal finance habits can save a lot of time, money and trouble and help us achieve a better control over our overall finances.

Since last 7 years I had prominently displayed a list of do’s and don’ts in financial matters in my office for all my visitors to see. The list basically chalks out general guidelines about how to stay financially disciplined. I would get appreciative comments from a lot of my clients who by the way also plead guilty to violating at least 2-3 of those personal finance tenets. Here is the complete list discussed in detail below:

1. I will not keep my money idle in savings bank account:

It is important to make your hard earned money work harder for you. So it is crucial not only to deploy your savings for investment but also to select the right investment option. While the savings bank interest rates have been deregulated, they offer a meager 4-6 per cent returns per annum which do not even beat inflation. So it is prudent not to keep huge amount of cash idle in savings bank account.

The maximum amount in savings bank account should be for monthly household expenses and some funds earmarked for emergency situations. An emergency fund helps to sail through critical times like a medical emergency, loss of job, etc. While there is no thumb rule for the amount, funds equivalent to six months household expenses (including EMI and insurance premium) can be invested as contingency funds. Although savings account offer low returns, one advantage is that the interest earned will attract a tax rebate of Rs.10,000 per year as per the recent budget proposal. This means that you can keep a balance of approximately Rs.2 lakh in your savings account and actually profit from it. The balance savings can be deployed in comparatively better options.

2. I will not subscribe to public issues indiscriminately:

I have never been a great fan of IPOs (initial public offer) although I am aware that people who invested through IPOs in 70s and 80s and even a large part of 90s have created wealth. My lack of enthusiasm is due to the fact that:

• Most IPOs are floated when markets are booming. As the popular saying goes, “A rising tide raises all boats”. Similarly, companies with new fund offers command hefty & unreasonable valuations in the booming stock market compared to their real worth and the upside for the investor is limited. Often, they trade below their initial offer price for a long time once the IPO hype fizzles out and the investors sell in desperation for a loss. E.g., Reliance Power IPO.
• They get oversubscribed heavily.
• The allotment of shares is in very small quantity.

Further, one should invest in an IPO of a company with good fundamentals with the aim of participating in the long term growth of the company rather than aiming to profit from short term market fluctuations.

3. I will invest regularly in a disciplined and systematic manner:

It is now a well-known fact that the best way to create long term wealth with calculated risks is through systematic investment plans (SIPs) in equity mutual funds. Even for short-term goals or creating funds towards yearly payments (like annual insurance premium), you could do SIPs in debt/liquid funds or open recurring deposit account in a bank. The key here is discipline.

Take the case of Employee Provident Fund (EPF).The EPF gets adjusted automatically from your gross take home pay every month and you do not even perceive it as a deduction. A similar disciplined approach in equity mutual fund SIPs is likely to yield lucrative results. For this purpose, adopt the attitude of earn-invest-spend rather than earn-spend-invest. Maintaining an expense journal on a daily or weekly basis will help to plug the holes and cap unnecessary spending during these inflationary times. I have found that once an individual starts on this savings and investment program, he quickly gets habituated to it.

4. I will invest in shares and equity mutual funds with a long term investment horizon:

Legendary stock investor Warren Buffet quoted “My favorite holding period is forever”. The most common query I get from investors is how long do I need to hold the investment? There is no right answer to that question because it would depend on a lot of things. But the generally accepted answer has been at least 5 years. Investment in equity/equity mutual funds for a long term horizon will help to iron out the short term volatility in the stock market.

There are mutual funds, which have been around since the 1990s and have weathered the ups and downs of the market over longer periods. For instance, Franklin India Bluechip Fund has yielded a 24 per cent compounded annual return since its launch in 1993.

The best way is to adopt a goal based investing approach. Knowing your target amount and also the time horizon will inculcate discipline. For instance, you require some amount of money for your daughter’s marriage after five years. Keeping that amount as your target, invest some amount regularly and during exceptional downturns. If your portfolio achieves the desired corpus for marriage funds, do not become greedy and wait for it to go up further. Book profits and invest that amount in fixed income instrument.

5. I will pay all my credit card dues on time and not avail of revolving credit facility:

The trend amongst advisors nowadays is to recommend debit cards instead of credit cards so as to ensure you spend only what you have. A good idea no doubt, but to those of you who are disciplined enough not to overspend I would still recommend credit cards. Use credit card wisely to avail the benefit of free money until the due date and for travel, security, incentives and unforeseen situations like a medical emergency. The discipline should extend to paying the entire amount (not just the minimum amount) before due date as interest rates on credit cards range from an exorbitant 27 to 40 per cent per annum.

6. I will not mix insurance with investment:

Think about why you require insurance. You want to protect your family goals like children’s education expenses or marriage expenses and providing for your spouse’s living expenses throughout his/her lifetime. Essentially it is a huge corpus. The corpus target will be difficult to achieve with expensive investment oriented policies. The cheapest form of insurance, which offers the best combination of coverage and cost is term insurance.

Insurance should thus not be mixed with investment. The main objective of investment is to build wealth through calculated risks while the sole aim of insurance is to cover for financial implications in the event of loss of human life.

7. I will buy adequate health insurance:

You may not feel the need to buy health insurance in your 20s or 30s as you would be then in the pink of health or if you are covered for medical expenses by your employers.

However, not having your independent medical cover poses a few risks. Health insurance provided by the employer will cease to exist once you change your job or retire and it also does not offer flexibility in terms of coverage and other features. Secondly, you would essentially require a medical cover in your golden years and the probability is high that you would be denied one then. Given the exponential rise in healthcare costs, which is expected to continue, health problems are likely to drain your retirement funds in the absence of medical cover. So it is prudent to buy adequate health insurance for yourself and family right from the early working years.

8. I will not buy any financial product just to save tax:

Each product in the market fulfills a particular need. Life insurance fulfills the need of financial security for the dependants in case of death of the income earner. Similarly, pension plan fulfills the need of a regular income after a person retires. Tax benefit is just an added perquisite on buying these products and should never be the sole aim.