Financial Resolution No.2 for 2012: I will save atleast 10% of my Salary Every Month

Well, the new year 2012 has begun and hope it has started on a positive note for everyone. Our first resolution was to “Stay on Top of our Credit Card“

The second financial resolution is going to be “I will Save atleast 10% of my Salary Every Month“. Yes, thats what our resolution is going to be. This is easier said than done, but lets strive towards it.

Before we begin, you would be astonished to learn that the average saving rate in India in this generation (as a % of their monthly income) is only around 5-6%. Whereas our fathers and grandfathers saved more than 10% of their monthly income. The concept of Credit Cards and a million other types of loans have depleted the concept of “Saving for a Rainy Day“. Sad, but true!!!

If you were someone who was surprised by the above paragraph, you would’ve had this question in your mind “What is an ideal Savings Rate for an Individual?“

The answer my friend is “It Depends“. Yes, it depends on your situation. If you are a bachelor with no dependants and a dad who is also earning, there is practically no savings required. Whereas, if you are a married man with a wife and child to take care of, you need to save some money for your retirement as well as your kids education, marriage etc. So, the true answer to this question is It Depends

But, the rule of the thumb is “Around 10-15%“.

An Interesting Point:
Financial experts suggest that any individual who works for a salary must have liquid cash equivalent to atleast 3 months of his/her monthly salary for any emergencies. What if you suddenly lost your job? What if you met with an accident and cant attend work for a few months? There are a hundred other “What If’s“ that can be added to this list. Lets hope and pray that, such what if’s dont have to be answered by us in real life, but frankly speaking the saying “Better Safe Than Sorry“ cant be more apt at this juncture.

If you were a curious person you would ask me “Why 3 months?“ Did this question come up in your mind? Well, the fact is that, 3 months is a comfortable amount of time for you to get a different job or to recover from most major illnesses. So, a 3 month salary cushion in your bank account means that, your family is going to be well taken care of in the 3 months that you will spend hunting for a job or recuperating from an illness. Now, do you think the 3 months concept makes sense?

Can I Really Save 10% of my Salary Every Month?

Yes, you can do it my friend. 10% may sound a huge chunk but, nothing is impossible. Think this way.

Lets say you are someone who earns Rs. 50,000/- every month. If you save Rs. 5000/- every month, you will have enough money to make the initial payment for a small car. Wouldnt it be cool to own a car?

This was only a very crude example. The fact of the matter is, the benefits of saving money cannot be emphasized much. “CASH HAS AND ALWAYS BE THE KING“

Some Tips to Spend Less and Save More:

1. I will keep aside 5% of my salary on the 1st day of the month as savings for the month as a mandatory activity. I will move this money to a different bank account and lock the Debit Card in my cupboard.

Reason: You can only spend what is there in the bank account you use on a regular basis. If the money isnt in your bank account, you wont spend it. Moreover, this 5% will go a long way in your future plans

2. I will not touch the back-up bank account

Reason: What is the point of saving money, if you scratch into it every now and then. Forget the fact that you have a back-up bank account. Use it only for emergencies. For all other purposes try to use your regular bank account or other cash sources.

3. Whatever money I have in my bank account on the 30th day of the month (The day before Salary Credit), I will move it to my back-up bank account

Reason:Moving any left-over money from your previous month’s salary into the other account will ensure that, you will not overspend this month. After all, you spent only so much this month and you wont actually need this surplus next month. Wouldnt you?

4. I will try to cut my unwanted spendings and try to save atleast 2-3% of my monthly salary or even better beat the amount of money I saved last month on the 30th.

Reason: It is a good idea to set saving targets and try to achieve them. If you see that last month you saved 2500 rupees and target to save atleast 3000 this month, you will be amazed to know that, you will actually save more than 2500 this month (unless there was an emergency or you went astray on your saving goals)

You might be wondering, the title says 10% and the first point in the above section starts with a 5%. Are you???

The reason for that is, you would’ve been used to a certain lifestyle considering your current salary. 10% cut on it is huge and will take quite a dig at your lifestyle but 5% is manageable. 95% of your salary is good enough for you to survive without compromising your lifestyle. Moreover, we are targeting the money that remains at the end of the month in your bank account (another 2-3% of your salary) and are planning to beat this every month. So, if you sincerely follow this resolution, i am sure you will reach the 10% saving target within the next 6-12 months.

Isnt that great? After all, who doesnt want a better home or a great education for our kids or a fantastic marriage for our daughter? Dont we all?

I am sure you will say, “Of course I do...“

Happy Saving Money!!!

Children & Money – Can We Teach Our Kids about Finance & Money Early?

When was the first time you spent some money, on your own? Am not asking about when you earned it, am asking about when did your mom or dad or any of your elders give you some pocket money for the first time and what did you buy?

I remember a bit vaguely but I think I was around 10 or 11. It was ten rupees that my grandma gave me and I got those WWF Action Cards. The cards where Hulk Hogan was Rank 1 and Undertaker Rank 2. Those were the good days!!!

Coming back to topic, we all work; we all earn and want to set up a happy family. Family means having a wife/husband and most importantly “Children”. The arrival of a baby in a family is cherished by every couple and involves a lot of fun and happiness. Most couples start saving money for their children’s future, for their education, for their marriage etc. Well, this article isn’t about that… It is about a question that many of us may have thought of, "Can we teach our kids about Finance & Money early?"

Children & Money:

In India, children aren’t allowed to learn much about money until they are in their teens. They aren’t allowed to carry money by themselves and they don’t know much about money until their parents teach them. This article is about how we (as Parents) must teach our kids about money and its value/worth.

Every responsible parent has almost the same dream. A dream to provide the best education to their children. They want them to progress in every field, whether it is related to studies, sports, music or any other activity.

A child will be able to be really & truly successful in his/her life only if they have the financial knowledge and wisdom required to survive in the current competitive world. Experts say that children who learn about money and finance early in their life are usually better at managing their finances in future. A kid, who knows the value of his pocket money and knows how to save it, will be able to earn more and invest it efficiently in future.

Does the Indian Education System teach our kids Money & Finance?

Unfortunately, NO. The current school education doesn’t do much to impart the monetary wisdom to children. There is a pre-defined syllabus and all kids are expected to study and pass subjects in order to finish their education. And sadly those subjects don’t include anything about money or finance until they are old enough to learn about it themselves. Though it happens, it doesn’t happen at the right age and kids are left wanting for monetary education until they actually get some money to spend after they grow up.

Was the Indian Education System always like this?

Unfortunately, NO. Our ancient education system had many things to teach children about money from their elementary education itself. The children were supposed to complete their education in the ashram. For a complete education term, they had to work hard and in return, they were provided with education. During the final pass-out, students had to pay guru-dakshina (in other words fees) to their gurus (in other words the teacher) from their own earnings. This process was very encouraging for children as it made them partially financially independent.

Some Ways to Impart Finance Education to Children

Teaching kids how to save money and how to manage their money is not such a difficult task. Kids these days are pretty smart and sharp. They will learn it very easily, provided you are willing to spend some time with them, teaching them and nurturing them to learn more about money.

Some things you can do, to inculcate finance education into your kids are:

1. Teach children about money from the day they learn numbers and counting. Educate them about its importance through stories and games.
2. As children grow, they tend to demand more. Gradually teach them about the value of money. Tell them stories of your struggle and what difficulty you faced while started earning. Teach them about importance of saving and spending wisely.
3. A lot of demands by the children are not genuine. Teach them to understand the importance of their demand. Let them decide about the importance of a demand being need or want.
4. It is easy being impulsive and want to get anything your son or daughter wants. Well, that’s what fathers are for, but think before you buy everything. There may be things that are pretty costly. Use that as an opportunity to teach your child the value of money and explain them that need is fine but greed isn’t.
5. For their every requirement, provide a fix amount of money and try to give them a choice, so that they can select the one that suits them best, while saving some money. For example, if they want to buy shoes. Give them Rs. 500 for purchasing the shoes and tell them that whatever they will be able to save; they can keep it as pocket money. Your kid will probably keep aside some money and buy shoes only for around Rs. 400 or so. Having pocket money is cool, even for kids at school…
6. As children grow, start giving them allowances for their monthly expenses. Keep strict watch on how they spend it. Tell them to make details of expenses every month. If your kid can control his/her expenses well, reward them with gifts. Try to motivate them to save more.
7. Sometimes borrow money from children for their motivation and repay with some interest on the amount. This way, they will learn about interest and investment. They will be encouraged to save more.
8. If children ask some question about money, don’t just ignore them. Answer them for all their queries until they are satisfied. Groom them to use their mind as they grow and not just follow instructions.
9. It is very important to allow children to experience the loss and profit on themselves. The loss will increase their risk assessment ability, and profit will motivate for better performance. In case your child gets dejected in case he suffers any losses, you are there as the caring parent to motivate him. Cheer him up, take him out and teach him how to be careful in future.
10. When the kid is old enough to make a career choice, sit with him. Talk over the various earning opportunities in the career choices he wants to make. Explain him the pro’s and cons of choosing each career and ask him to take a decision after taking into consideration all the requisite aspects
11. Well, this list could be potentially endless. A lot of things are mostly common-sense. Remember that, your child’s bright future is directly dependent on how well he can save and spend money and that is entirely dependent on how well you teach your kid.

Our elders have had this opinion “Money can make children money minded, selfish, and even they can slip into wrong hands”. Unfortunately the saying or rather opinion isn’t entirely true. If money can so easily change your kid, what exactly are we doing as Parents? I am sure that, if you spend proper time and care on your kid, there is no doubt that your kid will grow up to be a noble and responsible citizen of this society. Teach him early about money and how to handle it, and he will be a successful person just like his proud mom or dad…

Happy Teaching folks!!!

The Art of Financial Planning

In the previous article "Plan for a Better Future" we saw the importance of financial planning. In this article we are going to dig deep into step 3 which is “Design a Plan” to help you all formulate a plan that would help you achieve your financial goals.

Lets get started!!!

Things to consider while formulating a plan

Some of the things you need to consider while designing or rather formulating a financial plan are:
a. Liquidity – How liquid is the investment? Can we get money when we want?
b. Rate of Returns – How good is the investment? How much money would I earn with this investment?
c. Risk Involved – How risky is this investment? Will I get all my money back or will I suffer losses?

All the 3 above mentioned points are equally important. An investment that does not give good rate of returns to beat the inflation rate is bad and so is an investment that is too risky which may result in you losing all your money and so too is an investment that is illiquid and you cant sell it when you want the money. So we need to keep in mind all the above aspects when we plan for the future.

Asset Allocation:

Asset Allocation is very very important when it comes to financial plans. An old saying goes “Never put all your eggs in the same basket” and this is 100% true for financial investments too. For ex: when the stock market crashed a couple of years back, everyone who had investments in the market suffered losses (unfortunately I did too). Luckily some of us did not put all our money in the stock market and had some exposure to other investments like gold or bank deposits which helped us offset our losses. So it is extremely important that you have a balance asset allocation.

You can take a look at some of my articles on investment portfolios to get a good idea of the different types of them using the links below:

What is an Investment Portfolio?

Conservative Portfolio

Aggressive Portfolio

Balanced Portfolio

You can choose any of the 3 types depending on your risk appetite.

Choose your Asset Class based on your goals:

Choosing your asset class must be dependent on the goal you intend on achieving with the investment. For ex: Stock markets are very good in the long run as an investment but they are pretty risky and you may end up suffering huge losses if the market turns volatile in the short term. So if you are planning to achieve your goal of buying a car next year by investing in the stock market, you may end up with losses and not be able to fulfill your goal of buying the car.

The preferable assets classes depending on your investment/goal horizon are:

1. Short Term (< 1 year) – Stick to fixed income instruments like bank deposits and liquid cash 2. Medium Term (1 – 3 years) – Have a healthy exposure to fixed income instruments and have little exposure to stock markets 3. Long Term (> 3 year) – Have a good exposure to stock markets with a decent exposure to fixed income instruments.

Planning how much you can Invest every month:

Planning how much you can spare to invest every month is an important aspect of the financial planning life-cycle. Every month we have fixed expenses like groceries, house-rent or home loan EMI, childrens school fees, petrol expenses for car/bike etc. So, in order to arrive at the amount you can invest every month, you need to do the following:

a. Total your Earnings – Include your income (and your spouse’s income if they are employed) and all other earnings like rental income, bank interest etc
b. Assess your monthly expenses – Include all fixed monthly expenses like rent, electricity bill, telephone bill, petrol expenses, school fees etc
c. Subtract monthly expenses from earnings
d. Subtract any extra expenses – for ex: scheduled car maintenance/service, trips to the doctor, holiday/festival related purchases etc
e. Keep a cushion – Always keep a fixed sum (say 5% or 10% of your monthly salary) as liquid cash in a bank account to meet emergency expenses. This is to ensure that, you don’t eat out of your investments that are designed to achieve a long term financial goal to meet your current cash requirements
f. Subtract cushion from the amount remaining after subtracting monthly & extra expenses from your earnings

This is the amount you can invest every month for your financial future.

Time for Action:

Once you know how much you can save every month, you can then decide on the instruments you wish to invest this amount and then voila!!! You are on your way to a good financial future.

Happy Investing!!!

Plan for a Better Future

Planning for the future is something that we have learnt ever since we were kids. The story of the hard working Ant and the lazy Grasshopper was taught to us when we were in school. We were told that the Ant worked hard and saved food to help itself during the winter while the grasshopper enjoyed during summer and starved during winter.

I guess you are getting a fair idea of what I am going to tell you in this article. Yes, it is about planning for a better future. We all study hard with the aim of getting a nice paying job. Because, without a job you cannot get married, without marriage you cant have kids and so on and so forth. So, in order to settle down in life, we need money and I mean a lot of it. Am not trying to be boastful or pessimistic here, but the fact is, money has become one of the most important aspect of an individuals life (second only to love and family)

Every individual who is in a job and is earning, needs to plan for his financial future. Things like, marriage, childrens education, retirement are in the back of all our minds. This article is about planning our future in a way that would benefit us in the long run.

Lets get started!!!

The following section will have 3 items:
1. Step – The activity under consideration
2. TODO – What we must do

Step 1: Assess your financial health

Before we start charting out a plan for our financial well-being, it is most important to assess our current financial health. It would give us a good idea of where we stand and what needs to be done to reach the place we intend on being. Not all of us have a father who is a TATA or an Ambani. We are all sons and daughters of hard working middle class individuals who have struggled all their lives to give us a better education and eventually a better life. So the onus is on us to make sure that we make the most of it.

TODO: Analyze your savings, loan commitments, investments etc and figure out your current financial status. For ex:

Savings in Bank: Rs. 1,00,000/-
Stock Market Investments: Rs. 5,00,000/-
Car Loan: (-) Rs. 3,00,000/-
Home Loan: (-) Rs. 25,00,000/-
Annual Salary: Rs. 7,50,000/-

If you see the example above, the current status of this individual is pretty grim because he has loan commitments worth 28 lacs and has an annual income of 7.5 lacs and has investments worth 6 lacs. Even if he happens to use all his savings and all his income to pay off the loans, he will need 3 years to do that. This isn’t so nice is it?

Step 2: Identify your goals

The next step to a better financial future is to identify our goals. It could be like “I wanna buy a BMW in 2015” or “I want my son to study in Harvard” etc. It is just what our goal is. As expected, the goal involves a certain amount of money.

TODO: List out your goals one after the other and assign a rough value against it which we must save within the specified time frame in order to achieve our goal.

Ex:

Buy a Car in 2015 – Amount Required: Rs. 5,00,000/-
Daughters Marriage in 2025 – Amount Required: Rs. 10,00,000/-
Sons education in Harvard starting 2020 – Amount Required: Rs. 25,00,000/-

This would give us a fair idea of how money we need for our future goals.

Step 3: Design a Plan

This is probably the most important aspect of them all. Based on our goals and the timeframe we need to come up with a plan using all our available resources.

TODO: Calculate the amount required for each goal and figure out, how much you can spare to save/invest every month in order to achieve that goal.

For ex: Goal – Buy a car in 2015 – Rs. 5,00,000/-

As of today (Feb 2011) there are still almost a full 4 years till the target date of 2015. so if we manage to save Rs. 1.25 lacs every year, in 4 years we will have 5 lacs to buy our dream car. 1.25 lacs every year equals Rs. 10,000/- every month.

So, to achieve this goal, I would have to invest Rs. 10,000/- every month (in some sort of savings scheme, it could be stocks, bank deposits, gold etc etc) for the next 4 years and I will have 5 lacs to buy my car in 2015

Step 4: Execute the Plan

Do I have to say that, this is the hardest part of the plan? Planning to invest a certain amount every month is easy, executing it is extremely difficult. It is our duty to stick to the plan we formulated in step 3 and execute it properly.

TODO: Make sure you spare enough money to meet the plan designed in step 3 every month.

Alert: It is easy to skip the plan when you need some extra cash due to some unexpected situations. I repeat, it is very easy. But if we happen to do that, we will not be reaching our goal. So it is important that we stick to the plan as best as we can.

Step 5: Review the Plan

Every year, as our income and expenditure goes up, we need to review our plan. A plan for a better financial future is not a one time activity. We need to review it yearly and make sure we accommodate the change in value of our goals.

TODO: Check out the cost associated with each of your goals and maybe include new goals into your list or remove completed goals from the list every year. Make sure you make changes to the investment plans to adjust for the new entries added or existing entries removed/modified.

A car that you planned to buy in 2015 which was Rs. 5 lacs today may be 6 lacs in 2014. So, the rate at which you are saving every month wouldn’t be enough to buy your car. So in 2014, when you review your plan, you must accommodate the increased cost and adjust your savings in a way that you will end up with 6 lacs in 2015 and meet your goal.


Conclusion:

To wrap up, let me say that financial planning is very important and every individual who wants a good financial future must take some time to chart out a financial plan for themselves.

All the very best and Happy Investing!!!

Cutting Costs and Saving Money

“Cost Cutting” – This is a term that we are hearing day in and day out ever since the recession started. Though the economy seems to be stabilizing these days, the term cost cutting is still on the cards. Large organizations even conglomerates have introduced measures to cut their costs. They have cut jobs, reduced salaries, cut back on bonuses, avoided lavish spending on expansion plans etc. As employers they are taking steps to reduce their cost. As employees it is our duty to cut our costs too, to ensure that we do not end up spending more than what we earn.

A simple example. Let us say Mr. A, has an income of Rs. 50,000/- per month. He spends nearly 45,000/- of his salary every month on routine expenditure and saves the remaining 5,000. Assuming his employer introduced a 10% pay cut to cut costs, he would end up spending all his money and thereby his savings would turn out to be ‘0’ This is not an ideal scenario. If Mr. X follows some simple strategies, he may end up cutting his expenditure by Rs. 5,000/- thereby adjusting his spending with his income and at the same time continue to save money like he used to before.

The most important point to note here is the fact that, most of the essential commodity prices are on an upward movement always. So, if our salary is not rising the way these prices do, we may end up with not enough money to buy them. We would have to compromise on our living standard. This is not something that anyone would want to do.

All said and done, what are the things that we spend on every month? Food, groceries, clothes, etc etc. Let us have a look at some simple strategies that can help us achieve around 20% savings in our expenditure.

Where to cut costs?

Before deciding on how to cut costs, we must identify the areas where we can cut costs. We must identify the areas where we spend a lot of money every month.

1. Food & Groceries
2. Transportation & Communication
3. Education
4. Clothing & other accessories
5. Entertainment

Before going into the details, let me make one thing very clear. These are strategies that can help you cut costs by around 20% on your monthly total expenditure. The best thing we can do is, implement these steps, reduce our expenditure and “Save the surplus money for a rainy day”

1. Food & Groceries

Food & other grocery items for the house contribute to nearly 40% of our monthly expenditure.

a. Buy at discount stores. Large retail chains offer attractive discounts for people who buy stuff in bulk. Plan your grocery requirements before hand and buy them in bulk to take advantage of the discounts and offers available.
b. Reduce non-vegetarian food consumption. Switch to vegetarian items. It is healthy and at the same time cost effective too.
c. Cut out junk food

Target cost saving = 15%

2. Transportation & Communication

Transportation is an important area where we spend a bulk of our money. Nearly 10-15% of our monthly expenditure is spent on transportation & communication. This includes petrol bills, car/bike maintenance costs, telephone bills etc.

a. Do car pooling
b. Switch to a fuel efficient car. Forget those fuel guzzling SUVs and switch to sedans and smaller cars which offer us a better mileage.
c. Bundle land line, mobile and internet connection with one operator (If he is offering discounts for availing all services from him)
d. Change your tariff plans. Discontinue services that you do not utilize fully.
e. Switch to pre-paid if you do not keep a tap on your phone calls

Target cost saving = 10%

3. Education

Education is an area where scope of cost cutting is very difficult. It contributes to nearly 10% of our monthly expenditure. We cannot possibly try to shift our children to schools/colleges that ask for lesser fees, after all their education quality is extremely important and decides how successful they are in their career. But, here too we can squeeze in a bit of saving.

a. If you have multiple children, try to re-use the books used by the elder child
b. If you have a PC, check out options for online learning.
c. Do not buy everything for the schooling year every year. Try to re-use last years stuff like bags, shoes etc that can be used for a few more months.

Target cost saving = 5%

4. Clothing & other accessories

Clothes and apparels contribute to decent chunk of nearly 10% of our income. The kind of attire we wear, speaks volumes about ourselves wherever we go. But here too cost cutting can be done effectively.

a. Switch to private or in house brands instead of costlier brands
b. Buy at factory outlets. They are nearly 25% cheaper than showrooms.
c. Stock up during off season sale. Large brands offer up to 50% discounts during year end stock clearance sale. Use such opportunities.

Target cost saving = 25%

5. Entertainment

Everyone likes to spend time with friends and family away from home. Movies, multiplexes etc are the favorite hang out spots for people these days. We spend around 10% of our income in entertainment every month.

a. Avoid unnecessary eat outs. Eat at home, it is healthy and also cost effective
b. Explore your travel plans before going on a vacation. Book in advance. Most travel operators offer decent discounts for people who plan in advance
c. Switch to economy class from business class if you are paying the ticket charge. Your employer would have already done it, why don’t you. The air fares are comparatively lower.
d. Try downloading songs/movies instead of buying the CD/DVD.

Target cost saving = 30%

Cost Saving calculations:

Assuming Mr. X spends Rs. 50,000 every month. Which means he spends

1. Food & Groceries – 20,000
2. Transportation & communication – 7,500
3. Education – 5,000
4. Clothing & accessories – 5,000
5. Entertainment – 5,000

Total = 42,500/-

Expected Cost Savings:
1. Food & Groceries – 3,000
2. Transportation & Communication – 750
3. Education – 250
4. Clothing & accessories – 1,250
5. Entertainment – 1,500

Total = Rs. 6,750/-

If you invest this in an equity mutual fund that gives you a 15% returns per annum you would have saved up Rs. 93,150/- at the end of the year.

Doesn’t this sound nice?

Happy Spending!!!