Loan moratorium: When interest compounding works against you

Loan moratorium: When interest compounding works against you

Over the last 3 months, for many, salaries have been truncated, jobs have been lost and the health and lives of near and dear ones have been threatened. And for most, this is a first-time experience.

 

In support, the salaried middle-income person has also been given some breaks, importantly, an initially three, now extended to six months “moratorium” on their loans through banks/NBFCs. These include all kinds of loans, including credit card debt.

 

The terms of the moratorium are simple – it only defers your EMI, doesn’t waive it. There is no interest waiver. Non-payment (ie. deferral) does not impact your credit score.

 

Hence, it is advisable to pay your EMIs, and not take the moratorium, unless there are dire circumstances, because of which you are unable to pay. And if you do, pay back the deferred EMIs as soon as possible, to minimize the long-term impact.

 

But why so? The reason is simple. Taking a 6-month moratorium on a home loan that has 15 years left adds another 18 EMIs! And this is because of the effect of compounding over long periods of time.



Our latest article, published on Moneycontrol, explains exactly why. Click on the below link to read on.

 

https://www.moneycontrol.com/news/business/personal-finance/loan-moratorium-when-interest-compounding-works-against-you-5461361.html




Image credit: Moneycontrol

 

Finwise is a personal finance solutions firm that helps both NRI and resident individuals and families plan for their financial goals, follow their passions and achieve financial independence.

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10 money steps to help you stay prepared in case of a job loss

10 money steps to help you stay prepared in case of a job loss

As the impact of the COVID-19 crisis takes a further hold on the economy, its impact is beginning to be felt on its foot soldiers as well. Over the last few weeks, more and more news about planned salary cuts have been percolating, and over the last few days, the dam seems to have broken, with large job cuts also being announced.



This is likely to be wide-spread, and in the last few days, we ourselves have seen cases of 25% salary cuts, work without pay for the next 6 months, and finally, job-losses.



How to handle such a crisis is something someone impacted would be struggling to grapple with. And in case you are not hit by it as yet, count yourself as lucky and prepare for an eventuality like this. The below 10 steps should hopefully help you plan for it and address much of the impact.




Please read our latest article, published on Moneycontrol.


https://www.moneycontrol.com/news/business/personal-finance/10-money-steps-to-help-you-stay-prepared-for-a-job-loss-5325361.html



Image credit: Moneycontrol



Finwise is a personal finance solutions firm that helps both NRI and resident individuals and families plan for their financial goals, follow their passions and achieve financial independence.

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Celebrating the Men too, this International Women’s Day!

Celebrating the Men too, this International Women’s Day!

Its International Women’s Day on March 8th, 2020, and we can think of no better time during the year to reach out to you, to share a few inspiring success stories of people who are on the path to financial independence and well-being.

 

 

Last year, we shared stories of some successful women, who over the last few years, started their journey with Finwise and took charge of their financial lives to make it more secure for themselves and their families.

 

 

Conventionally, one would argue as to why we need a specific day in the year to celebrate Women? We should be doing that through the year, and we agree fully with the sentiment. Our monthly columns (published on Moneycontrol.com) on women and how they can handle money problems and achieve financial independence, is testimony to that fact.

 

 

We would instead like to respectfully submit that International Women’s Day need not only be about women individually. Women today are equal partners in life, whether at work or at home, and while they have fought to achieve this status, they have also been supported by a growing tribe of the opposite sex, who have actually lent credence to the theory that the “better half” is actually as good, if not better at managing money.

 

 

Over the last few years, we have come across many such success stories. While one kind is where both spouses are actively involved in planning and securing their financial future together (with, in some cases, the woman actually taking the lead), we also have the other, where the man, despite possibly being the sole or dominant earning member, consciously and actively involves his spouse in the financial decisions of the house, thereby, both literally and figuratively, “putting money where the mouth is”.

 

 

In our experience, it is this “absence of bias” in the relationship between spouses and respect for each other as equal partners, that is one of the true building blocks of well-planned and long-lasting financial and general well-being for the family.

 

 

This year, for International Women’s Day, we share journeys of some such couples over the next few days, and hope they inspire you to take similar actions to free your and families’ financial futures. Look out for the first journey tomorrow.

 

 

Finwise is a personal finance solutions firm that helps both NRI and resident individuals and families plan for their financial goals, follow their passions and achieve financial independence.

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For advice, please reach us at getfinwise@finwise.in or +91 9870702277/9820818007.

Lessons in managing money from Test cricket as we get into the 2020s

Lessons in managing money from Test cricket as we get into the 2020s

In the last decade or so, the Twenty-20 (T20) format has overtaken the traditional formats of cricket, due to its shorter match-time, fast-paced and glitzy game, adapted rules to make it more interesting as well as in-studio add-ons. While purists may not appreciate these “dilutions”, they have definitely democratized cricket, taking it to newer audiences both in existing countries where cricket is played, as well as to more countries across continents, moving the game up several notches in the global rankings of universal popularity as well as revenues.

 

Interestingly, we have also recently entered the 2020s decade. With the dawn of 2020, another decade just passed on! Already 2 decades of the new millennium are gone and it has been a full 2 years since the 21st century turned an adult! With attention spans shortening and the pace of life and changes to it both getting quicker, it sometimes seems that even time is playing a T20 version of its game on us.

While this fast-paced “T20 version” of life can get addictive, its effects can be quite corrosive! It has never been easier to acquire “look-rich” symbols of wealth, with literally everything, including luxury cars, now available at the click of a button on “easy” EMIs. There has been a dramatic change in the way people have managed their cashflows (Income vs Expenses) in the last few years, and this is also reflected in the household savings rate (as a % of GDP), which is down to 17.2% in 2017-18 from 23.6% in 2011-12 (data source – Forbes India, 2nd Jan, 2020).

 

The newer generation of investors also think quite differently as compared to their previous generation, placing far more emphasis on the present and the here-and-now while being not-as-concerned with what the future holds. Apart from re-defining their needs, this thinking also stems partly from a much higher level of self-belief and confidence in one’s own abilities, as compared to what the earlier generation had at this age.

 

That being the case, in these changing times, does managing one’s money also evolve a-la cricket and have its own “T20” version of the rules? In my view some things will not change, especially lessons on managing one’s money. They remain universal and relevant, just like Test matches in today’s T20 age, and if anything may become more relevant in the coming uncertain and high-speed decades. So, what are some of those lessons that you can take from Test cricket, to manage your money in today’s T20 times? Here are 7 simple ones.

 

 

  1. BE PATIENT – Test cricket can be boring, and needs to be played session by session

 

Test cricket can at times put you to sleep, and definitely test your patience, with its long-drawn out game, and sometimes non-result-oriented approach. Similarly, managing your money well can also be, rather, needs to be boring, and is a long-term repetitive process, year on year, with regular reviews and course corrections.

 

The great Warren Buffett says “The stock market is designed to transfer money from the impatient to the patient.”

 

 

  1. MAKE FEWER MISTAKES – The winner is the team which loses fewer wickets than the other

 

This is one the biggest differences between Test cricket and the other formats, since victory goes to the more resilient team, one that loses fewer wickets than the opponent. Similarly, a very productive approach in investing is to make as few mistakes as possible, and definitely, lesser than the broader market.

 

Charlie Munger once said, “It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.”

 

 

  1. PROTECT YOUR CAPITAL – Defense is the best form of offence

 

The “test” in Test cricket possibly stands for a “test of a team’s defenses”, since the team needs to stay at the crease, ball after ball, over after over, without losing an unnecessary wicket. Similarly, being prudent with your money is about preserving your capital as well as possible for as long as one can, rather, it’s about maximizing returns with as minimum risk as possible.

 

In Anthony Robbin’s words, “Don’t think in terms of taking huge risks to get huge rewards, think about the least amount of risk for the greatest reward and be disciplined about that.”

 

 

  1. LOOK FOR CONSISTENCY – Boundaries are not as important as exploiting the field and running between the wickets is

 

A team that keeps the scoreboard ticking over after over, without unnecessary flashiness or risks serves its chances better. Similarly, a prudent investment strategy should make your money needs to grow consistently, with lower volatility, giving you much peace of mind.

 

Paul Samuelson’s advice – “Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas”.

 

 

  1. ACTIVELY MANAGE ASSET ALLOCATION – Test cricket doesn’t have slog overs or power plays, instead, conditions determine how the game needs to be played

 

Test cricket doesn’t have pre-set match templates, needing one to score more in the early or late overs. Right from the decision post the toss, its about watching conditions and adapting your game accordingly. Similarly, when it comes to investing, there is no absolute good or bad asset class. Managing Asset Allocation on an ongoing basis is key to a stable and successful investment portfolio.

 

David I. Lampe reminds us what our parents also used to say “Asset Allocation is not that different from what mom told us growing up: don’t put all your eggs in one basket.”

 

 

  1. ADEQUATELY DIVERSIFY – Test cricket requires a full complement of quality players, each of whom is a specialist. In the shorter form, you can make do with pinch-hitters and all-rounders.

 

While in a shorter format, teams can get away in games with a few multi-talented players, in test cricket, even one weak link gets shown up over the course of the match. Every player is important and needs to bring to the ground specialist skills that will help the team prevail over the other. Similarly, a good investment portfolio is adequately-diversified to take care of risk (while not being over-diversified to dilute quality), and does not depend only on a few concentrated bets to deliver, while the rest of the portfolio underperforms.

 

Chris Lutz says “The purpose of diversification is so that when one investment goes down or is not doing well, you are insulated from the result because of the others you have in place.”

 

 

  1. STAY THE COURSE – Lastly, Test cricket is about winning the series. There can be comebacks, though difficult. Unlike in the shorter form, where one bad day can send you out of the World Cup.

 

Lastly, Test cricket is unique in that, it gives you a second chance. A bad day at work (or in the market) doesn’t send you home (or wipe you out). Similarly, Investing is about having a well-planned and adaptable strategy, not making catastrophic mistakes while learning from the smaller ones (not just yours) and staying the course even when things look bad.

 

Let me end with Peter Lynch’s wise words on staying the course “You get recessions, you have stock market declines. If you don’t understand that’s going to happen, then you are not ready, you won’t do well in the markets.”

 

 

Finwise is a personal finance solutions firm that helps both NRI and resident individuals and families plan for their financial goals, follow their passions and achieve financial independence.

To receive our articles through email, pl subscribe here.

For advice, please reach us at getfinwise@finwise.in or +91 9870702277/9820818007.

 

 

Image credits: Rahul Dravid – Photo Division, Ministry of I&B, Govt. of India, through Google (labelled for reuse); MS Dhoni – Wikipedia, through Google (labelled for reuse)

6 reasons why you still haven’t given time to manage your finances and 1 reason why you should

6 reasons why you still haven’t given time to manage your finances and 1 reason why you should

So, what gets people to have a serious look at their finances and take some concrete steps towards assessing their financial position and formulating a plan for their financial security?

 

Of course, there are some people who are “born” meticulous and organized and hence have their plans all chalked out. But for most of us (based on our experiences), it usually doesn’t happen gradually, rather needs a trigger of some sort in our lives. The trigger could be some sort of personal experience or something that has happened with someone close, or even the sudden unpleasant remembrance of some childhood memory.

 

But until this happens, managing your own money takes a back-seat, while prioritizing work, family, current needs, perceived emergencies and in the absence of all this, pure lethargy. So, here are six reasons why many still haven’t got around to putting their finances in order, and one reason why some have.

 

 

 

 

 

  1. “Whats the hurry? My goals are far away, I have enough time on my side” – THE CAREFREE

Some of us typically think we have a lot of time, and many a times mistake urgent for important. We avoid contemplating the future, thinking that it has a way of sorting itself out. We usually need some unpleasant shock to make us realize that the future is something that doesn’t just happen, but needs to be planned for.

 

 

 

  1. “I know I have to save, but I don’t have any savings left after I pay my EMIs!” THE OVERSTRETCHED

Some of us love running after material acquisitions. We hanker after the latest gadgets. We usually also end up having a lot of unsecured debt (either a personal loan or revolving debt on our credit cards) because we keep running into sudden cash-flow issues. For us, planning horizons are not long.

 

 

 

  1. “I know it’s important, but am too caught up right now, will do it as soon as I can” THE ALWAYS-ON-THE-TREADMILL

Many of realize the importance of putting our finances in order, but somehow never seem to think it important enough to be top of the list. We would be putting in 12 hours at work and still think that’s not enough to meet our commitments. Somehow, crises have a way of finding us and keeping us always in fire-fighting mode.

 

 

 

  1. “I have checked with my friend, colleague as well as online, I just don’t know whose advice is right!” THE CONFUSED

Then there are some of us who will ask, then validate, then re-validate and then re-re-validate. We will seek inputs from the colleague, the friend, the neighbourhood uncle and maybe then go online to check whether we are missing a point of view. Trusting someone and taking decisions doesn’t come easy to us.

 

 

 

  1. “I am sorted, I have invested my savings in some hot stocks and I also have these 2 apartments” – THE KNOW-IT-ALL

A few are us are those who are both knowledgeable and also proud of our knowledge. We will be clear on why things are and how they are going to unfold. We usually have strong views of our own on money and investments eg. owning multiple houses through leverage since we believe we “understand” real estate, buying some stocks because “they are tipped to do well”, and so on.

 

 

 

  1. “I think this is not the right time, market is too high, it might crash” – THE PERFECTIONIST

And then, there are some of us who understand both the need to keep their finances in order and can see the benefits of doing so, but just are waiting for the “right time”. For us, the market is either “too high” and likely to fall, or “too low” and therefore may not go up in a hurry. Strangely, we don’t have a problem seeing our money idle in the bank while we make up our mind.

 

 

 

  1. “I know time is important, every day lost is lost forever. I am in it for the long haul” – THE MARATHONER

Then, finally there are a few of us who understand the value of time and the benefits of long-term-investing. At the same time, we take our time to ask the right questions, understand the value of financial planning, and then quickly get into action mode. Lastly, we are disciplined, at least about money, and once we make up our mind, we trust our judgement and get on with it. Truly, we are called a “planner’s delight”.

 

 

 

So, do some of these “reasons” seem familiar? Which one is yours? Most people we see have more than one, sometimes even a few of these. But importantly, it is when you put on the last “reasoning hat”, that things start moving for you on the personal finances front. For some its timely, for some late, but as the popular saying goes, better late than never.

 

 

Image credit: Anemone123%, Pixabay

 

 

Finwise is a personal finance solutions firm that helps both NRI and resident individuals and families plan for their financial goals, follow their passions and achieve financial independence.

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For advice, please reach us at getfinwise@finwise.in or +91 9870702277/9820818007.

“What problem of mine can you help me solve?”

“What problem of mine can you help me solve?”

It is that time of the year, when everyone seems to be in a bit of a party mode. It is also that time of the year, when increasingly, school/college friends are meeting up for reunions! I was at one such reunion a couple of weeks back, and, as is oft the case, was meeting some friends after many many years. After many hugs and a few jugs of beer, during which time we reminisced about old times, discussions veered towards the serious stuff, including politics, the economy as well as catching up on each of us, both on the personal and professional front.

 

With everyone’s kids around similar age bands, there was some serious collective letting-off of steam about the pressures involved in being parents to children who preparing for their Std X or XII exams (Eg. don’t ever remember studying so much even for an engineering paper in our 3rd year as compared to what kids nowadays have to do for a Std X paper, OR how the current standard of Maths and Science in Std X is akin to what was done in 1st or 2nd year graduate courses in our generation!)

 

Things then moved on to what we were doing on the professional front and how we were coping with the pressures on the job, the state of the economy, and so on. I had left my corporate career to join my spouse in our small personal financial planning and advisory business and when I explained that I was a financial planner, there were the usual reactions – how exciting it must be to be on our own, how courageous we were to have taken such a step, some questions on how I was liking it, etc.

 

Of course, there were some who also wanted to know what exactly financial planning was, and what exactly it was that I do, which again is something that I am (by now) used to. I then (as usual, passionately) launched into a description of what we do as financial planners, how it helps people, and what our typical assignments are. Things took an interesting twist, when one of them asked a very interesting question – “What problem of mine can you help me solve?”

 

While I of course answered the question and the follow-ups that came post that, it set me thinking. As I have discovered over the past many months, over various interactions with customers and others, financial planning means different things to different people. Importantly, it actually is “solving different problems” for different people, as long as the problems related to money. In fact, it actually doesn’t matter what I say I do as a financial planner, as long as people, including my customers see that I am helping them solve some money problem of theirs, which for them becomes “their understanding” of financial planning.

 

So, what “money problems” can a good financial planner-adviser help you solve?

 

 

The “LIVING BEYOND MEANS” problem

A few people we meet are earning well and spending even better. No, it doesn’t mean that they don’t have any savings or assets, just that they underestimate the needs of the future while getting hooked onto today’s pleasures. For such a person, a financial planner acts as a quick wake-up call, who puts things in perspective, and is a catalyst for habit changes.

 

 

The “TOO BUSY TO GIVE TIME” problem

Quite a few people we see are financially prudent, but are successful individuals, so caught up in their day-to-day work and life that they are simply are unable to spend quality time on growing their money. Their investment decisions therefore are impulsive, driven by products that get sold to them or event-driven eg. taxation insurance. They end up collecting a disparate set of investments, lacking purpose and inefficient in performance. In such cases, a good financial planner can help become both the filter to weed out wrongly-sold or ill-intended products as well as the channel to invest their money in vehicles that are both risk-appropriate and goal-appropriate.

 

 

The “INCORRECT ASSET MIX” problem

Many customers in the middle years bracket (age 40-50, double incomes, good jobs) are reasonably secure on the wealth creation and savings front. Like most of their generation, they own multiple houses, and while these were popular investment avenues, they are not necessarily the right asset-mix for future goals like children’s education and retirement, due to their illiquidity, as well as the current question-mark on long-term appreciation prospects. For such customers, a good financial planner helps them restructure their portfolio, keeping their risk profile and goal horizons in mind.

 

 

The “WHERE TO INVEST” problem

Some customers we meet are both personal finance savvy and investment-aware, meaning they have a good handle on their financial position as well as understand most investment asset classes and their risk features. That said, they lack the time as well as inclination to identify the right products, which will give them the right performance metrics while keeping in mind their interests and their risk appetite. In such situations, a good financial advisor helps provide the right mix of adequately diversified high-quality products to meet their needs.

 

 

The “NEED PEACE OF MIND” problem

Lastly, a few are completely sorted and only need a bouncing board to help validate their approach as well as decisions. Some may be good on the financial investments front but are inadequately prepared to face unplanned challenges in their life in case of unforeseen events. For such people, a good financial planner provides peace of mind and a tangible improvement in quality of life by allowing them to outsource their worrying nature as well as the outside chances of having uncovered risks.

 

 

Whichever it is, suffice it to say that a good financial planner/advisor’s primary role is to “solve money problems”. So, rather than try and understand from prospective financial advisors what they do, ask them – “What problem of mine can you help solve?”

 

Credit: M, a good friend from college whose pertinent question not only made me pen this, but also helped hone our customer propositions.

 

Image credit: Mohd. Hasan, Pxhere

 

Finwise is a personal finance solutions firm that helps both NRI and resident individuals and families plan for their financial goals, follow their passions and achieve financial independence.

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For advice, please reach us at getfinwise@finwise.in or +91 9870702277/9820818007.

3 easy ways to know if your financial advisor is good for you

3 easy ways to know if your financial advisor is good for you

In a recent article, we shared 3 simple approaches that can help you determine whether you need a financial planner/advisor. But once you decide you need one (or already have one), how do you know whether he or she is giving you your money’s worth, if not more?

 

Personal Finance advisors who manage money range across a broad spectrum of names. A few of these are Financial Advisor, Investment Consultant, Wealth Advisor, Financial Planner, Relationship Manager, etc. Unfortunately, while there are certifications and qualifications* that can help customers determine whether the advisor is actually an “expert”, the awareness about these are very low and the average customer has no clue about these.

 

* Some (but not all) of these qualifications are CFP (Certified Financial Planner, issued by Financial Standards Planning Board, USA), CWM (Chartered Wealth Manager, issued by American Academy of Financial Management) and RIA (Registered Investment Advisor, issued by SEBI).

 

So, how can a customer determine whether the “advisor” is qualified to give him advice and is experienced enough to be able to manage his investments? Here are 3 easy ways for you to check whether the financial advisor is right for you.

 

 

  1. The advisor asks you “What’s the goal/purpose for the investment?”

 

In our experience, most retail investors start investing as and when they have savings, based on advice that they get from whoever they know. Many a times, they discover the need for an advisor when there is a “penny-drop” moment in their lives, usually due to some realization eg. need to plan for child’s education, lost a significant sum of money in some investment, etc.

  • In either case, a genuine advisor will try to understand your goals and aspirations. Money is usually itself never the purpose (for investing), it needs to be put to good use to achieve some personal milestone for you.
  • It’s the job of a good advisor to understand your current financial health, and where needed, suggest re-structuring for your existing investments to align with your goals
  • Lastly, a good advisor will prioritize your goals and create an overall financial plan for you, that will act as your financial road-map

 

  1. The advisor says “I need to know more about you to suggest the right investments”

 

While the phrase “every customer is unique” sounds cliched, it is something that definitely needs to be borne in mind when it comes to personal finances. Your personal experiences with money, along with your financial health determine your risk-profile which, when combined with your goals, makes you unique.

  • A good advisor will spend time understanding you and your personal experiences with money, so that over time, he is able to address your fears and concerns about money.
  • He will help you understand your risk capacity (your financial ability to take risk) and your risk tolerance (the risk you are willing to take basis your personal experiences/biases), which together form your risk appetite
  • He will then suggest the right “Asset Allocation” as per risk profile and accordingly invests across asset-classes, while keeping in mind your goals. He will also come back to tell you basis your risk profile if some goals are unachievable, unless you are willing to take some higher risks

 

  1. The advisor says “I charge a fee, my advice is not free”

 

For us as advisors, one key moment when we know that a customer may not be suitable for us, is when we talk about fees. Quite a few customers balk at the idea of paying a fee, understandably so, when there would be many so-called “financial advisors” who don’t charge.

  • A good financial advisor is as much a qualified professional as a respected doctor, lawyer or chartered accountant is. He therefore charges a fee for his time and advice
  • That said, a good financial advisor also clearly explains the value that he would be able to deliver for the fee that is getting charged, so that the customer understands clearly what he is getting
  • Lastly, a good financial advisor operates in a structured manner – recorded/documented conversations, in-writing recommendations along with rationales, periodic reporting and pre-planned financial reviews, all of which mean that the number of hours that the advisor puts in for you behind you is far more than the mere conversations that he has with you

 

So, next time you feel the need to hire a financial advisor, and are short-listing one, understand how many of the above boxes does he or she tick? Alternately, use the above to understand for yourself whether your current financial advisor meets the grade, or do you need to find a new one.

 

Image Credit: Tim Graf, Unsplash

 

Finwise is a personal finance solutions firm that helps both NRI and resident individuals and families plan for their financial goals, follow their passions and achieve financial independence.

To receive our articles through email, pl subscribe here.

For advice, please reach us at getfinwise@finwise.in or +91 9870702277/9820818007.

 

3 ways to quickly check if you need a financial planner

3 ways to quickly check if you need a financial planner

Personal finance and investments related advice is omnipresent today. Open any regular newspaper and they have a daily page devoted to personal finance. Surf the TV and even normal entertainment and mainline news channels have programs which “help” customers on their personal finances and give product-related advice. On most infotainment portals, Personal Finance is a separate section and every few articles, one on personal finance advice pops up.

 

This surfeit of information has created a not-so-desirable impact for us though – easy access and availability of so much information makes us think that we now “know enough” and can even “do it ourselves”. That said, there is an information overdose even on the products side, so how does one be sure? That’s where financial planners and advisors come in. In our experience, hiring a financial planner is usually a big decision for people to make, and hence they end up delaying both this decision as well as their investment decisions, doing themselves more financial harm in the process.

 

So, how can you decide if you need a financial planner to help you with your personal finances? I am sharing below 3 simple thumb-rules which can help you decide. If your answer to even one of these is a NO, then you surely need one.

 

 

 

RULE 1 – THE SAVINGS RULE – Save at least “your Age %” of post-tax income

 

What – At age 25, you should be saving at least 25% of your post-tax income, and as you grow older, this % should increase beyond your age. Eg. at age 35 should be 40-45% and at age 45 should be 50-60%.

 

Why – Remember, for every year you work, you will live a year, possibly even more, post-retirement. Now, even assuming that your needs in retirement are more spartan than when you are young, unless you save an average of 40% of your income across your working life span, you may end up not having enough to fund your retirement.

 

 

RULE 2 – THE NET WORTH RULE – Your NW should be at least “(your Age * Pre-tax annual Income) / 10”

 

What – Your Net Worth is defined as your Assets minus your Liabilities. Do not include the house that you stay in, unless you are willing to liquidate it and move into a smaller one.

 

Why – This rule helps you assess 2 things – how much your savings have transformed into assets and how over-leveraged you are in terms of liabilities. Also, this is a “minimum” rule, to check whether you have “enough”. To understand whether you are “wealthy”, multiply this by 2 (or more). Eg. If you are 40 and your pre-tax income is Rs. 50 lakhs per year, then your minimum Net Worth should be (40 * 50 lakh) / 10 = Rs 2 Cr. Remember this is net of your liabilities and the house you are staying in.

 

 

RULE 3 – THE ROI (RETURN ON INVESTMENTS) RULE – Your investments should grow at minimum your country’s nominal GDP rate

 

What – Return on Investments is the rate at which your investments are growing on an annualized basis. Nominal GDP is Inflation + Real GDP. Your investments include both real and financial assets (excluding the house where you stay).

(NOTE: An easy rule to calculate your current ROI is the Rule of 72 – Divide 72 by the number of years it took you to double the value of your investments. Eg. If your investments were Rs 2 Cr in 2012 and today their value is Rs 4 Cr, ie. took approx. 7 years to double in value, the approx. ROI you have generated is 72/7 ~ 10%).

 

Why – In an Indian context, the nominal GDP over the next couple of decades can be conservatively estimated to be around 10% (4% Inflation + 6% real GDP growth). Preferably, add 1-2% to this, since lifestyle inflation is usually higher, and investment returns can be much more volatile than national Inflation/GDP, hence some buffers are needed so that you don’t fall short as you near financial goal horizons. So, a good number to plan for is 12%.

 

 

BONUS RULE – THE “PEACE OF MIND, NOT PIECE OF MIND” RULE

Benjamin Graham once said “The investor’s chief problem – and even his worst enemy – is likely to be himself”. And as if on cue, Jack Bogle said “An advisor serves as an emotional circuit-breaker, so you don’t abandon a well-thought-out plan”.

Frequent, sometimes even addictive perusal of “information” ends up making us over-reactive and take wrong decisions in the short-term, apart from stressing us out. A good financial planner allows you to forget about your money worries and gives you peace of mind, while also acting as a safety-net to prevent you from taking wrong money decisions.

 

 

So, use the above 3 rules to quickly check whether you need a financial planner to help you manage your finances. And use the bonus rule to assess whether your money is worrying you, rather than working for you.

 

 

Image Credit: TheDigitalWay, Pixabay

 

Rule 2 Credit: While the other 2 rules are commonly used thumb rule, Rule 2 is formulated by the authors of the book “The Millionaire Next Door”

 

Finwise is a personal finance solutions firm that helps both NRI and resident individuals and families plan for their financial goals, follow their passions and achieve financial independence.

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What role does your Financial Advisor play in your life?

What role does your Financial Advisor play in your life?

If you were asked to describe a good financial advisor, what would your response be? Based on our experiences over the years, let me go out on a limb here and say that the most popular responses are likely to be from among the below.

  • Someone who is trust-worthy, whom I can trust with my money
  • Someone who is available to me for advice when I need and has my interests at heart
  • Someone who will make my money grow at a decent pace while also ensuring that it is safe

 

Of course, there could be other responses, do add them in the comments section below. That said, if I am right till here, let me turn around and tell you that these expectations are rather basic and should describe any financial advisor worth his or her salt. I fact, these above “virtues” should be basic minimum expectations for anyone to qualify as a financial advisor. After all, why would you even consider using the services of someone who is not trustworthy or not available when you need or not competent?

 

So, what then actually makes a good, rather “really good” financial advisor? In my view, a truly good financial advisor will have the qualities of these professionals as well!

 

 

 

 

 

 

  1. Doctor

A doctor diagnoses ailments basis visible symptoms, necessary reports and probing, identifies them as chronic, acute or placebic (imaginary), and treats accordingly.

Similarly, a good financial advisor should be able to unpeel your personal finance onion layer by layer to identify your money problems so that the right approaches can be used to put them in order.

 

  1. Accountant

Just as an accountant helps you put and keep your books in order, as well as plan and stick to a budget, a financial advisor helps you understand your personal financial balance sheet and profit-loss statement, co-creates a plan with you to nurse them back to health and helps you execute a budget for your household.

 

  1. Designer-Architect

A designer-architect understands your personal desires and aspirations and helps you accordingly build a home that feels like yours and only yours.

In the same way, a financial advisor understands your personal financial goals, helps you prioritize them and works with you to construct your own castles.

 

  1. Policeman

A financial advisor is your personal money police and helps you stay on the right side of your plan and budget, while also reading you the riot act once in a while when you step out of line!

A financial advisor also is the person who you will run to in case of any doubtful or poor experience with your money, to seek advice on damage control as well as salvage.

 

  1. Lawyer

A lawyer helps you interpret the rules or the laws specific to your problem and finds a way to solve your problem for you within the available space to your best advantage.

Just like a good lawyer, a financial advisor always has your interests as paramount and protects them at all costs, even if you are at times being criminal with your money! Though at times she (or he) may not be civil about it!

 

  1. Psychologist

A psychologist studies people, their thoughts, feelings and behaviors, in an effort to understand the “why” behind people’s actions so that they can help plan appropriate corrective measures.

Likewise, a financial advisor understands you as a person, your relationship with money and your deeper motivations so that his advice is tailored to suit you as a person. At times he also gently corrects you when you are making common behavioral mistakes with your money.

 

  1. Teacher

Last but never the least, a teacher is someone who imparts knowledge and wisdom to her students, feels pride at their successes and then selflessly moves on to the next batch, ready to start the journey all over again.

A financial advisor too helps you move along the path of “personal financial wisdom” from safety to security to freedom, is there with you to celebrate your small wins at every step and when finally, your financial goals get achieved, feels proud to have helped make it happen.

 

So, if you have a financial advisor, how many of the above qualities does he or she have? And if you don’t have one as yet, use the above as benchmarks to set your expectations so that you select the right one!

 

Finwise is a personal finance solutions firm that helps both NRI and resident individuals and families plan for their financial goals, follow their passions and achieve financial independence.

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For advice, please reach us at getfinwise@finwise.in or +91 9870702277/9820818007.

 

Image credit: foreside.com

 

With even banks failing, which asset class is safe enough for me to invest?

With even banks failing, which asset class is safe enough for me to invest?

The last couple of years have not been kind to investors at all. Equities (the broader indices) have near-crashed, debt mutual funds have also sprung unpleasant surprises, real estate has languished. And if things couldn’t get any worse, the so-assumed last bastion of safety for investors – banks, has also been breached.

 

In the last few weeks, two specific pieces of bad news has hurt investors and further spooked markets which already were like a cat on a hot tin roof. The first relates to the NPA woes of Yes Bank, and despite the repeated assurances of the management, investors are panicking and not only are its shares being dumped by investors and employees, there are anecdotal stories of FDs and even basic accounts being moved.

 

The second piece of news is far more chilling to the retail investor. The RBI suddenly froze all accounts and transactions of PMC (Punjab & Maharashtra Cooperative) Bank, a medium-sized cooperative bank, throwing its depositors and customers into serious emotional turmoil and financial crisis. It turns out that nearly 3/4ths of its loans are NPA (non-performing asset, which in simple words means – unlikely to be paid back, at least in whole), having been advanced to a single customer (in brazen violations of existing regulations), which has gone bankrupt. What is sad is that there seems to be not much hope immediately in store for the thousands of retail investors who had deposited their hard-earned savings in the bank, and whose monies and access to liquidity has got stuck all of a sudden.

 

This leads me to the titular question – “As an investor, which asset class is safe enough to invest?” While I am sure this question is on many investor’s minds, this question is better answered by flipping it and instead asking oneself – “As an investor, how much do I understand the risks?”

 

Let me explain further. Most of the time, investors burn their fingers because they invest without fully understanding the products and the risks that they carry. Usually the only understanding of risk that they tend to have is volatility, which they then convert into a perception of capital protection. Ie. Equity is very volatile, and capital loss can be significant. Debt is not at all volatile and is like an FD, therefore capital protection is guaranteed.

 

Unfortunately, this is an incomplete picture of the risks that the products carry. At a recent seminar I attended, a speaker used the iceberg metaphor to depict the unseen factors behind results (success or failure) and it is apt here as well. Risk is also like an iceberg. While some part of it is seen, many parts of it remain unseen. And importantly, as an investor, while it may not be possible to identify all the risks (ie. many parts of it will remain unknown), it is necessary to understand and estimate it, to be able to manage it.

 

Eg, In the case of Equity, volatility is seen as the primary risk, but actually that’s not the risk investors should worry about, since over the medium to long term, the volatility subsides substantially. That said, business risk (how will the company perform) and concentration risk (% share of the company in the overall portfolio) are important risk factors that need to be managed.

 

In the case of debt, investors have some understanding about interest rate risk, since they know that FDs when renewed may be at a lower or higher rate, depending on the prevailing interest rate. On the other hand, the general investor belief about debt is that capital protection is guaranteed, and hence one sees a bee-line for some of these corporate deposits or debentures, which offer much higher rates vs the prevailing rate in the market. Key risks that investors ignore in the case of debt are credit risk (what if the company fails to pay either the interest, or worse, the principal as well) and business risk (what if the company you are putting your money in has bad lending practices and hence sinks eg. PMC Bank).

 

So, leading back to the question we asked originally, unfortunately, the answers aren’t black-or-white. Investors would be prudent not to chase so-called “safer” asset-classes basis their past experiences. They should instead spend time understanding the risks involved and managing them. Your investment is safe only if you have taken the necessary and right steps to manage the risks involved in those investments. Managing the risks involve having the right asset allocation basis your (the investor’s) investment time-horizons as well as appetite for risk, identifying the right investments within each asset class, as well as making sure that there is adequate diversification, both across and within asset-classes.

 

While the above is not rocket science, having both, the right expertise (analysis and research) and pain-staking effort (regular review and course-correction), is required. And importantly, the need to “unbias” yourself while evaluating your choices and taking your decisions is essential. If you are new or busy, then having access to a trusted advisor will help you manage your portfolio better in terms of both risk management as well as adapting the portfolio to best suit your needs and goals.

 

To summarize though, remember – understanding the risks is key to determining safety of your investments. Without adequate understanding, even the safest-seeming investment can turn out to be super-risky, while with some level of understanding and risk-management, investors can navigate their way safely through even seemingly high-risk investments.

 

Finwise is a personal finance solutions firm that helps both NRI and resident individuals and families plan for their financial goals, follow their passions and achieve financial independence.

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For advice, please reach us at getfinwise@finwise.in or +91 9870702277/9820818007.

 

Image by MoteOo from Pixabay