Middle Class Dreams

Mastercard advertisements

noreply@blogger.com (Smart saver) — Sun, 26 Oct 2008 15:02:00 +0000

I am a huge fan of the Mastercard advertisements, "There are some things money can't buy, for everything else there is Mastercard". The latest one is my favorite, the reunion of four friends at a five start hotel. To the tune of 'Purani Jeans" a middle aged executive takes a flight(travelling first class) and buys gifts for his friends, all the while reminiscing about their youthful days when the four of them tried to fit on a single scooter. They have dinner at a five star, and fight over who pays the bill, just like they used to, so many years earlier. Only this time they are fighting to pay. And tbhey resolve it, as they used to before, with a coin toss..

Wow. Dreams do come true. This is a financial fairy tale, hope we all get a piece of this feeling in our lives.

Investing in equity

noreply@blogger.com (Smart saver) — Sun, 26 Oct 2008 14:27:00 +0000

A lot of people including myself, have lost money in the recent down turn of the equity markets. Some are indifferent, some are looking for buying opportunities, but most people are in trouble.

A very small percentage of India is invested in the stock market. It's a really good thing that government backed retirement investments ( read PF, PPF) are not invested in equity. Yet there is so much talk of middle class India's wealth being wiped out. There is even talk that the government should step in to protect small investers!! (And how is that supposed to happen?)

It's really sad that many of the middle class people who have to endure losses they can ill afford are in this soup because of their own greed. It sounds a harsh thing to say, but this is true. Why should anyone sell off their gold, their house, or take a loan (yes, I know people who have) to invest in equity? Why should anyone put money that they need in the coming three years (and this is the absolute minimum) in stocks? Naturally that was a recipe for disaster.

My two cents on the cardinal rules for investing in equity:
1. Invest money that you do not need in the next 5-7 years. Only invest if the time horizon is greater than that, as this will give you time to weather the highs and lows.

2. Assess your risk tolerance. Invest according to that. Make adjustments as you grow older, your income and goals change. Most importantly, and this is where people miss out, make adjustments if one asset class outperforms the other. Let's assume you have arrived at 50% equity and 50% fixed returns for your asset allocation. And that your investment in equity appreciates by 100% (it happens during boom times if your stock pick is spot on). Then you should take some money out of stocks and put it into fixed returns. How much? That depends on your risk appetite and time horizon.

3. Diversify. Invest in asset classes like debt, equity, gold, real estate. Within equity, build a varied portfolio across industrial sectors. Never have a portfolio where the stock of a single company (however blue chip) dominates. Also, very importantly, do not let company stock be a major component of your portfolio. Your income is anyway dependent on the performance of the same company :-). If you receive some of this stock as part of your employee benefits, hold on to it until the minimum mandatory period, and then sell off the percentage of it that is not in tune with your portfolio.

4. Invest in equity only if you are comfortable doing so. Not because everyone else at your workplace, or social circle is doing it. This is not a race, this is about each one making their money to work for them. After all, money is a good slave, but a bad master.

Diwali...the festival of lights

noreply@blogger.com (Smart saver) — Sun, 26 Oct 2008 14:19:00 +0000

Goddess Lakshmi seems very angry with the entire world. So much wealth has been lost in the equity markets, companies are in the red, people are afraid of losing their jobs, inflation at a decade-old high. All of this means a very subdued Diwali.

It's a time for quiet reflection, and introspection. Do we really need all the stuff we own? Are we truly diversified in our investments? Have we assessed our risk appetites correctly?Are we spending to make ourselves happy, or to display a certain image?

As we clean up our homes today, it's time to declutter our thoughts. It's time for a new beginning.

The great Indian Wedding

noreply@blogger.com (Smart saver) — Wed, 16 Apr 2008 16:44:00 +0000

In India, marriages are traditionally between two families rather than two individuals. Whatever may be the economic level of the family, weddings are large family events. Parents usually spend a significant proportion of their assets on the marriage of their children. Because of the prevalent social norms in India, most people spend way more on a daughter’s wedding than on a son’s.

Several friends of mine who have gotten married in the recent past have had to spend all their savings on their weddings because if they had’nt, their parents would have emptied out their retirement kitties. It is very common for a young couple, and their parents (specially of the bride) to take loans to fund the extravaganza.

It all seems such a waste to me. Sure a wedding is a very important event, but after all it’s just a party. Surely nobody needs to go bankrupt in order to have a fulfilling marriage. How can one start one’s married life (or for that matter any new stage in life) on such a wrong foot? And besides most weddings are a social formality, for both the hosts and the guests. It’s actually just a handful of people who are really happy for you, and those people care too much for you to cause you or your family to go bankrupt. The rich can afford to have grand weddings, because they are not sacrificing their financial security. But it’s the middle class who hurt their finances the most by taking loans.

Several friends think that I have such a cold calculated view because I have not experienced the wedding fever myself. And that I will be very different if I am the one getting married. Sure there is some truth in that statement, because human nature is unpredictable. But I hope I won’t fall into that category. In any case, if a guy wants to empty a significant part of his and my savings for a party, then he won’t be the right person for me!!!

Delhi trip

noreply@blogger.com (Smart saver) — Tue, 15 Apr 2008 04:41:00 +0000

This is a long overdue post about my recent visit to Delhi. I spent 2 years there as a student, almost another year as a software professional in nearby Gurgaon before moving to Bangalore 3 years ago. This visit was to relive the old days, specially since my best friend is wrapping up her days in grad school in Delhi.

The city is beautiful as always, the expansive roads, the flowers of the late spring which I was lucky to see. Delhi is getting ready for the Commonwealth Games in 2010, so there's a lot of work going on. Everyone I met in Delhi was excited about the prospect of Delhi becoming a world class capital. I plan to visit again in 2010.

There were two major things I did in Delhi (apart from being able to spend quality time with my friend) and those were shopping and living in a student hostel. I totally enjoyed the shopping part, I bought several salwar-kameez for myself, and some for friends. I stayed on budget though. I had planned a total of 20K for this trip, including airfare (9K plus 0.5 K for transport to and from airports). I also took my friend and her lab people out to dinner which came to 2.5 K (including tip). It was definitely extravagant but every time I have visited her (which was a lot some years back) my friend has done it everytime. I also bought gifts for friends which were due anyway and would have cost me a lot more in Bangalore. I was totally tempted to burst my budget and get some more stuff for myself, but I did'nt. :-)

Delhi is such a shopping haven, specially when you compare it to Bangalore. The variety, the enthusiastic salespeople (who won't mind if you ask them to show you 50 pieces and then you walk out without buying. Try doing that in Bangalore!!), the colourful atmosphere on the streets. On the other hand, the fact that my friend and me had to wind up our shopping so that we could be back before dark. That too when there were two of us. She was surprised when I told her that in Bangalore I would be comfortable being out shopping alone till 8 as well.

The other aspect was living in the students' hostel. My friend commented that I had become sensitive and she was right. I just could'nt believe that I had stayed in the same hostel 4 years back, and loved the time I spent here. The water shortage, having to carry all the stuff to the common bathrooms, lack of cleanliness, etc. really put me off. Not that the apartment I live in is posh by any standards, but it's clean, rather I keep it clean and I don't share it with a whole bunch of people who are least interested in keeping it clean. I guess that is what happens after getting used to the real world again. I really ca'nt see myself living in a hostel now.

It was a refreshing break. I was happy to be there, happy to be back.

Upcoming family wedding

noreply@blogger.com (Smart saver) — Mon, 14 Apr 2008 10:34:00 +0000

This weekend I am headed home to Goa to attend my cousin's wedding. Like all Indian weddings, this will be a huge event and almost my entire family will be there.

I had to buy a new outfit for the wedding. Luckily I had a formal black skirt (which I can fit into, thanks to my recent weight loss), so I just needed to buy a top. I purchased it for 1.5K. Again I am lucky that I did'nt need to buy shoes or a purse. I need to go to have my hair and makeup done, so that will come to another 500 rupees. I just hope that my parents approve of the outfit I have decided on, else there will be an additional cost of buying a new one at the last moment.

The biggest cost will be the air fare (5K), plus conveyance to and from the airports (another 1.8 K) So that's a total of 8.8 K to attend this wedding. I am not buying a gift, my parents will be taking one. I am not sure whether I should get a separate gift, I probably should because I am independent and my cousin sent me a card separately. But that will be another 1K, because my parents will not like me to give a 'cheap' gift. And I am not inclined to spend more on this wedding anyway. In any case, this is the last of my older cousins who is getting married, next time I will have to get a separate gift!!

One of the things that I am looking forward to is for all my cousins to see me, now that I lost 10 kgs since they saw me last. Many of them kept telling me that I had put on weight (as if they had'nt!!! I can't imagine saying something like this to anybody's face). Now I can have the last laugh. :-) The one thing that I am just dreading is that everyone is going to be like 'it's your turn next' and things like that. I think the best strategy will be to ask them an equally nosy question. :-) I can feel devil's horns sprouting on my head.

Inflation at 7.5%

noreply@blogger.com (Smart saver) — Mon, 14 Apr 2008 09:36:00 +0000

The current inflation in India is a staggerring 7.5%!!!!!. Given that the rate of interest on all fixed return instruments is 8% (pre tax), and the stock markets in the red, it looks so very dismal.

Personally (and I am so lucky for this), the only way I am affected by this is that my investments are effectively not growing at all. Also I am more inclined to buy a house now, since home loans are hovering at 10.5%. But most people have been so adversely affected, the rising food costs are throwing already stretched household budgets into a breaking point.

I am no economist, and have no idea what has caused all this. But surely things can be better managed. On one side, India is growing and some of us are seeing a substantial increase in quality of life. (I always believe that had I been born 10 years earlier, I would have no option but to study for the GRE and go to the US, the predominant engineering jobs available here being in PSUs). But on the other hand, food prices are such a huge concern and affect the vast majority.

Recent big expenses

noreply@blogger.com (Smart saver) — Wed, 26 Mar 2008 07:51:00 +0000

As I mentioned in an earlier post, my new job will save me money on commuting and food. And it has. So my expenses should have fallen by 1.5K this month. However they have increased by 3.5 K, all this is on books.

Yes, I bought 10 books to read in the past 2 weeks and at the proper stores (not from the streets at a fraction of the cost) In any case these title would not be available anywhere else and I am totally enjoying reading them (completed 5 :-) ). But still 3.5K is very pricey, maybe I can gift them now. :-)

I also bought 2 sets of salwar kameez. a completely unplanned expense (1.5 K). That too when I am going to Delhi this weekend. Very bad, very bad.

So it better be back to disciplined spending after the Delhi trip. God knows when I will be able to there next, and with my best friend moving out from there, it won't be the same again.

Impromptu trip home

noreply@blogger.com (Smart saver) — Tue, 11 Mar 2008 12:13:00 +0000

I had almost a week off between leaving my old job and joining my new one. I had planned on using that time to spring clean my apartment and do some reading for my new job. After one day of doing that, I realised that it would be very difficult, and at the end of the week, I would be more frustrated than relaxed. So i decided to go home.

The cost of a last minute round trip from Bangalore to Goa came to Rs 6K. I also had to shell out for transport to and from the airport (4 trips) which came to Rs. 1.5 K. And now with the Bangalore airport being shifted 60 Kms out of the city, that will become pricey!!! So all in all, the trip cost me Rs. 7.5 K. I did'nt spend at all when I was at home this time, no going out with friends and even when I went out with my parents, they had invited other people (since those plans had been made well in advance, before I decided to come), so I did'nt offer to pay.

Goa is a very expensive place to live in, and eating out is so expensive. Much more than in Bangalore. I really feel jealous of my colleugues who are buying property in their home towns, I can't afford to do that in mine. It'll be a long while before I can, and by then the prices will rise even further. Not that I want to ever stay there, but I would like to have the option. And I do have a mental block towards renting in the place I call home. That is the disadvantage of coming from a place which is such a famous tourist destination.

Cost of a cold: Rs. 2000!!

noreply@blogger.com (Smart saver) — Tue, 11 Mar 2008 12:12:00 +0000

Bangalore is the allergy capital of India, or so we say. In my very first month here I succumbed to the seemingly harmless, but highly irritating cold and fever. My job as a software professional further made it irritating: office lit brightly by artificail lights, staring at a glowing screen and the air conditioning. Three years later and the colds continued at the same frequency. A small weather change creates an office filled with people coughing or blowing their noses ( and the closed environment provides a happy place for all the viruses and bacteria to breed) and doctors' waiting rooms filled.

My last bout was not a particularly nasty one, it lasted a week. In the spirit of this blog, I list all the related expenses. The total shocked me.

Doctor's fees ( 2 visits) Rs. 300
Medicines Rs. 300
transport costs for doctor's visits Rs. 150
Transport costs of going to office on a holiday ( to make up for sick absence, 2 days) Rs. 300
Take away (too tired to cook, plus need to eat extra foods) Rs 700
Entertainment ( movie cd cos i was too tired to go for a walk or hangout) Rs. 200

Total: Rs. 2050!!

Three bouts in a year could have financed another trip home for me.

All this emphasizes the importance of fitness. This year I have implemented a sensible eating and exercise plan, and hopefully that will keep me away from the common cold.

Emergency fund: how much, why & where

noreply@blogger.com (Smart saver) — Tue, 12 Feb 2008 18:11:00 +0000

Every financial expert, every financial blog talks about the importance of an emergency fund. That will cover expenses like unexpected repairs, medical bills for minor illnesses, travel, etc. The fund should also be large enough to cover living expenses in case of a job loss till you find a new job, or if a family member has to move in with you for any reason, or if your roommate(s) moves out and you have to pay the entire rent till you can find either a new house or a new roommate.

The size of the fund should be atleast 6 months of the fixed living expenses, if you have no children or dependents. If you do, I think 10 months is required. The fund should be larger the further away from family or friends you live. I strongly believe that this fund (atleast 3 months worth of expenses when you have just started earning) should be built before investing money anywhere. Then you can build up both your investments as well as the emergency fund.

Most of the emergency money should be in a savings account that you can access anytime, and yet gives a high interest should you not touch it at all. But some of it has to be kept as cash. Think of it this way: what if there is an emergency and you cannot go to an ATM? As someone who used to not have even Rs. 500 cash most of the times, I have often borrowed cash from family, friends and roommates to cover trivial expenses.. Specially those living alone need to have cash with them at all times.

Buying gold…Investment or not???

noreply@blogger.com (Smart saver) — Tue, 12 Feb 2008 18:08:00 +0000

One of my closest friends spoke very excitedly about how her ‘investment’ in gold jewellery is appreciating. She bought a pair of bangles in November 2005 for Rs 14 K and now the same weight of gold costs Rs. 22 K. She thinks that she has ‘earned’ a return of 57.1 %.

This certainly looks like a wonderful return. Besides gold will never go out of value. So why do I still not look at gold as an investment? The reason is: if she needs money, is she going to sell her bangles? These are bangles that she wears every single day, not some unseen pieces lying in a bank locker. I really doubt that even if the price of gold sky rockets they will be sold. There is an emotional barrier towards selling gold jewellery. It is the last resort for any individual or family. Investments are not about emotional attachment. You simply reclaim them for practical reasons.

Secondly, even if she decides to sell the bangles, whom will she sell them to? Banks are not authorized to buy back gold, neither are any financial institutions. I very much doubt that the branded jewellery stores buy gold this way. So she will have to take them to local jewellery shops. The less said about those the better. I doubt they will give the 22K.

So if at all one wants to invest in gold, it’s better to buy some gold funds or some other such instruments which can be redeemed as pure investments and nothing more.

My impending job change

noreply@blogger.com (Smart saver) — Tue, 12 Feb 2008 17:55:00 +0000

Hi all. I am back from a very long break from blogging. The main reason being that I am in the middle of a job change: interviews, juggling my present job while taking time off for attending the interviews, deciding between offers and resignation. End of this month, I will be out of my present company and in a new company.

I have got a 60% hike J, way more than I expected. That combined with the fact that my commute will be cut in half, will lead to a pretty tidy saving per month. My work load will be way more, but I have promised myself a less strenuous job after my next change (not before 4 years, if everything goes well). So that will be just as well.

And the learning opportunities are immense here. I had another offer, which would have paid more, because I would be onsite for a long time. But then it would be the same work that I have been doing all this while. So I opted for the former offer.

The only expense of the job change is going to be the transport costs for attending interviews all over Bangalore and going to office on weekends to make up for my time off. I also plan to buy some formal work clothes. All in all, I plan to spend Rs.10 K. So I hope to see a real cool increase in my net worth by this year end.

Tax Season Special: Provident Fund or PF and Voluntary Provident Fund or VPF

noreply@blogger.com (Smart saver) — Mon, 07 Jan 2008 04:26:00 +0000

All salaried individuals have a Provident Fund (PF) .In India, employers will deduct 12% of the basic salary and put it into the individual's PF account. In most cases, there will be a full employer match. The PF account of the person is tied to the current employer. In case of a change of employer, the individual has to activate the transfer of the funds.

Investment Limits for PF
The PF contribution will be 12% of the basic salary by the individual, and a matching amount contributed by the employer. So unless your salary changes, this amount contributed will not change. In case of long periods of unemployment or leaving the country, the individual must activate withdrawal of funds from the PF account.

Investment Limits for VPF
VPF provides a way for an individual to contribute more funds into the PF which is essentially a retirement account. The individual can specify any amount (upto the entire take home salary) as the voluntary PF or VPF contribution. There will be no employer match on the VPF contribution. Of course, investment exemption can be claimed only for investing upto Rs. 1 lakh.

Lock in Period
This is an employer linked retirement fund. Upon withdrawal before the age of retirement, the interest earned will be taxable.

Return on investment
Currently the interest rate is 8.5% for both PF and VPF. Since PF contribution is mandatory for salaried individuals, I discuss advantages and disadvantages for VPF.

Advantages

Provides an effective way (through payroll deduction) to increase the retirement kitty. This is especially useful when the basic salary is a relatively small fraction of the total take home pay.
Interest earned is tax-free. The only other assured return instrument offering tax-free returns is PPF. VPF has a slightly higher interest rate (8.5%) compared to PPF (8%), which can add up to a significant difference over the long term.

Disadvantages

Individuals with high risk tolerance will find the rate of returns small compared to those offered by ELSS. Smaller lock in periods offered by other instruments offer investors more flexibility in managing their money.
After every employer change, the funds need to be transferred to the new employer. This process needs initiation, and in some cases, active follow up.

Smart Saver's Verdict
VPF can be effectively used to harness the power of compounding in your favor. If you make significant VPF contributions in the first few years of your working life, the interest on those will keep compounding. These years typically coincide with the low financial responsibility phase for most people. Subsequently, as the need for more funds arises, (such as when you need to start paying off home loans, or after you start a family), the VPF contributions can be stopped.

Tax Season Special: National Savings Certificates or NSC

noreply@blogger.com (Smart saver) — Mon, 07 Jan 2008 04:24:00 +0000

How to invest in NSC?
NSCs are available at the local post office. Like bank fixed deposits, you can buy NSCs as and when you desire and at any post office in India.

Investment Limits
The minimum amount for NSC is Rs 1,000. There is no upper limit. For amounts greater than or equal to Rs. 50,000, PAN number is required. Of course, investment exemption can be claimed only for investing Rs. 1 lakh.

Lock in Period
An NSC matures in 6 years. After 3 years, some conditional withdrawals are permitted, but the tax penalty will eat away the returns earned during this time. The NSCs can also be pledged ad collaterals while taking loans.

Return on investment
The interest rate offered by PPF is 8%, compounded bi-annually. The interest earned on NSC is taxable.

Smart Saver's Verdict
Before the last rise in interest rates (I am talking of the time in early 2006, before the rates started climbing. Now of course, we are witnessing a descent), NSC was an attractive fixed return investment because of its low lock in period, compared to PPF whose lock in was 15 years. At that time, NSC's rate of return at 8% bi-annually was better than a bank fixed deposit running for an equivalent time frame.

Today, the verdict is in favor of tax saving fixed deposits that have a lock in period of 3 years and equivalent (if not better) interest rates; and hence score over NSCs.

Tax Season Special: Bank Fixed Deposits or FD

noreply@blogger.com (Smart saver) — Mon, 07 Jan 2008 04:22:00 +0000

How to invest in FDs?
Simply walk into any bank (not necessarily a nationalized bank) and they will do the rest.

Investment Limits
There is no upper limit. Of course, investment exemption can be claimed only for investing Rs. 1 lakh.

Lock in Period
A FD for tax exemption purposes generally has a lock in period of 3 years at present.

Return on investment
The bank will announce this from time to time. At the moment it is in the range 7.5 to 8.5%. The interest earned is taxable.

Advantages
Fixed return on investment.
Lock in period of 3 years. (As of now)
Interest rates compare favorably with those offered by PPF and NSC (as of now)
On maturity, the proceeds can be used for any financial goals, not just retirement.

Disadvantages
Interest earned is taxable.
Individuals with high risk tolerance will find the rate of returns small compared to those offered by ELSS.

Smart Saver's Verdict
At present, the small lock in period of bank FDs makes them score over the other fixed return avenues. However, for the goal of retirement planning, PPF still has an advantage because of its returns being tax exempt. It's about making the trade off between returns and time period of the investment.

Tax Season Special: Public Provident Fund or PPF

noreply@blogger.com (Smart saver) — Mon, 07 Jan 2008 04:19:00 +0000

Since the tax season is here, I decided to give a description of the various investment options available under Section 80C. Upto Rs. 1 lakh can be exempted from your taxable income. If you are in the 30% tax bracket, this will lead to saving Rs. 30,000. Of course, the returns on the investment are over and above that. Hence this is all the more reason to avail of this provision to the maximum possible extent.

This post deals with Public Provident Fund or PPF.

How to open a PPF account?
An individual can open a PPF accounts in a bank authorized to do so, like the State Bank of India. This account can also be opened in the name of your children. However, each individual can have only one PPF account. Documents to be submitted include PAN card and photograph.

Investment Limits
Once you have the PPF account, you can deposit either a lump sum at a single time or an amount at any number of intervals. The upper limit for investments is Rs. 70,000 and lower limit Rs. 500 per year. This means that you have to deposit at least Rs. 500 every year to keep the account active. Other than this, there is no compulsion to deposit a fixed amount every year; one can adjust the amount depending on the situation in that year.

Lock in Period
PPF has a lock in period of 15 years. After 3 years, some conditional withdrawals are permitted, but the tax penalty will eat away the returns earned during this time.

Return on investment
The interest rate offered by PPF is 8%, compounded annually. As of now, the interest earned on PPF is tax exempt.

Advantages
Assured return on investment, safe instrument.
The interest earned is exempt from tax, though this could change.

Disadvantages
High lock in period
Individuals with high risk tolerance will find the rate of returns small compared to those offered by ELSS.

Smart Saver's Verdict
PPF is a retirement fund; hence the lock in period being high should not be looked at as a disadvantage. Secondly, even the most risk tolerant individuals need to have a fixed return component in their portfolio (in order to make it balanced) and PPF is a worthwhile candidate to consider. As of now, despite its high lock in period, PPF scores over the other fixed return instruments (like NSC, bank deposits) because the interest earned is tax exempt.

The only situation wherein a PPF investment will be ill advised will be when that money will need to be tapped before the end of the lock in period. Of course, unforeseen circumstances can appear in anybody's life, but I here am talking about people who do not have an emergency fund, or who have a major life event (child's education, marriage, home purchase, etc.) coming up for which they need to earmark funds.

Term Insurance is the way to go

noreply@blogger.com (Smart saver) — Fri, 04 Jan 2008 04:33:00 +0000

Insurance protects us when calamity strikes. Health insurance will reimburse healthcare costs wholly or partially, depending on the nature of the policy. property insurance helps recover the cost of houses and vehicles in case of accidents and natural disasters. When we buy insurance for these causes, we do not expect anything back in case none of the respective eventualities occur. We pay the premiums fully accepting that the money will not be recovered if we do not need to claim the insurance amount. This is called pure cover.

But when it comes to insuring ourselves, most people think that this model of insurance ('term insurance' or pure cover life insurance) is throwing money away. This is the reason why the life insurance market is flooded with endowment (wherein the entire sum insured plus some bonus is paid out at the end of the policy duration) and money back policies (wherein a fraction of the sum insured is paid out at regular intervals during the policy duration). Agents of course are only too happy to sell these policies, the higher the premium, higher is their commission. But once you do the numbers, a different picture emerges.

Let us take the case of a 28 year old female requiring a cover of Rs. 10 lakhs, for a period of 20 years. The premium, under an endowment policy for this works out to approximately Rs. 47,000 per year. At the end of 20 years, upon survival, the insurance company will pay back the Rs.10 lakhs, which was the sum assured.

In case we opt for term insurance, the premium becomes approximately Rs 2,700 per annum. Of course if the person survives the term of 20 years, the insurance company pays back nothing. On the face of it, it looks like we have thrown away Rs. 2700 a year, or Rs. 54,000 over 20 years.

But let us see what happens if we are to invest the Rs. 44,300 ('saved' by choosing a term policy instead of an endowment). Assuming an annual growth of 8% (this is what banks are offering at the moment. you can do much better by investing in equities), at the end of 20 years this works out to a whopping Rs. 24 lakhs which makes the returns earned from endowment pale in comparison. And this is a very conservative estimate.

There is another problem with non-term insurance policies. This example assumes that we had the Rs. 47,000 available annually to pay the premium. Usually the premium required for an adequate meaningful cover works out so high, that most of us will settle for whatever cover an affordable premium will give us. This is a serious risk, as in case of an eventuality, the financial needs of the policy beneficiaries are compromised. After all the very purpose of insurance is to take care of all your financial obligations (dependents, loans, etc.) when you are no longer around to do so.

Bottomline: Insurance is cover and investment is about returns. Manage these objectives separately and both will be achieved.

Tax planning season is upon us

noreply@blogger.com (Smart saver) — Thu, 03 Jan 2008 03:35:00 +0000

Sometime this month, many of us will get an intimation from the HR/finance departments to submit proofs of various investments so as to avail of tax benefits.

(For those readers who are unfamiliar with what this means, I include a brief explanation. In India, as per the current income tax laws, one can get a tax deduction on upto Rs. 1 lakh, over and above standard deductions. Standard deductions exempt approximately the first one lakh of the income from income tax, slightly more if you are a woman or a senior citizen. The one lakh that I am talking about is over and above that. All you need to do is show that you have invested an amount upto one lakh into certain specified instruments and that amount is taken off from your taxable income. For more details on the instruments comprising this list, read
http://in.biz.yahoo.com/071126/93/6ocdz.html).

So if you have'nt done it yet, invest right away and save tax. Better to do it now, than to rush to do it in the last week of March (plus you lose 3 months for your money to grow). And best of all, when your company deducts the correct amount of tax at source from you (as a result of correctly factoring in all your investments and exemptions), you don't need to wait for a tax refund from the income tax department as well.

DISCLAIMER: I am not a certified financial professional. You are advised to verify all details regarding investment schemes, taxation laws, etc. from certified sources. The intent of this blog is to talk about the values and attitudes related to money management.

Bangalore

noreply@blogger.com (Smart saver) — Tue, 01 Jan 2008 12:53:00 +0000

A year ago, I was returning from church along with my landlord’s family (Dual income, two kids, one in school, the other in college). We passed by a mall about 10 minutes walk from our building and they asked me if I had been there.

Of course I had been there. Many, many times. To the multiplex where each ticket is a minimum of Rs. 100, even on weekday mornings. Eaten at the food court where a small (and average tasting) icecream costs Rs. 70 and a small cup of steamed corn Rs. 40. Hanged out at the coffee shop where the simplest coffee retails for Rs. 45. Naturally, I could’nt tell them all this. So I just mentioned that I visit the grocery supermarket there and that I consistently find that fresh fruits and vegetables at prices lesser than the local vendors.

By Bangalore standards, I am not extravagant when I visit these multiplexes, food courts and coffee shops. Because that is what software engineers do on weekends and on weekdays after work in this city. That question was a rude awakening for me. A family of four lives, educates its children and saves for a rainy day, on a total income that will be less than the starting salary for a software engineer. And the same software engineers will then complain that they have hardly anything left over to save at the end of the month.

For those of you who did’nt know, Bangalore is India’s IT capital. Many young high earning professionals like me have made it their home. Once known as a pensioner’s paradise, today it is one of India’s most expensive cities to live in. Even a combined post tax income of Rs. 1 lakh per month will keep a dual income, no kids couple firmly in the middle class.

The original population of the city, who are not part of the booming job sectors, obviously have been left out of the glittering malls and shopping arcades that are mushrooming all over the place. The only ones who have benefited are the people who own houses as rental incomes have hit the roof.

I am sure that Bangalore is not the first city (even in India alone) to have experienced this demographic change. However, this highlights the need for all of us to manage our money better, so that we are protected not only from inflation, but also from the vagaries of the job market and urban develoment.

Spending, saving and investing our money optimally is something all of us need to do, irrespective of our ages, family situations or job robustness. Not just in Bangalore.

2008 is here

noreply@blogger.com (Smart saver) — Mon, 31 Dec 2007 08:29:00 +0000

New Year Greetings to everyone!!!

It has been a year since I became aware of the importance of finanacial planning. The journey so far has been very exciting and there is such a long way to go. The first ever New Year resolution that I kept was finance related: to keep a track of all my expenses. It sounds very simple, but this was something that I had been trying to do for many years before that, but only succeeded in 2007!. It is to do with the fact that all these years it was others who told me to do it, but now it was finally me.

This blog will be about my financial journey towards financial freedom. I want to be able to do work that I enjoy, not for the money to live on.

Wishing you all a very happy 2008!