The Physics of Personal Finance Ranjan Varma Chief Web Architect India’s first online weekly on personal finance http://www.ranjanblog.com http://personalfinance201.com

Newton’s three laws Every object in a state of uniform motion or rest tends to remain in that state of motion or rest unless an external force is applied to it. The relationship between an object's mass m , its acceleration a, and the applied force F is F = ma . For every action there is an equal and opposite reaction.

Every object in a state of uniform motion or rest tends to remain in that state of motion or rest unless an external force is applied to it.

The relationship between an object's mass m , its acceleration a, and the applied force F is F = ma .

For every action there is an equal and opposite reaction.

Getting started is the key Procrastination in matters of personal finance is widespread. So the most important step is to get started. Failure teaches, success does not. The journey of a thousand miles starts with a single step. Stay tuned to check if it’s rocket science. What follows are some key questions and some possible answers and discussions .

Procrastination in matters of personal finance is widespread. So the most important step is to get started.

Failure teaches, success does not.

The journey of a thousand miles starts with a single step.

Stay tuned to check if it’s rocket science.

What follows are some key questions and some possible answers and discussions .

Is it so Important ? Lack of financial literacy leads to many wrong decisions on savings and investing Debt trap is widespread. Inflation erodes the value of your money. You are responsible for other people’s life and well being. You want your children to thank you by providing for them.

Lack of financial literacy leads to many wrong decisions on savings and investing

Debt trap is widespread.

Inflation erodes the value of your money.

You are responsible for other people’s life and well being.

You want your children to thank you by providing for them.

Budgets are like diets If you want to manage something, you must be able to measure it. It is important to know where you are spending your money. Everybody wants a six pack figure or a figure like Aishwarya Rai, but few succeed in living by a strict diet that makes them happen.

If you want to manage something, you must be able to measure it.

It is important to know where you are spending your money.

Everybody wants a six pack figure or a figure like Aishwarya Rai, but few succeed in living by a strict diet that makes them happen.

Simple equation or rocket science? Savings (t) = Income (t) – Expenses (t) Savings = Investment During a lifetime there are periods of saving, and periods of dis-saving. Our savings are other people’s (company’s) investments.

Savings (t) = Income (t) – Expenses (t)

Savings = Investment

During a lifetime there are periods of saving, and periods of dis-saving.

Our savings are other people’s (company’s) investments.

Time Value of Money Personal finance is about moving money, or purchasing power, backward and forward in time. Once you decide what you want to leave for the next generation, the problem is to balance income and expenses during your lifetime.

Personal finance is about moving money, or purchasing power, backward and forward in time.

Once you decide what you want to leave for the next generation, the problem is to balance income and expenses during your lifetime.

Opportunities to move money Financial assets—accounts, mortgages, loans, stocks, bonds, real estate, collectables, options, etc.—are the vehicles by which we move money forward, and backward. “Saving and investing” is when we move money forward to the future. We give up current consumption for future consumption.

Financial assets—accounts, mortgages, loans, stocks, bonds, real estate, collectables, options, etc.—are the vehicles by which we move money forward, and backward.

“Saving and investing” is when we move money forward to the future. We give up current consumption for future consumption.

The magic of compounding Make your money work for you. There is an advantage in starting early Know the rule of 72. The number of years taken to double your money is =72/CAGR. Or planned CAGR is =72/No. of years wherein you want to double your money. Go to slide 18 for best results.

Make your money work for you.

There is an advantage in starting early

Know the rule of 72. The number of years taken to double your money is =72/CAGR. Or planned CAGR is =72/No. of years wherein you want to double your money.

Go to slide 18 for best results.

What is your risk profile? Become aware of your risk profile You must have a well-defined attitude to risk. Your asset allocation should match your risk profile Thumb rules of Asset Allocation: 100 – age in equity, balance in debt. 120 – age in equity, balance in debt. This is your own Investment Policy !

Become aware of your risk profile

You must have a well-defined attitude to risk.

Your asset allocation should match your risk profile

Thumb rules of Asset Allocation:

100 – age in equity, balance in debt.

120 – age in equity, balance in debt.

This is your own Investment Policy !

Not all liability is bad Like risk, debt must be managed, and can rarely be eliminated. Large purchases, such as houses and vehicles, create “good” debt. Many purchases, such as food and clothing, create “bad” debt. But good for the economy! Credit cards are short term money movers, not long term loans. And at what cost?

Like risk, debt must be managed, and can rarely be eliminated.

Large purchases, such as houses and vehicles, create “good” debt.

Many purchases, such as food and clothing, create “bad” debt. But good for the economy!

Credit cards are short term money movers, not long term loans. And at what cost?

What’s in your portfolio? Debt or Equity? Cash, Bonds, Stocks. Mutual funds, brokerage accounts. Managed or Indexed. You are the decision maker. Take responsibility for yourself Match it with your asset allocation decision

Debt or Equity?

Cash, Bonds, Stocks.

Mutual funds, brokerage accounts.

Managed or Indexed.

You are the decision maker.

Take responsibility for yourself

Match it with your asset allocation decision

Have you covered the risks? If people depend on you, have you got your risks covered? How do you figure out how much insurance you need? Many methods to calculate human life value, what applies in your case? Insurance is not an investment as is widely accepted in India. Figure out the cost of a ULIP.

If people depend on you, have you got your risks covered?

How do you figure out how much insurance you need?

Many methods to calculate human life value, what applies in your case?

Insurance is not an investment as is widely accepted in India.

Figure out the cost of a ULIP.

The stock market What determines the price of a stock? (The forces of supply and demand!) Beliefs by buyers. Beliefs by sellers. Beliefs must differ for the market to work!

What determines the price of a stock?

(The forces of supply and demand!)

Beliefs by buyers.

Beliefs by sellers.

Beliefs must differ for the market to work!

What is growth and value? Stocks generate a positive return in 2 ways- Dividends Capital gains “Valuable” stocks have one or both characteristics- They are under-priced They will increase in value

Stocks generate a positive return in 2 ways-

Dividends

Capital gains

“Valuable” stocks have one or both characteristics-

They are under-priced

They will increase in value

Where is the value? How to identify under-priced stocks Need to determine the real value of the company. Compare to current price. How to identify price growth stocks Determine the future of the company. Review history of similar stocks.

How to identify under-priced stocks

Need to determine the real value of the company.

Compare to current price.

How to identify price growth stocks

Determine the future of the company.

Review history of similar stocks.

Do you require a fund manager? Over 20 AMCs offering 700 MF schemes. Funds ka funda…. do you see the ring or who’s pulling the strings? Look at the costs. Look at the past performance Belief in God helps!

Over 20 AMCs offering 700 MF schemes.

Funds ka funda…. do you see the ring or who’s pulling the strings?

Look at the costs.

Look at the past performance

Belief in God helps!

Can you do this yourself? Look at your own time vs. return matrix Successful investors work hard at it. Luck rarely lasts a lifetime. Day trade always has a tendency of squaring off your gains.(?) You can only profit from your special, or different, skills, knowledge, experience, insight, hard work, and luck. Experts are injurious to your financial health!(?) Have you read Freakonomics?

Look at your own time vs. return matrix

Successful investors work hard at it.

Luck rarely lasts a lifetime.

Day trade always has a tendency of squaring off your gains.(?)

You can only profit from your special, or different, skills, knowledge, experience, insight, hard work, and luck.

Experts are injurious to your financial health!(?) Have you read Freakonomics?

Stay invested……… You are “in it for the long run.” Stay away from hot tips. Filter out the noise. Greed helps in taking knee jerk decisions. Understand the pitfalls in investing, the sins of personal finance. If in doubt, buy an Index Fund/ ETF

You are “in it for the long run.”

Stay away from hot tips.

Filter out the noise.

Greed helps in taking knee jerk decisions.

Understand the pitfalls in investing, the sins of personal finance.

If in doubt,

buy an Index Fund/ ETF

What is index fund/ ETF ? Passive fund management Tracks an index, look at the tracking error. Have been proven to be at par with actively managed funds. And at a much lower cost! No advisor pushes it because there’s no commission. Greater the fund corpus, lesser the cost!

Passive fund management

Tracks an index, look at the tracking error.

Have been proven to be at par with actively managed funds.

And at a much lower cost!

No advisor pushes it because there’s no commission.

Greater the fund corpus, lesser the cost!

India’s first online weekly on personal finance Sections on Mutual Funds, Stocks, Insurance and so on……… Forum , where you can ask your questions Weekly updates on the latest in personal finance Directory of financial advisors Calculators Blogs Spoon feeding is wrong, information is power.

Sections on

Mutual Funds,

Stocks,

Insurance and so on………

Forum , where you can ask your questions

Weekly updates on the latest in personal finance

Directory of financial advisors

Calculators

Blogs

Spoon feeding is wrong, information is power.