Prudent newsletter oct 2013 edition


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Prudent newsletter oct 2013 edition

  1. 1. Have a 5D view of your loan portfolio Volume 2, Issue 4 Prudent Planning Financial Focus A B C F I N A N C I A L P L A N N E R S — N E W S L E T T E R PRUDENT FINANCIAL PLANNERS—NEWSLETTER October 2013 Debt management is an integral part of financial planning. Your Loan portfolio has a big impact on your investible surplus. While doing cash flow analysis it is inevitable to analyse the loan portfolio so that it should be paid off or managed in such a way that interest outgo can be reduced and thus surplus can be increased. Higher the loan EMIs, Lower will be investible surplus. Where the loan portfolio is interest rate sensitive as in case of Floating rate home loan than macro economy will also play a key role in your personal finance. To do a proper Debt management you should be having a 5D view of your portfolio, so you can weed out the unnecessary loan and thus improve your cash flow position. Following points will help you to find out the bad stuff. 1. Interest Rate This is the first step while analysing the loan portfolio. You should be having clear cut idea of the interest rate you have taken your loan on. Inside this issue: Many people use their Credit Cards very frequently and are in a habit of rolling over the outstanding balance every month. One needs to understand that more unsecured and easily available loan is, higher will be its interest rate. Credit card comes with rate of 24%-36% p.a. Personal loan which is again unsecured comes with rate of 16%-18% p.a. If the interest rate is high the cash outflow would be more. Thus when there’s nothing you could be able to do for the closure of loans, sometimes it make sense to take one more for closure of other. Like if the credit card outstanding is high so rather than rolling over each month you should take a personal loan and clear your credit card dues. 2. EMI Outgo Your total EMI outgo excluding home loan should not be more than 20%-25% of your total in hand income and if there is home loan Cont… Page 6 Prudent Gyan Look at value or price of product? 2 Financial Freedom comes with discipline 3 Financial Freedom - continued…. 4 Do bad habits impact your finances? 5 About Us.. 6 First step not making investments but planning for everything and then executing it Suresh K Narula, CFPCM
  2. 2. Look at value or price of product? In today’s financial world, a lot of products are made to appear as if they are amazing. The advertisement and promos make you feel that if you don’t buy or invest in them, you will miss an opportunity of a life time. The reason why this happens is because buyers or investors concentrate a lot on the price of a product, rather than on understanding its value. The Paradox of Value: The law of value simply says your true worth is determined by how much more you get in value than you give in payment. What we really need to understand is simply the difference between price and value. See, price is a rupee amount, it's a rupees figure. Value, on the other hand, is the relative worth or desirability of a thing, to the end user. In other words, what is it about this thing, this product, this service, this concept, this idea that brings with it so much value, so much worth that someone will exchange their hard-earned money for it and be glad…be ecstatic that they did while you still make a very healthy profit? Value is not the same thing as price or compensation. Your value is not necessarily equal to your salary. An accepted definition of value is, “The property or aggregate properties of a thing that renders it useful or desirable.” Your salary is simply the payment you take. Your value is the relative worth you add to the organization—both in the mind of the person who signs the checks and also in the experience of the people (both in the organization and outside it) with whom you interact. We understand these in our daily Life, but we forget this simple rule when it comes to money and investing. Let us now see some of the products which are of really High Value, Low price. Term Insurance: Millions of investors have discarded the possibility of buying term insurance as they don’t get any money back at maturity. You now realize what they all concerned on: The Price. They feel that they “lose” their money. They have concentrated only on what they don’t get and not on what they are getting. These investors do not think, for moment, about: The Value which term insurance provides to their family and dependents at the price they pay for it. Paying Fees to Advisor: Almost everyone runs away from paid services. It’s because the focus is on fees and not the value. Why? We are simply programmed to try to acquire anything we pay for at a lower or may be even free of cost. Fees V O L U M E 2, I S S U E 4 are not seen as an investment. They are considered as an “expense”. People look at fees as money that must be spent on something which is for immediate consumption rather an investment which can provide them with growth in the value of their wealth in the very near future. Let me give you an example of the difference between price and value would be a financial advisor who charges you Rs500 to do your file tax returns but saves you Rs2,000 as compared to what you would have paid in taxes had you completed the return yourself. He also saves you twenty-five to thirty hours of time of doing it yourself. So we see in this case value in both concrete, with the two thousand rupees savings as four times that fee in cash terms and even may be the time because we can put time to money, and also conceptual with the good feeling that you have, the feeling of peace of mind of knowing it was done correctly. You can hardly put a price on that. At the same time, although his fee (price) was Rs500 for the work, it didn’t cost his nearly that much to do the work, so he made a significant profit, too—which he should, given the value he provided. Similarly, financial planners ask for a fee of 15-20k and they can make a major change in your financial life by just sitting with you and counselling you on your financial life and the mistakes you should avoid. It might look expensive (if you look at price), but if you look at the value you get out of it, it would be a worthwhile product. In fact, if it delivers good results, it could even cover its cost and come to you free, because they can improve your life and enable you to reap benefits over the long term. Remember that free advice can turn out to be extremely expensive in the big picture. The Value of Value: Every time you invest your money it’s important to understand the price of it and value of it. If you find that its cost is less than what you are ready to pay, consider it cheap and go for it and not in the other case. Price and Value depends on Situation, time, age and other factor, don’t forget it. The way this happens is through focus, focus on providing the value. You see, money is an echo of value. It's the thunder to value's lightening. Focus on the value and the money will come. Page 2
  3. 3. Financial Freedom always comes with discipline!!! Mohit a technical guy, always used to think about the way he earns huge and not being able to save as per his goals. He use to invest into what others choose to, always uses his credit card for big purchases. This is the typical story of every individual who is either financially illiterate about saving/investing or who does not take his/her finances seriously. They will never take an advise from a professional and end up doing what their friends are. They don’t understand that every individual has a different kind of lifestyle and goals to achieve. People need to understand that to achieve financial freedom every individual has to sit and decide his/her own path. Cut-Copy-Paste will never help achieve the financial freedom in the life. In real scenario, just because you have money does not mean you have financial freedom. You have to plan out on how to manage your existing life and future life. And that what you can do when you choose to be disciplined with your finances. Here are 8 points which can help you in achieving Financial freedom. 1. Track your every expense: Everybody loves to do shopping, although it depends if it is monthly or weekly. But the important point is to track all the expenses. A recent study reveals that when you track all the expenses, month on month people have experienced that their expenses reduced. Reason because when you start writing every small expenditure you come to know So what actually is Financial Freedom?? where you are spending more or where you are spending without any reason. Always remember If you buy things you don’t need, you will soon end up selling things you need [Quote by Warren Buffett] 2. Start making your monthly or yearly budget: Making monthly budget should be your regular exercise. If you are making budget and following it then there is less chance of over spending and high chance of reaching your goal. The key to building a strong financial plan for the future is to understand how much you spend and save right now. This is called tracking your cash flow, and it can give you a sense of control and confidence that makes it easier to make financial changes in your life. 3. Spend Less than you earn: Are you spending more and earning less because it is only possible if you are Richie Rich or you have a big inherited wealth. It is very easy to spend less, yet many people never learn to A financial position whereby your The key to building wealth is optimized a strong financial plan to match your optifor the future is to under- mum financial needs and wants. Financial stand how much you freedom is much more than having spend and save money. It’s the freeright now. dom to be who you really are and do what you really want to in life.[By Kim Kiyosaki] Nobody can define your Financial Freedom. However once you have decided, you can take professional’s help to achieve it. For some people its about achieving goals in future without sacrificing current life, for some its about having lots of money so that they can do whatever they want and whenever they want. V O L U M E 2, I S S U E 4 do it. Cont…. Page 4... Page 3
  4. 4. Cont. Page 3 — Financial Freedom…. discipline!!! Only by spending less you can hope to build a wealth, which is very easy if you follow the above 2 points. 4. Start an emergency fund: Now this is interesting. People use to think that if they have health insurance, credit card, and balance in bank account then their emergency funding is done. They spend whatever they earn and live on edge. This works well till some emergency comes. It is always better to build up rainy day fund. Logic says to have 4-6 months of expenses as your emergency fund. It may take some time to build but the sooner the better. 5. Set Financial Goals: Imagine you are going on a trip without knowing the way to reach there. Is it possible? The same goes into personal finance. People have a tendency to save/invest, but they forget to link it up with the tized them, then it’s the time to act upon. Look out for alternative investment products which can help you in achieving the result. 7. Clear your Credit card loan/debt: Today people are frequent user of Credit card. At almost every place you can use your CC. However, all those people who don’t know the right way to use it always end up with a huge debt. So remember before start investing for your goals or for emergency fund, try to get out of your debt burden. One should always remember that the best alternative to their CC is bank’s debit card. It always ensure that you cannot exceed your balance and hence do not get under debt burden. 8. Fund your retirement: I am still young and I don’t want to save for retirement currently. Will start saving once my primary goals are taken care off. If these are Imagine you are going on future goals. Finana trip without knowing cial goals don’t just your words then you are forcing yourself in trouble. The early you start saving for your retirement the bigger the amount will be. That’s because the sooner you begin saving, the more time your money has to grow. Start taking the advantage of compounding. happen. You have to the way to reach there. Is sit and think about it and then prioritize it possible? The same it. Most people tend to have realistic nance. goals, such as children’s education, marriage, another house, retirement. If you have not set, do it on a priority basis. 6. Start investing to support your goals: Remember only planning your future goals will not help you in achieving them until you act on. A financial plan gets completed only when the things are implemented according to it. So if you have set your goals and have priori- goes into personal fi- V O L U M E 2, I S S U E 4 Its a well known saying that "No Pain, No Gain". The above points prove a pain lot many times, but the pleasure and satisfaction you earn after religiously following them and seeing your money grow it a different feeling altogether, something which is hard to describe in words. So if you are out of debt, saving for goals, having emergency fund and most importantly saving for retirement then you are on your way to achieve Financial Freedom. Page 4
  5. 5. Do bad habits impact your financial health? Humans are made for doing something great about the life. There is a need to add value in self and others life throughout which makes your life memorable. There are many things and choices which are constructive and destructive. The destructive ones are called bad habits. It is since from your childhood you are hearing that there are few things you should not do because they are not good and as you grow older, by different sources you gather enough information on why specific habits are called as bad habits? As you know these habits waste your energy as well as have very bad effects on your health and on relationships. But I would like to bring one thing to your notice that it does have a bigger impact on your financial health as well. I would like to narrate few of the bad habits. #1 : Tobacco: This is a substance which is available in different forms like snuff,Cigarettes,Cigar,Hookah, Bidi,Gutkha,ZardaPan,Chewing tobacco, Tooth paste etc. The different products of tobacco in India and how it affects pl visit to tob_pro_india.htm as per the global adult tobacco survey (GATS) 2009-10, 36.8% adults use tobacco in India. So this is a habit which covers the entire population and available and accessible for each class of the society. The cost of the products Vary from few rupees to thousands depending on the product and the other facilities available with it. The danger of this habit is addiction and once you are addict to tobacco you may have to consume it daily or hourly also. This habit also increase your chance to fall prey to Lungs cancer, asthma,TB and many such critical illness. Considering your age @30 and life expectancy of 80 with expenses growing at the rate of 7% per year. Rs.10 spend per day make you to lose opportunity cost approx. Rs. 2.04 cr. @12% in lifetime. #2 Alcohol: This also comes in many forms like beer,Wine, Spirit etc., almost 6.25 crores individuals consumes alcohol in India. The consumption of alcohol also leads in to disturbed family life. Alcoholism is also a major contributor in life threatening accidents. Alcohol addiction increases chances of Liver cirrhosis, BP, Heart attacks etc. Considering your age @30 and life expectancy of 80 with ex- V O L U M E 2, I S S U E 4 penses growing at the rate of 7% per year. A Rs. 500 spend per week will cost a lost opportunity of approx. Rs. 13.64 cr in lifetime. #3 Junk foods: Now a days eating at junk food outlets are very popular for time pass activities and are easily available everywhere with bombarding adv. on electronic media with lot of attraction of toys and special discounts. Indian Junk food like PaniPuri, Bhel,Patice,Kacchidhabheli etc... With Pizzas and Burgers in western style. You will get either at every corner of your city. The attraction towards junk food is from toddlers to adults, with lot of spices. This leads to improper digestion, acidity problems and obesity which make you prone to critical illness like Heart attacks, Diabetes etc. With consideration of your age @30 and life expectancy of age 80 and expenses growing at the rate of 7% per year. A Rs. 500 spend per week will make you lose approx.Rs.13.64 cr in lifetime. And A Rs.100 spend per day will make you lose approx. Rs. 20.40 cr. in lifetime. #4 Ordering more than requirement in hotels: This will not only waste your money but also waste the resources for others. At the time of ordering items at hotels always plan first how much you can consume. There are some countries as well as few restaurants in India which charge you for wasting food. Save your money and the resources for other always keep in mind that there are few people in our country who do not get the food. These all bad habits will make you poor every time you spend money on them, apart from this you will have a highest chance of critical illness which will cost Rs. 1,49,00,000/ - @ age 60 if you are 30 today considering 12% growth in medical expenses of Rs. 5,00,000/- today. One more alarming thing for you - With increasing life expectancy and medical advancement in India you may have to survive longer with lot of problem and illness if you do not quit the bad habits. Think!! Page 5
  6. 6. Cont…. Page 1…. 5D View on Loans than EMIs should not be more than 40%-45%. Though Banks take care of this ratio while approving the loan application but the person who’s in need of loan always tend to find out his unique ways of dodging the bank. One should understand that higher EMI outflows distresses your personal life along with personal finance. 3. Type of Loan Credit card and personal loan comes under unsecured loan category as you don’t have to pay any collateral or guarantee along with these. Whereas car loan, house loan, gold loan, loan against property/shares etc. are secured loans. There are some semi-secured loans too like education loans. As pointed out above, if the loan is unsecured than the interest rates will be high and so will be your EMI outflow. This will also impact your credit score negatively. Yes, even though you are servicing your loans well, high unsecured loans in your portfolio will reduce your credit score and you will face difficulty when you ask for other important loans. So if you are on closing loan spree than better to close the unsecured ones first. 4. Tenure of Loan This is a very important point to consider. Say you have 2 loans with the same rate, same outstanding but the tenure is different than which one to close first. Keeping other things constant close the one with longer tenure. You have to do some maths here and may need to take help of some loan adviser or planner. Else you may call for the Loan schedule and calculate yourself the interest yet to be paid. In fact you should do this exercise on all your loans. 5. Tax benefit There are few loans which provide you with some tax benefit too. Like Home loan provides tax benefit u/s 80C and section 24, Education loan provides tax benefit u/s 80E. If you are a business person you may also claim the interest payment on your car loan as expenses and can also claim the depreciation of that car. So while taking a view on your loan portfolio do keep in mind the taxation part. If there’s some tax benefit available, then the net interest outgo will definitely be less. Cash flow management is very much required for a proper financial planning. As the whole exercise of financial planning is directed towards your goal so many times clients have to take some hard steps which may not be emotionally satisfying but are very much needed for a better personal finance. Debt management is one of those. Service your loan EMIs timely, don’t take loans for consumption or your desires, take good loans if at all required. In the end, your Loan portfolio should not be a burden on your investment portfolio. Why Prudent Planners ? Prudent Financial Planners provide to Individuals Comprehensive Financial Plans tailored to meet their specific needs. We seek to build relationships to last a lifetime. Our abilities go far beyond investment. We provide our clients with expert guidance in Retirement, Insurance and college planning. Our advice is always comprehensive and the planning process is quite easy. You tell us about your lifestyle, experience, objectives and risk tolerance and we'll do the rest. We have excellent network of Corporate Agents and other Professional . Suresh K Narula, CFP Phone: 0172-2550396/ 9816002197 Website: CM CERTIFIED FINANCIAL PLANNER and CM CFP are certification marks owned outside the U.S. by Financial Planning Standards Board Ltd. (FPSB). Financial Planning Standards Board India is the marks licensing auCM thority for the CFP marks in India, through agreement with FPSB. This newsletter is published by The Financial Planners’ Guild, India & distributed by its members. Newsletter is designed to provide general useful information on Financial Planning & Personal Finance. It is not intended as specific investment, financial, legal, or tax advice for any individual. While the information contained herein was obtained from reliable sources, it cannot be guaranteed as to completeness or accuracy. Before acting on any of the information provided, consult the planner. © FPGI Prudent Mission Statement is to help our clients realize their dreams and goals, financial advice, money management and selecting services and products that best meet each client's need and goal fulfillment by building relationships and making path as the final decision comes from you, not us. Prudent FP's Comprehensive Approach use a simple three step approach, You can see how simple it is by viewing the quick outline of how we do this: We'll help you realize your personal and financial "GOAL", why are you investing, what is the goal associated with your investment. We'll provide a "PLAN" to help you reach your goals, discuss opportunities that may be right for you and address any changes that may occur in your life and financial world. objectives. Now you just have to take "ACTION’. Visit my Blog