Why are we studying PFP? Interesting Topic? Manage our own Finances effectively? Learn Individual Tax Planning? Managing investments in Equities, Debts, MFs? Taking purchase decisions regarding Automobiles, Real Estate? Investment Decisions? Planning retirement & for Insurance? Easy Subject to score marks? To get RICH by getting financially literate!
<ul><li>Designed & Presented By </li></ul><ul><li>Swapneel V Patkar </li></ul><ul><li>07BS3652 </li></ul><ul><li>IBS Mumbai </li></ul>
<ul><li>“ THE WEALTHY BUY ASSETS, THE POOR BUY LIABILITIES, and THE MIDDLE CLASS BUY LIABILITIES BELIEVING THEY ARE ASSETS” </li></ul>
<ul><li>WHICH CLASS </li></ul><ul><li>DO </li></ul><ul><li>YOU </li></ul><ul><li>FALL </li></ul><ul><li>INTO? </li></ul>
In order to find out we need to first look at what is the difference between Asset and Liability .
“ An asset is something that puts money into your pocket while a liability is something that takes money out of your pocket”. Robert Kiyosaki author of book “Rich Dad Poor Dad” says,
LIABILITIES <ul><li>THE POOR WILL BUY THINGS. </li></ul><ul><li>THEY LACK A LONG TERM PERSPECTIVE SO THEY BUY CONSUMABLES AND ENJOY USING THEM UP QUICKLY. </li></ul>TYPICAL LIABILITIES OF POOR
MIDDLE CLASS ASSETS <ul><li>“ LIABILITIES PRETENDING TO BE ASSETS ” </li></ul>
Some things that might be Assets or Liabilities: Bank Deposits or CDs Stocks Bonds Real Estate
A bank deposit or CD is always an Asset right? WRONG! If you deposit money into a bank and they pay you interest it is putting money into your pocket so you assume it is an asset. Right? But that is not necessarily the case. A bank deposit or CD can actually be either an asset or a liability depending on the inflation rate and your tax bracket.
STOCKS ? <ul><li>If you buy stocks they are an Asset (they put money in your pocket): </li></ul><ul><li>If they go up in price to more than </li></ul><ul><li>offset the cost of inflation. </li></ul><ul><li>If they stay the same (in real inflation </li></ul><ul><li>adjusted terms) but pay a dividend </li></ul><ul><li>If you buy stocks they are a Liability (they take money out of your pocket): </li></ul><ul><li>If they go down in price. </li></ul><ul><li>Stay the same in nominal terms (but </li></ul><ul><li>lose money in real inflation adjusted </li></ul><ul><li>terms) </li></ul>
Mr. BROKER “ OVER THE LONG RUN STOCKS HAVE APPRECIATED AN AVERAGE OF 10-12% PER YEAR”. “ THAT SOUNDS LIKE EVEN IF WE TAKE AWAY THE COST OF 3% AVERAGE INFLATION AND THE EFFECT OF INVESTING IN STOCKS IS TO PUT MONEY INTO OUR POCKET” .
<ul><li>At any given moment there are sectors of the market that are set to: </li></ul><ul><li>Rise (because they are undervalued) </li></ul><ul><li>Fall (because they are over-valued) </li></ul><ul><li>So even though the “overall market” might make 10-12% per year </li></ul><ul><li>individual middle class investors tend to do significantly worse. </li></ul><ul><li>Typical middle class investors are buying the overvalued assets </li></ul><ul><li>because they are the “hot” stocks and are selling the undervalued </li></ul><ul><li>assets because either they can’t stand holding the loss anymore or </li></ul><ul><li>because they aren’t the “in” investment. </li></ul><ul><li>And once inflation and taxes are taken into account they may </li></ul><ul><li>break even or actually lose money. </li></ul>
<ul><li>Can be a Liability: </li></ul><ul><li>If it goes down in price more than </li></ul><ul><li>the interest it pays. </li></ul>BONDS ? <ul><li>Can be an Asset: </li></ul><ul><li>If it stays level and pays you interest. </li></ul>But, people tend to hold them longer and they are easier to analyze because the interest rate can be calculated, so bonds have a bit more chance to be an asset and put money into your pocket.
Have I confused you yet? WE NEED TO LOOK AT THE BIG PICTURE AS THE WEALTHY DO.
We pay the taxes, insurance, and interest on the mortgage but we hope that when we sell it we will be ahead. Over the long term your house will appreciate about equal to the inflation rate although at any given point the appreciation may be greater or less. By the time you get done paying for insurance, maintenance, upkeep etc. You actually about break even. If you pay 6% interest to the bank and you get a deduction on your taxes for the interest you pay, (assuming you are in the 15% tax bracket), that means you save 15% of 6% or in effect your interest rate is reduced to 5.1%. <ul><li>The major advantages of home ownership is: </li></ul><ul><ul><li>It is a forced savings plan </li></ul></ul><ul><ul><li>It is difficult to dip into (although it is getting easier with home </li></ul></ul><ul><ul><li>equity loans, etc.) </li></ul></ul>Is it putting money into your pocket? SO A HOME IS ACTUALLY A SHORT TERM LIABILITY BUT MAY EVENTUALLY TURN OUT TO BE AN ASSET.
BANK DEPOSIT OR CD A wealthy bank client had a deal going through that wouldn’t close until about 4:30 on Friday afternoon . As we all know bank deposits don’t get credited after 2:30 until the following business day. The signs in the bank say so right? But this particular gentleman couldn’t bear to have his money not earning interest over the weekend, so he made arrangements with his banker to keep the bank open (and credit him interest) starting on Friday afternoon! When a large deposit from a good client is at stake it’s amazing what can be done, isn’t it? But the point of the story is that even though the money at stake was only 3/365 ths of 3% (3 days interest at 3%) this wealthy person would not sacrifice that interest (on a Million Dollar it comes out to about $245). Why would a Multi-Millionaire be worried about $245? Because he learned the lesson young ... Always, Always, Always have your money working for you!
STOCKS ? Do not buy on emotion or “hot tips”. Do not buy for excitement or to be part of a crowd. They buy at the bottom of a cycle when no one else is interested. Buy when it is cheap because no one wants it so their risk of loss is low and their potential gains are high. Managing their risks by ruthlessly cutting their small losses before they become big losses (but if they bought at the bottom the chances of this happening are small).
BONDS Does he just go out and buy one? Wealthy man wants to buy a new BMW. CERTAINLY NOT! Then what does he do?
BONDS The rule here is “ Never dip into the principal only spend the interest!” He takes the money and buys a bond that will give him a 6% return. Then he goes out and borrows the money to buy his BMW at 3% or even 0% from the car company. Then he uses the interest from the bond to make his car payments. Once the car is paid off he has both his car and his initial principle (the bond).
REAL ESTATE Wealthy don’t think of their own homes, they think of property that will put money into their pockets. Things like rental properties, houses and self-storage units. Each of these pays excellent returns well above the cost of holding them.(may be 5-6% ) At first glance you might think that 5-6% isn’t very good after all stocks should be able to earn that! Well that may be but when real estate is done right you put very little money up front and borrow the rest. Over time the tenants pay off the principal, you get wonderful tax deductions and in the end after it is all said and done, you may have earned 20% per year!
LEARNINGS <ul><li>Borrowing is not always bad and money in the bank is not always good. </li></ul>You need to look at the entire package and determine whether it is putting money into your pocket or taking it out. Be Financially literate
WISH YOU GREAT WEALTH AND HAPPINESS WITH THIS FABULOUS GIFT CALLED LIFE.