Author: admin

“Do you think there are any specific habits that make some people more successful with money than others?” This is a question that a lot of clients ask us.Initially, we avoided saying much as we did not want to make any general statements. As we moved around the country and met a lot of successful clients, we realized that there are certainly some differences in how financially successful people manage money vis-a-vis the not so successful. We came across a lot of people earning high salaries but who were always short of money as well as people with average salaries but always had money on hand. We were able to discern certain patterns which we would like to share with you:

1. Surround themselves with positive people. They tend to stay away from negative people and negative thoughts and do not listen to reasons why something cannot be done. They spend most of their time with people with a can-do attitude who find ways to make things happen.

2. Are not held back by failures. They use their mistakes and failures as stepping stones to success rather than obstacles or reasons to stop trying. Rather than running behind achievement, they spend a lot of time putting in the necessary efforts towards achieving their goals. Too much achievement can result in fear of failure.

3. Manage their time effectively. Hours, minutes and seconds are non-renewable and precious resources. They set their priorities and passionately focus on them. Successful people tend to limit their screen time (TV, video games) compared to unsuccessful people. There is nothing inherently wrong with watching TV but it tends to take up a time which can be better spent exercising, reading or learning something new.

4. Ignore the opinions of others. There is no compulsion to keep up with the neighbors. Limited exposure to mass media and advertising allows them to be more productive and not get influenced by cultural norms. They do not follow the herd while taking investment decisions. Warren Buffett, one of the richest people in the world, stays in a 5 BHK house bought in 1958 for $31,500 and currently valued at $700,000. People with trendy lifestyles and the latest fashions tend to be usually short of money.

5. Have a sense of direction. There is purpose to their actions. There is a reason why they work hard, save money and invest wisely. Their daily actions are aligned with their long term dreams and goals. People who are always struggling with money have no direction and idea of what they want from life.

6. Focus on the big wins. They pay attention to the details and develop smart saving habits, but are not paisa wise and rupee foolish. While they may save money on the small things, they do not sacrifice on critical wants like housing, food and income. While the not-so-successful people end up wasting away their paisa and rupees.

7. Do difficult things. They work harder, longer and smarter than other not so successful people. They are willing to sacrifice today’s small comforts for tomorrow’s gratification and big rewards

8. Make their own luck. They keep their eyes and ears open and are constantly aware of what’s happening around them. They recognize opportunities as and when they come and boldly seize and act on them before the others do.

9. Believe they are responsible for their own future. Any given situation, whether difficult or easy, is nobody’s fault and may be beyond one’s control. What is controllable though is how you respond to it. Successful people do not react to any given situation but respond pro actively and productively.

10. Grow and change over time. They are willing to adapt, evolve and appreciate different points of view. They are constantly acquiring knowledge and learning from their experiences with a view to change and mold their minds in the right direction.

Most people (including most of us) practice only a few of the above mentioned habits but not all. The most successful people we have meet practice all of them and the not-so-successful people do none.

To conclude, people who are successful with money and life take what they do very seriously. They treat their life as a business and behave as the CEO and CFO with the goal of “growing their business” over time. Your personal wealth is your real business, everything else is supplementary and supportive. Please nurture your business very carefully.

Few matters in life are regarded, by many, as less relevant than planning for the distribution of estate, or in other words accumulated assets. More so in a country like India where, family legacy can be passed on from father to son and their sons without much tax incidence, and seldom does it require an eye of the expert for distribution among family members. But this scenario is changing fast with more and more families building wealth along with complex family bonds it becomes increasingly difficult for the wealthy to leave a legacy without conflict.

For many families wealth distribution or the estate dissolution takes place within the lifetime of the main owners. Though, same is not the case with every family, some very famous incidents have occurred in some of the wealthiest families clearly highlighting the issue of “Lack of proper Estate Planning” and how quickly a family dispute can spiral into a very public one.

Estate Life Cycle
Just as every asset has a lifecycle, every human being has a lifecycle and so does the estate. In some cases it may stretch to many generations, while in some, it may simply be the case of one generation building other enjoying, but regardless of how many generations the Estate lasts, its life-cycle plays an important role in decision of planning, distribution and continuation of estate.

Figure 2.1: Estate Life-Cycle

To understand the importance of various steps in the life-cycle we must relate those steps to the real life situations of a person involved into this venture. By understanding the reason behind each stage of estate life-cycle we can understand the factors at work in the minds of our clients and the fears, the decision affecting premonitions and why and how would they actually achieve a peaceful resolution, when it comes to their estate being passed to the next stage.

For example: A first generation entrepreneur, building a startup business is not actually thinking or worrying about preservation of that business venture. But only sometime later, when the business itself has moved from the very high growth rate to a moderate growth rate would he/she be actually concern on how to preserve it and then pass it on.

Whereas, a family business owner, who received a venture already established and only require to sustain it, will certainly be worried about the last two stages of:

• Preservation, and Distribution;

With more focus on the latter.

Why to Accumulate Assets?
The need for asset accumulation is the birthplace of the need for estate planning. Therefore, by understanding the reasons behind asset accumulation behavior we can pinpoint the real need of the planning. So, why assets are accumulated? Or, why anyone should accumulate assets throughout life? Given below are some of the common reasons:

A. Income security
One of major reasons and followed by almost everyone. We accumulate assets out of savings for rainy days in future, or for achievement of bigger goals or retirement whichever is your goal, generating additional source of income is an important goal of every family. Following life goals may be considered while targeting income security by individuals and families:

• Retirement
• Kids’ education
• Vacation
• House purchase etc.

These are some goals necessary for every family to prepare for, and some of the goals actually ensure additional income for the family; i.e. house purchase and retirement plans.

B. Better Lifestyle
This goal can be called a part of the income security efforts but due to its static nature we can look at it under a separate lens. Lifestyle expenses are usually met out of regular income of the family/ individual, but some of these expenses may require a bigger outlay, for example: purchase of a car, is one such goal, which may require some amount of savings to go into. Similarly an international vacation may be one of the major wish of the family requiring some amount of savings.

But, are these savings really assets? Perhaps not, the nature of assets divides the lifestyle asset from income generating assets. For Example:

• “Purchase of a car,” which may be akin to building a short term asset, with limited utility of five to eight years.
• But “purchase of a vacation home,” could be a long term asset, which may even be converted to generate additional income, and thus contribute to the income security of the family as well.

C. Financial Security for next generation
You may ask how it can be different from the objectives mentioned above. To a great extent it is not, but considering the involvement of next generation this objective is very different from the previous two, how? Take for example the following case:

• “Vijay and Kirti are parents to their two kids who are minor, school going children. Considering that it’ll take at least 7 years for one of them to become major and another 3 – 4 years in starting to become financially independent, the parents carry the responsibility to provide not only for their sustenance but also for their education and any medical needs they may face.”
• Now consider purchase of a real estate property for income security purpose at Rs. 45 Lakh. Supposing the rent to price ratio is 5% p.a. family will increase their income by Rs. 2.25 Lakh p.a. “What happens if the kids are left to look after the property and themselves all by themselves?”
• The better solution for the family would have been to build sufficient financial assets, which are easier to handle, instead of major real assets, which will be difficult to handle or dispose off in stress scenario.

Therefore, different kinds of assets are required when we are building for the needs of the next generation. Insurance for example could be one.

D. For higher purpose/calling
With the advent of information technology and ease of execution, many of us are now able to follow our hobbies and areas of interest, which may not be directly related to income generation. Some of these areas even require substantial investment in the first place. Some of the hobbies:

• Photography
• Mountaineering
• Running a school
• Social welfare
• Pilgrimage
• Long distance travel etc.

The list can go on and on, but one thing may remain common and that is all of these most of the times are not related to the profession of the individual. Therefore, before launching themselves fulltime into such adventures, we must ensure that the financial needs do not pose a hurdle on the way. Also family and dependents remain provided for while we pursue our hobbies. Sufficient assets will ensure that for you and enable you to continue on your path unhindered.

So we can see the importance of investments and assets in our lives through these objectives, and also what happens when we remove them from the scene or from some family.

• Deserving dependents may have to start from scratch
• Dependents may have to cut down on lifestyle substantially
• Children’s financial future prospects may be jeopardized
• Loved ones may be forced to fend for themselves
• Business/Enterprise may be lost to creditors and distress sale
• That higher calling may have to wait for another day

How Assets are lost?

Asset transfer is one of the major reasons of loss of assets. 27% of the time assets are lost while in transfer to the next generation. Some of these assets take fairly long time to build , so one fact is clear, that by addressing:

1. The lack of discipline in asset use and wealth preservation
2. Wealth Plan &
3. Estate Transfer

We shall be able to reduce our chances of asset loss by 65% which is substantial, and moving further a good wealth plan itself will address the issue of health care and job loss, therefore completely filling up any gaps in asset preservation.

Estate transfer issues will not be completely taken care of by a wealth plan but certainly it forms the first building blocks of a good estate plan. The first ingredients in an estate plan are provided by a good wealth plan by organizing and bringing all assets and their characteristics at one place.

Why to Plan Estate Transfer?
Ensuing family feuds provide harsh enough reason for everyone with sufficient assets to embrace planning for its distribution or disposal in the unfortunate event of their death. But that may not be all. Here are five reasons why estate planning becomes important for everyone who owns substantial assets, or plans for the same:

1. Avoiding Family Disputes:
One of the most important reasons of all, this may be the reason for majority of asset holders out there, to keep family members and loved ones fighting over the leftover assets. Also this one reason has a huge impact on how the assets are to be distributed and there affects the planning directly or in other words is affected by the estate planning directly.

The first question a testator must answer to himself or the planner is that, whether there is a possibility of family expectations and what happens if those expectations are not met? Answering this one question may require much more bonding and clearer understanding of family interconnections and personalities but it also marks a turning point in the plan, when answered accurately.

Though, it will never be really accurate to answer of classify each one of the family members in such manner, but certainly all we need is to reduce the room for conflict, and the rest will be taken care of.

2. Survival of dependents:
Perhaps one of the greatest reasons why estate planning and small steps to ensure wealth transfer to right beneficiaries are just as important as building assets itself. As we have seen under the reasons for asset accumulation one of the reasons is to provide for the better lifestyle and more income security for the dependents, without proper planning transfer of the assets may be expensive and tedious process. Meaning much of the assets may be lost in the process or they may lose their value; for example: distress sale of business stake.

More than that, dependents may include those for whom it’ll be very difficult to survive in absence of external financial support, like children, handicapped relatives, old parents etc. For such dependents it may not even be possible to do rounds and take the effort of claiming most assets their benefactor may have left them, or worked hard to accumulate.

3. Survival and Continuation of Business/Enterprise:
Though this one argument may not be applicable to salaried individuals, but if they acquire stake in some business or enterprise this will also apply to them. Usually, many people including – employees, customers, creditors depend on the enterprise for their financial survival and growth, and thus, every business owner has this important responsibility to prepare for contingencies and pass on the ownership in a manner that ensures smooth transition of business to new owners and its continuation.

A proper estate plan will ensure the baton of ownership is passed unhindered and without much damage to the confidence of the three stakeholders in the enterprise as discussed above.

4. Continuation of Causes/Charities etc.:
With the financial security comes the freedom of will, and with freedom of will comes the desire to act on those higher callings in life, assisting others achieve greatness, promoting social welfare or fighting for a neglected yet important cause. People with substantial financial assets and good financial security are the ones often greatly active in their social lives and helping others overcome their difficulties. If you are one of such people, you would not want your cause to be forgotten after your demise, lack of estate planning might just do that. Therefore, once such causes are undertaken, ensuring their preservation also becomes equally important.

A good planning and forethought will not only allow your all important cause to continue, but may also bring many other likeminded activists along, expanding it multifold.

5. Preserve Family Legacy:
Family legacy is one of the factors which could be really rare and so precious. But like other causes and assets it’ll not protect itself from being lost, overtaken or forgotten by the generations unless it is allowed, through proper planning and guidance to grow and continue to benefit those it intends to, that may sometimes involve general public as well.

In modern times such concerns are taken up by business families, who have built substantial fortunes for themselves and need to forward the values and the enterprise to the next generation, especially in our country where most great businesses are family owned. The continuation of business is not the only challenge faced by businesses, but the continuation of the whole vision of the business which gives impetus to that effort. This will not just required careful planning for succession but also matching of family objectives with that of the enterprise, and further planning to continue the same for many generations to come.

6. Taxation & Transfer Costs: 
Cost of transfer of estate is another major factor one should look out for while transferring the estate. Under Indian tax laws gifts and estate transfer to own children may attract least taxation but when it has to be done to minors and daughter-in-laws one should be careful of clubbing provisions. Other than that timely and proper planning may avoid distress sale of assets which diminishes their value.

Therefore, depending on the magnitude of assets a person has, the priority might change from preservation to growth, to transfer, and within transfer whether to simply plan for changing hands or for a foundation, can be a matter of concern for various classes of individuals and families with ownership of small or large estates. But one thing remains common among all, that the estate must serve the purpose of the family and the next generations to come after all that is why it was built in the first place.

Emotions is what makes us human. Unfortunately, emotions also make us bad investors. As a powerful force, emotions has the strength to often shadow intelligence, rationale and logic. And as investors, it does hurt us. It also drives our investment decisions most of the time, knowingly or unknowingly.

THE CYCLE OF MARKET EMOTIONS :

Markets tend to be more like ECG graphs in the short run while behaving like weighing scales in the long run. No one can actually predict what is going to happen in the short run but we mostly have a fair idea of where the markets are headed over long run. The short run for equity markets can be described as anything less than say 1 to 3 years of time, it can be days or months together. The long run will be say over 3 to 5 years. The longer the period, the better can be the predictability of growth trends and markets. A real problem arises when we observe sharp market behaviour in relatively shorter period of time, stroking the emotions within us. As market moves up and down, the emotions within us change. The worrying part is that these emotions are the opposite to what rational logic would suggest at different peaks & bottoms of the market cycles. Have a proper look at the image below which shows how the emotions of an average investor plays out in response to market movements.

THE UP JOURNEY :

At the time of beginning our investments, we feel optimistic about the future and decide to invest for the long run. Slowly, we as see the markets rising, we are more excited and thrilled. At this time we often also invest more money hoping the trend will continue. When it does, we feel euphoric as if we have really achieved something.

THE DOWN JOURNEY :

However, as the market cycle reverses,we at first are a little worried but we assure ourselves that the trend will be temporary. When it falls further, we deny any down cycle but we begin worrying about investments while continuing to hold them as long-term investors. Slowly, as market falls, we start fearing and then end up panicking when our profits have wiped out and investments are at big loss. We keep hearing and accumulating all the negative news around us and we feel the decision to invest was wrong and it would be now wise to stop our losses by selling – just like everyone else. When the markets reach the bottom, we fell we have made the right decision.

THE RISE AGAIN:

Slowly rationality and logic sets in and there is reversal of the trend after the bottom has been hit. We feel a bit disappointed as the market rises above the levels we have sold. Uncertain of the market direction, we decide to wait and watch. Slowly, as markets rise, our sentiments change from doubt to hope to optimism. After markets have risen well, we feel confident again in future to enter markets. We take our past experience as a lesson in investing and then invest again for long-term. Waiting for the history to repeat itself.

SAYING NO :

What we have learnt from history is that people do not learn from history. The saga of market cycles and emotions continues to play every time and the same herd behavior is often seen in the markets. Investors often jump into investing after seeing very attractive returns already made by others who invested much earlier. And when there is a fall, most are not matured and patient enough to see notional losses in their portfolio and react by selling.

Time in the markets rather than timing is what really matters in the markets if we want to make big returns. But to do this successfully, we have to control our emotions. Most of us are intelligent enough to make right investment decisions but do not have the temperament to carry it through. Dravid, perhaps the greatest middle over batsman from India, was able to survive the most challenging oppositions in foreign soils more because of his steady mind. He did not allow himself to get carried away even after tough sessions of low scoring or falling wickets. He is today remembered for that temperament and discipline.

THE KEY :

The secret of success in investing is known to everyone but practiced rarely. It is about being rational and logical when others are being emotional. It is about avoiding hear behavior by investing when others are selling and being grounded and rational when others are euphoric. Let us remember this simple behavioral aspect of investing and we will be good enough for being successful than a big majority of other impatient investors in the market. Let us hold steady and stay on the crease for long.

We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful – Warren Buffett

Most parents think that they do not need to teach their children how to manage money and the value of managing money in the right manner. They believe that this will be taught to the children as part of their curriculum in schools. The reality is very different. Personal finance is not taught in schools and by the time children reach college it may be too late to correct this mistake. Therefore, the onus falls on parents to teach their children this critical skill. As parents, we have to see ourselves as the primary source of financial education for our children. The earlier we start educating our children, the better the chance of ensuring that our children grow up to become financially literate and responsible people.

We are listing down some strategies that parents can use to share knowledge of money management:

Lessons should be unique if you want the message to sink in. To start with, parents need to sit down with their children at eye-level either at a table or in the child’s room. Keep the mobile phone and other distractions aside for some time and start by emphasizing the importance of the conversation. It needs to happen at their own level and in language that they understand. Irrespective of how young the child is, the effort of making this conversation happen is worth every rupee.

Money mistakes made by parents in the past can serve as a good guidance for teaching children about money. Past mistakes is not a disqualification for teaching but can in fact help to get your point across to children. Parents can explain how the mistakes could have been avoided and provide documentary proof as a support. Children will grasp the learning much faster if have actual figures to refer to; parents can explain how much money was lost because of the mistakes.

Reinforce your Teaching constantly: Make it a point to involve your kids in any transaction where you have any opportunity to save. Even if it is saving of only 5% – 7% on account of a cash back offer from your debit or credit card, it can go a long way in reinforcing the benefits of saving money.

Encourage children to save more money by opening a bank account for them. Even though the bank a/c may not earn much interest, it will go a long way in making your children appreciate the benefits of saving money for the future.

Budget pocket money or allowance: First of all, it is a good idea to give an allowance to your kids on a defined frequency. There can be various options to consider on how to pay an allowance to your child, namely:

1. “Earn money for tasks” allowance: The child is expected to complete certain house work or tasks on a regular basis and is paid for his efforts. The child will see a direct correlation between the effort and the money he or she receives. If for any reason, the task is not completed, then the child is not given spending money.
2. “Pay as needed” allowance: Children do not receive an allowance on a regular basis but request their parents for money as and when required. Here the child may or may not be helping the parents with household tasks. Secondly, as this money does not come on a regular basis, the child may not be able to save for future expenses.
3. Unconditional allowance: The parents give a fixed amount to the child on a weekly or monthly basis without any precondition of doing any tasks. This method allows the child to manage money on a regular basis similar to a salary payment. The downside of this method is there is no correlation between efforts and the payment made.
4. Hybrid allowance: Here this child is expected to do certain basic tasks for free as a contributing member of the family. The child will be paid for completing larger tasks like cleaning the fans, windows or cupboards. Whenever the child wants more money, he or she can take up a task or job and receive payment on completion of it. This method teaches the child that the harder he works, the more money they can earn. This is of course, very similar to our real world.

Whichever method you as a parent choose to pay an allowance to your child, encourage them to create a budget before they receive the money. For e.g., if the weekly allowance is R1000, you can suggest that R200 should be saved, R 200 can go for charity (a very important concept your child needs to learn from a young age) and the balance can spent as they like. This budgeting will help them plan for their future purchases and also help them manage their finances when they become full grown adults and earn their independent incomes.

Let us know put down some action plans for execution of the above strategies. As Steve Jobs once said, “To me, ideas are worth nothing unless executed. They are just a multiplier . Execution is worth millions.”

Let’s start with shopping for your groceries at your nearest supermarket. Shopping with kids can be a nightmare; or a great way to teach them about budgeting, if you can spare some extra time:

Create a food plan followed by a shopping list: Get your children to help create a food plan for a week; then create the shopping list to fit your weekly grocery budget. This will teach your kids about budgeting, planning ahead and checking out any discounts being offered.

Getting the best price: Comparison shopping is a great way to teach kids about money and how to get the best value for your rupee. You can help improve your child’s math skills by challenging them to identify the best deal based on the product quantity or number or servings.

Making smart choices: Encourage your child to decide between several competing brands including the store brand. You may end up saving a lot of money provided you are comfortable with the product quality of the store brand, if you decide to buy it.

Matching discounts and sales with your shopping list: It may be worth your while to check out the discounts and sales offers the supermarket is offering. This will help your child to develop bargain – hunting skills.

Give your child a budget to spend on his treats and snacks. This will teach them to spend on their treats within their budget and not go overboard. Children love it when they are given the freedom to decide some part of their life. Now let’s move onto banking which is slowly and steadily moving the online route especially with younger generation.

Though a visit to the bank is still required if you want to deposit a cheque, fill a nomination form or meet the branch manager. It is a good idea to take your child along so they can better understand in person how a bank works.

Deposit savings: Children should be encouraged to deposit their piggy bank savings into their savings a/c on a regular basis. You can create savings milestones with your child which if reached within a particular time frame can be enjoyed with a small celebration or gift for the child.

Show your child the money: Children are fast learners by nature and very keen observers. Teach them how to deposit and withdraw money, how to fill up a deposit slip, how to operate the ATM etc. This will go a long way in making them understand the basics of money management.

Education literature: Check with your personal banker if they have any programs or literature for teaching children about basic banking. Banks may also provide you with educational coloring or story books which can used for learning and fun.

Finally, let’s talk about the large retail chains like Star Bazaar or Croma. These stores not only offer loads of electronic gadgetry but also plenty of stuff that your kids may wants like clothes, toys, games etc. A nightmare for all parents surely, but also a silver lining… opportunity to teach our children.

Economy and money: This is good place to teach your child about the working of the economy starting with why businesses are set up, how they grow and prosper, how the owners or shareholders are rewarded etc. Why does the store sell so many items, why is it organized the way it is?

Sales and discounts: Retail chains are famous for offering discounts and sales around festivals like Diwali, Holi etc. They also offer discounts on electronic items like TVs during the IPL season. Children can be taught how shopping smartly for electronics and other items during such events can help save a lot of money. On the other hand, just because a particular item is available at a huge discount is no reason to buy it.

Needs vs. Wants. Before buying any item, teach your child to check if the item(s) passes the following conditions:

1. Have they compared the prices with other retail shops and online shopping websites, especially for high priced items?
2. Is the item a need or want? Wants are discretionary.
3. Are there any discounts you can avail off (through your credit or debit card)?

If your are willing to teach your children about money, you can find a way irrespective of the choice of venue. Be creative in your approach and help your children understand why savings and budgeting techniques are critical real-life skills for them to learn. These skills will last them a lifetime and they will remember you for taking the time and efforts to impart them.

To conclude, can you rewind back to the times when you were young and your parents took the time to teach you about money management? If you are finding it difficult to remember, then this is the time to make up and put your children on the right path. The average Indian is struggling today as they have not saved sufficiently for critical goals like retirement and child’s education. There is a constant struggle to manage monthly expenses as the basics of budgeting were not learned in their young age. Please do not let your children commit the same mistakes when they become adults.

Financial literacy is regarded as an important requirement for the effective functioning for any economy and society. Over the years, financial literacy ensures supports social inclusion and enhances the well-being of our communities. While financial inclusion is the primary criteria while evaluating the level of development & progress of any economy, true financial independence cannot prevail in absence of literacy. In this article, we shall be taking a closer look at what financial literacy truly means and the advantages of it.

What is financial literacy?
Financial literacy refers to the ability to make informed judgments and to take effective decisions regarding the use and management of money. It thus includes the awareness, knowledge and skills to make decisions about savings, investments, borrowings and expenditure in an informed manner. In other words, financial literacy would mean that you understand the risks & rewards associated with every monetary decision and are also aware of the other options available to you.

Signs of financial illiteracy:

• Lack of awareness upon the need and importance of various financial services/ products.
• Lack of access or knowledge as to how to access to services/products
• Lack of knowledge and understanding of financial services/ products
• Inability to ‘rightly’ chose between alternate financial services/ products
• Inability to make proper assessment of the present & future financial situation
• Inability to understand the risks & rewards of any financial decision

Why financial literacy is needed?
The need for financial literacy is felt in developed and developing countries alike. Even if you have financial inclusion wherein you have easy and fair access to banking, investment and credit products, the real benefit can only be enjoyed if you are financially literate. There are many cases and even high chances that in absence of proper knowledge, one can be exploited by intermediaries and manufacturers, alike, leading to grave financial loses or crisis. In a world with growing financial inclusion, rise in number and complexity of financial products and a need for financial independence, financial literacy has become a must for everyone.

From a regulatory perspective, financial literacy empowers the common man and reduces the burden of providing protection and even grievance redressal to the common man by the regulators. It thus makes the entire financial system more efficient, disciplined and progressive. Financial literacy not only marks an improvement in the quality of life but also on the integrity & quality of the markets.

Who needs financial literacy?
Financial literacy is for anyone who has somthing to do with money. Thus, there is no one who doesn’t need it since all of us are either engaged in earning, borrowing or spending money and do take financial decisions in our daily lives. Perhaps only infants, lunatic, godly men or old age dependents may be excluded from this group.

The focus of this article is on financial literacy that relates to you and your family members. Financial literacy is important for you, your spouse, parents and even children. Though one may argue upon the level and depth of the financial literacy knowledge required between different groups, an overall understanding is a must for all. With financial literacy, we have the following advantages

• Clarity of financial concepts and terms
• Making better financial decisions related to savings, investments, borrowings, etc.
• Accessing financial products & services easily, without fear or prejudice
• Building assets and wealth over time, leading to better financial health
• Overcoming vulnerability and avoiding exploitation by people around us
• Planning towards economic security to self and for family

Components for Financial Literacy:
The next question that arises is to what does financial literacy comprise of? You, most probably, may consider yourself as financially literate but may not be able to clearly outline the required knowledge surrounding it. We are presenting the broad outline to test oneself on financial literacy.

The following together can be considered as comprising financial literacy for any individual.

Financial Planning (FP) Borrowings / Credit Life-cycle needs and goals Advantages & need of FP Components of FP Current Status V/s Planned Status When, How, Why & from Whom? How much debt should one take? Borrowing for Productive purpose Pre and Post Borrowing Factors Reducing vs. Flat Rate of Interest Savings & Investments Financial Products & Services Concepts of ‘Savings’ & ‘Investment’ How to Save & Invest Relationship between income/ expense and savings Assessing Risk & rewards in savings, investments & spending decisions Wealth creation concept Types of Risks Post-tax / Real returns (after inflation) Concept of Bank and types of Bank services / Bank Accounts Operating Bank Accounts & bank instruments Types and sources of Loan Need & types of Insurance products Types & features of Asset classes Types & basic features of financial products available Credit / Debit cards ATM operations / Netbanking / Online payments Equity markets Understanding finance General calculation skills Financial Independence Time value of money Terms (Inflation, Income, Interest, Tax, Capital Gains /losses, Market Risks, Returns, CAGR, Absolute Return, Insurance, EMIs, etc) Practice of Budgeting & Planning Insuring assets / future (life, health, car, property, etc) Future value from present value Present value from future value Absolute Return Simple & Compound interest

The above may seem to be a very comprehensive outline but the idea is to cover all the major aspects of money that one has to deal in their lives. While detailed knowledge may not be necessary under each heading, one should however have the broad conceptual understanding of the idea and/or knowledge of options, as the case may be.

Conclusion
Financial literacy is the primary step for financial inclusion since introspection changes behavior which in turn makes people seek and receive financial services and products. Financial literacy can lead to financial wisdom and financial independence in knowledge. It will give the ability to manage money not just deal with it and to use skills & knowledge to take wise decisions for the future.

We advise all our readers to ensure that they are ‘financially literate’ in the truest spirit. We also encourage all the readers to make their family members, especially spouses, parents and growing children financially literate. One may use the outline shared to impart such knowledge. Indeed it would be a great learning for anyone that would otherwise take great time & experience to gain. This would help increase the economic space, self esteem and the confidence level of any individual and make him/her ready to easily engage in the mainstream of the financial systems.

There is none better way to look at simple ratios to evaluate your financial situation. Companies and analysts are much more comfortable using ratios rather than actual figures for better understanding and decision making.Nothing binds us as normal investors to speak of our own financial situation in terms of ratios. We are sure that the practice would not only make it simpler to evaluate and understand situations but also interesting enough for you to engage in the exercise.

In this article, we present you with few personal finance ratios that can use used to evaluate your financial health. Assessing these the personal finance ratios and fixing your own targets or benchmarks will also go a long way in bringing prudence and control in your own financial situation. It can thus open a new world of possibilities for you…

The following few ratios have been devised based primarily upon common sense. These are not standard, academically defined ratios and you may change the composition of the ratios according to your own needs. Further, you may even devise new ratios that may better suit your unique needs. The objective is to incorporate the use of ratios in our personal financial lives to make more interesting!

Savings Ratio = Actual Savings / Post-tax Income 
Savings Ratio indicates how much you are saving out of your post-tax income for any period. The higher this ratio, the better it is. However, merely savings is not enough. The savings should be in a right asset class. Money kept ideal in bank accounts or other non-productive avenues do not qualify as savings. One may however cover asset building EMIs, like for home loans, insurance premiums, mandatory savings from salary, etc in savings. The idea is understand how much you are saving in building assets and securing your future. A good savings ratio is anything over 25%, The more it is, the better.

Expense Ratio = Actual Expenses / Post-tax Income
The Expense Ratio indicates how much you are spending out of your post-tax income for any period. The lower this ratio, the better it is. Typically Expense ratio should not be beyond 75% of your income. Expenses can be further broken into fixed expenses & variable expenses where fixed expenses would cover expenses like car / personal loan EMIs, rent, tuition fees of children, salary to servants, utility payments, etc. Variable expenses would include expenses on grocery, shopping & entertainment, etc. One can then also look at the proportion of fixed and/or variable expenses to post-tax income to better understand your spending pattern. Typically for any households having higher Variable expense ratio would mean that more unnecessary expenses are likely being made which needs to be controlled.

The relationship between Savings & Expense Ratio is also interesting since Savings + Expenses = Post Tax Income. One should ideally treat Expenses as net of Income & Savings rather than treat Savings is the residual after meeting all Expenses. By this approach we can limit & control our Expenses while making required Savings.

Debt Repayment Ratio = Debt payments / Post-tax Income
As the name suggests, the Debt Repayment Ratio can be used to understand the portion of your post-tax income that you are spending on payments of loans. Such loans would typically consist of home, car, personal or private loans. This ratio should be ideally below 40%, the lesser it is, the better. If it crosses over 50%, one can consider oneself in sort of some debt crisis and should act to minimise the debt portion.

Debt to Assets Ratio = Total Liabilities / Total Assets
You must be familiar to the Networth concept which is the balance after deducting all liabilities from the assets of an individual or a company. The Debt to Assets Ratio is on similar lines and speaks about the relative proportion of debt to the assets of an individual. The lower this ratio, the better it is. Typically, 100% or above of debt, as proportion of your assets, is unhealthy. However, due to liabilities of home loan and car, it is not unusual to find even higher proportions of Debt to Assets Ratio. While considering assets, one can either consider only disposal assets or total assets or derive ratio for both. Disposal assets can be considered better since liabilities can be paid off from such assets only and not those assets which are currently used for personal consumption, like for instance your residential home. A lower Debt to Assets (disposal) ratio would mean that you have greater flexibility to manoeuvre your financial situation.

Liquidity Ratio = Liquid Assets / Net Worth
The Liquidity Ratio indicate what percentage of one’s net worth is invested into liquid assets. In liquid assets, one may consider cash, bank balances and investments in cash & equivalent investments of very short maturity period. Networth, as said earlier, would be the balance of your assets after deducting all your liabilities. This ratio should not be either too high or too low and depending on your situation, a comfortable range can be between 5% to 15%. A higher ratio would indicate that you are not making productive use of your capital and that money which can is invested for better returns are lying ideal. A lower ratio would indicate that you run a risk of going short of cash to meet normal expenditures or to meet any emergency needs.

One can also view this as Emergency Ratio and can keep a few months of expenses in liquid assets in absolute money terms. This is more recommended it cases of individuals having high networth.

Conclusion:
The above ratios with ideal figures are for broad guidance. Typically, depending upon your life stage, there can be acceptable deviation from the ideal figures given above. For eg., for an unmarried person or a working couplel, the Savings ratio can be higher as compared to a family with one working spouse and children. We also need to consider special cases like in case of retired persons, where there is no post-tax income. Thus in such cases, low Savings ratio and high Liquidity ratio is acceptable while Debt to Assets Ratio and Debt Repayment Ratio will be a must.

Although the above personal finance ratios cannot be used for complete financial planning but they can definitely serve as a valuable reference points for better insights to your personal financial world. We encourage all readers to undertake such exercise at regular intervals of time and set benchmarks to be met with the help of your financial advisors, if felt necessary.

As investors most of us feel that creating wealth requires an active approach on our part. Frequent portfolio churning, be it stocks or mutual funds, multiple trading and demat a/cs and at the end of the year, managing the capital gains tax component. While some of us may feel that active management is the way to create wealth, let us understand how we can create wealth by just being passive investors.

LIQUID FUNDS:
This is one of the most underrated mutual fund product categories in the Indian MF space. Why? As investors, we tend to leave a lot of money lying around in our savings and current a/cs for liquidity or emergency reasons. We may have also come across investors for whom having a large bank balance is a matter of prestige and topic of discussion and comparison in their friends’ circles. This fantasy is further fueled by the big private banks who provide goodies like high value credit cards with free add-on cards, international debit cards with high daily withdrawal limits, stylish looking cheque books with Platinum or Gold customer mentioned on the cheque leaves and a dedicated relationship manager to take care of all your needs. The only person who benefits in this whole game is the bank and of course, the relationship manager. The poor investor is worse off as over a period of time the money lying in the savings and current a/cs has actually de-grown if we consider the impact of taxes and inflation.

Solution: 
Open a liquid MF a/c through NJ E-Wealth A/c which provides online buy / sell facilities through the mobile device of your choice. The entire process is paperless and also helps save the environment. You get your money back in 1 working day and the returns, depending on the option selected, can be either tax free dividends or capital gains. Some MFs also provide you with an ATM card which can be used at the bank of your choice for withdrawing upto 50% of your liquid fund balance. The card can also be used to pay for your groceries at supermarkets.

EQUITY LINKED TAX SAVING SCHEMES (ELSS):
This is a favourite with tax payers who want to take risk in their portfolio. The scheme has a lock in of 3 calendar years after which you are free to withdraw the money whenever you choose to do so. The money invested in year 1 can be redeemed in year 4 and reinvested to claim tax benefits for that year. Similarly, the money invested in year 2 can be redeemed and reinvested in year 5. This cycle can go on endlessly. The benefits to you are two-fold, namely: Tax benefits u/s 80C and market-linked capital appreciation. As an investor, you need to invest for only 3 years after which it becomes a self-generating investment.

PROPERTY:
Investors who are matured and have a large surplus can look at investing in property. The benefits to you are multi-fold. To start with, you can claim tax benefits if you buy the property on loan. Secondly, if you put the property on rent, you can generate a monthly income for yourself. Thirdly, this monthly income can increase over time. Finally, the property will also appreciate in value. If we were to do a survey of people who have taken a housing loan for a period ranging from 15 – 25 years, the interesting fact that will emerge is that majority of the borrowers tend to pay off the loan much before maturity. Thereby, saving on the interest component. Therefore, it makes immense sense to buy a house on borrowed funds and try to pay off the loan before maturity. You may then look at taking another property on loan and repeating the same process. The monthly EMIs can be funded from the income being generated from the earlier property. The result can be a chain of properties earning regular passive monthly income.

All the options mentioned above are applicable to salaried as well as self employed investors. The options are simple and easy to execute and, hopefully will not take much of your time. If the passive options are well executed, you may end up as a wealthy investor at the end of the day thanks to passive income. A word of caution: none of this will happen over night. It will require time and patience from you. The power of compounding requires time to work in your favour and help you create wealth. The legendary investor Warren Buffett once said:

“No matter how great the talent or efforts, some things just take time. You can’t produce a baby in one month by getting nine women pregnant.”

You will be tempted to eat all the laddoos if they are lying in your plate in front of you. Likewise the extra money or year end bonus in our pocket will prick you until you spend it. Right isn’t it?
The financial year has come to an end and we have got our annual bonuses. The same question of ‘what to do with the bonus’ arises every year. Should I buy a car? Should I go for a vacation? Should I pay off my huge credit card debt? Should I repay my home loan? Should I buy that new mobile? And the list goes on…
Bonus, like laddoos, tempts us to do something about it which might not be the right thing to do, especially if you are diabetic or in financial sense, not doing well enough. Take a pause; remember that you have earned that bonus through hard work not luck and hence it shouldn’t be ruined for fun and luxury. Proper planning is strongly recommended for your bonus and one should be careful to not get carried away by emotions. Else, pretty soon we may realize that the bonus is gone and then regret.

What Not To Do?

Before going on to what we should do with our bonus, let’s discuss the things which we should not do with our bonus…

• Keeping in the Bank Account: Often we find the bonus keeps lying into your bank account for long and you do nothing about them. Slowly, it gets eaten up by card payments and regular expenses… what a waste! We say “don’t keep your bonus in the bank account”. A grace of say 10 days can be given before you can plan and deploy your funds elsewhere.
• Investing before clearing high interest loans: Do not rush into making investments before paying off obligations like credit card debt or a personal loan. They should ideally be repaid before investing the money, since the cost of such debt might be higher than the return on investments. Be careful though in not rushing to repay your home loan as it has some income tax benefits also to be factored before deciding to invest or repay.
• Big Purchases or Vacations: You will not achieve anything by blowing up your bonus in a vacation or a big TV. You’ll cherish such things in the short run. But you have to secure yourself financially for long term pleasure. But at end of the day, it is also a question of personal affordability for such expenses and you need approval for the same, not from you, but preferably from your financial advisor…

What To Do?

Now, we know what we shouldn’t be doing with our bonus. The question of what we should do with the bonus is answered below:

1. Liquid Mutual Funds: As an immediate first step, you might want to put your money to good use without any risk and with adequate liquidity … look no further than liquid mutual fund schemes. Instead of keeping your money in bank, you might not want to plan /research before properly investing. Liquid funds can also be of great advantage when you decide on equity mutual fund schemes to invest as you can then request a STP or Systematic Transfer Plan or a switch to any other schemes. An STP from a liquid fund to an equity fund is like an SIP in the equity fund where you lower the risk of lumpsum investing while generating returns on investments lying in liquid funds.
2. Invest, Invest and Invest: Ideally, more than 50% of your bonus should be invested. Keep your expense list down. Make a list of the investment avenues, where you will put your money. However, you should prioritize a few expenses like high interest bearing debt or some other important personal or family commitments. Depending on your asset allocation or your financial goals, you must invest some part of your bonus into equity funds.
3. Contribute to Retirement & Emergency Funds: You don’t receive large sums of money everyday. Hence, one should be extra careful to allocate some part of your bonus to your yearly retirement fund. Remember that retirement is the biggest financial goal that you have for yourself. Small contributions made early in your life will give compounded returns to fill your retirement fund gap. The retirement savings will also help you as well as save taxes for the year, depending on your product choice. In addition, some money can also be parked as an emergency fund (preferably in liquid /short term debt funds) in case you do not already have one…
4. Start tax saving ELSS investments: This is the best time of the year to invest money in ELSS and other tax saving schemes. You have the time to plan, you can foresee your incomes and obligations and you have your bonus. So it’s best to shift your tax burden from end of the year, when you might take wrong decisions because of lack of time or money, to now when you have both.
5. Relax: Since It’s your bonus, you have the right to savor and enjoy it just like laddoos. The same should however be at a moderate level which is affordable, justified and which does not compromise your financial situation. At the end of the day, the positives or benefits from using your bonus must out weight the negatives or spendings you do. As a rule, you can keep maximum of 20% of net bonus received or 10% of your net annual income (whichever lower) as your upper limit of spending.

Managing money may not have been one of our worries in the early stages of our life and thus, we may have developed some habits which may not be well suited to the current times and needs. So the question comes, what habits can we develop now to take better control of our money. Here are a few habits one can focus on:

1. Budgeting

2. Prioritize Spending

3. Using Debt Wisely

4. Pay Yourself

[1] Budgeting:

Budgeting starts with most basic steps of managing money, and goes to an advance level of allocation of money for various goals. It includes following steps:

A. Recording Expenses

B. Classification of Expenses

C. Setting Limits

A) Recording Expenses:

So, we start with the most basic steps of accounting for our expenses. If you have been spending without recording your transactions, first step is to record your outflows and inflows every day. This exercise may seem tedious in the beginning but, going forward this will become the most

useful and effective tool towards the total control of your money. Once you have your expenses recorded at one place move to the second step of clubbing your expenses under various heads.

B) Classifying Your Expenses:

Purpose of various expenses can be similar and different. We can classify all of them based on their importance in our lives or based on our own obligation towards them. For example: We may not be able to postpone home loan EMI payment but we can postpone the home theatre purchase to another month. Another way of classification (more popular one) can be by putting them under heads depending on the area of life they relate to. For example: Rent, home maintenance, kitchen expenses can be put under Household Expenses, similarly travelling and fuel expenses can be put under Commutation expenses to better understand the area of spending.

Major Expense Heads in an Individual Life are as under:

> Household Expenses

> Utilities Expenses (incl. electricity, water, phone, mobile etc.)

> Travelling/Commutation Expenses

> Lifestyle Expenses (incl. outings, weekend exp., dinner etc.)

> Education/Children Exp.

> Subscriptions

> Insurance & EMIs

> Other regular Out-flows

C) Setting Limits:

Different expenses have different value in our day to day life, for example: Money spent on commuting to office from home is a choice between taking a metro, auto, taxi or own car. Similarly some expense, do give us choices some do not. Going forward you’ll find that most expenses give you options, though, exercising these choices may be easy or difficult at times. Providing a limit to the expense head in the beginning of the month will give you sufficient motivation throughout the month to keep it within that limit.

[2] Prioritizing Spending:

Priority of expenses depends on the obligation or avoidable and unavoidable nature of expenses. Like we discussed above, some expenses can be postponed and some cannot be, will define the importance of that expense in your financial life. Likewise, EMIs, Insurance Premiums, Children’s School fee etc. have priority over, weekend dinners and outings, but kitchen expenses are even more important.

[3] Using Debt Wisely

Use of debt is almost common in today’s lifestyle to provide for various expenses and investments. Problem with the

Debt comes in two forms:

A. It can make things expensive

B. Creates a long term obligation

Use of debt can be tricky as you’d not like to take a long term obligation for purchasing something which will depreciate over time, for example: Purchasing expensive electronic items on EMIs. With such purchases you will quickly find that the obligation of paying EMIs for long period is a toll on your savings and may create more dissatisfaction than satisfaction from material ownership.

When and How to Use Debt?

Most intelligent place to use debt is to purchase assets that:

> May increase in value over time,

> Give you tax breaks and

> Are too expensive to be paid for in one go.

Best example for the same is real estate. But this will also mean that you can make certain investments which are riskier than a deposit but have the potential to return more than the interest paid on borrowed money. But investing by borrowing is an advanced concept and not recommended for people with weak cash inflows.

How to avoid use of Debt?

The best way is to plan in advance. Though, it’ll be difficult to avoid use of debt in all possible purchases, but planning in advance will allow you to not only avoid huge amount of debt, but will also allow you to purchase something better. Also for purchase of assets which are going to depreciate early planning will ultimately save money as well, as you can earn interest on the savings you do towards it

[4] Pay Yourself

This is a method which gives you a definite amount of money regardless of total inflow, and even when you are trying really hard to save more and more money, paying yourself first will enable you to be satisfied even with major cuts in expenses. This is what you need at a bare minimum to enjoy life as it is and not just live it for money.

The Amount you pay yourself will depend on couple of things like:

> Your Personal Expenses

> Expenses for activities to de-stress you

These are generally the expenses that keep you going and help you achieve satisfaction from your day to day life. For example: when you go to your business or office, you cannot just roam around with an empty pocket, some or the other petty expense, where it’s about an occasional coffee with colleagues or fare

for an urgent commute you will need some money which cannot be planned.

Improving Outflow to Inflow Ratio

This is the ultimate objective of whole budgeting exercise. You would want to improve your savings ratio to meet your future demands. Since, we are focusing on good financial habits, budgeting counts as the most basic and most important one. All habits and their consequential purposes as discussed above can be summarized as follows:

1. Plan in advance

2. Budget your expenses

3. Prioritize Your Expenses

4. Avoid Debt for small expenses

5. Pay Yourself

Any kind of habit takes time to sink in and become a part of your conscience. Financial habits are no different, what is required is practice and if you sincerely practice, within no time you will be living them as per your convenience. Good thing is, small concessions now grow into huge benefits later, and this is what good financial habits are all about.

As an early 30’s person, you must be recently married with or without a kid, or about to be married. Your parents and family is dependent on you and you have a whole list of targets which you want to achieve in life. You must be in the middle stage of your professional life and looking forward to own a house and a car or upgrade the existing in the near future.

Most people at this time take impulsive decisions and pay for them for the rest of their life. Some common mistakes that people in their early 30’s tend to make are:

• People are mostly under insured. Most corporate employees rely on the corporate medical insurance.
• Early 30’s is an age where we don’t want to compromise on our lifestyle. People end up buying big luxury flats, which is something they don’t require or afford at this age.
• Our tax saving is not properly planned. Usually we end up buying random traditional tax saving schemes at the end of the year.
• People may be modern in other things, but when it comes to investments; they will follow their parents and stick to conventional instruments of investments. Some might try their hands in the equity market, but with improper knowledge and guidance, they spoil everything and then return to conventional instruments.
• Investments are not aligned to goals. People invest randomly without calculating if they are sufficient to meet their goals or will that investment mature when needed.
• People think that it is too early to plan for retirement and they have the whole life to earn and save for retirement.
• People don’t plan for emergencies. And many of them rely on investments / assets to meet these expenses when such emergencies arise.

You you need to polish your financial skills and plan your life as a financially intelligent person so that you can be financially much better later on. The idea is, not committing the silly mistakes, which an average Indian of your age would be making, and be smart in managing your finances.

Let’s analyze our position and see if we are on the right track and if not, change the details where are going off track

Insurance:

• Medical: The insurance provided by the company usually does not include family, secondly the cover is small, and thirdly it will be gone in case of a job change. So, an individual would need another medical insurance for himself and his family. He can go for a family floater including his parents, wife and kids. The amount of the cover should be set keeping in mind the high medical costs plus the age of your parents. Another option is to buy a family floater with a relatively small protection and smaller premium and get a separate policy for your parents.

• Life: Most people view insurance as an investment and have traditional life endowment plans, but the premiums of these policies are very high and a corpus is created providing nominal returns. These plans however, do not serve the purpose, since the protection is not enough to take care of the family in case of any mishap. It would be best to go for a pure protection plans with big covers, which should be enough to support your family. The monthly premium would also be significantly lower for such policies taken at a younger age.
• Personal Accident: Most life and the health policies are structured such that they are useless if you meet any accident. Any permanent or temporary disability and hospitalization due to accident can ruin a bright future for you and your family. A comprehensive personal accident cover for a large sum is most adviced at this age where you are a bit more accident prone.

Car:

If you already have a car, the sale proceeds of this car can be used as a down payment for the next in line upgrade, and if you do not have one and can afford one, you have to arrange for the down payment from your existing savings or future bonus or may be start an SIP for this purpose. With professional growth and salary hikes, you would be able to manage the increased installments. If you have a decently working car without EMIs, we strongly suggest to continue with the car for couple of years more and instead make additional savings (in lieu of car loan EMI) during the period. This will help you save more for higher down payment and/or a better car.

Emergencies:

It is recommended that you save around 3 to 6 months of monthly cash inflow /income as emergency funds. This does not mean that you need to keep cash at home; the idea is to keep money in reasonably liquid investment avenues like liquid /debt mutual fund schemes. Emergency funds are needed for those long gaps between job change or any unexpected event might lead to need for money to meet the family’s daily expenses.

House:

There is often a debate on whether you should buy or rent a home and it is often pointed out renting is better. But buying a home is often more driven by emotions and social pressures than pure finance. If is also better to delay the buying decision for home and start saving aggressively for same with a target of say buying home at age 40. By then you will have adequate wealth already created to buy a decent home and without too much of financial burden.

If you have decided on buying a home, firstly analyze your requirement according to your income and family members. Don’t aim for a house which is too big to fit in your pocket as you can always trade the one you have for a bigger one later in life. Always take a life cover / insurance with you home loan to not burden your family in case any eventuality happens.

Retirement: If you are in a private job, you won’t get any pension. You might have EPF and PPF, but these have lower interest rates which will mostly be offset by inflation. So, in order have a huge corpus at the time of retirement to maintain your lifestyle, you should change your strategy and divert the money towards equity, as amount invested in equity over a long term can yield returns higher than any other mode of investment. You may start an SIP and continue with the EPF and PPF, but with the minimum required amount. These will provide for your annual tax saving investments plus will serve as an investment for retirement too.

Putting some money towards retirement at this age is highly recommended since time is your friend for a comfortable retirement. With the power of compounding in equities over say 2-3 decades, your wealth can be substantially boosted which can never be made up even with much higher savings later.