The Physics of Personal Finance

http://www.personalfinance201.com

Do your personal finance maths online on Zoho

If you want to manage something, you must be able to measure it. In other words, if you can't measure it, you really can't manage it well.

Your personal finances also falls within the above concept. How do you know whether you are doing well with your personal finances or not?

So there are tools and calculators available which can help you with a self analysis and provide a road map for your finance decisions.

The following spreadsheets which I have done on Zoho , which has a suite of online web applications offering easy collaboration.

• Monthly Budgeting Worksheet
• Financial Freedom Calculator
• Networth Template
• Benefit of starting early

Zoho is really amazing and I found this excerpt about them:

This is the only real “little guy” on the list. I’ve written about the fact that Zoho already has an online office suite that is better than anything from Microsoft or Google. While the product is really good, what has been equally important for Zoho is that it has proven that it knows how to execute. Microsoft got to where it is today because it was faster and more effective at executing than any of its competitors

The advantage of these sheets is that while you can toggle with your own case figures in the sheet online and they will return with the figures for your case in a jiffy. And you can also download them for free if you really like them! We'll be happier if you spread the word to your friends.

WealthSpa: Are you missing the basics of Financial Planning

When I create financial plans for my clients, whether they have a net worth of negative, or seven figures, there are a few tips I give to every client. These basic fundamentals are requirements for every individual and family, regardless of your current phase of life or situation.
Check out below to make sure you have these basic fundamentals in place, before you even start worrying about investment portfolios or retirement plans.

Emergency Fund. You should have cash set aside to pay for emergency expenses, or cover you living expenses in case of job loss or the collapse of a business. These funds need to be easily accessible, and have little to no risk (so not stocks you plan to sell). How much you need exactly depends upon how many people in the family earn income, your tolerance for risk, and your living expenses. Most people should have three to six months of living expenses set aside in this cash account.

You may not need life insurance, but everyone needs as much liability insurance as they can afford. Liability insurance protects you and your assets from lawsuits, for your (alleged) actions or non-actions. For example, from a car accident slip and fall on your sidewalk. Liability insurance is part of your automobile, homeowner's, renter's, and even in a separate umbrella insurance policy. If you don't have many assets, this insurance is still valuable. First, if you loose a lawsuit, they could go after your future assets and income. Second, the insurance pays not just for the damage, for the lawyer to defend you. The more insurance you have, the better lawyer the insurance company hires for you.

Healthcare Directive or Power of Attorney for Healthcare, and Power of a Attorney for Financial Purposes.

You may not need a full estate plan (will or living trust), but everyone, even 18 year olds, need to plan for their incapacity. If you are in a coma or unable to make decisions for yourself, you will need a person designated to make those decisions for you. This person or persons will be able to make decisions about your healthcare and handle your finances. These documents are necessary to protect your family, keep your loved ones from fighting, and protect yourself (especially for when you wake up).

Take Action

Take one action step on either setting up your Emergency Fund, obtaining Liability Insurance, or getting your Healthcare Directive. That may be opening an account, calling your insurance agent, or contacting an attorney.

Elizabeth Potts Weinstein, CFP®, JD, the "Money Maven," helps women achieve their most important life goals through strategic financial planning, coaching, and education. For a free Special Report, How to Avoid the Top 10 Money Mistakes, go to http://www.thewealthspa.com.

When are you celebrating your Money Day?

>This was posted on India's first online weekly on personal finance on 14th August, 2007

JD Roth started writing his thoughts on personal finance which summarized all that he had learned from several months of reading financial self-help books. Now that journal has grown into a very useful and popular blog on personal finance, titled Get Rich Slowly, personal finance that makes cents! (Dollars, I would say)

In the following article, JDR shares his idea of a Money Day where you can focus on all personal finance matters in a day. Even though there are some issues which are US specific, the idea of a Money Day is universal.

Read on...

I opened my first checking account on the day I entered college. During registration, local banks set up tables at one end of the room. They all seemed the same to me. I chose the bank that gave me a free Frisbee. I did business with that bank for seventeen miserable years. I loathed that bank. They were constantly finding new and interesting ways to charge me money. If I hated it so much, why didn’t I change? Because I never felt like I had the time. Besides, I had no idea where else to go.

Eventually the bank went too far. Because of some obscure procedural policy, I was charged three $30 overdraft fees in a single day. This kicked my ass into gear. I took an afternoon off from work, closed my account, and started fresh at a local credit union.

It was one of the best financial decisions I’ve ever made.If I could solve one financial problem in a few hours, just imagine what I could do with an entire day. If you, too, have grand financial plans that you never seem to have time to fulfill, consider taking a personal Money Day.

Choose a normal weekday (when banks and business are open), take time off work, and get things done. Don’t worry that you’re using a vacation day for “nothing” — this vacation day will repay you many times over, not just now but for years to come.Before you begin, remove any barriers — mental and physical — that might prevent you from accomplishing your goals.

Gather all the account information you can find. Eliminate distractions. Commit to spending the entire day taking control of your personal finances. It’s time to do all the things you’ve been putting off!

Here are some tasks you might consider for your Money Day. These may sound dull, but the money you’ll save by taking the time to do these can be very exciting:

Read the full article

Financial Literacy Series: Financial System

I have been busy working on the financial literacy programme for me and you. If you have come here without looking at this backgrounder post, It will be my request that you take a look at the introduction post too.

Before we discuss in detail the various instruments available in the financial market and their role and significance in personal financial planning, it would be helpful to have a brief overview of the financial system in India.

The Financial System Consists of
o Financial Market Segments,
o Players in the Financial Markets
o Financial Instruments

The financial system basically facilitates transfer of funds from the cash surplus economic units to those who need it, and does it in the most efficient manner.

There are three major types of economic units.
a. Households where personal finance is involved.
b. Business entities which resort to Financial management and we can refer it as business finance
c. Government where we come across fiscal and monetary policies.

Usually, the business entities and governments are fund deficit units and require funds to finance their capital and operational expenditure. The householders as a group are net savers and channelise their savings to the other units through the mechanism of the financial markets.

So you and me are surplus economic inits and the government and business use our money and make us look like beggars!!

This fund transfer from the surplus units to deficit units may be done in one of the two ways – directly or through financial intermediaries such as banks or insurance companies.

In case of direct transfer, the deficit units sell financial claims on themselves, which are purchased by the surplus units. An example is the debentures issued by a company. These debentures are sold at a price. These represent financial claims on the issuing company in the form of a promise to pay periodic interest and principal repayment. This method is more cost efficient as no intermediary costs are involved here.

However, deficit and surplus units may not be in a position to access each other directly. E.g. the households are interested in a wide array of assets, and evaluate investment vehicles based on their return, risk characteristics as well as tax treatment.

The corporate houses want to get the best possible price and keep the cost of funds as low as possible. Financial intermediaries (FI) such as banks and insurance companies help bring these two together. They pool funds from the investors, invest money on a large scale.

They are able to diversify their asset base that is rather difficult for individual investors. These intermediaries also gain expertise in the course of their business that enables them to give a better deal to the investors. , FI are able to reap the benefits of Economies of Scale, Lower Transaction Costs, and Reduction in Information Costs due to their intimate knowledge of finance.

The Government simply passes taxation legislation (bullies us) and gets load of money from us to fill its coffer and serve the social needs!

Financial markets can be over the counter (OTC) or organized. In case of an OTC market, the buyer and seller directly meet each other, may negotiate the price and strike the deal.

In case of organized markets (say securities exchanges or Stock markets), buyers and sellers give their price quotes and the exchange facilitates matching of buy and sell orders based on compatibility of price quotes. In fact, the same instrument may be traded either way. For example, if an investor buys units of a mutual fund directly from the fund, it is OTC. However, units of certain mutual funds are also listed and traded on the securities exchange.

Financial Literacy for me, you and your friends

I need to go through a financial literacy programme and I am making that effort. So do you, dude.

I've hated finance. Maybe because I was not able to understand the jargons and the maths. But I guess ignoring personal finance worsens the situation. And the only way to get maximum out of your personal finance is to look it into its eye and grapple with it. You will come out stronger.

If you think it's too early for you to bother, let me tell you that the first principle of investing is to start early and see the magic of compounding. College grads, fresh MBAs and guys under 25, the smart thing to do is to start now.

Do you think that you have mastered the basics but are not able to use it to your advantage, it's time to put your thinking cap on and review your strategies. Learn from your failures. Often we tend to get stricken by some deadly internal enemies which Kartik Jhaveri details here.

Some of you guys would be rich enough not to be bothered about these mundane things. But have you ever given a thought that you are in a position to contribute to the nation's economy by being more efficient about your finances. Wealth has the unique ability to create more wealth. Are you using that power?

Before I move on, let me articulate the background to this financial literacy programme that I am so smitten about. The following facts and questions keep on humming in my mind:

1. Equities give the best returns and you are putting your money in a professionally managed corporate organisation. Compare this with your insurance products which give much lesser returns and your money is invested in the Government which is inefficient with your money, to say the least.
2. However the total AUM under Mutual Funds is about Rs 3.5 lakh crores while LIC alone manages funds worth more than Rs 6 lakh crore. Yes it's true that LIC has been there for over 50 years and has a huge distribution reach. But it has hardly tapped the huge insurance potential that India has.
3. Financial experts scoff at ULIP saying that it's very expensive compared to Mutual Funds. But LIC collected more than Rs 25000 crore in 2006-07 and it's total fund under ULIP is approx 40000 crore which is more than UTI's AUM of approx 39000 crore (since existence)

All this and more points to widespread financial illiteracy at all levels. Be it college grads, software geeks, MBAs, Engineers, even CFA/Economists( they are experts at business finance or government finance) and even Financial advisors (they rarely have a holistic view), everyone needs to be literate about his personal finances.

And there are over 700 mutual funds, 5000 stocks, 300 insurance policies and hundreds of other financial products to choose from!!

Interested! And the literacy programme that I have in mind will have the following details:

• Financial planning basics.
• Financial markets.
• Financial products like Mutual Funds, Stocks.
• Research reports, Financial analysis, technical analysis.
• Insurance : Basics, Company review, product review.
• ETF : Basics, Company review, product review.
• Bonds : Basics, Company review, product review.
• Tax Planning : Basics, product review.
• Retirement Planning : Basics, product review.
• Children's education. : Basics, Company review, product review.
• Calculators :Budgeting, Networth, Loan, Asset allocator, Risk analyser,etc.
  

Any suggestions. And if you are interested why don't you subscribe to my RSS feed or by email. And tell your friends too. I'll cover them one at a time. [ I need to learn them and then only I can share it with you :) ]

Btw, if your eyebrows are tensed up and you are thinking why I am making so much effort working on this financial literacy programme, I'll tell you my secret. It's for the website I dream of every day and night!! The site launches in August'07.

Do It Yourself Tools for Personal Finance

Personal Finance is a thing which we keep on postponing. I’m already feeling like a poet out catching people to hear my poem. And being a person who hardly understands poems, I can understand the yawning souynds people make when I try to tell about personal finance.

I’m persistent. But this time I’ll not rant on any theory and give you a download option where you can do all your personal finance yourself.
So you are about to make a poem yourself. :)

The worksheet has the following sheets. Download it here.
1. Networth
2. Budgeting
3. Planning for Child's education
4. Advantage of starting early
5. Tax Calculator
6. Retirement Planning
7. Mutual Fund Portfolio
8. Insurance details
9. Other Portfolio
10. When you will be a crorepati
11. Calendar2007

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Reviews, Tips, Calculators with an Indian perspective.

Allocating your Assets to Good Use

Asset Allocation (AA) sounds sophisticated, no? It assumes you have an asset to allocate and gives a boost to your ego, eh! Looks like a smart and sexy word for a thing as drab and dreary as planning your personal finance. And AA also gives you a feeling that you are holding some aces (AA) rolled up in your sleeves. It specially applies to the Financial Planners or Advisors.

But seriously, asset allocation is a useful concept to know. Simple too. And once you get your fundas clear about AA, you can use it to your advantage. It is the first step of adding value to your money or putting your money to good use.

Asset allocation is the percentage distribution of your money into equity, debt and liquid instruments. Equity, as you know, gives the highest growth but comes with the highest risk. Debt instruments are more or less guaranteed but give you a lesser return. Liquid money is your money in your savings account.

Let’s start with the thumb rule of AA. Your allocation to debt should be equal to your age. And as you age, the percentage in debt should increase too. In other words, your investments in equity should be (100- your age).

But AA should be much more dynamic than the above thumb rule. I feel that it should depend on your age and your risk appetite. Guys at 20-25 years of age may want to invest everything into equities and I think that is the right strategy.

And before you set off to do some AA for yourself, I would like you to ask the following questions to yourself:

1. What is your risk appetite?
   
2. What are your financial goals?
   
3. When do you need the money?

And if you love ready made formulas, here's some from allocation strategies from John Bogle:

• Older investor in distribution phase: 50% equity; 50% debt


• Young investor in distribution phase: 60% equity; 40% debt


• Older investor in accumulation phase: 70% equity; 30% debt


• Young investor in accumulation phase: 80% equity; 20% debt
  
  

Reviews, Tips, Calculators with an Indian perspective.

Tips on Financial Planning & Budgeting

My following article on "Handy Tips of Financial Planning" was featured in Desicritics

Getting rich is in your hands, nobody else's . So get started with working hard or smart (depends on you again), adding to your finance knowledge and generally taking responsibility for yourself. Get Rich Or Die Trying.

If Financial decisions look like rocket science to you and Investing is even more daunting, here are some baby steps for you.

This one is from Deborah Fowles, Guide to Financial Planning in About.com Seems very elementary but I doubt how many people are scoring more than 5/10. Here it goes, the top ten:

1. Get Paid What You're Worth and Spend Less Than You Earn : Hey, I get less than what I deserve and so do you!! And I've not done any budgeting so that I may be sure of the second part.

2. Stick to a Budget : I'm ashamed, no budgeting exercise for myself, not to speak of sticking to one.

3. Pay Off Credit Card Debt: Thank God, I finally get a score on this one. I've managed to stay clear though I've had to suffer with the agonising interest calculations earlier.

4. Contribute to a Retirement Plan: I do have a pension plan but I've never cared to figure out whether it is sufficient! Will give 1/2 for that one to me.

5. Have a Savings Plan: Yeah ,I'll be partial to myself and give some score here too! I do save about 15% of my income though it's a recent phenomena. Better late than never!

6. Invest! : Pretty straight forward. But few people manage to find an hour for that in a week. They'll rather watch TV(Big Boss is on these days!)

7. Maximize Your Employment Benefits : A meeting with your HR guy!! Brace yourself. I have no hope with my guys.

8. Review Your Insurance Coverages: Putting a finger on that is important from the family point of view. Those of you without that responsibility can breathe easy on that count. But I get full marks here!

9. Update Your Will: Never thought about that up till now. Bless Ms Fowles.

10. Keep Good Records: I will, as part of my New Year resolutions. But I've yet to get started on that. Next Monday, I promise.

Phew!, I score about 4/10!! So much potential to improve!!

But before I sign off, for guys who suddenly want to get started with their budgeting exercise, here are percentages of major spending categories from the US Bureau of Labor Statistics (2003) Consumer Expenditure Survey. May not apply to you and me but it's an interesting statistic anyway. Gives you an idea where you stand and where you can increase/decrease your expenses.

Food at home 7.7%
Food away from home 5.4%
Alcoholic beverages 1.0%
Total food and drink 14.1%
Housing 32.9%
Apparel and services 4.0%
Vehicles 9.1%
Gasoline and motor oil 3.3%
Other transportation 6.7%
Healthcare 5.9%
Entertainment 5.0%
Personal care products and services 1.3%
Reading .3%
Education 1.9%
Tobacco products and smoking supplies .7%
Miscellaneous 1.5%
Cash contributions 3.4%
Personal insurance and pensions 9.9%

Work on your Budget sheet for two hours and it'll tell you a lot about yourself. Look at it as a personality test!!

Download the worksheets

And yes, Taxquery wonders how any financial planning can be successful without tax planning. He's dead right. Go to his wonderful blog for tons of info on Taxes




Reviews, Tips, Calculators with an Indian perspective.

Getting Started on your Investment Journey

The first step of our investment journey is the toughest. The biggest step is getting started.

Let's try to learn financial planning and investment principles, plan retirement & employee benefits here. I promise a lot of resources here without trying to teach. Actually it's a journey for me and any feedback will definitely help.


Here are some of the topics on which I want to talk about which can help us reach our financial goals:

• Financial planning
• Retirement planning
• Insurance needs
• Stocks and Mutual Funds
• Asset allocation and investment advice
• Financial seminars for employees or organizations

Start with downloading this Excel worksheet where you can start your budgeting, planning and controlling your finances.

Claimer/Disclaimer: One thing that separates this blog from other resources on the net is my independence. I do not accept fees, commissions, products or services from any financial service firm or investment manager to write or review their products. On the other hand, I am not offering any financial planning services.


Reviews, Tips, Calculators with an Indian perspective.

Start sharing your Slides

Slideshare is a wonderful way of sharing your slides and powerpoint presentations. It is a place to share and discover slideshows. You can embed the slideshows in your blog, tag, comment and have fun.

I have embedded a presentation I have made on "Taking responsibility for your finances"



Waiting eagerly for comments.


Reviews, Tips, Calculators, Sensex, Insurance, Real Estate, Mutual Funds with an Indian perspective.

WorkSheets on Budgeting, Planning and Control

I'm amazed at myself. My 200th post and it's hardly four months since I've fallen(err..or risen to) for this blog thing!!

I have been writing a lot of theory(crap;?) on going about your financial decisions. Sounds fine but how do you actually do it? Have been working a while on some worksheets and here is the result of my efforts. Download this Worksheet on Excel

The entire worksheet has eleven spreadsheets and they are:

1. Networth Statement: Start with calculating your Networth. The sheet also gives you an idea of the weightage of each asset and liability.

2. Budgeting: The sheet gives you an idea of planning your expenses vis a vis your income. The idea is that when you start measuring it, you can manage or control it and then improve upon.

3. Children Education Planner: Gives you an idea of what amount you need to invest and for how long so that the desired level of money is available for your children.

4. Starting Early: The worksheet compares between two scenarios where in one you start early and in the other where you start late. See the difference.

5. Tax Calculator: You can enter your monthly income and the total tax can be seen. Well this is according to Indian Tax laws. If any of you want the template for the Tax returns, do let me know.

6. Retirement Planner: This sheet will help you in arriving at the amount to be invested monthly for desired retirement pool. Toggle around with the figures.

7,8,9. Gives you a sheet where you can enter your Mutual Funds portfolio, Insurance and Other Investments.

10. Crorepati?: It calculates the Future Value of your investments and tells you when will you be able to become a crorepati!!

11. Calendar 2007 : A desktop and soft copy of Caledar on Excel.

I'm proud of my effort. But this should not stop you from telling me what improvements I can make. Infact that will be hugely appreciated. I'm also looking for somebody who can make it better. Also guys who can convert this into some other platform like odp or anything better.


Reviews, Tips, Calculators, Sensex, Insurance, Real Estate, Mutual Funds with an Indian perspective.

Budgeting is for Sissies; Millionaires Don't Need Budgeting

True, I believe that Budgeting is for Sissies and Millionaires don't need to do Budgeting. But I could be wrong(hard to accept that but I guess I can win some brownie points for being flexible:).

Now even though I lay no claims on being a sissy [:)] as well as a millionaire($) [:(], here are some thoughts on Budgeting:

FMF says that Millionaires become millionaires by budgeting and controlling expenses, and they maintain their affluent status the same way. Yes, you can make all the money in the world, but if you spend all the money in the world plus $1, you have a negative net worth. Budgeting and controlling expenses hold the key to wealth.

The country has a budget. Every well run organisation has to have a budget.

It is said that if you want to improve on anything, first you should be able to measure it. Budgeting provides the measuring scales for your finances.

So if you have come around to giving Budgeting a try, here are five keys to developing a successful budget from Crosswalk:
1. Teamwork: Get your spouse into it too. एक से दो भले!
2. Learn what your true income is: Accept it, even though it is less than what you deserve:).
3. Do your budget on a monthly basis: Get started atleast.
4. Do your budget in written form!!! : No mind games!
5. Prepare your budget in order of priority: What priority I don't know. Maybe when I understand it fully, I'll share.

Happy Budgeting!!

Budget For What You Love Doing

This is a must read by Ramit. It talks about conscious spending and also doing what you love to do.

I'm amazed at the amount of thinking Ramit does in writing that post. He talks about conscious budgeting and also doing what u want to do in life.

Well said, but most people like me have trouble balancing them. Obviously there's a thin line separating them and u hv to learn to balance them yourself.

KISS while Investing.

Simplify your Life.

Unless you're working full-time in the financial world, you don't have the skills, tools, information, time or interest in playing the market. In fact, even the hotshots working full-time in the financial world follow the same strategy with the bulk of their assets. It's their biggest secret.

Mutual fund managers who are playing the market with your money, often lock away the bulk of their retirement assets in safe, untouchable portfolios. Well, they've got families to protect too.

So what is this laidback investing? Simple, well-diversified portfolios of a few no-load index funds, either mutual funds or ETFs. Least expensive and no tracking troubles!

Keep it Simple, Stupid. It's the KISS strategy!

Financial Strategy: A Fallout of Investment Objectives

Extract of a question and answer appearing in Economic Times

Question: I am 42 years old and have two daughters, one studying in class 10 & other in 5. My wife is a home maker. I earn around Rs 6 lakh per annum. My investment details are as follows — PPF 15%, KVP 23%, shares 17%, diversified MF 40.9%, infrastructure bond 1.9%, NCD 0.44% & cash 1.7%, term policy - Rs 10 lakh, medical insurance - Rs 5 lakh (on behalf of the company). How can I invest better? — Rajesh Gupta

Answer: Returns are a fallout of the investments we make and investments are a fallout of the financial strategy and the financial strategy per se is a fallout of financial objectives. Broadly, the investment allocation you have is about 60% into higher return generating assets, i.e., stocks and MF while the other 40% is into fixed return generating assets. There is basically nothing wrong with your strategy.

In my view, your question should have been what modifications are needed to achieve financial objectives? Given this premise, there are two things you need to do. First, make an estimate of your financial objective — for example, let’s assume that you want to plan for your younger daughter’s wedding in about 15 years time. You will need about Rs 5 lakh for that, factoring inflation as well. Second, you need to do a bit of mathematics. You need to calculate how much you will need to reach 5 lakh in 15 years’ time.

If you have more money you can afford to be in safer instruments and if you are short on money you have to be invested with higher risk products. Just a word of caution; equity investments may be considered only for financial objectives of three years or more.

Your medical insurance level seems fair but your life insurance seems to be low. If you plan to increase your life insurance you may only consider term life type of policies and nothing else.

Become A Crorepati

Becoming a crorepati is a dream for many. Honestly, being a happy, go lucky guy, I haven't given it a lot of thought on becoming one.

And now when I think of it, my analytical mind tells me that there are so many variables on which the dream depends on. Hard work, patience and persistence are some variables which can't be quantified. But there are some variables which can be quantified and they are:

1. Amount Invested every month/year. 2. Rate of return. 3. Period for which amount stays invested.

So if you start at age 20 and invest Rs 60000 every year (Rs 5000 every month) and earn 13.50% return on your investments, the total works out to Rs 1 crore after you attain 45 years of age(25 years)

Want to work on the permutations and combinations for yourself. Download the excel sheet here

Financial Planning Is Life Planning

Financial Planning comes across as a mundane exercise where you are looking at the money decisions in your life. Well, it's not the holistics way of looking at it, me thinks.

Ultimately, your money decisions should give you the freedom of living life as you want it to be. That means that you have to build such a networth that you don't worry about money when you are doing something dear to your heart.

An example would help to express my case. A guy who is in a 9 to 5 job, has a family to support dreams of becoming a farmer/writer/entrepreneur. Focused on his goal, he makes financial decisions in harmony with his values. He keeps his lifestyle expenses low to provide him the freedom to save and invest the difference so that he can reach his goal. Simultaneously, he takes the appropriate continuing education so that he can live up his dream.

The process of financial planning brings families to decide which values they want to live by, and causes them to adjust their daily monetary decisions to fit those values.

There are two ways of getting rich. One, by maximising your income and two, by minimising your needs. If you have more than you can spend, u're rich, I think. And at the end of the day, if you have a rich sleep, nothing like it.