Rigour,discipline and time are needed to make a financial plan effective
Call it a professional hazard.Most of my meetings with friends start with a standard line: hey,I was thinking of calling you.Would you please give me numbers of some good financial planners or advisors Nothing wrong with the request per se,considering I write on the topic.But the trouble is that we have been through the same drill many times in the past.The same requests were made a few months,a few times earlier,the numbers were passed on and the gentlemen had spoken about meeting some advisors,too.But thats where it always ends.As they say,history repeats itself mostly as farce.By now I know what happens in those meetings.In the initial enthusiasm,an appointment was made with the advisor.After the initial meetings,the advisor asks for (sometimes in a form) financial details.Many bravehearts call it quits at this juncture because for most of them remembering or going through their financial records is a task similar to preparing for the board exam.They did it in school because they didnt have a choice,but wont do it ever again.Some people even filled up the necessary details,but failed to turn up for the proposed meeting at a future date.Now,they are embarrassed to go back to the same person.The story may have different ingredients,but the crux remains the same: many people fail to finalise their financial investment plan for a variety of reasons.
A FEW HOURS EXTRA,PLEASE
In our experience,the younger category within the age group of 25-45 often fails to go through the entire exercise.Its mainly because of the lack of awareness or enthusiasm.More importantly,they also cant find time to do it because they are extremely busy with their life and career, says D Sundararajan,investment consultant,Trendy Consultants.This is a familiar story shared by many planners and advisors.I dont know whether they actually cant find the time,or is it that famous chalta hai attitude at work, says an advisor.Many youngsters seem to think they dont have to worry about the future because they have a great life ahead. Sundararajan says he has found a unique solution to deal with the issue.We find that senior and elderly people are very diligent when it comes to financial aspects of their life.We impress upon them to convince the younger people in the family to be serious about their financial health.Since we have the tradition of listening to elders like parents or in-laws in the family,it seems to work, he says.
CANT SACRIFICE LIFES PLEASURES
For most people,planning for the future is equal to sacrificing the present happiness.Rightly or wrongly,the perception is deeprooted among the younger category.Blame parents for trying extra hard to ingrain financial discipline.For most people,spending has become a way of life.They dont think it is worthwhile to plan for a big purchase when they can do it with a credit card or a zero percent finance scheme in a matter of a few minutes, says Hemant Rustagi,CEO,Wiseinvest.Sundararajan also has an interesting experience to share: We were conducting a serious programme for young managers in a bank.When it came to investment and financial discipline,many of the younger manages had serious issues.They were categorical that they dont want to compromise on their current lives to be able to lead a better future life, he says.However,experts say,these people have got it completely wrong: financial planning doesnt mean living a hermitic life.You can definitely spend but it should be within your means.Thats all.
I KNOW IT ALL
A lot of people believe that since they read so much about personal finance on the net,newspapers and magazines,they are their best manager.Hiring a mutual fund advisor or an insurance advisor and making investment is their idea of a comprehensive financial plan, says Suresh Sadagopan,chief financial planner,Ladder7 Financial Advisories.Sure,one can do justice to it this way,but the sad truth is very few would be able to do that.Apart from the knowledge about investments and financial plans,the real problem is lack of time.Many people dont have the time to follow their plans continuously, he says.Sundararajan also says thanks to the internet and various online tools available,many people have become experts overnight.He doesnt find anything wrong with it,provided they can do a thorough job.I dont want to say that it is difficult to do it because it may sound serving my own interest.But the trouble is many people just accumulate various investments without understanding them, he says.
STARTING WITH VAGUE IDEAS
Building castles in the air is best left to special effects experts.You cant have fancy plans that cant be supported by numbers.Most people fail to finalise a plan because they dont have a clear idea about their objectives.For example,they cant decide when they want to own a house or a car.It is easier in the case of their retirement or childs marriage because they are certain when it will happen, says Rustagi.According to experts,fancy notions about ones future are a common problem among highearning category.They want everything in life,but the problem is that you should be able to support it financially.For example,there is nothing wrong with a holiday home in Goa.But the question is will you be able to save or invest for it along with your other goals like,say,childs education,a house to stay,or your own retirement, asks a financial advisor.When they face these real issues,most people have the tendency to vanish. Some people start investing as per the plan very earnestly,especially those who have started late in life.But the trouble is that they tend to be extremely aggressive.The moment they see their investments not doing well for a year or two,they lose all interest.They just abandon all their plans and run away, says Rustagi.He says this is a concrete example of not having a concrete plan.
I DONT WANT TO PAY FOR THE ADVICE
Your fee is a bit stiff.Thats something many experts are used to.In fact,many people even ask for a discount.I dont think they ask for a discount from their doctor, fumes a financial planner.The attitude is that I am coming to you only because I dont have the time.But I dont think your fee is justified, he adds.People dont understand that drawing up an entire financial plan or reviewing an entire plan is not an easy job and they should be prepared to pay for it.Even those who go through the initial plan think its for life and vanish because they dont want to pay for the review, says Suresh Sadagopan.It could be a costly mistake because any big change in your life would call for a proper review of your financial plan, he says.
10 Tips to Get Your Finances Right
Be clear about your objectives before starting to make a plan
1) A few mutual fund units and Ulips alone wont help you meet your future financial goals
2) Assess your financial situation and investments,do some calculations to find out the ground reality
3) If you think you cant do it alone,then its time to hire a professional planner or advisor
4) You can fix an appointment and meet the person for an introduction mostly free
5) Keep your bank statement,investments,loan details ready for the next meeting
6) Once you give the necessary details,the advisor will be able to draw up a financial plan for you
7) A financial plan would have details of all your future goals and investments to achieve them
8) You have the option to just buy the plan or ask the person to implement it for you for an extra fee
9) Always show up for periodic reviews and clear your doubts promptly;never try to second guess
10) The plan given by your advisor is never final.You have to review it periodically to fine tune it to the present situation
Written By Madhu T in economic Times of 22/09/2011
Thursday, September 22, 2011
Wednesday, September 21, 2011
Don't be surprised but India and social security do go hand in hand.- Ram Valia
When we talk about social security the attention primarily shifts to the country of stars and stripes. It is wrongly presumed that India does not care for its human capital and the largest contributor to its booming GDP. The truth is that India too has social security measures in place for its currently working and future aged workforce.
Though hard to believe now, but not so after the explanation that follows.
In India there are mainly two types of retirement plans which has several measures to ensure that the employees are eligible to getting several benefits after retirement or superannuating from a company.
1) Defined Benefit Plans
2) Defined Contribution Plans
1) Defined Benefit Plans
in Defined Benefit plans employee's post retirement benefits are ascertained and fixed based upon a formula, irrespective of their contributions. They are linked to the employee's age, service tenure and amount of salary. The benefits that are based on these variables which in turn are directly based on certain predefined formulae.
The employees prefers this type of benefit plan as they don't have to face any investment risk and neither do they have to make any specific contributions towards these future benefits.
Employers consider this deplorable as these benefits lead to the addition of a liability on their balance sheets, as and when these benefits get accrued. The contributions towards these benefits are solely made by the employer. The employer is not only left at that, even after the contributions that are made the investment risk is also Bourne by them.
The types of benefit schemes in the defined benefit plans are:-
Gratuity
It's the benefit paid to the employee for long term continuous service with the employer. It has a vesting period of 5 years and based upon the type of service rendered it normally pays 15 days salary for every completed year of service.
Retrenchment Compensation
A company cannot just fire its employees as and when it feels like. To protect the interests of the employees the employer has to pay a specified compensation to it's employees in times of a closure of a unit or downsizing. It also has tax benefits so that the maximum benefits are availed by the employee
Voluntary Retirement Scheme
To achieve optimum utilization of human capital certain companies offer a VRS option to it's employees to retire early and in return they are offered a range of benefits, they can be cash or shares or even an annuity amount for life. this ensures that even as the employee retires early his post retirement expenses can be taken care of.
Leave Encashment
When a person does not avail of the statutory leaves allocated to him over the year then they get accumulated over the working years. At retirement he can claim the salary for all the unavailed leaves over the years at the daily wage rate payable at retirement. Hence increasing the value of the leaves many folds over his working life.
2) Defined Contribution Plans
In these plans the employee's contributions are defined but his benefits are not certain. They are based on the investments made and the returns obtained on the same over the investment tenure. The employers responsibility ends after making the initial statutory contributions. Because of these reasons Defined Contribution Plan is preferred by the employers and not by the employees. But it also holds a very important benefit for the employees Portability of benefits. Unlike the defined benefit plans, the defined contribution plans being portable can be carried along with the employee if he changes his employer. So his benefits remain unchanged even when he changes his job. In Defined Benefit plans if the employee changes the job then his benefits are either completely diminished or substantially reduced..
Employee Provident Fund
This compulsory investment option offered by all employers can be a great retirement asset, It deducts 12% of an employee's basic salary and the same is matched by the employer. This entire investment is invested at a fixed rate of return of 8.5% p.a. Though Loans and Withdrawal options are available its not advisable to use this fund for anything else but retirement. To force employees not to foreclose this account before retirement there is a penalty for complete withdrawal of money from this account before retirement.
Public Provident Fund
Another long term investment option given to everyone is PPF. it is an investment for a period of 15 years which grows at a rate of 8% p.a. There is a minimum investment amount every year of Rs. 500 and a cap on the maximum amount of Rs. 70,000/-
New Pension Scheme
It's a pension system recently launched by Govt of India from 1st April, 2009.. You can regularly invest your money in this and get a lump sum at your retirement and a fixed monthly income for the lifetime. It will work almost the same way as Private Pension Schemes. The investment choice can is completely at the discretion at of the investor. the investment is not only by the investor but a part is also contributed by the employer and the Government.
Employee Deposit Linked Insurance Scheme
This scheme also provides individuals with a term life insurance at a miniscule cost. This helps protect the interests of the investor incase of an unfortuanate even which might cost his life.
Employee Stock Options
For companies with Shares issue attractive Esops to employees which enable them to buy a stake in the company at a discounted price. This increases their loyalty towards the company and motivates them to work towards the progress of the company
Though it is clear that the availability of retirement beneits and social security measures are in plenty in India but the the actual ability to avail this benefit is very tedious and cumbersome due to the highly bureaucratic nature of executing agencies involved in providing these services. If one finds a way too surpass and circumvent these processes and policies in place then the Indian social security measures can be of great vaue for everyone in the post retirement phase.
Happy Planning
Think before you act as
'It's all in the Mind'
Though hard to believe now, but not so after the explanation that follows.
In India there are mainly two types of retirement plans which has several measures to ensure that the employees are eligible to getting several benefits after retirement or superannuating from a company.
1) Defined Benefit Plans
2) Defined Contribution Plans
1) Defined Benefit Plans
in Defined Benefit plans employee's post retirement benefits are ascertained and fixed based upon a formula, irrespective of their contributions. They are linked to the employee's age, service tenure and amount of salary. The benefits that are based on these variables which in turn are directly based on certain predefined formulae.
The employees prefers this type of benefit plan as they don't have to face any investment risk and neither do they have to make any specific contributions towards these future benefits.
Employers consider this deplorable as these benefits lead to the addition of a liability on their balance sheets, as and when these benefits get accrued. The contributions towards these benefits are solely made by the employer. The employer is not only left at that, even after the contributions that are made the investment risk is also Bourne by them.
The types of benefit schemes in the defined benefit plans are:-
Gratuity
It's the benefit paid to the employee for long term continuous service with the employer. It has a vesting period of 5 years and based upon the type of service rendered it normally pays 15 days salary for every completed year of service.
Retrenchment Compensation
A company cannot just fire its employees as and when it feels like. To protect the interests of the employees the employer has to pay a specified compensation to it's employees in times of a closure of a unit or downsizing. It also has tax benefits so that the maximum benefits are availed by the employee
Voluntary Retirement Scheme
To achieve optimum utilization of human capital certain companies offer a VRS option to it's employees to retire early and in return they are offered a range of benefits, they can be cash or shares or even an annuity amount for life. this ensures that even as the employee retires early his post retirement expenses can be taken care of.
Leave Encashment
When a person does not avail of the statutory leaves allocated to him over the year then they get accumulated over the working years. At retirement he can claim the salary for all the unavailed leaves over the years at the daily wage rate payable at retirement. Hence increasing the value of the leaves many folds over his working life.
2) Defined Contribution Plans
In these plans the employee's contributions are defined but his benefits are not certain. They are based on the investments made and the returns obtained on the same over the investment tenure. The employers responsibility ends after making the initial statutory contributions. Because of these reasons Defined Contribution Plan is preferred by the employers and not by the employees. But it also holds a very important benefit for the employees Portability of benefits. Unlike the defined benefit plans, the defined contribution plans being portable can be carried along with the employee if he changes his employer. So his benefits remain unchanged even when he changes his job. In Defined Benefit plans if the employee changes the job then his benefits are either completely diminished or substantially reduced..
Employee Provident Fund
This compulsory investment option offered by all employers can be a great retirement asset, It deducts 12% of an employee's basic salary and the same is matched by the employer. This entire investment is invested at a fixed rate of return of 8.5% p.a. Though Loans and Withdrawal options are available its not advisable to use this fund for anything else but retirement. To force employees not to foreclose this account before retirement there is a penalty for complete withdrawal of money from this account before retirement.
Public Provident Fund
Another long term investment option given to everyone is PPF. it is an investment for a period of 15 years which grows at a rate of 8% p.a. There is a minimum investment amount every year of Rs. 500 and a cap on the maximum amount of Rs. 70,000/-
New Pension Scheme
It's a pension system recently launched by Govt of India from 1st April, 2009.. You can regularly invest your money in this and get a lump sum at your retirement and a fixed monthly income for the lifetime. It will work almost the same way as Private Pension Schemes. The investment choice can is completely at the discretion at of the investor. the investment is not only by the investor but a part is also contributed by the employer and the Government.
Employee Deposit Linked Insurance Scheme
This scheme also provides individuals with a term life insurance at a miniscule cost. This helps protect the interests of the investor incase of an unfortuanate even which might cost his life.
Employee Stock Options
For companies with Shares issue attractive Esops to employees which enable them to buy a stake in the company at a discounted price. This increases their loyalty towards the company and motivates them to work towards the progress of the company
Though it is clear that the availability of retirement beneits and social security measures are in plenty in India but the the actual ability to avail this benefit is very tedious and cumbersome due to the highly bureaucratic nature of executing agencies involved in providing these services. If one finds a way too surpass and circumvent these processes and policies in place then the Indian social security measures can be of great vaue for everyone in the post retirement phase.
Happy Planning
Think before you act as
'It's all in the Mind'
Tuesday, September 20, 2011
Have your Retirement Planned... The earlier the better - Ram Valia
A stage of life always considered too far into the future to be planned for, but it can be quite intimidating when you realise the amount of money you require to sail smoothly through the retired phase of your life.
Retirement as i define is the day from which you stop working for money, you can continue into any profession, business or service but the work is not motivated by the primary requirement for you to fun your family. so continuing to work for a cause or for a liking is not considered work and doing it irrespective of the monetary benefits is the time when retirement has started.
Retired phase of life makes up for almost 1/3rd part of most people's lives. This figure when revealed takes many people by surprise as they believe that like their ancestors and forefathers, their children will take on the responsibility of providing for the their living expenses. it is widely believed that once they are into retirement their expenses will drop down dramatically and the little unplanned savings which they have will suffice their every need. One aspect that is completely forgotten is the demon of inflation. This demon can have treacherous effect on the real value of money that has been saved over the years. Thr belief that everything is left to the almighty and they will get no hardships can really have them falling flat on their face. They completely sideline the fact that they will have illnesses as they age, they will have social obligations to cater to, they will have some hobbies in mind which they would like to pursue, and that they will not come cheap. Getting complaisant about their financial position based upon the mere adulation of their friends and colleagues whose base is a misconceived assumption about your financial situation can prove fatal in those critical later years of life.
Retirement should be Planned
Sit with your planner, and get a planner who has only your interests in mind. Discuss your current lifestyle, argue upon the inflation rates coupled with other assumptions like the growth rates of various asset classes, an appropriate asset allocation based upon your risk profile after a distilled understanding of the risk factors and the meaning of each risk factor
Setting the ground rules correct lay the plinth by discussing your expenses under various heads. Each head is important as it would grow at its specific inflation rate. An input of expense start and end year should be given prime importance so that precise expense calculations for the future years can be made.There could be certain expenses like medical expenses, socialising that can grow at different inflation rates , those need to be incorporated separately.
After this, deciding upon the retirement age is critical, there are two aspects to this. A desired retirement age, this is the age when you wish and aim to retire and an extendable retirement age which is the age upto which you can stretch your retirement if the plan cannot be made at the desired age. Also the most important input is the life expectancy. This is generally based upon the history of the family's life expectancy along with the person's health situation.
A buffer amount is needed
As the retirement plan has many assumed inputs used, there will be times that the actual situation can be different than what was assumed. Inflation can vary, so can the returns of each asset class over the planning period and the probability of humans to live longer than the horizon planned for forces a big threat to the sincerity of the plan. Though it is good to live more and backed with today's advancement in science and medical fields it is quite possible too. But it might not be that good for the plan. To protect against this risk called 'Longevity Risk' in which you might live longer than what is planned for you should have a buffer amount in your plan. This amount should at any point in time be able to suffice the next 5 years expenses adjusted for inflation.
Pay fees to your Planner
To get the best interests in mind you should pay a fee that is decided upon before entering the contract. This wil make him more accountable to you and force him to serve you better.
Plan your post Retirement Activities
In the time after retirement, though you have the finances planned, it is equally important to have your time planned too. This means engaging in activities that will keep you busy and your mind away from ill thinking. it can be either a hobby that you like, or following a sport that you adore, or even a cause that you stand strongly for. Knowing this will ensure that you are occupied towards productive thinking and action post retirement. Your expenses after retirement will be heavily based upon the type of activity chosen.
Plan Early, Plan Smart
If there are two people, Mr. A an Mr. B, both are currently 25 years old and have their current expenses at Rs. 50000/- p.m. and both plan to retire at 60. Mr. A starts planning for this from age 25 and Mr. B starts planning for retirement at age 40. With identical situation and risk profile assuming an inflation rate of 7% and a weighted average post tax return on investments of 12% and a life expectancy of 85 years Mr. A will only have to invest Rs. 18288/- p.m. and Mr. B will have to invest 109567/- p.m. which is almost 6 times Mr. A's required savings
So when it comes to retirement be planned, be ready and this will ensure that you can rest carefree in you hammock on the serene spot of your dreams
Happy planning
Think before you act as
'It's all in the Mind'
Retirement as i define is the day from which you stop working for money, you can continue into any profession, business or service but the work is not motivated by the primary requirement for you to fun your family. so continuing to work for a cause or for a liking is not considered work and doing it irrespective of the monetary benefits is the time when retirement has started.
Retired phase of life makes up for almost 1/3rd part of most people's lives. This figure when revealed takes many people by surprise as they believe that like their ancestors and forefathers, their children will take on the responsibility of providing for the their living expenses. it is widely believed that once they are into retirement their expenses will drop down dramatically and the little unplanned savings which they have will suffice their every need. One aspect that is completely forgotten is the demon of inflation. This demon can have treacherous effect on the real value of money that has been saved over the years. Thr belief that everything is left to the almighty and they will get no hardships can really have them falling flat on their face. They completely sideline the fact that they will have illnesses as they age, they will have social obligations to cater to, they will have some hobbies in mind which they would like to pursue, and that they will not come cheap. Getting complaisant about their financial position based upon the mere adulation of their friends and colleagues whose base is a misconceived assumption about your financial situation can prove fatal in those critical later years of life.
Retirement should be Planned
Sit with your planner, and get a planner who has only your interests in mind. Discuss your current lifestyle, argue upon the inflation rates coupled with other assumptions like the growth rates of various asset classes, an appropriate asset allocation based upon your risk profile after a distilled understanding of the risk factors and the meaning of each risk factor
Setting the ground rules correct lay the plinth by discussing your expenses under various heads. Each head is important as it would grow at its specific inflation rate. An input of expense start and end year should be given prime importance so that precise expense calculations for the future years can be made.There could be certain expenses like medical expenses, socialising that can grow at different inflation rates , those need to be incorporated separately.
After this, deciding upon the retirement age is critical, there are two aspects to this. A desired retirement age, this is the age when you wish and aim to retire and an extendable retirement age which is the age upto which you can stretch your retirement if the plan cannot be made at the desired age. Also the most important input is the life expectancy. This is generally based upon the history of the family's life expectancy along with the person's health situation.
A buffer amount is needed
As the retirement plan has many assumed inputs used, there will be times that the actual situation can be different than what was assumed. Inflation can vary, so can the returns of each asset class over the planning period and the probability of humans to live longer than the horizon planned for forces a big threat to the sincerity of the plan. Though it is good to live more and backed with today's advancement in science and medical fields it is quite possible too. But it might not be that good for the plan. To protect against this risk called 'Longevity Risk' in which you might live longer than what is planned for you should have a buffer amount in your plan. This amount should at any point in time be able to suffice the next 5 years expenses adjusted for inflation.
Pay fees to your Planner
To get the best interests in mind you should pay a fee that is decided upon before entering the contract. This wil make him more accountable to you and force him to serve you better.
Plan your post Retirement Activities
In the time after retirement, though you have the finances planned, it is equally important to have your time planned too. This means engaging in activities that will keep you busy and your mind away from ill thinking. it can be either a hobby that you like, or following a sport that you adore, or even a cause that you stand strongly for. Knowing this will ensure that you are occupied towards productive thinking and action post retirement. Your expenses after retirement will be heavily based upon the type of activity chosen.
Plan Early, Plan Smart
If there are two people, Mr. A an Mr. B, both are currently 25 years old and have their current expenses at Rs. 50000/- p.m. and both plan to retire at 60. Mr. A starts planning for this from age 25 and Mr. B starts planning for retirement at age 40. With identical situation and risk profile assuming an inflation rate of 7% and a weighted average post tax return on investments of 12% and a life expectancy of 85 years Mr. A will only have to invest Rs. 18288/- p.m. and Mr. B will have to invest 109567/- p.m. which is almost 6 times Mr. A's required savings
So when it comes to retirement be planned, be ready and this will ensure that you can rest carefree in you hammock on the serene spot of your dreams
Happy planning
Think before you act as
'It's all in the Mind'
Monday, September 19, 2011
WHAT IT TAKES TO BE A LANDLORD- Amit Shanbaug
It’s easy to buy property with a loan and use rental income to pay the EMI, but dealing with tenants and maintenance issues can be a problem. Find out what you should know before renting your house
Amit Shanbaug
The two-bedroom flat in the multi-storeyed complex at Vasundhara Enclave near the Delhi-Noida border is in a mess. The flooring has cracked, the pipes are leaking and the woodwork is in a bad shape. Still, Noidabased businessman Sudhir Makhija is interested in buying it. It’s because he wants to invest in property for rental income. Makhija estimates he will have to spend another 2 lakh to do up the house before he can find a tenant. “The high rental value of the locality will more than make up for the expense,” he chuckles.
There are many buyers like Makhija whose sole intention is to put up the property on rent. In fact, according to an online survey conducted by ET Wealth, the age of such investors is coming down, with almost 90% of the respondents being less than 45 years of age.
This unabashed focus on rent has many positives. Inflation is rent-friendly. Rents go up with inflation, while the home loan EMI for the property remains more or less steady. And, while the property earns a regular income for the owner, it continues to appreciate in value.
However, renting out property may not be everyone’s cup of tea. “My business gives me the flexibility to manage my five properties. Someone with a full-time job will find this difficult to handle,” says Makhija. Dealing with tenants can also be a nightmare. Besides the usual shenanigans over delay in rent, there is the fear of a tenant not vacating the property. This is why Mumbai-based Ravi Tiwari, who owns two properties, says, “I change my tenants every 2-3 years.” It means shelling out more to a property dealer, who finds a tenant for him, but Tiwari doesn’t mind. “If a tenant stays for long, he may refuse to vacate,” he says.
These are just two of the issues that can crop up. There are other aspects like income tax, wealth tax, the real cost of loan taken for the property and the soft skills required of a landlord. Here’s what you need to consider before you decide to wear the hat of a landlord.
LOCATION AND SIZE
If you want good rental income, buy a property that boasts a good location. It makes sense because what tenants spend extra on rent, they can save in transportation and in time.
The ideal neighbourhood should have a built-in tenant base. This can be a commercial or an institutional hub in close proximity, which will ensure a steady supply of working professionals and their families.
The smaller the property, the better is the rental yield. This is because the tenant base gets bigger as we move down the income pyramid. In Mumbai, smaller flats are more in demand as they are affordable for a larger number of people. They generally compare the rent with the EMI payout in case they own the house.
TAX IMPLICATIONS
If you own more than one house, the second house is deemed to be rented out and you are taxed for the notional rent received from the property. According to Sanjay Kapadia, chairman, Taxsum.com, this rent is calculated by accounting the municipal valuation and the fair rent of the property. If, however, a property is covered by the Rent Control Act, then the amount of rent expected cannot exceed the standard rent determined under that Act.
The good news is that the rent from the second home is not fully taxable. There is a 30% standard deduction. Besides, the interest paid on a home loan and municipal taxes paid can also be deducted from the income. Unlike in a self-occupied house, there is no annual limit for the home loan interest you can claim as a deduction. Some of these rules will change when the Direct Taxes Code comes into effect next year. Also, if a property has been given on rent, it is not taken into account while calculating wealth tax. But if it is lying vacant, its value is included while calculating the tax.
THE LAW & THE TENANT
A residential lease agreement is a legally binding contract between the landlord and all cotenants. Once an agreement is signed, it can’t be unilaterally changed by one party. It is, therefore, important for a landlord to ensure that this lease agreement is watertight.
SMART STRATEGIES TO FOLLOW
Mind the other costs: While sizing up a property, don’t just look at the potential rental income. Factor in other costs, such as maintenance charges, property tax and payment to the broker who gets the tenant. Also, keep in mind that there may be a gap of 1-2 months between two tenancies.
Think downmarket: Some of the properties most wanted by tenants may not be in upmarket locations but in downmarket areas. Locations close to colleges or work places or with direct access to public transport, but in a notso-prime location, will always be in demand for their lower rentals.
Additional facilities: New projects in suburbs offer facilities such as clubs and swimming pools. Most tenants don’t like to pay for common facilities they hardly use. Avoid buying such properties.
Stay clear of oversupply: Don’t buy a rental property in areas where many projects are coming up as the new supply may lower rentals. If the property prices are affordable, tenants may prefer to buy instead of rent.
Resale properties offer better rentals: Resale (or old) properties score over new as they are ready for possession and will most likely be in a more central location than a new one. The drawback, however, is that not everyone will be able to afford the high upfront payment sometimes required for a resale property.
Renovate sensibly: When you renovate to rent out a property, don’t go over the top. Stick to basic renovation, such as fixing electricity connections, checking the sanitaryware, polishing the woodwork and painting the house.
Don’t buy outside city or state: The farther you live from your rental property, the harder it will be to monitor it. Collecting rent or taking care of maintenance will be more difficult and costly if you live in another city.
Have a contract: It is always better to have the terms and conditions on which you lease out your property put down on paper. Also, review the contract when you renew a tenant. Collect rent on schedule: Being consistent with your tenants is imperative. If you are too lax one month, you may have a hard time collecting rent the next month.
EVICTING A TENANT
Sometimes evicting the tenant is the only feasible option. If you cannot get the tenant to pay or obey rules, it may be time to start the eviction process. The rules for evicting a tenant vary between states. It is, therefore, imperative you discuss your options with a lawyer. For security, you may want to conduct the eviction through your lawyer. Send all your requests in writing. The first step is to send a written notice for the tenant to pay rent, fix problem behaviour or move out. If the problem is not rectified despite the notices, file a suit. If you win this, the law enforcement personnel deliver the written notice, when the tenant may remove his items from the premises.
Read the full story in ET Wealth
(Sep 12-18 issue) or log on to
www.wealth.economictimes.com
Kiran Shetty
Owns a 1-& a 3.5-BHK house in Mumbai.
HIS STRATEGY: Let out a property only after it is debt-free. Shetty plans to rent his loan-free 1-BHK house to take care of the partial EMI for his bigger house. As the 1-BHK house is located at a prime location, he expects a hefty rental. He purchased the bigger house for 1.35 crore around a year ago. Of the total sum, about 45 lakh came from home loan, the rest from his savings. THE PROBLEM: Though his house is situated in a prime location, he would still need to renovate the 1-BHK house and bear the cost to attract good customers.
Ravi Tiwari
He owns two 2-BHK flats in Navi Mumbai and Thane.
HIS STRATEGY: Lease out one flat to pay the loan taken for the other house. When he purchased his second flat in Navi Mumbai, he leased out his earlier flat in Thane, which was in a better location, to reduce his loan burden as it fetched him a higher rent. THE PROBLEM: He is unable to visit Thane regularly and misses out on paying monthly maintenance bills, water charges and property taxes and ends up paying 300-400 as fines. He plans to pay the entire year’s maintenance in advance.
Amit Shanbaug
The two-bedroom flat in the multi-storeyed complex at Vasundhara Enclave near the Delhi-Noida border is in a mess. The flooring has cracked, the pipes are leaking and the woodwork is in a bad shape. Still, Noidabased businessman Sudhir Makhija is interested in buying it. It’s because he wants to invest in property for rental income. Makhija estimates he will have to spend another 2 lakh to do up the house before he can find a tenant. “The high rental value of the locality will more than make up for the expense,” he chuckles.
There are many buyers like Makhija whose sole intention is to put up the property on rent. In fact, according to an online survey conducted by ET Wealth, the age of such investors is coming down, with almost 90% of the respondents being less than 45 years of age.
This unabashed focus on rent has many positives. Inflation is rent-friendly. Rents go up with inflation, while the home loan EMI for the property remains more or less steady. And, while the property earns a regular income for the owner, it continues to appreciate in value.
However, renting out property may not be everyone’s cup of tea. “My business gives me the flexibility to manage my five properties. Someone with a full-time job will find this difficult to handle,” says Makhija. Dealing with tenants can also be a nightmare. Besides the usual shenanigans over delay in rent, there is the fear of a tenant not vacating the property. This is why Mumbai-based Ravi Tiwari, who owns two properties, says, “I change my tenants every 2-3 years.” It means shelling out more to a property dealer, who finds a tenant for him, but Tiwari doesn’t mind. “If a tenant stays for long, he may refuse to vacate,” he says.
These are just two of the issues that can crop up. There are other aspects like income tax, wealth tax, the real cost of loan taken for the property and the soft skills required of a landlord. Here’s what you need to consider before you decide to wear the hat of a landlord.
LOCATION AND SIZE
If you want good rental income, buy a property that boasts a good location. It makes sense because what tenants spend extra on rent, they can save in transportation and in time.
The ideal neighbourhood should have a built-in tenant base. This can be a commercial or an institutional hub in close proximity, which will ensure a steady supply of working professionals and their families.
The smaller the property, the better is the rental yield. This is because the tenant base gets bigger as we move down the income pyramid. In Mumbai, smaller flats are more in demand as they are affordable for a larger number of people. They generally compare the rent with the EMI payout in case they own the house.
TAX IMPLICATIONS
If you own more than one house, the second house is deemed to be rented out and you are taxed for the notional rent received from the property. According to Sanjay Kapadia, chairman, Taxsum.com, this rent is calculated by accounting the municipal valuation and the fair rent of the property. If, however, a property is covered by the Rent Control Act, then the amount of rent expected cannot exceed the standard rent determined under that Act.
The good news is that the rent from the second home is not fully taxable. There is a 30% standard deduction. Besides, the interest paid on a home loan and municipal taxes paid can also be deducted from the income. Unlike in a self-occupied house, there is no annual limit for the home loan interest you can claim as a deduction. Some of these rules will change when the Direct Taxes Code comes into effect next year. Also, if a property has been given on rent, it is not taken into account while calculating wealth tax. But if it is lying vacant, its value is included while calculating the tax.
THE LAW & THE TENANT
A residential lease agreement is a legally binding contract between the landlord and all cotenants. Once an agreement is signed, it can’t be unilaterally changed by one party. It is, therefore, important for a landlord to ensure that this lease agreement is watertight.
SMART STRATEGIES TO FOLLOW
Mind the other costs: While sizing up a property, don’t just look at the potential rental income. Factor in other costs, such as maintenance charges, property tax and payment to the broker who gets the tenant. Also, keep in mind that there may be a gap of 1-2 months between two tenancies.
Think downmarket: Some of the properties most wanted by tenants may not be in upmarket locations but in downmarket areas. Locations close to colleges or work places or with direct access to public transport, but in a notso-prime location, will always be in demand for their lower rentals.
Additional facilities: New projects in suburbs offer facilities such as clubs and swimming pools. Most tenants don’t like to pay for common facilities they hardly use. Avoid buying such properties.
Stay clear of oversupply: Don’t buy a rental property in areas where many projects are coming up as the new supply may lower rentals. If the property prices are affordable, tenants may prefer to buy instead of rent.
Resale properties offer better rentals: Resale (or old) properties score over new as they are ready for possession and will most likely be in a more central location than a new one. The drawback, however, is that not everyone will be able to afford the high upfront payment sometimes required for a resale property.
Renovate sensibly: When you renovate to rent out a property, don’t go over the top. Stick to basic renovation, such as fixing electricity connections, checking the sanitaryware, polishing the woodwork and painting the house.
Don’t buy outside city or state: The farther you live from your rental property, the harder it will be to monitor it. Collecting rent or taking care of maintenance will be more difficult and costly if you live in another city.
Have a contract: It is always better to have the terms and conditions on which you lease out your property put down on paper. Also, review the contract when you renew a tenant. Collect rent on schedule: Being consistent with your tenants is imperative. If you are too lax one month, you may have a hard time collecting rent the next month.
EVICTING A TENANT
Sometimes evicting the tenant is the only feasible option. If you cannot get the tenant to pay or obey rules, it may be time to start the eviction process. The rules for evicting a tenant vary between states. It is, therefore, imperative you discuss your options with a lawyer. For security, you may want to conduct the eviction through your lawyer. Send all your requests in writing. The first step is to send a written notice for the tenant to pay rent, fix problem behaviour or move out. If the problem is not rectified despite the notices, file a suit. If you win this, the law enforcement personnel deliver the written notice, when the tenant may remove his items from the premises.
Read the full story in ET Wealth
(Sep 12-18 issue) or log on to
www.wealth.economictimes.com
Kiran Shetty
Owns a 1-& a 3.5-BHK house in Mumbai.
HIS STRATEGY: Let out a property only after it is debt-free. Shetty plans to rent his loan-free 1-BHK house to take care of the partial EMI for his bigger house. As the 1-BHK house is located at a prime location, he expects a hefty rental. He purchased the bigger house for 1.35 crore around a year ago. Of the total sum, about 45 lakh came from home loan, the rest from his savings. THE PROBLEM: Though his house is situated in a prime location, he would still need to renovate the 1-BHK house and bear the cost to attract good customers.
Ravi Tiwari
He owns two 2-BHK flats in Navi Mumbai and Thane.
HIS STRATEGY: Lease out one flat to pay the loan taken for the other house. When he purchased his second flat in Navi Mumbai, he leased out his earlier flat in Thane, which was in a better location, to reduce his loan burden as it fetched him a higher rent. THE PROBLEM: He is unable to visit Thane regularly and misses out on paying monthly maintenance bills, water charges and property taxes and ends up paying 300-400 as fines. He plans to pay the entire year’s maintenance in advance.
Sunday, September 18, 2011
Victoria's Secret
Victoria's Secret certainly has a wonderful history, it all started when a graduate student from Stanford Graduate School Of Business felt rather embarassed when it came to purchasing beautiful lingerie for his wife from a department store. His name was Roy Raymond who was located in San Francisco, California. In 1977 Roy borrowed $40000 from his in-laws and another $40000 bank loan & decided to open his first store at Stanford Shopping Center, thus 'Victoria's Secret' was born.
It made $5,00,000/- in the first year of operations. After 5 years of operation Roy Raymond sold Victoria's Secret to ''The Limited'' for $4 Million, Happy ending , right?
But after just 2 years of operations under "The Limited" its worth was $500 million seeing which Roy plummeted to his death off of the Golden Gate Bridge
Moral of the story
"Never sell off anything till you find its True value"
It made $5,00,000/- in the first year of operations. After 5 years of operation Roy Raymond sold Victoria's Secret to ''The Limited'' for $4 Million, Happy ending , right?
But after just 2 years of operations under "The Limited" its worth was $500 million seeing which Roy plummeted to his death off of the Golden Gate Bridge
Moral of the story
"Never sell off anything till you find its True value"
Thursday, September 15, 2011
You might have a planner, but is he a true Financial Planner? - Ram Valia
There are many folks gallivanting in the financial markets professing a self proclaimed title of financial planners and Advisors. But are they true financial planners? Can they help you plan your finances better? Can they help you secure your financial future? These are the questions that you need to ask yourself. Unlike other services that one opts for, one can't say that he will buy it, try it and then judge and decide whether it is worth it or no. It's about your hard earned money, and even a small mistake can cost you dear and can set you back from your financial goals to quite a big extent.
So its of prime importance to judge and decide whether the planner that you are about to give the control of your money is a real financial planner and considers you above everything else..Your judgement and decision should be based on the following points..
- Is he Certified?
In India and more than 23 countries around the world the CFPcm mark is a symbol that is well connected with a good financial planner. This is because they follow a system of 4 E's
Ethics, Educstion, Examination and Experience. Ethical practices of conduct forms the basis for every CFP certified financial planner. They clear a set of 5 exams and need 3 years of experience in the financial services sector to receive their certification Before they can claim themselves as a CFPcm certified. Not only should the person only be certified but also a practising financial planner.
So being updated with the latest happenings in the financial services frame is also a predicament for maintaining the certification.. this is done by a requirement to be dedicated towards a process of continuous education.
Having a certification be a certifying agency like FPSB (Financial Planning Standards Standard Board) India is not enough. To ensure that the person is practising the learnt concepts of financial planning it should be checked that the person does not come from a specific company that sells products of any specific company. If he does that then the advise will be prejudiced and the aim will be selling the products to you without citing your best interests in mind. So he should be neutral from the company from where he comes.
- Is he a Client Representative?
Being a client representative is very important as it defines the basic role of a planner. He should solely have your best interests in mind. He should not be motivated merely by the commissions he gets from the products that he sells to you. He must evaluate all products and investment advice based upon the fact that how will it benefit you, up to what extent and how will it help you secure your financial future.
- Does he Charge a fee?
As nothing in this world comes free neither should financial advice. On charging a fee the planner is bound to see your interest above his own and also his company's interest. He is your guide and should not be motivated by anything else but your best interest in mind..
This can be tested by seeing if he discloses to you the ref\eral arrangements he has from all product sources. He should tell you all his sources of income so that you can judge the objectivity of his advice. He should list down the fees clearly stating if there are any additional taxes. Are there any commissions that he gets by referring you to any agency for any product that you need. This can enable the client to judge the true basis of your advice..
- Does he present a Contract of Undertaking?
There should be a contract which details out all the offerings of the service and the charges for the same, there should be no array of ambiguity in the terms and in case any arise then it should be cleared before entering an agreement. This contract should also state the serviceability tenure and the statement of client confidentiality. this statemtent of Confidentiality is required as the planner has access to alot of privileged and confidential information regarding the client.
The contract should clearly state the details of regular communications and plan updates modifications and reviews. The client should be communicated about his financial position on a regular basis so that he is aware about the actions taken by the planner and the results of the same.
- How good is his Financial Knowledge?
Not only should the planner be able to make a plan impeccable but he should also of knowledge about the financial markets, the way the equities markets works, the details of the bond markets, the factors that govern the functioning of the economy and how the global factors affect your investments, along with this his skills to work with excel and spreadsheets should be impeccable
- Is his Execution Team as good as he is?
What is a director without his team? What is a king without his countrymen? The phrase of 'A one man army is passé and lame. The planner should have the ability to make the plan and have the team and infrastructure in place with separate departments to execute each function of the plan separately with independent watertight responsibilities and actionable for each department. The departments can be
1) Plan writing
2) Client Acquisition
3) Operations.
4) Research
5) Execution
A well trained staff in each department and a good operations department with well tech-age technology base with ease the process of serving you and you will be highly content of the outcome of the service.
So keeping these points in mind find your true financial planner and be free of all your financial worries.
Happy Planning
Think before you act as
'It's All in the Mind'
So its of prime importance to judge and decide whether the planner that you are about to give the control of your money is a real financial planner and considers you above everything else..Your judgement and decision should be based on the following points..
- Is he Certified?
In India and more than 23 countries around the world the CFPcm mark is a symbol that is well connected with a good financial planner. This is because they follow a system of 4 E's
Ethics, Educstion, Examination and Experience. Ethical practices of conduct forms the basis for every CFP certified financial planner. They clear a set of 5 exams and need 3 years of experience in the financial services sector to receive their certification Before they can claim themselves as a CFPcm certified. Not only should the person only be certified but also a practising financial planner.
So being updated with the latest happenings in the financial services frame is also a predicament for maintaining the certification.. this is done by a requirement to be dedicated towards a process of continuous education.
Having a certification be a certifying agency like FPSB (Financial Planning Standards Standard Board) India is not enough. To ensure that the person is practising the learnt concepts of financial planning it should be checked that the person does not come from a specific company that sells products of any specific company. If he does that then the advise will be prejudiced and the aim will be selling the products to you without citing your best interests in mind. So he should be neutral from the company from where he comes.
- Is he a Client Representative?
Being a client representative is very important as it defines the basic role of a planner. He should solely have your best interests in mind. He should not be motivated merely by the commissions he gets from the products that he sells to you. He must evaluate all products and investment advice based upon the fact that how will it benefit you, up to what extent and how will it help you secure your financial future.
- Does he Charge a fee?
As nothing in this world comes free neither should financial advice. On charging a fee the planner is bound to see your interest above his own and also his company's interest. He is your guide and should not be motivated by anything else but your best interest in mind..
This can be tested by seeing if he discloses to you the ref\eral arrangements he has from all product sources. He should tell you all his sources of income so that you can judge the objectivity of his advice. He should list down the fees clearly stating if there are any additional taxes. Are there any commissions that he gets by referring you to any agency for any product that you need. This can enable the client to judge the true basis of your advice..
- Does he present a Contract of Undertaking?
There should be a contract which details out all the offerings of the service and the charges for the same, there should be no array of ambiguity in the terms and in case any arise then it should be cleared before entering an agreement. This contract should also state the serviceability tenure and the statement of client confidentiality. this statemtent of Confidentiality is required as the planner has access to alot of privileged and confidential information regarding the client.
The contract should clearly state the details of regular communications and plan updates modifications and reviews. The client should be communicated about his financial position on a regular basis so that he is aware about the actions taken by the planner and the results of the same.
- How good is his Financial Knowledge?
Not only should the planner be able to make a plan impeccable but he should also of knowledge about the financial markets, the way the equities markets works, the details of the bond markets, the factors that govern the functioning of the economy and how the global factors affect your investments, along with this his skills to work with excel and spreadsheets should be impeccable
- Is his Execution Team as good as he is?
What is a director without his team? What is a king without his countrymen? The phrase of 'A one man army is passé and lame. The planner should have the ability to make the plan and have the team and infrastructure in place with separate departments to execute each function of the plan separately with independent watertight responsibilities and actionable for each department. The departments can be
1) Plan writing
2) Client Acquisition
3) Operations.
4) Research
5) Execution
A well trained staff in each department and a good operations department with well tech-age technology base with ease the process of serving you and you will be highly content of the outcome of the service.
So keeping these points in mind find your true financial planner and be free of all your financial worries.
Happy Planning
Think before you act as
'It's All in the Mind'
Monday, September 12, 2011
Are you ready for your old age medical expenses? Think Again !!
Applying an analogy of a human body is a machine. it does get old and parts to loosen out. Unfortunately its not that simple to replace any part or buy a new body altogether, not only the trauma of a surgery but the quantum of medical expenses can literally be quite a pain.
If we are still in the same old frame of mind that once we have bought health insurance in the form of a mediclaim, we are safe from the financial impact of any illness or accident we need to be brought to face the reality.
The rate at which the costs of medication has been rising coupled with the ever increasing propensity of us to fall ill arouses the immediate need of an old age medical contingency fund to be into place.
Whenever I meet clients we discuss their current medial insurances' sum assured, I get a couple of similar answers either they are partly covered by their employer or they have some medical insurance bought on their own. Nor do they know the coverage factors and the exclusions of that insurance policy. neither do they understand that an adequate amount of sum assured along with a policy that covers maximum illnesses and has least exclusions and sub-limits is critical.
An employer sponsored insurance is a good option as no premiums need to be paid, but incase of a job loss or a shift of jobs that cover ceases to exist and then buying a new insurance can be relatively more expensive.
Though a floater policy that covers all the members of a family up to the amount of sum assured is an acceptable policy for the young earners but as we age each individual needs a separate policy so that they can benefit from the complete amount of sum assured. in an individual policy the premiums are applicable as per their individual ages rather than the age of the eldest member like in a the case of a floater policy.
Lets take an example of Mr. X who has a sum assured of Rs. 300000/- for himself. Though he might feel that he is adequately covered against medical contingencies he does not realise that moving on after 25 years this sum assured would cover for illness and treatment expenses of not more than a value equivalent of Rs. 30,000/- today. So speaking in terms of real value numbers to treat an illness that costs Rs. 3,00,000/- today he will have to pay Rs. 32,50,000/- after 25 years. This is by assuming an inflation rate of medical expenses at 10%. This is how bad is the impact of inflation on your medical bills. A cover of Rs. 3,00,000/- today becomes worth Rs. 30,000/- after 25 years and to get the same value of today's Rs. 3,00,000/- you will have to shell out Rs. 32,50,000/-. And as per my knowledge medical inflation costs can be quite higher than 10% too.
Not only does the value of your sum assured falls, your premiums also increase with age. Insurers have age bracket slabs which are used in calculating insurance premiums. Varying from insurer to insurer the slabs could be age 25-30, 30-35, 35-45
and so on . Every time you move on to a higher age bracket your insurance premium is increased by quite a bit.
So in all you as you get older you are paying more and more for a policy that is protecting you for a value that is decreasing every year. This is not a wise step in your financial plan.
Your planner should advise you on creating n old age medical fund . Its value should be an amount that is atleast equivalent to the value of today's Rs. 3,00,000/- at the time when you retire. The rate at which it increases would be based on your assumed medical inflation rate, which according to me should not be less than 10%. This value is called the future value of your Medical contingency fund.
Now as you know the value that you need to build over your working life your planner would guide you on the strategies needed for the deployment of your savings into an appropriate channel. If your retirement is at least 10 years into the future then a major portion of this should be equities and other risky assets, this is because we have the time horizon that is sufficient to manage the volatility congruent with the equity markets. This is because the return potential of equities is paramount in achieving our aim of beating the high rate of medical inflation.
This fund will need a regular revaluation and asset reallocation as the goal nears. This investment strategy can ensure that you are well prepared for the ultra high medical expenses that can arise as we age. This fund keeps you covered to the true value of today's medical expenses when you retire and also saves you from paying unnecessarily high premiums for a cover amount that doesn't cover you in the true sense.
Cheers & Happy Planning.
Think before you act as
'Its all in the Mind.'
If we are still in the same old frame of mind that once we have bought health insurance in the form of a mediclaim, we are safe from the financial impact of any illness or accident we need to be brought to face the reality.
The rate at which the costs of medication has been rising coupled with the ever increasing propensity of us to fall ill arouses the immediate need of an old age medical contingency fund to be into place.
Whenever I meet clients we discuss their current medial insurances' sum assured, I get a couple of similar answers either they are partly covered by their employer or they have some medical insurance bought on their own. Nor do they know the coverage factors and the exclusions of that insurance policy. neither do they understand that an adequate amount of sum assured along with a policy that covers maximum illnesses and has least exclusions and sub-limits is critical.
An employer sponsored insurance is a good option as no premiums need to be paid, but incase of a job loss or a shift of jobs that cover ceases to exist and then buying a new insurance can be relatively more expensive.
Though a floater policy that covers all the members of a family up to the amount of sum assured is an acceptable policy for the young earners but as we age each individual needs a separate policy so that they can benefit from the complete amount of sum assured. in an individual policy the premiums are applicable as per their individual ages rather than the age of the eldest member like in a the case of a floater policy.
Lets take an example of Mr. X who has a sum assured of Rs. 300000/- for himself. Though he might feel that he is adequately covered against medical contingencies he does not realise that moving on after 25 years this sum assured would cover for illness and treatment expenses of not more than a value equivalent of Rs. 30,000/- today. So speaking in terms of real value numbers to treat an illness that costs Rs. 3,00,000/- today he will have to pay Rs. 32,50,000/- after 25 years. This is by assuming an inflation rate of medical expenses at 10%. This is how bad is the impact of inflation on your medical bills. A cover of Rs. 3,00,000/- today becomes worth Rs. 30,000/- after 25 years and to get the same value of today's Rs. 3,00,000/- you will have to shell out Rs. 32,50,000/-. And as per my knowledge medical inflation costs can be quite higher than 10% too.
Not only does the value of your sum assured falls, your premiums also increase with age. Insurers have age bracket slabs which are used in calculating insurance premiums. Varying from insurer to insurer the slabs could be age 25-30, 30-35, 35-45
and so on . Every time you move on to a higher age bracket your insurance premium is increased by quite a bit.
So in all you as you get older you are paying more and more for a policy that is protecting you for a value that is decreasing every year. This is not a wise step in your financial plan.
Your planner should advise you on creating n old age medical fund . Its value should be an amount that is atleast equivalent to the value of today's Rs. 3,00,000/- at the time when you retire. The rate at which it increases would be based on your assumed medical inflation rate, which according to me should not be less than 10%. This value is called the future value of your Medical contingency fund.
Now as you know the value that you need to build over your working life your planner would guide you on the strategies needed for the deployment of your savings into an appropriate channel. If your retirement is at least 10 years into the future then a major portion of this should be equities and other risky assets, this is because we have the time horizon that is sufficient to manage the volatility congruent with the equity markets. This is because the return potential of equities is paramount in achieving our aim of beating the high rate of medical inflation.
This fund will need a regular revaluation and asset reallocation as the goal nears. This investment strategy can ensure that you are well prepared for the ultra high medical expenses that can arise as we age. This fund keeps you covered to the true value of today's medical expenses when you retire and also saves you from paying unnecessarily high premiums for a cover amount that doesn't cover you in the true sense.
Cheers & Happy Planning.
Think before you act as
'Its all in the Mind.'
Saturday, September 10, 2011
Dont wait for an emergency to make an Emergency Fund- Ram Valia
Dont wait for an emergency to make an emergency fund.
As our lives are surrounded by uncertainties and events that we might not have even dreamt about, an unfortunate event can be right around the corner ready to take a toll on you when you least expect it. The intent is not to scare the reader but make him aware that expecting the best and being ready for the worst can make him ride smoothly through all of life's fancies.
We never expect to lose our job as we might consider ourselves indispensible and there it is, one day, right in our faces the economy starts slipping, the company starts losing revenue, coupled with that exactly at this very point on time its struck by a clients claim or other natural calamity. all of this in a climate with the rates rising in such times debt payments become difficult. And to offload the heavy weights the company awards you with the one thing that you would be despondent to receive. The dreaded 'Pink Slip'
What do you do now.? As the time when you lose the job is exactly the time when all vacancy banners are hid in the dark room
With the stressful lifestyles, unhealthy eating habits and uncomfortably long hours of incorrect posture puts up a serious toll on our bodies. Accept it or not its a machine that can ware out and wither. Managing a medical emergency can shake up your entire financial plan and weaken your years of financial saving. Personally I haven't ever been to a medical store to find out that the medicine that I purchased the last time is still available at the same price. This throws the spot lights on the perennially rising costs of medication and treatment. Funding such an emergency on one's self or the dependant family member can send your finances for a toss. It can be an elective medical surgery . Illness or an accident, the treatment and rehabilitation costs are phenomenal
in any of these situations either taken together or considered separately, how would you fund your regular expenses, gone are the times when you would spend all your earnings as there are no earnings.
How do you pay for the loans taken?
How do you go for the vacation that you had planned for?
How do you pay for your children's school tuition?
How do you plan for the new car?
How would you be able to buy your spouse that diamond ring that you have paid the advance for?
Jumping onto your previous years savings which might not be that liquid and immediately available will force you to sell them at a price that is lower than its worth..
Taking up this advise simply means to keep aside a fund equivalent to your next 6 months expenses including EMI's and all other compulsory expenses into a highly liquid instruments.
These instruments range from 'Sweep-in Fixed Deposits' to 'Liquid debt funds' and Short Term Bond Funds. All of them have similar features of keeping your money safe and are immediately available when you need them.
The differences can be understood as follows. The Sweep-in FD empowers your savings account to be linked to the FD account so that your idle funds can earn you the FD rate of return and not a a mere savings account rate which is around 3.5%. Hence it makes your savings account act like your FD account. As and when you need the money you only have to issue a cheque from the savings account and the appropriate amount is only deducted keeping your FD maintained with the remaining funds. The amount that is withdrawn using a cheque will get the interest applicable for the slab for the time for which it was in the FD.
A liquid fund is offered by a mutual fund house, it falls under the debt category of funds. It invests into short term fixed income instruments with an average maturity of around 91 days that are issued by banks, NBFC and large corporate houses.This enables it to give you better returns than a savings bank account but not as high as an Sweep-in FD.
A Short Term Bond Fund invests in debt securities like Treasury bonds issued by Government of India and other Bonds and debentures floated by banks and corporate houses. This is a tax efficient instrument for the investors in a high tax bracket.. Due to its sensitivity to changing interest rates its return are accompanied by an element of risk but as they are short term in nature it is quite low.
So be it in any form but ensure that an emergency fund covering 6 months of all your required expenses is up and running for you way before any emergency catches up with you. For the very beginners start with an amount equivalent to Rs. 50000/- and gradually move upto your goal of 6 months expenses. And remember luxurious getaways, fancy shopping spree and an unthoughtful splurge does not count as an emergencies.
Cheers and happy planning.
Think before you act as
'Its all in the mind.'
As our lives are surrounded by uncertainties and events that we might not have even dreamt about, an unfortunate event can be right around the corner ready to take a toll on you when you least expect it. The intent is not to scare the reader but make him aware that expecting the best and being ready for the worst can make him ride smoothly through all of life's fancies.
We never expect to lose our job as we might consider ourselves indispensible and there it is, one day, right in our faces the economy starts slipping, the company starts losing revenue, coupled with that exactly at this very point on time its struck by a clients claim or other natural calamity. all of this in a climate with the rates rising in such times debt payments become difficult. And to offload the heavy weights the company awards you with the one thing that you would be despondent to receive. The dreaded 'Pink Slip'
What do you do now.? As the time when you lose the job is exactly the time when all vacancy banners are hid in the dark room
With the stressful lifestyles, unhealthy eating habits and uncomfortably long hours of incorrect posture puts up a serious toll on our bodies. Accept it or not its a machine that can ware out and wither. Managing a medical emergency can shake up your entire financial plan and weaken your years of financial saving. Personally I haven't ever been to a medical store to find out that the medicine that I purchased the last time is still available at the same price. This throws the spot lights on the perennially rising costs of medication and treatment. Funding such an emergency on one's self or the dependant family member can send your finances for a toss. It can be an elective medical surgery . Illness or an accident, the treatment and rehabilitation costs are phenomenal
in any of these situations either taken together or considered separately, how would you fund your regular expenses, gone are the times when you would spend all your earnings as there are no earnings.
How do you pay for the loans taken?
How do you go for the vacation that you had planned for?
How do you pay for your children's school tuition?
How do you plan for the new car?
How would you be able to buy your spouse that diamond ring that you have paid the advance for?
Jumping onto your previous years savings which might not be that liquid and immediately available will force you to sell them at a price that is lower than its worth..
Taking up this advise simply means to keep aside a fund equivalent to your next 6 months expenses including EMI's and all other compulsory expenses into a highly liquid instruments.
These instruments range from 'Sweep-in Fixed Deposits' to 'Liquid debt funds' and Short Term Bond Funds. All of them have similar features of keeping your money safe and are immediately available when you need them.
The differences can be understood as follows. The Sweep-in FD empowers your savings account to be linked to the FD account so that your idle funds can earn you the FD rate of return and not a a mere savings account rate which is around 3.5%. Hence it makes your savings account act like your FD account. As and when you need the money you only have to issue a cheque from the savings account and the appropriate amount is only deducted keeping your FD maintained with the remaining funds. The amount that is withdrawn using a cheque will get the interest applicable for the slab for the time for which it was in the FD.
A liquid fund is offered by a mutual fund house, it falls under the debt category of funds. It invests into short term fixed income instruments with an average maturity of around 91 days that are issued by banks, NBFC and large corporate houses.This enables it to give you better returns than a savings bank account but not as high as an Sweep-in FD.
A Short Term Bond Fund invests in debt securities like Treasury bonds issued by Government of India and other Bonds and debentures floated by banks and corporate houses. This is a tax efficient instrument for the investors in a high tax bracket.. Due to its sensitivity to changing interest rates its return are accompanied by an element of risk but as they are short term in nature it is quite low.
So be it in any form but ensure that an emergency fund covering 6 months of all your required expenses is up and running for you way before any emergency catches up with you. For the very beginners start with an amount equivalent to Rs. 50000/- and gradually move upto your goal of 6 months expenses. And remember luxurious getaways, fancy shopping spree and an unthoughtful splurge does not count as an emergencies.
Cheers and happy planning.
Think before you act as
'Its all in the mind.'
Friday, September 9, 2011
Zindagi Na Milegi Dobara' has useful lessons for financial planning Sumeet Vaid Sep 8, 2011, 04.59am IST
Zindagi Na Milegi Dobara has been enthralling audiences with its intriguing story, along with some good performances by the lead actors.
But, for me, the aspect that stands out the most is the core message of the movie – live for the moment and enjoy life because you only live once! And I could not stop drawing the obvious comparisons between the theme of the movie and the purpose of financial planning.
Like the movie, the aim of financial planning is also to enable each one of us to enjoy the things we have and want from our lives. The three protagonists of the movie, besides fighting their internal demons, also depict classical traits that I have found in several individuals, especially those who have not started with their financial plan.
Let us look at the three lead characters of the movie and see what we can learn from them.
Should i keep my life on hold?:
Hrithik Roshan's character, Arjun, is a financial trader working in London who wants to make enough money and retire at the age of 40.
He believes that since he faced hardship all through his childhood, he should have money when he retires. He believes future financial security is important and is willing to give up on his present to get there.
This may be a movie, but I have come across several people who believe that letting go of your desires of the present for attaining something in future is acceptable. While aiming to retire by 40 is good, one should not forget that life is made up of small and big pleasures, which cumulatively add to the quality of life.
The most optimum way is to create a financial plan that will help one balance both the current and future aspirations.
Learn to live with your fears:
The second protagonist of the movie, Imran, played by Farhan Akhtar, is a drifter by choice and a closet poet. His problem is not confronting his fears — he keeps putting off meeting his biological father.
For many of us, our relationship with money is similar. We are scared to accept reality. Fear associated with money may be based on not wanting to face hardships, but what one tends to forget is that the hardship is already present; it's only our acceptance which we can control.
Accepting your fears related to money is the first step to liberate you and start you on the path of financial freedom.
Kabir, the character essayed by Abhay Deol, has an unusual predicament. Everyone around him, including his fiance, thinks he wants to get married to her when in reality he is just not ready for marriage.
While Kabir does manage to find his way out towards the end of the movie, his role highlights the fact that one can never predict the kind of surprises life can throw up at any point of time, and some of these surprises may not be pleasant.
There is no way to stop such unforeseen events from happening, but what we can do is be prepared financially to handle such events in life. Investing in a financial plan can help you not only deal with unexpected events, but also make you financially strong, so that when the time arrives, you are not left counting your chickens.
A certified financial planner can not only advice you as to how you should go about this process, but also tell you how much you should invest to get to your goal. It is said that life inspires movies, and sometimes movies inspire life.
And when it comes to the inspiration quotient, Zindagi Na Milegi Dobara ranks high. The message is loud and clear – live for the moment and seize life. And make sure you do everything you need to do along the way to make yourself capable both mentally and financially.
Sumeet Vaid, Founder freedom financial planners
But, for me, the aspect that stands out the most is the core message of the movie – live for the moment and enjoy life because you only live once! And I could not stop drawing the obvious comparisons between the theme of the movie and the purpose of financial planning.
Like the movie, the aim of financial planning is also to enable each one of us to enjoy the things we have and want from our lives. The three protagonists of the movie, besides fighting their internal demons, also depict classical traits that I have found in several individuals, especially those who have not started with their financial plan.
Let us look at the three lead characters of the movie and see what we can learn from them.
Should i keep my life on hold?:
Hrithik Roshan's character, Arjun, is a financial trader working in London who wants to make enough money and retire at the age of 40.
He believes that since he faced hardship all through his childhood, he should have money when he retires. He believes future financial security is important and is willing to give up on his present to get there.
This may be a movie, but I have come across several people who believe that letting go of your desires of the present for attaining something in future is acceptable. While aiming to retire by 40 is good, one should not forget that life is made up of small and big pleasures, which cumulatively add to the quality of life.
The most optimum way is to create a financial plan that will help one balance both the current and future aspirations.
Learn to live with your fears:
The second protagonist of the movie, Imran, played by Farhan Akhtar, is a drifter by choice and a closet poet. His problem is not confronting his fears — he keeps putting off meeting his biological father.
For many of us, our relationship with money is similar. We are scared to accept reality. Fear associated with money may be based on not wanting to face hardships, but what one tends to forget is that the hardship is already present; it's only our acceptance which we can control.
Accepting your fears related to money is the first step to liberate you and start you on the path of financial freedom.
Kabir, the character essayed by Abhay Deol, has an unusual predicament. Everyone around him, including his fiance, thinks he wants to get married to her when in reality he is just not ready for marriage.
While Kabir does manage to find his way out towards the end of the movie, his role highlights the fact that one can never predict the kind of surprises life can throw up at any point of time, and some of these surprises may not be pleasant.
There is no way to stop such unforeseen events from happening, but what we can do is be prepared financially to handle such events in life. Investing in a financial plan can help you not only deal with unexpected events, but also make you financially strong, so that when the time arrives, you are not left counting your chickens.
A certified financial planner can not only advice you as to how you should go about this process, but also tell you how much you should invest to get to your goal. It is said that life inspires movies, and sometimes movies inspire life.
And when it comes to the inspiration quotient, Zindagi Na Milegi Dobara ranks high. The message is loud and clear – live for the moment and seize life. And make sure you do everything you need to do along the way to make yourself capable both mentally and financially.
Sumeet Vaid, Founder freedom financial planners
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