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Planning to fail in your golden years?

Yet again, a discussion with few friends on a Sunday afternoon has brought me here today. We were discussing about our future plans and each one of us wanted to retire early and retire rich. No surprises there. What surprised me is that my friends only have a vague idea, no concrete plans about how they are going to achieve this goal. This is true for most of us. With rising cost of living and increasing life expectancy, the need to plan for one’s golden years is absolutely necessary.

Lack of a concrete plan for retirement may lead to problems just when you are least prepared for it. As one of the founding father of the United States, Benjamin Franklin, so succinctly put “If you fail to plan, you are planning to fail”.

Most of us tend to underestimate the retirement corpus. If you need Rs. 50,000 for monthly expenses today, will you need the same after 30 years, when you retire? The answer is no. You will need Rs. 2.2 lakhs every month, assuming just 5% inflation. There it is, now I have your attention. Inflation leads to reduction in purchasing power, by slowly but steadily eating up your money. Learn more about it here.

Let me tell you one more thing. With increasing life expectancy, the non-earning period in an individual’s life is expanding. Someone retiring at age 60 after working for 30 years could live on for another 25 years or more. Assuming your current age of 30 years, current monthly expense of Rs. 50,000, inflation of 5% and retirement age of 60 years, the amount of retirement corpus one needs for 25 years after retirement is Rs 5.3 cr and for 30 years after retirement is Rs. 6.1 crore. These are not small sums by any measure. If you do not start to plan now, there is a high probability to fall short.

Are you now thinking when to start investing for retirement? The answer is as EARLY as possible. If you do that, your money gets more time to grow. Each rupee gained generates further returns. This is called “power of compounding”, and this helps you get rich… and richer over time.

Let us take the above example, say you start investing at age of 30 years and continue to do so for next 30 years. To achieve a corpus of Rs. 5.3 cr at retirement, assuming 12% return on your investment, you will have to invest Rs. 15,391 per month. If you delay the investment by even 5 years, the same monthly installment doubles itself to Rs. 28,630.

Don’t feel overwhelmed by all the numbers shown above, you can take help from your financial advisor for this. The key is to start early, invest regularly and choose the right products for your investments.

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Crazy about being fit? How about some financial fitness?

Ajay, my neighbor, was a regular “fitness freak” and never failed to capture my avid respect for his assiduous dedication to his fitness regimen. Three years ago, I was impressed enough to seek his friendship and invited him over for dinner. It was across the dinner table that I discovered his personal dilemma.

His passion for physical fitness was total and amply rewarded. However, he was nursing a deep regret in that he saw no way of realizing his abiding dream of starting a fitness center. In twenty years of working as a gym instructor, he had not managed to save any money.

As a financial planning aficionado, I immediately put on my “financial adviser” hat and apprised Ajay of “Financial Fitness” – how, by following a simple set of money management skills, a stress-free life of financial well-being can be ensured.

 1) Have predefined financial goals

The secret of financial stability begins with sorting and ordering priorities and with defining short term and long term goals. It is essential to achieve this clarity so that resources can be managed and plans laid out, to align with fine-tuned goals. If there is no sense of direction, the destination cannot be reached.

2) Calculate net worth

Once the goals and priorities are defined, assets and liabilities need to be assessed to determine the net worth of an individual. If a huge loan repayment is pending, an investor’s net worth may be negative, a situation that calls for urgent and concerted financial planning.

3) Manage Taxes

Taxes are often considered a necessary evil. While this may be true, there are numerous ways to harvest the benefit of government schemes and reduce taxable income, in the process. Filing tax returns before the stipulated deadlines and avoiding any direct or indirect course of tax evasion goes a long way towards inducing financial discipline.

4) Invest regularly

Simply depositing money in a bank cannot be the most productive way of capitalizing on savings. Investing is a wiser route to beating inflation and simultaneously building a corpus over a period of time. Align investments with pre-defined goals. It is possible that at all times sufficient funds for investments are not available; nonetheless, regular and disciplined investments should be maintained every month. Start small, but start early! Read more about this here

5) Earn as well as learn

Financial knowledge is not everyone’s forte. The lack of adequate information should not accrue as the stumbling block in financial decision making. There is no harm in consulting financial experts. Broadening the knowledge base in this domain can prove extremely rewarding. It is never too late to learn how to earn.

6) Maintain an emergency fund

If there is one thing that will remain constant, it is the ever changing scenarios that life will keep presenting as challenges. To deal with unexpected exigencies efficiently, an individual should have saved an emergency fund, which should ideally equal about 5 to 6 times of the monthly expenses. This will ensure the much needed cushion in times of emergency.

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Are you making the best use of your bonus?

Ajay and Vijay are two IT professionals working for the same firm. Having completed one year in office, they are excited about the performance bonus that they are going to receive. Both of them worked really hard throughout the year and it is time they reap the benefits of their hard work.

On one such anxious day, they were hanging out in their break out zone and discussing the very obvious topic – their upcoming bonuses!

Ajay:  I just can’t wait for the year-end bonus. I have so many things planned once I receive it.

Vijay: Really? I have a couple of things in my list too. Seems like we share common interests. What is it that you have planned?

Ajay: I am going to buy a Macbook Air for myself. It has the most amazing features. I also planto  get my brother the new Play Station he has been craving for.

Vijay: Oh okay, so you intend to spend your entire bonus on these luxury items. Hmm. I was, however, planning on something different.

Ajay: (seemingly confused) what else can you possibly plan?

Vijay: I want to use my bonus to plan my finances better. My topmost priorities are:

1) Repay debts where interest is high

I have a personal loan on which I am paying 14% interest. It is leading to high interest expense and zero tax advantage. I cannot enjoy luxuries till I have such a high interest liability due. So, I would like to repay that first.

2) Build an Emergency Fund

Normally, an emergency fund is not something that should be made after receiving the bonus but since I have not built one so far, I will do it with a part of my bonus which will ideally be 4-5 times my monthly expenses. I will park this amount in a short term debt fund.

3) Invest for long term goals

I will park a portion of my bonus in a liquid fund and start a monthly investment into an equity fund from there. This will help me create wealth over the long run ad simultaneously earn modest returns in the liquid fund.

4) Spend on what’s needed, not on what’s wanted

I want to have a clear distinction between our needs and our wants. While everyone likes to spend money based on their interest, I want to be careful about not splurging it all away on unnecessary items.

Ajay: You seem to be very adept at money management my friend. I think I am having a change of mind now. How do I plan my bonus allocation better?

Vijay: Consult an expert financial advisor about how should you best allocate your bonus.  Everyone has different goals and preferences and a plan should be devised accordingly.

Ajay: Indeed. Thank you so much for delivering this mantra to me: spend wisely, save judiciously and invest smartly!!

How do we help?

At CAGRfunds, we help you devise a suitable investment plan for your bonus such that it contributes to your long term wealth creation.

If you have received your bonus and do not know how to make the best use of it, comment on this post or whatsapp us on +91 97693 56440. We shall be happy to help!

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Stand out from the crowd while following the herd

If you were standing at the crossroads, in a new city, unsure of which direction to take and you observe 9 out of 10 people moving towards the left, isn’t it likely you will follow the more numerous group? This is an illustration of the herd mentality that we are all prone to, especially in unfamiliar situations. “When in doubt, play safe”, is the philosophy that drives this behavior. Ever wondered why this happens?

1) Social Acceptance

It is natural for us to crave acceptance in a group and wish not to be perceived as someone who goes against the crowd. This social pressure often compels us to choose options we would otherwise not have considered.

2) The Ad Populum Fallacy

We are ensnared by this fallacy when we happen to be unclear about the choices to opt for. Believing that we lack some information that others have access to, we choose to endorse the choices of those others, even if the preference may appear irrational at first. We convince ourselves that it is unlikely that so many people can be wrong simultaneously.

If many believe in a particular outcome, the chances of them being correct are high, isn’t it?

This may or may not be true. ‘Argumentum ad Verecundiam’ or ‘Argument from Authority’ is also sometimes termed ‘Appeal to False Authority’ or ‘Appeal to Unqualified Authority’. Argument from authority illustrates a statement that is authenticated by expert opinion. The latter two terms refer to positions that are adopted on the basis of hearsay. We often encounter hearsay in stock markets. Millions of people trade in equity stocks based on “tips” they receive from friends or relatives and many end up burning their fingers.

The inclination of investors, to follow the herd instinct is rooted in the quest for the latest trends in the financial markets. Which mutual fund scheme is fetching the greatest returns or which scheme is a part of some top investor’s portfolio? Did equity outperform bonds in the financial year or not? Based on the answers to such questions, investors switch back and forth rapidly, without realizing that the cost involved in such a process is going to eat into their profits, if at all they make any.

How do we avoid such behavior?

Should investors stop looking at trends and suggestions? It will be wrong to eliminate networking altogether. Research and meticulously acquired expertise are the two pillars, which serve to neutralize the risk of following the crowd.

This adverse impact of herd behavior is most visibly apparent in the realm of financial markets. An investor needs to overcome the fear of isolation and drive innovative investment strategy. Towards this end, he must either gain the expertise to manage his investments with acumen or take the help of a reliable advisor, who can guide him.