Mental tricks to save money

Some mental tricks that can save you money:

1) Lots of research shows that paying through cash makes you think twice before you buy anything. In contrast, paying through credit card seems to increase unnecessary expenses.

2) When paying with cash, keep big bills with you and some small bills. This will help you in curbing the urge to buy small unnecessary things because it is relatively difficult to buy an Rs 50 item with Rs 500 bill then with Rs 100 bill.

3) Whenever going for grocery shopping, eat something before leaving home. You tend to buy expensive, ready-to-eat items when hungry.

Saving for long term goals

Secret to save for long term goals, like retirement, kids studies etc, is simple. Start early, be disciplined in savings, increase the saving amount as your income increases and adjust savings allocation periodically.

Start early because it gives lots of freedom. First you have abundant time in your side and hence you can use power of compounding for you. Also, because you will be starting early, you can start with small amounts.

Being disciplined is important because you are trying to save for long term goal and it might happen that short term goals sweeps away all of your money. Hence, automate the savings as much as possible and then set short term goals based on leftover money.

Adjust your allocation as time passes. For example if you started to save 10% of your monthly income, increase it every time you get a hike.

Last but not the least, review your allocations periodically say once every year and do necessary changes. As and when you are approaching your goal, reduce risk in your portfolio. If you started with 70-30, 70% in equity and 30% in debt market, with age change this allocation to 50-50 and then to 30-70 eventually.

These all simple steps will make sure that you can save for any long term goal without much of pain.

Save for Yourself

Lot's of people buy lotteries in order to get rich quickly. Lotteries are so addictive that I remember how Delhi Government put a ban on it.

People who buy lottery tickets want to use small sum of the money to get rich quickly. Well I am not sure of what will be the odds to get rich that way, but I know one sure way which will give you some wealth in long run. It's called power of compounding.

Let's say a lottery tickets is for Rs. 100 and you buy lottery ticket every week. At the age of 20, if you start saving and investing this Rs. 100 in some recurring deposit or mutual funds or stocks, then over the long period of time it may yield much better secure returns.

For example of savings give 9% of return, then this savings will become Rs. 59430 in 30 years.

So, don't save to make others rich rather save with discipline to build wealth for you.

Savings across the generations

Savings patterns have changed tremendously over a period of time. I still hear stories from my older generation how they started saving and investing as soon as they started jobs, a pattern that I find missing in today's generation, including me.

One senior member of my family proudly preaches how he bought his first investment, a small shop, within 2 years of his job. And over the period of time when he retired, he owned four residential and commercial properties.

I have also heard numerous stories from one other family member that how they managed to build two houses and educate and marry all of their three kids in single-income family.

Of course both of them will accept it that while they were fulfilling their duties and building wealth, they never owned fancy things. Cars used to be rare commodity at that time. Kids were not studying in fancier schools. Family members were not wearing fancy most clothes and no they might not take a vacation every year. Theirs attitude is what I’ll say "Saving's First" attitude.

Cut to generation X. As soon as we get the job, we want to buy a new car. By the time car loan is half paid, lucky one's will get married. After marriage comes luxurious travelling for next few years. After two-three years, planning for future starts, which includes owning a house and having a family. Now if one starts working at the age of 24, it's at age of 29-30 when one is thinking of buying a house. That home loan might take 5-10 years for repayment or even more depending on how diligently you want to finish it ASAP. By that time you are near or in your Forties. At that point, concerns for retirement and kid’s future may arise. This is the stage in financial life where I have personally seen most of people regretting. I still remember when my manager who was in her early forties once commented to me that "You are quite wise and smart to start investing when I am still in my mid-twenties. I used to splurge all my money on eating-out when I was your age." This attitude is what I'll say "Spending's First" attitude.

I am not trying to advocate any kind of lifestyle here. I am absolutely OK with both kinds of lifestyles. But I have a suggestion to all the youths who are starting on their careers. Having a decent lifestyle is absolutely acceptable. Go and buy a car, buy a new Cell Phone and new PS3. But try to save some portion of your salary every month. Saving 10% of your salary will not hurt your lifestyle much, but can save you a heart attack in your forties.

What about you? What kind of lifestyle do you have? "Saving's first" or "Spending's First" attitude?

Net Worth

I was still working on this one and my lappy mis-behaved and it got posted un-cooked.
So I pulled it pack.
Now it's well cooked, so I am reposting same. :)

NET WORTH

I know lots of PF blogger who calculate their Net Worth and check/update it periodically. I found this idea little intriguing because this idea is Non-Indian as per my values. I mean if I'll tell somebody that tomorrow if I need to sell myself, my cost will be XXX Rs, he is not going to talk to me again for sure. And in case some guy will talk like this, people will definitely think that he is talking about the amount of dowry he expects. :P

Irrespective of what I think, people do it and according to them it's a good number that tells you where you stand currently, in financial terms. So, I thought, it might be interesting to do a post on something I am not enthusiastic about.

Net worth in simple words mean what's the value of all assets you have. (If you ever get kidnapped, this number will help your kidnappers in deciding how much ransom they can demand for you :).) From personal finance perspective, it will let you know where you stand today and in case you know where you want to end financially, you can determine the difference. Once you know the value of all the assets you own, you can also decide how much risk you can take or how much insurance you might need to protect your assets.

Formula for Net Worth:
Net Worth = Value of all assets - Value of all liabilities

Thumb rule for Net Worth is: your net worth should be your age times your salary, divided by ten.

For example:
Age: 35 Yrs
Annual Salary: Rs 8 Lakh (800 Thousand)
Ideal Net Worth: (35*800000)/10 = Rs. 28, 00,000(Rs 28 Lakhs).

According to the thumb rule, if your net worth is around Rs 28 Lakhs, you are doing good, else buck up.

P.S. The formula and thumb rule, both are taken from a book, The Millionaire Next Door.

Emergency Fund

Emergency fund according to me is a building block in personal finance. It's needed to that your financial structure doesn't come down when a 4 Ritcher scale earthquake hits. Emergency fund helps you absorb little ups-downs of life.

All the PF guru's I read advocate that 3-6 months of expenses should be kept aside as emergency fund. Manshu from OneMint recently confessed that he never does this. Well, I like to keep at least 3 EMIs of my mortgage aside as emergency fund. That's sufficient for me to sleep peacefully at night. Now, you will say my EF doesn't cover my other expenses. Yes and there are reasons for same.

Dual Income - We both earn. In case one of us lose jobs, other's salary will be there to cover our daily expenses. So it's mainly mortgage payment that we might struggle with at that time.

No Kids - We have no kids as of now and hence not lot's of unforeseen expenses at least theoretically.

Job Security - My organization has done quite OK in this recession time. It feels to work in there quite secure as compared to other companies of my domain.

Family Support - We both have a supportive family. I know in case of some big adversity, I have people to fallback on. This for sure gives a secure feeling.

How about you? How much EF do you keep? What factors determine your EF amount?

Don't delay savings - even small amounts matter

Saving money seems to be very tough. There are so many excuses to not save for future.

1) My current expenses are very high.
2) I am too young for retirement.
3) I believe in savings in lump sum, but I am never able to save enough lump sum.
4) I have just started my job.

This list can be endless. The circumstances that a non-saver gives as an excuse also exist in a saver's world. What differs is the attitude to save and understanding of basic rules to build wealth in long term, Compound Interest (CI).

CI has a magical power that works every time you don't want to cheat the system. If you will continue to be diligent with savings, CI will never let you down. And when you will let CI work for you for some years, you will end up with good sum of money. Just for illustration, consider following scenarios and results:

Example1:
A is 21, just started her job. She is not earning very high salary, say 15K per month. She for sure knows if nothing exceptional happens, then she want to work for next 25 years. She will be earning more with every passing year. How can she make CI work for her? Depending on her liabilities she might have some fixed expenses. Let's assume that she can at least manage to save Rs.10 per day, if she has few responsibilities on her shoulder. If she is a freebie, she can save even more.



Scheme1:
A saves same amount all her working life span, for 25 years and ends up with big lump sum compared what she invested. Click at the photographs for detailed look at the returns.



Scheme2:
A increases the amount she is saving by just one rupee every year, for 25 years and ends up with big lump sum compared what she invested. Click at following photograph to have detailed look at the returns and difference in returns of scheme1 and scheme2.

Example2:
A does not listen to advice about CI and now, at the age of 35, is worried that she doesn't have any money to quit job in 10 years. She decides to start saving now, for rest of her working life. As she has never saved, she is facing what everyone faces initially, difficulty to cutting down expenses, though her salary is many a times what she started with. She can somehow manage to save Rs. 500 per day. With that she manages to get Rs. 2698007 at the end of tenure which is almost same as she could get with saving Rs. 100 per month with scheme1 and scheme2, assuming same rate of interest.

That is the power of compounding; it lets you save money without much of the pain and with the maximum gains.

If you are just starting out, make the use of power of compounding. Start with a small amount, if not big, but don't waste on time. This will help you in the long term.

List of Tax Saving Instruments

This is tax saving time. Time to use different instruments to save Tax Liabilities. Quick sheet to see various instruments available to save tax:

HRA

Staying on Rent - Claim HRA exemption

Deductions from Total Income

Medical Insurance Premium - Individual, Spouse and Children (Sec 80D)

Medical Treatment/Handicapped Dependent (Sec 80DD)

Interest on Educational Loan (Sec 80E)

Donation (Sec 80G)

Savings

Pension Fund

EPF

LIC Policy Premium

PPF (Public Provident Fund)

NSC (National Savings Certificate)

ELSS (Equity Linked Savings Scheme)

ULIP (Unit Linked Insurance Policy)

Fixed Deposit Schemes (5years or above)

NSC Interest

In case of housing loans

Loss from house property

Spending Lessons for New Comers

Set Goals - If one does not know the destination, journey can be never ending and almost without any progress. So as the first step, set some goals for your self. You want to buy a car, a new laptop, want to get a house in two years, planning to get married in coming years. Good! Choose one or many goals and start saving towards them.

Setup Emergency Fund - This is required so that if some emergency comes, your whole financial plan is not derailed. Generally speaking, 3-6 months of in hand salary should be saved in bank account as emergency fund.

Save for Tax Rebates - Rs One Lakh of savings get you good tax rebate under section 80C. Take full advantage of these schemes.

Save for Future - Start investing in long term savings instrument systematically. Choose equity or gold or any other instrument that you are comfortable with.

Make Budget - Make a budget of monthly and annually expenses. Try to keep it within 50% of in hand salary and slowly try reducing it to 30%.

Track Expenses - Track your expenses so that you can know any leaks in spending money.

Avoid Credits - Try to avoid credit cards or any type of loans as much as possible. Set goals and save in cash for anything you want.

Have Fun - But have fun in process. It's OK to go over budget once in a while. If you will not enjoy your life, there is no point in saving it for future.

SIP - Systematic Investment Plans

Second in the series for tools for investments:

Let me start with listing few of the traits:

1) You can not shelve huge amount for savings at once, but can take afford small amount periodically.
2) You have no understanding of equity market.
3) All your savings always lie in bank deposits.
4) You have more or less risk aversion, and want minimal risk.
5) You can stay invested for period of 5 – 10 years.
6) You always seem to be waiting for the “right time” to invest

If you have more or less similar traits, Systemic Investment Plans (SIPs) are appropriate for you. SIPs are just like recurring deposit schemes of the banks. Through SIPs you will be investing in Mutual Funds at regular intervals and can leave the worry about following things:

1) Timing the market. If market is going low, you will be buying at cheaper rates and if market is going up, you are getting returns.
2) Selecting the right mutual fund every time you have lump sum money available with you.
3) You are investing in equity, small amount every month, so cost will be averaging over the period of time. Cost averaging will keep the risks at bay.
4) Avoid panic sales
5) Invest as little as Rs.500 / Rs.1000 per month
6) Becoming a disciplined Investor
7) Taking advantage of Power of Compounding

So, you convinced that SIPs are ideal for you. Next step, decided which mutual fund you want to start with, consider few of the following things:

1) Fund House – performance of various funds of that fund house
2) Fund Manager – look at the performance of various funds managed by him.
3) Track Record of Fund – This will give you the confidence that this product is in market from quite some time and has survived so far implying, chances are that it will survive further also.
4) Investment Portfolio of Fund – My personal preference, when it comes to investing through SIPs is to avoid sectorial funds. Reason, simple, the sector which is hot now may fall in next one year, and SIP is a long term investment. So, I prefer diversified portfolio based funds for SIPs.

There are many sites available where you can get all this information. My favorite is though www.moneycontrol.com. I also consult www.indiabulls.com before making my call and invest for at least 3 years in any fund and then leave it aside for another 3 – 5 years.

Starting with Smart Savings: Money Multiplier Account

When I passed my college and joined job, I was a financial illiterate. All my savings used to lie in bank account and that’s it. Then I came across ‘Rich Dad and Poor Dad’. But once I finished reading the book, I realized that I am also one of the abundant species of “Financial Illiterates”.

I decided to change my breed, and from then started my regime of “Smart Savings”. I decided on my long term goals and decided that not only I’ll be saving regularly; I will also use those tools to save that will help grow my savings at rate > 10% annually. Why more than 10%, because banks will give you 10% returns. So if you spending some time on investments, then returns should be > 10%, otherwise I call it a failure.

When I started Smart Savings, basic problem I faced was deciding what all tools to use. There are so many instruments in the market to perplex you. But now after 2 years, I can list some tools for a fresher in the field that one can explore to start with:

Money Multiplier Account: Its one of the product of ICICI Bank, Corporation Bank of India. (I know about these two banks only. There can be other banks, may be you can consult your bank!) Money multiplier account is nothing but a Fixed Deposit (FD) Account. The only difference is that you don’t need any special request to break it in case you need that money. A Money Multiplier Account allows you to set a minimum balance to be maintained in your Savings Account. You can put in a request for the transfer of the excess of the minimum Savings Bank Account balance to Fixed Deposits. So you enjoy a higher effective rate of interest on your deposit.
Generally most of people will keep their 3 months expenses worth money in their bank accounts. They won’t use FD schemes for them, thinking that in case they need money before FDs mature, it will cause extra hassle. And moreover, I can’t use my money on the spot. What I mean by that let me explain:

Let’s say I want to buy some furniture. First I have to go to my bank to close that FD (or at least call them for same) one day prior of my shopping. Then if I didn’t get what I wanted to buy, I again have to go to the bank to create FD. That’s a pain. With money multiplier account, when you need the money you can withdraw it by issuing a cheque or through an ATM. Thus, you don't lose out on liquidity either!
The Money Multiplier feature gives you the liquidity of a Savings Account coupled with high earnings of a Fixed Deposit. It’s just like cash in your savings account, but will fetch you an interest of FD. It’s worth exploring and the best feature of my ICICI bank account. :)

Power of Rounding Up: Saving Rs. 15000

I love to do my budget and tracking my expenses. That gives me a sense of situation in control. Every time I track my expense, I round it up to next multiple of 5. Let’s say I bought A, B and C for Rs 21, 25, and 27 respectively on the same day. In my expense book they will be entered as: A, B, C – 75 (21+25+27=72).

At the end of day, all my coins go in my piggy bank. Once my piggy bank gets full, I take out coins and exchange them for notes. This amount then goes in my miscellaneous earning accounts in my account book. I was browsing my money book last night and realized that in last 2 years, I have saved approximately Rs 15000 out of this saving habit. Wow was the feeling after my results.

I loved the power of Rounding Up. It acts just like a phoenix.

Identify Your Financial Goals

In my last blog, I shared my motivation for spending time on ‘Smart Savings’. Once you are convinced that ‘Smart Savings’ is worth exploring, take the first step: define your Various Financial Goals. Let me explain this with some example.

Assume, you earn X amount and can save some Y amount, where both X and Y is variable. You can use Y to get an optimum corpus but key here is to know when you might need this money! Ok, no one can answer this for sure, because future is uncertain. So, comes the planning. No plan can be perfect. I mean my plan can never work for you, why? Simple, I have different financial background, different needs, different liabilities, and different age. So, always plan for yourself. Don’t copy from someone else’s plan, but only learn. Factors to consider while doing the planning are:
1) Your current age
2) Age when you want to retire
3) How much money you want to save and spend (and when)?
4) Current Liabilities

Converting it all into financial goals, know how can you divide the money in following categories:
1) Long Term – Corpus that is adding directly to my long term goals (eg. having 1 crore rupees at the end of 20 years).
2) Mid Term – Corpus that you can save now but may need 2 years from now, or 5 years from now. Idea of time period will help you in selecting the right investment tool.
3) Cash in Hand – Corpus that may be needed tomorrow. Basic principle that all experts (me anytime not an expert) suggest is; have 3 months of expenses available as cash.

Now fill your goals quantitatively, that is determine what’s your long term goal, what’s mid term goal and what’s short term goal. Various instruments that I am aware for these different types of investments are:

Long Term: ULIP, Gold, Pension Plan, PPF, ELSS, Mutual Funds, Real Estate.
Mid Term: Equity, Mutual Funds, Bank FDs, Stocks, Real Estate, Postal Savings Certificate.
Short Term: Savings Bank Account, FMPs, Money Multiplier Account, Bank Fixed Deposits.

There are many more investment tools which I keep on exploring as I get time, and latest I am learning is F&O.

For now, try to quantify your goals and see how much portion should go where and take advantage of principle of computing to achieve your wealth related goals.

Savings Smart - Let your savings grow on themselves

Wealth management is my pastime since childhood. I use numerous techniques to handle my money and always try to learn more. My basic principles behind increasing my wealth include:
1. Earn more
2. Spend less
3. Spend smart
4. Manage savings judiciously

Earn more: Increase your earnings. Improve your skills so that you get good salary. Always be ready to learn new things, as they will give you edge over others and will help you earn more.

Spend less: Spend less than what you earn. If you spend all that you earn, your wealth will never increase.

Spend smart: Spend smart and will have more blogs on same here subsequently.

Manage savings judiciously: Yes I am earning and spending less then what I earn! Now why do I need that! Simply for same reason for which you want to save in the first place: “Future Security and increasing your wealth”. Let’s take a meager example; there is a man, ABC, who earns Rs 10000 per month. He follows principle# 2 and spends Rs 8000 only. So he saves, Rs 2000 monthly. He keeps his savings with him and not in bank and he is doing this from last 12 months.

So total he have (10000 – 8000) * 12 = 24000.

He wants to buys a bike whose cost is Rs 50000 and increases 2% annually. So if in current year its cost is Rs 50000, next year it will be:
50000 + 50000 * .02 = 50000 + 1000 = 51000

To buy that bike, ABC needs to save for 27 months approximately.

But the main thing to notice here is cost of bike is going up every year, but his savings are not growing on its own. This is called “Inflation into Picture”. And what it means is once you will stop earning, cost of living will increase day by day, but your savings will only be depleting. So, while you are young and can take some risks, learn the art of ‘Smart Savings’. One of the naiveté and least time consuming approach may explain it better.

Now consider the second scenario, ABC saves his money in bank and for simple calculation sake, let’s assume that bank gives 4% return after every 12 months. So how much money will this gentleman have after 1 year, i.e. if he started in Jan 2007, how much will he have in Jan 2008:

Month	Principal	Interest	Total
Jan	2000	2000*4*12/(100*12) = 80	2080
Feb	2000	2000*4*11/(100*12) = 73	2073
Mar	2000	2000*4*10/(100*12) = 66	2066
Apr	2000	2000*4*09/(100*12) = 60	2060
May	2000	2000*4*08/(100*12) = 53	2053
Jun	2000	2000*4*07/(100*12) = 46	2046
Jul	2000	2000*4*06/(100*12) = 40	2040
Aug	2000	2000*4*05/(100*12) = 33	2033
Sep	2000	2000*4*04/(100*12) = 26	2026
Oct	2000	2000*4*03/(100*12) = 20	2020
Nov	2000	2000*4*02/(100*12) = 13	2013
Dec	2000	2000*4*01/(100*12) = 06	2006

At the end of 12 months, now he has Rs. 24516 instead of Rs 24000. And his dream is not Rs 51000, and he needs Rs (51000 – 24516) = Rs. 26484.

Now in the second year, he starts with 24516 + 2000 = 26516, and it goes like this:

Month	Principal	Interest	Total
Jan	26516	26516*4*12/(100*12) = 1	27576
Feb	2000	2000*4*11/(100*12) = 73	2073
Mar	2000	2000*4*10/(100*12) = 66	2066
Apr	2000	2000*4*09/(100*12) = 60	2060
May	2000	2000*4*08/(100*12) = 53	2053
Jun	2000	2000*4*07/(100*12) = 46	2046
Jul	2000	2000*4*06/(100*12) = 40	2040
Aug	2000	2000*4*05/(100*12) = 33	2033
Sep	2000	2000*4*04/(100*12) = 26	2026
Oct	2000	2000*4*03/(100*12) = 20	2020
Nov	2000	2000*4*02/(100*12) = 13	2013
Dec	2000	2000*4*01/(100*12) = 06	2006

At the end of second year, he has now Rs. 50012 instead of Rs 48000. And bike is Rs 52020. So one more month saving and he achieved his target in 25 months, instead of 27.

So, got the point, mediocre 4% annual returns on his savings helped ABC to achieve his goal one month faster. That is why one needs to manage his savings judiciously.

Inflation and interest figures used here might be fictitious but not the facts. There are many tools for investments with various terms and conditions and it’s too late for today to discuss them. Will write about my techniques in some other blog, for now think about ‘Smart Savings’.