- You have to work
- Want to work
Send your answers on 9029868078 (WA) or mail me on firstname.lastname@example.org
Send your answers on 9029868078 (WA) or mail me on email@example.com
One of my friend (Akshay) asked if he can buy car on Loan?
Car value = 10 lacs
Down payment = 1 lac
Loan = 9lacs
Monthly EMI = Rs 20,000 for 5 years
Akshay asked if his decision is right in buying car in above calculated approach
I said, You are buying a liability on another liability
Akshay – How, please explain.
I – Car is a liability, we need to keep spending on car monthly for fuel and maintenance and its value decreases over time.
Akshay – Acha Ok.
I – And you are buying a car (liability) with a loan (another liability), which is not a good approach.
Akshay – Ok, but my wife started working last month and she is earning 20-25k approx monthly and we thought to buy car with her salary.
I – So, when your income increases, you buy things which you dont need on loan?
Akshay – No, but we want Caaaaar.
I – How much will be your daily usage of car?
Akshay – We will not use it daily, may be monthly twice or thrice during weekends or holidays.
I – Ohh, then you can make use of cabs like Ola or Uber.
Akshay – Yes; but it doesnt give feel of owning a car.
I – Oh, I think you dont know, until loan is cleared CAR will not be yours’.
Akshay – Hmm yes, but it will be with us 🙂
I – You are getting emotional.
Akshay – Please tell me if my logic is correct, shall I buy car with calculations mentioned above?
I – As I said earlier, it is not a wise approach to buy car on loan. By the way, bank will not give loan to your wife as she just started earning and also nobody will give loan upto 80-90% of income going as EMI.
Akshay – I thought about it, so what I will do is, I will take loan on my name and pay emi from my account and will adjust with my wife salary.
I – Ok, what if your wife stops working after couple of years?
Akshay – Why will she stop working?
I – Consider for suppose
Akshay – It may become tight for me to pay EMI, I dont have much emergency fund also.
I – Hmm…thats risky.
Akshay – Please tell me if my decision is fine?
I – I have been telling since beginning, that this decision is not wise, but what are you expecting from me?
Akshay – I want you to tell me that my decision is right.
I – Then; why are you asking me if you have pre-decided?
Akshay – I want to confirm with you.
I – I can give opinion if you can listen open-mindedly. If you have pre-decided then whatever I say doesnt’ matter to you.
Above discussion happend about 8 to 9 months ago with one of my friend (name has been changed for privacy reasons) and no conversation happend after that
Today he pinged me and asked if we can meet over coffee and when we met;
Mr. Akshay looked unusual and was uncontrollable with his emotions. Upon discussing with him, following is the summary,
He bought the car on the loan, then after 4 months his wife had to stop working as it became difficult for her to manage work at office and son (2yrs old) at home as Akshay’s mother went back to their hometown who used to take care of his little son.
Akshay, in his words whatever you told became reality. After my left to hometown, We have decided and asked my wife to stop working and car EMI became a big burden now. I thought of informing you at that time itself but I did’nt know how to show my face to you, all these days that’s why I did not communicate to you.
Today I thought, Kaustubh was able to analyse and tried to advice me not to buy car at that time itself but I did’nt listen to him.
I dont know how many more mistakes i m doing which I did’nt ever thought of, so I kept my ego, shyness aside and messaged you. Now, I want your advice on all my financials and tell me what actions should I take to ease out my financial burden.
Kaustubh – My Final words – Financial Planning is all about managing RISK and ensuring we achieve our Dreams and Aspirations by not falling as trap to RISK by avoiding / mitigating it
Long real life story, please read at your convenience. Hope you all learn out of it 👆🏾👆🏾👆🏾👆🏾
People fail to believe or have trust.
We, the people, make same mistakes again and again, yet never learn from it.
Any Guesses…..Because we give them the sole right to take from us.
Have a look at these headlines & try to understand our behavior.
According to Financial Stability Report released by RBI on June 26 says, In 2018, there are more than 6000 registered fraud cases amounting to losses of more than 30000 Crs.
In my understanding, people are growing impatient & lack three important virtues of investing – Contentment, Pragmatism & Contemplation.
Contemplation states that Blindly chasing investments for Windfall Returns has its pitfalls.
In current market situation, not a single entity or person can assure or guarantee you extra-ordinary returns.
Please remember the fact:
Ask Yourself – “Do you Really want to get rich / wealthy”?
Is it on your priority list OR are you happy going through life living salary to salary and retiring at 58 and then wondering how to spend the next 20/30/40 years of your life?
Not many people are cut out to create wealth. In fact most people do not.
How much time do you spend each day thinking about it?
You don’t even think about financial independence once a day and you expect to get there in your 40s?
Forget about it.
You think you CANNOT resist spending Rs. 200,000 on that bike that you are dreaming off or on a car costing Rs. 12,00,000 when you have not thought about Investing for Financial Independence?
Forget financial independence in your 40s, after all you do not want it as badly as you want your car or house, do you?
Likewise, what are you willing to sacrifice to build your Retirement corpus? It takes some sacrifice, and the longer you delay that sacrifice, the larger the sacrifice becomes.
If you are 33 yrs, and not yet set up any SIP for retirement, and all your money is in Bank FD, Real Estate, ULIPS, LIC etc, kiss your early retirement / wealth creation dreams a Happy Goodbye.
The longer you delay the lesser the chances of you being able to create any wealth.
The longer you delay, the lesser retirement corpus.
The longer you delay, the longer you have to work.
The longer you delay, higher chance of you working forcefully even if your health doesn’t support.
The longer you delay, the sooner your happy retirement dreams will fade away.
P.S- Interested people can contact us for Financial Independence Program.
A conversation between a Client & Financial Planner.
Mahesh : Happy Diwali Dr. KD. I checked today’s Money control. It says..next diwali..45k and sent top 15 stocks to invest.
Dr. KD : Happy Diwali to you and your family.
Do you know, last year prediction from money control. Check following details.
Mahesh : Oh…
Dr. KD : Even they recommended top 10 stocks.
Note: PAL – Price at Last diwali
Target – Given by moneycontrol
Actual – today’s price
BATA/ 800/925/ 1022
KARUR V B/110/180/79
Mahesh : Oh.. Except one or two, all are down. Then why do they predict?
Dr. KD : Because it is their business and they earn from it. We should believe in our financial advisor not the online companies.
Mahesh : Yes Dr. KD, There is no short cut to become wealthy. We have to give time.
Recently, one of my friends died due to accident. Hemant was just 33 and was heading family owned business in Mumbai. He is survived by his home maker wife Rohini aged 30 and 1 kid aged 7.
He used to contribute 1 Lakh per month for the family. His monthly cash flow was as follows.
EMI for the Business Loan – 30,000
House hold expenses – 28,000
Parents’ Support – 20,000
Life Insurance premium – 5000
Mutual Funds Investments – 17,000
He was staying in own house which was a ancestral property and were leading a quality life. Kid is studying in good school.
He was paying an insurance premium of 5000 per month for a life insurance policy of 12 Lakhs. The insurance company settled the claim of 12 Lakhs.
Rohini has deposited this amount of 12 Lakhs in a bank. She is getting around 6,000 per month as interest on it. Now the family is living on this. But she finds it difficult to manage the schooling of the kid with this income. She is planning to shift the kid to another school from next academic year.
If they want to maintain the same standard of living, there should be an inflow of 28,000 per month. Instead of 12 Lakhs, if there were 44 Lakhs in bank, she will be getting 28,000 as monthly interest.
In simple words, Hemant should have insured his life for 44 Lakhs.
Is it sufficient? In the above calculation, I have not considered the effect of inflation, possibility of reduction in interest rates etc. Assuming these 2 factors into consideration, the amount required to ensure an inflation adjusted withdrawal of 28,000 per month for the next 50 years (till she is 80) is around 1.3 Crore. Here I have assumed that the amount of 1.3 Crore will generate a return of 1% above the inflation.
So, this is the amount Hemant would have looked at instead of 44 Lakhs. He was planning to provide for 10 Lakhs in today’s cost for the higher education of his kid when she reaches age 17. For that he was investing in mutual funds. If you consider this goal also into account Hemant would have insured his life for 1.5 Crores.
Had he insured his life for 1.5 Crore, now his family will be getting 1.5 Crore as death claim. Rohini can invest 20 Lakhs for the children higher education needs and use the balance 1.3 Crore to ensure same standard of living till she is 80.
Now, let us check the premium for a 1.5 Crore policy. He was paying a premium of 5000 for a 12 Lakhs policy. Going by that rate, the premium for a 1.5 Crore policy will be around 62500 per month, which is not affordable to him.
Is there any alternate to insure life at a lesser premium? Yes. He could have opted for a term insurance policy.
What is Term Insurance?
In this policy, there are no maturity benefits. In simple words, you will not get anything at the end of the policy. But if you die during the term of the policy, your nominee will get the policy amount immediately.
If you are 35, the annual premium for a 1.5 Crore policy will be around 18,000. If you pay this premium every year from 35 to age 60, your family is sure about the payment of 1.5 Crore in case of your death. But if you live upto age 60, nothing is payable from this policy. You will be losing the premium of 4.5 Lakhs paid during these 25 years.
This is the only way to ensure adequate life insurance for a person. The amount of 18,000 per year (1500 per month) is to be considered as the price you are paying for the peace of mind you are getting in ensuring a decent living for your spouse and kids in your absence. After all, this 1500 per month is just the cost of a weekly outing.
Precautions while purchasing term policy
Insurance is based on the concept of ‘Utmost Good faith’. You are supposed to disclose your health/habits etc correctly while applying for an insurance policy. For example, if you are diabetic, or having hypertension don’t forget to mention these in the proposal form. Similarly if you are a smoker or consume alcohol, mention these in the proposal. The insurance company may charge a higher premium depending on your health/habits. It is called loading. This prompt disclosure is important to avoid confusion later. If you are hiding these details at the proposal stage, there is a possibility of claim rejection in future. Be 100% honest while purchasing the policy.
Claim Settlement Ratio
This is the ratio of clams settled out of claims reported. The higher the ratio, the better it is.
Some companies are claiming that their claim settlement ratio is highest in the industry. Suppose the claim settlement ratio of company A is 98% and for company B it is 90%. As a heart patient, if you purchase a policy from company A without mentioning this issue and die after 2 years the claim will be rejected. So, you will be within that 2% rejection of company A.
But if you are purchasing the policy from company B with prompt disclosure, your claim will be settled. This is because you will fall under the 90% of company B.
More than claim settlement ratio, prompt disclosure from your side is more important in insurance. You may purchase the policy from the company of your choice with prompt disclosure.
If the claim is rejected, there are many options for the claimants to represent the case. They can approach the grievance cell of the insurance company, insurance ombudsman or consumer forum with appeal. Normally all genuine claims will be settled.
Ensure Prompt Nomination
While purchasing the policy, ensure that you are nominating your legal heir as the nominee. If you are purchasing the policy before marriage and nominate parents as nominee, it is better to change the nomination in favour of your spouse after marriage. Remember, you can change nomination anytime and the nominee has a role to play only in case of your death.
Inform the nominee the following
I have purchased a policy for Rs. X from company ABC and as a nominee you are eligible to get Rs. X after my death.
The policy number, premium amount and the due dates of premium.
Where you are keeping the policy document
The contact details of company ABC to be contacted in case of your death.
Why term policies are not popular in India?
We feel that we are losing the premium in term policy because there is no maturity benefit. But see the large benefit in case of death of the bread winner! This is the only way to ensure a decent life insurance cover for a person at an affordable premium. If you really love your family, purchase a term policy of decent value when you are alive and healthy.
The main reasons for the low popularity of term policies are
1) Agents are not interested in selling this policy because of the low premium and the small commission involved.
2) Low awareness about the real benefit of term policy.
3) Feeling that you are not getting anything on maturity and losing the premium paid.
4) Emotional issues like wife saying – I don’t want any amount because of the death of my husband.
5) If every wife knows what a widow feels, no husband will remain uninsured.
It is high time that you should purchase a term policy and ensure all earning members in the extended family and friends circle are insured for a decent amount. Infact government can think of making it mandatory as a social security measure so that no family will suffer in case of death of the breadwinner.
The aversion to term policies by Indians motivated life insurance companies to innovate and come out with policies with maturity benefits along with death benefit.
Let’s understand this with an example:
If you are aged 35 and purchasing a 20 year endowment policy of 10 Lakhs, the annual premium will be around 50,000 per year. You have to pay 50,000 for the next 20 years and you will be getting the following at age 55.
Sum assured – 10 Lakhs
Bonus – 8.4 Lakhs
Total – 18.4 Lakhs
Bonus is declared by the insurance company every year based on its profitability and claim experience. In the above calculation, I have assumed a bonus rate of Rs. 42 per thousand sum assured. Since it is a 10 Lakhs policy, the bonus for a year will be 42,000. If you are getting the same bonus for the next 20 years, you will get 42,000 x 20 = 8,40,000 as bonus.
Let’s calculate the rate of return on this policy. It is around 5.5%. This is a pathetic return for a long term investment.
Please note that the bonus is not guaranteed and it can change every year. Since the interest rates are coming down in India, there is all possibility of a reduction in bonus rates in the near future.
Now, let us understand the benefits from this policy in case of your death. Your nominee will get the sum assured of 10 Lakhs and bonus accrued till date of death. Suppose the death happens at age 40, your nominee will get the following
Sum assured – 10 Lakhs
Bonus for 5 years – 2.10 Lakhs (42,000 x 5 = 2.10 Lakhs)
Total – 12.10 Lakhs
Will this 12 Lakhs is sufficient for the family in your absence? No.
This policy is not good as investments due to poor returns and not good for risk cover due to the low insurance cover it offers.
Who benefit from this policy?
When you are paying 50,000 as the first year, premium, your agent is getting around 25-30% of it. 12,500-15,000/- is going to his pocket. From second year, the commission is around 5%. The agent is getting 2500/- every year as long as you pay the premium. In the 20 year policy, the agent is getting 65,000/- in total!
This is the reason why agents and banks are trying to sell insurance policies.
What you can do?
Instead of paying 50,000 premiums under such policy, you can purchase a 1.5 Crore term policy by paying 18,000 per year. The balance amount of 32,000 can be invested in a mix of equity & debt as per your risk taking capacity. If you are investing 32,000 per year in an equity mutual fund, you can expect around 23 Lakhs assuming 12% returns. Please note that many good mutual funds have given 20% returns in the past 20 years.
In case of unfortunate death, your family will get 1.5 Crore immediately. This amount can really help your family in maintaining the standard of living in your absence.
This combination of term policy & mutual fund is beneficial both in case of death and maturity.
To make it attractive, insurance companies are offering many types under this category. The most popular ones are the following:
In this policy, the sum assured and the bonus is payable at the end of the policy term. In a 20 year policy, you will get this at the end of 20 years as explained above.
Money back policy
In this policy, you will be getting certain percentage of the sum assured at different intervals. A typical 20 year money back policy will give you 20% after 5 years, 20% after 10 years, 20% after 15 years and 40% along with bonus at the end of 20 years. In case of death in between, the nominee will get the full sum assured irrespective of the payments made already. The premium under money back policy is high compared to endowment policy.
This is sold in bulk on emotional appeal. The benefits under this policy are paid in instalments during the higher education of the child. In some cases, there is an option to waive the premium in case of unfortunate death of the parent proposer.
In this policy, the benefits are paid out as pension during your retired life.
Unit Linked Policies (ULIP)
In this policy, the insurance company is investing your premium in a mix of equity & debt instruments as per your mandate. ULIP policy can give better returns compared to other types of policies discussed above.
But there are many charges which are deducted from your policy, which will reduce your effective return.
The main draw backs of savings linked policies are:
Lack of flexibility
Once you join for a 20 year policy and later, if you are not happy with the policy, exit options are limited. If you stop paying the premium in the first 3 years, you will not get anything back under most of the traditional policies. If you surrender the policy after paying premium for 3 years, then you will get only 30% of the premiums paid. After paying 50,000 for 3 years (1.5 Lakhs), you can exit the policy with just 45,000 as surrender value.
In ULIPs, you will not lose the premium paid, if you stop paying the premium within 3 years. The fund value will be moved to discontinuance fund and it will be payable to you on completion of 5 years from the start of the policy. During this period, you will get around 4% returns on the fund value.
If you want to surrender the policy after 5 years, you will get the fund value immediately.
If your fund is not performing the only option for you is to surrender and take the money out.
In both these cases, you can understand that there is no flexibility. But if you opt for a combination of term policy & mutual funds, you have 100% control on your money. If a new insurance company is offering a term policy with lesser premium, you can opt for that and just drop the existing policy (subject to your good health at that time). If your mutual fund is not performing, you can just sell it and reinvest in better funds without any difficulty.
In traditional policies, the returns will be in the range of 4-5% only. This is because the investment is happening mainly in debt products and a good amount is going towards commission and other expenses of the insurance company.
In ULIPs, there are many charges. When you pay Rs. 100/-, full amount is not invested in your account. The company deduct premium allocation charges from your premium and only the balance is invested. If the allocation charge is 10% only Rs. 90/- is invested in your account. There are other charges like policy administration charge, fund management charge and mortality charge etc. These charges are deducted by way of cancellation of units from your account. You will not understand it unless you verify the fund value statement carefully.
If you just check the percentage return on your Net Asset Value, it will not reflect the reduction in number of units due to various charges. Even if the fund is performing well, your actual return will be much less due to the cancellation of units.
The only policy you require from a life insurance company is a basic term policy. Buy it online to get the advantage of lower premium. All other policies are not beneficial to you. It will help only the insurance company and the agent.
By Charlie Munger
If all you succeed in doing in life is getting rich by buying little pieces of paper, it’s a failed life. Life is more than being shrewd in wealth accumulation.
A lot of success in life & business comes from knowing what you want to avoid.
Develop good mental habits. Avoid evil, particularly if they’re attractive members of the opposite sex.
If your new behaviour earns you a little temporary unpopularity with your peer group, then the hell with them.
Beware of Envy
The idea of caring that someone is making money faster (than you are) is one of the deadly sin. Envy is a really stupid sin because it’s the only one you could never possibly have any fun at. There’s a lot of pain & no fun. Why would you want to get on that trolley?
How to Get Rich
Spend each day trying to be little wiser than you were when you woke up. Discharge your duties faithfully. Step by step you get ahead, but not necessarily in fast spurts. But you build discipline by preparing for fast spurts.
The Importance of Reading
In my whole life, I have known no wise people who didn’t read all the time. You’d be amazed at how much Warren reads.
I think when you’re trying to teach the great concepts that work; it helps to tie them into the lives & personalities of the people who developed them. I think you learn economics better if you make Adam Smith your friend. That sounds funny, making friends among the eminent dead, but if you go through life making friends with the eminent dead who had right ideas, I think it will work better in life & work better in education. It’s way better than just being given the basic concepts.
Reduce Material Needs
Most people will see declining returns (due to inflation). One of the great defences if you’re worried about inflation is not to have a lot of silly needs in your life. You don’t need a lot of material goods.
Once you get into debt, it’s hell to get out. Don’t let credit card debt carry over. You can’t get ahead paying 18%.
The Decline of Public Schools
You could argue that (the decline of public schools) is one of the major disasters in our lifetime. We took one of the greatest successes in the history of earth & turned it into one of the greatest disasters in the history of the earth.
Are you misbehaving with your money?
If you are of the opinion that you are behaving cordially and appropriately with your money, you are probably wrong. Given the way our brains are wired, it is impossible to not let our emotions overpower logical reasons. In the academic arena this is known as behavioural economics or behavioural finance. We can look at some routine day to day examples to prove this fallacy.
1. Neha had parked 5 lakhs Rs. in a fixed deposit at 8℅ p.a. and she is also serving a 3 year personal loan of Rs. 4 lakhs at 15℅ p.a.
Now logically it makes so much sense to close the personal loan as Neha has adequate surplus available with her. But by behaving irrationally she stands to lose. Having her money parked in fixed deposit gives Neha tremendous sense of comfort.
Wrong comfort zone, wrong investment decision.
2. Mr. Aggarwal is a so called intelligent investor. He follows Warren Buffett’s maxim, “Buy low and sell high.” He always buys stocks which have hit their 52 week lows and sells the ones that have hit 52 week highs.
However, Mr. Aggarwal has not made money. What is an issue? Choice of an arbitrary reference point. The company which has hit 52 week low may be in the downtrend due to some big problem and may go down further. Likewise, 52 week high does not stop the stock to go up as the company may have produced outstanding results and holds terrific potential due to some discovery.
Wrong reference point, wrong investment decision.
3. Wasim started Investing in ABC mutual fund via SIP 10 years ago. The fund performs exceptionally well and gives Wasim 20℅ compounded returns over 10 years. Wasim is happy as he is able to meet his goal of making down-payment for buying a house and is also able to prepay his car loan.
However, Wasim gets disappointed when he comes to know that his friend William has got 23℅ return during the same period.
Well, fund manager does not ideally aim to generate best returns but the returns should ideally be enough to meet investor’s goals. But Wasim started comparing his returns with William’s fund. However, what was the risk taken by William’s fund manager to generate extra 3℅ returns???
Wrong comparison, wrong investment decision.
4. If you analyse the stock portfolio of a large number of investors, you will notice the following.
a. There are few multibaggers.
b. There are quite a few failed stocks.
This happens because people hate losing money. They are affected by loss aversion. Similarly when the stock appreciates they are eager to book profits. Selling early denies investors huge amount of potential profits. Peter Lynch rightly said, “If you cannot imagine to see your investments going down 50℅ you should not be in the market. You are not yet ready.”
Wrong timing, wrong investment decision.
These stories amply prove that humans are emotional fools. Remember how companies shape our behaviour to make more profits.
The Porcupine Story
The story goes that it was a particularly harrowing time in porcupine land. The winter was severe and the porcupines were finding survival difficult. They were freezing to death.
That’s when they held a meeting to decide on a course of action. As they got together to discuss their survival strategy, they discovered that just by being in close proximity with each other they were able to feel warmer and protect each other.
Being closeted together meant that their bodies generated heat which helped keep everybody warm. So they found they could survive the cold by just staying together!
But there was a problem.
As they moved closer, they found each other’s quills to be a bother—they poked and hurt.
Feeling the discomfort, some porcupines decided to avoid the pain from the quill pokes and moved away.
And as they ventured out on their own, the cold got them and they died.
Soon better sense prevailed and the porcupines realized it was better to stay together and survive rather than go out on their own and die.
Getting poked by the quills of porcupines that were close to them seemed like a small price to pay for survival.
This story has a great lesson for investors.
1) Investors afraid of market volatility redeem their investment because volatility seems to hurt them. Only if they could tolerate a little volatility their lives would be much better off in due course but their fear gets the better of them and they hurl themselves into a bigger crisis.
2) Another lesson investors can draw from this story is of leaving their Advisors and practicing self advisory or self medication whatever one may like to call it because the small fee that they have dispense seems to hurt them. They eventually venture out on their own and with no Advisor to manage their irrational and emotional behaviour, they too fall prey to greed and fear and lose their way.