Remember how your parents instilled the habits of thrift in you, how your mom used to help you save money from your pocket money to deposit in the piggy bank, and when you got bonus bucks for reciting a poem, how your dad played money games with you and you got rewarded when you saved, when your dad helped you open your first savings account, how they helped you make your first investment. Now its your turn, the tables have turned. It is difficult to imagine, but yes, your parents have become old. And it's your responsibility to see that your parents are not going off track.
Your old mom and dad are not as tech advanced, they are not familiar with the latest investment options available. They tend to forget to pay bills and incur penalties. If both parents are alive, they divide their tasks, one handles the investments, the bills, the world outside the house and the other takes care of the domestic activities. But if either one is alive, it becomes difficult to handle everything, they get confused and end up messing things. Their health is deteriorating with time. There might be instances when they change their financial plan suddenly, or there is a change in the spending pattern. When you start noticing these traits in your parents, its time you should step in at this stage to take care of the financial health of your parents along with their physical health.
How to approach?
You must understand your wellspring's psyche before proceeding, since they have been guiding you throughout your life, managing their incomes and expenses, providing for your expenses as well and a sudden exchange in roles should be soft. Your words and actions must not hurt your parent's ego at any time. You need to take a few steps in order to effectively manage your parent's wealth.
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Talk: The first step is to talk it out. You must acquaint yourself with the exact financial position of your parents, their assets and liabilities, their income and expenses, investment commitments, etc. It might be a little difficult to initiate the money talk with the ones who have taught you about money, there will be hesitation in asking directly or they may not be comfortable sharing such things with you but you have to break the ice. You may start by narrating anecdotes, say an example of a friend's parents, who faced bad situations, because they could not manage their finances as a result of lack of awareness and your friend had no idea of what was going on.
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Health: Another major issue with old people is a constant narrowing down of health, and increasing medical expenses. You must review the medical insurance plans of your parents, and in case the policies do not have a sufficient cover or are not apt, you must immediately pay and upgrade or make the necessary modifications, since unexpected medical costs may become a burden.
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Associate with their advisors: Get in touch with your parents' financial advisors, meet them often, so that you are familiar with their investments, and also you'll be in a better position to understand and convey their specific requirements and goals.
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Keep a check: Be vigilant, keep an eye on their banking transactions. Monitor their payments, check if there are any outstanding bills or credit card payments, ensure that they are being paid in time, to avoid penalties, you may automate processes for them, authorize direct debit for regular payments. Educate them the benefit and usage of technology or try to do the tech stuff for them. You can become joint holders with your parents in their bank accounts, this will enable to monitor the transactions easily, you can also take decisions on their behalf, write cheques, etc.
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Estate planning: This is a very sensitive subject, but is equally important. Your parents have toiled throughout their life to build the assets that they have today. And they wish to transit the property to their loved ones. But in absence of a will, these assets will go as per the choice of law and not as per your parents'. So, in order to avoid such complications in future, you must make a move and ask your parent's about their estate transfer plans. You should discuss their plans and accordingly you may arrange for a professional will writer for them. If things are clear from the beginning, you can escape from undesirable consequences later.
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Phishing attacks: Senior citizens are the soft targets of phishing attacks. If you hear your Mom giving out her personal details, like her bank account number, passwords, address, etc. on phone or going to the bank to deposit money in someone's bank account because she won a lottery, you must intervene immediately. You must be vigilant and also educate and alert your parents about such misdeeds. Falling prey to such traps can be a huge setback for your parents and you may face severe financial loss.
You are the sandwich generation, you have take care of your kids as well your parents. It is better to prepare and plan. A little caution and effort on your part can have a productive impact on the financial health of your elders.
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“Frugality may be termed the daughter of prudence, the sister of temperance and the parent of liberty.” - Samuel Johnson
Saving is the predecessor of investments and building wealth. The minimum you spend, i.e. the maximum you save, i.e. the maximum you invest and grow. To be wealthy, we have to spend wisely. There are millionaires and billionaires, who are wise men, and they follow the lifestyles of a commoner, not because they are stingy, rather because of their morals, on the foundations of which they have built an empire worth billions.
Warren Buffet, the man behind Berkshire Hathaway, is always amongst top five richest people in the World list, he also tops the list of modest billionaires. He is often referred to as the “world's best investor”. He has also quoted various mantras on investing, which are followed worldwide. Buffet still lives in the house which he bought for $31,500 in 1958. Buffet does not spend on electronics, he does not carry a cellphone, nor does he have a computer on his desk. He keeps his maintenance expense to the minimum and is always looking for a better deal, Coke and Cheetos are a part of his daily diet.
Wipro's founder, Mr Azim Premji, one of the richest man of India, is famous for his frugal lifestyle. There are various anecdotes on Mr Premji's life, which narrates his ideologies. He is known to drive a Toyota Corolla for over a decade, and on his senior executives' advice, he upgraded to a pre-owned Mercedes Benz E Class, which he purchased from a Wipro employee. He prefers to fly in economy class, he has also been spotted in autorickshaws, public buses, and is seen walking on the roads. He would always prefer company guesthouses over 5 star hotels. And this is just one face of the coin. Mr Premji has given away half of his wealth for charity, he founded an NGO, Azim Premji Foundation, through which he contributes for spreading education and upliftment of the society.
Apart from the above, there are many big names, who believe in humility. Some of them are Mark Zuckerberg, the Jeans and T shirt CEO of Facebook, who drives a Wolkswagen Golf GTI to office; Carlos Slim, the owner of Telmex and America Movil; the owner of Zara, Amancio Ortega and many more.
On the contrary, we have our Indian tycoon, Mr Vijay Mallya, who is known for his exorbitant lifestyle, fancy cars and flamboyant parties. Mr Mallya owns a private megayacht, the Indian Empress, where he throws his VIP parties, he travels in private jets. He believes in 'Living life king size'. He accumulated a lot of wealth over the last 3 decades, only to lose it all. His destroyed business now provides a lesson to the entrepreneurs, 'Things that they should not be doing in their business'.
Everybody can't be like these great mean, it is because of their extreme beliefs and practices, they are great. But we can at least imbibe a small degree of their basic values into our lives. We buy a lot of stuff which we can't afford, we buy expensive clothes, eat at fancy restaurants. There are people whose value in terms of their assets is Rs 50 Lacs and they buy cars worth Rs 15 Lacs. This is absurdity which is not letting us grow.
This is an overheard a conversation of two young salesgirls in a Levis store in Mumbai, Girl one, “I am saving because I want to buy that designer handbag worth Rs 20,000”, Girl two,, “Are you out of your mind, why do you want to spend so much on a bag, you would get a good bag within Rs 1,000 in that store on the third floor” Girl one, “But I am in love with that piece, I'll buy it anyway.” Clearly, she can't afford to buy it, and there would not be any tangible difference between the designer's bag and the one at the third floor, but her inclination towards the former is only on account of the brand value. We often make such mistakes, where we compare the brand and not the quality, or we buy something, not because we need it, but because our friends have it. We can save a lot of money if we bring some thrift and sense into our thought process, we can direct the money that we save today to our future and for the country's future.
There are great men and if they can do it, you can do it too. It is for you to decide whether you want to be the Warren Buffet or the Vijay Mallya. If you want to be big and maintain the enormity, you must not waste what you have.
“If you don't value money today, a day will come when money will no longer value you.”
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It may be expected from the articles at this place, regardless of the topic, that it’ll revolve around the personal finance aspect of life. But when it comes to the growth of kids, and their financial security, with sufficient experience we figure out that regardless of our financial position, their personal financial success is dependent on the money management skills they understanding they develop in their formative years of life. Let us therefore, start with essential financial measures you must take as a parent to ensure a safe financial journey for your kids and also extend the text to include ways to ensure that your kid’s future is secure even without your money. First we start with the steps to provide for the minimum required financial security to your kids...
LIFE INSURANCE
Life insurance is the most basic of the tools, to start with once you have any dependent. Since for rest
20 - 25 years of life your kids are going to be financially dependent on you, it is important that this dependency is safeguarded and provided for even if you are not there to provide for it. Your next question may be about how much is needed, so there is a detailed analysis of future requirements that can be done by your wealth manager/ financial planner. In case you are yet to consult an advisor, and want some cover immediately, you may go for a term cover of at least 10 times of your annual income; i.e. if your income is Rs. 10,00,000 p.a. your pure life cover should be minimum of Rs. 1 crore.
HEALTH/ DISABILITY/ CRITICAL ILLNESS -C.I.- INSURANCE
Health insurance or disability insurance is more important than life insurance for you, as one must have a health insurance even if he/she does not have any dependents. Main reason being, disability or bad health may curtail your earning capacity and badly damage your long term financial scopes by digging into your existing savings. When you have kids to look after as well, their health also becomes an important factor. A reasonable amount for individual health policy given the level of costs today is Rs. 5,00,000; but again if you can afford you should go for higher cover. For any critical illness, expenses may be even higher and hence protection cover against same should be at least 2 times of the health cover. E.g. if you have a health cover of Rs. 5 Lakh you can go for a Rs. 10 lakh of minimum cover for critical illness.
EMERGENCY FUND
Emergency fund is that money, which fills the gap between income and expenses in case of emergencies like job loss or any other financial emergency, not covered by any insurance policy. Also sometimes you may have to bear some amount of expenses out of your pocket before you can get the insurer to cover the costs. Emergency fund comes in handy in such situations. Most of the money for emergency fund is kept in fairly liquid investments like, bank accounts, money market mutual fund schemes. The size of fund would depend on the nature of your job/business and extent of expenses. In general you may follow the rule of 4 to 6 months of expenses as emergency fund.
REGULAR GOAL BASED SAVING
After you have completed the contingency planning, it is time for planning the long term goals for your loved ones. Again it’s recommended that you take assistance of an advisor to plan your goals thoroughly and to arrive at the right amount for monthly /yearly savings and/or lumpsum savings. The investment avenue for your savings will depend on your required amount of savings in future and the time horizon remaining for the same. Often you may be required to save in market linked products like equity mutual funds for long term goals as traditional investment avenues may not potentially generate the wealth you need. Hence, it is advised that you sit with your financial advisor and discuss all your financial goals like child education, marriage, wealth creation etc. and save accordingly.
IMPORTANT THINGS TO DO OTHER THAN INVESTMENT & INSURANCE
Now that, you have financially prepared yourself to tackle almost every need of your kid, you need to think ahead and also prepare your child for the challenges of the future. Following steps can be taken to allow kids to develop their skills and understanding:
Engage Them In Your Budgeting Plans
For grown up kids, it is good that you also engage them in your family budgeting exercise and let them observe and understand how you go about planning savings and expenses. Let them also have say in few things based on costs and features like say appliances, etc. The learning to impart is that the income is limited and one has to manage all things within a set limit.
Have Them Prepare Their Own Budgets
You may give your kids a fixed pocket money for expenses on a weekly/monthly basis. Let them then decide how and where to spend. Be strict in not giving money beyond the budget. You may also show and encourage them to save regularly to buy valuable things after some time. The key learning would be to plan expenses, save money for future and to procrastinate non-essential expenses.
Teach Them About Personal Finance
It is good to slowly start teaching your children about all personal finance aspects early in life. You may start with opening their bank accounts. Letting them know about investment products, insurance, credit cards, loans, asset classes, etc is also a good idea. It is also important that you also show them documents, statements, etc. This will slowly let them be comfortable with these things in life and also give confidence when dealing with these things in future.
Letting Them Earn And Experiment
It is good that kids experiment and earn money in small ways. Grown up kids may earn by giving tuitions, selling things like collections, paintings, crafts, etc. One has to be careful in guiding children in small “business” ventures which they may show interest in. The idea is that they learn the basic skills of business, negotiation, etc. early in life.
Conclusion: Making your children financial secure for their future is the primary responsibility and also the wish of every parent. However, not everyone of us would have taken the necessary steps to do so. Personal financial ignorance, biasness and rigidity should not be allowed to come in way of planning the future of your children. Beyond this, one also has to make sure that you have imbibed the right money management skills and financial knowledge in children. Together, they would make sure that your dreams and your children's dreams are realised in future.
Inflation is the first thing that all of us should know on the subject of wealth management. It is very surprising that most educated and learned persons /investors still do not fully comprehend the term Inflation and it's impact on us. Ronald Reagan, the 40th US President, once said that "Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man". There are a lot of things that we can learn about Inflation and things related to it. In this piece, we attempt to present a simple FAQ on the subject.
What Is Inflation?
Inflation in simple terms means general price rise of goods & services. In economics, Inflation is a sustained increase in the general price level of goods and services in an economy over a period of time. When the price level rises, each unit of currency buys fewer goods and services. In other words, the real purchasing power of currency reduces due to Inflation. As Sam Ewing once said "Inflation is when you pay fifteen dollars for a ten-dollar haircut you used to get for five dollars when you had hair".
How Is Inflation Measured?
Inflation is usually measured based on certain indices and broadly, there are two categories of indices for measuring Inflation i.e. Wholesale Prices and Consumer Prices. For measurement, an index number or a single fi gure is arrived at that shows how the related basket of goods & services has changed over time. Thus we have the Consumer Price Index (CPI) and the Wholesale Price Index (WPI) as the two major indicators of Inflation. The Inflation rate is the annualised percentage change in the index over time.
CPI (also retail Inflation) = Measures changes in the price level of a market basket of consumer goods and services purchased by households. It is the Inflation which is borne by us as individuals.
WPI (also headline Inflation) = Measures changes in the price level of a representative basket of wholesale goods which are traded by producers. It is the Inflation at the level of producers and has more meaning to industries & manufacturers. It is measured more quickly than CPI which takes more time to get reflected in the index. Different countries have different methods of measuring Inflation. In India, like many other developing countries, uses the Consumer Price Index (CPI) as it's central measure of Inflation. Previously India used Wholesale Price Index (WPI) as the measure for Inflation but since year 2014, the new CPI (combined) is the new standard.
What Are The Reasons For Inflation?
There are several factors that affect Inflation in an economy and it is not easy to identify the exact relationship between different factors and it's impact on Inflation. For the sake of simplicity, we will broadly take a look at the primary factors for Inflation here...
Demand factors: It happens when the aggregate demand exceeds the aggregate supply. It is a situation where too much money chases few goods. Increased money supply due to loose monetary policy and low interest rates results in Inflation. Fiscal deficit financing by government by way of printing more money also results in Inflation.
Supply factors: It happens when the aggregate supply is not able to meet the aggregate demand. It is a cause of Inflation in an agrarian country like India where food is a major component of CPI. Further, because of rising wages & cost of capital also impacts the production cost of goods & services leading to rise in prices.
Domestic factors: In addition to demand & supply, the quantum of spending by government in the economy directly a ffects Inflation. Further, higher employment levels, taxation rates, etc. also add to Inflation. Issues like hoarding, blockages, etc. also positively impact Inflation.
External factors: There are external factors like currency exchange rates, trade barriers, etc. which a ffect the price of imported goods. Commodity prices in international markets like crude oil, gold, etc. also has impact on domestic Inflation.
How Does It Affect Us?
Inflation affects us directly and indirectly and has both positive and negative impact on us. While we may not list every type of impact, here are a few ways in which we may get affected as investors.
Purchasing power: Inflation hurts our buying power since we will have to pay more for same goods & services. Thus, with an Inflation of say 8%, your 1 lakh rupee today will be worth only R46,319/- in ten years time.
Cost of living: The cost of living is not equal to Inflation but is an aggregate impact of Inflation in our day-to-day lives. With Inflation, our general cost of living will increase and unless we are o set by rising income by the same rate, we will have increased expenditure and reduced savings. It will mean that one financial goal today will be worth lot more in future. For eg., when planning for retirement after say 25 years, your 50,000 worth of monthly expenses would rise to over 3.42 lakh rupees at an Inflation of 8%.
Wealth Creation: If your investments are not earning you more than Inflation then you are not actually growing or creating wealth. To create wealth you need to generate more of 'real returns' which we will talk later.
Interest rates: In case of sustained periods of high Inflation, the government is likely to keep interest rates higher meaning that loans will be at higher rates while rates of deposits will be also kept higher to absorb money. There will be less of government spending in general. In periods of low Inflation, interest rates will subsequently fall and this may also lead to a fall in interest rates offered by small savings /deposits making it a challenge in retirement planning.
Housing & stocks: In general, if you have already have investments in housing /stocks/equity mutual funds before Inflation, you will be in position to benefit from Inflation when prices rise. However, if not, you will find them expensive to buy later.
What Are Real Returns?
As investors, we should always look at returns not as notional returns but as real returns. Notional or stated returns is what you receive but real returns is what you are getting in real terms – after removing Inflation. For eg., if a bank account is giving you 8% pre-tax returns yearly – even with conservative retail (CPI) Inflation of say 7%, you are only getting 1% returns. If you consider post-tax (30% slab) returns of 5.6%, then your real returns are a negative of 1.4% meaning that you are loosing money by investing in such an avenue.
Next time whenever you are evaluating investment decisions, please remember real returns. Going a step further, it will be great if we calculate post-tax, real returns between investment avenues /products for our investment horizon.
How To Get Protection Against Inflation?
First, be aware of the Inflation figures and their impact in future costs. But merely knowing Inflation and real returns is not enough and we must also act to get protection against Inflation. Here are a few things that we should do in order to get protection...
Do Goal planning: Inflation is at the heart of financial planning. You must get to know your future financial needs to fulfill your life goals/dreams with the 'right' Inflation figure. The right Inflation rate is critical since CPI cannot be applied in general to all financial goals. For eg., Inflation for education and medical treatments is observed to be over 10%.
Save & invest aggressively: Merely planning is not enough and you also would need to aggressively save money and invest money. This means reducing expenses and controlling your budget.
Get Real Returns: Investments have to be made in asset classes /products giving you the maximum post-tax "real returns" as per your risk profile. The case is strongly in favour of equity asset class which has no long term capital gains (over 1 year) and where long term returns (at least 5 years) potential is the highest (average 12-15% expected) among all asset classes. This means that even at 12% nominal returns you are getting 5% of real returns vs. 1.4% of negative returns in fixed income instruments with 8% pre-tax returns.
Conclusion:
As Milton Friedman once said, "in¬flation is taxation without legislation". And there is no escaping it and no magic wand to keep it tamed and friendly for you. Infl¬ation impacts our financial lives more than anything else and we have to understand how infl¬ation would impact our future finances and financial goals. Understanding though is only the first step and protection is the next step where we must learn to interpret figures in terms of real returns and aim to maximum same. Unless we do not start doing that, we will keep eroding and loosing the our wealth without even knowing.
“Life is a game; and money is how we keep the score”
There is a very popular ad by MasterCard, wherein a young man's parents visit him,
The cost of business class tickets is Rs 110,000,
He rents a luxury car, cost is Rs. 8,000,
He takes them to an amusement park, cost Rs 5,600.
And the old couple is on a ride laughing their heart out,the ad says “ watching your parents become children again, 'Priceless'. ”
If someone told you, “Money can't buy happiness”. He probably wasn't entirely speaking the truth. The ad clearly highlighted that the young man had spent Rs.123,600 as cost to have that priceless expression on his parent's face. The underlying universal truth today is simply this - there are only a very few things that money can't buy and for everything else, there is money!
One can easily imagine doing many small things that gives happiness but doesn't cost us like spending quality time with family, watching favorite TV shows, waking up late on Sundays, chilling out with favourite buddies, going for a mountain trek, sitting on a beach on a beautiful evening and so on... True these things do not cost us but can we imagine us doing all these activities in absence of any money? The truth is that we all would fail to see and appreciate life's small moments and wonders if we don't have any wealth. We can live a normal, peaceful life absent of any worries only if we feel that we have financial security and well-being. In absence of same, we will see ourselves toiling day and night to earn money to fulfill our basic needs and our life's primary goals.
We all want financial freedom in our lives to do the things we like most but yet, most of us often spend a life time running a rat race to reach there. And when we reach that state, if at all we do, we would have become old to do any of that.
So what's the answer?
There is no magic wand, but all we can say is that we need to commit ourselves with all our will to aggressively save and be strict in observing wealth creation and management principles which we have so often iterated.
We need to start with basic money management skill of controlling expenses – a very important need today. We need to realise that spending money will grant satisfaction, it may however not last forever but spending money wisely will grant satisfaction that may last a lifetime. What you do with your money, matters more than how much you have. If you spend on things that give you satisfaction, it is really worth it. But if you spend on things that give you immediate pleasure but lose its lustre after some time, will not give you happiness. The idea is not to compromise on your needs or desires or to not follow your passion. It is about managing your expenses intelligently, so that you have a surplus which you can invest for your future.
It is wise to buy experiences and not articles.
You like cycling, plus its good for your health. Now there are three cycles to choose from, A,B and C, costing Rs 5,000, Rs 25,000 and Rs 100,000 respectively. Cycle A may not be very comfortable, so you might want to choose between B and C. A smart investor would always choose B because; Cycle B would maintain it's quality and comfort, it would have all features which are required for a comfortable cycling experience. It might not however be a big brand as C, it might have 2 lesser gears than C, Cycle C would be made of carbon, so you can lift the cycle with one finger. But does this really matter? Will it at all impact his cycling? No. So, he would rather buy Cycle B, save Rs. 75,000 and invest the money for his future. And there are hundreds of instances, where we have to make a choice between similar products but with different prices, or between buying or not buying at all. It depends on how wise we are and how effectively we follow money management techniques in each purchase; it will be a significant sum at the end of the year.
This first step is most critical as it will enable you to save money which can then be invested in avenues which help grow your wealth. Remember a rupee saved is a rupee earned. For some even such small savings can give happiness when they believe in their hearts that these savings will bring many smiles in future …
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