June 24, 2017

It helps to get your financial house in order and there are several experts who can help you do that. But, it will be in your interest to act on some bit of planning at your own end; do not leave all your financial matters for others to sort – it’s your life and money. So, never sign on an insurance policy proposal without reading what it is all about. Likewise, do not blindly save money in tax saving instruments without understanding how it will work for you. Here are a few pointers to get started with.

Emergency funds:

 Create a separate savings stream where a few months’ household expenses are kept aside to fund during an emergency.

Easy credit:

If you are unable to get a handle on investments, start with something that you understand like investments-returns by way of dividends. Interest or dividend-bearing instruments will ensure a regular income. This would work in times of emergencies when you may need to borrow money.

Retirement funds:

Your post-retirement income may not be sufficient to take care of you and your spouse. And remember, that money will have to stretch to cover your needs as well if your spouse predeceases you. If you are employed, make some retirement investments apart from contributing to a combined retirement goal. Make sure these are tax efficient to invest as well as earn from.

Estate planning:

Do not leave it to chance. Even if your savings and investments are small, make sure that it is well documented to reach your dependents and nominees without any difficulty. 

Medical emergency:

At any given moment be adequately insured to face medical emergencies. Poor health can hit you badly; do not compromise on taking health insurance.

So, there you have it – five compelling reasons for you to take an active interest in your finances, and to eschew a hands-off policy.

PLAN RECAP 

Till 40: your risk appetite is high. Go for higher-risk, higher-return investments like growth mutual funds, equities and real estate, after mandatory out-lays for retirement, insurance and emergencies

40 to 50: your savings have built up. Supplement with lower-risk options like income funds and bonds

Past 50: retirement, children’s higher education, medical costs… Put all in lower-risk investments

60 plus: Stay away from high-risk assets

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Yoga helps harmoniously develop your body, mind and spirit; Yoga is a way of life. With the declaration by United Nations General Assembly to celebrate 21st June as International Yoga Day, the world is catching attention towards Yoga and its benefits. While most people relate Yoga to asanas, there is more to yoga than just asanas. Asanas are but one of the eight limbs of Ashtanga Yoga laid out by the Indian Maharsi Patanjali, author of The Yogasūtra.

1.      Avidya or Ignorance:  on how to create wealth is probably the biggest reasons for not investing favourably. There are largely two kinds of ignorance—first is the lack of knowledge and the second is wrong knowledge. Lack of knowledge on where to invest leads to investments based on hearsay. People invest money in stock markets based on tips from friends / relatives expecting it to grow overnight.

Second is wrong knowledge where people allocate most or all of their investments in sub-optimal asset classes like fixed income, gold or real-estate thinking that it is the best investment option to grow their wealth. As a result, most of these investors fail to achieve significant inflation adjusted return or real-return. Equity has outperformed all asset-classes in the long run and therefore the Yogic investment mantra to reduce this klesha is to include equity in your investment portfolio.

 2.      Asmitā or Ego:  is another klesha that must be avoided. “I know it all” or “I cannot be wrong” reflects one’s ego that can be injurious to your wealth. “I know it all” klesha typically build up during bull markets when stocks picked by the investor/trader are rewarded by the market with profits. This gives a false sense of superiority and it starts a negative loop of ignoring market signals, facts and trends.

The mantra to negate this bias is to “stay humble and ask for directions”. Learning is a never ending process and there is no shame in seeking expert advice backed by reputed institutions to validate your views. Make sure you check the success ratio before acting on their advice.

 3.      Raga or Attachment:  to an asset class or stock is yet another bias that is best avoided. Some people get emotionally attached to particular asset classes like gold (jewellery) or real-estate (property) and concentrate their savings in them. Similarly, there are others who invest in stock markets but get attached to one or two stocks that they like for emotional reasons. 

Always remember the Yogic Mantra of diversifying your investments through asset allocation. This is the best way to ensure predictability of returns as when one asset class or a subset of that falls there are others to compensate for the loss.

 4.      Dvesa or Aversion:  is the opposite of Raga i.e. aversion towards things that produce unpleasant experiences. Aversion towards equity happens either due to hearsay or bad past experience. Hearsay is probably one of the biggest reasons for low domestic retail participation in equity.

Historical data suggests that most retail investors enter the market at the peak of the bull-run. Stock market buzz catches up during a bull run and most of us get the feeling of being left out and as a result we invest in lump sum with the intent to make profits quickly.

When the market corrects, this creates an unpleasant experience. Therefore, rather than timing the market it is important for investors to stay invested in quality stocks for over a long period of time.

 5.      Abhiniveśāḥ or Fear of loss: is a major barrier to healthy investing. If your stock appreciates by 10 per cent, you may not be elated but if it corrects by 10 per cent, you feel terrible. This illustrates that investors react more to a loss than to a gain of similar magnitude.

This makes most investors park their investments in fixed income, which gives them predictable returns. It is important to understand that equity will never give you linear returns, as it is risky in nature, and you may incur losses. But over the longer term, you will be creating wealth.

Apply these simple mantras, avoid Panchklesha to watch your investments grow. On this International Yoga Day, let’s pledge not only for a better physical health but also a great financial health.

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If you want to get your investing off to a successful start, there are two things to do first.

 ➡  Have no short-term debt

Before you start investing, pay off any credit card debt, or personal loans, or overdrafts, or any other short-term debt.

Why? It’s simple. You have to pay interest on debt. And you have to pay a lot of interest on short-term debt.

If you could borrow money at 7% from a bank for three years, and invest it for a guaranteed return of 12%, then it would make sense to take a loan and invest the money.

But that’s never going to happen. The interest you pay on short-term debt will always outstrip any return you can hope to make without taking a ludicrous amount of risk.

So investing (or even just putting money in the bank) while you still hold short-term debt is like using a thimble to fill a bucket with a hole in the bottom. A waste of effort.

Patch your financial leaks first. Then you can start saving.

 ➡ Have three months’ living costs to hand

Life happens. Boilers blow up. Roofs need mending. People lose their jobs.

That’s why we have emergency funds. A pot of cash you can access immediately to cushion against life’s ups and downs.

How big should your emergency fund be? It depends partly on your circumstances. If you have dependents, you’re probably less keen to suffer a drop in living standards than if you’re on your own.

As a minimum, aim to have three months of living costs saved up. In other words, you could live for three months at your current standard of living without earning anything.

Of course, three months go by fast. So it’s not much of a cushion. Ideally, it would be six months.

But I can already hear some of you sighing with tedium at the idea of saving up three months’ costs.

So once you’ve got three months, you can start investing. But keep topping up your emergency fund too until you get to six.

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