My financial audit in July

Readers of the blog will know my financial plan where the cash flows are set up from passive income streams as well as active income through my Consultancy. It is important to audit these plans once in a while to see how they are going and if any course corrections are necessary. I had initially planned to do this quarterly, like most corporate organizations are required to do. However, a combination of my being caught up with my daughter’s admission in XLRI as well as some laziness on my part, has meant that I am now doing it for the first 4 months of the financial year, from April to July 2016.

My cash inflows at present are mainly through the sources below:-

  • Investment income in the form of dividends, interest and capital gains through redemption of FMP and other debt plans. In the four month period in question the contribution from this source was 48%.
  • My active income is largely from Consultancy. For this period the contribution from this source was 42% of my total income.
  • Rent from my Chennai apartment contributed the remaining 10% of my income.

My cash outflows for the same period were largely due to the following:-

  • Children’s education and other expenses constitute around 70% of my total expenses for this period.
  • Rent at 8.5% , Travel at 4.5% and Insurance at 4% are the other significant categories.
  • About 3% of cash outflows are due to new investments in this period.

It will be important to understand that the expenditure on the education of my children are atypical. I had spent a lot of time in thinking about how to structure the spending on the XLRI course for Rinki and came to the conclusion that I will fund the first year expenditure, while the second year can be through the bank loan. Ronju’s semester fees are typically in July and December. So, in effect the high proportion of spending in this area will remain for the current financial year.

The above also explains two other observations I made from the audit. Firstly, there is a cash deficit of about 1 lac which had to be funded through the amounts I had in my different SB accounts. This is fine as I was expecting the deficit to be a tad higher, given the extent of the college expenses. Secondly, it appears from the audit that almost nothing is being spent on other areas. This is explained by the high total expenditure which renders the percentages to be very low for most other categories such as Groceries, Household expenditure etc. This will, of course, change when the overall expenditure comes down after the college expenses are reduced.

The other aspect is that the college education expenses do have a separate fund for both my children, which is not part of my income. However, as a good accounting practice as well as to understand my overall financial situation better I have treated all of these as expenses rather than taking them out of the audit. Viewed from this angle, the deficit is notional though it helps me to stay grounded and realize that life through this year and next will still mean a fairly close watch on my finances.

On the investment front, my plans have gone well and I will write about this in another post. At the end of the day , the idea is to have a lifestyle which you desire, and I will look at this too in another post.

Purely from the cash flow perspective though, i am reasonably happy to see that my plans are working quite well. In the next 4 months the following are likely to happen:-

  • No fees for Ronju but for Rinki the Term 2 and Term 3 fees of XLRI will need to be paid. The overall amount will be less than what I paid in the current period.
  • We traveled a great deal in the current period and this may be a bit lower for the next 4 months.
  • Most of the insurance expenses are done for the financial year so this will reduce.
  • No significant changes are anticipated in the other expense categories.
  • Active income from Consultancy may see some increase in September time frame.
  • Investment income is likely to be along the same lines as the current period.

With all this I am hoping to get out of my deficit financing mode in the August to November period. Let us see if this works out.

Spending vs Investment – A case study

A perennial issue that most earners face today is how to balance their spending and investments, given the pulls and pressures of daily life. Our monthly expenditure is largely dominated by items such as EMI for home loan, EMI for car/other loans, School going expenses of children, variety of insurance related expenses etc. Based on these and the goal based investment levels proposed by the different calculators or financial planners, many families are taking a hit in almost eliminating their discretionary expenditure. This may make your finances look good on paper but certainly takes out a lot from the joy of living your life the way it ought to be lived.

In one of my earlier posts I had referred to a real life situation that many investors belonging to the high income group are facing today. I have deliberately chosen to demonstrate the situation with a high income group person, so that the acuteness of the problem can be underlined in an emphatic manner. Needless to say, people who are earning less will have even more of the same problems.

Let me explain through a real life example. One of my readers wanted me to advise him on his current plan. The basic information gathered from him, made very interesting reading:-

  • His post tax income was 1.5 lacs, not low by any standards.
  • 50000 of this was going to the home loan EMI which has 5 years still to run.
  • 10000 was going to PF and another 40000 to SIP through MF.
  • He therefore had only 50,000 available. Out of this about 25000 went to the schooling and other expenses of his 2 children.
  • This left only 25000 for other expenses and he therefore had little or no room for any discretionary expenses. The family had not been for a good vacation in years and has to depend on any bonus etc for making any purchases of Durable goods.

Much of this was because he had boxed himself into thinking that the recommendations from his financial planner were mandatory. I was able to show him rather easily that there were much better ways of making an investment plan which will allow him enough surplus cash to spend on activities he and his family really wanted to do. With the kind of income he was having, it is absurd that they could not go for vacations etc.

So what are the possible preventive actions that could have been taken not to land up in this situation? Firstly, the investor could have fixed his home loan EMI amount in line with his income. In general, the EMI should not be more than 25-30 % of your overall monthly post tax income. Secondly, given that the home loan interest rates are in double digits, it makes sense to aggressively pre-pay the home loan whenever some one time payments become available in the job. Thirdly, while his calculations may show correctly that he needs to invest 40000 in SIP over the next 15 years in order to meet his goals, there is a fundamental flaw in this. The SIP amount does not need to be at an uniform level, in fact it will be rather silly for us to do it that way. After 5 years he will not have the home loan EMI to pay and can easily invest a lot more at that time. I have always been surprised as to why the calculators and planners fail to understand this simple issue.

But coming back to this specific case, my recommendation for this investor was as follows:-

  1. Liquidate some of his fixed income assets like FD and Debt funds which were paying him significantly less than the interest on his home loan.
  2. Reduce his SIP investment to 30000 a month and keep the 10000 in a liquid fund for any discretionary expenditure that could come up.
  3. Any variable pay or bonus was to be used for pre-payment of home loan. After this was over, part of these could be invested and the rest could be again kept in the same liquid funds where the monthly 10000 was going regularly.
  4. Any increments annually would again be divided partly for investments and partly for funding purchase of any discretionary item for the family.

What was the impact of the plan? In one word the family were able to do much more with their lives and lifestyle than before and this resulted in genuine happiness. In tangible terms they were able to see these changes :-

  • A fortnightly dinner outing was now possible along with a weekly dinner from one of the fast food joints for the children.
  • The family could take a ┬ávacation within India for a week every year.
  • They could also take a vacation outside India once every 3 years. This was easily made possible by redeeming the money in liquid fund.
  • The home loan was paid off in less than 3 years.
  • All the investment goals were well on track though the route was a different one now.

As you would have seen from above, a financial plan is really a combination of some knowledge and a lot of common sense. Being a prisoner of calculators and financial planner was preventing this family from leading the life they ideally wanted to live. I am very happy that I was able to play a role in showing them the right path.

How does one pursue happiness?

If you ask most people what they would really want to achieve in their lives, the answers will vary over a spectrum. However the most frequent answer is unlikely to be money or fame – it is equally likely to be happiness. This is not surprising if one considers the fact that earning money or acquiring any material possessions, is all done with the ultimate objective of being happy.

While the above is intuitively easy to understand, the ways and means of being happy varies widely from one individual to another. Over the years, I have come to the conclusion that happiness is really the sum total of all the good experiences that a person has had in his or her life. These experiences will, of course, differ between people and the value each person puts on such experiences will also be unique. For example, an athlete will find it a supreme experience to breast the winning tape ahead of the others, an actor may feel blessed on winning a critic’s award, a mother may feel the happiest on seeing her child for the first time and a father may be ecstatic when his children achieve something great. Even though the happiness is our’s it will very often be linked to the achievements of some near and dear one.

So how does one pursue happiness – I have a very simple way to look at it. So much so, that many others have expressed grave doubts as to whether it is possible. However, it has worked for me and will probably work for all others too, if applied honestly and properly. As happiness is the end result of enriching and good experiences for the individual, the basic requirement is to engage in things that make you feel good about yourself. For example, a soldier may feel good about a fitness drill, a cricketer may feel good about net practice and an author may feel good about conjuring up a complex plot. The corollary of this is also simple – if you are not doing activities on a regular basis that make you feel good about yourself then you are unlikely to be happy. This explains why many people are not happy with their jobs – they do not feel good about doing what they do day in and day out. The best fit is of course when you have a job that lets you do what you want to anyway.

I have applied this formulation to myself and looked at experiences which make me happy and instances when I feel good about myself. This requires a fair bit of thought but each one of us will be able to arrive at their own list of things when they put their mind to it. For me the list is as follows, in the order of priority. I feel good about myself, when:-

  • My sharing knowledge with others help them achieve something.
  • My grooming of my children contribute to their academic and personal success.
  • My mentoring of colleagues have helped them become successful professionals.
  • I am able to spend quality time with my wife.
  • I am able to contribute to some deserving cause, monetarily or otherwise.
  • I get the opportunity to learn something new and useful.
  • I succeed in a complex business situation through my knowledge and initiative.
  • I travel to different parts of India and the world.
  • I am with friends in a casual atmosphere with no time deadlines.
  • I am able to read good books of all kinds, eat a variety of food, see some good cultural performances and watch all kinds of sports live or on TV.

So my happiness in life will depend on whether my time being spent is linked to experiences which have the above characteristics inherent in them. If my time is in areas completely different from the above then there is a problem.

What are the times you feel good about yourself and is your current lifestyle having a good amount of these? Only you can think about this and see why you are happy or unhappy.

Expenses = Income – Investment ?

When I was starting out in my career and had some money to save, the financial equation prevalent at that time was ” Savings = Income – Expenses”. This made sense in those times 25 plus years back, when most savings went to fixed deposits and LIC with only a handful of intrepid people investing in the stock markets. Over a period of time, with more options available to put your money in and a distinction being made between investment versus savings the equation changed to “Investment= Income – Expenses”.

This was intuitively simple to understand. You earn money through income and then spend money for expenses. The surplus amount you have is channelized into investments for meeting your future financial goals. Over a period of time as financial products industry grew stronger, a new profession of financial planners got established, new modes of investing like SIP in Mutual Funds came into being, there was a concerted attempt to turn the equation on it’s head. The logic primarily went like this – you need to plan for your goals first and need to ensure that your future life is good, even if it means you have to cut corners for now. Complex calculators, built in with mostly wrong assumptions, try to convince you that unless you invest heavily right now and keep doing it, there is no way you will be able to manage anything in future. The outcome of all these efforts is to twist the above equation as follows : ” Expenses = Income – Investment”.

What does this really mean? You are being told that your first priority is investment, so much so, that you need to get it done every month as soon as you get your salary or other income. You will then have to manage your expenses out of whatever is left. Now, this will not be an issue for people who have an income high enough to invest the required amount, as they would still have a lot left for expenses. For these people, it does not really matter how the equation is written, it will work any way. Unfortunately, for a vast majority of people this is really not the situation. For them needing to invest a certain fixed amount mandated by their financial planner or calculators mean that they are not able to have much leeway for any discretionary expenditure at all.

Let me explain through a real life example. One of my readers wanted me to advise him on his current plan. The basic information gathered from him, made very interesting reading:-

  • His post tax income was 1.5 lacs, not low by any standards.
  • 50000 of this was going to the home loan EMI which has 5 years still to run.
  • 10000 was going to PF and another 40000 to SIP through MF.
  • He therefore had only 50,000 available. Out of this about 25000 went to the schooling and other expenses of his 2 children.
  • This left only 25000 for other expenses and he therefore had little or no room for any discretionary expenses. The family had not been for a good vacation in years and has to depend on any bonus etc for making any purchases of Durable goods.

Much of this was because he had boxed himself into thinking that the recommendations from his financial planner were mandatory. I was able to show him rather easily that there were much better ways of making an investment plan which will allow him enough surplus cash to spend on activities he and his family really wanted to do. With the kind of income he was having, it is absurd that they could not go for vacations etc.

While I can explain my recommendations in another post, the key thing to understand is this. You first need to lead the life that you and your family want to. There is nothing like “paying yourself first” through investment. You are paying yourself first when you are spending on activities or items which are important for you and your family. Yes, you should not be reckless in spending but then, most of us are not like that.

So the equation is very much “Investment = Income – Expenses” and not the other one which has been cleverly concocted by people having serious vested interest. If this results in your not being able to invest enough, there are other solutions to it.

Will take up that issue in another post at a later date.

The dark side of being obsessed with finances

There is a bright side of earning well and investing wisely. Availability of money, in the present and future allows us to do what we need to today and also provide for the future in a good manner, to sustain the lifestyle that we need to have. Awareness about personal finance and investment through financial blogs, Facebook groups and other medium have helped create a culture of being aware of money issues, which is largely good.

There are however, some dark sides to it as well. Over the past couple of months I have personally experienced some situations and have read about several more which has made me wonder whether we are getting way too obsessed with money, Let me share with you some of these, so that we are on the same page on what I am trying to convey here.

  • Read a discussion of a Facebook group last week where a person has posted about how he avoided tipping a delivery person. Others added to the discussion justifying it by saying how much money would the delivery boy earn monthly etc.
  • A friend of mine was earlier contributing to a charity regularly has recently stopped. Since he can easily afford it, I asked him why. The reason he gave was how much the money will grow in 15 years and what all he could do with it !!
  • At a recent gathering the conversation turned to domestic helps and their salaries. It was interesting to note that most people felt quite upset that these people demand an increase of salary of 10% or so every year. Remember, these are the same people who will crib majorly with their annual increments or with the seventh pay commission recommendations, despite both normally be over 10%.
  • A neighbor whose son plays very good cricket, was reluctant to send him for a tournament in Bhopal as it was costing 20,000 Rs. Some of us got together and finally convinced him. His plan was to invest this money in buying stocks !!
  • Another friend was postponing the replacement of his car, despite the earlier one being on it’s last legs. When I had a discussion with him, he told me that he had learnt from some seminar to utilize assets to the maximum. After my strong urge, with some help from his wife, that the present car was a liability rather than an asset, he changed his car last month.

I could go on with more examples but you would have got the point. Over the years, I have felt quite strongly that the value of money is only in what you can accomplish through it. Yes, we do need to invest for our goals including retirement but it makes no sense to me, not to utilize the money in a productive manner today also. Some of the things which I would advocate my readers to try out are as follows:-

  • Get associated with a couple of charities and give to them as much as possible for you. There are many who are not as fortunate as us because they do not have the opportunity. Any help extended to them will help them in making these people self-sufficient and contribute positively to society. I contribute to CRY and Helpage and have continued to do so even after giving up my regular corporate career.
  • Focus on things which give you true happiness and spend on it. Be it travel, reading, seeing live musical performances, pursuing a hobby etc, you need to do it today. Not save money today and try to do it after 20 years when you will not enjoy it.
  • The same is true for your family. Put your child in a good school rather than worrying about how much she will need for college. While both are important, compromising on school education because it can be expensive is likely to be quite harmful to her.
  • Be generous with tips and salaries to domestic help, drivers etc. These are the people most affected by inflation and any extra earning will help them. It is almost inhuman to grudge them this when it means so much to them and is so affordable to you.

Money is important, but we need to use it in the right way both in spending and in investments. Being obsessed about it by constantly thinking how much will the amount grow to if we do not spend it today is completely senseless.

After all, if you do not need to spend, then why do you really need the money?

ULIP #3 -How to use it for goals

I had started writing a series on ULIP but it had got interrupted as I thought some other posts will be more relevant. Readers who are interested in the previous posts can read them to get an idea of why the older ULIP’s were a bad idea and how the different charges connected with them work.

As ULIP is an unique product it can be used in a very innovative way, by taking advantage of insurance and market linked growth combination. Let me give you an example below in order to demonstrate how it can be used:-

  • Suppose you are planning for your child’s education in college which is 15 years away. Normally you will do some SIP in MF to achieve this goal.
  • The risk in above is something unfortunate happening to you, in which case the SIP may stop. This can be taken care of through insurances that you will have. However, as the insurance is not linked to the specific goal, someone will still need to manage the process of continuing the investment on your behalf.
  • An alternative can be to use ULIP. If your goal is 20 lacs in current money terms, take a policy with an equivalent life cover. Keep paying the regular premium.
  • If at all, something untoward happens the amount received can be simply put in a debt fund so that it grows to a reasonable level by the time the goal comes.
  • If you go for an online ULIP then the policy allocation charges are quite low. This will ensure that the overall cost structure of the ULIP is low.
  • Note that ULIP and MF both invest in the same underlying asset class. As such there is really no reason why an ULIP will under perform an MF. The real problem is with the charges and that has got addressed to a large degree now.

I am not saying that you should or should not look at ULIP as an investment product. However, in the changed form it does offer you a lot of flexibility and benefits. In order to convince yourself, look at the performance of some of the recent ULIP for yourself, both in terms of the returns as well as the charges.

You may then well start wondering as to why you have not thought of it earlier !!

LT Infotech – should you invest?

Of late the IPO market seems to be sizzling with action. Mahanagar Gas did rather well and Quess Corp exceeded even the wildest expectations of the optimists. So much so, that very few people who applied were blessed with any allotment. The listing gains that the stocks had seem to justify the enthusiasm of the applicants. In the light of the current situation, how will the LT Infotech issue work out? Is it worth an investment?

The first thing to look at any IPO is the company and it’s relative position in the industry. The second issue to look at is the prospects of the industry in the short and long term. The third issue to look at is the price point of the offering and whether it makes sense. Let us look at each one of these one by one.

To begin with one must understand that LT Infotech is not really a tier 1 IT services company in the Indian context. There are several companies which have done better, despite the fact that LTI has been around for a long time, with the support of a group as strong financially as any other. At the same time, it is a decently profitable company which has grown revenues by 18 % annually over the years. Their growth has been steady, though not spectacular. So, if the question was whether you should buy it in comparison to other IT majors, the answer is probably no. However, the IPO is a different matter and here we need to examine at what price we are getting it allotted.

As far as the IT industry in India goes, there is no doubt that it is passing through challenging times and the landscape is likely to remain difficult in the near future. The growth in USD terms has really been negligible in this year and the Q1 results due now do not promise much. The BREXIT issue along with the H1B bill that will be discussed in the US will impact two of the largest markets that the sector has. The model followed by most Indian companies was to push for more manpower both onsite and offshore in order to grow the revenues and profits. Technology, business and regulatory changes is putting sustained pressure on this model and the players will need to adapt fast.

So does the pricing make sense? Yes at 12-13 times of current earning, the IPO seems rather attractively priced. In the current liquidity driven market situation there is a possibility of the issue being hugely oversubscribed and open with good listing gains. The one factor that can queer the pitch is the quarterly results of other IT majors. In case these are disappointing, there will be a dampening effect on the listing price of LTI.

In the balance how is the future of LTI? I think it will be subject to the same challenges as all tier 1 and 2 companies. However, the support of the group as well as the strong finances that it has will very likely propel it to better growth as compared to others. I will therefore recommend people to invest in it, especially if you are having a portfolio that is light on IT. For people who are starting to build a portfolio, this will be a decent company to invest in. Do not go for listing gains alone, this will be worth holding and adding to for the long term.

How should you invest? If you have 2 lacs available then put in the entire amount. It will maximize your chances of getting some shares and your money is only going to be blocked for 10 days or so. In any case, it is unlikely that retail investors will get more than 1 lot.

Go for it – maybe 15 years later you will thank yourself (and me) that you did so !!