2016 was a year of many new financial experiences

I had written some earlier posts on my experiences in 2016 and the financial perspective of my income, expenses and investments. The current post is more about the new things I experienced on the financial front.

To begin with, I filed my tax returns on my own this year. Till now, I had always done it through a CA. This year though. what with the complexities of my income having come down in terms of amount, I wanted to try it out on my own. The forms were quite simple, the instructions reasonably clear and as I had most of my financial records available the overall time taken on it was only about 2 hours. What is more, I was able to do electronic verification and received my refund within a month. All in all a great experience which I would like to repeat.

With the kind of travel I do, some due to family commitments and others due to leisure it is important for me to try and take benefits of reduction in travel expenses wherever possible. The expenses are made more complicated by the fact that we normally travel by air now, unless the train journey is an overnight one. This year I used travel portals extensively, keeping track of both loyalty benefits as well as the cashback provided by banks and credit cards. I will write about it in more details later but these new mechanisms have helped immensely in cutting down on my travel expenditure significantly.

I have always been spending online wherever I can and really did not need much cash at any time. However, the advent of note ban forced me to look into the few areas where I was earlier spending in cash. I needed it mostly for cabs so created accounts in both Ola and Uber. Using Paytm was the next logical step, though I use it only for utilities payment rather than any direct shopping. With cash of smaller denomination almost going out of fashion and no one really willing to take 2000 Re notes, this has really helped greatly to get basic stuff done – latest example being my daughter and I buying some cookies from Cookie Man when we had been to InOrbit mall to catch a movie.

I have used credit cards for a long time now and there are some great benefits to be had from these. Notable is the 50 % off I get on movie tickets through Citi card if I use it in BookMyShow portal. Additionally, this year I got invitations to several special events as well as a fair amount of travel cashback.

This year was also one where we replaced our older furniture. I wanted to sell the old stuff from where we were buying the new ones but they offered only salvage value. Realizing that I had to get a better price, I registered in OLX and to my surprise got a number of responses within a day. By the next day the dining and drawing area was quite empty and we got fairly decent money – significantly more than what the furniture shop offered us. I am already decided on selling a lot of our old stuff in OLX when we shift from Hyderabad.

Personal finance is linked to all areas of our lives, it is not only investments. Using the tools available to us will help us lead a life richer than what we are doing right now. Demonetization may have hastened the process but much of it was available to us earlier too.

For my part, I am looking forward to a lot more experiences in 2017.

My 2016 Income audit

As I had said in an earlier post, my expense audit of 2016 showed that it was by far the most expensive year of my life yet. This was somewhat unexpected as my initial idea was for Rinki to either take up a job or to get her B school education funded entirely through an Educational loan. In the actual event, I decided to fund her first year expenses and with several other discretionary expenses adding up, we ended up spending what we did.

While I have not been worried about the figure as it is not really representative of our future expenses, these still needed to be funded from somewhere. When I looked at the income sources from 2016, I was happy to see that I was able to take care of the significant higher expenses through my income and other planned sources, without having to take recourse of redeeming my investments in any unplanned manner. Not that it would have mattered a great deal but it is good to know that my current portfolio can withstand the shock of significantly higher expenses relatively well.

Let me state upfront that this was possible due to the fact that I had some active income in 2016. Of course, I worked full time only in January and then again from June to December part time. If you look at the overall time spent, it would have not been more than 25 % of normal working. In other words if the normal working days in a year are about 220 full days, I probably worked for 55 full days. As my earning out of it was more than 30 % my likely earning should I have worked full time, I guess I was quite productive.

My passive income is through multiple sources and will normally be able to take care of my expenses comfortably. A closer look at the passive income stream in 2016 reveals the following :-

  • Rent from the Chennai apartment was along expected lines and covered up our rent paid in Hyderabad, with a little to spare.
  • Interest from tax free bonds amounted to 2.16 lacs as planned.
  • FMP investment of 26 lacs were redeemed in the year. I have reinvested the principal amounts while using the capital gains as passive income. Amount of capital gain was equal to roughly 7 lacs in the year.
  • Dividends from stocks and some Mutual funds amounted to about 5 lacs in the year.

As far as the educational expenses for children went, I had planned it through some FD in their names which are outside of my net worth calculations. It was fortunate that this was planned liberally and I was able to use some of it for Rinki’s B school expenses. The rest of it was funded through my active and passive income. This will not be there next year as we plan to fund the rest of the XLRI fees through the sanctioned Educational loan from SBI. Ronju will still have 4 semesters to go in BITS, so we will have to pay through 2017 and 2018, but these are already planned for.

In overall terms despite serious changes in plans the expenses were managed through the income generated. By the way it looks, next year should be a lot better in terms of surplus money available to invest more. Realistically, 2018 will probably be the year when I can do without any active income at all.

My spending in 2016 -expensive but smart

The regular readers of the blog would probably be aware of my spending philosophy by now. I am definitely not frugal but neither am I extravagant or reckless. I do believe that experiences matter most in life and many of these experiences require money to fund them. 2016 has been a year where we have ended up spending a great deal and I have tried to see that much of it is smart in the execution.

To begin with, most of my expenses are done through credit cards for a very long time now. In fact except for the few things where cash is needed like some domestic services, we do not pay through cash at all. Wherever possible, we use credit cards and for large value transactions we use direct bank transfers. In fact, we have rarely used our check books for the past few years too. This helps out in many ways – gives us a free credit period, provides credit card reward points, helps keep track of the spending and also offers many other benefits linked to travel etc. The key thing is to pay off all your credit card dues in full when they are billed – anything else will simply end up being a disaster.

Coming to the 2016 spending, let me start with the regular spending first :-

  • Buying from the Supermarket is commonplace now and we normally buy from Spar, close to our home. Apart from the normal discounts, we also received some non-stick cookware as gift this year as we spent more than 20000 Rs between July and September. Last year we had got an Induction cooker.
  • We go to the movies very often, catching most of the good Hindi movies and the occasional English one. Fortunately, ticket prices in Hyderabad are quite reasonable and it is made better through Bookmyshow, which allows me to get two tickers for the price of one when I use my Citibank card. Through this year we must have seen about 40 movies and the savings have been about 6000 Rs.
  • We eat out quite often and it has become more expensive over the years. Our credit card reward points help out to some extent here. Just last week we had lunch at Mainland China and I was able to pay by vouchers for 1000 Rs. I had got these by redeeming the Reward points of my HDFC bank credit card. In most years we get about 5000 Rs worth dining vouchers from the multiple cards we have.
  • I normally do not buy clothes much, it is clearly a necessity for me personally. This year though, I needed to buy some trousers. The overall list price was amazingly about 6000 Rs for 3 – Pantaloon first gave a discount of 2000 odd, loyalty vouchers from Max Bupa covered another 2000 and finally there was another 1000 covered by my credit card reward points. In all, I had to pay 1000 Rs for the 3 trousers and we got a bed sheet free in the bargain too.

Let me now look at some of the other purchases I made in the year, which were of a higher value. In general, I prefer buying online due to the many deals which are on offer and this year was no different.

  • I had bought a Micromax phone for Lipi in 2014 and she got acclimatized to it pretty quickly. So much so, that the limited memory and storage of the phone was proving to be an issue. This year I bought her an Asus Zenfone. The list price was 11,000 odd, Snapdeal was giving it at 8000 and I got a further 1600 off through the Citi card. At 6400 Rs that I paid, it was a very good deal.
  • I had bought a Sony Bravia LCD TV in 2006 when the price was about 1 lac. I wanted to replace it for a long time but for various reasons it kept getting postponed. This year I did the rounds of some stores where I liked the Android TV version by many manufacturers. However, these stores refused to give more than 2000 for my old TV which was working fine. Flipkart provided just the deal I was looking at. The Sony Android TV with a list price of 67000 was being offered at 60000, I got an exchange price of 8000 for my old TV and finally another 3000 Rs as cash back from Citibank. In effect I paid 49000 for the TV which was a great deal.
  • We also bought some Balcony furniture from Amazon, the discounts and cash back were not huge there but we still managed to save about 1000 Rs from a physical store purchase.

How can you spend smart in the next year? Well, here are my thoughts :-

  1. Use credit cards for everything possible. Have multiple credit cards, just make sure you pay off in full whenever you get the bills.
  2. Accumulate reward points and redeem them for things which are useful to you. There are several categories, choose what you like.
  3. Always check any consumer durable from a physical store but buy it online.
  4. Choose sale periods, you can afford to wait for a TV etc.
  5. Forget frugality, you have only one life to live after all 🙂

My expense audit for 2016

In the last post I wrote about the experiences in 2016 and how they have enriched the lives of me and my family. While I do believe that the best things in life are free, many things do cost money and one needs to plan for it and also keep track of it. I have now done an expense audit for 2016 and some of the results were definitely surprising.

To begin with, this has definitely been the most expensive year of my life so far. While that by itself was kind of expected, I did get jolted by the extent of the spending. As you can see from my 2015 audit, last year was significantly more expensive than other years, therefore a high growth on that already elevated level is a little worrying. A closer look at the expense categories and my earlier assumptions reveal some rather interesting highlights.

My assumption that Rinki would finish her Graduation in 2016 and subsequently join a job did not hold true but I was quite happy to be wrong here. On the balance, I had always wanted to do an MBA from a good B school immediately and this was probably because I had taken the same route 3 decades back. Her excellent result in CAT and the superlative result in XAT, were kind of an icing on the cake. She was very happy to join XLRI over IIM Kozhikode or a job in Accenture which she had got. XLRI is the most expensive B school in India today and the overall costs for 2 years would come to about 24 lacs. We went through a lot of discussion about how to fund it and, while our initial plan was to take an education loan for the entire amount, I finally decided to part fund it. This would leave her free to choose her own path without being burdened by the entire loan. Thus we took an Education loan of 12 lacs from the SBI branch at XLRI, and decided to use it in the second year largely to mitigate the interest costs.

The upshot of this was my having to spend about 12 lacs in this year for Rinki’s education, which was completely out of the earlier estimates. For Ronju the costs were lower at about 4 lacs and this was part of the spending plan. If you look at the total spending it will be about half of our total expenditure in 2016. I am quite liberal about what my children spend in college as long as they are having fun in a responsible manner. After all, these are the best years of their lives and there is no point in not enjoying them.

Rent was the next highest category in terms of expenses, it did increase a little as compared to 2015. However, that was not much of a concern as it gets covered by what our Chennai apartment rental earns. Travel was the next category – we had been to a lot of trips in 2016, some for pleasure others for needs like Rinki’s admission etc. I always consider this as money well spent and such experiences enrich your living , not to speak of broadening your mind. If you are interested you can read about my travel experiences in other posts of the blog. 

Insurance was the next category – I have an LIC policy, one ULIP and one Pension policy apart from the Health and Car insurance. Have never had Term insurance as I did not see a point in my situation. Subscriptions to our Timeshare, where we got ourselves upgraded to the next category, along with services such as Library and internet etc was the next one.

Our discretionary purchases for the home was fairly high this year. The furniture we had was age old, though of very good quality. After the uncertainty of the past couple of years where we vacillated about moving from Hyderabad, we decided to bite the bullet this time. Replacing our Sofas and Dining table along with buying some Balcony chairs and Table set us back by about 75000 Rs. I went ahead and bought an Android TV from Sony too, the deal being sweetened by the cashback from credit card and the exchange of old TV. We also bought a new phone for Lipi and replaced our Tata Sky set top box with the HD variety.

So, on the whole it was a great year full of good events and experiences along with some asset replacements. The cost of all this in terms of our total expenses would be as below:-

  • Children’s education + other expenses  : 50 %
  • Rent : 9 %
  • Travel : 8 %
  • Memberships + Subscriptions : 5.5 %
  • Insurance : 5.5 %
  • Cash expenses : 4.5 %
  • Asset purchases : 3 %
  • Taxes : 3 % 

I did end up spending a whole lot more than my plan for 2016, much of it due to changed assumptions and discretionary purchases. Fortunately, my earlier plans of keeping a separate account for the higher education of my children came in handy and I did not need to redeem any of my investments.

But more of that in the next post, when I talk about my income audit.

2016 has been year of rich experiences

Now that the year is coming to an end, I have been thinking about how it had gone. In most ways it has been a great year for me and my family. My yardstick for how something has gone is normally the quality of experience associated with it and, in many ways, this year has had a good share of experiences in the aspects of life which matter to us.

To begin with my work as a Management consultant was quite good this year. I completed my ongoing assignment on IT Strategy formulation for a large Aircraft leasing company in Kuwait in February. For a time, I was completely caught up with my daughter’s B school admissions, before starting another assignment with an IT services company in Hyderabad. They were looking for some management bandwidth in the sales area and the overall success for the assignment in terms of new processes as well as sales numbers have been very encouraging. I am in a discussion with them for a longer term engagement and that will probably get finalized this week. My overall goal of working on one meaningful assignment with other workshops around it can be tried out well in the next year. I am also engaged about half my time which is also a good thing as it lets me follow a lot of my other interests a regular job would not have.

As far as the education of my children go, 2016 was a great year too. Rinki did quite well in CAT getting 98.48 percentile and even better in XAT where she scored 99.856 percentile. After a long set of interviews she secured admission to the BM program at XLRI. She had also got selected for IIM Kozhilode and missed out narrowly in IIM Bangalore. However, we were quite happy with her selection of XLRI. There was a sense of deja vu too, remembering my long and memorable schooling years in St Xavier’s Durgapur. Rinki is doing quite well at XLRI and has got a summer internship at GE. She was also the topper in her Engineering Branch ENI, from BITS Pilani, Hyderabad campus. My son Ronju is currently in the 3rd year of his 5 year dual course – Msc Maths + BE Computer Science. Like all typical college going boys of his age, he is not very sure of what he wants to do in the future but I am quite sure things will work out in the end. So in a family of 4 we are 3 post graduates, 3 Engineers and 2 MBA so far which is quite an achievement I suppose. Also Rinki is a third generation Engineer after my father and me.

Travel has been my foremost passion and this year has been excellent for it. Even though Kuwait was mostly work, I managed to visit a few nearby places and went for a drive to the border of Saudi Arabia. In February we went to the Rann of Kutch as part of the Kutch festival. It was an absolutely amazing experience, unique in terms of the landscape and also in terms of the great arrangements, the highlights being our tented accommodation and the lovely vegetarian food that was on offer. In end February we went down to Bangalore for Rinki’s B school interviews. It was a great drive to Bangalore, though there were far too many toll booths punctuating it and there were too few eating joints on the way. Lipi went off for a rendezvous with her erstwhile colleagues to Kerala for about a week in March end. Our next trip was to Matheran, again a place where we had wanted to go for a long time. The uniqueness of the views as well as the peace and solitude that can only be there in a place without motor vehicles was quite special. In June we went on a longish trip – first to Jamshedpur for Rinki’s admission at XLRI, then to Durgapur to visit my parents and finally to Delhi, where Ronju was doing an internship, to celebrate his birthday. September saw us in Goa for our yearly vacation there – it was good food and beaches as usual and spending some time with Ronju was a welcome bonus. Finally, in November we went on a trip to MP, a state which we have not seen much of. The visits to Sanchi and Bhimbetka were really awe inspiring for different reasons. Bhopal was a good place to be too and we traveled onward to Kanha and Jabalpur. The jungles of Kanha were rather mysterious and we managed to catch glimpses of two tigers. Finally, Jabalpur was good to be in for the Marble Rocks and Dhuadar waterfalls – unique again.

At the stage of life we are in, with a nuclear family and children away in college, Lipi and I look forward to meeting family and friends whenever feasible. In 2016 we were fortunate in this respect – notable were meeting Lipi’s cousins in Bangalore after ages, celebrating Ronju’s birthday with a host of relatives in Delhi, meeting my parents in Durgapur and meeting up with a school friend of mine in Bhopal. However, the best was definitely our visit to Jabalpur where we met my two cousins and their families after a really long time. I had last seen my cousins 25 years back and Lipi had never seen them. Even in these days of virtual communication, there is really no substitute for actually meeting and spending time with your near and dear ones. Now that the year is coming to an end Lipi’s mother and Ronju are with us and we are waiting for Rinki to finish her exams and join us. It will be a fabulous end to the year.

As far as my other interests go, the blog has done quite well in terms of readership. Even though I say so, it is probably the only one of it’s kind !! Reading has always been a passion and it was helped greatly by Rinki gifting me a Kindle Reader with her internship earning. We went to several movies and other events – Pankaj Udhas and Talat Mahmood concert and the Qadir Ali Baig Theatre festival were the best along with the Bengali Film festival which is the high point of Hyderabad’s culture nowadays.

In terms of my financial planning etc, much was in the auto mode. All of the above resulted in an expensive year but I am rather happy about the richness and quality of the experiences. On the whole a year very well spent and looking forward to the next one being as eventful.

Tax compliance – most people live in glass houses

This post is going to be politically incorrect and many will view it as a harsh indictment on most people. However, it will also be the complete truth and as usual, I do not care much about public opinion when I am writing these posts. Now that you have been given an early warning and have had a chance to stop reading, let me get on with it.

As all of us know there are only about 4.5 crore people in the country today who file their tax returns. This too is after a great deal of efforts by all relevant authorities, the figure used to be less than 2.5 crores only about 5 years back. Now out of this 4.5 crores there are many who pay no taxes, so the number of tax payers is only about 2.5 crores. Among these also, the number of people paying taxes less than 10000 Rs is significant. Now, it does not take a genius to figure out that there must be tax evasion on a massive scale here. Also, even the people who are paying taxes are probably not fully compliant.

Why do people, who are perfectly well educated and understand the importance of taxes do not take the right attitude of paying taxes. Well, the harsh truth is they want to keep the money themselves due to their wanton greed and crooked nature. However, since they cannot take that stance publicly, due to their own image and the inordinate fear of tax authorities, they will come up with several excuses that sound reasonably clever but are completely flawed in reality. Let us look at some of these :-

  1. Our tax rates are too high, cannot afford to pay so much. Yes, this used to be true decades back but the current rates are quite reasonable.
  2. Tax laws are too complex, do not want to get into it. Truth is that arriving at your taxable income and taxes is fairly simple and you have a slew of professionals who can help you with it.
  3. Taxes paid by me will not be used properly. This may or may not be true, but it cannot be a justification for not paying taxes.
  4. Chances of getting caught are not high. People giving this logic are of course admitting that they want to stay crooked as they probably will escape.
  5. Even after paying taxes I will be harassed by the tax authorities. Truth is only 1 % returns get taken up for scrutiny and that too if there are some red flags in them.

So who are the people who practice tax evasion on a massive scale? Almost all sections of society and some of the notable ones are as follows:-

  • Professionals like Doctors, Lawyers, Consultants, Architects who insist on getting paid by cash, maintain 2 sets of books and seriously under-report their income while seemingly being tax compliant citizens.
  • Small businesses which deal almost entirely in cash, have very little records and almost pay minimal taxes or no taxes.
  • Individual vendors like a Chaat wala or a Fish seller who are of course not in the tax ambit at all. Now, I have my full sympathy for their plight in life, which is tough to say the least, but as far as taxable income goes they need to file returns if their income crosses the threshold of 2.5 lacs in a year.
  • Small companies and big corporate who have stretched the tax laws to the limit, often quite creatively, to ensure their employees can avoid taxes as much as they can.
  • Individuals who rarely report the right income in terms of House property and other financial assets.

What about the people who do pay taxes more or less correctly? Well, firstly their numbers are really pretty limited, most of them are salaried people who can limit the TDS but cannot really avoid it. However, even here there are serious mistakes or malpractices that are common. Let me state a few of them :-

  • Many people getting rent from a house owned by them so not declare it properly. Some under-report it, some believe that for one house the rent does not need to be declared, some show the house as self occupied etc. The rule is very clear, any income you earn must first be reported, exemptions can be looked at later.
  • This is more tricky, but the law is that if you have 2 houses you need to declare some deemed rent for the second house and add it to your income. It does seem frightfully silly but if it is the law then it has to be followed.
  • Most people do not declare income from their Debt instruments such as POMIS etc where there is no TDS provision. The logic again is that it will be difficult for the tax authorities to find out !!
  • For FD where there is TDS, very few people declare the total interest income and pay the taxes beyond the statutory deduction of 10 %.
  • As far as LTC and Medical bills go the malpractices are quite legendary and most readers will be familiar with them.
  • Capital gains earned are often not reported at all or reported wrongly.
  • Savings bank interest are now exempt till 10000 Rs but all such interest earning must be declared and applicable taxes paid on the amount exceeding 10000 Rs.

Are you seeing anything here that you can identify with? If so, I would seriously suggest that you correct this when you are filing your returns next year. Do not listen to people telling you as to how you can avoid taxes, they are crooks of the first order. You should pay taxes properly because it is the right thing to do, not because you can get caught. In any case, with the IT enabling of records, it will become increasingly difficult not to be tax compliant, so you might as well make a virtue out of a necessity.

Not paying taxes due is a sure shot indicator of being a bad citizen. You can pay your dues and then question the government as to how it is using the taxes. They are accountable to you, just as you are accountable to the tax authorities.

How should you invest in Debt instruments now

While the current economic and business scenario is rather worrying for most investors, there are also opportunities that present themselves in the current context. If you look at your Debt allocation now, you may be worried about what you should be doing about the low returns that are already there and will possibly get far worse. 

Let us see what is likely to happen in the different types of debt instruments, based on the current situation and what you can do about it:-

  • There will be a secular reduction in interest rates and we will probably get back to the 2004-2005 situation. The one difference from there will be that the rates may not rise again the way it did at that time.
  • Assuming the rates are going to be staying here or get lower in the near future, it makes a great deal of sense to lock in investments now. Look at the ubiquitous FD, Post office MIS or Dynamic Bond funds.
  • Capital protection plans will be a good idea now, look at available schemes from good fund houses and select ones with 3-5 years duration.
  • FMP investment may also be a good idea but make sure you do it in the next month or so and be clear about the return expectations.
  • If you are looking at Debt MF, try the Duration funds with a time frame of 3-5 years. At this point of time, do not go for funds with longer duration.
  • In the present context a return of 7 % or anything more will be quite good if you are going for pure debt.
  • Rates in PPF and SSY will reduce but these are long term instruments and therefore investors should continue with them.

Given that a fair amount of my portfolio is in Debt, what are my plans for it? Let me first say that in 2016 at least, the performance of Debt has actually been better than equity. Here is what I have and how I plan to deal with it:-

  • Tax free bonds give me an interest of 8.9 % now. Even though I am having handsome capital gains from it, I plan not to sell them and keep getting the interest.
  • PPF accounts for me and my wife – I plan to continue both and invest the maximum permitted in 2017 also.
  • My FMP plans have given me pretty good returns, in several cases over 10 %. The ones getting redeemed will need to be deployed elsewhere.
  • As of now regular FMP does not make much sense – I plan to go for Dual Advantage funds, Short duration Debt funds, Balanced funds or MIP.
  • In general, it will be a good idea to invest in instruments which are hybrid in nature and not just pure debt in the next one year.

How you deal with your money is something you have to decide – make sure you understand the entire landscape, listen to sensible advice and take the right decisions.