Cash flow planning is key to a good financial plan

Many of my readers keep asking me as to why I do not have different portfolios allocated to different goals of mine. I have explained this in other posts so will not repeat the basic arguments here. Suffice it to say, multiple portfolios will most likely lead to sub-optimal returns and I do not look upon it as smart financial planning at all. In fact if you really look at how you go about your life and the finances you need ta take care of your plans, the most important aspect is really cash flows.

While cash flows are kind of implicit in goal based planning – we are asked to redeem our financial investments to cater for the expenses linked to a goal – it is important to understand the true nature of it. In a recent discussion with a friend it struck me that most people do not have a clear idea about it at all and do not understand how to go about it. When I was thinking of how to explain this to my readers, I thought of how we use water in our daily lives. This is an analogy I have used in one of my earlier posts and can be used well here.

Let us assume a normal middle class household in India where we have different types of expenses such as listed below:-

  • Regular monthly expenses such as food, groceries, utility bills, transportation etc.
  • Quarterly or biannual expenses such as school or college fees.
  • Annual expenses such as Insurance premiums, TV subscription etc.
  • Irregular expenses such as clothing, purchases of personal discretion.
  • Large expenses such as White goods, Vacations abroad etc
  • Goals such as College admission, marriages etc.

To personalise this example let me relate it to you as a reader. For the next 12 months, list out all possible cash needs you have out of these categories. For example you may have something looking like this:-

  • Monthly household expenses @ 40000, Annual costs = 4.8 lacs
  • School fees @ 10000, Annual costs = 1.2 lacs
  • Insurance premiums, TV service etc, Annual costs = 1 lac
  • Vacations, White goods, Annual costs = 1 lac
  • No large goals in next 12 months.

What does this really mean? In cash flow terms, your outflow will be to the tune of 8 lacs. So if you have got 8 lacs and more from your salary or business you are fine, right? This is unfortunately not true at all – understand that your outflows on large goals are not there now but they will occur at some point in time. When it does you have to spend and that amount may not be possible from your normal cash inflow. Let us say your son will go to a college that costs 5 lacs a year for 4 years. If this amount can be catered for through your active income, you are home and dry. If not then you must invest in the years before he gets to college so that when the time comes you have access to the money. Similarly you need to plan for your retirement – at that time you have no active income but your household expenses remain there. So, you must have some alternate source of cash inflow so that you are able to sustain your expenses.

Where does cash inflow come from? Well, there can be several sources, but some of the more common ones are as follows:-

  • Salary from your job
  • Income from business or profession
  • Income from hobbies or other interests ( blogging etc)
  • Interest income, dividends
  • Rental income
  • Capital gains from selling an asset
  • Redeeming financial instruments

Where does the water analogy come in? Well, you can think of regular cash flows as the water that is supplied to your house every day by the City corporation. Most of your needs are met by that. However, you also store some water for an emergency that may occur. In case you are planning to clean your house thoroughly, you will plan to arrange for availability of water etc. What happens if you are having a big function at your house and you need to have a lot of water? Well, in case you have stored it in a tank etc you can use that. Alternately you can get some water tankers to get water for you. This is similar to redeeming financial instruments for a large goal. You can also stretch the thought process to look at these tankers as a loan – in that case you have to pay back the water just as you pay back through EMI for the loans.

The bottom line is this – your cash inflows either in term of current income or income from past investments or loans must match your cash outflow needs at all points in time. With the water analogy we have to look at running water, water stored earlier or water obtained from external sources such as tankers to take care of our needed consumption.

Pretty simple really, if you think of it a little and then the entire financial planning just becomes an exercise in cash flow management. How do we factor in investments into this? Well, I will cover that in another post as this one has already got quite long.

My experiences with Tour operator Kesari

A lot of people have contacted me on my blog and Facebook and wanted to know more about my experiences with Kesari, the tour operator I had chosen for our Italy trip. Let me try and address all the queries in this post.

To begin with, this is the first time I was looking at an end-to-end tour operator. So far we had been to Thailand, Sri Lanka, Nepal, Bhutan, Netherlands, France and Australia and in all these travels we had booked the travel and the local tours mostly on our own. I am a firm believer that you should have a certain flexibility when you travel, for there may be things you want to do on your own and a group tour can be constraining in some ways. However, the reason we wanted to do this travel through a group tour was simple – it was difficult to cover all the places we wanted to see on our own within one week. If I was staying in Rome for 3 days I would definitely do it on my own but as we wanted to see Italy properly in the current trip a tour operator with a group tour was a better option. It also gives you the option of just enjoying the trip while the tour leader takes care of all the necessary arrangements.

Once we had identified the places we wanted to see, there was really only one tour that covered them all. It was Flavours of Italy by Kesari. When we contacted them with our queries, they were very prompt in their responses and we were quite satisfied with the inputs we received. The fact that they were covering all the meal costs and had local guides for the important tours was a definite plus point. As we were booking early there was a reasonably good discount that we got. Once we paid the 2.71 lacs as a one time fee we got into the process of arranging for the visa documents etc.

During the period between January and April we continued to interact with Kesari for purposes of visa documentation and application. They helped us with validating all the documents, taking appointment with VFS and keeping us updated about the reservations as well as the travel regulations that had come into vogue newly. The Tour leader sent us a WhatsApp message with details of how we had to meet in Mumbai and how things will proceed from that point. Kesari also provided us with the following for the travel :-

  • A stroller and a shoulder bag which were very useful during our travel.
  • A raincoat and a cap
  • A snacks hamper with Tea/coffee sachets
  • An Electric kettle
  • A power adaptor suited for Europe

From the time we checked in at Mumbai for our first leg of the flight to Abu Dhabi, our tour leader was in complete control of the situation. She got us to the transit flight in Abu Dhabi and once we were in Rome, guided us through immigration. Having travelled abroad frequently, these were no issues for me but there were many who were going out of India for the first time and were happy to get the kind of guidance she provided.

Over the next 7 days the tour leader was omnipresent in everything we did and she also let people do their own things if they so desired. The whole itinerary was managed very professionally – be it the hotel check-in’s, the meals, the transportation, the local guides and all the crises. For example when we went to Capri it was told to us that the Blue Grotto ( an underwater cave ) was not possible to visit due to the high tide in the seas. While many of us were disappointed at this, our tour leader took stock of the situation quickly and arranged an alternate activity of a chair lift ride, which we liked a lot. Through the long coach rides, she played the perfect hostess and got the group to know it’s members and to play games that were of common interest. She also had an plethora of stories, movies and music to keep people occupied.

So was it all good then? That rarely happens in real life and I would have liked to do some things had I done it on my own. For example, I would have definitely seen some museums in Rome and Florence. However, to be fair, that would have been impossible to squeeze into one week. On the whole, I think the itinerary planned out by Kesari was a really good one. Each day was an unique experience and if the objective was to give us the Flavours of Italy, I think the tour did achieve that.

The best part of the tour was definitely the tour leader and how everything was managed well. We could just focus on enjoying ourselves without worrying about any of the logistics. The worst part was we had to move as a group to see everything and sometimes that caused issues of timing and coordination.

Overall, I am happy to have taken the tour and may repeat it with the same operator in the future. If you have enough time and money along with an inclination to plan your own travel, you can definitely do so. However, most people do not have the above luxury and for those a group tour with a standard tour operator can be a great option.

Our travel to Italy – The plan

As all my readers will know by now, travel is one of the aspects I and my family are really keen on. We try to do it as much as possible and look for all possible opportunities to travel both within and out of India. A lot of my readers and connections in Facebook have asked me to write a travelogue on our recent Italy trip. However, I think it will be a better idea to do a few posts on it, this is the first of the series.

To begin with, after our last significant tour to Australia in 2014, our idea of the next trip out to Europe was really in 2018. The Australian tour was on a big scale as we took out two weeks for it and also had significant expenses – in the range of 6 lacs for both of us. The plan to do an European tour in 2018 was to celebrate our 25th wedding year. The reason I wanted to advance it in 2017 was that we wanted to get away from the Hyderabad heat in May for some time. Also, while our Australia trip was a great one, 2 weeks at a go is difficult, especially when I am working as a CSO in a company. After we took a fundamental decision to travel in segments of one week, it was easier to think in terms of a holiday outside India every alternate year. My wife was obviously quite pleased with the advancement and we got down to searching for places.

Our first idea was to look at South Africa but there were some difficulties involved in it. This was a place where we wanted to travel with our children and that was tough in 2017, due to their academic and other engagements. Also, both the trip costs as well as the time needed for it were more in the range of 12 days or so. Finally, we were unable to go in March etc as there was a little gap after our Kumarokom vacation in February. Based on all of this and the need to get away in May, we wanted to look at Europe for a week. Over the months of December and January we did extensive search of several tours in order to see which one would be suitable for us.

In terms of Europe, the following aspects were important for us:-

  • As we had already seen Amsterdam and Paris we wanted to avoid tours that spent time in these two cities.
  • We were good with the idea of Switzerland but here again, we would prefer the children to travel with us.
  • Eastern Europe or Spain were good options.
  • Italy was another good option.
  • We wanted to go with a tour operator this time as we had to cover several cities in the span of a week.

On going through all of the above, it seemed that a trip to Italy covering all the major cities over a week would be a good idea. We searched for such offers from all the reputed tour operators and settled on the Flavours of Italy tour by Kesari. It was covering all the places we wanted to cover – Pompeii, Capri, Vatican City, Rome, Florence, San Gimignano and Venice. The one advantage with Kesari is that they give you an all inclusive cost, so what you spend extra is only on indulgences and shopping. We got a Bonanza offer, similar to an Early bird thing, which came to 2.72 lacs for the two of us. On the flip side all Kesari tours start from Mumbai, so we had to make that arrangement on our own.

Once we decided on the tour and paid the money, the rest of the activities were coordinated very well by Kesari. I am sure a lot of readers might want to go on similar trips , so I will do a separate post on that. It will be right to say that the entire plan went smoothly and in the end we were really happy that we had chosen Kesari.

As far as the experience of the trip goes, for both Lipi and me it was a dream come true to see the places we have read so much about and seen so much in movies and news. We did manage to get away from the Hyderabad heat in a nice manner too.

But more details of our Italy trip in a future post.

Experiences and money – my take

As I am writing this blog post on Monday, sitting in our unit in Karma Chakra at Kumarokom, I cannot but feel somewhat philosophical. I think it partly has to do with the backdrop of the beautiful Vembanad lake which stretches out in a seemingly endless manner and can be viewed really well from our balcony. So instead of the usual investment related post, let me write one on the quality of experiences and whether you need to have a lot of money to spare if you have to undergo these experiences.

Let me start by admitting that some experiences you seek will definitely require a fair amount of money. For example, if you are keen on visiting the Swiss Alps or the Great Barrier Reef in Australia, you will need a certain amount of money to get there. If you do not have that amount then you simply cannot do it and need to accept the same. However, even here the kind of experience you seek will define the quantity of money you need to have to go through it. So you could go to Australia with 2 lacs or do the same thing for a much higher price.

The concept that we must understand here is what you consider to be the core of the experience versus the peripheral frills. It is much like the cake and the icing concept – the icing looks attractive, tastes good and enhances the whole experience of having the cake BUT it does not really decide the quality of the cake. The core of your experience is like the cake itself, the associated frills are akin to the icing. So it really boils down to the kind of person you are and what are you temperamentally suited to. Is the movie important to you or do you want to lie down in a sofa while seeing the movie?

Let me explain with an example that happened just today morning and led me to think about writing this post. Many of you will know that the backwaters of Kerala and the Vembanad lake is famous for the different kinds of boats that ply through them. You have simple rowing boats, ferries and also the large house boats that come with all kinds of comforts and trappings from air conditioned bedrooms to authentic Kerala cuisine which is prepared in the boat while you relax. Now, if you have not been to one of these Rice boats or Kettuvalams, I will recommend you do it once in your life. It is an unique experience and will stay with you life long. In one of our visits to Kerala earlier, we had taken one such boat from Aleppey and enjoyed our overnight stay immensely. This was about 15 years back and it had cost 5000 Rs then – expensive but entirely worthwhile. Note that in this case, the experience we were seeking as a family was being in the House boat and having an authentic Kerala backwater experience. Here the House boat was very much part of the cake itself and not the icing.

Cut to the present – Lipi and I are visiting Kumarokom after a long time and our resort is right on the Vembanad lake. The location of the resort is breathtaking and you can have your fill of the Vembanad lake, including the surreal sunsets and bird watching. Now this resort has a House boat of it’s own which they rent out to the guests, either for overnight or for a 5 hour lunch cruise. The cost of the first is 17,500 Rs and the second is 9000 Rs. It is a happy situation that we can afford to spend the money, but should we? Going by the cake analogy, what is the cake here? For me it was clearly to experience the Vembanad lake and getting closer to the birds to watch their hunting of fish. Yes, it could be done very comfortably from the house boat, but the rest of the facilities there were really an icing.

We chose to visit a local boat jetty reasonably nearby where there were ferries plying from Kumarokom to Muhamma. It was a great slice of local life, with people driving onto the ferry in their bikes and getting to see the regular inhabitants of Kumarokom. The ferry transported us from one end of the lake to the other in about 45 minutes on way. Through the whole journey we got a great view of the Vembanad lake, got to see the water birds at really close quarters and I can vouch that the experience I was seeking was fully met by my criteria – luxury was of course nor one of them and neither was it available. Note that the core requirement had changed from our earlier backwater cruise as I had already experienced it once before. The cost here was obviously a trivial one – tickets were only 10 Rs each on the ferry and we ate at a local bakery close to the jetty for 200 Rs.

So next time you are looking at an experience, separate the core from the extraneous. If you can afford designer holidays and want them then go for it by all means. However, if you love travelling do not deny yourself just because you cannot do it in style. You really do not need an upscale seaside resort to enjoy the views of the sea, nor do you need a private beach to enjoy swimming there. I think many of us are unable to separate the cake from the icing, so I will give you some examples here :-

  • If you like reading, become a member of a library. Do not give up reading just because you cannot buy all the books you want to read.
  • If you want to visit a place but cannot afford the rates in peak season or in the popular resorts, check out home stays and other less expensive hotels.
  • In case you cannot afford the local cuisine in a 5 star joint, check out the local eateries for the same – many of these will be as varied and taste good too.

Coming back to this trip and separating the cake from the icing, I will conclude with how I have looked at it :-

  • Our stay at Karma Chakra is really the cake – we wanted to stay in a comfortable place and have planned for it over the years through our Timeshare investment.
  • Our travel to Kochi by air was also the cake – read my post on air travel to understand more on this.
  • Experiencing Vembanad lake is the cake and doing so by house boat is the icing.
  • Experiencing good food is the cake – we went to a local hotel yesterday with some friends where the local food quality was superb. It was not really inexpensive but clearly lacked the frills of a high class restaurant. Our resort has one such eating place and we are happy to eat there as well.

The point is have both the cake and the icing as your experience if you can afford it. But too often in life, we ignore the cake because we cannot get one with an attractive icing. Maximise the number and quality of your experiences within your means and you will be leading a much more meaningful and happier life.

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.

Alternative ways of owning a car

As you read in my previous posts, I do not think taking a car loan to buy a car is really a good idea. Some people have got back to me saying that, while they principally agreed to buying cars through cash payment, it probably means they would not be able to buy the car which they want to buy.

My first response to it will be that you need to cut your coat according to the cloth that you have.If you do not have money to buy the car you want to possess and cannot hope to save up for it within a reasonable period, then you probably cannot afford it anyway. A slightly risky way will be to invest in equity or hybrid products in the hope you will be able to get better returns in the time period under consideration. For example you may want to buy a car costing 10 lacs after 3 years. The scenarios can play out as below:-

  • Let us say you have 2 lacs today and will get about another 2 lacs by trading in your present hatchback after 3 years.
  • Assuming a 8 % return in debt products, your current 2 lacs will be 2.5 lacs in 3 years time. You therefore need additional access to 5.5 lacs.
  • You will need about 13828 Rs investment every month if it grows at 12 % and the cost of car rises by 5 %.
  • In case your investment returns are 8% then the amount you need to invest 16128 Rs every month.

As you will see from here, investment in equity will help you get a car of your desire. However, in a short period like 3 years there is a significant risk of the market returns being poor or in some cases, even negative. A better way will be to simply go by the 3 portfolio strategy, not bother too much about the particular goal, invest as much as you can and withdraw money from the appropriate instrument when the time comes. For instance if the markets are doing really well, sell a few stocks from your portfolio in order to buy the car you wanted.

For people in corporate jobs, the best way will be to get a car given to them by their company as a perquisite. This works out well for the company as they can claim depreciation and also for the Employee as the tax incidence is not high. However, as only a few roles have such perquisites inbuilt , this will not be of use to majority of people. You can then look at the option of leasing a car from your company as part of your CTC. The company will normally not have an issue with it, you save something on taxes and after 3-5 years you can get out of the lease. This is actually a good way of changing your cars every 5 years or so, provided you are in a stable job and plan to be there for a fairly long term.

An easier way, in case your spouse is not working or is in a lower tax bracket will be to buy the car in his/her name and get your company to lease it. Even though the lease rental paid will be taxable in the hand of your spouse, the overall tax impact for the family will be lower. This mode is easier as you can easily shift the lease to your new employer, in case of a change in jobs.

Of course, if you are a self employed person or in business you can show the car as an asset and claim depreciation on it. This will be the easiest way of buying a more expensive car. In this situation too, leasing a car directly from leasing companies will work out well as you can write off the amount paid as an expense.

So, go ahead and plan for your first car if you are not having one now. And, if you do, make a plan as to what your next car will be and when are you going to get it.