HELP- Holistic Engagement in Life Planning

I have been writing this blog for over 3 years now and one of the most common queries that I get from readers is whether I provide any Financial Planning services. Let me be upfront about this at the start – I do not provide such services in the way they are normally understood, nor am I a SEBI registered Financial Planner. In fact, I have absolutely no intention of being one too as I do not see this as my profession.

However, I do provide a service to select people who approach me directly. I have given the acronym of HELP to it. The expanded form is Holistic Engagement in Life Planning. In this post I will explain about this service and explain as to how interested people can avail of my services for this. As I have explained in several posts of my blog, life planning must precede financial planning. As an individual or as someone responsible for your family well being, you will need to plan the important life events as well as the lifestyle choices you want to maintain. Note that the typical financial planning process assumes that people will by and large plan for typical goals such as children’s education, marriage, own retirement etc. I find this a completely unsuitable way of doing things as the life of each individual is unique and needs to be catered as such.

So what is HELP then? As I said, the starting point is to take stock of your life in terms of where you are today and what are your dreams as a family – individually and collectively. So if you are a family of 4 with two teenaged son and daughter, your dreams could look like this when you are 42 years old :-

  • Son wants to take up a career in Bio technology, daughter wants to be a film maker.
  • Your wife is 38 and gave up her career for her kids 10 years back – she now wants to open up a boutique of her own in the next 3 years.
  • You are interested in starting your Consultancy practice by the time you are 50 and for that you need to be financially independent.
  • All of you like travelling and want to take a domestic vacation every year apart from short trips and also an international vacation every alternate year.

The idea of HELP is to bring out these life goals and lifestyle choices clearly, so that it can be determined what kind of financial support these would require and how can that be organized. Yes, the last part will involve financial planning but it will be in a very different way than just how to buy MF through SIP etc. 

As I said, I have provided HELP to several people and all these were people who have approached me after reading my blog. Some examples will make interesting reading:-

  • Advised a Colonel in Indian army as to how he could fulfill his dream of migrating to Canada in a teaching role.
  • A software professional in Kolkata was worried about longevity of job and worked out an alternate plan should such an event occur.
  • Got several people started on building a stock portfolio from scratch.

Note that in all of these cases, the people already had a financial plan made through a SEBI accredited Financial planner but they were not happy with their life and lifestyle.

The question that will definitely be asked is why am I the right person to do this? Let me start by giving some background of myself :-

  • BE in Computer Science & Engg from Jadavpur university, Kolkata in 1986.
  • PGDM from IIM Calcutta in 1988, with major in Marketing and Systems.
  • Overall experience of 30 years plus, 27 years in regular corporate roles and nearly 3 years now in my Consultancy practice.
  • I have worked almost entirely in the software services and BPO space.
  • Have worked as a CXO for 15 years plus, nearly half of this in 2 publicly listed companies.
  • Lived in Kolkata, Delhi, Chennai and Hyderabad besides having travelled widely all through the world for my work.
  • Have been financially independent since 2014 and writing a blog since 2015 June. The blog has had views in excess of 3.5 lacs till date.
  • My daughter is BE from BITS, PGDBM from XLRI and working in a Consultancy firm now. My son is in his final year at BITS, doing a dual degree – Msc Maths + BE in Computer Science.
  • I am associated with helping students in career counselling for Engineering / MBA.
  • Am in the Hyderabad panel for IIMC admissions.

I believe in the Indian context, I am one of the few people who are able to deliver a service such as HELP. This has been proven by the 10 situations where this is done.

So if you are interested in knowing more about this, how do you get started? Well, the first step will be to write to me at expressing your interest to avail of this. I will then ask a few questions over mail to assess your current situation and then we can have an introductory call. After this I will let you know if I can do this for you and what will it cost.

Typical duration for the complete exercise is 1 month, with 2 interactions over phone per week and costs can range between 20000 and 30000 for the first year. Yearly reviews after first year will be 25 % of the year 1 costs.

If you reach out to me, do not get offended on my inability to take you up ( if that happens ). I am doing this to add real value to the lives of the people and therefore cannot spread myself too thin.

Look forward to hearing from some of you – believe me, your life will undergo a serious transformation once you go through this exercise.

Arranging for passive income in my changed life context

Life is dynamic in nature and ever changing, no matter how much you try to plan for it in advance. When your life circumstances change, there is a need for you to revisit your financial plans and related investments. In my case, I am already in an FI state, though with some active income and had to look into rearranging some of my finances, in the light of several life changes which took place this year.

Before getting to the passive income bit, let me outline the changes that have taken place this year, for me as an individual and for our family as an unit :-

  • Though I am still doing my Consulting practice, I am more keen to do Workshops now as opposed to regular engagements that are more time consuming. As such my active income will be potentially good but it will also be erratic.
  • My daughter Rinki has started her corporate career and is financially independent of me now. My son Ronju is doing two internships in his final year and gets paid for the same. So, for all practical purposes he too financially independent of me. He may do an MBA and I will fund it to some extent but that is a future issue.
  • Fortunately for us they are both staying in Hyderabad now, which has meant that my plans for shifting from here are currently on hold at least till July 2019.
  • The tenant of our Chennai apartment moved out in July and we were lucky to get a new one quickly. The rent from there continues to cover the costs of our flat here.
  • Though I had budgeted for travel in a liberal manner, in reality we spent more than our budget in the first few months of the year. This was due to a couple of family vacations within India to Bengal and Goa, and an international vacation to Bali.
  • The year is also our silver wedding anniversary and we plan to go to Mauritius for a week this month.
  • The overall impact of all of these have pushed up my expenses significantly.

If you have seen some of my previous posts, you will know that I was estimating an expenditure of 8 lacs per year apart from housing and children related expenditure. In the current context I think the figure of 8 lacs is an underestimation and we will need 10 lacs per year to fund the lifestyle we are aspiring for.

From the viewpoint of generating passive income of 10 lacs, this is my plan overall :-

  • 2.1 lacs from interest of Tax Free Bonds that I purchased in 2013-2014.
  • 1.1 lac from interest + dividend of InvIT fund.
  • 1.5 lac from dividends of MF schemes.
  • 1.5 lac from dividends of my stocks.
  • 3.5 lacs from capital gains of FMP / Debt fund redemption
  • 1 lac from capital gains from Stocks / MF

Note that I have not taken any PPF withdrawal into account as I plan to grow it till 2024 before I start that. I have also not taken into account any active income as I normally invest it into stocks.

I keep getting a lot of queries about my asset allocation and the instruments I have invested in now. Let me share that in my next post.

A real life financial planning case study

It always surprises me a little to see the reactions of people in Facebook groups when a group member asks a simple query. Some members assume that the questioner needs to get knowledge by reading blog posts of some other members first, others advise him to go to a fee only financial planner and even give him a list, yet others tell him that one should just keep working and not think of retiring.

To come back to the recent query, here are the salient facts shared by the person who wanted advice on whether he will be able to gain Financial independence in 6 years:-

  • He has 1.2 crores in FD and another 30 lacs in equity etc
  • Can invest 20000 per month for next 6 years
  • Has a child in class 7, who should be going to college in 6 years
  • Has his own house and loans will be paid for by the time he is 50.
  • Current costs are 1 lac per month, 15000 for child and includes loan repayments.

Let me come to the question as to whether he will be able to be financially independent by the time he is 50. For this we will calculate his Financial Independence Number (FIN) in the following manner.

  • His base cost at 50 will be lower than 1 lac as child cost will be gone and so will the loan repayment. However, let us take it at 1 lac to take care of inflation etc.
  • For retirement of 30 years his cost will be 3.6 crores at zero real rate of return
  • For child higher education we can take 20 lacs
  • For asset replacement etc we can take 20 lacs
  • Total FIN therefore comes to 4 crores.

Fortunately, in real life we do not need to go with financial planner and/or calculators blindly and can use some experience and common sense. It is difficult to tell others what to do as they will have their own goals and ways. However, if I were in his place, I would be doing the following:-

  • As his child’s college education is 6 years away, I will put 10 lacs in an Aggressive Balanced fund like HDFC Prudence. This amount will take care of the 20 lacs that will be required for the child’s graduation.
  • I will redeploy the 1.1 crore left in FD to different types of Debt funds. Assuming a CAGR of 8 % this will grow to an amount of 1.75 crores.
  • His current equity investment will grow to 60 lacs if we take 12 % CAGR over 6 years.
  • 20000 SIP @ 12 % returns will grow to about 21 lacs in 6 years.
  • So at 50 years he will have 1.75 crores in Debt and 81 lacs in equity

Let us now look at deployment of corpus. In the first 10 years of retirement, his strategy can be the following:-

  • Interest from Debt portion will be to the tune of 14 lacs @ 8 % returns. This is definitely possible if he is into good quality Debt instruments.
  • As his child is in college and he is still relatively young, I will not reinvest this 2 lacs but spend it in discretionary expenditure such as travel or asset replacement.
  • At the end of 10 years, he will be 60 so the activities will reduce and on the balance his medical expenses may grow. I think an annual expense of 18 lacs will be enough. There is no need to calculate this by inflation formula – makes no sense at all to do so.
  • Assuming a 12 % return on equity his equity corpus will be 2.51 crores.

In the next decade his deployment can be as follows:-

  • Keep using the interest from Debt instruments and take out the remaining required amount from redeeming the principal.
  • Even after you finish the decade you will have some amount left in Debt instruments. I suggest you donate it to a charity of your choice.
  • Your equity investments would have grown to more than 7 crores by now and will be more than enough to last your life as well as live a legacy.

So to come back to the basic query – will you have enough to retire at 50? You bet you will. Now just shut out all the negative people with negative comments from your mind and go ahead with the plan. Honestly, if you are able to get the selection of instruments done on your own, you do not even need a Financial planner.

Will be happy to receive comments, feedback and criticism on the post.

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.

A contrarian case study on retirement

I have been writing this blog for more than a month now and have come across many individuals, with different and unique financial situations. I also get pulled in for advice on how to deal with several financial issues. I think it will be a good idea to share some real life situations with my readers so that it helps them in their financial journey.

The first one that comes to mind is of a recently retired person who was introduced to me by a friend. For the purposes of this discussion we will call him Aloke. Some background of Aloke will be in order before we get to the case itself.

  • Aloke is an Engineer by profession and has worked in different manufacturing companies for about 35 years before retiring last year.
  • His wife is a homemaker and he has one son who is a CA, working now in a reputed audit firm in Mumbai.
  • Aloke has a 3 BHK apartment in West Hyderabad and wants to settle there.
  • He has never been in equity, most of his investments were in PF and PPF. All expenses except the apartment was always from his active income or from FD / RD which he had set up for larger expenses.
  • His current expenses are 5 lacs a year and he thinks if that is adjusted for inflation he will be pretty ok with it.
  • He got his PF in 2013 which amounted to about 1 crore. He had put all of it into Tax free bonds that were giving an interest of 9 % then.
  • His PPF is presently having 45 lacs.

Aloke came to me as he was confused with all kinds of strategies that were being told to him by financial planners. Many wanted him to sell his funds in the secondary market and put the money into different buckets etc. This is an amazingly bad idea as he is getting a tax free income of 9 lacs and will be getting it for the next 17 years !!

Here is what I suggested to him.

  • Continue with the current situation till the tenure of the tax free bonds run out. By that time he will be 80 years old.
  • For the surplus each year, put 1.5 lacs into PPF and the rest in a multi cap mutual fund such as ICICI Value Discovery or SBI Emerging Blue Chip.
  • Assuming 6 % annual inflation, Aloke will be able to carry on the MF investment till year 6 by which his investment will be about 9 lacs.
  • PPF can be carried out till year 9 when his expenses will get to 9 lacs a year.
  • From the years 10 through 17 he will need to withdraw from his MF fully and PPF partially to fund extra 32 lacs of expenses.
  • At the end of 17 years, when Aloke is 80, he  will have 1.5 crores in PPF and 1 crore from redemption of tax free bonds.
  • Even with annual expenses of 20 lacs then, this will definitely last him comfortably till the rest of his lifetime.

Understand that the plan is specific to Aloke who does not really want any risks, does not want to worry about taxes and is comfortable with his present lifestyle. It is not always important to have 5 crores or chase equity returns. There is a financial plan present for each person and situation, you just need to use some knowledge to get there.

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.

My investment audit in July

In the last post I had written about my financial audit in July, where the focus was mainly to look at my revenues, expenses and consequently the cash flows. In the current post I will look at the investment audit which I had carried out simultaneously for the same period, that is the first 4 months of the financial year.

As my regular readers will probably recall, I had the following investment plan for the current year:-

  • Investment of 3 lacs in the PPF account of my wife and me.
  • Investment in equity MF to the extent of 5 lacs in the year. For this purpose I am looking at the calendar year 2016 rather than the financial year.
  • Stock portfolio investment, mainly by my wife, to the extent of 1 lac.
  • Reinvest of the principal amount from FMP redemption proceeds into appropriate debt or hybrid instruments.

In my audit of investments, I had the following observations:-

  • Contribution of 3 lacs was made to the PPF account of Lipi and me in the beginning of April. The next contributions will be in April 2017.
  • Equity MF purchases were done in the January to March period mostly. I have so far invested 2.5 lacs out of the yearly planned 5 lacs. I have plans to buy MF again when the Nifty is close to the 8000 figure. I feel it eill happen by October or so, but even if it does not, I can always buy at a later point.
  • As the stock buying opportunities were good, we ended up moving about 1.5 lacs fresh money into Lipi’s portfolio. This was helped by the maturity proceeds of an FD that she had.
  • FMP investments worth 7 lacs at cost value matured in this period. I have taken the LTCG as revenue for myself and reinvested the 7 lacs. Based on my thought process about FMP not being a good choice right now these have been invested in Gilt funds, Equity Savings funds, Monthly Income Plans and Arbitrage funds.
  • I also redeemed one of my debt funds from Franklin Templeton as it was not doing well. Again, the proceeds were invested in the instruments mentioned in the earlier point.

In the August to November period there are some key investment decisions that I need to make:-

  1. Decide on an appropriate time for additional MF purchases.
  2. Reinvest FMP maturity proceeds into appropriate investments.
  3. Decide on how much money should be made available for Lipi’s stock portfolio.

Overall, the investment plan seems to be going fine and I am feeling quite good about it.