Lumuhuku

Arbitary Obsessionist's Blog : Ambition is redundant. In life, mission is everything.

Archive for April 2010

How to be richer : Master your money in 2010-2011

with 30 comments

I know. You must be thinking that, by mistake you have landed on some personal finance blog. But let me assure you. You are right where you wanted to be. You are on Lumuhuku. 😉

Since the FY 2009-2010 has just ended and we have just entered in Financial Year 2010-2011, I decided to do a post on personal finance for a change.

[Caution: Dev is a self proclaimed financial expert (read stalker) and not a certified one. So beware. Your decisions should be your own, as the money you have is your own. Period.]

Before I start talking about money, I would like to specifically address those who believe that Money is the root cause of all evil. The underlined text just before, is bullshit. And to help you digest this fact, I recommend you read something historical here. And if you are still not convinced, just drop a comment. I’ll try to convince you. 🙂

So, lets start and let there be money,

First of all, do you know where you stand in the list of world’s richest people?

This is where I stand –

You can check your own rank here and then if you are inspired enough to rise up the ranks, read on.

1) Change your mindset: Think like the rich think

It all starts in that thing between your ears. You need to believe that you can take control of money rather than money taking control of you. In very simple words, you can become richer in just 2 ways.

The first one is to make more money. And the second one is to spend less of it.

Yes. It is as simple as that. And it is as difficult as that. As a matter of fact, the second option is much easier than the first one. Talking about the mindset, I would like you to download this free report (the link collects personal details; but it is worth it) from Donald Trump [Donald once said – “Show me a man without an ego & I will show you a loser.” Read more about him here]. This report is full of ideas which will ‘force’ you to change your mindset. Atleast, you will start ‘feeling’ rich when you read it. 🙂

Now, whenever we refer to financial planning of any sort, it should be realized that it is not just about managing your wealth. It is about how you can finance your ideas, stuffs & experiences you want from life. And this is a very important fact worth remembering.

2) Calculate your networth

Networth is your financial-worth-till-date. It can be calculated by subtracting your liabilities from you assets. Is it important to know your current worth? Following example will answer your question. Suppose you have Rs 2 Lacs worth of cash, FDs & investments. But you are also serving a loan whose outstanding amount is Rs 2.5 Lacs. So, what’s your worth? The answer is (–) Rs 0.50 Lacs. So even having loads of money is useless, if you have liabilities bigger than your assets. Plainly speaking, your networth tells whether you head is below water or above it. 😉

3) Budget

In India, a budget is something which we all hear around late February. Our finance minister presents the Annual Report of India’s Financial Health. But, for you and me, what is budget? Budget is a tool. A tool that will help in making a spending plan and also allow in planning one’s savings & investments.

Budgeting is tough. But it has its own rewards. Only resources required are a small notebook, a pen & you.

There are a few good approaches available for budgeting which are highlighted below –

There is a good approach known as the Balanced Money Formula [from the book All Your Worth: The Ultimate Lifetime Money Plan]. This formula is based on your actual net income (after taxes) and looks a bit like this –

As you can see, ideally, you should spend not more than 50% of you income on Needs. Of the remaining 50%, 20% should go to savings and rest 30% to wants. Here I would like to differ a bit. I feel that since ‘need’ of each and every person is unique, we can’t do much in this category, unless we take some concrete steps. What we can control is our ‘wants’. Wants are optional. 30% on just fulfilling our wants is fine for a time or two. But not everytime. I would rather propose a different pie –

I would increase the share of ‘savings’. And that too at the expense of reducing the fund allocated for ‘wants’. It is because, money going to ‘savings’ is the money that is going to work for you. It will earn you more money from interests, dividends, etc. So why not curb our wants a bit and make more money? And, if you really do want to have a better financial position, you should bring your ‘Needs’ down too. I know it is difficult. But it is possible. I will take up the topic in later part of the post.

Using this approach of budgeting will need a bit of labor from your side. You will need to keep track of each and every rupee you spend for one whole month to know what exactly is your money upto. Where does it come from and where does it go. And how you can take control of it.

A more simpler budgeting approach is proposed in The Only Investment Guide You’ll Ever Need. It gives 3 steps to a better budgeting

  1. Destroy all your credit cards.
  2. Invest 20% of all that you earn. Never touch it.
  3. Live on the remaining 80%, no matter what.

This approach is good for the starters as it removes all the complexities associated with budgeting. Taking an example of a person earning Rs 40K per month, needs to save/invest atleast Rs 8K per month (20% of 40K). The rest Rs 32K can be used as per his requirement.

4) Emergency Fund

Now this is really important. An emergency fund is what its name suggests. A fund where you can dip in when you have an emergency. Emergencies like job loss, theft medical emergencies, etc. So what is the adequate size of an emergency fund? Experts recommend that it should be able to take care of 3-6 months of your family’s living expenses. I am a bit conservative in the matters of money and will strongly recommend it to be on the higher side, i.e. 6 months. So if you earn Rs 40K per month and your expenses are Rs 25K, you should maintain an emergency fund of around Rs 150K (25K x 6 months).

An important point here is that you should not confuse this fund with your investments in stocks, mutual funds, gold etc. This is different from investments and should be highly liquid and readily available. It should be in the form of cash or in savings account.

I will also recommend that before making any major investments or purchases related to ‘Wants’ [as given in the formulae above], you should relentlessly add money to this emergency fund, till the time it becomes of adequate size. And remember to give this fund its due respect and dip into it only in cases of emergencies and not when you are bloody optimistic about some stock in a rising market [Read why the Reliance Power chaos happened 😉 ]

5) Frugality Rocks! Unless otherwise stated

As already mentioned earlier, easiest way to become richer is to spend less.

So how can we spend less every month?

Let me take a few examples –

Eat Out LessIt won’t be wrong to say that our generation is in a habit of eating out a lot. We just need an excuse to eat out or party. I am not advocating that we should stop going out with friends. What I want to convey is that we can reduce the frequency. An average working person in mid twenties will have 5 eating out expeditions or parties each month. Now if each one of it costs around Rs 750-1000/-, it shows that the person is shelling out around Rs 3500 to Rs 5000 per month!!

If the same person now realises that instead of 5 times a month, he should eat out only 2 times a month, it will lead to a monthly saving of about Rs 3000/- per month. Now if this amount is invested intelligently, the magic begins. This magic is known as the magic of compounding.

So here is the magic –

An amount of Rs 3000/- invested each month, for the next 30 years can get you a cool Rs 97 Lacs!! Yes. Rs 97,00,000/- [Assuming a rate of return of 12%][Forget inflation for the time being.]


& will you still eat out as many times as you already do??

🙂

Think before you buy that thing A lot of us are into impulsive buying. We suffer from the” We-need-it-when-we-see-it-and-then-we-have-to-buy-it rather than thinking-about-what-we-need-and-then-going-to-buy-it.

Whenever we want to buy something, we should ask ourselves some questions like –

  • Can I avoid buying it?
  • What purpose will it serve if I buy it?
  • Is this my ‘need’ or ‘want’?

The answer to the last question, if given honestly  will save you a lot of your money.

There are a few more examples where you can save money –

  1. Don’t drive to your nearby market. Walk or take your bicycle there.
  2. Do It Yourself – Reverse outsourcing [If you think hard, you will realize that there are loads of things which you pay for, but can do it on your own]
  3. Switch off those lights and appliances when you go out of the house. And when you are using them, use the energy efficient ones.
  4. Use that cellphone of yours a bit less. It is tough, but possible. 😉

Always remember to spend according to who you are and not according to who you want to be.

6) If possible, earn extra

When I say earn extra, I mean that you can convert some of your hobbies & stuffs you are good at into a source of extra income. If you watch TV or surf the internet without any purpose, you won’t become rich. But if you love gardening and can grow certain plants which people might be interested in buying, then you can definitely make some money. If you love making cakes and people are ready to buy them, then you can make some serious money. You can make money online also. But that is something that will take time and you will need to do a bit of research about the ways successful people like ProBlogger do it. You will also need to be aware of people who may fool you 😉

You can even start a consultancy if you are interested in selling your expert services & advices rather than products.

There is another good book, The Other 8 Hours. The author makes the reader realise that apart from sleeping 8 hours and working 8 hours, a person can also use the left over 8 hours do his monetary benefit.

Some of the words in the book are quite motivating –

This “free” time is the most valuable resource you have to achieve your ideal life…How you spend the other 8 hours determines where you are in life, your happiness, your weight, your level of debt, the satisfaction you have with your relationships, the car you drive, the languages you speak, your love life, your education, the places you travel, your bank account balance, and just about everything else that is important to you.

[Caution : Do not turn the other 8 hours into just another period of work. 🙂]

7) Investments

[Read this section only if you have interests in Stock Markets]

You should never confuse investment s with savings. Investment is what grows your wealth. Savings are what support you in bad times and your investments in good times.

Before even you think of investing, you should make the following very clear –

  1. You should have your emergency fund in place.
  2. Don’t expect to double your money every year.

There are millions of good books written about successful stock market investing. And being a non-pro, its better to avoid giving advice on the same. But I will like to share some of my own rules which I follow in the market –

  • I will invest only when I have adequate money in my emergency fund.
  • My primary aim is return of capital and not return on capital.
  • I will never buy a business that I don’t understand.
  • I will not invest for the short term.
  • I will buy stocks that have slipped out of popularity. 😉

I guess most of my readers would have been scared off till now. 🙂 So I will stop giving advice on stocks now. Rather, I will recommend you read about Warren Buffet [read about my imaginary dinner with him], Peter Lynch. I will also urge you to check out this site called Investopedia to get your basics of stock markets right. And if you are passionate about some books on stock market, then I’ll advocate Benjamin Graham’s Intelligent Investor & Letters of Berkshire Hathaway’s Annual Meetings (These are legendary!)

8) Get some financial education

In financial matters, it is very important that the source of your knowledge is authentic and worth knowing from. [If I still have any readers who have been able to read down till here, I will ask you to check with your own financial planners before taking your advice.]

One of the books I would like to recommend here is The Richest Man in Babylon.

Based on some very simple parables of ancient times, it tells you how to become rich. That’s it. Simple & Awesome. And if you can follow the advice given in the book, nobody can stop you from getting up the rich list.

Another one which should not be missed by anyone planning to be rich is Rich Dad Poor Dad.

Though a lot has been said against this book, but I still like it for the way in which it makes us relate to all that has been said in the book. The book is definitely worth a read.

You can also subscribe some good personal finance blogs, which can keep you on your toes and help you with loads of things financially. I recommend –

Get Rich Slowly

The Simple Dollar

[Now all these blogs are not Indian by origin. But art of getting rich is independent of currency. J So do read them. They might be helpful.]

I guess I have talked a lot and its time to end this attempt of mine. So my best wishes to the readers and always remember – “To be rich is  glorious”

Advertisements

Written by Dev

April 7, 2010 at 11:24 pm

Time To end the prank : Last post was a joke : I am sorry : 1st April Worked :-)

with 15 comments

🙂

It is not possible for me to sell my blog. Period.

Though I did get an offer.

🙂

Written by Dev

April 1, 2010 at 12:24 am