My engagement with Financial Planning

Firstly the purpose of this document is to perhaps write a simple financial planning process/ choices after going through perhaps tons of reading material from basics of compounding to 4% rule to perhaps 100 odd blogs.Who am I: 2 adults + 1 child + No real estate :)rent-paying and tax-paying citizen:)with no degree in finance and a strong penchant for travel

I was an FD guy and wanted to buy real estate and thought life will be good. All these were 3 years back and then I changed perhaps for good. Here is my pickytrades simplified guide and a few concepts which you should be aware of

Part 1: Let’s start with a few of the mistakes many of you would be making

Ulips/LIC with the money back: If you are invested in anything which sounds like ULIP or LIC which pays back money. Stop !! Stop today !! Your bankers are getting rich, you will never be able to understand this product because it is one of the most complicated well-packaged products.INSURANCE and INVESTMENT mixing is dangerous to health and you will puke :). Want to know what’s wrong: If you die, 25 lakh of ULIP insurance will be insufficient for people you leave behind. So go quit your ulips even if you lose money, I can assure you that you will recover it easily with a higher sum. For example, eventually costs 12000 Rs annual to get Rs 1 crore term plan. Moreover It is equivalent to 3 of your monthly dinner in cyber hub Gurgaon or Kamla mills but this is it !! Your family gets this amount if something happens to you. If you survive, 12000 was worth covering the risk per annum. How much insurance: below that it is subjective, will write some other time. But if you know what is term insurance by now, it is a good beginning. Don’t worry there are many avenues to save tax:) Repeat again, INSURANCE and INVESTMENT mixing are dangerous to health and you will puke :).

2. You have never budgeted| don’t know your expense| Don’t know how much you save /can save: This is the first thing your fin planner will do before goals. You need to do it in excel. You need to find patterns :). No amount of reading will help including this post.3. You don’t know Rule of 72: Let’s say your FD gives you 6% interest per annum( forget taxes for a moment). Divide 72/6 = 12. So it will take 12 years for your money to double. Mouth salivating now?? Are you dividing 72 by 18% or 20% or 24%?So let’s say you have settled at 12%. Here is what 1 lakh invested at 12 % will behave 2018: 1 lakh

Cycle 1 of 6 years ends in 2023: 2 Lakh

Cycle 2 and so on :2029: 4 lakh

Cycle 3 and so on : 2035: 8 lakh

Cycle 4 and so on : 2041: 16 Lakh

Take a while, let that sink in !! @12 %, it is not the initial 18 years that matters, its the bucket from

18-24 and 24-30 years:)

What does that mean: Real Magic of compounding happens after 3 cycles – 4 cycles. It is not

bad before that too but compounding works with TIME

4. You know what is inflation but you don’t know what to make out of it

You know it is 3-4% or 5-6%, it doesn’t make a difference to your life because life goes on and

because your expenses are categorized in so many things, you never look at inflation.

But here is what inflation looks like

Rent increased by 10% is inflation 🙂 so if you go by the rule of 72 your rent will be double in

approx 7 years. 4 times in 14 years and 8 times in 21 years:)

Relax !! I am not asking you to buy real estate because that is what your spouse would be doing

by telling you that see how much rent we pay:)

The MBA I did in 2005 -07 was of 4 lakh including hostels, stands at 17 lakh today and will be

perhaps 50-70 lakh by when my kid is 21( he is 5 today).

The real inflation is not 3-4% because our expenses are very different from what the

government considers as inflation:)

For example, my kid’s school fees increase by 10% YoY and it is 20% of my expenses !!

5. You have never opened excel/ used excel to find Future value and EMI

The reason is that you only use excel to make some graphs and use pivots. I am not going to

write about it how to do it but here is an exercise for you.

Spend a night learning it on google and observe the following for a 20-year loan of Rs 75 lakh

1. Month-wise split of interest paid and principal paid ( you will have a few WTF moments

and I can assure you)

2. Do it yourself and don’t use a website.The pain and learning of doing it yourself by

dragging the formula in excel is far more valuable than using an online calculator:)

If you get close to a few WTF moments and have not bought real estate yet, thank me with a

smile 🙂

6. You have never calculated how does BANK tell you the final value of YOUR RD that you see

Here is how it plays out. You save by opening up a wish in ICICI or your HDFC bank RD which

tells you if you save X thousand for 48 months, you will get Rs Y. You are like, Ok, I know the

the amount and I are good !!

Here is an exercise for you( use google and excel).

Find out how much an RD of 10000 at 6% will give you after 4 years, 7 years, 10 years… Just play

with numbers. Let it soak in. because till the time you won’t play with a few variables like making

6% to 12% or to 6 years to 12 years, the knowledge and understanding will be limited.

7. You are still not going to work on points

It is evident that I am getting a bit technical and you are losing interest in this post but I can

assure you if you don’t spend enough time in understanding 5 and 6, you will make a lot of

financial mistakes in your life

8. You think the tragedy will never strike you | You think Insurance is for Losers

You think young death is not gonna be part and parcel of your life, you think medical expenses

are not much but you still want treatment in fortis/max. You think pregnancies don’t get

complicated or it is ok to drive and message and accident will not occur in your family. Touchwood it should never.

But as I write, it is happening with someone somewhere.

Insurance is like a helmet/seat belt. Think about it.

9. You don’t invest in the stock market because you fear for your life when you hear “Mutual

funds are subject to market risk”

We will come to this point later in planning tips but isn’t it true that you have never made a

genuine attempt to know what is a mutual fund

Real estate goes up, gold goes up, FD is enough is your only learning from your parents in the field of

finance.

10. You believe in new year resolutions and every year you tell yourself, I will sort my financial

life this year

Believe me, you won’t. Reading the resolutions-related articles is a million-dollar ad business on the

internet but sorry, resolutions don’t work on 1st January. It is an off day

Bonus number 11: You never had any financial goals or you don’t know what are your goals

You have heard your parents say “ everything will be taken care of when the time comes”.

Everyone comes with their own luck. You know you can buy a phone at zero cost emi.

I will not go deeper into this but you know what I mean 🙂

Part 2: My Tryst with financial planning

1. Jargons

Let me simplify Jargons for you and tell you what is good to know and what is important to

know.

Good to know

FD /RD: Safe, go drink a pina colada. Your kid’s education cost will rise 2x of your RD interest over the next 15-20 years

Equity mutual fund: There is an insane number of funds running after some 300 Indian

companies. Let me simplify, they invest in the share market as professionals. Period!! Don’t muzzle

up your mind by knowing large-cap, mid-cap, small-cap, multi-cap, opportunity, advantage.

They all look like different stacks of saree in a saree shop in Chandni Chowk stacked by price

and pleasure. ( pleasure is the risk in case of mutual fund)

Debt funds: There are many types. Literally many types… Hybrid, liquid, short term, medium

the term, ultra long term, Dynamic, and what not… cut all of it for a moment and say “I need a liquid

fund and nothing else”

Important to know

a. Equity Mutual fund: The purpose is to grow money but it comes with risk.I

b. Liquid fund: The purpose is to keep money handy and yet save taxes. Beat RD/equal to RD.

Avoid risk in it. ( yes there are risky types)

c. RD/FD: Purpose is to satiate your ego which stops you from venturing into investing:)

2. Goals

You can make short term goals ( 2-3 years away), medium-term ( 4-9), long terms 10 years and

away.

I made 3 goals and all 3 are long-term goals which are 12-15 years away.

a. Child education and child post-graduation: 12 /16 years away

b. Financial independence by 50: 14 years away

c. 100% down payment for the home at age 50: 14 years away

i.e Yes, I convinced myself that buying a home in Gurgaon is the height of stupidity

and I will not be PENNY wise POUND foolish. Home is the biggest expense. Yes

yes, I have had a fair share of my fights with my spouse but I seem to be winning

the battle as of now. Write back to me for tips:)

You can make as many goals as you want. Read Stable investor.com for goal setting. He has

written great articles.

But My funda has been a few BHAG goals… BIG HAIRY AUDACIOUS GOALS, rest all is noise/ too

many variables. I want to focus on the top 3 and biggest 3.

3. Why are you not able to choose a mutual fund

Greed, fear, trepidation, inertia, and paradox of choices, and of course your love for real estate and LIC. Believe me, I have gone thru all and in 3-4 years, have tried 12 mutual funds, and now down to 3. Happens with all, will happen with you too but they say you learn by doing it yourself:)

Choosing a mutual fund is like shopping with your spouse to buy a saree in SAROJINI or in CHANDNI CHOWK. The hunger, desire, appetite is insatiable and by the end of the day, you may have taken 1 or 2 but with a mutual fund, you will not.

The reason is “You are running after returns” instead of thinking “ How much %age return is enough for my Goals”. Now of course till now you have not made goals and hence you don’t know how much you need to save for a goal and how much return from the investment will suffice for the goal. You are stuck at either looking at financial websites showing either 3-year returns of 20% or 1-year returns of -3%.

Now imagine there are some 300 plus mutual funds in the EQUITY category giving some return ranging from 6% to 32%. What will you do? you will say “ I don’t know which mutual fund is right for me “

4. How did I choose my equity mutual funds?

I am a firm believer in the law of averages. I believe almost all mutual funds in a particular

category will be in a range of X to Y percent returns. So HDFC equity is equal for me as ICICI

value Pru or MIRAE India Equity.

What do I mean by that? I first decided on my goals and the monthly amount required for goals. I

then decided to do my planning at 10% returns. Yes, 10% and I am comfortable with it.

So if I have a figure of 10% in my mind and historically top 50 mutual funds in large/multi-cap

has given between 14% to 18%, what are the chances that if I pick any 2, I won’t be able to reach

my goals

So what happened here? I am not chasing returns. I am just putting my money in 2 well-known mutual funds with over 10 years of experience and that is it. Now they may give 14% and 17% respectively or 13% and 19% , or 9.5% and 12.5 %. All of these variables are unknown but what I have done here is removed noise/170 parameters to judge a mutual fund and the need to read about alpha beta gamma ratios.

Remember START is more IMPORTANT

Here is My choice of Mutual funds

For my Financial Independence Goal

a. Quantum Long term equity and Parag Parikh’s long term equity

For My Child’s education and home purchase

a. Mirae emerging blue chip

For experiment and dabble in the small-cap with 10k per month

a. DSP small-cap

I am deliberating hard on the index fund but have yet to make up my mind.

5. How to calculate Amount you need to save for

Ideally, this should be your exercise but let me simplify with an excel formula for you.

Example child education in 2032

a. Today expense in engineering ( the degree is hypothetical): 25 Lakhs

b. Inflation 10%

c. Expense after 14 years: 1 Crore ( 25 lakh – 50 Lakh ( in 7 years approx) – 100 lakh ( in

another 7 years approx)

d. Now use this formula in excel

FV=( Rate of interest/12, number of months, the amount per month)\

Try it out with 12%, 168 months and Rs10000

That is 90% of financial planning

I will write some other time on liquid funds/debt funds/ asset allocation/emergency

fund/insurance but I strongly recommend you to consult a financial planner for asset

allocation/understanding risk more and deeper questions that you may have.

Let me know how did you find it 🙂 this is my first attempt at writing something.

Things I think I have done well

● I have term insurance 30x my annual expenses. No other insurance product

● I have medical insurance from the company and a personal one for family

● I invest

● I have no FD

● I have a good portfolio in an index management fund

● I have 1 liquid fund and PF and PPF. That’s it

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By Rahul mishra

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Financial Planning For Beginners

My engagement with Financial Planning

Part 1: Let’s start with a few of the mistakes many of you would be making

Part 2: My Tryst with financial planning

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