Do you have the right Insurance? April 26, 2007
Posted by Ranjan in Insurance.add a comment
Today I was talking to a friend who was telling me about his Insurance cover. He is a 32 year old guy and has a cover of Rs 7 lacs and pays a premium of approx. Rs 50000. When I told him that I’m covered for Rs 35 lacs with only Rs 20000 premium, he did not beleive me at the first instance.
If you haven’t started a family, an Insurance cover is the least of your priorities. But even though it’s not that cool to be insured, it sure is smart when there are people who depend on you.
A very simple way of looking at your economic value towards your family is as follows. Imagine a monthly income of Rs 20000 and the net income provided to the family is Rs 18000 after deducting Rs 2000 for personal expenses. Thus the annual income provided to yr family is Rs 226000. The amount of money which will earn Rs 226000 pa at 8% interest rate is Rs 28,25,000. This is only a representation of the value of HLV. It is not the exact way of calculating yr HLV.
Right now you can go to this page to calculate your HLV, The future income growth, your income generating assets, liabilities, spouse income, children’seducation, etc are also to be factored in.
Ask your agents about the term assurance plans and he would definitely discourage you from taking one. After all there’s little commission he’s getting there since the premium is so low.
The point is that Insurance is NOT Investment.
What is Human Life Value? April 25, 2007
Posted by Ranjan in Insurance, Personal Finance.add a comment
Putting a finger on the value of yr life is crazy. Isn’t yr life invaluable and priceless?
Indian consumers have bought life insurance for reasons of tax saving rather than the core need of providing for one’s family in case of death of breadwinner.
Secondly, Indian consumers have been unaware that insurance too needs change with every change in one’s life stage (e.g., if one gets married or has children, one’s need for insurance goes up).
As a result the average insurance size is less than Rs 1,00,000. This is less than the price of a car yet to be made. And every car has to be insured by thr rule of the land. This implies that people who think they are insured are also heavily under-insured.
Heard of this yaksha question: What is the greatest mystery on earth? Yudhisthir answers, Every one has to die. But no one thinks that for himself. This is the greatest mystery.”
In a broad economic sense, insurance transfers risk from individuals to a larger group, this is
better able to pay for losses.
So how do you calculate yr Insurance need? Start with calculating yr Human Life Value (HLV). A very simple way of looking at it is as follows. Imagine a monthly income of Rs 10000 and the net income provided to the family is Rs 8000 after deducting Rs 2000 for personal expenses. Thus the annual income provided to yr family is Rs 96000. The amount of money which will earn Rs 96000 pa at 8% interest rate is Rs 12,00,000. This is only a representation of the value of HLV. It is not the exact way of calculating yr HLV.
The future income growth, yr income generating assets, liabilities, spouse income, children’s
education, etc are also to be factored in.
Tips on Financial Planning and Budgeting April 24, 2007
Posted by Ranjan in Asset Allocation, Budgeting, Investing, Personal Finance, Planning.1 comment so far
Getting rich is in your hands, nobody else’s . So get started with working hard or smart (depends on you again), adding to your finance knowledge and generally taking responsibility for yourself. Get Rich Or Die Trying.
If Financial decisions look like rocket science to you and Investing is even more daunting, here are some baby steps for you.
This one is from Deborah Fowles, Guide to Financial Planning in About.com Seems very elementary but I doubt how many people are scoring more than 5/10. Here it goes, the top ten:
1. Get Paid What You’re Worth and Spend Less Than You Earn : Hey, I get less than what I deserve and so do you!! And I’ve not done any budgeting so that I may be sure of the second part.
2. Stick to a Budget : I’m ashamed, no budgeting exercise for myself, not to speak of sticking to one.
3. Pay Off Credit Card Debt: Thank God, I finally get a score on this one. I’ve managed to stay clear though I’ve had to suffer with the agonising interest calculations earlier.
4. Contribute to a Retirement Plan: I do have a pension plan but I’ve never cared to figure out whether it is sufficient! Will give 1/2 for that one to me.
5. Have a Savings Plan: Yeah ,I’ll be partial to myself and give some score here too! I do save about 15% of my income though it’s a recent phenomena. Better late than never!
6. Invest! : Pretty straight forward. But few people manage to find an hour for that in a week. They’ll rather watch TV(Big Boss is on these days!)
7. Maximize Your Employment Benefits : A meeting with your HR guy!! Brace yourself. I have no hope with my guys.
8. Review Your Insurance Coverages: Putting a finger on that is important from the family point of view. Those of you without that responsibility can breathe easy on that count. But I get full marks here!
9. Update Your Will: Never thought about that up till now. Bless Ms Fowles.
10. Keep Good Records: I will, as part of my New Year resolutions. But I’ve yet to get started on that. Next Monday, I promise.
Phew!, I score about 4/10!! So much potential to improve!!
But before I sign off, for guys who suddenly want to get started with their budgeting exercise, here are percentages of major spending categories from the US Bureau of Labor Statistics (2003) Consumer Expenditure Survey. May not apply to you and me but it’s an interesting statistic anyway. Gives you an idea where you stand and where you can increase/decrease your expenses.
Food at home 7.7%
Food away from home 5.4%
Alcoholic beverages 1.0%
Total food and drink 14.1%
Housing 32.9%
Apparel and services 4.0%
Vehicles 9.1%
Gasoline and motor oil 3.3%
Other transportation 6.7%
Healthcare 5.9%
Entertainment 5.0%
Personal care products and services 1.3%
Reading .3%
Education 1.9%
Tobacco products and smoking supplies .7%
Miscellaneous 1.5%
Cash contributions 3.4%
Personal insurance and pensions 9.9%
Work on your Budget sheet for two hours and it’ll tell you a lot about yourself. Look at it as a personality test!!
And yes, Taxquery wonders how any financial planning can be successful without tax planning. He’s dead right. Go to his wonderful blog for tons of info on Taxes
Work the Magic of Compounding April 21, 2007
Posted by Ranjan in Investing, Personal Finance.add a comment
I spent an hour working in calculating the future values of my investments and worked on MS Excel for that. I found out the “Power of Compounding” and the benefit of “Starting Early”.
If I started at age 20 and invested Rs 2000 every month (Rs 24000 annually), my corpus at age 55 would have amounted to Rs 65 lacs. With similar amount and rate of return, if I started at 40, the corpus would be a miserly Rs 7.62 lacs. I invest less by Rs 4.80 lacs and the corpus difference is Rs 57.42 lacs (1196%)!
To match the returns I would have to invest more. How much? Instead of Rs 24000 every year, I will have to invest Rs 205000!! Rs 1.80 lacs more!
Confounded? Want to see the calculations. Download it here You can toggle around with the age, rate of return, retirement age and the amount to be invested. The parts highlighted by blue color are formulas and should not be changed. As you can see, it is nothing of a rocket science. Simple functions on Excel help you in this analysis.
25 Golden Rules of Stock Investing April 20, 2007
Posted by Ranjan in Investing, Personal Finance, Stocks.add a comment
I don’t remember the source, but here they are:
1. Plan your trades. Trade your plan.
2. Keep records of your trading results.
3. Keep a positive attitude, no matter how much you lose.
4. Don’t take the market home.
5. Forget your College degree and trust your instincts.
6. Successful traders buy into bad news and sell into good news.
7. Successful traders are not afraid to buy high and sell low.
8. Continually strive for patience, perseverance, determination, and rational action.
9. Limit your losses – use stops!
10. Never cancel a stop loss order after you have placed it!
11. Place the stop at the time you make your trade.
12. Never get into the market because you are anxious because of waiting.
13. Avoid getting in or out of the market too often.
14. The most difficult task in speculation is not prediction but self-control. Successful trading is difficult and frustrating. You are the most important element in the equation for success.
15. Always discipline yourself by following a pre-determined set of rules.
16. Remember that a bear market will give back in one month what a bull market has taken three months to build.
17. Don’t ever allow a big winning trade to turn into a loser. Stop yourself out if the market moves against you 20% from your peak profit point.
18. Expect and accept losses gracefully. Those who brood over losses always miss the next opportunity, which more than likely will be profitable.
19. Split your profits right down the middle and never risk more than 50% of them again in the market.
20. The key to successful trading is knowing yourself and your stress point.
21. The difference between winners and losers isn’t so much native ability as it is discipline exercised in avoiding mistakes.
22. Speech may be silver but silence is golden. Traders with the golden touch do not talk about their success.
23. Dream big dreams and think tall. Very few people set goals too high. A man becomes what he thinks about all day long.
24. Accept failure as a step towards victory.
25. Have you taken a loss? Forget it quickly. Have you taken a profit? Forget it even quicker!
Too much to follow or remember? Don’t get into stocks then.
