Whose Money Is It Anyway?. Introduction to Personal Finance Tax-saving; Email from F/A!...
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![Page 1: Whose Money Is It Anyway?. Introduction to Personal Finance Tax-saving; Email from F/A! Circumstances Employee Chit-chat Call from relationship Manager.](https://reader035.fdocuments.us/reader035/viewer/2022070323/56649e245503460f94b13484/html5/thumbnails/1.jpg)
Whose Money Is It Anyway?
![Page 2: Whose Money Is It Anyway?. Introduction to Personal Finance Tax-saving; Email from F/A! Circumstances Employee Chit-chat Call from relationship Manager.](https://reader035.fdocuments.us/reader035/viewer/2022070323/56649e245503460f94b13484/html5/thumbnails/2.jpg)
Introduction to Personal Finance
•Tax-saving; Email from F/A!
•Circumstances
•Employee Chit-chat
•Call from relationship Manager
•Friendly neighbourhood insurance agent
When does the typical, average, salaried individual start thinking about money, investing, personal finance?
![Page 3: Whose Money Is It Anyway?. Introduction to Personal Finance Tax-saving; Email from F/A! Circumstances Employee Chit-chat Call from relationship Manager.](https://reader035.fdocuments.us/reader035/viewer/2022070323/56649e245503460f94b13484/html5/thumbnails/3.jpg)
Personal Finance Approaches• Tax-savings first
Buy products or make investments in haste at the end of each FY
• Product-firstSeek out a product for a need without understanding/analyzing the need
• Returns-first
Maniacal obsession over returns without paying heed to long-term and short-term risks
![Page 4: Whose Money Is It Anyway?. Introduction to Personal Finance Tax-saving; Email from F/A! Circumstances Employee Chit-chat Call from relationship Manager.](https://reader035.fdocuments.us/reader035/viewer/2022070323/56649e245503460f94b13484/html5/thumbnails/4.jpg)
Personal Finance Approaches• Needs first
Thorough evaluation of needs … and wants!
• Product-lastWe do not search for products. We narrow down a type of product and then select one from that type
• Tax-planning incidental
Select a product from the chosen category that saves tax.
![Page 5: Whose Money Is It Anyway?. Introduction to Personal Finance Tax-saving; Email from F/A! Circumstances Employee Chit-chat Call from relationship Manager.](https://reader035.fdocuments.us/reader035/viewer/2022070323/56649e245503460f94b13484/html5/thumbnails/5.jpg)
Personal Finance Approaches• Tax-savings first
• Product-first
• Returns-first
• Needs first • Products-last• Tax-planning incidental
Goal-based investing
![Page 6: Whose Money Is It Anyway?. Introduction to Personal Finance Tax-saving; Email from F/A! Circumstances Employee Chit-chat Call from relationship Manager.](https://reader035.fdocuments.us/reader035/viewer/2022070323/56649e245503460f94b13484/html5/thumbnails/6.jpg)
Goal-based investing• List all known ‘needs’ and ‘wants’• Classify them in order of importance• Classify them as per duration• Analyze each need/want. Determine how
much we need to invest• Determine how much we can invest(!)• Decide on an approach• Find suitable investments• Invest• Monitor; Manage – A life long exercise!
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First, we need to build a moat!
Caerlaverock Castle, Scotland. Source: Wikipedia
Random Ramblings
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1. Protection against ….• Death of breadwinner(s)
1. Inflation-proof income to manage monthly expenses at least until kids go to a job
2.School fees3.College fees4.Marriage expenses5.Other liabilities
Solution: Life Insurance
Product: Pure Term Life Insurance until retirement
![Page 9: Whose Money Is It Anyway?. Introduction to Personal Finance Tax-saving; Email from F/A! Circumstances Employee Chit-chat Call from relationship Manager.](https://reader035.fdocuments.us/reader035/viewer/2022070323/56649e245503460f94b13484/html5/thumbnails/9.jpg)
2. Protection against ….• Hospitalization of family members
1.History of illness2.Age of dependents3.College fees4.Typical room rents in neighboring hospitals
Solution: Medical Insurance
Note: Enhance premium annually
![Page 10: Whose Money Is It Anyway?. Introduction to Personal Finance Tax-saving; Email from F/A! Circumstances Employee Chit-chat Call from relationship Manager.](https://reader035.fdocuments.us/reader035/viewer/2022070323/56649e245503460f94b13484/html5/thumbnails/10.jpg)
3. Protection against ….• Emergency expenditures
1. Monthly expenses x 122. Medical emergencies3.Liabilities
Solution: Rainy day fund
Products: SB account; Online FDs, Liquid funds. No credit cards!
Key: Returns are irrelevant; Taxation is secondary; Ability to replenish
![Page 11: Whose Money Is It Anyway?. Introduction to Personal Finance Tax-saving; Email from F/A! Circumstances Employee Chit-chat Call from relationship Manager.](https://reader035.fdocuments.us/reader035/viewer/2022070323/56649e245503460f94b13484/html5/thumbnails/11.jpg)
4. Protection against ….• Disability
1.Must if job is not permanent2.Must for professionals and businessmen
Solution: Accident Insurance
Products: Get from general insurer not from bank!
Key: Read policy document before buying
![Page 12: Whose Money Is It Anyway?. Introduction to Personal Finance Tax-saving; Email from F/A! Circumstances Employee Chit-chat Call from relationship Manager.](https://reader035.fdocuments.us/reader035/viewer/2022070323/56649e245503460f94b13484/html5/thumbnails/12.jpg)
5. Protection against ….• Critical illness?
1.Complex products
2.Better off starting a corpus for medical expenses – treat as a long term goal
Solution: CI insurance
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Cash Flow Analysis: Creating a Zero-based budget
• Zero-based budget: “One in which every dollar is assigned a role” – Dave Ramsey
• No money left at the end of the month!
• Live ‘hand to mouth’ because of investing!
• No lump sums allowed!
![Page 14: Whose Money Is It Anyway?. Introduction to Personal Finance Tax-saving; Email from F/A! Circumstances Employee Chit-chat Call from relationship Manager.](https://reader035.fdocuments.us/reader035/viewer/2022070323/56649e245503460f94b13484/html5/thumbnails/14.jpg)
Zero-based budget
• Step 1: List all sources of income
• Step 2: List all monthly expenses
• Step 3: List all annual/recurring expenses
• Step 4: List present and future liabilities
• Step 5: List present investments (incl EPF)
• Step 6: Determine amount available for investment (incl EPF)
![Page 15: Whose Money Is It Anyway?. Introduction to Personal Finance Tax-saving; Email from F/A! Circumstances Employee Chit-chat Call from relationship Manager.](https://reader035.fdocuments.us/reader035/viewer/2022070323/56649e245503460f94b13484/html5/thumbnails/15.jpg)
Recurring Expenses
• Insurance premium, school fee, AMC fee etc.
• Returns: irrelevant
• Taxation: Irrelevant
• Instruments: SB acct; RDs; Liquid funds; Arbitrage fund(?) …
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Future Expenses: aka financial goals!
• List all expected expenses in future
Expenses before income stops
Expenses after regular income stopsaka ‘Retirement’
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Dividing the goal timeline
~ 5 years
Save Invest
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Power of non-compounding
Power of compounding does not matter for ~ 5Y or less
![Page 19: Whose Money Is It Anyway?. Introduction to Personal Finance Tax-saving; Email from F/A! Circumstances Employee Chit-chat Call from relationship Manager.](https://reader035.fdocuments.us/reader035/viewer/2022070323/56649e245503460f94b13484/html5/thumbnails/19.jpg)
Saving vs. Investing
~ 5 years
Saving Investing
Choose not to Worry Inflation
Returns Choose not to worry
Importance of beating Inflation, grows with duration
Importance growsWith duration
Taxation Choose not to worry
Importance growsWith duration
![Page 20: Whose Money Is It Anyway?. Introduction to Personal Finance Tax-saving; Email from F/A! Circumstances Employee Chit-chat Call from relationship Manager.](https://reader035.fdocuments.us/reader035/viewer/2022070323/56649e245503460f94b13484/html5/thumbnails/20.jpg)
Short-term Goals: determining how much to invest
What is the current Cost ?
Take all expenses into accountAs accurately as possible
Use an inflation of 8-10% (more for a safety margin)
Return = post-tax interest rate of FD or RD
![Page 21: Whose Money Is It Anyway?. Introduction to Personal Finance Tax-saving; Email from F/A! Circumstances Employee Chit-chat Call from relationship Manager.](https://reader035.fdocuments.us/reader035/viewer/2022070323/56649e245503460f94b13484/html5/thumbnails/21.jpg)
Short-term Goals: selecting instruments
• Focus on nature of taxation:
1)Tax upon maturity/redemption (mutual funds)
2)Tax each financial year (RD/FD)
3)As per slab; with indexation; flat rate;
Prefer: Tax upon redemption with indexation (debt mutual funds)
![Page 22: Whose Money Is It Anyway?. Introduction to Personal Finance Tax-saving; Email from F/A! Circumstances Employee Chit-chat Call from relationship Manager.](https://reader035.fdocuments.us/reader035/viewer/2022070323/56649e245503460f94b13484/html5/thumbnails/22.jpg)
Note on indexation benefit
• Capital gains = Sale Price – Purchase price
• If the purchase was made 3Y ago, Inflate purchase price using cost inflation index
• (Sale Price – Inflated Purchase Price) Can be negative
• long-term capital losses can be set off against long-term capital gains
![Page 23: Whose Money Is It Anyway?. Introduction to Personal Finance Tax-saving; Email from F/A! Circumstances Employee Chit-chat Call from relationship Manager.](https://reader035.fdocuments.us/reader035/viewer/2022070323/56649e245503460f94b13484/html5/thumbnails/23.jpg)
Short term capital loss (both in equity or debt fund)
short term capital gain (equity or debt funds)
long term capital gain (debt funds)
long term capital loss (debt funds)
long term capital gains (debt)
long term capital gains in equity mutual funds are tax exempt … for now!
Source: CafeMutual
Offset against
Offset against
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Why not have some equity exposure?
Is not 5 years long-term?!
A primer on volatility
Year 1 Year 2 Year 3 Year 4 Year 5
10% 10% 10% 10% 10%
Annual Returns
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Compounded Annual Growth RateYear 1 Year 2 Year 3 Year 4 Year 5
10% 10% 10% 10% 10%
5 (1 10%)
(1 10%)
(1 10%)
(1 10%)
(1 10%)
1 [
]
CAGR
10% 10% 10% 10% 10%ArithmeticAverage
5
Geometric Average
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Compounded Annual Growth RateYear 1 Year 2 Year 3 Year 4 Year 5
10% 10% 10% 10% 10%
5 (1 10%)
(1 10%)
(1 10%)
(1 10%)
(1 10%)
1 [
]
CAGR
10% 10% 10% 10% 10%ArithmeticAverage
5
Geometric Average
![Page 27: Whose Money Is It Anyway?. Introduction to Personal Finance Tax-saving; Email from F/A! Circumstances Employee Chit-chat Call from relationship Manager.](https://reader035.fdocuments.us/reader035/viewer/2022070323/56649e245503460f94b13484/html5/thumbnails/27.jpg)
4.17 8.54 10.86 11.54 -9.44 8.53 4.14 2.67 11.25 4.57
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
XYZ Monthly Income Plan Fund
Equity Exposure: 11.5% to 15.1%Cash Exposure: 41% to 85%Rest Bonds
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5 year CAGR
Year 1 Year 2 Year 3 Year 4 Year 5
8.53% 4.14% 2.67% 11.25% 4.57%
5 (1 8.53%)
(1 4.14%)
(1 2.67%)
(1 11.25%)
(1 4.57%)
1 [
]
CAGR
6.2%
Assuming no fluctuation from debt component!
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Monthly Income Plan Funds
5 year returns: 5.6% to 13.6%