NPS Vatsalya is the central government’s new pension plan for children, which Finance Minister Nirmala Sitharaman recently launched. Finance Minister N. Sitharaman announced the Scheme in the Union Budget 2024-25. NPS Vatsalya is a plan for contribution by parents and guardians for minors. It is billed as the government’s “commitment to promote early start in securing children’s financial future”. The scheme will initiate minor subscribers into the scheme with Permanent Retirement Account Number (PRAN) cards.
NPS Vatsalya will allow parents to save for their children’s future by investing in a pension account and ensure long-term wealth with the power of compounding.
The Scheme offers flexible investment options, allowing parents and guardians to make contributions of ₹ 1,000 annually in the child’s name. This makes the scheme accessible to families from all economic backgrounds. When the child reaches age of majority, the plan can be converted seamlessly into a normal NPS account. This new initiative is designed to start early in securing children’s financial future, marking an important step in India’s pension system.
The NPS Vatsalya Scheme will be run under the Pension Fund Regulatory and Development Authority (PFRDA).
The scheme has already attracted significant interest, with 9,705 minor subscribers enrolling on launch day, according to a statement from the Pension Fund Regulatory and Development Authority (PFRDA).
Documentation required
To open an NPS Vatsalya account, the following documents are required:
PAN of the Guardian: The PAN of the parent or legal guardian is mandatory, while a PAN for the minor is not required.
Identity proof: Valid ID for the guardian.
Proof of age: Birth certificate or any government-issued document showing the child’s age.
Taxability
Investments made under the NPS Vatsalya Scheme are classified under the EEE (exempt-exempt-exempt) category. This means that contributions are tax-deductible, with no tax liabilities during investment, accumulation, or withdrawal stages. Investment in tier I of NPS falls under the EEE category, and therefore there are no tax liabilities in all the three stages of investment. Currently, NPS Vatsalya is open only for tier I.
Transitioning to an adult account
When a minor turns 18, their NPS Vatsalya account will automatically convert into a regular NPS account. The subscriber will have to complete the KYC process for the same. This process can be completed online and the subscriber need not visit the points of presence (PoP). The schemes for NPS Vatsalya and regular NPS are the same. On shifting the account to regular NPS, the asset allocation will remain the same, and the subscriber will be able to change it, if required, under the norms of regular NPS.
At 18, investors can either withdraw a portion of their corpus or use it to purchase an annuity.
Currently, most of the parents buy Child Insurance plans. But these are low-return plans with bad insurance coverage. NPS Vatsalya will provide another avenue for parents who want to save money for their kids. Higher equity investment option will give market returns as the money will be locked for longer term.
However, only time will tell the acceptance of such a scheme among the masses.
Warren Buffett is known as a legendary investor. He is the greatest investor of all time. He earned consistent returns from his investment, which seems unrealistic, but true. Every investor wants to know, how did he do this. Warren himself explained that sticking to a few key principles over long term is key to successful investing. These rules can be implemented in everyday life. Here are seven rules of Warren Buffett, revealed by him during a lecture, which can make us better investors.
Intelligence, Initiative, and Integrity
Warren says – “We look for intelligence, initiative or energy, and integrity when hiring people. If somebody does not have integrity, then the first two will kill you. Because if you hire someone without integrity, you want them dumb and lazy. You don’t want them smart and energetic.”
Thus an investor must look to invest at those companies, that are run by people of integrity. Obviously, the first two are important, but integrity is a non-negotiable principle.
Always look at facts, not emotions
Warren says – “Investors behave in very human ways, which is they get very excited during bull markets and they look in the rearview mirror and they say, I made money last year, I want to make more money this year. So this time I will borrow. So when In view in the rearview mirror, a lot of money has been made in the last few years. They plow in and they just push and push up prices and when they look in the rearview mirror, and they see no money having been made, they just say, “ This is a lousy place to be”, So they don’t care what is going on in the underlying business. It is astounding but that makes for a huge opportunity.”
Typical investors get influenced by the bull run or bear phase. The correct ways to focus on the underlying business, irrespective of market sentiments.
Buy Wonderful Businesses at fair prices, not Cigar Butts
Warren says – “I have been taught by Ben Graham to buy things on a quantitative basis. Look around for things that are cheap. That was taught in 1940s or 1950s. It made a big impression on me. So I went around looking for what I call “Used Cigar Butt” of stocks. The Cigar Butt approach of buying stock is that you walk down the street and you are looking around for cigar butts and you find that on the street this terrible looking soggy, ugly looking cigar, one puff left in it. But you pick it up and you get one puff and throw it away. Disgusting, but it is free. I mean it is cheap. And then you look around for another soggy one puff cigarette. That’s what I did for years. But it is a mistake. Although you make money doing it but you can’t make it with big money. It is so much easier to buy wonderful businesses. So now I would rather buy a wonderful business at affair price than a fair business at wonderful price.”
Crappy businesses are unpredictable. There is a very low probability of making money by investing in such businesses. It is always better to invest in wonderful companies at a fair valuation.
Buy only those stocks, that you understand
Warren says – “I have an old-fashioned belief that I can only expect to make money on things that I understand and when I say understand, I do not mean to understand, what the product does or anything like that. I mean, I understand what the economics of the business look like 10 years from now or 20 years from now. I know in general what the economics will say, Wrigley’s chewing gum will look like 10 years from now. The internet is not going to change the the way, people chew gum. It is not going to change, which gum they chew. If you own the chewing gum market in a big way and if you have got Doublemint, Spearmint and Juicyfruit, those brand would be there 10 years from now on. I can’t pin point exactly, what the numbers going to be look like, but will not be way off, if I try to look forward on something like that. Evaluating that company is within what I call “ my circle of competence”. I understand what they do, I understand the economics of it, I understand the competitive aspects of business.”
Finding your circle of competence and investing around it will increase the probability of success in investing. One can understand the economics behind such businesses and can see 20 years from now in such businesses.
Avoid missing the opportunities
Warren says – “The biggest mistake we have made by far of mistakes of omission, not commission. It means, things, I knew enough to do. They were within my circle of competence. Still, I passed up the opportunity. I probably cost Berkshire at least USD 5 billion. For example 20 years ago, when Fannie Mae was having some troubles and we could have bought the whole company for practically nothing. I don’t worry about that if it is Microsoft, because Microsoft isn’t my circle of competence. But I did know enough to understand Fannie Mae and I blew it. Those were the big mistakes and I have got plenty of them. Big opportunities in life have to be seized. We do not do so many things, but when we get a chance to do something, that is right and big, we’ve got to do it. And even doing it a small scale is almost not doing it at all. You really got to grab them, when they come. Because you are not going to get 500 great opportunities. You would be better off, when you got out of school and you got a punch card with 20 punches on it and every big financial decision you made, you used up a punch, you’d get very rich because you’d think through very hard in making each decision. If you go to a cocktail party and someone talking about a company, he made money on that last week, you would not buy it, if you had only 20 punches on the card.”
Always think very hard before making an investing decision. Always look out for good investing opportunities.
When to sell?
Warren says – “We are not going to sell our wholly owned business, no matter how much somebody offers us. If somebody offers 3 times, what somebody is worth, we are not going to sell it. I may be wrong in having that approach. But selling one would be like selling one of my children, because somebody waived a big cheque. If we are short of funds and some opportunity comes, we might have a somewhat different approach. But our inclination is not to sell things unless we get really discouraged perhaps with management or we think that the economic characteristics of the business change in a big way. And that happens. So we are not going to sell simply because it looks too high, in all likelihood.”
Stay invested for long term. Sell only when business economics changes and does not support your long-term views.
How does Warren finds intrinsic value in a company…
Warren says – “Intrinsic value is the number that if you were all knowing about the future and could predict all the cash that a business would give you between now and the judgment day, discounted at a proper discount rate, that number is what the intrinsic value of a business is. In other words the only reason for making an investment and laying out money now is to get more money later on, right? That’s what investing is all about. Now when you look at a stock, when you look at a bond, assuming it is a United States Government Bond, It is very easy to tell, what you are gonna get back. It says when you get the interest payments, it says when you get the principal. So it is very easy to figure out the value of a bond. It can change tomorrow if interest rates change. The cash flows are printed on the bond. But cash flows are not printed on stock certificate. That is the job of analyst to print out change that stock certificate , which represents an interest in the business and change that into a bond and say, this is what I think, it’s going to payout in future. If you buy Coca Cola today, the company is selling at $110-115 billion in the market. If you had $110-115 billion, the question is “ would you lay it out today, to get what the Coca Cola company is going to deliver to you over the next 200-300 years. The discount rate does make much difference after, as you get further out. And that is a question, how much cash they are going to give you. It is true if you are buying a farm or an apartment or oil in the ground, any financial asset. You are laying out cash now to get more cash back later on. And the question is how much you are going to get? When are you going to get it? And How sure are you? When I calculate intrinsic value of a business, whether we are buying all of a business or a little piece of a business, I always think, we are buying the whole business, because that’s may approach to it. I look at it and say, what will come out of this business and when? What you really like of course is then to be able to use the money, they earn and earn higher return on it, as you go along. I mean Berkshire has never distributed anything to its shareholders, but its ability to distribute goes up, as the value of business we own increases. We can compound it internally. So if you can’t answer this question, you can’t buy the stock.”
Intrinsic value is the present value of future cash flow, discounted at an appropriate discount rate. It is not very complex to estimate long-term cash flows of a simple and predictable business.
If you do not have a guaranteed pension for life, your biggest fear of retirement may be “What if the money does not last for life”. So, it is necessary to have a plan in advance for retirement years.
During a normal discussion on personal finances, Amit told Mohan that though he is saving for retirement, which is far away. Still, he does not know, how many years of retirement you should plan for. It is very difficult to look at 20-30 years of retirement. What if, saved money would not be sufficient for life, given the inflation?
This question is generally very difficult to answer because you do not know, how long you will live. Still, you can estimate the years of retirement and then you can chalk out a plan.
Estimating years of Retirement
Though it is not easy to accurately predict the number of years in retirement, still you can put in a rough estimate. This estimate could be based on general life expectancy, your present health, medical support systems in your neighborhood, and other factors. I know it is difficult to make such an estimate.
Recently, J. P. Morgan in a study showed that a person has about 83% chance of living till 75, about 50% chance of living till 85, 28% chance of living till 90, 11% chance of living till 95, and 2% chance of living till 100.
Assuming you do not have any life-threatening health issues, you can safely say that there are 25-28% chance of living till 90 years. Now you can plan around this estimated life.
You also need to decide about the age of retirement. Say, if you retire at the age of 55 years, you need to plan for 35 years of retirement (till the age of 90).
Estimating Retirement Corpus
You will need money to support you for about 35 years (a long time). You need to ensure that money does not run out. 35 years is a long time and inflation may have a critical impact on your plans. There have been several studies, that indicate that if you withdraw 3% to 4% annually from retirement corpus, adjusted for inflation, it will sustain you for your life. This is called the Safe Withdrawal Rate.
If you choose the 4% Safe Withdrawal rate, then you need to multiply your annual expenses by 25 to arrive at an estimated retirement corpus amount. For example, if you need 1 lakh for monthly expenses at retirement, then for 12 lakh annual expenses, 3 crores (12 lakh X 25) would be required in retirement corpus.
In the above example, monthly expenses of 1 lakh are estimated at retirement age. It also means that if you want to retire today with 1 lakh as monthly sustenance expenses, then you would require at least 3 Crores.
But only sustenance expenses are not enough. You also need to account for some big expenses that may fall after retirement, such as higher education of kids, marriage of kids, healthcare expenses, etc. The same needs to be added to arrive at the corpus needed at the time of retirement.
Keep an Eye on Inflation
To avoid the situation, where your corpus may run out, you need to keep a watch on inflation. You may need to adjust your expenses if the remaining corpus seems insufficient. If you are getting an average return of about 8% on your investments, while you withdraw 4% annually, you will have a surplus of 4%. This surplus can be used for additional expenses. If you are generating returns through equity, you need to decide surplus based on 3 years’ returns, because equity markets may also give negative returns in any year.
Keeping Things Simple
Once-a-year review is sufficient for this plan. You can do this on January 1st or your birthday. Based on returns earned over investments and prevailing inflation, you can decide about the withdrawal amount for next year. You can withdraw the annual expenses and deposit them into a liquid fund. From liquid funds, a Systematic Withdrawal Plan (SWP) instructions will deposit the amount automatically in your bank account monthly.
With proper planning in advance, you can estimate the required corpus amount. The earlier you plan, you will have sufficient time to fund your corpus with savings and investments. Remember, you can not plan for retirement, if it is tomorrow.
Simplification and ease of doing is the bedrock of financial planning. It is always helpful to get a perspective on investment returns. This article gives you scenarios of returns achieved if you invest Rs 10000 monthly SIP for 10 years.
SIP stands for Systematic Investment Plan. In SIP, an investor invests a fixed sum monthly on an asset class, irrespective of the condition of the economy or stock market. It is a technique of rupee cost averaging. A few mutual funds have also launched daily SIPs. But monthly SIP is sufficient for averaging and is more popular amongst investors. This study is based on monthly SIP. Before estimating returns on SIP, let us first decide on the asset class for investment.
Choosing Asset Class for Investment
There are plenty of options available to an investor for investment. One can invest directly in stocks or indirectly through equity mutual funds. You can also invest in much safer debt mutual funds. There are also Exchange Traded Funds (ETF). Equity mutual funds have a superior risk return profile. Also, you can get higher returns than debt mutual funds by investing in equity mutual funds. Selection of asset class to be done based on risk appetite of individual investors. But for this study, we will consider investing in equity mutual fund.
Selecting Equity Mutual Fund to Invest
Equity mutual funds are broadly of five types. Large Cap, Mid Cap, Small Cap, Flexi Cap, Thematic
Index have returned more than 12% in long term. We’ll avoid thematic and invest in a broad-based fund such as Nifty50 index or Nifty500 index fund.
Rs 10000 Monthly SIP for 10 Years
We’ll invest Rs 10,000 per month via the SIP route for 10 years. Given long-term track record, we assume a 12% annualized return on investment. At the end of ten years, the total value of investments would be Rs 22.42 lakhs, out of which Rs 10.42 lakhs were earned through returns, against a total investment of Rs 12.00 lakh. Please look at image below for year-on-year return.
You can notice that in the year 7 annual return Rs 1.32 lakh is more than the annual investment of Rs 1.20 lakh. By year 10, the annual return (Rs 2.34 lakh) would be around 2 times of annual investment.
Rs 10,000 monthly SIP for 15 years
If you invest Rs 10,000 via monthly SIP for 15 years. Assuming 12% annualized return on investment, at the end of 15 years, the total value of investments would be Rs 47.64 lakhs, out of which Rs 29.64 lakhs were earned through returns against total investment of Rs 18.00 lakh. Please look at yearly report below.
You can see that in the year 15, one year return is about Rs 5 lakh. This is power of compounding.
Returns for 20 and 30 Years Investment
If you can maintain the discipline of investing for 20 years without withdrawing any amount, your total maturity amount would be Rs 92.08 lakhs, against total investment of Rs 24 lakhs.
For 30 years investment, the total maturity amount would be Rs 3.08 crores against total investment of Rs 36 lakh. That is 8.5 times the invested amount.
Returns for 30 Years STEP-UP Investment
If you increase the SIP amount by Rs 1,000 every year and invest for 30 years in the same way, your maturity amount would be Rs 5.33 Crores against total investment of Rs 88.20 lakh.
Conclusion
This is a simple strategy to accumulate huge retirement sum, but it is very difficult to implement. It is simple because it is passive. It is difficult because, you will get into several situations, which may force you to withdraw from your investments. To make this strategy successful, you must have sufficient term insurance, health insurance and an appropriate emergency fund. Also, you need to create different funds for important life events such as an education fund, marriage fund, so that you need not dip into this corpus.
Creating a budget is the first step in your Financial Independence journey. Sticking to your budget is the next and most important step. If you are a free spender, then it could be very challenging for you. People usually tell me that they do not know, where the money is going. My answer is always like…” track it”. Usually, it does require big efforts to stick to your budget. You need to take the first step and continue for an entire month. Sticking to your budget for an entire month is like a tightrope walk for someone, who has never done this.
So let us assume that you have prepared your monthly budget. 20% of monthly take-home salary for investment/savings and 80% for current expenses. This 80% of current expenses would include Essential and Non-essential expenses. Try to limit your essential expenses to 50% of your take-home salary and 30% to non-essential expenses.
Here are some tips, which will help you to stay on track with your budget target.
Use Cash as far as Possible
Use cash for payments as far as possible for all your transactions. Cash means, you use real money in your account, not the credit card money. Seeing real cash getting deducted from your account or paying hard currency notes by hand has a profound impact on limiting overspending habits. For digital transactions, use UPI or Internet Banking. Since it requires that you can only use the amount available in your bank account, you can never spend more than you have.
Using this technique, you can stick to your budget and avoid overspending. You can also consider using hard cash for payment of non-essential things, such as eating out or entertainment.
Be a Responsible Credit Card User
When you pay for your expenses using Credit Cards, you will feel happier as compared to when you spend hard cash. Since you are not paying from your pocket, you feel like getting it for free. In reality, you have used the Credit Card Company’s money (money on credit), which you have to repay after a month. This is the reason, most of prudent financial planners advise staying away from Credit Cards.
I believe that it is not practical to not have Credit Cards. Credit Cards have their utility. In one place, they help us save substantial money through discounts on products, they also help to build good credit scores. Remember that Credit Cards Are Good Servant But Bad Master.
You have to be more responsible towards Credit Cards usage. You need to squeeze all discounts, cashback and benefits available from a credit card. If you get your salary on a “T” date, change your credit card payment date to a “T+5” date. As soon as you get your salary, pay off the entire credit card bill (without waiting till “T+5”). If a Credit Card is helping us to get a discount on flight tickets, restaurant bills, or e-commerce websites such as Amazon or Flipkart, etc, we must use that Credit Card to get the discount.
There is one Credit Card Trick, which can help you avoid overspending and keep a foolproof track on expenses. The trick is that If you want to spend “X” amount, first check, if you have that much amount in your bank account. If yes, only then use your Credit Card. After the transaction on your Credit Card, immediately transfer the same amount to your other bank account. This amount was saved for next month’s repayment of your credit card bill.
Let us understand this with an example. You have 2 bank accounts, say, one in ICICI Bank and the other in Axis Bank. You use ICICI Bank account as the primary account, where your salary gets credited. Suppose you need to buy a product from Amazon for 5,000. You found that Amazon is providing a 5% additional discount on Amazon Pay ICICI Bank Credit Card.
First check, if you have 5,000 in your ICICI Bank account.
Then decide, if this spend of 5,000 would fall under 50% (essential) or 30% (non-essential) and decide if you still want to make this purchase.
Then, use your credit card for a purchase of 4,750 (net of 5% discount).
After that, immediately transfer 4,750 from your ICICI Bank account to your Axis Bank account.
The amount transferred to Axis Bank will be used for payment of ICICI Credit Card bills.
Usually, people overspend, due to higher limits available on Credit Cards. They lose sense of control. But this overspending hits them at the time of payment of Credit Card bills. This technique of transferring equivalent cash to another bank account will ensure that you will never overspend.
Tracking your expenses is extremely important for sticking to your budget. By tracking, you will always have a fair amount of idea, where your money is going. If you are going overboard, then you can adjust your spending to remain within your budget. Tracking will also help you in accurate planning for the next month. You can use a budgeting app or a spreadsheet to track your spending but I recommend old-fashioned, writing down your expenses in a notebook. You also need to review your budget regularly, so that you can stay on track.
Always Make a List Before Going for Shopping
Failing To Plan Is Planning To Fail. If you do not make a list of things to buy, before going shopping, you will do impulse buying and wreck your budget. First, make a list of things, you need and stick to it during shopping. Don’t buy things, that you don’t need.
Understand the difference between WANT (non-essential) and NEED (essential). If you see something and WANT to buy it, don’t buy it immediately. Wait for a few days before buying. By delaying tactics, you can avoid most of the non-essential expenses.
Plan for Your Food Ahead
If you can plan for your food, you can save substantial money on eating out and non-essential groceries. Some small steps such as buying groceries in bulk, having food at home before going out, and taking your water bottle with you whenever stepping out of home, are such small yet significant steps, that can help you save a substantial sum in the long run.
Cutting Non-Essential Expenses
Identify and cut non-essential expenses. You must regularly review your monthly expenses and decide if you can eliminate any expenses. Sometimes we enroll in magazine subscriptions and Gym memberships, which we do not use. You can cancel those, which you do not need.
Find Cheaper Options
Always try to find cheaper quality options for the product, you are buying. Rather than branded medicines, generic medicine can be used. Instead of costly branded clothing, quality clothes from discount stores may be purchased. Similarly, cheaper alternatives for transportation and entertainment can be explored.
Envelope System of budgeting
In this method of budgeting, we divide the entire available cash into different envelopes as per budget estimates, representing different categories such as grocery, transportation, entertainment, education, etc. As soon as you run out of cash from any envelope in a particular month, you stop spending cash in that category. This method will help you to avoid overspending and keep you within your budget.
Keep Your Morale High
Making a budget is the first step in financial freedom. Sticking to your budget is half the battle won. Stick to 50-30-20 which means not more than 50% of take-home on essential expenses, and not more than 30% on non-essential expenses. Essential + non-essential expenses must be less than 80% of your take-home pay. Try to increase your investment/ saving from the initial 20% target.
To keep yourself motivated, keep on indulging in some luxuries as a reward, while keeping in budget. Keep on reminding yourself that sticking to your budget will reward you with reduced debt and financial freedom over the long term.
Conclusion
Creating a budget and sticking to it, is essential for achieving your financial goals. If you implement the above tips, I am sure that you will not go over budget and have effective control over your finances. Your self-discipline and commitment towards sticking to a budget will lead you to the path of RICHNESS.
October 2023 marks the third year of my budgeting journey. Before October 2020, I never took budgeting seriously. Though I always wanted to track my spending, but found it too complex. I had several credit cards, which I heavily used for expenses. Sometimes payments also happened on cash basis. Initially, I used an expense-tracking app to track cash flow. The app was used to read SMS and automatically categorize expenses. Most of the time, the app wrongly categorized expenses. Also, the app could not differentiate between cash and credit card spend.
My idea for cash flow management was that credit card spending is cash flow for the next month (when we pay credit card bills- how wrong I was?). After trying for a few months, I stopped tracking cash flow. It was too tedious and complex.
Then something happened in October 2020, which pushed me to keep control over my expenses. I had taken a home loan. Usually, a home loan is the biggest loan, one takes in life. Now, I needed to keep tight control over my spending because besides paying home loan repayment, I needed to save towards investments.
This time, I used an old method of expense tracking, i.e. tracking expenses in a diary. Over time, I refined and improved the process. Now, it has been three years or 36 months of continuous tracking. It has now been ingrained in my behavior. On the last day of every month, I feel the anxiety of knowing my financial position.
First few steps are always hard. In this post, I will elaborate on the budgeting process in simple steps. While making a monthly budget, I decided to streamline my credit card spending. Here is how you can approach the same.
Budgeting Step-1: Managing Multiple Credit Cards
If you use multiple credit cards, you would have found it difficult to keep a tab on tracking your spending. Also, sometimes it becomes tedious to remember different payment dates. A missing payment date means a big penalty. I decided to simplify this. Firstly, I reduced the number of credit cards from 7 to 4. It is a one-time 10 mins investment to get a card cancelled. The customer care guy will entice you with offers to keep the card alive. But you do not deviate from this punchline “I want to close this card”.
If you can live with one credit card only, even better. Then, decide to use only one credit card for all kinds of transactions. Change the billing cycle, so that bill payment date occurs on the 5th of every month for all credit cards. But, you need not wait till the 5th for payment of bills. On the first weekend, after you get your salary, pay all your credit card bills. By this, you save precious money on unnecessary credit card penalties. You also keep your mind free from worries by paying all bills before time. Needless to say, this will lead to a big thumbs up to your credit score.
Budgeting Step-2: Buy a diary
You have to keep this process sacrosanct. This diary will only be used for writing your budget, nothing else. This diary must have at least 50-60 pages so that the same diary can be used for years. Please do not use digital diaries (word doc, notepad, etc.) for this process. We shall use a paper diary and write on it with a pen. Please note that Budgeting is a behavioral finance exercise. Writing has a more profound impact on your brain than typing.
Budgeting Step-3: Categorize Expenses into Four Buckets
Let’s divide all your expenses into four buckets. Managing four categories is easy. Our whole objective is to cut the clutter and keep this process simple enough.
Bucket-1: Essential expenses
Bucket-2: Non-essential expenses
Bucket-3: Investments
Bucket-4: Given to others
Bucket-1:
This bucket is for essential expenses only. Essential expenses are such expenses that are required to live your life with dignity. Grocery, utility bills, rent, school fees, kid’s education-related expenses, traveling cost to office/ school, etc. come under this category. To decide, if some expense is essential or not, ask yourself this question. “If you lose your job, will you still spend money on this?” If the answer to the question is yes, then it is an essential expense, otherwise not.
Bucket-2:
This bucket is for non-essential expenses only. Any non-essential expense will come under this bucket. Eating out, party expenses, buying non-essential gadgets, unnecessary OTT or gym subscriptions, etc. come under non-essential expenses. You can ask yourself the same question, as in Bucket-1 to decide about non-essential expenses.
Bucket-3
This is your most important bucket, called the investment bucket. You should strive to invest/ save at least 20% of your take-home income. If you are using mutual funds, set up SIP for automatic deduction from your bank account. If you can save more than 30% of your take-home salary, you are on a fast tack to financial freedom.
Before making an investment for growth, you need investment for safety. You need to create an Emergency Fund to provide a safety cushion to your investment and save you from sudden financial impacts. You can learn more about the Emergency Fund here.
Bucket-4
Expenses, which are not covered above will be listed here. For example, money lent to someone, payment to charity etc will come here.
Budgeting Step-4: Start Tracking/ Recording Your Expenses in Notes App
You must already have a “Notes” app in your smartphone. You can also use Google Keep, ColorNote, Notepad, OneNote, etc. apps. Open a new page in this app and name the page as budget.
Use your Notes app on your mobile to note down expenses on a real-time basis. That means, immediately recording the expense in a proper bucket. Do not wait till the evening. You just need to record the amount. That’s it. A typical Note on your smartphone looks like this.
Every Sunday, you have to note down all expenses from the app to your diary. Again, sit on the last date of the month to add all numbers in a particular bucket and we have monthly expense data with us. As there are 4 weeks in a month, you need to record expenses 4 times monthly.
Repeat this process for 2-3 months. You will have a ballpark estimate of your essential expenses and non-essential expenses. Remember: You don’t need to be accurate. Ballpark estimates keep this process easy and keep your life simple.
Budgeting Step-5: Making Your Personal Balance Sheet
After recording expenses in your diary, on the last day of the month, you need to draw your balance sheet. This balance sheet will give you a clear picture of your financial standing. It is a simple process, just follow the below steps.
We first note down the list of Assets, then Liabilities, and then calculate Net Worth (by subtracting Liabilities from Assets)
Assets include cash in the bank, the value of the investment in mutual fund accounts, stocks, FDs, and Retirement funds such as the Public Provident Fund (PPF), National Pension Scheme (NPS), Contributary Provident Fund, etc. I have not added real estate, because we are trying to ascertain cash net worth. These assets can be termed as cash assets.
Liabilities include any debt that you have taken such as home loan, personal loan, credit card debt etc.
Asset minus Liabilities will give you cash net worth. Please have a look at the below picture for more clarity.
This Cash Net Worth will be a good indicator of your financial position as of that date. If you have to retire tomorrow, this cash is available to you immediately.
Budgeting Step-6: Review of Expenses
On the first day of the month or the last date of the previous month, you need to review expenses done in the previous month. Usually, you will find most of the expenses in buckets 1, 2, and 3 only. It is recommended to keep sum of essential and non-essential expenses less than 80% of your take-home pay. The investment bucket must be at least 20% of your take-home pay. If you are below 20%, make all efforts, including reducing non-essential expenses to reach at least 20% investment target. If you can increase bucket 3 to 30% or 40% or 50%, you will reach the financial independence stage very soon.
On the very same day, you also review your personal balance sheet. If you are in a negative Net Worth stage, make serious efforts to increase your assets, while reducing your liabilities. To increase assets, you need to increase funds towards investments. To decrease liabilities, reduce non-essential expenses. Reduce/ avoid debt. Also, avoid taking on more debt. Get rid of high-cost debt (debt at high rate of interest) first. Once you reach at a positive Net Worth category, keep on increasing this number.
Repeat Every Month
You need to repeat this exercise every month. The initial few months would be tougher, but ultimately tracking budget and balance sheet would become your second nature by fourth or fifth month.
Conclusion
What gets measured, gets improved. Budgeting of your finances is the first step of your financial journey. Consistent efforts will definitely keep you in that path. I am sure, you will improvise the above methodology to suit your style. Do you have any comments, please let me know.
To get 50,000 monthly income for a lifetime, we need to invest a certain sum on a lumpsum basis and then devise a proper strategy for withdrawal. There are several ways to achieve it. If you do not want to do it yourself, you have to rely on some institution to do it for you. One way of doing it is to invest in bank fixed deposits or Post office Fixed Deposit schemes. Another way of doing it to buy an annuity from an insurance company. The third way of getting 50,000 monthly is to invest in equity. Let’s analyze all three options in detail.
Invest in Bank Fixed deposits and liquid funds for monthly income
You can invest in bank fixed deposits or Post office deposits to receive 100% risk-free income. Assuming a 6% rate of interest, you need to invest 1,00,00,000 One crore to receive 50,000 monthly income. But long-term interest rates may go downwards, thus reducing your interest income. If you are a senior citizen, you can invest in Senior Citizen Savings Schemes for higher returns, but there is lock-in of 5 years. You can use a combination of liquid funds and FDs. For ease of operations, keep 12 lakh in liquid fund and set up a Systematic Withdrawal Plan (SWP) for a monthly withdrawal of Rs 50,000. The remaining amount to be invested in FDs in multiples of Rs 5 lakh FD.
Buy an annuity scheme from an insurance company for monthly income
Using this method also you can ensure a lifetime pension amount. This method is better than the previous method because here, a lifetime pension is guaranteed by the insurance company.
If you invest Rs 1 core as one one-time payout to the insurance company, you can immediately start an annuity. For example, with Rs 1 crore investment amount, HDFC Life provides Rs 58,700 per month lifetime, while MaxLife and ICICIPru give Rs 53,500 and 50,700 respectively.
With a one-time investment of Rs 1,00,00,000 (one crore), you can get a pension for life. The drawback is that your pension amount will remain the same throughout your life. If you want to continue your pension to your dependant (spouse) after you, there are options available.
Investing in equity (Do-It-Yourself method)
In this method, we invest a part of the total amount in equity to generate inflation-beating returns. The good news is that you can do this with a starting amount of Rs 95,00,000 (Ninety-five lakh) only compared to other options. The key benefits with this option are as below:
Initial corpus: Rs 95,00,000 (Ninety-five lakh)
Your monthly income increases by Rs 5,000 every year. So, year-2 monthly income would be Rs 55,000. Year-3 monthly income would be Rs 60,000 and so on. Year-10 monthly income Rs 95,000. Year-15 monthly income Rs 1,20,000. Year-20 monthly income Rs 1.45,000. Year-25 monthly income Rs 1,70,000. Year-25 monthly income Rs 1,95,000.
This arrangement will last for 50 years. Year-50 monthly income Rs 2,95,000
The portfolio value will peak at Rs 2.2 crore in Year-35. After that, the portfolio value will start decreasing.
This method assumes 12% per annum annualized returns on index funds and 6% per annum annualized returns on FD/ liquid funds.
Now let’s understand the 4 step process:
Step1:
Invest 75% amount (Rs 71,25,000) in a broad-based index fund. Nifty-50 index fund or S&P Nifty500 index fund could be a good option for this. There are only 2 criteria. The fee must be as low as possible and the fund should be from an established fund house with having 10-20 years track record.
Step2:
Invest 25% amount (Rs 23,75,000) in a liquid fund or bank FD. Liquid funds are better in terms of setting up automatic withdrawal instructions. FDs are cumbersome as these are tax inefficient and banks levy penal charges for premature withdrawal.
Step3:
Set up a Systematic Withdrawal Plan (SWP) in liquid fund at monthly intervals for a monthly income of Rs 50,000 for a year. Next year, the same instruction is to be revised for a monthly income value of Rs 55,000 and so on.
Step-4:
Setting up SWP instructions from index fund. This is to be done in year-4, when you exhaust your liquid fund. You use liquid funds for an initial 3-4 years and then withdraw from the index fund.
It is also important to understand the issues in method three. The issue is with the human psyche. Here the period is large. In this method, there is no lock-in. All money is at your disposal. You can withdraw all the money at any point in time. And this is biggest drawback of this method, is that it does not force you to stay invested and use only the withdrawn amount. You need self-discipline to succeed here.
Which method to choose
Now, we have analyzed 3 methods of generating a monthly income of Rs 50,000. Method three of investing in equity is the winner of the three. Still, we recommend that you must choose the method, you are most comfortable with. If you have invested in equity and mutual funds in your working life, you would understand that market returns may remain volatile in the short term, but they generate superior returns in the long term. Seeing your portfolio in red is painful. That’s why we have not touched index funds for the initial 3-4 years. By that time, returns generated would be sufficient to take care of any short-term volatility and therefore, the principal amount remains unaffected.
If you are somebody, who has never invested in equity funds or stocks and is in late 60s, I would advise to stick with the annuity route. If you also want to have full control over your money during the retirement period, then invest in bank FDs.
Now, we have so many digital options and apps at our disposal that, it is very easy to invest and set up SWP without visiting any branch. You can get help from your financial planner for setting up the same.
[Disclaimer: Website and the information contained herein is not intended to be a source of advice or credit analysis with respect to the material presented, and the information and/or documents contained in this website do not constitute investment advice.]
Everyone faces an emergency sometime in life. I am talking about a financial emergency, which you would have faced in the past. You can reduce the impact of financial emergency if you have an emergency fund. In this article, we shall delve into “What is an Emergency Fund and How to Create one?“.
Recently Lido Learning, SuperLearn, and GoNuts had laid off 100% of its workforce. Then GoMechanic, PhableCare, and MFine laid off 70-75% of its workforce. Byju’s laid off 4,000 employees and Swiggy laid off 2,880 employees. And the list keeps growing.
With these job losses, come laid-off employees missing their EMIs, delaying health care expenses, and delaying school fees of their kids.
However, with proper planning, the monetary impact of such events can be managed with adequate emergency funds.
First Rule: Have an Adequate Emergency Fund
It is one of the first rules of financial planning that a person must have adequate protection in the form of an emergency fund. It is such kind of fund, which you keep at a safe place. You do not touch this fund unless there is an emergency. Financial planners generally suggest that Emergency funds should be equal to three to six months of living expenses. These include expenses that can not be avoided even if there is a loss of income. Such as expenses towards food, kids’s education, rent, EMIs, insurance, etc.
Say, you have monthly expenses of Rs 50,000 and another Rs 10,000 for EMI payments, then the appropriate emergency fund should be six times Rs 60,000 i.e. Rs 3,60,000.
Emergency fund protects you, in case of sudden loss of income. It also helps you to tide up with essential expenses, till the time you restore your income.
Further, if one meets with an accident, then you may require immediate funds. Insurance may not cover all expenses. Sometimes you need to get spend from your pocket beforehand, and then seek reimbursement from the insurance company.
In case of sudden job loss, it may take about six months to get a new job. That’s why a six-month emergency fund was recommended, however, you can increase/ decrease the cover, given your specific situation.
How to create an Emergency Fund?
Once you have decided on the quantum of the Emergency Fund, contribute every month towards this through SIP, until the required fund is reached. Remember, you need to first create an Emergency Fund and only after that, you can invest the surplus savings in other investment avenues.
Where can you keep your emergency fund?
An emergency fund is for the emergency, hence it should be kept at the safest place. Also, it must be easily and immediately accessible. For safety, one has to compromise with returns.
You can park one-half of the Emergency Fund in the form of bank Fixed Deposits and liquid funds. The remaining one-half can be invested in a Balance Advantage Fund, such as ICICI Pru Balance Advantage Fund.
While creating bank fixed deposits, do it using online mode. That way, you can liquidate FDs even at midnight without visiting a bank branch.
For Bank FDs, always choose big banks such as SBI, ICICI, HDFC, etc. You must avoid cooperative banks or small finance banks. These cooperative banks or small finance banks will always offer higher interest rates on FDs. The higher interest comes at a price of high risk. There have been several instances of mismanagement in the cooperative banks, which caused the freezing of all money by the Reserve Bank of India. You can use the Laddering Technique to maximize FD returns.
Investment in a Liquid Fund can be done in any big fund house, just compare fees and choose the lowest fee one. You can get plenty of options in your investment platform such as Paytm Money, Groww, etc.
In case of Emergency, first FD or liquid fund to be used. Only after these two are exhausted, is the Balance Advantage Fund to be used.
The creation of an Emergency Fund is the most basic yet most important step in your road to financial robustness. It ensures that you do need not to touch your investment portfolio in case of a real emergency. This way you get the benefits of compound interest over a long period.
Regular Review
Over the years, as you grow old and have more responsibilities, you must review the quantum of Emergency Fund requirements. This will ensure that you will always have an optimum Emergency Fund. Reviewing emergency funds can be clubbed with a review of a financial plan.
Suppose I need to invest in a mutual fund. There are two ways to invest. Lumpsum or SIP.
Lumpsum: I invest the entire sum at one go.
SIP: SIP stands for Systematic Investment Plan. Here I invest a fixed amount at regular intervals (usually monthly).
Let’s understand it using an example. First Net Asset Value or NAV. For a mutual fund, It is the market value of investments divided by the total number of units issued.
Month-1: NAV is Rs 20 per unit.
The first month’s SIP investment of Rs 20,000 will get us 1,000 units (20,000/20 = 1,000).
Month-2: NAV is Rs 40 per unit
The second month’s SIP investment of Rs 20,000 will get us 500 units (20,000/40= 500).
Month-3: NAV is Rs 10 per unit
The Third month’s SIP investment of Rs 20,000 will get us 2,000 units (20,000/10= 2,000).
Therefore, at the end of 3 months total investment = Rs 60,000
Total number of units: 3,500.
Month-4 NAV: Rs 35
Total value of investments: Rs 3,500 * 35 = Rs 1,22,500
Total investments: Rs 60,000
For a lumpsum investment of Rs 60,000 on month-1, the total number of 3,000 units will be allotted (60,000/20= 3,000). Therefore, the total value of investment at month-4 would be Rs 1,05,000.
SIP Investor:
An SIP investor is someone, who is not thinking about timing the market. Whether the market goes up or down, sentiments are positive or negative, he/ she is least bothered. He/ she will invest a fixed sum every month to a particular asset class (here, mutual fund) at a fixed date. He/ she believes in long-term compounding in the market and stays invested for long-term. By investing monthly, he/ she gets the benefit of rupee cost averaging (in the above example, the investor gets to invest at a lower level in month-3). He need not be an expert timer of the market. He is so busy with his other ventures that he has no active involvement in the market. He need not keep himself updated about the market.
Lumpsum Investor:
A lumpsum investor is someone, who is confident about market levels. He has decided that the market is low, so investing a big amount at this level will get him good profits when markets go up. In reality, he is taking a higher risk by betting a higher sum, because he is assuming a higher probability of returns.
So, SIP investor does not care about market levels, because he/ she is investing at all levels. Lumpsum investors need to be cautious about market levels. It is true that however people boast, no one can predict the market movement correctly everyday.
Which is better?
By now, you must have decided what is better for you, Lumpsum or SIP investment. If you are still undecided please read below.
If you are salaried, that means you can invest a fixed sum regularly (monthly). Since you have clear visibility of your income and expenses. You can estimate the monthly amount for investment. In this case, SIP suits you. But if you do not get any regular income, you can invest through Lumpsum.
If you have little to no knowledge of the market, invest through SIP. But if you consider yourself an expert in the market, then you can try for extra returns by investing through Lumpsum.
If you can not bear a 10%-20% loss in your portfolio value, that means your risk appetite is not much. Invest through SIP only. On the other hand, if you can bear with short-term loss in value of your portfolio value, in anticipation of higher returns in the future, that means you have sufficient risk appetite for market fluctuations. Then invest through Lumpsum.
Still Undecided?
If you are still undecided and need my help in deciding. My take is to invest through SIP mode. If you are salaried, then estimate a fixed sum every month and set it on autopilot. Autopilot means, that every month your investment platform takes that fixed sum and invests in your mutual fund.
What if you got a big sum of money, say received a bonus or received from family? You still need to use the SIP method. For example, you received Rs 1,00,000 and now looking to invest this amount. Now if you are investing Rs 25,000 per month through SIP, then you should invest an additional Rs 25,000 for 4 months to deploy Rs 1,00,000. There is no hard rule, just you need to spread big investments into smaller chunks, so as to avoid sudden loss in value due to market collapse (remember, this has happened several times in history and may happen the next day of your investment).
Even if you are not salaried, the same method applies to you too. If the amount is smaller (up to Rs 50,000), invest in one go (Lumpsum). If the amount is larger, divide the amount into 4-5 equal parts, and every month, invest a part. You will get the benefit of rupee cost averaging, in case of a falling market.
Sometimes, people ask, if Rs. 10 crores corpus can be created by someone salaried through SIP. Yes, it is very much possible. Then, the next question comes …”how much time will it take”. This post tries to answer that.
If you invest through the Systematic Investment Plan (SIP) route in mutual funds and assume an annualized return of ~12%, then Rs. 10,000 per month investment would take 39 years to take your corpus to Rs 10 Crore.
The assumption of a 12 % annualized return is quite reasonable, considering the 14.5% annualized return achieved by UTI Nifty 50 Index Fund (Direct Plan-Growth) since January 2013.
With the same set of return assumptions, Rs. 30,000 SIP amount will take 30 years to reach Rs. 10 Crore and Rs. 50,000 SIP amount will take 26 years to reach Rs. 10 Crore.
But this is an impractical scenario. In 25-30 years, generally, a person’s income increases several times, then it is more appropriate to consider an increase in SIP annually. I think that the 10% annual SIP amount can be increased comfortably. This Step-up will result in accelerated compounding of the portfolio.
With a 10% step-up, Rs. 10,000 SIP will take 31 years to reach Rs. 10 Crore. This is significantly 8 years less than Rs. 10,000 SIP without any step-up. The sweet spot is Rs. 30,000 SIP with 10% Step-up. Here an investor can achieve Rs. 10 Crore in 23.5 years, which means the target is achieved within working life.
You must be thinking that this is all paper workings and may not be achievable. The truth is that the same can be made real by patience and discipline of investing 25-30 years, without withdrawing any amount. I assume 5 to 6 big market crashes in that time frame therefore, the investment would require tremendous emotional maturity to continue SIPs even in bad phases of the market.
You can also look at several SIP scenarios in the table below and select a scenario for yourself.
SIP Amount per month(initial)
Step-Up: Annual increase in %
0%
5%
10%
10,000
38 years, 7 months
35 years, 1 months
30 years, 11 months
20,000
32 years, 11 months
29 years, 8 months
26 years, 1 month
25,000
31 years, 1 months
27 years, 11 months
24 years, 7 months
30,000
29 years, 7 months
26 years, 6 months
23 years, 5 months
40,000
27 years, 3 months
24 years, 4 months
21 years, 6 months
50,000
25 years, 6 months
22 years, 9 months
20 years, 1 months
75,000
22 years, 3 months
19 years, 10 months
17 years, 7 months
1,00,000
20 years, 1 months
17 years, 10 months
15 years, 10 months
SIP scenarios for accumulating Rs. 10 Crore
Therefore, if you start investing say, at the age of 25 years, with a SIP of Rs. 30,000 per month at a 10% annual step-up, assuming an annualized return of 12% per annum, you will realize Rs. 10 Crore corpus by the age of 48 years.
If you are lucky and getting higher returns, this goal can be achieved even earlier. Now the most important thing…10% annual step-up looks very simple, you must know that with a 10% annual step-up, the Rs. 30,000 SIP amount will be ~Rs. 70,000 SIP in year-10, ~Rs. 1,10,000 SIP in year-15 and ~Rs. 1,80,000 SIP in year-20.
While we are sitting at year 0, year 15 and year 20 SIP amount may look unreasonably higher, but if you ask somebody, who is about 55 years of age, he/she may agree that an increase in income since he/she was 25 years old was even more than 10% per annum. Therefore, it is reasonable to assume that an increase in investment could be at least 10% per year. I agree that an annual increase in income will not always be more than 10%. Some years could be less than 10% or no growth at all. The practical solution would be to increase your SIP proportionate to your income or projected expenditure for the next year.
So if you increase your income by 15%, SIP gets increased by 15%. If you get only 5% growth in income, your SIP gets increased by only 5%. While projecting your annual expenditure, if say your car loan/ home loan is over, you can increase your SIP quota even beyond 10%. Sometimes, it could be less than 10% step-up. The basic premise is to maintain consistency, irrespective of market sentiments.
