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Budgeting Simplified: Six-Step Budget for a Powerful and Happy Financial Life

Mohan N
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20
Budgeting Simplified: Six-Step Budget for a Powerful and Happy Financial Life

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.

Budgeting

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.

Budgeting

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.  

How to get Rs 50,000 monthly income for a lifetime?

Mohan N
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0
How to get Rs 50,000 monthly income for a lifetime?

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.]

How to create an Emergency Fund?

Mohan N
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3
How to create an Emergency Fund?

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.

Lumpsum or SIP, which option is better for mutual fund investment?

Mohan N
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3
Lumpsum or SIP, which option is better for mutual fund investment?

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.   

What do you think, please let me know.

How to accumulate Rs. 10 crore Retirement corpus in 23 years?

Mohan N
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0
How to accumulate Rs. 10 crore Retirement corpus in 23 years?

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%
10,00038 years, 7 months35 years, 1 months30 years, 11 months
20,00032 years, 11 months29 years, 8 months26 years, 1 month
25,00031 years, 1 months27 years, 11 months24 years, 7 months
30,00029 years, 7 months26 years, 6 months23 years, 5 months
40,00027 years, 3 months24 years, 4 months21 years, 6 months
50,00025 years, 6 months22 years, 9 months20 years, 1 months
75,00022 years, 3 months19 years, 10 months17 years, 7 months
1,00,00020 years, 1 months17 years, 10 months15 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.

What do you think? Please let me know.

Laddering: A New Strategy for Higher Fixed Deposit (FD) Returns

Mohan N
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4
Laddering: A New Strategy for Higher Fixed Deposit (FD) Returns

What is the secret of getting higher fixed deposit returns? Avoiding penalty on invested amount and keep the amount invested till maturity. Still, we need to make premature withdrawals from FDs. Laddering of Fixed Deposits (FD) helps avoid loss of interest, in case of premature withdrawal of money. In this method, the total amount should be invested in FDs of different timeframes.

Investment in FD comes with a guarantee of steady returns along with surety of principal protection. It is always advisable to park emergency funds in the form of FDs. Also, retired persons or senior citizens feel more comfortable with investing in FDs. They also offered higher interest rates. If we compare FD interest rates from banks, we find that small finance banks such as RBL Bank offer 8.3% per annum interest rates to senior citizens on 15-24 months FD. State Bank of India is also offering 7.6% per annum interest rates on 400 days FD to senior citizens (7.1% to public). Such higher interest rates entice many risk-averse investors to put their funds in these traditional investments.

While FDs offer guaranteed returns and a low-risk product, there are still some issues with it. Such as there is a mandatory lock-in during the tenure of FDs. Though you can withdraw by prematurely closing FDs, it comes with penal charges. Such penalty ranges from 0.5% to 1% in different banks. Other than penal provisions on FDs, investors also lose out on FD interest with withdrawn funds. Also, the investor is paid much lower interest on withdrawn funds.

Now you may understand, why banks keep on pushing customers to make FDs. This is most profitable for them. They get the money and due to premature withdrawal, they pay lower interest. Therefore, pre-mature closure of FDs results in loss of principal and interest amount.

Laddering Strategy: Strategy for higher fixed deposit return

In the Laddering strategy, the investor divides the investible FD amount into smaller parts and then creates FDs of different tenures, thus ensuring higher fixed deposit interest. The following example will help in understanding this better.

Assume, you have Rs. 5,00,000 for investment in FD.

Option-1: You would invest the entire Rs. 1,00,000 in a single FD of a tenure say, 5 years.

Option-2: Laddering strategy, wherein the investor divides the amount as below:

FD 1: Rs. 1,00,000 in 1 year FD

FD 2: Rs. 1,00,000 in 2 years FD

FD 3: Rs. 1,00,000 in 3 years FD

FD 4: Rs. 1,00,000 in 4 years FD

Now, suppose you need funds Rs. 70,000 urgently, say after 7 months of FDs creation.

In Option-1 you prematurely close FD. Pay penal charges of 0.5% – 1.0% of the principal amount i.e. Rs. 5,000. Also, interest will be paid to the extent of a tenure of 7 months.

In Option-2 you close FD 1 prematurely. FD 2,3,4 continues to earn interest with no penalty. There will be lower penal charges of Rs. 1,000. Thus higher fixed deposit returns. 

Thus Laddering strategy ensures that

  1. There will be flexibility in investment options, as you have FDs of different tenures. So you liquidate shorter-term FDs first.
  2. You have liquidity w.r.t. your investment. You need not liquidate a big FD. Rather a smaller FD liquidation serves the purpose.
  3. You get a higher fixed deposit return on longer-tenure FDs. FDs opened for 4-5 years get the highest interest. Your substantial amount gets locked for the entire duration.
  4. There is a lower penalty for premature closure. Since a lower amount of FD is liquidated first, the substantial sum remains invested.
  5.  You can utilize money in emergency expenses with minimum loss in interest
  6. Liquidity ensures that you can utilize the money if any other profitable investment opportunity arises.

Is it the right time to start investing in mutual funds?

Mohan N
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0
Is it the right time to start investing in mutual funds?

Young investors often ask…Is it the right time to start investing in mutual funds? By “Young Investors” I mean someone who has never invested in mutual funds. If you are such an investor, this article is for you. For you, the timing of investment in mutual funds will depend upon your financial situation, investment goals, risk appetite, and market conditions.

Mutual funds have long been considered a popular investment vehicle for long-term wealth building and achieving financial goals. For considering saving and investment, it is never a bad time. However, new investors should always avoid investing in shares directly. A mutual fund is a much better way to invest in the market.

One should always start investing as early as possible in life. It is also important to stay invested long term, as the magic of compounding works in the long term. But how much is long-term? Mr. Buffett says that his investment horizon is forever. But looking at the past performance of mutual funds in several market cycles, it is better to remain invested for at least seven years. In seven years, the probability of making a loss becomes too small (though it does not vanish).

Right Time to Invest through SIP

You should start investing using a Systematic Investment Plan (SIP) facility in a mutual fund. SIP is a process where an investor automatically invests an equal amount every month at a fixed date. Investing every month helps in rupee cost averaging. So, when the market goes down, more units are bought at the same investment amount. Also, while invested long term in SIP, the benefits increase due to power of compounding.

Automatic investment at the start of the month

Making the process automatic means, one does not have even to plan or think about making investments. This is useful in keeping emotions away. Whether the market is good or bad, a fixed amount gets invested without the intervention of the investor.

Choose performing mutual funds

Mutual funds giving better returns than their benchmarks should be selected for investments. From the sea of mutual funds, you can also look at thirty mutual funds selected by MoneyControl (MC30). Always look at the annualized performance of five years first, then three years, and then one year. A fund that is consistently giving top returns in 5 years and 3 years periods, while charging a low fee, can be considered for investments. While selecting funds, equity and debt funds can be selected as per the risk appetite of the investor.
If you do not trust a mutual fund manager, then you can invest in index funds. Index funds are passive vehicles with lowest cost structure. Again there are multiple index fund options available. Index fund should be of lowest cost, lowest tracking error and of good mutual fund house.

Regular review

You should regularly review of your mutual funds, as it can help eliminate non-performing funds with higher exit loads, expense ratios, etc. You should give at least three years to mutual fund, before replacing it. If equity fund is giving an average XIRR of more than 16%, then you should continue in that fund. If returns drop below 15%, then cautiously watch the fund for some more time. If it drops below 12%, while benchmark returns are much higher, then you should take out money and reinvest in performing funds.

Conclusion

The above guidelines are for new investors. After spending some time in the market, you can understand the risk-reward ratio. Then you can think of increasing your investment horizon by investing in other asset classes. Please note that selection of a mutual fund is a simple yet important process. You should give proper thought to equity-debt ratio and asset allocation before starting your investment journey.



Jeevan Pramaan Patra (Digital Life Certificate): 4 Steps To Submit Online in 2024

Mohan N
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Jeevan Pramaan Patra (Digital Life Certificate): 4 Steps To Submit Online in 2024

Jeevan Pramaan Patra (Life Certificate) is a mandatory requirement for pensioners to be submitted to the government every year. There are more than a crore pensioner families, where pension is disbursed by government agencies. There are about fifty lakh Central Government pensioners and another fifty lakh pensioners of various State Governments, Union Territories, and other agencies of public sector enterprises. In addition to this, about twenty-five lakh defense personnel (Army, Navy, Airforce) also draw pensions.

Now there is an online facility by which pensioners can submit their Jeevan Pramaan from the comfort of their homes. Following is the step-by-step process for submitting a Life Certificate (Jeevan Pramaan) using an Android smartphone. It does not require any external devices. Pensioners need not visit any bank/ post office etc.

Table of Contents

Smartphone specification required:

  • Android smartphone (version 7.0 or above) (device must be unrooted)
  • Internet connection
  • RAM: 4+GB
  • Storage: Minimum 500 MB free storage
  • Camera resolution: 5 Megapixel or more

Jeevan Pramaan (Life Certificate) Process

Step-1: Search, Download, and install the AadharFaceRd App from Google Playstore

Search for the AadharFaceRd app as shown in the below image and download the app. Please check before downloading that the app must be from the Unique Identification Authority of India (UIDAI). This UIDAI app is designed specifically to assist with the operational processes required for the Jeevan Pramaan Application to function properly. It is critical that you download the most recent version compatible with the Aadhaar Face RD application, which is currently version 3.6.3.

AadharFaceRd
AadharFaceRd app

Even after downloading, you won’t be able to see this app with other apps on your phone. This app will be visible in Settings > App Info as shown in the below image.

AadharFaceRd App

Step 2: Download the Jeevan Pramaan Face App from the Google Play Store

Search for the Jeevan Pramaan Face App as shown in the image below and download and install it.

Jeevan Pramaan app

After you have successfully installed the app, please run the app. You can see the below image.

Jeevan Pramaan face app

After that, the app asks for continuing with a supported biometric scanner. Click “Yes” and proceed further.

Jeevan pramaan Face app

Then a pop-up will appear, asking for permission to Jeevan Pramaan app to take pictures and record videos. Allow the permissions “While using the app” to proceed further.

Jeevan pramaan app

Another pop-up will appear, asking for permission to Jeevan Pramaan to access photos and media on your device. Click on “Allow”.

Jeevan pramaan app

Step 3: Operator Authentication

Any person helping a pensioner can act as an Operator. Even a Pensioner can act as an Operator. The Operator needs to enter his/ her Aadhar number, Mobile number, and Email address and then submit (please see in below image). The application can also be operated using Hindi. Please select the Hindi dropdown from the top right corner.

Jeevan pramaan app

You will receive an OTP on your mobile and the email given above. Enter OTP and submit. Please click on Resend OTP button, in case OTP is not received.

Jeevan pramaan app

After successful validation, a screen as shown below will appear, where the Operator will be required to give his consent for authentication by selecting the check box. Then click on the “Scan” button to proceed toward the face scan.

Jeevan pramaan app

Next a pop-up will ask…”Do you want to scan face?” Click “YES” to proceed further.

Jeevan pramaan app

Next, the screen will show the instructions for face authentication. Keep lighting even and proper on the face. Maintain an appropriate distance from the device camera. Then, click on “PROCEED”.

Jeevan pramaan app

Now the camera will detect the face. You can use a front or back camera for scanning. You need to hold the camera and face still and blink when such instructions appear on the screen. Follow the instructions given on the screen for successful authentication.

Jeevan pramaan app

After successfully authentication, the app restarts, and the message is shown as in below image “ Client Registration Successful”. This means that Operator registration is successful.

Jeevan pramaan app

Step 4: Pensioners Authentication

Next, the Pensioner authentication screen will open. The pensioner needs to enter his/her Aadhar number, mobile number, and email address. Then click on “Submit”.

Jeevan pramaan app

Enter the OTP received and click on the “Submit” button to proceed further.

Jeevan pramaan app

After successful OTP validation, the below screen appears asking for details of Full name (as in Aadhar), Type of pension, Sanctioning agency, Disbursing agency, PPO number, and account number (Pension). This screen may be prefilled with data or may be blank. In case, it is prefilled, please check the details. Otherwise, fill in the details. Then, check the 2 boxes and “Submit”.

Jeevan pramaan app

In case you want to modify PPO number, select “Add new Pension PPO” from the top drawdown and modify details. After submitting, a pop-up will appear as per below image, asking “ Do you want to Add new pension PPO not in the list for yourself”. Click “YES” if you want to enter. Then user will be required to select all the details such as Type of pension, Sanctioning agency, Disbursing agency, PPO number, and account number (Pension).

Jeevan pramaan app

Next, the screen shows all PPO numbers selected by Pensioner. Pensioners need to check the box to give consent. Then click on “SCAN” to proceed further.

Jeevan pramaan app

Next, a pop-up will appear, asking “ Do you want to scan face? ” Click on YES to proceed further.

Jeevan pramaan app

Once face authentication is successful, the Digital Life Certificate (DLC or Jeevan Pramman)  is successfully generated. The screen shows Pramaan ID for each PPO. The Pensioner also receives a Pramaan id and a link to download DLC on SMS.

Final picture on submission

Pensioners are required to present Jeevan Pramaan (Life Certificates) to accredited pension disbursing organizations, such as banks and post offices, so their pension can be credited to their account after they have retired from the service. The person receiving the pension must either appear in person before the pension disbursing agency or have the life certificate issued by the authority, where they previously served and have it delivered to the disbursing agency to obtain pension.

The necessity of physically appearing before the disbursing agency or obtaining a Jeevan Pramaan frequently proves to be a significant obstacle to the smooth transfer of pension funds to the retiree. It has been observed that it results in significant hardship and needless inconvenience, especially for elderly and frail pensioners, who are not always able to appear before the relevant authority to obtain their life certificates. Furthermore, many government employees decide to relocate after they retire, either to be closer to family or for other reasons. This presents a significant logistical challenge for them when it comes to obtaining their full pension amount.

By digitizing the entire Jeevan Pramaan application process, the Government of India’s Jeevan Pramaan Digital Life Certificate for Pensioners Scheme aims to address this exact issue. It seeks to simplify and make the pensioners’ experience hassle-free when obtaining this certificate. This initiative greatly benefits pensioners and removes needless logistical obstacles by eliminating the requirement for pensioners to physically appear in front of the certification authority or the disbursing agency.

Early Retirement Planning: How to Achieve a Secure Future in 14 Steps

Mohan N
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0
Early Retirement Planning: How to Achieve a Secure Future in 14 Steps

Ever thought of early retirement planning? Most of us think, but how many have a proper plan. We all look forward to this stage of life. This is the time to unwind, go on trips, engage in hobbies, and spend time with those you love. Nonetheless, careful planning and saving are essential to ensuring that your retirement goals become a reality. This article will walk you through the crucial actions you need to do, to safeguard your future and have a pleasant retirement.

Step 1: Set Clear Goals for Early Retirement Planning

Setting goals is the first stage in early retirement planning. For you, what does a prosperous retirement look like? Think about things like your ideal lifestyle, the age at which you wish to retire, and any particular aspirations or objectives you may have for your retirement. It will be easier for you to estimate how much money you’ll need to save if you have a clear vision. Every 5 years, make a detailed review and check if you are on the right path.

Step 2: Calculate Your Retirement Expenses

You must project your future spending to calculate the amount of money you will need for retirement. Begin by taking into account your basic spending, which includes housing, utilities, groceries, medical care, and transportation. Remember to factor in inflation. Then, include optional costs for things like entertainment, hobbies, and travel. This will provide you with a ballpark figure for your annual retirement expenses.

Step 3: Assess Your Current Financial Situation

You must ascertain your existing financial status before you can start saving for retirement. Examine your earnings, outgoings, debts, and possessions carefully. To determine your net worth, construct a balance sheet. Making educated judgments about your retirement plan will be made easier if you are aware of your financial situation.

Step 4: Build an Emergency Fund

Preparing for retirement requires having an emergency fund. It guarantees that in the event of unforeseen costs, you won’t take money out of your retirement savings. The goal should be to accumulate three to six months’ worth of living costs in a different, conveniently located account.

Step 5: Choose Retirement Accounts

There are various options for retirement accounts, and each has special tax benefits. National Pension System (NPS), Atal Pension Yojana, Contributary Provident Fund (CPF), Public Provident Fund, etc. are popular choices. The best combination for your circumstances will depend on your consideration of your employer’s retirement plan as well as your research into individual retirement accounts.

Step 6: Determine Your Retirement Savings Target

You can determine your savings goal by multiplying your projected retirement costs by your anticipated retirement age. For a more accurate estimate, you can speak with a financial advisor or use online retirement calculators. Keep in mind that since unforeseen expenses might occur during retirement, it’s always preferable to aim high and save more.

Step 7: Create a Budget

You must effectively manage your budget if you hope to save enough money for retirement. Set aside some of your income for retirement savings, then follow through on your plan. Keep tabs on your expenditures, make necessary cutbacks, and allocate the proceeds to your retirement accounts.

Step 8: Maximize Your Contributions

Make the most of any employer-sponsored retirement plan, such as NPS, CPF that your company may offer. Give at least what is required to get the full employer match because it is practically free money. Aim to contribute the maximum amount per year to your individual retirement account in NPS and PPF. Also don’t forget to invest in equities through mutual funds Systematic Investment Plan (SIP). This will provide inflation-proof income over long term. You can invest in index mutual funds to avoid high costs.

Step 9: Diversify Your Investments

The secret to controlling risk in your retirement portfolio is diversification. Invest in a variety of asset classes, including bonds, equities, property and cash equivalents. You can reduce risk and increase returns with this strategy.

Step 10: Regular review and course correction

Retirement planning is a continuous process rather than a one-time event. Every year or whenever a big life event happens, like a change in your income, marital status, or health, you should review your plan. Make the required modifications to keep your retirement plan on course.

Step 11: Consider Healthcare Costs

Your retirement budget may include a sizeable portion for healthcare costs. Do not depend on kids to foot your medical bills. Make sure, you have enough health insurance in retirement. Other than your employer-provided insurance, take your own health insurance too. At old age, it would be difficult to get a new health insurance, when employer-provided insurance ends on retirement.

Step 12: Develop a Withdrawal Strategy

You’ll need to plan how you’re going to take money out of your retirement accounts when you retire. Recognize the regulations governing withdrawals and their tax ramifications. You may also want to consult a financial advisor to develop a withdrawal schedule that fits your retirement objectives.

Step 13: Estate Planning

To safeguard your assets and make sure your beneficiaries are taken care of, estate planning is essential. Consider making trusts, naming beneficiaries for your retirement accounts, and drafting a will.

Step 14: Enjoy Your Retirement

You can retire early with confidence if you’ve followed these guidelines and created a sound retirement plan. Take advantage of your well-earned retirement years, follow your passions, and make priceless memories with loved ones.

Remember that early retirement planning is an ongoing process and that there is never a bad time to get started. You must start thinking about retirement, as soon as you start your working life. Your retirement will be more secure, the earlier you start because you’ll have more time for your money to grow and compound. To make the most of your golden years, do not hesitate to work with financial advisors and stay up to date on the newest retirement trends and tactics. You can have the retirement of your dreams if you put in the proper preparation and discipline.

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