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Posts Tagged ‘Expenses’

1 (1) (1)In a world where access to internet is becoming more and more widespread, information on almost anything is subsequently becoming easier to find, simply by “Googling” it. Furthermore, free information quite often results in self proclaimed experts of the field, sometimes resulting in unfavorable outcomes for anyone who follows their views/advice without understanding how such individuals arrived at those outlooks.

As such it is important to separate a few facts from myths in terms of what data an individual should consider when faced with some common financial planning aspects rather than what is most commonly/easily available of the internet.

Sending children abroad for higher education is no more a matter of consideration for the upper class families. Nowadays, more and more middle class families aspire to send their children outside India for their education. As such, planning for such an major event requires careful attention. The common misconception is to take simple average rise of Indian education costs and apply the same data for education in a foreign country. However, two critical data points get missed out in such an exercise, (A) the rise in education costs in that particular country to which you plan to send your child. It is inappropriate to consider the inflation numbers would be identical or even similar to that of India. (B) the rise/fall in the currency exchange rate for the two countries in consideration. The following illustration should help clear this concept:

Particulars % Change
Rise in average education cost of  universities in the U.S. in last 10 years 5%
Rise in Currency Exchange rate in last 5 years 4%
Total Inflation to Consider 9%

Now In comparison the inflation rate for the Indian colleges is approximately 10%-11% p.a.

Talking about inflation, another topic of debate is if the Consumer Price Index (CPI) data is an adequate inflation benchmark, especially for higher middle class/ HNI families. To put things in perspective, following is a snapshot of items considered in the CPI basket and their respective weight-age:

Sr. No Particulars Weightage
1 Food and Beverages 45.86%
2 Pan, Tobacco and Intoxicants 2.38%
3 Clothing and Footwear 6.53%
4 Housing 10.07%
5 Fuel and Light 6.84%
6 Miscellaneous 28.32%

(Source: Ministry of Statistics Programme Implementation Circular Dated 14th March,2017)

As you can see, the weight age of expenses, while more suitable for the lower strata of income generating families, might not be appropriate for the higher end. Something like expenses on food/groceries would certainly not be half the expenses. As such, while current CPI numbers are around 3.5%, indicating that going forward inflation is to be expected around that range, it would be right to assume that a middle class family living in Mumbai would face the same inflation rates. A more appropriate method would be to calculate the individual inflation of major expense heads i.e. food, rent, education, lifestyle expenses and find the average of the same. You would more likely discover a very different inflation rate compared to the CPI.

Past returns is a favorite filter for most investors when choosing products of an asset class, especially stocks and mutual funds. However almost all online data provided by various service providers show Trailing Returns.. Trailing returns show how a fund has performed from date A to date B, by simply seeing the difference in NAV of those dates. But it does not show how consistently it performed in that period. A recent upswing in its performance can skew the average of say a 3 or 5 year performance. To adjust for this, Rolling Returns is considered. It does not take only one block of a 3year period but several blocks of such periods. Thus it allows you to see a range of performances across blocks of time. They therefore capture performance of funds over different market periods, giving a more reliable view of the fund’s performance

Similarly, another topic of debate is usage of Total Return Index v/s Simple Price Index as a benchmark when selecting a mutual fund. A Simple Price Index only captures the capital gains due to stock movements in the fund. But the Total Return Index considers the capital gains and dividend paid by the companies to the investors. Hence it shows a truer picture of the returns. Almost all mutual funds today benchmark their returns against the Simple Price Index. This can result in showing higher alpha generation by the fund which may not give the right picture to the investor. For example, Nifty 50 Price Index over past one year (as on 27th October 2017) was 18.63 percent and Nifty Total Return Index for the same period showed 19.75 percent. Hence a mutual fund will show different alpha based on the benchmark used.

Plan Ahead Wealth Advisors believes that Rolling Returns and the Total Price Index are the correct data points to consider.

Finally, the widespread use of the general rule of thumb when it comes purchasing a Term Insurance Plan i.e. the sum assured is to be 15-20 times the annual income. Procuring a term plan should be about covering financial risks that may befall on the dependants in case of an unfortunate event. Financial risk does not only include loss of income but also other factors such as pending liabilities, future financial goals, current assets that can be redeemed shortly to meet any obligations. Such factors also play a significant role in determining how much cover needs to be taken.

Using the right data is critical during the financial planning process. As you can see, wrong data can lead to significant errors/assumptions which can have detrimental impacts.

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Retirement is when you stop living at work and start working at living!

retirement 1

Retirement is not merely a goal but it’s a journey. There is more to it beyond merely planning for a desired sum as your retirement corpus.

Now that you are retired and you have an accumulated corpus with you, you have to plan wisely in order to sustain the sum till the end.

Expense management

The starting point of your exercise will be to have an expense pattern which you broadly have to stick to. There are many changes which will occur in your expense pattern now that you are retired.

Your retirement expenses will also have phases. Initially in your60s you may see a certain type of expenses going up. For example travel expenses. Now that you have all the time for yourself and your spouse, you may wish to go for multiple vacations –  either domestic or international. Another expense that may increase could be group memberships. You may join a hobby group or a club of your choice. Also it will take some time for your lifestyle to undergo a change so your lifestyle expenses may not change much in the first few years. Later on with age your choices and preferences may change. For instance you may no longer prefer restaurants as often, as you used to prefer at one point in time.

As you move towards your 70s your medical expenses may increase. Your medical costs will go up due to need for regular checkups and dependence on medicines. Health insurance and critical insurance do not cover your costs after a certain age. Even if they do, the cost is very high as the premiums increase with age. Therefore having a health care provision for your retirement is critical.

Plan for a regular and tax efficient stream of income

Another major change is that you will no longer receive any regular salary or business income.

Now that you have an accumulated sum, you have to plan your investments in a manner so that you can have a regular and a tax efficient stream of income. Do not be overly aggressive or overly conservative. Whilst the exact investment strategy may vary from person to person, the focus should be to maintain and grow at least a part of your existing wealth.

On the asset allocation front you have to move a portion of your investments into debt/fixed income instruments, and allocate a limited portion towards equity.

In order to have a regular stream of income you can start a Systematic Withdrawal Plan (SWP) from your existing set of mutual fund investments.  Opting for a dividend payout option could attract Dividend Distribution Tax, especially for non equity oriented funds. Therefore, SWPs can work well. Also dividendscould be irregular at times depending on dividend paying history of the fund but in an SWP you can choose a fix amount that you wish to withdraw.

You can also invest in the senior citizen savings scheme as it provides a better rate of interest amount compared to other small savings scheme options.Do remember that small savings rates have gone down and will be altered on quarterly basis going forward.

You can also look at Bank FDs. These provide an additional 0.25% to 0.50% extra rate to senior citizens which varies from bank to bank. Company FDs can be a slightly riskier option as compared to bank FDs.

If you have a self occupied property which you feel is no more needed since you kids have moved out and it’s only you and your spouse who need to stay, you might consider selling it and buying two smaller properties. One you can use as self occupied and other you can use to let out to avail regular rental income. Do consider the capital gains tax angle to it.

Make a will

It is a very important step. This makes transfer of wealth to your future generation smooth and hassle free.

Also have a nominee attached to all your investments and insurance so that there is succession challenges are reduced. Also make sure that someone knows where all you wealth and investments are lying so that your family does not have to struggle to get what you have left behind for them.

Have a Happy Retirement!

Image credit:www.cbtownandcountry.com

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Remember your college days when you had to manage your pocket money between stationery expenses, conveyance expenses and lifestyle expenses. The amounts may not have been large and budgeting was critical. So what’s changed in your life today – most definitely the amounts involved, but then so have your needs and wants.  So its budget time again. Budgeting could be at an individual level, at a family level, at an organization level or even at a company level. From a Financial Planning perspective, budgeting at an individual and family level is critical. Budgeting is all about managing your incomes, expenses and cash flows effectively.

Incomes can be of different types. You can basically distinguish between regular income and irregular flow of income. Regular incomes can be your net salary income, government pension, income from business. All the other incomes like professional income in the case of free lancers for example could be irregular, interest income will last till maturity of investment, rental income will last for the tenure that you have let out your property and variable pays/bonuses if any will fall under irregular income.

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Image Source: taxmantra.com                                                 Image Source: properji.com

If you have a regular flow of income then you should manage your expenses and develop a regular savings habit so that you can invest to achieve your financial goals.  If you have an irregular cash flow, then you need to plan your cash flows wisely because your income may not be regular but your fixed/non-discretionary expenses certainly are.

If you have an irregular cash flow, then you need to plan your cash flows wisely because your income may not be regular but your fixed/non-discretionary expenses certainly are.

There are two things you can do to address this. Depending upon the age you are in, you should invest in skill development which can earn you a regular income. If you are a freelancer for example or in a business which is seasonal in nature and it does not occupy your time all 365 days, then maybe you can master some professional skills which will enhance your already existing skill set or maybe enhance your career in one way or the other. Sports professionals and actors, for example, may have shorter earning life spans and thus may need to build their skills accordingly.

The other thing you can do is that you can plan a portfolio in such a way that your investments will provide you regular flow of income. It can be done in the following manner:

Emergency-funds

Image source: businessdayonline.com

  • Since your primary goal is always  to meet your regular expenses, start of by creating a contingency fund which accounts for at least 6 months of your non-discretionary expenses like your children’s school fees, your EMI if you have any, your basic monthly household expenditure, amongst other things. If both you are your spouse are working, you could plan for 3 months.
  • Do not block all your money into investments that are illiquid ,even though the returns they may be offering you could be tempting. Ensure you have enough liquidity at all points in time to meet your regular expenses. Locking in your money into illiquid instruments might not only make it difficult for you to exit but if you wish to exit in case of an emergency you may have to settle for a lower value. Investing in real estate is a classic example. People invest in it in anticipation of high returns growth but have to hold on to it for long periods till the time it gets an appropriate value, due to its cyclical nature. Emergency exits may require you to settle at lower valuations.
  • Invest in simple products which provide safety, liquidity and returns.
  • Investments should be made in line with your goals and not in isolation.
  • Have adequate life insurance cover so that in case something happens to you, it will help your family members to continue with same standard of living.
  • Health insurance and critical Insurance is a must. You certainly do not want to spend your hard earned money on high medical expenses.

Once you have your income and expenses in place, it is critical to begin the job of tracking them. Whether you use technology or an old fashioned diary for this, doing it is crtical. After all, a budget is not relevant if it is not tracked.

Whilst you may not be able to go to college again, you certainly can go back to budgeting for yourself and your family. It may be boring at first, but I promise you that you will enjoy the benefits of it some day.

 

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Recently one of my good friends received a job offer with an upcoming IT company in Silicon Valley which would take him away from India for at least a few years. I congratulated him on his dream job in a new country and he asked me about what to do with his existing investments and potential NRI investment options in India? This is a question that comes to us very often from NRIs all over the world – whether they are in the Middle East, Europe, Australia or the US.

With the Indian economy being one of the fastest growing economies in the world and a home bias that tends to exist for many families, many NRIs choose to invest in Indian markets to achieve their life goals such as planning for a child’s education and marriage, planning to purchase a property in India or abroad, or planning for one’s retirement.. Whilst both Indian equities and Indian real estate, along with Indian fixed income options are a great way to boost the overall yields on your portfolio, there are a few critical items that you need to keep in mind especially as you try to build a large corpus to sustain life events that you would come across during your 25-30 years post retirement, when there would be no income stream of salary or professional income to depend on.

Choice of Assets & planning for them

You need to have a financial plan in place so you can have a holistic view of your finances to make financial decisions with confidence. Having large accumulated savings in your bank account can sometimes expose you to taking investment decisions that are sub-optimal for your overall financial health, as you may be in a hurry to put it away.  Your financial plan will show you how much you need to invest starting today, for each of your life goals, and will also enable you to create an appropriate mix of equity, fixed income and real estate exposure in your portfolio.

Repatriating your money:

Confused with so many bank accounts? You need to be clear whether you want to invest your funds in Indian rupee or a foreign currency, and also if you wish to have complete flexibility in repatriating the monies overseas. A NRE account that is designated in INR can be a savings account, current account or term deposit account without any taxes from an Indian perspective, and allows complete repatriability. Once you become an NRI, your existing bank account will be converted to an NRO account (Non Resident – Ordinary). You can deposit all your earnings in India into a NRO account. As per RBI guidelines, you can remit or repatriate an amount up to USD 1 million per financial year from the NRO account.

Currency Fluctuations:

When you earn and spend in one currency, and invest in a different currency, currency risks have to be well understood in relation to the goals and investment product selected. An investment today may offer attractive returns in rupee terms; it may not remain attractive when it is repatriated. Considering that India has traditionally being a high inflation economy vis a vis many other global economies, potential currency depreciation tends to be an important factor to keep in mind.

Tax Treatments:

It is critical to understand the tax implications in both countries as a part of your financial plan. You may need to seek the help of a tax advisor in both India and your home country, so that there is complete clarity on the same. In addition, there may be Double Tax Avoidance treaties in place that allow you to set off the taxes you pay at in one country against taxes due in India, or vice versa, so that you are not taxed twice on the same amount. This is extremely critical as income which is tax free in one country may be subject to tax in the other, and it is therefore critical to get good tax advice around the choice of investment products that you buy.

Frequent Home Visits:

This is one type of recurring and large expense many families may be facing overseas. It may be  common for some NRIs, that they should book and send tickets for their parents and other close relatives, when they have to visit them in the host country, or certainly when they visit India. Don’t forget to add this as a different goal in your financial plan.

To conclude, NRIs need to better understand the potential currency fluctuations, taxation and income and expenses pattern in their country of residence and retirement, before making investment decisions. Creating a financial plan should help you and your family have a very clear roadmap for yourself and your family.

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