Make Your PayCheck Last Longer

It would be nice to wave a magic wand and suddenly have enough money to cover all of your bills with plenty leftover for fun.  Isn't it ? But, The truth is that prices are going up and you may need to do more to stretch your pay-check to cover rising costs.

First Step as elders may say will be a Budget

This may not seem like a way to stretch your pay-check, but if you carefully plan how you want to spend your money, you will have more money to spend on the things you want to. But  If you do not have a plan, your money will quickly disappear as you try to cover your expenses. It is one your strongest money management tools. It can be as flexible as you need it to be, so that one month you spend more on your vacation expenses and cut back on eating out or in other areas.

Keep Looking/checking  at Your With holdings

A flexible spending account, monthly retirement contributions, and your health insurance premium can reduce the amount the Income tax department  takes out, and you may not find a big cut in your pay-check. Open enrollment for these programs usually runs in the fall, and you should take advantage of them now if you haven't already.

Use those Shopping Skills for Better Plans

It is worth shopping for a better rate on your cell phone, your cable provider, car insurance, and your gym membership each year. New customers are offered better deals than existing customers. If you sign up for a contact, then you should shop each time your contract is up for renewal. This can lower your monthly bills, without much work, and make your money go farther. Additionally you may consider reducing your plans minutes, or the channels to reduce your monthly deal, especially if you do not use them all each month.

Please Avoid Unnecessary  Debt

You can make your money go farther if you do not need to pay interest to a bank. Think about it, if you use a credit card to buy an item because it is on sale, but only make the minimum payment you are going to pay much more in interest than you originally saved on the purchase. Paying with cash or debit cards  gives you more spending power for your rupee. If you do not need to make any monthly debt payments then you will have more of your pay-check to spend and save each month.

Try to Split Costs When You Can

In your twenties bulk buying does not usually make sense. If you are single or even a couple, you may have a difficult time using up what you purchased before it goes bad, and if you throw enough of the products away, then you really are not saving money. You can solve this problem by doing a co-op with a few friends, where you buy the bulk items together, split them up and divide the cost with each other. Use car pooling to save on petrol that cost you.

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Few Tips for Financial Planning Principles

Every January, some of us look in the mirror, dust-off our running sneakers, and set advantageous goals to lead a healthier and more active lifestyle. Unfortunately, little time or attention is given to address and fix our own fiscal well-being. Similar to setting health goals, financial planning goals can be best achieved if they are specific and realistic. Goals should have a time frame to implement and be written on paper. The following are the top five recommended financial principles to live by.

1. Eliminate Debt. Create an action plan and timeline to pay off your credit card debt as soon as possible (for example, over the next 18 months) and defer any major purchases until you can pay for them with cash. Develop a monthly budget and track your expenses on a spreadsheet or a mobile phone application. Dedicate any available discretionary cash flow to aggressively eliminate your credit card debt. Pay off debts with the highest interest rates first. Be careful to not quickly consolidate and close out any existing lines of credit, as that could adversely affect your credit score. Also, if you are a baby boomer nearing retirement with a mortgage, create an action plan to pay off that obligation within four years, before or after, your retirement goal.   

2. Protect your credit score. Regardless of your age, your credit score may come into play for many critical activities like applying for short term/long term loans. Protect and improve your credit score by keeping your balances low and paying off the majority of your expenditures every month.

3. Create a 'rainy day' fund. Develop a cash reserves bucket. Most people (before or after retirement) do not have enough cash reserves handy to get by for even two months in case of emergency or unemployment. They then start relying on retirement accounts, credit cards, family and personal loans to pay their bills and put food on the table.

4. Increase your retirement savings. Many Indians  are significantly under-prepared to retire by age of 58 due to insufficient savings and end up dependent on Social Security as their primary income resource. Lack of planning and work-place financial education seems to be an ongoing epidemic in today’s society. Make a conscious effort to put off short term (instant gratification) purchases and instead make retirement savings a monthly expense item on your balance sheet with every pay-check. Dedicate at least 40% of your annual gross earnings for this goal.

A good rule of thumb to consider is that you may need 20 to 25 times your final salary in a lump sum to retire successfully (considering a 8% portfolio distribution rate in retirement). Work with a financial planner to assess your specific retirement budget and lifestyle goals on paper and then put together an action plan to achieve them. Once you retire, continue working with your trusted adviser to implement an ongoing investment and income distribution plan to keep you on track for the long run. Remember that in the end, you can't put your retirement on a credit card.

Finally, carefully review all of your investment and insurance account beneficiary designations to make sure they mesh with your current goals and wishes for your family and estate.

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Why Do You Need Investment Goals?

If you don’t have any investment goals, why invest at all? If investing is something you want to do, then there is obviously a reason for it – you want to retire, you want to have the money for your children’s education or you want to afford the house of your dreams.

These goals are great, but to build a suitable investment portfolio you need to be more specific. Detailed goals will help you choose appropriate investment options and build a portfolio that is right for you. That’s why setting investment goals is so important.

Setting Investment Goals – The Details

You can begin the process of setting investment goals by jotting down some rough ideas of the more expensive things you want to accomplish or buy in your lifetime:

·         I want to retire by age 50

·         I want to buy my dream house when I’m 30-35

·         I want to be able to pay at least half of my child’s college tuition

·         I want to own an Audi R 8

The examples above are big, long-term goals – excellent reasons for investing your money. After writing them down, begin working on the details. Figure out the following for each goal:

·         Deadline: when you expect to need the money

·         Cost: the total amount you need to reach each goal. This can be the sum of all periodic payments, if that’s what you goal calls for (such as the case with college tuition)

·         Already Saved: the amount already saved for each goal, if any

·         Duration: length of the goal if it requires payments over time

Be as specific and accurate as possible. It’s OK if you can’t come up with exact figures – use your best estimates. It’s better to start working toward something, even if you are a little off, than to wait until you can better predict the future.

Investment Goal Example

Here is what one of your investment goals may look like:

·         Goal: to pay half of my child’s college tuition

·         Deadline: around August, 2023

·         Cost: estimated at Rs. 32,00,000

·         Already Saved: Rs.5,00,000

·         Duration: will be paying college tuition over the course of 5 years

And that’s it! After setting investment goals, write them down so you can review and revise them later. Circumstances do change, and it’s important to update your investment goals accordingly. Once you are done setting investment goals, you are ready to move on to the next step – determining your risk tolerance. Read about it in the next installment of our Portfolio Planning Basics series.

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How the Interest Rate cycle affects your debt portfolio

There are some things that can confuse even seasoned equity investors. One of these things is the link between debt funds and the interest rate cycle. Let's start at the beginning.

First, what is a debt fund?

A debt fund is nothing but a pool of investments (also known as a mutual fund) in which the core portfolio comprises fixed income investments. These would be a mix of short, medium or long term bonds, money market instruments, securitized products and floating rate debt.

Bonds (also called fixed income securities) are used by a variety of entities such as corporate, municipalities and even the Government, to finance activities. When you buy a bond, you are effectively lending money to this entity that borrows your funds for a fixed time period and pays you a pre-decided rate of interest at regular intervals, also pre-decided. This interest is called a Coupon. Bonds are also traded in the secondary market before they reach maturity, and each bond has a price that fluctuates depending on market factors. 

Given that bond prices fluctuate, it is unlikely that you would ever buy a bond on the secondary market "at par," or at its exact face value. You would either buy below par i.e. at a discount, or above par i.e. at a premium.

Now that we know what coupon, price, and discount and premium are, what is yield (to maturity)?

Yield to Maturity (YTM) represents the total return you can expect to earn if you buy a bond at a certain price and hold it till it matures, earning all the coupons (or regular interest payouts) on the way too.

A simpler version of this is just Current Yield. If you buy a bond "at par", the yield is simply the Coupon. But if you by a bond where the price is fluctuating, your yield will also fluctuate depending on how expensive (or not) your bond is. This Yield is equal to nothing but Coupon divided by Price.

So current yield = Coupon / Price  

Now that you've understood the relation between yields and prices, in which situation would you want high yields and in which situation would you want high prices?

You would want high yields (i.e. low prices) when you are looking to buy a bond. The adage Buy Low, Sell High applies here too. Once you have already bought the bond and become a bondholder, you want high prices so that you can sell at maximum gain.

So knowing this, when is a good time to become a bondholder?

When you know that yields are going to go down, going forward and therefore prices of existing bonds are going to go up which will enable you, the bondholder, to make maximum gain when your bond matures, or when you sell. This is what's happening in our economy at the moment…

We are currently in a falling interest rate cycle.

When interest rates in the economy (the repo and reverse repo rate) begin to fall, new bonds will offer interest (coupon, to the bondholder) in line with the new, lower rates of interest. This means that their coupon will be lower, so their yield will be lower than the coupon and yield of existing bonds. Older bonds that were issued in times of higher interest rates, would be offering higher coupons and therefore comparatively higher yields.  So these existing bonds therefore become comparatively more attractive than newer bonds. People are therefore willing to pay a premium to own these bonds. So when yields fall, prices of existing bonds go up. It's simply a question of demand and supply.

And that's when debt funds make money, when the bonds in their portfolios start to command higher prices, in times of falling interest rates.

How does this affect your finances? Should you be adding to your debt portfolio currently?

To answer the second question first, yes you should be adding to your debt exposure if you have a lower risk appetite, a shorter time horizon (up to 3 years) and want to increase your debt portfolio exposure, to balance your equity portfolio you should invest in short and medium income funds. Keep your liquidity requirements in mind and also have an estimate of what post-tax return you can expect (debt funds long term gains are taxed at 10% without indexation or 20% with indexation).

Coming to the first question, remember, debt funds are great investment avenues to help you meet your short term life goals and also to contribute towards a corpus for your longer term life goals. So if you are looking to build a debt portfolio, now is a great time to do it.

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