Habits

Financial Independence, Uncategorized

I just finished reading the book The Power of Habits by Charles Duhigg.  I had bought this book long back but it was lying on my Kindle… forgotten.

It has been my habit, that whenever I saw a new recommendation, I ended up buying the book.  Especially so when it was available on Kindle because then there was the instantaneous gratification of having the book in my possession.  This was not a good habit because I always had a huge backlog of books to be read.  Now I have taken a sabbatical from buying any more new books, till I finish the complete set lying on my bookshelf as well on my Kindle.   I haven’t bought a book in 3 months and I have a feeling that I may not need to buy for another 6 months because of the backlog.

This book is a very interesting read and Charles shows with very interesting examples of how it’s very difficult to break a Habit He talks about the loop – “Cue – Habit – Reward”.  If you are not cognisant of this loop you cannot change behaviour.

Recently on ETNow there was a news item which mentioned that the amount of SIP flows had not changed dramatically even-though the stock market had been faltering over the last 12-18 months.  {If you have been following my posts then you would know that a SIP is a Systematic Investment Plan where money is directly debited from your bank account every month automatically}

This news item came as I was finishing this book and it got me thinking – is it that the flows have not reduced because of a habit as Charles Duhigg says or because of inertia or because the investing population in India has become so mature that they realise that in equity investment the short term rise and fall of markets have little significance.

Only one of my friends asked me, if she should change the scheme in which she had the SIP to another scheme for the SIP.  She did not mention about stopping her SIP.

I doubt if the population investing in Mutual Funds has become more mature.  This could be pure conjecture but the SIP culture in India is not more than 5 years old.  So a population maturing in 5 years becomes doubtful.

What could play is that people have inertia. So they do not go to the mutual fund agent or to the mutual fund site to stop the SIP.  My wife I think is from this constituency and the fact that I keep telling her that equity is for long term.

After reading the book I realised that there could be a third play here.  The media and the association of mutual funds has made SIP investing more like a movement. Now as Charles points out, once something becomes a movement then it creates leaders from individuals at the community level and the movement keeps going from strength-to-strength.

He gives a clear example of Rosa Park and Martin Luther King and how that one incidence in the bus and the links that Rosa Park had propelled the civil rights movement in  the USA.

I have a feeling something similar is happening here with the SIP movement.  Since people in offices and homes are now all talking about SIPs there will be a lot of peer pressure on a person if she thinks of shutting – off their SIPs.

Another thing which I think could be happening is that since the individuals have got into the Habit of living on a smaller amount in the bank, they do not feel a pinch if the amount they have out into a SIP does not appreciate for a few months.

Due to the amount of SIPs continuing the amount of money coming into the stock market has not fallen dramatically.  Due to this the market has not fallen because when the foreign institutional investors take money out the domestic institutional investors keep buying.

the AMFI and channels like ETNow need to be congratulated on creating this movement with their sustained initiatives in India.

Do you know of any such movements for creating a better financial future in your country…I would like to hear.

Till next time….

Pay taxes, still go for your dreams

Financial Independence

Death and Taxes are the only things which are certain in life.

There is nothing much which I can suggest on the first item – though if you are interested, it will be worth your while to look at Dr. Peter Diamandis and others on what they are doing for enhancing the quality and longevity of human beings.  If you subscribe to his Abundance newsletter it will give you insights into the kind of amazing work that’s going on in the areas of robotics, DNA research etc.

However coming back to taxes….this is the time of the year (April – July) in most countries when taxes have to be filed.

For service class people the biggest challenge is that the government takes away its “pound of flesh” even before we get the salary in our hands.  Depending on the tax brackets, generally the income tax rates are around 25-35% in most countries.  So for every $100  that you earn, the government has a right on $35 before you.  Which means the harder you work, the more your try to earn, the more you end up paying to the government.

Unlike a business person who is allowed a lot of expenses as tax deductible.  The employer has to deduct tax at source before paying the employee.  That’s kind of unfair for the employee.  Being an employee myself I completely sympathise with all my salaried brethren.

Having said that, we also have to take cognisance of the fact, that all the roads, hospitals, defence services that the government provides.  If we have to ensure prosperity and safety for all the people of the country then paying taxes is mandatory.  One of the big challenges for countries like India through history have been poor compliance to paying taxes.  That has resulted in us still being a poor country.

So we should ALWAYS ensure we pay taxes which are due.

For the employed the government in India does give avenues to do a tax deduction to plan for long term capital appreciation.  One of the things in this is the NPS( National Pension Scheme) in India. ( In the US I believe there are 401K plans) . Not only can you contribute about 10% of your basic income and get tax exemption, you can in addition contribute another Rs50000/-.  The biggest advantage of this scheme is that there is a very low management charge and you can decide to also invest a certain percentage in equity because of which you get the benefits of tax exemption as well as capital appreciation in the long term.

There is another avenue which you should look at exploiting and do good as well. The government wants you to help organisations which are doing good for the society.  When you showcase that you have contributed to a good cause you can also get a tax exemption.  Now that’s such a good idea….you do a good cause and the government supports you in doing good by giving you tax exemption.

There are many such things which the governments in India, US etc. give to help the salaried class reduce the tax liability.  I would sincerely suggest that you’ll take professional advice from a CA or CFA on how to bring down your tax liability as per what is legal.  But do not shy from giving taxes.

Now when you get the tax deduction, the money saved should be put into a bucket to help you achieve your dreams.  Over the long term these amounts aggregate to a very large  corpus to help you get closer to your dreams without breaking the bank.

Last time I had spoken of how I had gone about trying to achieve things from my bucket list.  You too can, by utilising the avenues given by the government, reduce your tax liability and then let that money compound.

Every person should have a bucket list to look forward to in life.  That’s what makes life interesting.  Let finances not stop you from living your life.  Plan things, use compounding to your advantage and take benefits given by the government to have life.

Till next time.

Carpe Diem!!!

Adventures – have a life – get experiences

Financial Independence

While I keep talking about compounding and investing it does not mean that you should not have fun and live a life.

I am actually wanting you to invest so that you can enjoy your life.  While some of my advice may make you wealthy in the long run, most of my advice is to help you live a life today.

A well lived life is about getting experiences.  In my view the best experiences are gained when we travel to different parts of the world and see different cultures and eat different foods.

I got this trait from my father, who showed us so many countries when we were kids.  The education and learning I got by travelling helped me become a more tolerant and considerate person.  It also taught me on seeing different points of view, appreciate different food habits and enjoy in whatever surrounding I am.

When I became an adult, I  decided  that India itself is a very big country and I made it a point to see and show my family various parts of India first.

There is a treasure trove of history, food and culture all across India – whether you go to Rajasthan, Gujarat and Maharashtra in the west, to Bengal & Assam in the east, to the states of Karnataka, Tamil Nadu, Andhra Pradesh and Kerala in the south to Uttarakhand, Uttar Pradesh and Himachal Pradesh – there are snow clad mountains, to forts to human evolution – everything and no two states are alike.  That’s the beauty of India.  We have been to most of India, sometimes travelling the countryside by road and enjoying local fruits and foods and sights.

Then over the last 2 years  I have been making it a point to first show my family all the countries I had seen as a kid and then cover my bucket lists.

So I have taken them to Canada, Switzerland and France.  Some more countries remaining on the agenda include UK, Singapore, UAE and USA

I have shared earlier also that I have a huge bucket list – from seeing the northern lights and southern lights to seeing the giraffes in their natural habitat, to exploring the Mayan and Aztec civilizations and to see the Gold Coast.

This kind of extensive travel, often, is not easy on the pocket,  specifically for an individual who is earning a salary in India. Especially when whatever you save becomes 70 times less when converted into the US Dollar or about 85 times less when compared to the Euro.

That’s where the concept of buckets comes in.  Again this is not something I have invented.  I use this concept to build my asset allocation.  Some of the money is kept in cash equivalents for emergency purposes.  This is usually not with me because I would end up spending it.  Then I have a set of regular SIPs (Systematic Investment Plans) for mutual funds and stocks.  These are my forced saving methods where the money goes out of my bank account on a pre-determined date and I cannot do anything about it.  And then I have a bucket for my “bucket lists”.

Whenever I get some backlog of salary or allowances I put this amount into putting together my corpus to fund the initiation of my trips.  If I can find a way to pay for the tickets and the visa costs then I plan my journeys.  Usually planning a journey takes about 2-3 months.  During this time and till I complete my journeys I save whatever I can to pay off the travel bills without taking credit card debt.

Inspite of all this I am short of some amount always, because we always end up spending more than our budget.  That’s when I take some profits off the table from my investments.  This is not a good strategy because I only tell you that  the longer you keep the investment the better is the chance for compounding to do magic.  But the value of  the experiences which I can give my family have a much higher value so I do encash some of my investments to pay-off the expenses.

My advice to you also would be to always create a budget for gaining life’s experiences.  Using those experiences you can tell stories to your friends relatives and grand children.  That’s what will make your day and give you a richer life.  Wealth can follow.

Carpe Diem!!!

 

Benefits of SIP – nothing to do with the image above

Financial Independence, Uncategorized

I am a person whose attention span is very limited.  I end up getting attracted to the next bright object all the time.  It’s extremely easy to distract me.  Due to this, even in my office I have taken a room which is in the corner so that my distractions are limited.

Whether its books – my other hobby – the moment I am given a reference of a new book, I end up buying it from Amazon for my Kindle.  I have more than 30 books which I have bought and not even started reading and there would be another 30 which would be in semi-read state.  This does not account for the number of physical books that I have which are lying unread and semi-read, in my book-shelf.

Similarly its with investments.  I see a new theory or a new company or a new investment avenue and I start researching it on how I can benefit from it.

That’s where the benefit of investing via a Systematic Investment Plan (SIP) comes in.  It’s forced money which gets deducted from my bank account.  And since I don’t want to get a message saying that the SIP was not executed because of a lack of funds, I end up ensuring that there are always enough funds to cover my SIPs.

I originally started my SIPs with just Rs1000/- per month in 2013.  Thats about USD16/- that’s all.  Over a period of  time I have been increasing the amounts in various mutual fund schemes.

While I was investing in the equity mutual funds, I was also studying some of the good companies.  I read a whole lot of books on this – I have shared names of the books in an earlier post – and took every opportunity to watch videos on Youtube where legendary investors shared their knowledge.

Once I was able to analyse some of the good companies which had good management, I started SIPs for those individual stocks, again with very small amounts.  The “kick” of investing in individual stocks is

  1. I don’t have to pay a service charge to the mutual fund manager.  The 2.5-3% service charge that they take for managing our money can substantially reduce the overall wealth you can create.  I have shared complete tables of these calculations in earlier posts.
  2. When the company declares a dividend or gives bonus shares then the pleasure I get is immense.  This does not happen when you have mutual funds.

Having mentioned the two points above, I still have a lot of SIPs going into mutual funds, because I am not in a position to identify mid and small companies on my own because of paucity of time.  Having a fund house do that for me makes more sense even if they are charging me a percentage, which eats up into my returns.  Once I take my retirement, I intend to even do this on my own.

Another psychological advantage of SIPs is that your brain now works to live within the limits of the money which is leftover after accounting for the SIPs. This is a very important factor for people like me who end up choosing the next bright object.  This keeps me focused on ensuring that I take up any new adventure only after I have paid for my SIPs.

From a financial perspective SIPs ensure that you get the advantage to being able to buy more when the price goes down thus ensuring you take advantages of the draw down in the market.  On your own you would never be able to time the market so well.

I even started a few SIPs for my son so that he gets the advantage of age on his side.  Even to my friends, I force them to start these for their children at as young an age as possible so that they get the power of compounding on their side.

Whatever your age or whatever you earn, you can start investments into a SIP and make your money work while you sleep.

Especially women (and girls) – they have this big “mindblock” on not knowing finance.  With a SIP you don’t need to know anything about finance or stocks.  You just need to tell your financial advisor about the amount of risk you are comfortable and she will suggest a scheme for you.  You could also go to sites like valueresearchonline.com or moneycontrol where they showcase the risk ratings of funds.  You could just choose from any of those.

Till the next time.

Carpe Diem!!!