Keep your Systematic Investments Plans (SIPs)

compounding, Financial Independence, Human Brain

The market has gone down and rebounded. That’s the way the market behaves. You don’t know which way it will decide to turn. However the pandemic is real. People losing jobs is real. But more than anything else is the fear psychosis that things will never come back to normal. The media keeps bombarding you with news about the number of cases of Covid 19 which have grown by the hour.

Fact is that the media earns its money by playing on people’s fears. The pandemic is real there’s no doubt. But the human race has always found solutions to the toughest of problems. Ingenuity of human beings is directly proportional to the number of human beings (Julian Simon the Ultimate Resource). Today when we are more than 7 billion people on earth, we have much better lives than when there were 1 billion people on the earth. Sometimes it takes a little longer sometimes not so much.

This virus has been playing games for sometime, and the vaccine is still seeming elusive, so yes there is a lot of uncertainty. But already in most countries we have been able to now reach numbers of people getting cured and getting reported at almost similar levels. A lot of pharma companies are talking about having a vaccine ready by September this year (2020).

So now let’s get to you. If you still have a job – congratulations. You may have the job with reduced salary or normal salary. I don’t know your exact situation. I hope you and your family are safe and healthy.

If you don’t need the money immediately don’t encash your investments – the world will not come to an end. If you can somehow last these next few months without encashing your investments, then you would reap tremendous benefits because compounding will always play a role – Covid or no-Covid. If you let the compounding equation work uninterrupted you will have created a base to hit your financial freedom. If you have just started your investment journey over the last few years, you may not think that there is too much you have been able to accumulate. That is the way of any exponential equation as you will see from the graph above. Its only after the 15-20th period that the numbers suddenly explode. So staying the course till you hit that 15th period or near about is the key to your financial freedom.

In the long run the stock market in India has given 12-15%. So if you have SIPs going on – then when the stock market crashed couple of months back you would have been able to buy a higher number of units with the same amount of money, which means you would now have a higher number of units on which appreciation will happen when the market goes up. And markets in the long run have always gone up. In India because of higher inflation they have been at 12-15% average while in the US it is lower because of lower inflation.

The same logic would hold even if you have Fixed(term ) deposits. If you have a recurring amount getting deducted to invest in a term deposit, please continue similarly. Don’t let the compounding equation break. You may think you will restart later, but the later never comes…..that’s pure human nature.

So whatever investments you have been able to make, keep them as far as possible so that you are on the continuum to take advantage of the compounding equation

Till next time.

Carpe Diem!!!

Investment Strategies for Young Girls – Part 4

compounding, Financial Independence, Youngsters

In the first three parts (Part 1, Part 2, Part 3) I covered the basics on interest rates and compounding, then about taking insurance at all costs and then in the last one I spoke about keeping a base income of 3 months in liquid assets which can be taken out immediately. In the last post I spoke about eliminating Credit Card debt.

Today I will talk about student debt as the next biggest killer after credit card debt.

I read a wonderful blog post by Wintery Knight (you can read it here) about how student debt is such a big issue and even a cause of divorces in some cases. What was more poignant in the post was that women ended up taking up student loans and in general did course which ended up in low paying jobs, so paying off the loan took an even longer time.

When I started writing this series – investment strategies for young girls – of blog posts I did not have this kind of data. I was writing more from the fact that most of my sisters, female colleagues, team members were always working very hard, but when it came to finances, they preferred to avoid thinking about it. The result is that a lot of these young women work hard and earn a lot of money but because they don’t know the investment strategies, they are not able to make money work for them.

The thought process – finances, money, maths are things which are better handled by their father/brother/husband, I thought was something more pronounced in India where because of cultural issues women did not think about money, finance and maths.

However the data sources in the Wintery Knight’s blog show that this is an issue even in developed countries like the US. So somewhere maybe the conditioning we give our girls right from their childhood, in all cultures, is a reason for this issue.

So let’s get down to solve this issue of the education loan crisis. If you have done what I mentioned in the first 3 posts and you still have a job, then make it a habit to pay 1.6 times what ever you paid in the previous month/year. So as an example if in the first month / year you pay out $100 then in the next make an effort to pay $160 or as close to $160 as possible. In the next month / year pay 1.6 times of $160 and so on. This is going to use the Hemachandra-Fibonacci series that I wrote about in my blog here…..

This way you will break the ability of the finance company to compound interest on your pending loan amount. Negotiate hard with them to ensure they don’t have a problem with you increasing your monthly/quarterly/yearly payments by 60% in every period(monthly/yearly/quarterly). The more you reduce the amount of principal at the earlier stages of your loan tenure the easier it will be payoff the loan faster.

Now this is going to be tough for the first few years where you will not be able to go out for parties and may not have the money to even buy expensive dresses and cosmetics. You could also however do some freelancing alongwith the job and increase your income ( we will take this up in a separate post).

Entrepreneurship is obviously the fastest way to wealth, but with a loan sitting on your head, it will be advisable to ensure you clear that out at the earliest and also gain experience on the way.

From the next post I will start writing about how you can utilise the laws of compounding to your benefit.

Till then – Stay Safe and Carpe Diem!!!

Investment strategies for young women Part -3

compounding, Financial Independence, Youngsters

In the first part I wrote about some fundamentals of interest rates and the rule of 72 and how using the rule of 72 you will know how soon you can let compounding grow your wealth. You can read part 1 here.

In the second part I spoke about the importance of taking insurance – life and health – before looking at making any kind of investments – because the earlier you take the insurance, the lower it will cost. If you are interested you can view the post here.

Today I will talk about the next thing you should look at before going in for your investment strategy. As you start your job, first ensure that you have your 3 months of expenses set aside. The job market is extremely volatile and you don’t know what is in store the next day. So you should always have money available in your savings bank which can help you meet your 3 months expenses.

You may think of 3 months expenses, equals 3 months salary because you end up spending all your salary every month. That’s not the case.

What you are looking at is the basic things you will need to survive for 3 months if you don’t have a job or don’t get salary for 3 months.

So this would include the rent for the house that you stay in. It would include the electricity bill and basic food requirements. Any loans that have to be paid back monthly and basic travel expenses. It will not include entertainment and eating out budgets. It will also not include holidays and tourism.

Typically the amount needed to survive at a basic level of sustenance for a human being is generally not much. If you will chart out your basic expenses you will realise that in most cases it’s not more than 30% of your monthly salary.

When I was young, I had taken life insurance as my first step. However I would end up spending all my money tht I would earn. Since I was living with my parents, I never felt the need to save. It was only after I had got married and I started staying independently and the company I was working for went in a downturn and we didn’t get salary for months. We did not having enough savings and we ended up buying things on the credit card. But because salaries were getting delayed the credit card debt started pilingup.

Which brings me to the next part. Never ever take credit card debt. I know in some countries, its necessary to improve your credit rating. You however need to understand before you start spending on the credit card, what’s the level of interest they charge on outstanding. Then use the rule of 72 which I explained in the first post. In India typical credit cards charge more than 3% per month, which means that your outstanding doubles in every 2 years.

So say you bought an item worth Rs/$100. After the first 30 days of credit you pay back the minimum 5% of the outstanding due – which is $5. This means $95 of the principle is now outstanding. Next month on this outstanding the company will charge 2.5 % which would mean your total outstanding (principle+interest) would become 97.38. At minimum 5% payment due next month you will end up with an outstanding of 92.3.

I have given above a chart of how your payment will scope out if you just keep paying 5% of the outstanding back. You will take more than 10 years to payback Rs/$100. Similarly if you were to pay 10% of the outstanding amount, back every month at the same level of interest, you would take about 5 years. But if you pay back 25% of the outstanding amount every month then you will payback in about 2 years. And all this is assuming that you have not made an additional expense on the card. Then the the whole chart will change dramatically

Now look at the amount you would have paid back to the credit card company in absolute money over the period of the time you were paying the interest and principle.

So when you take a credit of Rs/$100 and pay minimum 5% of the outstanding every month then you payback more than Rs/$3500 and when you are paying back 25% of the total outstanding every month then you will end paying a total of Rs/$ 431.

What the above is showing you is how compounding is working “against” you and “for” the credit card company. This is the reason people fall into a debt trap and are able to come out of it with great difficulty while all the banks and credit card companies are always growing.

So as a general rule take a credit card because you have to start getting a credit rating built but ensure you are always paying back everything in the interest free period. That way you can actually take advantages of the credit card. I will cover those in a separate post.

For now after you get a job, take an insurance for your life and medical/health. After that ensure you have a bank savings account which has minimum 3 months of coverage of basic necessities covered. Then go for a credit card to build your credit rating, but ensure you are paying back within the interest free period.

Till next time.

Carpe Diem!!!

Investment strategies for young working women – Part 2

Affirmative action, Financial Independence, Insurance

In my post of 15th March on this topic I had written about the rule of 72 and how this simple number can give you the rate of interest that you are getting for an investment or the amount of time it will take to double your money if the rate of interest is known.

Today I will talk about an essential item for a young girl who’s just entered the workforce and that is insurance. Even before you think of making any investments, first go and insure yourself. Even if you are single today. Someday you will have dependents. You are not living on island. So you will end up creating dependents who will suffer if you have to die early or if you fall sick with a long medical condition.

A simple rule – whether you are taking life insurance or medical insurance – is start at the earliest. The earlier you start the lower is the cost.

Life Insurance – As far as feasible, whenever you are considering life insurance, look only for the “term” plans and not “endowment” or “money-back” plans. The reason for taking life insurance is to cover risk. It’s not to do saving. Also understand that in a lot of countries taking life insurance allows you to gets you income tax benefits also. So a lot of life insurance agents will sell you the idea of taking life insurance to save tax. This is a perfect example of a “tail wagging the dog”.

When you take life insurance there has to be only one objective – how much risk can I cover at the lowest possible cost.

Why am I pushing you to go and take life insurance as the first thing when you get your first paycheck. The life insurance companies keep increasing their premiums based on age. They also have other criteria but the biggest factor is age. So when you take life insurance at a young age, they believe that you have a long runway and the probability that they will have to pay for your death during the coverage period is low.

As you grow older the chances that you will die during the coverage period keep going up.

So by taking it at an early age you keep your premiums to the lowest and get the highest possible coverage which is practical.

Initially the premium for a coverage of a 30 year plan may seem high by your earning capability today. However please understand that after 10 years, as a percentage of your income this amount may be only a few percentage points but the risk cover would still be the same amount.

Medical Insurance- Similarly even if your company provides for medical insurance, you should opt for a personal medical insurance. The younger you are, the lower is the premium. In addition because of your age, chances are you will not fall sick and therefore next year you could get a bonus coverage for the same price. Every company has their own group medical policy. By having your own personal policy over and above the group insurance provided by the company you are ensured of a minimum level of insurance throughout your life as long as you continue paying premiums. In addition to that in most countries, medical insurance also gets you tax benefits.

These days you have enough policies available from direct insurance sites, which you can compare on your own. You also have aggregators who can suggest you options once you give them your criteria. However my advice would be to compare both the aggregators and direct company sites always. A lot of times at a minor price differential the direct company may offer a much higher level of benefits.

Take your first step. Go visit an insurance site. Start evaluating plans. Get your coverage for a Rainy Day

Carpe Diem!!!