AAMDANNI
ATHANNI, KHarchyarupayya; bhayya,
napuchonapuhchohaal;
Natijatan tangopal”
The
purpose of writing this song here lies in the meaning of this song.This song
speaks the most basic and yet very powerful financial planning rule in our
life. There is one thing common in Bollywood heroin and this article. Bollywood
heroine revolves around the tree while singing this song while my article
revolves around the central theme of this song itself.
In
this article, I have tried to analyse typical life style of a kokani community,
their spending pattern which has a big impact on their lives. I have
scrutinised existing financial rules of thumb stated by many financial advisors
& experts in order to assess whether these rules are really relevant to
Kokani people. If not then what thumb rules are more useful to Kokani people. Also,
I have mentioned the limitations of using financial rules of thumb. And finally
I have created a case study of Munnabhai to demonstrate how he did his
financial planning.
Relevance
of financial thumb rule:
If
you search on Google, you will find pages after pages for financial thumb
rules. When I did some research, I realised that most of the original thumb
rules have origin in USA or some other developed countries. They operate in different
environment. Let us examine few thumbs rules. There is a thumb rule that says
you should have minimum fund available with you all the time to cover 3 months
of household expenses to deal with an emergency. After probing the rule
further, I came to know that the meaning of this rule is , if you lose your job
then it may take 3 months to find another job hence you should have enough fund
to survive during unemployed period of 3 months.
In
developed countries loosing job is normally considered an emergency because
health, education and anything else is either taken care of by social security
system or insurance. However, in India the emergency is mostly due to medical
problems or accidents, where someone in the family is diagnosed having heart
problem; cancer problem or meets with an accident. All of a sudden people need
huge money for surgeries or costly treatments. If any kokani person saves 3
months household expenses for an emergency, would that be enough? This will
help little bit. Small saving is still better than no saving at all but the
point is, 3 months saving will give false sense of security if any Kokani
believed this rule of thumb.
Buying
a Vehicle----The 20/4/10 rule
Rule
says, when buying a car, you should put down at least 20 percent as a down
payment. You should finance the car for no more than four years and spend no
more than ten percent of your gross income on transportation costs.
All
Kokani people don’t buy car but spend equivalent money on weddings. If
unnecessary wedding expenses incurred for show off purpose is avoided then that
saved money is enough to buy car. So, this rule is relevant for Kokani
marriages & not for car.
In
developed countries these % based rules work because everyone gets a decent
salary. Even Labourers & cleaners get enough salary that they buy cars and
houses. But in India, if someone is
earning only 20,000 Rs. / month, can he even think of buying car?
Now
assume, someone is earning 1,00,000Rs salary per month. We know that he can
afford to buy car with this salary but is this rule good enough for layman to
understand how much money he should spend on buying car? Let us put this rule
to test. Assume, this person has saving
which is equivalent to 20% of car value. As per rule, he would take car loan
for 4 years which is fine.
Now
coming to third criteria, which is, spending maximum 10% of his income on car
which is 10,000 Rs in this case. But if you take car loan for 4 years then what
we are talking here is that your EMI ( Equated Monthly Instalment) should not
be more than 10,000. If you take car loan of 3,90,000Rs at interest rate of
10.5% for 4 years then your monthly equated Instalment would be 9985 Rs. Again
3,90,000Rs is 80% of car value obtained as car loan. This person will shell out
his 20% so the cost of car will be 3,90,000 X 100/80 = 4,87,500 Rs. it means a person
who has a salary of 1,00,000 Rs / month should not spend more than 4,87,500 on
buying car.
I
assumed that car loan interest rate is 10.5%. If interest rate is more than 10.5%,
his buying power will significantly go down. To arrive at this car buying power
of 4,87,500Rs, I had to do lot of
calculations. How many people would be able to do these calculations&
figure out the amount they can spend on car buying, as per their salary?
On
the other hand, if you've got the cash, you might choose to pay for your car
upfront rather than take a loan with
interest. Many Muslim people try to avoid interest if possible which is ideal.
In reality, the rule wouldn't apply to Kokani people who has no money to buy
car, or someone who has down payment but does not want to take car loan to
avoid interest or someone who has enough money to buy car outright.
Retirement:
The
10% Rule
This
is probably the most traditional rule of thumb when it comes to saving for
retirement. Save ten percent of your income toward retirement.
Issues
with this rule:
10%
is a good start. However, the percentage doesn't consider how much you'll
actually need in retirement. There is no
way to understand how much money you will get back when you retire. It also
doesn't consider how much you've currently saved. If you're playing catch-up,
you'll probably need to save considerably more than ten percent of your income.
If you want to retire early, or more lavishly, you'll probably need to save
more than ten percent.
The
Income Rule for buying house;
Don't
buy a house that costs more than three years' worth of your gross annual
income. If your monthly salary is 60,000 Rs. Then according to this thumb rule,
you should not buy house that cost more than 21.6 lakh Rs. This rule falls
short in many ways. In India, you need to pay 50% by black & 50% by white
money to the builder so this rule goes out of whack.
Secondly,
there are professionals with seven-figure incomes who cannot afford a I crore
Rs property, and there are couples like
Munnabhai in the case study just starting out who thrive on the financial
discipline of stretching to pay for a home that is four or more times their
income. Affordability is not necessarily a function of income, but rather what
people do with that income.In my case study, you will see how much Munnabhai
could spent on home so that you can realize how much crap this thumb rule is.
The
purpose of showing the limitations of above thumb rules is that Kokani people
should not just blindly follow what they read on internet. I have noticed on
Facebook &whats app group that people believe on whatever hoax mails they receive
& forward to other contacts thinking that it is useful information without
verifying authenticity or accuracy of the information. Although thumb rules
stated on various websites are not hoax, they may be totally irrelevant for our
circumstances. Since Kokani community’s life style & culture is different, these
rules are worth reworking to our needs.
Financial
advice is not an exact science. They are
based on number of assumptions that can go wrong. But that is not justification
for not having financial planning in place. That would be disaster. Fail to plan finance is plan to fail finance.
Financial advice serves as a good approximate guideline for decisions, while
everyone's situation is different, these serve as a good starting point.
Not
all thumb rules are crap though. There are some good thumb rules that I would
like to highlight here
In
how many years my amount will double?
It’s
a very simple & most common rule – if you divide 72 by rate of return you
will get the number of years in which your money will double. For example, If
you expect a rate of return of 12%; your money will double in 6 years (72/12=6)
. What about if rate of return is 8% ?
72/8=9 years. This can also be used in reverse order at what rate your
money will double in 5 years – 72/5=14.4%
Rules
similar to rule of 72; Rule of 114 & 144
These
can help you in how many years your money will be triple (114) or quadruple
(144) at some rate of returns.
Rule
of 70
You
know it or not but inflation is our biggest enemy – rule of 70 will tell you in
how many years value of money will be half. You just need to divide 70 with
rate of inflation so if rate of inflation is 7% – 70/7=10 years. So in 10 years
your Rs 100 note will be worth Rs 50.
Ready
Reckoners:
Financial
investment involves very complex, tedious calculations. In fact the
calculations are so complex that by and large people involved in finance are
only able to understand the finer nuances of the finance & do the
sophisticated calculations. Therefore, I have done all the calculations &
put under the tables below.
|
ROI
|
No of
years of saving
|
|||||||||
|
30
|
29
|
28
|
27
|
26
|
25
|
24
|
23
|
22
|
21
|
|
|
7%
|
3.36
|
3.22
|
3.08
|
2.95
|
2.82
|
2.70
|
2.59
|
2.48
|
2.38
|
2.28
|
|
6%
|
2.79
|
2.69
|
2.59
|
2.50
|
2.41
|
2.32
|
2.24
|
2.16
|
2.09
|
2.01
|
|
5%
|
2.32
|
2.25
|
2.19
|
2.12
|
2.06
|
2.00
|
1.94
|
1.89
|
1.83
|
1.78
|
|
4%
|
1.94
|
1.89
|
1.85
|
1.81
|
1.77
|
1.73
|
1.69
|
1.65
|
1.61
|
1.58
|
|
ROI
|
No of
years of saving
|
|||||||||
|
20
|
19
|
18
|
17
|
16
|
15
|
14
|
13
|
12
|
11
|
|
|
7%
|
2.19
|
2.10
|
2.02
|
1.94
|
1.86
|
1.79
|
1.72
|
1.65
|
1.59
|
1.53
|
|
6%
|
1.94
|
1.88
|
1.81
|
1.75
|
1.70
|
1.64
|
1.59
|
1.53
|
1.49
|
1.44
|
|
5%
|
1.73
|
1.68
|
1.64
|
1.59
|
1.55
|
1.51
|
1.46
|
1.43
|
1.39
|
1.35
|
|
4%
|
1.54
|
1.51
|
1.48
|
1.44
|
1.41
|
1.38
|
1.35
|
1.33
|
1.30
|
1.27
|
|
ROI
|
No of
years of saving
|
||||||
|
10
|
9
|
8
|
7
|
6
|
5
|
4
|
|
|
7%
|
1.47
|
1.42
|
1.37
|
1.32
|
1.27
|
1.23
|
1.18
|
|
6%
|
1.39
|
1.35
|
1.31
|
1.27
|
1.23
|
1.19
|
1.15
|
|
5%
|
1.32
|
1.28
|
1.25
|
1.22
|
1.19
|
1.16
|
1.13
|
|
4%
|
1.24
|
1.22
|
1.19
|
1.17
|
1.14
|
1.12
|
1.10
|
How
to use multiplier in above table:
Let
me explain what the highlighted number below means:
|
ROI
|
No of
years of saving
|
||
|
30
|
29
|
28
|
|
|
7%
|
3.36
|
3.22
|
3.08
|
Let
us say, you invest 100 Rs every months for 30 years. Return on investment after
subtracting inflation is say 7%. In that
case at the end of 30 years, your maturity amount will be 3.36 times your
investment. In above example, you invested, 100 Rs/ month X 12 months X 30
years = 36000 In return you will get 36000 Rs X 3.36 = 120960 Rs at the end of
30 years.
Let
me give you case study to demonstrate how to do calculations in financial
planning:
Munnabhai&Munnibegum
got married. They are blessed with one daughter & one son. To provide better education to kids, Munnabhai moved his family to Ratnagiri as there was no
good school, water scarcity and lack of other amenities in his village. He pays
5000 Rs. Rent for one bedroom apartment in Ratnagiri .Other familyliving expenses are 20,000 Rs. Per
month. Munnabhai is an accountant in UAE and earns 60,000 Rs. /months salary.
He needs 5000Rs for his maintenance in
UAE. Out of 60,000 RsOf his salary, he saves 30,000 Rs / month. He got married
at the age of 28. At his marriage, he
spent 4 lakh Rs on his marriage & another 6 lakh Rs for house renovations.
Now his age is 30. He will retire at 60. At the moment he has no loan
whatsoever.
-------------------------------------------------------------------------------------------------------------------------------------
Munnabhai has following plans in his life:
After
4 years, he wants to buy Nano Car. He expects to spend 2 Lakh Rsfor car.
After
20 years, he wants to have following funds available to him:
Provision
for heart surgery if required…. 4 Lakhs Rs.
Daughter’s
wedding………………………………..5 Lakhs Rs
Son
& daughter’s education……………………….8 Lakh Rs
Hajj
for two people……………………………………..1.5 Lakh Rs
Total:
--18.5 Lakh Rs.
Munnabhai
thinks that if he was a retired person today, 15000 Rs / month would be enough
to manage living expenses. Munnabhai knows that life expectancy in India is:
Male 63.8, female 67.3 which is 7-8 years after retirement. He thinks that 20 years provision after
retirement is good enough.When he retires, he wants a fund that will last him
for 20 years. So at the time of retirement, he needs 15000 Rs/ month X 12
months X 20 years = 36 Lakh Rs
After
15 years, Munnabhaiwants to build decent house in Ratnagiri. Whatever money is
balanced after 15 years, he will use that amount as a cash payment to the
builder & borrow loan from bank if required.
Munnabhai
created four portfolios to manage all his financial planning. One is retirement
fund portfolio; second:- Car purchasing portfolio; 3rd: home
building portfolio, and fourth:- Mid
Life Crises portfolio. Munnabhai does not want to invest anything in risky
shares. He wants to invest only in Mutual funds, debentures, bonds etc. His
promised return is 13% .Hovever after subtracting average inflation rate of 8%
his ROI is 5%.
Munnabhai
used my ready reckoners & did his financial planning as per below:
Since
Return on Investment is inflation adjusted, there is no need to think about
what will be future retirement expenses; wedding expenses or education
expenses.
Since
Munnabhai will invest same amount every month for 30 years with ROI 5% , his
investment multiplying factor from ready reckoner table is; 2.32 as per below.
This
multiplying factor of 2.32 means that Munnabhai will get maturity amount of 36 Lakh Rs at the end
of 30 years if he invests 15,51, 274 (36 Lakhs Rs divided by 2.32). 30 years
equal to 360 months hence per month investment required in retirement fund is
15,51,274Rs/ 360 months = 4310 Rs. / month.
Mid
life crises portfolio:
This
fund is required after 20 years with RIO 5%. As per ready reckoner, multiplying
factor is 1.73
Maturity
fund required 18.5 Lakh Rs
Investment
required using 1.73 multiplying factor = 1850000 Rs/ (1.73) = 10,69,364Rs. No
of months invested= 20 years X 12 months = 240 months
Monthly
investment required in Mid Life Crises portfolio= 10.69.364 Rs / 240 months =4455
Rs/ month
Car
buying portfolio:
To
buy car, 2 Lakh Rs required after 4 years of investment @ 5% ROI .Multiplying
factor for this is 1.13
Fund
required after 4 years @5% ROI is 2,00,000Rs. Investment required using 1.13
multiplying factor = 2,00,000 Rs / 1.13 = 1,76,991 Rsto be spread across 48
months = 1,76,991 Rs / 48 months = 3687 Rs / month.
Home
building portfolio:
Munnabhai
has so far put 4310 Rs. / month (Retirement portfolio) + 4455 Rs/ month (Mid
Life Crisis portfolio) + 3687 Rs / month ( Car buying portfolio) totalling
12452 Rs. He saves 30,000 so balance amount = (30,000 Rs- 12452 ) 17548 will be
invested in Home Building portfolio.
Munnabhai
estimated how much fund will be available after 15 years after checking ready
Reckoner.
His
investment will be 17548 Rs/ month x 12
months X 15 years = 31,58,640 RsMultiplying factor from ready reckoner for this
is 1.51
Therefore
maturity amount at the end of 15 years will be 31,58,640Rs X 1.51 = 47,69,546
Rs
After
car was bought, car buying portfolio was closed and 3687Rs monthly investment
transferred to Home buying portfolio. It will continue for 11 years as first
four years were used for buying car.So, investment in 11 years will be 3687 Rs
X 12 months X 11 years= 4,86,684 Rs.
Multiplying
factor for 11 years @ 5% ROI is 1.35
Hence
car buying portfolio transfer fund will be 4,86,684 X 1.35 = 6,57,023 Rs.
Therefore
total fund available is 47,69,546Rs + 6,57,023 Rs = 54,26,569 Rs.
As
per original plan, he thought he will pay 54 Lakh by cash & checked how
much loan he can afford to take from bank. After checking bank calculator, he
realised that he can afford 28 Lakh Rs loanfrom bank because EMI for 28 Lakh @
interest rate 10.5% for 15 years will be 30,951 Rs /month. Therefore his home
buying power is 54 Lakh + 28 Lakh = 82 Lakh
After
knowing his buying power he saw property prices at prime location in Ratnagiri.
He found one property which had 2436 Sq feet area @ the rate of 3093 Rs / Sq
feet. The total buy price of the house was 75,34,548. His bank loan reduced from 28 -7= 21 Lakh
Rs. reducing his EMI from 30,951 to
23213 Rs
Rationale
behind case study:
Many
of the thumb rules based on % of your income or expenses invented by so called
financial experts are just crap. They are useless. Every community has
different dynamics and characteristics depending on their value system, their
traditions and psychological makeup. Hence every community needs to have tailor
made financial model as a guide. Therefore, I have simulated Kokani community’s
life style in case study that would make more sense than throwing some
financial jargons & irrelevant thumb rules. Poor thumbs have to create
rules for these experts besides showing direction up or down.
The
idea behind walk you through case study is to make case study as a guide for
DIY (Do it yourself) kit for financial planning. Once you know how much money
you can save per month, how much expenses you expects for the things you want
to achieve in life, just follow the steps I showed you. You will only
substitute numbers that are relevant to you.
Return
On Investment (ROI) used in the Ready Reckoner table.
Maximum
ROI stated in table is 7% assuming that you invested in shares. I know many
people will be shocked by this seemingly very low number. Share market is very
volatile. If you do short term gambling in shares, you can earn significant
money. Many people have made good money. However, when share market collapses
like how it doomed in 2008, many people’s lives were ruined as well. But if you
just hang on there then in the long run investment in shares yields 7% ROI
after subtracting inflation percentage. In India the RIO from shares investment
in the long run is around 15%. However average inflation for last 10 years is
8% so if you take away inflation, the effective ROI is 7% only.
Where
does this 7% ROI number come from?
My
primary source for that number comes from Warren Buffett, who claims
point-blank in this Bloomberg article that you should expect a 6-7% annual
return in the stock market over the long term. In that article, Buffett
describes the analysis that led him to that kind of conclusion:
Beyond
that, the long-term data for the stock market points to that 7% number as well.
For the period 1950 to 2009, if you adjust for inflation and account for
dividends, the average annual return comes out to exactly 7.0%. Check the data
for yourself.
Initially,
I thought that I will include all calculations for ROI up to 15%. However, I
realised that people who get gross return as 15% will mistakenly use 15% as ROI in that table.
Inflation is the biggest enemy of investment returns. In India, 100 Rstoday
will devalue to 12Rs after 30 years so making error in inflation would be disaster.
To prevent this potential mistake, I have included ROI upto 7% maximum only.
Cushion
exercised in the case study:
In
case study, the assumption is that current 60,000 Rs/ month salary will remain
same until Munnabhai retires which is not realistic. All countries take review
of compensation every 5 year & they adjust it according to market economic
condition, demand & supply, and inflation as well. Besides 5 yearly
adjustments, many companies offer pay raise every year. Middle East countries
are not exception to this. As per research paper by Mercer, titled. “Economic,
Political and remuneration trends in the Middle East” and in-depth survey Of
IMA in 2012, majority people working in Middle East countries do get pay raise
up to 5% annually except health professional because they are well paid
otherwise.
To
project realistic financial planning in case study, I thought of incorporating
5% pay raise every year however I dropped that idea for two reasons.Inclusion
of pay raise would have made case study extremely complex defeating the purpose
of simple to use Ready Reckoner.
Without
inclusion of pay rise, Munnabhai’s home buying power was 82 Lakh .If pay hike
is included in case study, then I am sure home buying power would surpass crore
Rs. So, if anyone has any doubt whether financial outcome demonstrated in case
study is achievable or not then I can say that calculations in case study are
lot more conservative therefore definitely achievable. If someone starts
working at the age of 25 then he has 35 years of career however I have done
calculation for 30 years only so that is another level of cushion in the
calculation.
Disclaimer:
I am an Engineer by profession hence I am not a financial planning expert but being
an Engineer, I am good at mathematical calculations & developing
formulae. Therefore, I want to
share my knowledge with you. Having said that I am open to all constructive
criticism to improve the quality of my write up& learn something from
everyone’s knowledge. Let us share each other’s knowledge & become rich in
knowledge.
For
example, my article is based on an assumption that we all have one life & one
wife on earth, However, if you are managing two wives then this case study will
fall short of financial planning required in your situation. In that case, you
share your knowledge of how you manage more than one wife and I will share my
knowledge of investment calculation applicable to you. Jokes apart, but the
point I want to convey through this crude joke is that you know where your
shoes hurt you exactly. Therefore, if you think that your situation don’t fall
under case study & if you need help with different set of investment
related calculations then feel free to reach out to me. I am only one email
away from you.
Who
needs financial planning?
There
is one criteria that decides eligibility. When you are born, you have breadth
but no name, when you die, you have name but no breadth..If you are in between
this two states then you certainly need financial planning. Now a day’s people
make planning for their funerals as well when they are gone. In shortwe all
need a planning.
How
long we need planning?
Simple
answer is you need this during your shoulder to shoulder journey meaning; from
the time your mother takes you first time on her shoulder when you are born
until four people take you on their shoulder for your goodbye farewell.
The
best golden rule we are taught by our ancestors:
“Live
within your means.”
The
following quote explains importance of living within mean succinctly.
“There
is no dignity quite so impressive, and no one independence quite so important,
as living within your means.
“Calvin Coolidge”
It
is not about how much you make money, it is how much you save money & pass
on makes difference to your life & your kids life..
On
a lighter side, if someone challenge my above punch line with following quote
then I don’t have answer for that.
“Dogs
have no money. Isn’t that amazing? They’re broke their entire lives. But they
get through. You know why dogs have no money? .. No Pockets – “ Jerry Seinfeld
Well,
Jerry has point though.Now, whether you want to follow, Jerry or my article is
your choice.
I
can sum up my article with following tagline,
“KAL
HO NA HO;
FINANCIAL
PLANNING ZAROOR HO”
Introduction
of the author:
Shakur
Tisekar’s native place is Tise -Khed Taluka in Ratnagiri district. He is a
graduate Engineer from Bombay University, migrated to Australia & currently
settled in Melbourne. He is a staunch supporter of Kokni community upliftment
& proud of Kokani culture, language & kokani exotic food. Although he
is living in Australia, he is till connected with kokani community by umbilical
cord.
