Personal finances and Tax

Why Tax Sops?

The government gives a variety of tax sops to encourage certain behavior. For instance, the tax savings under section 80 c gives tax benefits for savings up to Rs 1.5 Lakh per year. The idea is to get people to save and invest money. Similarly section 80 ccg gives tax benefits for investments of up to Rs 25,000 for people having income less than 12 Lakhs. The idea is to get small investors to invest in mutual funds so that they get good returns without inordinate risks.

Of course, sometimes the tax sops stop making sense. For instance, on a first self occupied house, a maximum of Rs 1,50,000 deduction is available. But on second or more houses, the deduction available is the entire interest less 70% of deemed rent. In the present scenario, with high interest, high property values and low rents, this second option may be several times the first limit. In other words, it gives very high deduction for people buying a second or more property which does not make sense.

Tax Sops and Financial Planning

While good financial planning takes maximum advantage of the tax benefits, it is not directed by tax benefits only. Good financial plans begin with the needs of the individual and once these can be fulfilled, the optimum tax benefit is taken. Often, however, people make mistakes which can be very costly.

For instance, most of the investment options under section 80 c require the investor to lock in the money 5 years. Schemes like NSC give returns of 8.5% but the interest is taxable. So even considering the initial tax savings, net returns are between 9% and 15% depending on the tax slab. Given that most personal loans and EMI schemes are at 14% to 16% interest rates, this is usually a losing proposition.

Of course, investment in PPF is way better because the interest income is also tax free. But since these are very illiquid (and early withdrawal is again taxed),  one needs to think carefully before investing in them.

Rules of thumb

If you are in the 10% tax bracket, then do not invest in tax saving schemes like traditional insurance and NSCs. If you are very certain that you will need money for 20-25 years, then invest in PPF.

If you are in the 30% tax bracket then you should completely meet the limit in section 80 c. Most of it will probably be covered by EPF and similar instruments. Also, you should not require to buy things (except house) on EMI.

If you are in the 20% tax bracket, then the difference between the two options are not significant. But if you do anticipate need for money in a couple of years, then it is better to not invest in locked up schemes.

3 Valuable Lessons from the NASDAQ Bubble

The NASDAQ Bubble

Looking back, one can recall that the big capitalization technology stocks which controlled the NASDAQwere wildly overrated by out-dated measures. The Wall Street Journal had published on March 14, 2000, a prominent article - `Big Cap Tech Stocks are a Sucker Bet’. This article was contributedby the Wharton School finance professor and fellow Kiplinger’s columnist, Jeremy Siegel. He was of the opinion that `several investors of present time are undisturbed by history and by the failure of any large cap stock ever to justify, by its subsequent record, a (price-earnings) ratio anywhere near 100’. Bubble is a change and the nature of bubbles is that no one can predict when they could pop. If Nasdaq seemed to be overvalued in 2000, it was also overvalued in 1999 as well as 1998 and 1997. This resulted in investors rushing to buy stocks in late 1990s with the intention of not missing out on profits which their colleagues would be making. Most of the buyers overloaded their portfolios with big cap tech stocks with the belief that they could later sell to make a profit.


Education from the NASDAQ Bubble

Three of the most valuable education from NASDAQ bubble -

• Diversification - The main lesson from Nasdaq COMP, -0.63% bubble was diversification. Having ones’ savings in one high beta sector of financial markets would give rise to substantial risk of long lasting loss. Though the NASDAQ took fifteen years to break, an investor owning a 60%/40%stock/bond portfolio beginning on March 1, 2000 was at risk for less than four years. Besides, while NASDAQ was scrabbling its way back to break even, one generated an annualized return of 5.5% though not bad at buying while it was at its peak
• Price compression creates tail risk–Investors get involved in years’ worth of future returns into a very short time period. If the underlying entity does not give the actual value which it was priced in, this would give rise to disequilibrium. In other words, you would get investors who priced in high growth that does not seem to be profitable. When understanding dawns, the price decompresses and the bigger the compression, bigger is the decompression. As the Nasdaq bubble tend to get expanded, investors were looking forward to gain profits of the Internet, pricing in years’ worth of profits in a very short span of time. This means that they priced in a 15 years value of profit in a few years. When one fails to diversify accurately, one could be exposed to their savings being at risk. They should allocate their savings accurately to avoid being exposed to huge risk to their portfolio.
• Avoid chasing the next hot thing for maximizing returns –If one intending in maximising the primary source of income and allocating some of the income in, with the intention of planning for the future, proper allocation of saving is essential. The purpose of savings is not actual return maximization; on the contrary, return maximization within the boundaries of suitable risk taking. If one is a real saver on the lookout for stability, then the main portfolio goal is not simply a protection against purchasing power loss but the risk of long lasting loss. This means that it could be probably unwise to overweight the portfolio in favour of purchasing power protection.

Conclusion 

Most of the investors unfortunately turn to the stock market as a place where they could raise their profit and improve their financial status. In their eagerness to reach high, the risk factor is often overlook and sometimes ends in disaster. Caution needs to be exercised in every plan of investment to earn the fruits of a good labour.

Teach your kids about money




Image by everyday family

Congratulations, you have a brilliant kid in the house and the more your little angels grow up the more responsibilities are piling up. This is the challenge in parents nowadays. You are taking care of a money making machine, sooner or later that kid will become an adult and earn millions thru his/her entire life. How do you train them about handling their finances will give them a better advantage. There are a lot of things you can teach to a child but I consider these are the pillars of personal finance.

Once your child knows how to count that is the moment we are waiting for. It would be better for you to start doing this. Again, don’t be frustrated if your child is having a problem making adjustment with what you are trying to impart to them. This is not an overnight process. Being a mom or a dad is lifelong career so just keep guiding them and never stop trying different approach.

Spend using cash- Your child already has a Ph D. in spending so it wouldn’t be too hard for you to teach this. I think you have a Ph. D. too. The “I want it now in them”   is being activated whenever they see something they WANT or colorful. Teach them that their allowance has an allocation for it. Introduce the word “budget”.  Remember to spend only 50% max (this is my personal take) of what you give to them because there are things that they still need which is MORE important. Whenever me and my child roam around anywhere I normally set her expectation that we will just buy food and not toys or vice versa so that we can to avoid further tantrums. Skies the limit is not in my vocabulary. If you can’t let your kids abide a simple rule then most likely they will have a problem when they turn adults.  Spending cash has a link with out emotion. It really hurts to spend cold hard cash compare to a plastic card. In addition to it “You really do spend more with plastic than cash”- Art Markman Ph. D.

Rule of thumb for this is 50% of her allowance.

Save for the future- Since I have a daughter I am trying to give her an idea that having patience will be more rewarding (Ideally). As much as possible you give her visions of long term discipline. Whenever she wants something then she can use that money she saves for the toys or shoes that she wants. If you will keep giving your kids money without guiding them properly that will be a curse for them that’s what Dave Ramsey said.  Always tell your child what’s the purpose of saving because this is counter intuitive.  You don’t want to be kill joy in the eyes of your child. The best way to teach is thru modeling not on what you’re saying. Be a really good role model.

Rule of thumb for this is 20% of her allowance.

Invest regularly – Time to start a brand new and powerful habit. As early as 3-5 years old your child should at least have an idea about financial principles from you. Don’t start teaching your kids about money when he/she is already in college. I can say that the earlier you teach them about finance the better. Once your child gets the momentum of saving and you were able to see that he/she is more comfortable now. Your child needs to understand why you are doing this in the first place. 15% from his/her allowance is my rule. If you will be able to impart this knowledge and this becomes a discipline I can guarantee you that your child will become a millionaire or even a really good investor. Your child knows how to win the game of money. Your little kid will be able to afford the future.  This is not a rocket science. Never lose hope that he can afford the future. You badly need to repeat it again and again the principle or else they will lack wisdom. You are giving your child the priceless but the most expensive principles of all time that is not available literally in school.

One great investment that all parents can make is in the financial education of their children.  Kids who learn money management skills and healthy spending habits at home are more likely to become financially responsible adults. Studies have linked structured financial education early in life leads to lower materialism, lower compulsive buying, healthy financial risk tolerance, high future orientation and high self-efficacy.  -ELOAN

Give – Giving back is such a wonderful act. When your child were still babies and you keep on asking them to share their toys or other stuff that they own the answer you normally got is “This is mine! Why should I share it?” I love how my daughter is doing now; I’m seeing the seeds that we planted in her. Seeing my daughter respond when it comes to helping someone makes me a proud dad. She’s starting to value giving compare to the previous years. She has this heart that melts whenever she see kids from the street. She kept on asking me to use some portion of her savings to give to the street kids or poor people. 15% or more is my rule. Encourage your kids to give to your local church, relatives or non profit organization like Real Life organization  or Right start. If giving is not something that you really love then please don’t expect your kids to follow you. It will be very hard for your child to understand this if you are not doing it..

For example, research by social psychologist Liz Dunn and her colleagues appearing in the journal Science shows that people's sense of happiness is greater when they spend relatively more on others than on themselves. In one survey of over 600 U.S. citizens, Dunn and colleagues found that spending money on others predicted greater happiness whereas spending money on oneself did not, and this pattern was found across all income levels. In other words, even those with little money reported greater happiness when their proportion of spending on others, relative to the self, was greater. Allen R. McConnell



David Isaiah Angway is a Financial Evangelist

NSDL CAS : One stop window into all your investments

One of the most common challenges of the early retirement or personal finance enthusiast, is the ability to meaningfully track all their investments from a common platform.  The investment avenues are so diverse in India, that typically your investment universe is spread across everything from your friendly neighborhood banks, online brokerage portals, MF AMCs, online portfolio management tools, your own local excel spreadsheets, insurance agents, relationship managers, post-offices, and the list can go on and on.  How does one really manage all of these different avenues, and more importantly is there a single platform from which you can access and view all your different investments?  If this sounds familiar, read on.

The need for a common platform to view all of your investments is so pervasive, that several online services provide portfolio management software, and there are multiple start-up ventures that can link all your accounts, and provide you complete visibility of your investment portfolio in one place.  For example in India, Perfios is a commonly used account/investment aggregation site, somewhat similar to Mint, that is very popular in the US.  However, I have never been comfortable using these services since the aggregater sites require you to share your account password details, which makes me nervous.  The online portfolio management software, requires you to diligently enter every single transaction that you do, which is very painful, and soon becomes unsustainable.

Recently, the Government of India has come up with this very nice NSDL based initiative, that attempts to provide a single view into all your investments as linked to your PAN number.  In India's financial landscape, the PAN number is the closest thing that comes to a single unique ID across all kinds of platforms, investment avenues and services for every single person or financial entity.  This is akin to the SSN concept that is so convenient in the US.  So it becomes rather evident, that using the PAN number, one should be easily able to link all the transactions and holdings (since practically all financial matters are dealt with in DEMAT form these days) into one common place.  This is precisely what the NSDL CAS (Consolidated Account Statement) attempts to do.

Using the PAN number as the key, the CAS statement provides a consolidated view of all accounts that are associated with that particular PAN number (so this covers any joint accounts you may have, as long as your PAN number is associated with that account)

This is what the NSDL CAS statement states as a preface to the actual numbers and data.

The data itself seems to cover all my DEMAT accounts which covers all my direct equity holdings, all MF folios and all bonds.  It does NOT cover my insurance products, bank accounts (so no FDs, RDs, etc), PPF or EPF contributions (which in my opinion should be very easy to link as well)

In addition to holdings, the statement also provides a neat summary of every single transaction made, and also provides details of the various accounts, SIPs, etc.  In short, it is jam packed with a ton of relevant information about your financial health.  One note of caution with finding all this data in one place, is to be extremely careful of securing the data so it does not fall into the wrong hands.  

The overall holdings summary it provides is very intuitive, and the graphical format is quite easy to ready as a consolidated statement of my networth (except of course the missing pieces I described above)  The statement arrives once a month, which is perfect to review any changes in my overall networth.  I have not seen a similar consolidated statement ever before, and I dare say there isn't one available even in more advanced developed countries, with this level of detail.

I plan to use the NSDL CAS statement as my single source of networth information, and track it monthly to ensure I am hitting my financial goals.  My only recommendation to NSDL would be to include bank account, insurance, PPF, EPF and any other financial data that is already linked to my PAN, to provide a more comprehensive view of my portfolio and finances.

Privacy, market decoupling and REITs

Real estate market in India is currently claimed to be in bubble territory. Certainly, the price increase during the boom period of 2004-2015 is unprecedented. While it has been a wonderful time for people who got on board before or in the initial stages of the boom, for people who did not purchase a house, it seems pretty hard. Worse, these are the people who are most likely to buy property at the worst possible time - just before the bubble explodes.

Privacy and market decoupling

So what has this got to do with privacy? Well, as per the original definition, a private citizen was one who took no interest in the affairs of the society. Given that most of the functions of a society are performed by markets today, I would call privacy as the degree to which a person is decoupled from markets.

When a person rents a house on a one year lease and license agreement, he or she is highly coupled with the market. Price changes would affect him greatly. The coupling decreases as the lease term increases and price stability is built in; however, often the "price stability" assumes other factors to remain constant. For instance, a 10% escalation clause would be fine in high inflation (and high salary rise) era but if inflation drops to 2% and salary increases follow suit then again issues arise.

Owning the house you live in significantly reduces the risk. You become much more disinterested in what happens to property prices.

Ticket size and Timing risk

Unfortunately, while owning a house reduces the risk associated with market movement, the process of owning a house increases it. In other words, if you purchase a house when the prices are high, you are significantly worse off. The real issue is that you can never be sure when the prices are high or low and since you must purchase the house at one go, you need to take up this one time risk

REITs

It is easy to see where all this leads to. REITs are a mechanism to "buy a house one square foot at a time". Basically a REIT (real estate investment trust) is a large corpus of funds that is invested in real estate. The investment into this corpus can be bought and sold in "small quantities". Sure, this costs money and my sense is that for REITs, the costs for managing REITs are likely to be 2-3% which will probably be of the same order as rents so your returns will be substantially lower than if you had bought a property. However, the benefits of diversification and small ticket size are significant since for many people there will be no other option.

In other words, once well managed REITs are available, you can invest in them in small amounts. They will allow systematic investment in property. For a person who has just started a job and would like to buy a house in 5-6 years, REITs would give an alternate mechanism to "decouple from the market". By investing a fixed amount every month, one can get rid of the fear of "what if property prices increase substantially". When one is ready to purchase property, one can just sell the investment in the investment in REITs and purchase the property.

For people who dislike paying interest and / or are not certain where they want to live in (probably because they are considering changing their job, career or city), these will be a boon and an alternative to purchasing a house on EMI.

Markets know best

It is not hard to come across investment opportunities that seem too good to be true. From the piece of real estate that can never fall in price because it is at a great location to the stock of a company that has great management so it will perennially keep appreciating are all "tips" that one often keeps hearing about. We also hear about the people who made a killing by actually investing in those. In this article, I will talk about when it makes sense to go by these tips and when it does not.

Efficient Markets

This is a technical term that actually is very useful to understand markets. Basically it says that the price of any item (including real estate and stocks) at any time is "correct". By correct it means that if you were to see the movement of price, it would increase in about 50% of the time decrease in 50% of the time. In other words, it is not possible, on an average to make profit.

How does it work?

While the proof and even the interpretation of this statement is very involved, some reflection will convince you that it should be correct. Consider the case of a property that is at a very good location. In this case, it may be the case that the property will be priced higher than others but why would it keep appreciating? On the other hand, if everyone knew it would appreciate than everyone would try to buy it and would make better and better offers to the seller. This would stop only when all the "excess appreciation" was factored into the price. Exactly the same thing works the company with a good product or a good management.

Can one make money out of tips?

A little reflection will tell you that the only way to make money out of tips like this is to get - and act on - them before others do. So your reaction may be to act on them immediately while others are still evaluating. This is often also mentioned in the tip itself. Unfortunately, that is unlikely to help you either.

The reason it does not work is because usually the person giving the tip has no special "love" for you. He could have given the tip to anyone else. Most likely, he chose the order in which to give the tip at random which means that a large number of people must already have received it and much of the price appreciation must already have taken place.

On the other hand, it is a great way to commit fraud. If even some people blindly believe on tips, than prices will increase for a short time. So the person giving those tips can hoard the item in question and sell it when the prices increase. This was the reason a why a couple of years ago promotional SMS about stock tips were banned.

But I believe in this tip

At times you will come across a tip that you think makes sense. Before investing on the basis of it, do ask yourself the following questions - 

1. What new information do I have that others either do not have or do not believe in?
2. Has there been any price movement in the last few days or weeks which may have been due to others getting the above information?
3. What is risk involved? What does it mean for my financial health?

When do markets NOT know the best?

This is one last thing that is important. There are a large number of cases when the market price may be wrong - often for large amounts of time. This often happens when

1. There is a monopoly - a single buyer or a seller.
2. Information is available to a select few - for instance when government comes up with a master plan for a city or a major contract is awarded.
3. Some new technology or innovation comes up - consider the dot com boom and bust
4. The world is going crazy - for instance when the central banks print a lot of money and flood the market with it

But in each of these cases again the only way you can make money is by getting out before everyone else realizes that they made a mistake. On the other hand, the potential to make huge losses is very large. If you realize that such a situation exists, the least that you should do is be very careful.

The Secret to Investment Returns in a Flat Market

The Nasdaq index is making headlines this week as is closes north of 5,050; closing at a new all-time high close for the first time since 2000 - according to USA Today "fifteen long years" after reaching its zenith of 5,048 on March 10, 2000 during that epic peak of the great dot-com bubble.   

Source:  Bloomberg.com

Back at the end of 2008 when the credit crisis was at its nadir, there were abundant articles and news programs (60 Minutes even had an expose) decrying the 'lost decade' in the S&P 500 after it had dropped 40+% in the previous 15 months.  These 'lost fifteen years' of the Nasdaq must surely have been worse, given its much steeper drop (down 78% between 2000 and 2002 to it's low of 1,108) and much longer recovery period.  

 Let's take a look at how bad it was.

If an investor had started near the peak and begun investing $1,000/mo in April 2000 into the Nasdaq composite index, by April 2015 he would have of course invested $180,000.  If he did this every month - sticking to his plan, ignoring the credit crisis, second gulf war, housing bubble and simply investing month after month - his account value after the 'lost fifteen years' of the Nasdaq would have been just north of $390,000.  

If you're keeping score at home, that's an annualized return of around 9.75%.

Hmm - I guess 'Nasdaq Index Goes Nowhere But Nets Investors Nearly 10% per Year' doesn't make very good headlines.  But the fact is that consistent dollar-cost-averaging into stocks remains a sure way to have a successful investment experience regardless of what the market does.

It's good for us that the people we serve care more about facts then headlines!

Furious 7 teach us finance

Right now as of this writing the movie already reached 1.15 billion dollars and according to The BBC Furious 7 has set a new franchise record for the fastest film ever to make $1 billion at the global box office. It is a remarkable film and I can see alot of things that is in relation to finance.

Radical stunts- There are breathtaking moves in the movie, flying cars everywhere plus non stop action filled fight from the villains and the main cast. In our personal finance we need to make radical decision to be in the right side. It is not easy but will surely help us gain the upper hand. Again it is about character not the money in the bank. Your ability to make a savings out from your budget every pay day is a radical move or starting an investment and consistently putting the same amount of money for 10 years consistently is surely a radical character.

Family- Vin Diesel said " I got no friends but I got family". How important is the role of our families in establishing our personal finance? The family is the basic unit of every society. The culture that you have at your home is the starting point of your journey thru financial freedom. If you got kids make sure to guide them or else if you provided your kids with allowances without guiding them that will become a curse for them.

Villain- Jason Statham (Deckard Shaw) and Djimon Hounsou (is the leader of a terrorist group and the secondary antagonist in Furious 7)  till the end of the movie gave us a lot of head ache. They caused a lot of trouble to the main cast and to the city. Most of the time there are also bad characters in developing our personal finance skills. According to the newest survey done by the National Foundation for Credit Counseling. shows 41% of adults give themselves a grade of 'C' or lower when it comes to their personal finance knowledge.(American Study). The main villains that we have are poor belief system, lack of visions and goals in life, poor spending habits.Friends who are bad influence. Knowing is just one of the ways how to counteract it but doing something about it will help you Win Long Term.

Sad memories- Hahn died during the Tokyo Drift but he was not the only one who left the main cast His GF too and recently Paul Walker died in a car accident and will be forever missed. You think about those people that you lend money and never tried to get back to you? I am sure you can make a list of those  people who betrayed your trust and exchanged the friendships that you had with a minimal fund. Whenever you think about it, you forgive them but it always reminded you to be careful again. Sometimes you need to love people from a distance or else you won't Win Long Term.

Collaborate with the authority - Dwayne Johnson needs help and the main cast with Vin Diesel need to make sure that they will stop Jason Statham or else they will be killed. Not only that the government needs to retrieve God's eye. Without the connections they can't Win Long Term against those bad guys.  Handling your finances is not easy. If you are currently investing you need someone who is ahead of you in that field. If you are into real estate you also need people who are a licenced brokers.A friend of mine told me "When you need insurance, you need to talk to someone who is an expert about insurance, and not just heed the advice of your non-expert friends who are not so knowledgable when it comes to money..."  You need to value those relationships from those expert because they will help you in making really good decisions.

Drone won't stop - The last part of the movie shows non stop run with the drone and it almost killed  Ramsey (The creator of Gods eye). Imagine that Debt collector will always run after you specially if you don't know how to manage your credit very well. I have couple of friends who were really mad and afraid with the collection agencies because they keep calling everytime they are in their workplace. Some of them told me they they felt so harrassed.
Of course, that's the money they lend to you and as a credit card holder you need to pay for it whether you like it or not.  Don't run, just face it.

God's eye - If this one exist in real life I am sure that many people are going crazy with this.But this invention is so important because you can simply check the location, behavior, personal information of people everywhere. This is the ultimate search engine better than GOOGLE. God's eye reminded me that we are highly predictable. The more you earn the more your spend. Lifestyle creep every time there's a bonus or profit sharing or I can see that in the eyes of God we are being watch how we use His resources.

See you again- Whiz Khalifa wrote the song and it was really emotional because the last portion of the film was dedicated for Paul. Before the credits they showed Paul and Vin Diesel driving separate ways.It reminds me that  we need to understand that at the end of the day we need to decide to go to another level when it comes to handling your personal finance. The last chapter will never be the same. After the storm you need to start all over but remember be excited. If you lost a business, deals,money remember that there's still hope. Your character will be tested and you will experience mistakes but that's not the end of the road. You gotta ride for the last time.

Successful people view things differently

David Isaiah Angway is a Financial Evangelist

Are YOU Middle Class?

With tax season behind us, income is fresh in our minds.  The term 'middle class' gets thrown around a lot, and we all feel like we know what it means but defining that concept can be difficult.  For one thing, most of us don't feel like we are particularly rich, regardless of our income level.  Plus there can be a big geographic difference - a $100,000 salary in Lancaster WI allows a much different lifestyle than the same income in San Francisco or even Madison.  A Business Insider article recently reviewed a Pew Charitable Trust analysis of incomes from 2013.  In the study Pew defines 'middle class' as households with income between 60% and 200% of a states’ median income.

They produced a list for all 50 states of the median income, and then based on their definition of middle class the upper and lower boundaries of who could be considered middle class in each state.

source:  Pew Charitable Trusts via Business Insider

Surprisingly, at least to me, is that both Alaska and Hawaii have median incomes in the top five nationwide, while both California & New York fall outside the top ten.  And being middle class in Minnesota requires 20% more income than here in Wisconsin.  Also interesting is that there is a nearly 100% gap between the highest and lowest income states.  Which further illustrates how being 'middle class' is at least as much mindset as it is hard fact.

Check out the full article here http://www.businessinsider.com/middle-class-in-every-us-state-2015-4