A way to deal with your money better and a blog on personal finance

Towards the end of 2010, I made Seven Money Resolutions for 2011 that I hoped to execute upon through the year in order to strengthen my personal finances. A year has almost passed and I thought I’d provide an update on each of these resolutions.

Resolution #7:
I want to keep my personal finances better organized.

Though I write a lot about managing your personal finances, I often slip-up when it comes to managing my own personal finances. For example, some time back, I wrote a series on organizing your finances. These thoughts originally arose from a personal need for organizing my own personal finances. Though I did complete some of these steps, there’s a whole lot that I didn’t do. So, in 2011, I’d like to organize my personal finances better.

Here’s what I specifically want to do:

• Get rid of financial clutter. I’ve done this successfully in the past but of late have let a couple of things creep in again. I have a current account into which reimbursements were credited by my previous employer but this account is no longer of any use. This account doesn’t financially justify its existence and hence needs to go. Another thing that I’d like to really get rid of is my defunct LIC Jeevan Anand policy.

Update: Closed that legacy and unused current account. Got rid of that LIC Jeevan Anand Policy. I closed two other Savings Bank Accounts that I hadn’t used in over 10-years as well. Bye bye personal finance junk. Seriously, goodbye!

• Create and maintain a master information document. Once I’m rid of all that clutter, I’ll know what my true financial assets are. I’d like to create a master information document that details all of my true financial assets. The purpose behind this document is to have a ready and up-to-date reference available at all times and which can be directly reused at a later time (say when I need to create a will).

Update: Started but not finished.

• Get my nominations in place. Once I create my master information document, I’ll know which of my financial assets have nominations that are either outdated or are completely missing. From personal experience, I can advise that for every financial asset that you own make sure that you have a nomination in place. And for someone who writes about personal finance, not having my nominations in place is honestly unacceptable!

Update: Started but not finished.

• Put together my personal finances folder. I did get started on this task this year but got sidetracked quickly. I think this folder will be most effective if I do this simultaneously as I build my master information document — what I write in the master information document should be backed by physical documents in the folder.

Update: Started but not finished. I have everything in the folder but it’s not synchronized with the Master Information Document.

I think this is a broad enough framework to capture everything that I need to about my personal finances. But the real challenge, as they say, lies in execution. When done though, I will have everything that I need to have about my personal finances in one place.

What do you think? Any suggestions?

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Towards the end of 2010, I made Seven Money Resolutions for 2011 that I hoped to execute upon through the year in order to strengthen my personal finances. A year has almost passed and I thought I’d provide an update on each of these resolutions.

Resolution #6:
I will grow my Net Worth by at least 2% month-on-month and by at least 30% year-on-year. I will grow my Financial Independence Portfolio by at least 3% month-on-month and by at least 50% year-on-year.

With respect to my personal finances, I primarily track two key performance indicators:

1. The Percentage Change in my Net Worth and
2. The Percentage Change in my Financial Independence Portfolio.

Update: I gave-up on tracking my Net Worth a couple of months after I started. As many readers correctly pointed out, it wasn’t really adding much meaning or context and was simply just another number to report. So anything related to Net Worth on this post is now meaningless.

This year, I’ve managed to keep both indicators positive but didn’t really fix a target. But in 2011, I want to meet or exceed the targets that I’ve mentioned above. It’s going to be a real challenge!

I compute my Net Worth as being equal to the Cash equivalent of my liquid-able Assets minus the Cash equivalent of my Liabilities (note: my Net Worth includes my car but not my home). I compute my Financial Independence Portfolio as being equal to the sum of my Passive Income Portfolio and Investment Portfolio. And yes, my Financial Independence Portfolio is included in my Net Worth.

Update: I touched a 41% growth year-on-year in my Financial Independence/Freedom Portfolio. In terms of absolute numbers though, this growth represents a significant amount saved (much more than I ever have) in one-year’s time. So, while I didn’t touch 50%, while I went out and treated myself to the Galaxy S2 (this could have added a couple of percentage points), I’m however very very pleased. And it was a fantastic experience just going through this challenge. I promise to do much better in 2012.

These percentages are auto-computed on my personal finances spreadsheet; I update the numbers behind these computations once on the 15th of each month and again on the last day of each month.

Update: I did this diligently each of the last twelve months.

Other than these, the only other factor that I look at is that my free cash flow should be positive each month.

How about you? What are your benchmarks for your personal finances?

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Towards the end of 2010, I made Seven Money Resolutions for 2011 that I hoped to execute upon through the year in order to strengthen my personal finances. A year has almost passed and I thought I’d provide an update on each of these resolutions.

Resolution #5:
I will continue the good money practices that I followed in 2010.

I practiced a few disciplined money management techniques over the course of 2010 and I found these techniques to be incredibly useful in helping me manage my personal finances. I will carry these good practices into 2011 refining further where possible.

I describe these techniques — five in all — below.

• Technique #1 — Saving well in advance for your annual expenses through what I call the “Annual Expenses EMI” technique.

Regular readers of this blog know that I strongly advocate first listing all of your annual expenses and then creating an annual expenses chart, the output of which is an amount of money, that we’ll call M. Simply treat M as another EMI that you need to pay each month. Do this and the next time that car insurance is up for renewal you can cut a check without blinking an eyelid. Trust me on this one — this method simply works.

Update: I find this technique to be so incredibly useful that it’s ingrained into my subconscious now. Happens like clockwork each month. And I have some good news — a couple of friends and I are working on developing an easy to use web tool to help you get started with creating your own annual expenses chart. Stay tuned for more details.

• Technique #2 — Breaking-up planned expenditures into monthly saving targets and setting this money aside each month from my salary.

More often that not, you will have a fair idea of your expenditures (planned purchases, service bills, etc.) over the next six months. Rather than incurring a big outgo in one month, make an approximate estimate for these expenses and start saving for them each month (you could set this up as a short-term goal). I’m doing this right now for repairs that need to be done on the Swift. I’ve estimated that these repairs will cost me Rs 30,000 (new wheels, body damage repairs) and I’m setting aside Rs 5,000 each month from my salary.

Update: This technique actually sounds cliche. “Come on. Plan and save for your expenses. We all know that.” But do you really sit down and do that month-in and month-out? Believe me, this technique works incredibly well too. Result: No credit card needed. I broke this rule once this year and suffered a negative cash flow for a couple of months.

• Technique #3 — Online bill pay where possible failing which making advance utility payments.

I’ve already written in detail about this before. Luckily, Bangalore One centers accept cash that’s more than what’s due on the bill. Works to my advantage.

Update: Saves me time. And time is money. Right?

• Technique #4 — Each month:

Income

minus Annual Expenses EMI

minus Budgeted Expenses

minus Savings for Short-term Goals

minus Investments for Medium- to Long-term Goals

minus Non-budgeted Expenses

= My Free Cash Flow

for that month.

This personal finance equation now forms the bedrock of my personal finances. I use my free cash flow either as “fun money” — which means I’m free to use it as I wish to — or I channel it back as an additional investment into my financial independence portfolio. More often, it’s the latter.

Update: I usually don’t end each month with too much of free cash flow. And what little I end up with, I dump it into my financial independence/freedom portfolio. As I wrote above, I did have a negative flow for a couple of months though and that was seriously painful.

• Technique #5 — Tracking my personal finances using a simple spreadsheet model.

I’ve setup a spreadsheet with the following tabs:

1. Cash Flow, where I track my cash flow using my personal finance equation.
2. Primary Savings Account, where I track my single source of financial truth.
3. Short-term Goals, where I detail goals less than a year away.
4. Medium-term Goals, where I detail goals less then three years away.
5. Long-term Goals, where I detail my financial independence portfolio.
6. Goals/Net Worth Tracker, where I track my goals and compute my Net Worth.
7. Performance Dashboard, where I track my progress.

I update this sheet on a weekly basis and have kept it purposefully simple. In 2011, I plan to add just one more sheet to track D’s finances.

Update: All those ERE-charts come straight from this worksheet.

I’d love to hear your thoughts. Would any of these techniques be useful for you?

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Towards the end of 2010, I made Seven Money Resolutions for 2011 that I hoped to execute upon through the year in order to strengthen my personal finances. A year has almost passed and I thought I’d provide an update on each of these resolutions.

Resolution #4:
I will work hard towards becoming truly financially independent. I want my money to work for me and not the other way around.

So, what exactly is financial independence?

1. Freedom from financial reliance on loved ones.
2. Freedom from financial reliance on creditors.
3. Freedom from financial reliance on employment.

This still is the best definition of financial independence that I have come across. And financial independence is my foremost goal. Having cleared all of my liabilities earlier this year (which means that I can place a check against #1 and #2), I have been doing a fair bit of thinking on how I want to get to #3. My thoughts follow.

I’d like to split my target for financial independence into two stages:

• Level 1 Financial Independence — where the sum of income from sources other than my regular job is equal to or exceeds my monthly living expenses.

• Level 2 Financial Independence — where the sum of income from my investments is equal to or exceeds my monthly living expenses.

Update: Over the course of the year, I subsequently made an important distinction between financial independence and financial freedom (the comments on that post make for a very interesting read). I also discovered the concept of ERE and was hooked.

Right now, Level 1 is a medium-term (less than three years away) goal and Level 2 is a long-term (three or more years away) goal for me. Getting to Level 1 would mean that I achieve #3 — freedom from financial reliance on employment — but that would be inadequate over the long-term. Getting to Level 2, however, would mean true financial independence, but getting there is a tough task.

Let’s make some rough calculations. Suppose you estimate your monthly living expenses to be Rs 30,000. You’d need to have a corpus in the region of Rs 5,000,000 earning between 7% — 8%. Light years away from where I am today. :-) But as the saying goes, a journey of a thousand miles begins with a single step.

Accordingly, I am structuring two portfolios:

1. A Passive Income Portfolio for Level 1 Financial Independence.
2. An Investment Income Portfolio for Level 2 Financial Independence.

The names are slightly misleading. Let me explain.

My Passive Income Portfolio

Since I already have a couple of sources of income (the sum of which is less than my monthly living expenses) aside from my regular job and since I don’t need this income right away, I’m socking it away in a liquid mutual fund. At the same time, I’m also working on bringing-in other such sources of income (I need to do this given the irregular nature of such income and given that the sum of these should be equal to or exceed my monthly living expenses).

So long as I don’t need this income, I plan to build a corpus in the liquid mutual fund and gradually do an STP (Systematic Transfer Plan) into my Investment Income Portfolio (described below). But, were I to need this income each month (say due to prolonged unemployment or other such reasons), I’ll stop the STP and use the income.

Update: This strategy worked extremely well this year. I recently moved the accumulated funds into a couple of 370-Day Fixed Maturity Plans and shifted the book-keeping to be a part of my Investment Income Portfolio.

My Investment Income Portfolio

This portfolio would be my ticket to Level 2 Financial Independence — a portfolio that can generate investment income (in the form of interest, dividends, etc.) each month sufficient to cover my monthly living expenses. Ideally speaking, I’d never need to draw any of the principal ever. This is my dream.

I’ve just started putting this portfolio together. So it’s too early to talk about it. I promise to write in detail when I have everything in place.

Update: Right now this portfolio comprises of a mix of Fixed/Recurring Deposits, Public/Employee Provident Funds, Fixed Maturity Plans, and Direct Stock Market Investments (note the absence of mutual funds; I got out when I had to set right some negative cash flow).

Know what would be the icing on the cake? Still having Level 1 Financial Independence when you achieve Level 2 Financial Independence. That would take care of any inflationary concerns.

What do you think?

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Towards the end of 2010, I made Seven Money Resolutions for 2011 that I hoped to execute upon through the year in order to strengthen my personal finances. A year has almost passed and I thought I’d provide an update on each of these resolutions.

Resolution #3:
I will buy term life insurance online. Because I’ve only had terrible experiences with life insurance agents and medical diagnostics laboratories, I will purchase a simple term policy online. I will also ignore all those complex financial models that tell me that I need to insure myself for crores of rupees out of the box (heh!). I will think BIG but start small.

My (mis)adventures in trying to buy term life insurance are legend to regular readers of this blog. From agents who suddenly go missing, to direct marketers who blatantly ask you to lie on the application form, to totally clueless medical diagnostics centers (ironically called Clumax), to insurers who force you to surrender a defunct endowment policy prior to applying for a term policy, I have seen it all.

I’ve also grown tired of those life insurance calculators whose “artificial intelligence” output tells you to insure yourself for crores of rupees. When you can’t buy a term policy for even a rupee, dreaming about insuring yourself for crores of rupees is quite sadistic.

Hence, in 2011, my strategy to buy term life insurance is:

• No life insurance agents. No direct marketers. No diagnostic labs. Online and faceless is my only option left.

• Research term policies that I can buy online (only a handful as far as I know). Sum assured will be a [relatively] small but decent amount and for the longest tenure available.

• Surrender my now long defunct LIC Jeevan Anand endowment policy. Use the proceeds for paying the initial premium on the term policy.

• [Assuming that I get the policy,] Wait for six months and double my coverage through a second term policy. (And if luck is on my side, repeat this strategy in 2012 — possibly through a different insurer).

Think BIG. Start small. Be faceless. That’s my strategy.

What do you think?

Note: If an emergency fund, health insurance, and zero-debt together form the core of your personal finances, disability or personal accident insurance constitutes the layer on top of the core, with life insurance when you have dependents forming the third layer.

Update: Again, I did absolutely nothing through the year. So many of you wrote-in (through comments, emails, and personal interactions) asking me to evaluate online term-insurance providers that it should have hustled me into taking action or at the very least be prepared with my research. But for one reason or the other I never got around to doing this and I apologize for that. Not having insurance when you need it and you can afford it is indeed a no-no. I promise to get around to completing this in January, 2012.

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Towards the end of 2010, I made Seven Money Resolutions for 2011 that I hoped to execute upon through the year in order to strengthen my personal finances. A year has almost passed and I thought I’d provide an update on each of these resolutions.

Resolution #2:
I want to purchase disability insurance (commonly called personal accident insurance) for both myself and D.

I strongly believe that once you have the foundations — an emergency fund, health insurance, and zero-debt — in place, your next step ought to include having a disability or personal accident insurance in place for each family member who you believe faces this risk. In our case, both D and I need to have individual policies since we both face this risk.

I had done some research a few months back and had observed that there are basically two types of disability/personal accident policies on offer:

1. Those that pay a fixed lumpsum one-time, and
2. Those that pay a fixed sum each month for a certain number of years.

The one-time fixed lumpsum model (such as this policy) is the most common type on offer. If you opt for such a policy, it makes sense to purchase the highest possible cover for the longest duration since you pay a one-time premium for the entire duration. I’m not too keen on this model because the payout is 100% upon accidental death (and hence of no use to you and you’d be better off buying a cheaper term life insurance plan) and between 25% to 100% depending upon what portions of you become disabled (example: for a Rs 10 lac policy you’ll only get Rs 2.5 lac if you lose one eye and the policy most often ceases at that point).

The fixed sum each month model (such as this policy) are not widely on offer. And it’s close to impossible to extract any information from the insurer on such policies. But I really like this model — a fixed-sum (you can set this amount to be equal to your monthly living expenses) each month for the next several years (up to 20!) in the event of a disability. That’s much much better and is what you’d typically want were you to become disabled.

However, I’m yet to decide which model to opt for and I’d love to hear your thoughts on this before I go ahead and make a purchase. What would you suggest?

Update: I had followed-up on this post with another one asking if we (D & I) really needed to have a disability/personal accident cover. My conclusion was that since both D and I work, I’ll buy a policy only in one of our names since this would cover us even in the worst scenario. And then I did absolutely nothing for the rest of the year! Guess I’ll have to carry this one forward.

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Towards the end of 2010, I made Seven Money Resolutions for 2011 that I hoped to execute upon through the year in order to strengthen my personal finances. A year has almost passed and I thought I’d provide an update on each of these resolutions.

Resolution #1:
I will strengthen the core portfolio of my personal finances.

I consider the following elements to be the core building-blocks of my personal finances:

1. Emergency Fund,
2. Health Insurance, and
3. Zero-Debt.

A big emergency fund, adequate health insurance, and freedom from debt, are what let me sleep peacefully at night. I still recollect that night, about six years back, when I couldn’t sleep because I’d taken a loan from my employer for paying my credit card balance. I don’t want to experience that ever again. That said, here’s what my core portfolio looks like at present.

Current situation:

• I have an emergency fund equal to 4-months worth of monthly living expenses. Three-fourths of this serves as my job-loss emergency fund and the remaining quarter serves as my general-purpose emergency fund.

• I have individual health insurance policies plus work-provided health benefits for me and D from my employer.

• I have cleared all my debt.

Much of this was done in 2010. From here, I’d like to move-up into the position outlined below.

Desired situation:

In 2011,

• I’d like to first increase my emergency fund to cover 8-months worth of monthly living expenses. The 3/4 : 1/4 split between my job-loss emergency fund and general-purpose emergency fund would still continue. (Then, in 2012, I’d like to increase this further to cover 12-months worth of monthly living expenses.) I define 1-month’s worth of living expenses as the amount of money that I believe to be adequate for my family to lead a decent lifestyle for 1-month.

Update: Though there were quite a number of unforeseen emergencies that required me to dip into my emergency fund, I will end the year with 8-months’ worth of monthly living expenses.

• I will continue our present health insurance cover. Additionally, I will look for individual health insurance policies to cover D’s parents (they’re covered right now through D’s work benefits).

Update: I renewed our individual Star Health Medi Classic policies. I purchased Star Health’s Senior Citizen Red Carpet Insurance for D’s dad. Yet to successfully convince D’s mom! She acknowledges the need for health insurance but is adamant about not undergoing medical tests. She’s not 60 yet, so we’ll need to wait a while before buying Red Carpet Insurance for her as well.

• I will continue to remain out of debt.

Update: No headaches here. I’ll continue to end the year with no liabilities.

If I manage to do all these, then by end-2011, my core personal finances will be twice as solid as they are today.

Update: I think I have a pretty solid foundation now. 2011 turned out to be a good year.

Over to you now. How strong is your core personal finance portfolio?

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