by Vinaya HS on May 21, 2012
in Finance
A few days back, I happened to see an ad for this Monthly Income Plan from MetLife, a life insurance company. In this plan, you’re supposed to pay the premiums for about 10-years and then post these 10-years of paying premiums you’re guaranteed a fixed monthly income for the next 15-years.
As it always happens, I immediately started to think if a Do-It-Yourself (DIY) Monthly Income Plan (MIP) would be much much better off for you (after all why would you ever want the monthly income to stop after X number of years?) than a monthly income plan from a life insurer. In the MetLife plan, there are some complexities involved around your death and the related death benefits (since this is an insurance-cum-investment plan) but we’ll ignore all of these since I assume that you’d want to enjoy the monthly income in your own hand and not eye it virtually (!) from up above.
In the product brochure of the MetLife Monthly Income Plan (click here to download the product brochure), the following example illustration is shown –
You can see from the above illustration that you pay Rs 35,541 each year for 10-years and then you get back Rs 2,500 per month for 15-years. After 15-years, the monthly income stops!
But what if you think a bit different from everybody else, don’t mix insurance and investment, and go for a do-it-yourself monthly income plan? Here’s what the above illustration would turn into –
You’d get the same Rs 2,500 per month in perpetuity! You could open a new Fixed Deposit each year for 10-years and implement this plan. It’s as simple as that. Or, you could even open a Recurring Deposit with a monthly payment of Rs 3,000 per month. There are many options. But what’s more important is that you stay in complete control of your money (it’s in front of your own eyes).
For the purpose of comparison with the insurance plan, if your DIY MIP were to earn an 8% rate of interest, here’s what your monthly income would look like –
About Rs 3,700 per month in perpetuity! (The insurance plan still continues to pay out only Rs 2,500 per month.)
And at a 10% rate of interest, here’s what your DIY MIP look like –
More than Rs 5,000 per month in perpetuity! (The insurance plan still continues to pay out only Rs 2,500 per month.)
Finally, the corpus left over (the maturity benefit figure in the insurance illustration) from the insurance plan is seriously laughable when you compare it with the corpus left over from your DIY plan.
So, why would you ever want to give your hard-earned money to a life insurer?
What do you think?
by Vinaya HS on May 18, 2012
in Finance
I followed-up with reader Rakesh, one of the winners of the Jago Investor — Change Your Relationship With Money book giveaway in March, what his key takeaways from the book were. Here’s Rakesh’s response in an easy to read Q & A format –
[There were actually two winners in March. I'm still bugging the other winner to read the book and share his perspectives. I won't give up.]
Q: What are your top-5 key takeaways from the Jago Investor-book?
- The language used is very simple and can be understood by a common man.
- Good use of charts for depicting future goals.
- Use of day-to-day/personal life examples make it more interesting to read.
- More stress laid on early investment.
- Good use of pictures make it more easier to understand.
Q: What is your overall assessment of the Jago Investor-book?
I have read the book and think it’s great. It’s a must read for anyone starting off with their finances. Those already reading Jago Investor [the blog] will find some of the articles in the book familiar but nevertheless even for people with sound knowledge in financial planning this book is a good refresher. I am going to ask my wife to read it and then pass it on to my friends.
Rakesh was good to his word, got his wife to read the book, and shared her feedback as well –
- An excellent book for a beginner.
- Has good knowledge about handling one’s personal finances.
- Uses good real-life examples.
Wonderful.
Update: A few more takeaways from the other winner, Raghu. (See…I make it a point to ensure that you really do read a book.)
Since I am new to personal finance, I found the book very interesting to read. The examples and characters used in the book make it an entertaining read. Some of my key takeaways were –
- An Open Secret — Initial chapters focus on one of our open secrets i.e. “start investing early” and its impact on our financial life. Since managing a long-term investment is much like growing a tree, investing early lowers our burden later.
- Compounding and Term Insurance — Ways of compounding against time through simple pictures makes the reader curious but some calculations are not clear. Buying adequate term life insurance equals peace of mind.
- Goal-based Investing — Linking your investment with goals in life keeps you more focused and satisfied in your financial life.
Overall, as the title of the book suggests, it’s an initiative towards shaking the investor and driving them to take productive action. But at certain places the calculations were not clear thereby making the reader to rethink. The book mainly focuses on the fundamentals of personal finance which everyone must be aware so that it helps them to meet their financial objectives. Finally, this book is must read for newbies to personal finance.
by Vinaya HS on May 16, 2012
in Finance
[Sorry if this topic seems a bit advanced and haywire in its presentation but I felt it'd be good to share with you.]
I was reading-up on and strategizing the other day about the possibility of including high dividend yield stocks as one component of my early retirement portfolio. The general line of thought in this strategy is to buy and hold high dividend yield stocks and then use the dividends paid out each year as one of your sources of passive income.
Post my initial reading, here are some of the thoughts spinning around in my head –
- The dividend yield for a chosen stock over a 5-year window should consistently have been above the post-tax rate of return on an equivalent debt instrument (possible benchmarks — a one-year fixed deposit or a one-year recurring deposit at prevailing rates of interest). Else you might as well stay invested in the equivalent debt instrument.
- I haven’t even heard the names of most of the current highest dividend yield stocks (an example list). On the other hand, the stocks that I am comfortable and familiar with don’t seem to payout a high enough dividend yield (when compared to the equivalent debt benchmarks).
- Does one need to even bother about capital appreciation in such a portfolio?
- If picking individual high dividend yield stocks into a portfolio, when’s the correct time to recalibrate/churn the portfolio (because you can’t predict dividend yields)?
- Or should I chuck it all and simply be conservative in a good old fixed deposit?
I think I need to explore more. But have you ever attempted such a strategy before? How did it fare? I’d love to hear your thoughts. Even if you haven’t, I’d still like to hear about any research that you might have done on this topic.
by Vinaya HS on May 14, 2012
in Finance
I’ve simply lost track of the number of horror stories I’ve heard about totally junk life insurance being forcibly dumped on your head by relatives/friends-cum-insurance-agents. Everyone out there seems to have bought a life insurance policy from either a relative, or a friend, or a friend of a relative, or a relative of a friend, or a relative of a relative, or a friend of a friend, and similar relationship chains. It’s quite horrible.
I asked D, who also happens to be a victim of such a life insurance policy, to create an art of finance sketch on this concept. Here’s the result –
I think all of her bottled-up vengeance came out in this sketch! And I think it’s true to every word. A junk life insurance policy is like a tight noose around your neck just waiting to snap it into two. The scenario is just like a guillotine and you can guess who the executioner is! So, if you currently happen to be in such a mess, make a plan to jump off the frame before the axe wields. And if you currently being led towards one, now’s probably a great time to run away. Think about it.
by Vinaya HS on May 7, 2012
in Finance
The recent Sodexo Meal Coupon fiasco seems to be causing a whole bunch of stress and heartburn to employees everywhere. Read through this FAQ issued by D’s office to see the kind of thought’s running through employees’ minds –
- Why are you changing the existing agreement? Why can’t we continue with the same?
The Law has been there since long, but the Income Tax Department has become more stringent in order to minimize issues of non-compliance. Hence, to ensure compliance our finance department has had to change the existing policy. The Income Tax Law states –
The value of free food and non-alcoholic beverages provided by the employer to an employee shall be the amount of expenditure incurred by such employer. The amount so determined shall be reduced by the amount, if any, paid or recovered from the employee for such benefit or amenity. Provided that nothing contained in this clause shall apply to free food and non-alcoholic beverages provided by such employer during working hours at office or business premises or through paid vouchers which are not transferable and usable only at eating joints, to the extent the value thereof either case does not exceed fifty rupees per meal or to tea or snacks provided during working hours or to free food and non-alcoholic beverages during working hours provided in a remote area or an off-shore installation.
- Why just Rs 750 per month and why not more?
As the Law states we need to take into account all of the free snacks, coffee, tea, biscuits etc. that are made available during office hours. Hence, we have set an amount that would be seen as the right amount by the Income Tax Department for extending the tax benefit.
- Why can’t we trust employees that they would use the physical meal vouchers only in the office?
One of the requirements under the Income Tax Act is that the benefit is to be extended for eating in food joints and during working hours. The change being made would ensure that the tax agencies are satisfied that Company as an employer has put in place clear process requirements to meet the tax requirements. Please note that as an employer, Company has the onus and responsibility to ensure strict compliance with all Income Tax Rules and Regulations as far as an employee’s Company-related income and benefits are concerned.
- When other companies are continuing with the meal vouchers, why cannot we continue with the meal vouchers?
As mentioned before, we are committed to the compliance of applicable Laws from time-to-time. We did check with other companies of our size and nature and found that they have changed the program or are in the process of changing it. The benchmark results indicated the following –
Companies Surveyed: 20
Number of Companies using Sodexo: 10
– Few of these Companies are considering stopping of Sodexo Meal Vouchers
– Half of these Companies allow the usage of Sodexo Meal Vouchers only in their cafeteria
Number of Companies NOT using Sodexo or any other Coupons: 10
- How do we know that employees are not misusing other programs such as the Company Leased Car Program or any other benefit?
As a Company we can take all precautions to minimize the risk, if still anyone is misusing the same it is a violation of the code of conduct and appropriate action will be initiated.
- Tax saving is an employee’s right. Why take that away?
We are not taking away any rights. We are doing what is right from a compliance point of view and in line with the spirit of the Income Tax Rules.
- Why cannot Company compensate the excess tax that they have to pay due to this change?
All applicable taxes on employee compensation and benefits have to be borne by the respective employee. Company will extend all tax benefits as per Income Tax Rules to employees and is committed to following the Income Tax Rules in letter and spirit.
- Why cannot I use the Meal Coupons in the eating joints outside of Company office and Campus?
As per Income Tax Rules, the Meal Coupons are meant to be used during office hours and inside the Company premises. Hence, they cannot be used outside.
- Can the Food Court inside the Company Campus accept the new Swipe Cards?
From the Company’s point, we need to ensure all vendors inside our Company accept these cards. Additionally, we have requested Sodexo to install the machines in the Food Court but it is a decision that Sodexo has to take.
- Are there other benefits that the Company can give which will offset the loss due to Sodexo plan change?
Company has allowed all tax benefits on Compensation/FBP as allowed by the Income Tax Rules. Any change to the tax rules to allow higher benefits from time-to-time will be extended to our employees.
- What happens if your Meal Card still has some outstanding balance at the end of March, 2013?
You should utilize/spend the credit before the end of the Financial Year. This is where the Rs 9,000 per annum limit helps. It is not likely to leave balance if used regularly for meals during office hours.
- What happens if an employee decides to move out of Company and some balance is left in the Meal Card?
The employee should use the balance by the exit date.
- As the opt in/opt out scheme is up to September, 2012, what happens to unutilized balance in the Meal Card if employee decides to opt out in September, 2012 for the next 6-monthsperiod?
Even if an employee opts out in September, 2012, the balance in the Meal Card can be utilized till March, 2013.
What a complicated mess. As I’ve mentioned before, I simply asked D to opt out.
by Vinaya HS on May 4, 2012
in Finance
Perhaps the most often asked question/comment that I get is — “Why don’t you switch over to a more frugal car?”
Here’s their case. I’ve driven the Swift 60,000+ kilometers. The fuel efficiency that I’ve always got is 10 kilometers per liter (the rev line was breached on day one but because of that the car’s performance is a dream today). So, back of envelope calculations suggest a burning of 6,000 liters of petrol. At an average of Rs 65 — 70 per liter of petrol over the past 3-years, that directly translates to a burning of Rs 400,000 in cash! Wow! One more year and I’ll have crossed the purchase cost of the Swift itself. That is some achievement eh?
But assuming that I had a doubly efficient car that burned the cheaper cousin of petrol, I’d hypothetically have saved up around Rs 250,000 by now. At an assumed rate of interest of 9%, that would have translated to around Rs 2,000 per month in the form of interest earned. Those 2,000 Units of Freedom would most certainly have pushed me a notch up on the ERE-chart.
But then again, I’d for sure be 2,000 Units of Happiness less happier. I think it’d actually be much much more than that because I happened to meet D about a month after I bought the Swift (and no amount of financial freedom can replace that happiness). So, on the Units of Freedom vs. the Units of Happiness chart, I’d be free-er but unhappier.
In general, I believe this to be a tradeoff that each one of us seeking financial independence would have to make at one point or the other in our lives. Based on what’s important to you, you either choose the freedom path or the happiness path. In my case, with respect to the Swift, I chose the happiness path which is why I spend a bunch on petrol each month without blinking an eye. That’s also why I have no current plans to switch to a more frugal car. I simply don’t wish to be less happier.
There, I just had to get that rant off my chest. Thanks for your patience in reading to this point. But have you ever had to make a similar choice before? If so, what did you choose?
by Vinaya HS on May 2, 2012
in Finance
Given all that official travel way back in January, I completely forgot to announce the winner of the January Book Giveaway. I was taking stock of all previous book giveaways only to discover that the January one was amiss. So here it is –
The winner of the Stock Market Book by Dalal Street Investment Journal is reader Ravi. Congratulations! Thanks for sharing your personal finance goals for the new financial year. I will email you separately for your mailing address.
Have a nice day everyone. And for those of you who have your permanent residences in Bangalore, hope you were an early bird and availed the 5% discount for paying your property tax within the stipulated deadline.
by Vinaya HS on April 30, 2012
in Finance
A couple of weeks back, I’d asked what your office was doing with the Sodexo Meal Vouchers for Financial Year 2012 – 2013. Then, my office hadn’t yet declared a Sodexo Meal Voucher policy for the new financial year but D’s office had and I’d published that. My office just declared our policy (emphasis and download link mine) –
Dear All,
As you are aware “a few of the modern organized retail players had decided to discontinue their relationship with Sodexo and hence were not part of the Sodexo Network effective 1st January, 2012”. Based on the recent option given to employees to opt out of Sodexo, around 50% of the employees have already opted out. Hence, based on internal decisions we have decided to remove the Sodexo option by replacing it with ICICI Meal Card with similar features.
Enclosed is the ICICI Meal Card features for your information. (Click here to download the product brochure and list of Bangalore-outlets that accept the Meal Card.)
This change would be effective from 1st April 2012 for the Financial Year 2012 — 2013 under the FBP (Flexible Benefit Plan) bracket. We would keep you informed on the process for applying for the ICICI Meal Card and also send an email to declare the same under the FBP bracket.
Regards,
Payroll Services
Thankfully! What a relief!
I will opt for this Meal Card under my Flexible Benefit Plan.
So, what’s your office recommending? More important, what are you choosing?
by Vinaya HS on April 27, 2012
in Finance
There were several wonderful responses to the April book giveaway. It’s really heartening to see each one of you recognize the mistakes you’ve made in your personal finance journey and then take corrective actions to set them right. It’s even more heartening to see you share your experiences so that other readers can benefit too. Hence, a BIG thanks from my side to each one of you.
This time around, the computer picked Tushar Jain to be the winner of the April book giveaway of The 4-Hour Work Week: Escape the 9–5, Live Anywhere and Join the New Rich. Congratulations Tushar! I will write to you separately for your mailing address.
Stay tuned for the May book giveaway…
by Vinaya HS on April 25, 2012
in Finance
To date, I haven’t understood why some — actually many — financial experts advise you to not save-up your money in a Public Provident Fund account. Thankfully, I’m not in that camp of thought. I have always encouraged you to save the maximum allowed limit (currently Rs 100,000) each year in your PPF account. In fact, I wrote this post as soon as I came home having made my annual deposit into my PPF account. Let me tell you that I was very happy when I saw the interest credited for the past financial year (though not as happy as I could have been).
Let’s make some simple calculations –
Let’s suppose that you’ve managed to save-up a total of Rs 500,000 in your PPF account over a period of 10-years. In the 11th year, at the current rate of interest, you’d get Rs 44,000 (!) purely as interest earned. In the 12th year, you’d get nearly Rs 48,000 (!!) purely as interest earned. In the 13th, you’d get nearly Rs 52,000 (!!!) purely as interest earned. This continues to only increase according to the laws of compounding.
Seriously, what’s not there to like about that? Don’t forget that the amount that you put-in, the interest that you earn, and the amount that you withdraw are all income-tax free. There’s no need for you to worry about whether the capital markets are headed-up or headed-down or headed-nowhere. What more should the PPF account offer to convince the financial experts? (Hint: With equity there’s something to write about each day and get you to take action/change course but with the provident fund there isn’t.)
But here’s a previous post with an extremely healthy debate in the comments section where readers suggest various other options including the Employees Provident Fund and SIPs in Mutual Funds. I encourage you to read that article in its entirety.
As I’ve commented over there, it’s not an either this one or that one decision. In fact, I’m currently invested in all three forms. Just that I’m a lot peeved when someone says that the Public Provident Fund isn’t a worthy option and especially when that advise is geared towards a younger audience. Suppose you start at 23, by the time you’re in your early 30s, you’d be making a cool Rs 50,000+ per year (per the example above) simply in interest alone. And if you managed to save-up a whole lot more, you’d be making an even cooler amount as interest earned.
Seriously, don’t listen to those financial experts! Show them what an expert you are!!
by Vinaya HS on April 23, 2012
in Finance
One of the questions from The 4-Hour Work Week (note: there’s still some time left to participate and win a copy of the book) that really struck out was –
What is the pot of gold that justifies spending the best years of your life hoping for happiness in the last?
Déjà vu, because, a few months back, I had asked pretty much the same question when writing about the fallacy of traditional retirement calculations and had then followed-up on that post with this exceptional art of finance sketch by D –
I stand by all of those questions that I asked back then (in fact my conviction in them has only grown stronger). And then to add –
- This problem is further compounded by the fact that the media is often plastered with ads (such as the one below) for traditional retirement that lure you towards that hypothetical pot of gold that magically appears out of thin air and falls into your hands the moment you turn sixty. But in a twist of fate, you then realize that due to some weird and arbitrary commuting (withdrawal) laws and fractions and compulsory annuity for the remaining fractions things don’t really add up to that pot of gold.
- I haven’t invested even a rupee this far in any of those multi-decade pension (deferred-life?) plans and I don’t have any plans whatsoever to do so in future. Not even in the New Pension Scheme (which given the way things stand today could very well turn out into a No Pension Scheme).
- Early retirement to me means voluntary paid/unpaid work be it of my own industry or for someone else (if you look around there’s an incredible amount of that available) and certainly NOT NO WORK or WORK FOR WORK’S SAKE (W4W as coined in the book)!
Finally, here’s another point from the book to ponder over –
[Traditional] Retirement as a goal or final redemption is flawed because most people will never be able to retire and maintain even a hotdogs-for-dinner standard of living. Even one million is chump change in a world where traditional retirement could span 30 years and inflation lowers your purchasing power 2 — 4% per year. The math doesn’t work. The golden years become lower-middle-class life revisited. That’s a bittersweet ending.
A commentary of thoughts running in my head…
by Vinaya HS on April 18, 2012
in Finance
I am totally hooked to this book.
I’ll say that again. I am totally hooked to this book.
I’ve only read through about a hundred pages or so, but each page has made me stop and think quite a bit about life, work, and personal finances. I’m so hooked that I wanted to giveaway a copy ASAP. This book’s going to make you seriously question every aspect of your life as you lead it today. Note that down.
Here’s a sample of what you’ll end-up answering –
- What is the pot of gold that justifies spending the best years of your life hoping for happiness in the last?
- Is it really necessary to work like a slave to live like a millionaire?
- How has being “realistic” or “responsible” kept you from the life you want?
- How has doing what you “should” resulted in sub-par experiences or regret for not having done something else?
- Look at what you’re currently doing and ask yourself, “What would happen if I did the opposite of the people around me? What will I sacrifice if I continue on this track for 5, 10, or 20 years?”
I believe this book will be a revelation for you just as it has been for me.
Here’s how you can win a copy of the book –
Answer this simple question.
What are the top-3 financial mistakes that you’ve committed and how are you recovering from these?
Remember the more detailed your response is the better is your chance of winning the book. Leave your response in the comments section along with your email address.
I will announce the winner in about a week’s time. Thanks for participating.
by Vinaya HS on April 16, 2012
in Finance
While early retirement is my primary goal, a common feedback that I hear from readers of the blog is that I am quite vague when it comes to specifying absolute amounts and absolute figures with respect to my own situation. I’d really love to share these figures with you but the very nature of the medium where I have to share it also ensures that I can’t do so. As a middle ground, I’ll try and publish as much data as I reasonably can out here and if you’re really interested in the specifics just write to me and we’ll continue the conversation over email.
Here’s the first chart showing the percentage of high liquidity, medium liquidity, and low liquidity investments [in my early retirement portfolio] as a function of time over the past four-quarters –
You can observe from the chart that I’ve slowly increased the low-liquidity investments over the past year in order to take advantage of the current interest rate cycle. In other words, I actively manage my early retirement portfolio to take advantage of any opportunistic market situations.
Here’s the second chart showing potential income and expected expenses as a function of time over the past four-quarters –
When I say potential income, I am referring to any passive income plus the income that I could potentially generate by liquidating all of my low-liquidity and medium-liquidity investments, consolidating it into one corpus, and earning a monthly interest off this corpus at an assumed average rate of interest. My first target is to have at least two successive quarters where the income line is above the expense line. Now, that would be something!
by Vinaya HS on April 13, 2012
in Finance
I followed-up with reader Ashutosh, the winner of the Early Retirement Extreme book that also happened to be the first ever book giveaway on Capital Advisor, what his key takeaways from the book were. Here’s Ashutosh’s response in an easy to read Q & A format –
First of all let me apologize for the delay in response. I can give a million excuses, but the bottom-line is, it was plain laziness period. I have read the ERE-book almost full, the last few chapters still remain, however I think I am in a position now to answer your questions.
[Once you win a book giveaway on Capital Advisor, I make it a point to keep prodding you until you actually read the book!]
Q: What are your top-5 key takeaways from the ERE-book?
- Start Early – Most of us only begin to realize the importance of investing when we cross thirty.
- Forget Timing, Think Compounding – Don’t set a mental block like “I will start investing the day I can save Rs 20,000 per month.” The amount doesn’t matter, it’s all about timing and compounding.
- Salary & Saving are Not Linked – Very few of us really are able to differentiate between the two. Common misnomer is higher the salary the better it is. Seldom do people realize that if you are earning more and spending even more, you are surely headed towards a debt trap.
- Control Your Lifestyle Expenses – It’s very important to keep such expenses under control. Most of us automatically assume that bigger designation implies that we ought to be eating at certain star rated hotels / hanging out at certain “hep” places.
- Do Your Goal Setting – Goal setting quantifies the amount of money, the time frame required and also the method to reach there.
Q: What is your overall assessment of the ERE-book?
ERE gives a very different perspective on retirement planning. A book written by a non-finance person, based on his first hand experience on the journey towards financial freedom. The feeling of “been there-done that” comes out very clearly throughout the book. This is something that lacks in most other books, even the ones written by financial planning experts.
Thanks, Ashutosh.
I now request you to pass the book on to someone you know who can benefit from it.
by Vinaya HS on April 11, 2012
in Finance
by Vinaya HS on April 9, 2012
in Finance
About a month back, you read my analysis of the Bajaj Allianz Cash Rich Insurance Plan. From the analysis, you also found out that it’s most certainly NOT YOU who’s becoming rich as part of this plan (literally?).
So, imagine my utter horror when I came across this interview piece (in a personal finance magazine) with management –
I really can’t find that “corpus which can be used in your retirement years” anywhere! What you actually get from this plan is more of a financial corpse than a financial corpus. And what’s that end-to-end retirement solution? You end your working career and then get ended by this plan?
Seriously! Run away as fast as you can in the opposite direction. I can’t even fathom what that pension [tension?] product being talked about would look like. I’m already running away just hearing about it.
by Vinaya HS on April 6, 2012
in Finance
Here’s something that I happened to read the other day –
I am an old man and have known a great many troubles, but most of them never happened. Mark Twain.
Leads to some interesting thoughts — How many months [worth of monthly expenses] is too many months in your emergency fund? Should you really be prepared for every possible emergency that life can throw at you? Should you (or your financial investments) really be prepared for every possible financial risk?
In my line of work, we look at a risk in terms of its likelihood (probability of occurrence) and impact (magnitude of loss on occurrence). Perhaps this could be a good framework for planning ones personal finances as well. Look at the illustration below.
For example, the likelihood of a job loss is high and its impact when you don’t have a financial buffer (emergency funds, alternate sources of income, etc.) is high. Then you really do need to worry about this scenario and work towards mitigating it. But the chart shouldn’t just be seen as snapshot at a point in time. So as you work hard towards building that financial buffer the impact starts decreasing and at a point there’s no need to worry about it any more (having a fatter emergency fund after this point doesn’t really change anything).
A good strategy would be to evaluate your risks periodically (once every quarter) against this framework — your goal should be to move everything to an “Ignore.”
What do you think?
