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It’s that time of the year when we all look back at the past year, introspect. And prepare for the new year. Technically new year is just a change in the date, but emotionally for many us, it’s a time to make new beginnings, fresh aspirations, and renewed dreams.
Apart from the new year party and celebrations, a very common ritual followed across the world is “New Year Resolutions”. Doesn’t matter, if we stuck to last year resolutions or not, we should resolve afresh every new year. So, here are few new year resolution ideas that may help in re-inventing your financial world. These resolutions may help you in inching towards your financial goals in a better way.

Identify financial goals.

“If you want to live a happy life, tie it to a goal, not to people or things.” 
– Albert Einstein

Yes, it’s time to work on your financial goals. Clear and well-articulated goals can give you a sense of purpose. Setting financial goals has great benefits. Be it the next vacation you are planning or the higher education of your children. Articulating your goals will motivate and help you in realizing the real purpose of your savings/investment. So, take time to jot down your goals. Mapping your goals to your investments is a great way of giving meaning to your investments.

Track Spending

If You Can’t Measure It, You Can’t Improve It.
– Peter Drucker

Resolve to record every bit of money that goes out of your pocket. You can write it down in a diary or in a spreadsheet. You may also want to make use of expense manager mobile apps. My favorite is “Expense Manager”. At the end of every month, look back at your expenses. This will give you a clear picture of your spending pattern. You may have an unused magazine/newspaper subscription that you hardly read. Your monthly expense record may give you many ideas to cut back on your spending. In the age of Amazon and online shopping, impulsive buying is a very normal thing. Impulsively we buy many things that we hardly use. Tracking such things down may help you name and shame your bad expenses. Remember, a penny saved is a penny earned.

Budget

If you’re want to gain better control over your spending and begin working towards your financial goals, you need a budget.
With a budget in place, you can prioritize your spending and better manage your money and financial future. The intelligent data you gathered by tracking your expenses can be put to use in allocating your budget. For example, you might get rid of your cable TV connection that you hardly watch and save some bucks. You may start walking to the office if it’s at a walkable distance to cut on monthly fuel costs. Instead of going to eating out every week, you may go every alternate week and save a lot on restaurant costs. Budgeting may not always be about cutting the costs but it’s about rationalizing your spending. You may realize that you are spending far too less on sports and recreational activities and spending too much on fast food and sweets. And you may want to balance the two.

Commit to reading more

Reading good books to get smarter is one of the most sought-after skill today. Many of us want to develop this habit. Reading more leads to better decisions, more rationality, and good financial success. Most of the successful investors are voracious readers. 
I found a very simple and practical trick to tweak myself reading more books and being persistent with the habit.
Start small:
Start reading the small number of pages a day. The definition of small may vary for everyone. I started with ten pages a day. And followed the routine religiously. If you read 10 pages a day, that adds up 300 pages per month. That may equal to one book per month. That may add-up 12 books a year. Try to recall the time you took to finish your last read book. I am sure you will be happy with the rate of reading one book a month. And then try to increase no. of pages per day by few more pages. That will add a few more books per year. This trick worked wonders for me. Though it may seem simple at first, it may give amazing results in the long run.

Be Persistent

Our resolution has no meaning if we don’t persist in pursuing them. Be persistent with them and magic will start happening.

Direct Mutual Fund Vs. Regular Mutual Fund & their expense ratios

Mutual funds are available with two plans: Direct and Regular.

Regular Plan: When you buy a mutual fund through a mutual fund broker, distributor or advisor, it is called a regular plan. In case of a regular fund, the fund house pays commission to the middleman. The MF company will add this commission to the expense ratio. This is why regular funds are slightly more expensive than direct funds. The commission is deducted every trading day.

Direct Plan: In the direct mutual funds, there will be no role for intermediaries commonly known as brokers. Investors are free from commission or distribution fees, which brings down the expense ratio.

Expense Ratio

The expense ratio of a mutual fund is the total percentage of fund assets used for administrative, management, advertising, and all other costs. An expense ratio of 1% per annum means that each year 1% of the fund’s total assets will be used to cover costs.

The expense ratio of direct plans is significantly lower than regular plans. And investors should always take this into account.

Illustrations to help you understand expense ratio:

1.

Suppose there are 200 trading days in an year & MF’s expense ratio is 2.5%. So expense ratio per day becomes 2.5/200 = 0.0125%. Suppose on any trading day, the mutual fund has gained overall 0.30%. You NAV on that day will increase by 0.30–0.0125 = 0.2875%. Similarly, if the mutual fund decreases by 0.30%, your NAV will decrease by 0.3125%. Per day, 0.0125% seems a very small number, but in the long run, it becomes substantial.

2.

Aditya Birla Sun Life Tax Relief 96 Regular Plan has delivered 19.60% CAGR in five years, with an expense ratio of 1.92%. And the direct plan of the same fund has delivered 20.64% CAGR, with an expense ratio of 1.07%. (As of writing this post.)

So the direct plan has a 0.85% less expense ratio.

Suppose, you invested 10 Lakh in this fund for five years. Then at the end of five years, the value of your fund might have been:

Direct Plan: ₹ 25,55,386

Regular Plan: ₹ 24,47,123

So, there is a difference of ₹ 1,08,263. You earn this much less by investing in the regular plan.

So buying a direct plan can reduce operating expenses of the fund. And it can add more returns to your bucket. Also keep in mind that expense ratio also compounds with time.

If you are looking at different options to invest your money, the mutual fund is often a most attractive form of investment vehicle. With increasing awareness about stock markets and mutual funds, more and more people are starting to invest their money in MFs. However, there is a steep learning curve in understanding mutual funds. A wrong decision may bring unpleasant experience. A wrong expectation may spoil the planning.
Here through these series of articles, I will try to explain mutual funds in details. These articles may help you in learning the basics of investing in mutual funds, choosing the right fund that suits you, setting and achieving financial goals.

What Are Mutual Funds?
A mutual fund is an investment company that takes money from multiple investors and pools it together. The fund manager invests the money in different types of assets including stocks, bonds, gold. We, as an investor buy the mutual fund units. These units represent an ownership interest in the fund.

Investor: He who invests in a mutual fund.
Fund Manager: An employee from mutual fund company who manages the investment of money on its behalf.

How mutual fund company makes money?
When you read mutual fund fact-sheet, you may find one component named as Total expense ratio (TER), it is associated with the total costs involved in managing a mutual fund. These costs include fund management fees, operational expenses, administrative expenses and distributor commission. So you should always look at TER while choosing MF. TER is deducted from every investor’s investments.

What are the benefits of investing in a mutual fund?
Investing in a mutual fund is like hiring a professionally trained driver to drive your car, sitting on a back seat and enjoying the journey. While your driver drives the car for you. In the case of mutual funds, the fund manager is your driver.
Mutual funds are managed by a professional fund manager who constantly monitors the fund’s portfolio. Because this is his or her primary occupation, they can devote considerably more time to selecting investments than an individual investor. It provides the peace of mind that comes with informed investing without the stress of analyzing financial statements or calculating financial ratios.

Increased diversification: A MF diversifies by holding many shares. This diversification decreases risk.
Liquidity: Most mutual funds allow investors to redeem their MF units any time they wish. (Although it is recommended to hold them for the longer period and take exit loads (if any) into consideration while redeeming MFs.
Professional investment management: Mutual funds hire portfolio managers to supervise the fund’s investments.
Ability to participate in investments that may be available only to larger investors. For example, individual investors often find it difficult to invest directly in foreign markets.
Government oversight: Mutual funds are regulated by a governmental body.
Transparency and ease of comparison: All mutual funds are required to report the same information to investors, which makes them easier to compare to each other.

Note: This post is written considering Indian real estate market.

For Indians, owning a house is an ultimate definition of being successful. According to RBI’s Household Finance Committee Report 2017, only 5% of India’s household savings is invested in financial assets as against 77% in real estate.

During 2003–13, India saw a real estate boom. That helped establish real estate as an asset class by itself. There has been a continuous positive publicity given to this asset class in weekend newspaper supplements. There were regular TV shows on investing in real estate. And everyone had a ‘friend’, who has made a fortune with his third flat in Pune. Despite of all this positive publicity, real estate is a dangerous asset class for investors. We will see how?

Ticket Size: You can buy a stock for as low as ₹10 and a mutual fund for ₹500. But you need few lakhs upfront for investing the cheapest of the properties.

Liquidity: If you compare real estate with Stocks, bonds, MF, Gold etc. Real estate is an illiquid asset class. With a simple click on your smartphone, you can trigger a transaction to sell your stocks. However, selling real estate in itself is a complete project. There were instances when a process of selling a property went on for months and sometimes years.

Transaction Costs: Stamp duty, registration and other transaction charges exceed almost 10 percent of the cost of the property. Sometimes, developer or the housing society also charges transfer fees.

Taxation: Short term capital gains taxes on real estate are marginal. Long term capital gains tax is 20%.

Non Standard Asset: One gram of 24-carat gold will appreciate at the same pace in your hand as it will in the hands of someone else. It will appreciate at the same pace in Pune as it will be in Mumbai. Same is the case of any stock. However, if you consider real estate, it is completely non-standard. Two neighboring flats may not always get sold at the same price. Prices vary across streets and neighborhood. And beware, if the word spreads that your flat is haunted by ghost, then it won’t ever see a buyer. 😁

Black Money: Real estate have always been a darling asset class to park the black money. It is one of the least clean sector in India. The multitude of clearances required to buy a land, build and then sell it makes it an ideal sector for bribery and black transactions. In such case, a middle class investor who holds complete white money, pays his taxes is always the last person to benefit from real estate investment.

House prices don’t always go up: Usually equity and debt have a cycle of three to five years. i.e. within a cycle of 3–5 years you may witness a full cycle of bear and bull market. Such cycle occurs in real estate for more than ten years. So the most of the people who reaped the profits during bull cycle of 2003–13, don’t have any experience of downward cycle. As a result, they get caught in the belief that real estate prices only go up. Unfortunately, in India there are no reliable real estate prices indices. So this myth prices always going up is nurtured due to lack of any solid evidence.

There was an article in India today in 1997, which neatly explained the real estate crash of nineties.

Magnificent returns don’t last forever: Yes, 2003–13 real estate bull market generated magnificent returns during that period. However, there were certain downsides too. Even if the property you purchased appreciated significantly, if it’s your occupied home, it is impossible for you to book the profit. 2003–13 was the best period for residential real estate in India, and it will be a long time before we see another such period of price appreciation. Till that, the unrealized gains buyers made will be corrected to normal due a bear phase.

Holding Period: Real estate is usually held for very long period of the time. Nobody buys a real estate and checks it’s price every single minute. That happens with the stocks, bonds and gold. It is very well proven that stocks if bought right and held tight generate humungous returns over very long period like a decade or more.

And most important factor:

Bad Maths: It is very common for real estate investors to boast about his property going up by five times in the last twenty years. But the compounded annual return it generated is merely 8.3%. In the same period, the Indian stock market is likely to have risen at 15% per annum. Which compounded over 20 years translates to a sixteen times return.

So if you are thinking of putting your money into real estate, these points should be taken into consideration. Closely looking at current real estate market, it is clear that the bull run is over. Even if India do not witness a real estate market crash, it is quite unlikely that they will go up in any meaningful manner. A phenomenon that call it a Time Correction.

We are often raised to believe that, Money isn’t everything. Money can’t buy Happiness. And in our hapless search for Happiness we end up being miserable by ignoring what money can buy for us.

Yes, Money can buy happiness but it entirely depends on what you spend it on.

Very first question to ask yourself is What happiness means to you?

“If you have a garden and a library, you have everything you need.”

― Marcus Tullius Cicero

Good Books? Money can buy Good Books for you, least an access to good library.

A beautiful Garden? Money can buy best in quality seeds, fertilizers, land, tools that constitute a beautiful garden.

Meeting new people, visiting new places? Money can buy tickets for you to travel wherever you want.

Good Health? Money can buy food, access to health instruments, treatment for your diseases and access to healthcare.

Helping Others? What else can be greatest utilization of the money than helping others. Money can buy yourself more time, resources, energy to help others.

Happiness is mostly attributed to things like Garden, Health, Good Books, Good social circle. And the most important fact that connects everything together is often ignored that is Money.

I quoted Cicero’s quote earlier, however we should not ignore that he was born in 106 BC, a time when mostly money was a tool of riches and powerful. Today we live in fairer, democratic, freer world and we have access to ethical ways of garnering money than ever was possible.

So let’s respect the value of money in our life and lets not waste it on petty things, garner it for our own Upliftment by choosing to spend our money wisely.

An entire generation pumping gas, waiting tables, slaves with white collars, advertising has us chasing cars and clothes, working jobs we hate so we can buy shit we don’t need. We’re the middle children of the history man, no purpose or place, we have no Great war, no Great depression, our great war is a spiritual war, our great depression is our lives, we’ve been all raised by television to believe that one day we’d all be millionaires and movie gods and rock stars, but we won’t and we’re slowly learning that fact. and we’re very very pissed off.” 
― Chuck Palahniuk, Fight Club

Our society is on a perilous course. A dangerous crisis is slowly emerging. Like a cancer it is spreading slowly through society. Unknowingly it is eroding our most cherished values. I’m talking about rampant consumerism that is spreading like a infectious disease and we are helpless.

According to one recent study, that by age 16 the typical American will have seen almost six million ads. That in other language means more than one ad per waking minute. And in other countries too situation is equally depressing. Such unstoppable bombardment of advertisements is creating a very powerful effect on our culture. Watching mere advertisements may not seem like a problem, however the real problem arises when advertising convinces us that consumption is the real answer to our life’s challenges. We madly act as if all our problems can be solved by buying what is shown in those advertisements. To get in shape, we purchase an exercise video by that famous model. To lead a healthy lifestyle, we heed the mystical teachings of self-anointed beard sporting guru. Every year, some new model of that fancy smartphone comes to market and we convince ourselves to spend a big portion of our monthly salary to buy it.

With every purchase we make, we should realize that advertising is a fertile land of lies and unfulfilled promises. But we do never learn from our own mistakes just to repeat them. Instead, we keep on consuming more and more. With each new purchase we invent a more imaginative excuse for why the previous purchase failed to solve our problems.

You buy furniture. You tell yourself, this is the last sofa I will ever need in my life. Buy the sofa, then for a couple years you’re satisfied that no matter what goes wrong, at least you’ve got your sofa issue handled. Then the right set of dishes. Then the perfect bed. The drapes. The rug. Then you’re trapped in your lovely nest, and the things you used to own, now they own you.
― Chuck Palahniuk, Fight Club

So, why should we be worried about it? Consumerism directly results into self-inflicted poverty. And we don’t even realize it. Actually television constantly bombards us with completely false sense of wealthiness. It provokes us to buy more to look like rich, indirectly emptying our pockets and making us poor and miserable with every purchase we make.

Finance expert often talk about saving and investment. How these two things are not same things and how should we plan them differently. More about it, later. However, we are completely ignorant of the fact that, before saving/investing our money, we need to protect it. Yes, protect it! We need to protect it from our own irrationality, conformity. Our irrational spending habits, instant gratification methods are making us spend more. And we urgently need to save us from ourselves.

How? Stay tuned.

Inflation is when you pay fifteen dollars for the ten-dollar haircut you used to get for five dollars when you had hair.
― Sam Ewing

Inflation is the rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of currency is falling. As a result of inflation, the purchasing power of a unit of currency falls. For example, if the inflation rate is 7%, then a pack of food that costs ₹100 in a given year will cost ₹107 the next year. As goods and services require more money to purchase, the implicit value of that money falls.

Whatever returns compound interest generates, inflation degenerates it. Inflation is shrinking your money with compound interest, lets call it decompound interest.

Consider a situation where you invest Rs 1 lakh of your money in a deposit which earns you 8 per cent a year. At the same time, the prices are also generally rising at the rate of 8 per cent a year. In such a situation, your compounding returns will just about keep pace with the inflation. That means your ₹1 lakh values at ₹1 lakh even after one year.

If you are an Indian reading this then India’s average rate of inflation over last few years was 7%. Consider a worst situation where you do not invest your ₹1 lakh and it do not earn you any return. In that case, after one year your ₹ lakh will get shrunk to ₹93 thousand rupees in first year and then to ₹86, ₹80, ₹74 thousand in subsequent years, considering 7% average inflation rate.

To summarize it more clearly, ₹10000 in 1982 is worth just ₹607 today.

If your lifestyle costs you some ₹xx,xxx amount today then calculate the amount you need to sustain similar lifestyle years from now, maybe your retirement years. And then count the amount you will need to save per month to actually sustain that lifestyle once you stop earning. So, if ₹1 crore sounds like the kind of money you’ll want twenty years from now then you’ll actually need to have about ₹4 crore. If you work backwards from there, you’ll need to save about ₹68,000 a month if the returns are 8 per cent.

That’s considerably huge amount, but it is! And there is no escape from the arithmetic. So you need a form of investment that’s inflation adjusted. If you really think you can survive with your bank FD, then think again.

Compound interest is the eighth wonder of the world. He who understands it, earns it, he who doesn’t pays it.

Albert Einstein

Those who have earned basic numeral literacy learn Compounding in our school days. But do we really understand the term to the core?

If you really understand the term: compounding, I’m sure you will think thousand times before buying that expensive mobile phone next time.

Wikipedia definition of compound interest says:

Compound interest is the addition of interest to the principal sum of a loan or deposit, or in other words, interest on interest. It is the result of reinvesting interest, rather than paying it out, so that interest in the next period is then earned on the principal sum plus previously-accumulated interest.

The most important thing that we should appreciate about compounding is the enormous value of time. As our returns themselves start earning, and then the returns on those returns themselves start earning, the profit starts piling up at an enormous pace.

The graph below illustrates the example above and shows this clearly. The amount starts growing slowly, but as compounding takes over, the extra time means a lot more income.

The graph below shows 1 Lakh invested over a period of 10 years with compounded interest of 15%.

The most striking effect of compounding is it’s effect over longer time. To understand this consider this next graph.

Translated into a human lifetime, it means that starting to save 10 years earlier can mean earning enormously more wealth. The graph shows this clearly. If one has time to learn just one thing about investing, then it should be Compounding.

To know how rich people use compounding to their benefit? Take this example in consideration.

Bill Gates

Bill Gates stopped working at Microsoft 10 years ago. At the time of his retirement his net worth was approximately $50 billion. Today, after 10 years his net worth is around whopping $87 billion. Yes that is enormous amount for any individual on this planet. He is making money faster than he can spend without working at Microsoft. How? Reread this post once again to know. Story does not stops here. Oxfam, the U.K. world hunger organization, meant to shame the world’s richest with its list of multi-billionaires estimates that Bill Gates’ wealth may exceed over $1 trillion at the end of 25 years. How? Reread this article again.

You only have to do a very few things right in your life so long as you don’t do too many things wrong.

— Warren Buffet

We all secretly crave to be wealthy, but shy away from admitting it. In my opinion there is nothing wrong with it. Our society always demeans those who dream of getting rich. There is some sort of stigma attached to the money. In fact, most of us feel that those who become wealthy always do it by exploiting others. Many people turn philosophers when it comes to the topic of wealth creation and they start telling us that “Money is not everything.”

Yes, it may be true that Money is not everything but that should not stop us from realizing our full potential.

Yes, money can’t buy happiness but it can buy many things that bring happiness with them. The most important joy I felt when I started earning was that, now I can buy whichever book I desire. Books are synonyms to happiness to me and money only can buy it for me.

This may apply in many areas of our life. Money can’t buy health, but it can buy healthy food. It can buy medicines when you fall ill. Count the number of cancer survivors and then count their wealth. Those who survive fatal diseases mostly are wealthy and can afford the treatment.

We may all may not become super rich or richest person on the planet, but we can always become what we deserve. It’s very sad sight when we see unrealized careers, when people spend their lives in self-inflicted poverty.

So, at the very first, we need to change our attitude towards money. There is nothing wrong with wanting more money. If we see around us, there is huge ignorance about the money and wealth creation. Let’s call it financial illiteracy. Let’s admit that we all secretly dream of getting wealthy, but do not take concrete steps towards it. That brings us in unending loop of workaholism, consumerism and unsatisfied lives. So many of us do hard work but never get to it. In my honest opinion the answer to all these issues is: “Financial Illiteracy”.

Many of us and now our children get good literacy (Not always education). We are trained to become engineers, doctors, lawyers, professors and we work hard towards it. But what we do wrong is we focus on our core skills only. Yes, those core skills only bring us our daily bread and butter. But what we forget is that daily bread and butter loses its value daily and we don’t even realize it. We are too lost in our core skills that we forget the challenges life brings to us. Evolutionary biologists suggest that ancient humans possessed way more skills than today’s average human beings. He knew around 60 Square KM map of the jungle he’s living (when was the last time you found an address without Google Map?). He knew herbs and medicines to cure many ailments. He even knew self-defense, hunting, cooking and what not. Today we can see highly specialized humans around us who can do only one thing their entire lives, but they ignorantly fail to achieve basic proficiency in any other field.

Similar problem is happening with the financial literacy. It is one of the important problem among us. This problem is leading to self-inflicted poverty. So if you are looking to enhance your skills, keep Financial literacy as your next priority item.

We know how to earn the money but we don’t know how to Protect it, save it, invest It and grow it.

And nothing can be more serious than that!

We believe that someday or other justice will happen. Majority of the societies believe in justice and make sure that wrongdoers are shown the stick of the law.

In fact, Theory of Karma is one of the most favored subjects in almost all religious teachings.

The question is: “Is there really justice in Nature?”

The term ‘justice’ in human history goes back to Agricultural Revolution. When humans started organizing themselves in mass-cooperation networks to sustain agricultural practices and stopped hunting-gathering, they needed some order. Humans created imagined orders and devised scripts.

The core idea of justice itself went on varying with passing time. In fact, justice for one was adversity for someone else.

Most of the societies claim that their idea of justice is natural and just. However, there are stark differences in society even today that have resulted in the rich-poor divide, race/color/caste supremacy across the world. And humans are finding it painfully difficult to keep up the order.

The real question is: “Is there really justice in Nature?”

There are many unanswered questions that theory of Karma does not answer.

Why do bad things happen to good people?

Why do good things happen to bad people?

What is the fault of a newborn baby in a war-torn country whose life is taken away by bombing?

Why is it so difficult for a poor student to climb the social ladder to live a better life and it’s so easy for a rich kid to buy anything he wishes?

Poor in Africa, India, Bangladesh die of simple diseases like diarrhea and citizens from rich country survive even life threatening diseases like Cancer?

Yes, I know that social justice and order is essential today for society and human existence. However, in our personal lives when we try to understand the meaning of events happening to us, justice and Karma take back-seat. If you believe that Karma will take its own course and bring justice to you then you are wasting your time. Am I being pessimistic by writing this? I don’t think so. I am trying to be a realist.

I find the phrase: “Survival of Fittest” to be more natural than any other theory in this regard.

Yes, there are many interpretations of this theory but in my personal view, I find it an answer to the original question of Justice. Will justice happen to me? Don’t know. But one thing is certain that if I am fit then I will survive. Fit does not always mean strong and survival does not always mean victory.

Then how should I spend rest of my days on this planet that are given to me? My answer is living in the present moment.