Money Ladder

Money Ladder

Money Ladder

Time Tested Lessons in Money Management & Personal Finance

What this presentation is about.

  • Basics of money management, savings and investments.
  • Basic psychology and concepts of money.
  • Essentials of personal finance.
  • How to avoid ‘money traps’
  • Do’s & Dont’s of investing.
  • Few generic recommendations.

What this presentation is ‘NOT ABOUT’.

  • Stock market tips.
  • Advanced investment recommendations.
  • Get rich quick tips.

Money Psychology

Why Money Is Required.

Money means different things to different people. It also means different things to same person at different stages of his/her life. At the very basic level, money is used to buy food and comfort. As we acquire more money, it is progressively used to improve our sense of safety and security. For example: Buying a home is popular because owning a home gives us a sense of security. Similarly, expensive cars are generally safer than economical cars, etc.  After these two physiological functions are met, money is used more for emotional reasons like status, power, legacy, charity, etc.

Highest Form of Wealth.

  • The Highest Form of wealth is the ability to wake up every morning and say, “I can do whatever, I want ”– Morgan Housel
  • Being Rich and being Wealthy are
    • (https://medium.com/life-lemons/what-you-can-learn-from-a-mexican-fisherman-a8334882204c)
  • How much is Enough is an individual

‘Freedom’ and ‘be the boss of our own time’ is considered as the highest form of wealth. For the same reason, being rich and being wealthy are two different things. Please read the story of American investment banker versus Mexican fisherman to understand this better.

Story can be accessed here: https://medium.com/life-lemons/what-you-can-learn- from-a-mexican-fisherman-a8334882204c.

Concepts

Let’s understand a few basics first!

Concept #1 Time Value of Money.

 

As these examples from 1960s shows, that money loses it’ sits value gradually. This is due to inflation.

Concept #1 Time Value of Money.

 

If you had Rs.85.8 in November of 2020 and you have Rs. 100 today, they have the same  value.

Time Value of Money.

  • Technology and efficiency improvements impact TVM!
  • Few things get cheaper others expensive!
  • On an average
  • 100 rupee today > 100 rupee tomorrow!

 

Technology and efficiency make things cheaper or improve quality.

Education is expensive because, in 1960, you needed the same classroom and student/teacher ratio as in 2019.

The same for hospitals; there hasn’t been much improvement in the efficiency of a doctor. They still see patients in more or less same way as he did in 1960. Knowledge and overall medical technology have advanced, but not the patient-doctor interface.

Question: Which of the red items will be in cheaper in next 10 years?

Concept #2: Power of Compounding.

Too Tough: Read this story: https://atish- mistry.medium.com/once-upon-a-time-6d0c310c0386

If you find the formula for compound interest too tough, please read the story of sage who bankrupted the king. We learned this story in our childhood from comics like Panchatantra.

Story Link: 2 different versions with explanation of the formula.

https://www.wesmoss.com/news/this-simple-story-is-a-potent-illustration-of-the-often-unexpected-power-of-compounding/

https://atish-mistry.medium.com/once-upon-a-time-6d0c310c0386

Power of Compounding.

  • See the equation between r & nt
  • Time is much more powerful than rate of return.

 

Compounding only works if you can give an asset years and years to grow. It’s like planting oak trees: A year of growth will never show much progress, 10 years can make a meaningful difference, and 50 years can create something absolutely extraordinary. – Morgan Housel

Remember how our ancestors talk about a home they bought for few thousand rupees that is now worth crores. It is the power of compounding.

QUIZ Time.

Present Value 0 Future Value
Investment SIP -10,000 PM  

₹8,16,697

ROR 12% PA
Time 60 Months
Time Block Value Added
First 5 ₹8,16,697
Second 5 ₹14,83,690
Third 5 ₹26,95,415
Fourth 5 ₹48,96,752
Present Value 0 Future Value
Investment SIP -10,000 PM  

₹23,00,387

ROR 12% PA
Time 120 Months
Present Value 0 Future Value
Investment SIP -10,000 PM  

₹49,95,802

ROR 12% PA
Time 180 Months
Present Value 0 Future Value
Investment SIP -10,000 PM  

₹98,92,554

ROR 12% PA
Time 240 Months

Investments:

5 years: 6 lakhs
10 years, 12 lakhs
15 years, 18 lakhs 20 years, 24 lakhs

Concept #3: Delayed Gratification.

  • What it means?
  • 2 units later versus 1 now.
  • Let’s see the video.

YouTube link to the video that I showed.

https://www.youtube.com/watch?v=QX_oy9614HQ

Marshmallow Test.

  • Researchers followed up kids until the age of 24 and found that,
    • Kids who waited and got 2 marshmallows were more successful in general.
  • Lessons in Career & Investing
    • Ahhh…. That fancy mobile, that big TV.
    • Credit card debt, Personal loans.
  • Envy
  • Delayed Gratification: Ability To Suffer

All marketing and sales people are competing with themselves to give you ‘instant gratifications’. Malls, e-commerce websites, BNPL schemes, instant EMI schemes are all designed to give you ‘instant gratification’ prompt you to take your credit card out of your pocket. It is a vast field in marketing and consumer psychology. Our job as consumers is to protect ourselves against it.

By investing today, you are delaying gratification to a few days, months or years later.

Concept #4: Probability Versus Consequences.

  • Small probability events with fatal consequences.
  • Let’s play Russian Roulette.
  • Winning Prize: Rs. 1 Crore.

 

While the odds of winning looks good at 5/6, a 1/6 chance of losing has a very big consequence. In our financial matters as well, we need to guard ourselves against such fatal mistakes.

Nuts and Bolts

Let’s get down to some practical gyan!

Money Management Ladder.

  • We will see several
  • Don’t step on next rung before completing the prior one.
  • Remember, our first priority is to avoid RUIN.

 

 

Step #1: Money Buckets.

  • Mental Accounting.
  • Hide Marshmallows: Move money away from temptation.
  • Brings Discipline.
  • Normal: Income – Spend =Investment
  • Desired: Income – Investment = Spend

Open three different savings accounts and mentally assign a label to each money bucket. If your bank website/app gives you option to nickname the accounts, name them as the Spending Account and Investing Account. I have been following this practice for the last 20 years, and it has worked wonderfully well for me.

Bucket Budgeting.

Create an Excel sheet to facilitate the decision-making process for allocating funds between the investing and spending accounts

 

Step #2: Health Insurance.

  • All of you have a corporate Mediclaim.
  • Assess whether it provides sufficient coverage
  • If not, consider obtaining a Top-up health insurance plan.
  • You don’t need to opt for a regularplan. Atop up isadequate.
  • Top up:
    • Let’s say, corporate insurance cover: Rs. 3 Lakhs.
    • Desired cover: Rs. 10 Lakhs.
    • Take Top up: Start Rs. 3 lakhs up to Rs. 10 Lakhs.
  • Forindividuals above 50: years old, acquire a regular plan 5 to 6 years before retirement.
    • To complete 4 years of ‘preexisting’ disease period.

Please consider purchasing a health insurance policy if needed. At today’s time, a coverage of 3-5  Lakhs may not be sufficient for a family of 4. Assess your needs and invest in a top-up policy beyond what is covered by company. Top-up, policies are affordable, stand alone and have independent terms. There is no linkage between a top-up policy and your corporate policy.

Considering rising cost of health care, plan to secure an insurance cover of Rs. 50 lakhs or above.

Health Insurance: Do’s & Don’ts.

  • Be honest.
  • Don’t accept ‘co pay’ clause.
  • Check ‘pre existing disease’ clause carefully.
    • Disease waiting period.
  • Compare sub limits.
  • Check for exclusions.
  • Don’t get fooled by ‘sales pitch’
    • Make comparison excel yourself.
  • Don’t go cheap.
  • Check claims history of the company
  • Good Brands: HDFC, Bajaj, ICICI, SBI, Govt companies.

This slide is self-explanatory.

Step #3: Check your loans.

  • Pay off all loans, except for
    • Housing
    • Car
    • Two-Wheeler loans.

Please pay off loans except the three listed on the slide. If you choose not to  pay them off,  that’s acceptable but kindly refrain from over-investing in risky assets such as equities.

Borrowing and investing in volatile assets may yield positive results during prosperous periods, but it can have severe consequences during economic downturns, akin to playing Russian roulette.

 

Step #4: Get Life Insurance.

  • Applicable only to people with dependents (Or if you expect to have dependents in near future)
  • Life Insurance is not required for people who don’t have
    • How many of us got fooled with below sales pitch?
      • Insurance for kids? / Dependent spouse? Parents?
  • Life Insurance is not a ‘Tax saving’ tool.
  • Beware of friends/relatives who are insurance agents.
  • Never mix insurance and investments.
  • Buy only ‘Online Pure Term’ Plan from a reputed company.
    • LIC, HDFC, ICICI, SBI, Birla,Tata!

Please purchase only ‘online pure term plan.’ Insurance is an expense, not an investment.

Life Insurance: Beware of Agents.

You need to treat the insurance industry and those who sell within it like walking through reptile-infested waters.

You need to stay on the safe part, They’re out to get  you. You need to look after your money.

I’m not joking.

– Monica Halan

Please safeguard yourselves against insurance sales people like Bank relationship managers, relatives, friends, etc.

How Much Life Insurance?

  • Thumb Rule: 8 to 10 times income.
    • Add any outstanding loans.
    • Deduct available savings.
    • Deduct the ‘company’ provided cover.
  • Use Human Life Value Calculator on Insurance websites.

This slide is self-explanatory.

 

 

Step #5: Build Emergency Corpus.

  • Young: 3 Months
  • Mid: 6 Months
  • 45+: 12 to 18 months
  • 50+: 24 months
  • Keep the funds in a reputable bank
    • Only SBI / HDFC Bank / Kotak / ICICI or Axis.
  • The rate of interest is not important, safety and liquidity of money are!

Do not deposit your money in a substandard bank such as cooperative bank or a smaller private sector bank. Please keep your emergency funds to a very strong banks like SBI, HDFC or Kotak. If desired, you may extend to ICICI or Axis, but refrain from considering banks beyond these.

Step #5: Emergency: Leverage CC.

  • Get a credit card with high credit limit.
  • Use in solely in sudden emergency situations.
  • Set sub-limits to prevent fraud and for self-discipline.
  • Pay dues in full each month; preferably, set Autopay.
  • Disable ‘International’ transactions.
  • Example:
    • Card with 10 Lakhs limit (or higher, as high as possible).
    • Set sub limit at a comfortable level, such as the transaction/day level.
    • In case of emergency, remove the sublimit and use credit card for instant payment.
    • Use your emergency funds to settle the credit card bill in full.

Slide is self-explanatory.

 

Invest-IT Bucket

Complete the first 5 steps before exploring investment bucket.

From step 2 till 5, we have covered only expense items. Only after you have completed the same, please proceed to consider your investment bucket.

Step #6: Divide Investment Bucket:

  • Start with a laundry list of all goals.
  • Prioritize
  • Be aware that you will not be able to achieve all goals.
  • You may be required to drop certain goals or move them from one bucket to another.
  • Review annually.

Further divide your investment bucket in 4 different compartments. Your choice of investment vehicle will depend on the time horizon of your goal. The shorter the time horizon, the safer be instruments should be. The safest instrument is bank FD in an RBI-governed reputed bank, followed by liquid funds from top mutual fund houses. Long-term bonds and equities are risky and should not be invested for shorter terms.

Once completed, please review your goals annually so that you can move funds from long- term bucket to short-term bucket or vice versa, if desired.

Please review this slide carefully. Normally, I have seen that people who are forced to sell equity investments like shares and equity mutual funds is when they invest their short-term money in equity funds and then recession hits. They panic and sell.

However, if you have covered your short-term money requirements using emergency funds and lower time duration buckets as shown in this slide, then you should not bother about short-term losses. Continue the SIP or paying EMI of your home loans even in the worst recessionary periods.

 

I am not going to engage in a very logical debate on real estate as it a very context driven. Family preferences and emotions have a huge impact on your real estate decisions. We all know that real estate is illiquid and has low yields, but still, it is a very  popular asset class in India. So, let’s directly talk about some Do’s and Dont’s.

Real Estate: Do’s.

  • Buy one for living when:
    • You have completed steps 1 to 5.
    • You can afford EMI <50% of take-home income.
    • You have decided to live at a location for next 7 to 10 years.
  • Real Estate as an Investment
    • Without or with minimum EMI.
    • You are sure of location prospects.

Real estate gives sense of security. Having a roof over one’s head is a significant source of security for many Indians. Therefore, if you meet the criteria as mentioned above, please go ahead and buy a home for living.

However, be careful about real estate as an investment (when bought without any intention to live). Do it only if you know the game very well.

If you drive in Pune, there are hoardings telling you that if you buy a flat in upper Kharadi (which is nothing but a nicer name of Wagholi), then Rohit Sharma will come to teach cricket, Mahesh Bhupati will teach tennis and Shamak Davar will teach dance to your kids. There are a few other projects that give you address of ‘Manhattan’ in Wagholi. Needless to say, this is all nonsense.

But the ability of their salesmen and women to entice you with stories is so high that you get very high ‘fear of missing out’ syndrome and are prompted to instantly gratify yourself by booking an apartment which will be delivered to you a minimum 5 years later.

Please be careful and safeguard yourself. Any investment made with high loan amount is a double-edged sword. It can benefit you in good times but will be fatal if the 1/5 chance of bullet hitting you during Russian Roulette comes true.

Buying for living is good, but know your game and evaluate all pros and cons before buying for investment purpose.

 

Step #6: +5 Years: Pre-requisites.

  • Ensure that you have completed steps 1 to 5
  • Ensure that you have completed step 6: < 5 years planning.
    • If possible: maintain a balance between: Multi duration investments / goals.
  • Ensure that your ‘Housing’ plans are sorted.

Balance your goals between different time durations and then you have two options:

  • First, fill buckets of 1 to5 year durations.
  • Or, simultaneously make monthly additions to different buckets. A simple excel modelling will help you figure out how much is required for which goal and in what time.

Investment Bucket > 5 years.

  • Equity Index Mutual Funds.
  • Avoid Direct stocks.
  • Avoid Fancy Mutual Funds/Products.
  • Strict No to any unregulated products.

Investment Bucket > 5 years.

Why Equities?
Beating Inflation.
Rewarding in long term >5 years.
Tax Friendly.
Helps in nation building & job creation.
Can result in life changing wealth.
Why Index Funds; Not Direct Stocks!
Direct Equity investment needs a lot of knowledge & time commitment.
Markets participants are not very honest.
Retail investors don’t have research or information edge.
Mutual Funds are more tax efficient than direct stocks.

Don’t Play Russian Roulette

Return of money is more important than return on money!

What Causes RUIN.

 

There are no short cuts to success, whether in work or in investing.

Investor Psychology.

Please continue SIP. Most investors become active when markets are near the top and don’t invest when markets are at the bottom. Please don’t do this. Invest via SIP to remove such psychological traps.

Index Versus Individual Stocks

Sensex, Nifty, NASDAQ, DOWJONES, S&P 500 are several Indices!

SENSEX: 26 Years.

 

This is the Sensex chart of India over 26 years. As is evident from this chart, you should  recover any short-term losses if you hold Index fund for a long duration.

S&P 500 (USA): 90 Years.

This is the S&P 500 chart of USA over 90 years. Index investing over long term is both safe and rewarding. Follow SIP route. Don’t invest lump sum except when the index is really cheap (like in March 2020).

How About Return History of Index.

 

As we can see that the probability of making losses over 5-year period is really low. That’s why index funds are recommended only for duration of over 5 years.

However, this is not true for individual stocks. Many stocks like Suzlon, Yes Bank, Vodafone Idea and many others have led to permanent loss of capital for investors.  We need to avoid permanent loss of capital at all costs.

NIFTY:

 

As we saw in previous slide, that the probability of loss in an Index fund is very low when invested for 5+ years. It is also remarkable to note that probability of earning higher returns increases when held for long term. That is why it is important that we hold equity funds for at least 5+ years. The bucket approach helps in protecting  this because other buckets will take care of the expenses coming in less than 5 year duration.

SIP in Index Funds Avoid RUIN.

The Key is in Surviving 10+ years without accidents.

Exotic products (including direct stocks) are more prone to accidents.

If you survive long with moderate returns, you will do well.

Stay safe and avoid accidents. The power of time with modest returns will take care of your long-term financial well-being. Focus on maximizing time with moderate returns.

Step #6: 5+ Years.

  • KISS Index Funds: ‘Keep It Simple Smarty’
  • Divide your monthly SIP in 3 parts:
Fund Description
Nifty Fifty Index Fund Top 50 stocks in India.
Nifty Junior (Next 50) Fund 51 to 100t h rank stocks in India.
NASDAQ 100 Fund Top 100, non-financial stocks in USA.

I recommend three index funds. You can allocate 33% in each; this will give you 67% exposure to India’s top 100 companies and 33% to USA’s best companies.

Alternatively, you can allocate40:40:20 in Nifty, Nifty Junior and Nasdaq funds; this will give you 80% exposure to India and 20% to the USA.

You don’t need any other fund.

Do’s & Don’ts.

  • Avoid Agents, Brokers, Banks, Go Direct!
  • Select: Direct Plans.
  • Select: ‘Growth’ option.
  • You don’t need more than 3 index funds.
  • Stop the nonsense of 7-8 different equity funds.
    • It is just a sales pitch driven by incentives.
    • Complexity Simplicity doesn’t.

Most advisors will not recommend you index funds as these are the cheapest funds. These funds don’t require a high-profile manager to make decisions; they simply copy index constituents. Both mutual fund companies and advisors earn lowest in these funds.

However, history has proven that these are the best funds for investors. In American, over 90% active fund managers fail to beat index funds even after charging very high fees. In India. many fund managers also fail to beat the index fund returns.

By investing in 7 to 8 funds, you may get exposure to almost 300 to 400 companies with a lot of overlap. It is not required. Most such strategies fail to beat overall Index           level returns. But they help your advisors, sales people and marketers. They make a lot of money and therefore, they sell active funds to you under several names. They make fancy pitch and give a lot of fancy reasons. Please avoid such sales traps.

What to do with One Time Money.

  • Pay off ‘Non-Housing Loan’
  • Buying other capital assets.
  • Take a vacation.
  • Decide allocation of different investment buckets.
  • If you have housing loan:
    • When the Index is expensive: Repay the housing loan.
    • Index is cheap: Invest in Index Fund (5+ years).

Good Hygiene Practices:

  • If possible, have joint account with your spouse/parents (if bachelor).
  • Have nominations at all your accounts.
  • Follow good record keeping practices–Excel sheet, cloud storage, prints with parents.
  • Don’t look at ‘Marshmallows’ every day.
  • Never have credit card debt, pay in full every month.
  • Never believe in There is no ‘Santa’ in real life.
  • Try double compounding. It’s magical.
  • Maintain balance.
  • Monitor your CIBIL scores regularly.

Books.

 

Please read the first 3 books, and if you want to, consider reading the 4th book. These books are life-changing when it comes to money management.

Products.

  • For 5+ Year durations:
    • SBI / ICICI / HDFC
      • Nifty Index Fund – Direct Growth
      • Nifty Next Fifty (or Junior) Fund – Direct Growth
      • ICICI / Kotak / Motilal Oswal NASDAQ 100 Fund or S&P 500 Fund – Direct Growth.
    • Only SIP > 5 years, Preferably 10 years.
    • Increase SIP in line with income / savings growth.
    • Don’t Panic if market falls in the interim.
    • If you have taken care of steps 1 to 5 and managed buckets well, then short term loss should not panic you.
  • For 3 to 5 Year duration:
    • Conservative Hybrid Funds
    • Multi Asset Funds
  • For shorter durations:
    • Liquid Fund.

Buy directly from the MF website or from ‘Mutual Fund Utility’ or from newly launched ‘MF Central’. Don’t buy from your Bank or stock broker’s website. They give you regular plan option only. Regular plans are about 1% more expensive per year compared to Direct plans. Direct plans are without commission.

Recap.

  • Ladder.
  • Buckets.
  • Discipline.
    • ₹ Power Of Compounding 👍
    • ₹ Delayed Gratification 👍
    • ₹ Russian Roulette 👎

Stay safe and avoid accidents.

🙏 Thanks 🙏

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