A little insight into how you should invest.
1. Figure out where you are
The first thing to do is to prepare a personal balance sheet of sorts. Describe your assets - which is what you would call anything you own that is of real value. That means a house is an asset, money in the bank is an asset and stocks/mutual funds are assets. Your TV is not an asset. Your car should not be considered an asset (unless it's less than 3 years old, in which case consider the value declared to insurance).
So add all the values up and you get a list of assets, like so: Assets
Cash in bank: Rs. 50,000
Fixed Deposits: Rs. 200,000
Stocks: Rs. 150,000
Mutual Funds: Rs. 70,000
Gold: Rs. 20,000
Current value of house: Rs. 25,00,000
EPF: Rs. 8,500
TOTAL: Rs. 29,98,500
Underdeclare values of stocks, gold etc. by at least 25% since these are variable commodities.
Now figure out your liabilities. Meaning, how much do you owe other people? Liabilities
Oustanding housing loan: Rs. 20,00,000
Personal Loan: Rs. 100,000
TOTAL: Rs. 21,00,000
Don't include things you intend to pay back immediately, like credit card bills, or phone bills etc.
Subtract your LIABILITIES from your ASSETS to find out your NETWORTH: meaning, how much are you worth today. In the example above, NETWORTH = Rs. 8,98,500.
2. What's your "cash flow"?
Now find out how much you spend. Include all standard expenses (in fact, keep a record of this for about six months, and find out the real average) and also amortize your annual payments (like insurance) into the monthly amount.
Add the total income you earn (minus taxes and any other deductions) Expenditure:
Apartment Maintenance: Rs. 2,000
Phone bills: Rs. 3,000
Petrol: Rs. 2,500
Credit Cards: Rs. 5,000
Internet connection: Rs. 1,000
Interest payment on housing loan: Rs. 11,000
Insurance Amortised: Rs. 3,000
House taxes etc. amortised: Rs. 1,000
Cash expenses: Rs. 8,000
Total: Rs. 36,500
Income:
Salary: Rs. 45,000
Dividend: Rs. 2,500
Total : Rs. 47,000
Cash Flow: Rs. 10,500 per month.
If your cash flow is not positive, i.e. Expenditure is greater than Income, STOP RIGHT HERE. Go back to the drawing table and figure out how to reduce your expenses or increase your income - there is no other way around. Investments are only for cash flow positive people!
3. What and when do you need money? And How Much?
1. Figure out where you are
The first thing to do is to prepare a personal balance sheet of sorts. Describe your assets - which is what you would call anything you own that is of real value. That means a house is an asset, money in the bank is an asset and stocks/mutual funds are assets. Your TV is not an asset. Your car should not be considered an asset (unless it's less than 3 years old, in which case consider the value declared to insurance).
So add all the values up and you get a list of assets, like so: Assets
Cash in bank: Rs. 50,000
Fixed Deposits: Rs. 200,000
Stocks: Rs. 150,000
Mutual Funds: Rs. 70,000
Gold: Rs. 20,000
Current value of house: Rs. 25,00,000
EPF: Rs. 8,500
TOTAL: Rs. 29,98,500
Underdeclare values of stocks, gold etc. by at least 25% since these are variable commodities.
Now figure out your liabilities. Meaning, how much do you owe other people? Liabilities
Oustanding housing loan: Rs. 20,00,000
Personal Loan: Rs. 100,000
TOTAL: Rs. 21,00,000
Don't include things you intend to pay back immediately, like credit card bills, or phone bills etc.
Subtract your LIABILITIES from your ASSETS to find out your NETWORTH: meaning, how much are you worth today. In the example above, NETWORTH = Rs. 8,98,500.
2. What's your "cash flow"?
Now find out how much you spend. Include all standard expenses (in fact, keep a record of this for about six months, and find out the real average) and also amortize your annual payments (like insurance) into the monthly amount.
Add the total income you earn (minus taxes and any other deductions) Expenditure:
Apartment Maintenance: Rs. 2,000
Phone bills: Rs. 3,000
Petrol: Rs. 2,500
Credit Cards: Rs. 5,000
Internet connection: Rs. 1,000
Interest payment on housing loan: Rs. 11,000
Insurance Amortised: Rs. 3,000
House taxes etc. amortised: Rs. 1,000
Cash expenses: Rs. 8,000
Total: Rs. 36,500
Income:
Salary: Rs. 45,000
Dividend: Rs. 2,500
Total : Rs. 47,000
Cash Flow: Rs. 10,500 per month.
If your cash flow is not positive, i.e. Expenditure is greater than Income, STOP RIGHT HERE. Go back to the drawing table and figure out how to reduce your expenses or increase your income - there is no other way around. Investments are only for cash flow positive people!
3. What and when do you need money? And How Much?
Find out any longer term requirements to fund a large one time requirement. The way to do this is: Ongoing: Liabilities, Rs. 21,00,000
After 5 years: School Donation for Child, Rs. 100,000
After 10 years: House repairs and upgrades, Rs. 10,00,000
After 15 years: College fees for Child, Rs. 10,00,000
After 20 years: Marriage costs, Rs. 10,00,000
After 25 years: Potential medical expenses, Rs. 10,00,000
After 30 years: Retirement, Need to have corpus of Rs. 30,00,000
Discount all these amounts by inflation of 6% a year.
4. The Investment Plan Recipe
Now's the time to act. You need to increase your network every single year to reach your goals. Your immediate goals for the next ten years are to build up a corpus for your child's education, and to clear out your loans. Always pay out your first house loan - that is the house you live in, so you must attempt to make that debt free. Further real estate can be financed by loans etc.
To finance the above goals, you have a sum of Rs. 10,500 a month, of which you invest Rs. 3,000 per month (say) in the principal of your housing loan. The remaining Rs. 7,500 must be invested.
What do you need? Here's an illustration:
After 5 years: School Donation for Child, Rs. 100,000
After 10 years: House repairs and upgrades, Rs. 10,00,000
After 15 years: College fees for Child, Rs. 10,00,000
After 20 years: Marriage costs, Rs. 10,00,000
After 25 years: Potential medical expenses, Rs. 10,00,000
After 30 years: Retirement, Need to have corpus of Rs. 30,00,000
Discount all these amounts by inflation of 6% a year.
4. The Investment Plan Recipe
Now's the time to act. You need to increase your network every single year to reach your goals. Your immediate goals for the next ten years are to build up a corpus for your child's education, and to clear out your loans. Always pay out your first house loan - that is the house you live in, so you must attempt to make that debt free. Further real estate can be financed by loans etc.
To finance the above goals, you have a sum of Rs. 10,500 a month, of which you invest Rs. 3,000 per month (say) in the principal of your housing loan. The remaining Rs. 7,500 must be invested.
What do you need? Here's an illustration:
The idea is that:
1) You get 20% on the first 10 years of investment and you increase the quantum of investment per month every five years.
2) After ten years you move money to less risky investments and get lesser return, and this goes on.
3) Every five years you withdraw the amount of money needed to finance your needs.
4) After thirty years you are left with about 3 crores, which will most likely be just enough for your current expenditure for a while.
This is an investment goal. You can see where your goals like and try to achieve them. Update your networth statement once a month, and estimate your free cash flows every three months. That way you are aware of how close you are to your immediate goals and whether you are making it or not.
1) You get 20% on the first 10 years of investment and you increase the quantum of investment per month every five years.
2) After ten years you move money to less risky investments and get lesser return, and this goes on.
3) Every five years you withdraw the amount of money needed to finance your needs.
4) After thirty years you are left with about 3 crores, which will most likely be just enough for your current expenditure for a while.
This is an investment goal. You can see where your goals like and try to achieve them. Update your networth statement once a month, and estimate your free cash flows every three months. That way you are aware of how close you are to your immediate goals and whether you are making it or not.
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