Smaller Savings Add up

Its always the smaller Savings which add up. when I mean small savings, its about putting those smaller amounts in a place, where, it will grow up to be a larger value.

Was reading this article on Quora and I thought that I should be sharing it.

1) Small purchases add up. In the place where I live, a coffee will cost about $4. Drink a coffee every day and you are dropping well over $1,000 a year on your coffee habit. That's the price of a vacation to a foreign country or a couple tailored suits. Make the coffee at home and save BIG!

2) The true cost is not what you paid today, it's what you give up in the future. I can spend $1,000 on coffee this year. Or, I could put that $1K in an S&P index fund and let it sit till I retire. If I could have earned say 8% annual returns and plan to retire 30 years later, my coffee habit this year reduced my retirement by $10,000.

Understand these basic concepts and you'll be able to to become much wealthier by making some simple, small changes to your life.

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1 Crore on Retirement

I have been getting some emails from some insurance companies asking me to invest into some of their funds/plans and become a crorepati when you retire.
First, I don't like to rely on insurance companies which sell ULIP only to gain the commissions to give you promises especially for your retirement fund.

The ULIP and mutual funds give the returns only on market conditions. Market goes up, you get a good return and goes down.. you know what that means. This is acceptable, when you can afford to take risks, but wouldn't be the only investment for my retirement plan. I would like to invest a bigger portion in debt funds when it comes to retirement, than on equity funds.

The given ad, said, invest 8000 per month and earn 1 crore. But do these people give guarantee on the returns. The disclaimer is always present there, that the returns are subject to market conditions.

Let's say, you invest 8000 per month in a FD and lets say, you still have 30 years of your working life. A simple FD with a 8% return would give you 11,745,213/-(1 crore 17 lakhs ) Offcourse, we will not always have 8% as the interest , it can come down or go up, but still an average of 8% is quite reliable over a long period of time. A simple investment of 8000 per month can do this wonders, why take the additional risk of market equity.
Nothing stopping you from taking risks, but its all based on your target's you want to achieve for your retirement.

Few examples of FD returns
30 years  5000 per month    73 lakhs after 30 years at 8% compounded annually
25 years  10000 per month   95 lakhs after 25 years at 8% compounded annually
25 years  10000 per month   1.29 Crore after 25 years at 10% compounded annually

FD's are something, which are guaranteed income, and the even in the worst of cases, there is no loss.

Before I conclude, couple of points

1.  FD's will never be able to make up for Inflation. But it will be a secured amount when you need it.
2. The interest earned on the FD's are taxable depending upon your tax slab.

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Your PF

Every time that you change your company, the HR will give you the document to withdraw the money or transfer it to the next company that you join. And we being we, the urge is to withdraw it, considering the fact that you are so pressed for clearing that long pending credit card bill, which has already absorbed huge amount in the form of 33% interest. Definitely, it makes more sense to clear off the high interest rates debts with these amounts which barely give 9% interest.
But hold on. Though the urge is there to withdraw and I know, almost everyone has immediate needs. But just make sure to keep the money handy for your retired life. Remember, now, you have a source of income and the PF money is meant to take care of you when you dont earn. Please remember that you dont earn a pension like our parents did, when worked for an government organisation. Yes, those are the perks that they enjoy , and we will not be.

So , in short, once you join your new company, please transfer the money to your new PF account in the new company. From what I last remember, the interest will be paid on only one PF account. So if you havent transfered it, there is quite a bit of chance that there will be no accumulation of the interest. But I am not sure, how the PF department finds out that, one has more than one account. Nevertheless, its our job to make sure, we have only one account.

Also, if you still dont have PPF account (Public provident fund), please open one. You can invest there as less as 2000 per year. And that account will earn a good return at the rate of 8 or 9% interest(the rates keep changing). There amounts are exempted from tax under section 80ccc. This is a great way to accumulate the funds for your retirement and also have the freedom to invest as per the comfort level.

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Cost of Appliances

We all know that each of the appliances/Gadgets/Vehicles that we use comes at a cost. The TV, the bike, the car and most importantly the mobile. Whats more important in today's world is the cost of replacing them regularly, with the advent of new models or features. Yes, we all love the new stuff and always love to do the shopping. But it only means we are spending more. Not that spending is bad for the economy, but I would prefer one self to use the money carefully.
Lets talk in terms of examples -
A specific mobile phone costs 12000/- INR. And you use it for 12 months. Which simply means that the cost of owning this mobile has been 1000/- per month. (The other cost being the variable cost of your mobile service bill, and I would leave that out in this discussion. )
Now, most people replace mobile based on their habits. Some in 6 months, some in 12 and some around 1.5 to 2 years time frame. Its not necessary that the mobile has stopped working, its only that one gets a tickling to buy a new one.
So the cost of mobile for a person using it for 6 months would be 2000 per month while that for one using it for 2 years would be 500/- per month. For every additional month that you use your new mobile, you will be paying a little less per month. Isnt that a great saving? There will always be new ones coming with fancy features. The trick lies in finding it, whether you really need it or its just for buying something new that one just swipes the card.
The similar habits applies for cars and bikes and so on for TV sets.
Just use them one more month.. at a time ..

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Simple Investment Rules

Contingency Plan and Savings

Always have a plan for your emergencies. They dont come to you giving you time to prepare. Its just that you need to be prepared for it.

Keep aside 3-6 months of your monthly expenses aside in a liquid investment. This could be Fixed Deposits.

Secondly,
Invest in yourself from day 1. If you are not doing it, then start today.

Reading various articles on the simple Investment tips, here is what I follow to take care of both these.

Every month I put in a fixed amount in to a Recurring Deposit. This also makes me to invest regularly into a savings plan and also create enough backup for emergencies

Preferably create these RD Account's which you dont use regularly and give in to your impulse purchases.
In the Bank where I have got an account created, I dont even have a Debit card.

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Simple Investment Rules

Investing in Equities

What percentage of your investment's should one invest in equities. Well the rule is simple
If your age is 25, then 25% of your investment's should go into debt funds

(100-25)% ie 75% should go into Equities.

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Insurance and Investments

This is a term normally reminded by the Insurance Agents just before the tax declaration time for many of the people. But come to think of it, even I have done pretty much the same. I have normally ended up investing in ULIP's thinking of returns rather than insurance per se. Looking back today, I dont think that I am covered enough.
So whats the best way to cover one self from Insurance perspective.

Well, lets keep things simple and understand a couple of basic points.

1. Insurance is meant for keeping a backup incase of any eventuality that happens to you and you dont want your dependent's to suffer
2. Investment's are meant to create more financial stability for you and your family  so that down the years you can enjoy, especially with the rising cost and for the years you stop earning, or for planning for expenses down the road(House,children's weddings, Children's education)

With time , we have seen that both of these were sold together as a single plan. Either as ULIP's or equivalent one's. At the same time I dont completely blame the insurance companies. As that was the time markets were booming and people could see some stable income coming in and also get some insurance and finally and most importantly SAVE TAX.

Today, all I would say is, for Insurance, buy a simple Term Plan. Cover your self, say 7-10 times your current annual income. There are a lot of companies giving insurance at a very low cost. It is indeed cheap.

For Investment, divide your investment into FD's Mutual Funds, Stocks, Bonds etc. Don't invest in one type of instrument. Most important, keep discipline while investing. Do it every month fixed amount. Use SIP's(Systematic Investment Plans) wherever applicable. Thats the best way to do it. 

Dont make investment complicated. Invest what you can and that doesnt mean spend everything and say you dont have any money left. Keep some target every month. And If possible increase that over a period of time.You will be surprised the amount you will accumulate at the end of an year.

Keep Investing and creating wealth.

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