Financial Risks of Social Networking

There has been a huge spurt in the social networking sites and the number of people addicted to it. If you just look at the Facebook statistics, it is mind boggling, check the screen-shot below

Facebook has more than 300 million active user (note that these stats might be a bit out of date since these are not dynamically updated). It is also estimated that young people are more attracted towards these social networking sites, as indicated below

These networking sites are great, but with the number of users growing enormously, the end-user is getting exposed to so many risks. It is growing like a jungle, where at each turn, you may encounter someone sitting with a trap to get on to you.

How many user, who subscribe to Twitter or Facebook actually read the privacy policy while signing-up? As an example, Twitter recently updated its privacy policies and I doubt any of the current user even knew about it. (Here's a link to the updated policy and a link to the old policy.) The twitter policy is way much simpler and easier to understand than say Facebook’s policy. It is extremely difficult to wade through this mumbo-jumbo of legal terms, so probably even if someone brave enough tries to makes sense of it, will fall flat on his/her face.

You would think, why someone should actually read or bother about these policies. Google has warned about privacy issues on social web in a paper [PDF] presented at the Web 2.0 Security and Privacy 2009 workshop.

There are multiple aspects to the risks associated with social networking sites and privacy is just one of them. The risks ranges from someone hacking into your profiles to the risk of infantilizing the human mind.

One of the significant aspects of privacy on such websites like Twitter is the website utilizing the data generated by their users. There is absolutely nothing from legal standpoint to prevent this usage. These types of applications are not that far-fetched, given reports of tools to analyze someone's social network and assess their credit worthiness ("Rapleaf") or psychological profile ("TweetPsych").

But how would these lead to financial losses (which is the main focus of this post)? Well these social sites can lead to huge financial losses to the users by

• Making you loose your job, similar to Heather Armstrong or @theconner
• Making you loose your insurance benefits similar to Nathalie Blanchard.
• Data misuse after hacking your personal information including degrading your credit rating.
• Making you have legal liabilities for using trademarks with-out following the rules. You may use some trade-mark symbols/names into your own merchandise (like this) or your website.

So it is extremely important to keep your eyes open about these risks when interacting socially. Any data that leaves your computer can come back to haunt you.

How to reduce your monthly expense?

I recently got a stealthy email from my a very good buddy. The content of the email was crisp asking me for some 15,000 Rs, he was short this month and needed to pay-back someone. I helped him out, but it got me thinking why he got himself into such a situation. He is earning decently (I would imagine around 20 Lakh PA), do not have any family responsibilities (all his sisters are married off) and just has one kid.

As per me, this is definitely not a good sign when you have to borrow from your friends. I am not against borrowing money, after all  friends are for helping you out, but it should be for a genuine reason.

Why so many educated people fail to manage their personal finance?

The single underlying principle for managing money is

Make your expenses lesser than your income

Is this so difficult to understand, that to save money, your expenses should be less than what your earn.  Yet, I find so many people struggling to maintain this equation, eventually letting themselves buried into debt.

So how exactly we should implement this in our daily life? How to spend less and save more? How to reduce expenses? The answer lies in getting into “good financial habits”. If you are single, you need to develop these into yourself, if you are married you need to share these thoughts with your spouse and inculcate these within both the partners. It is more difficult with kids, if you have any, but once these become part of your family, it will go a long way in helping your children in their lifetime.

Here are some great techniques to reduce your expenses:

• Start on 1st day of the month and every night note down all the money you spent that day. You can do it as a combined list of family (preferable) or you can do it separately for each family member. I assure you that this is extremely painful to start with since it wont bring any immediate relief but do it diligently without fail. Note down every detail of what you spent through cash, credit card, online purchase or any other mechanism. Also note down the channel you are paying through. You can use some software on your desktop or mobile to keep track of you expenses or use just a plain paper

                  You can also use application like this for iPhone

• Once you have this list (the hard-work has to give you some benefit) ready, then it is the time to walk through it and arrange the items in following categories
  • Must-Haves like rent, electricity bills, food bills
  • Emergency Purchases like medicines,
  • Casual/Impulsive Purchases like clothing, mobile phones, books, eating out etc
  • Social purchases like gifts
  • Useless purchases
• Then, go through these monthly bills or recurring expenses and see if there is something that you really need. For example do you really need to buy these costly books every month or you could just subscribe to a near-by library in your locality. I have actually reduced these expenses in my budget (I am a voracious reader). I used to buy books/novels worth more than 20K per year, this is exorbitant (not only in terms of buying but also in terms to keeping them, I spend more when I have to relocate since these books make those so many extra cartons). So I joined one of the local libraries and I have reduced by expenses to mere 1K per year along with gaining immense variety of books. There are hundreds of such expenses that you can cut-down without sacrificing your living standards or the returns in terms of value that you are getting.
• Some of the expenses can be saved just by tweaking your daily habits. You would be amazed that simple habits like switching off lights, fans or chargers can provide significant savings. We did that by switching off chargers or TV switch (not just switching off from the remote, but actual switch). These have given me a saving of as much as 100 Rs per month on my electricity bills (i.e. 1200 Rs per year). It may sound like too much pain for saving such miniscule amount, but think of it as serving to the society, doing this in the larger interest of the country. You can install CFLs instead of those big bright tube-lights or don’t run those geysers only when needed and not for long period. These are non-renewable energy and such saving by millions of people can be simply huge.
• One of most effective tip that I use consistently is to store my all credit cards in least accessible places like in the locker or a suitcase which is stashed away. The idea is not to keep credit cards at places where you can quickly pick up before going to a shopping mall. I also have a credit card with a credit limit of not more than 10K, this helps me to gain the real advantage of credit card (use it to so that you don’t need to keep the cash with you and useful during emergencies). So why keep those other credit cards with huge credit limits? Well they would be useful when I want to travel or for making those big purchases so that I can convert them into equated monthly installments with a small fee or to get those discounts at specific services (e.g. I get one ticket free when I buy two movie tickets on a ICICI platinum cards in PVR cinemas).
• Never buy on impulse, one of most crucial principle for money saving. The entire idea of those glitzy shopping malls and front displays is to attract the consumer and make him buy impulsively. Some people justify that impulsive buying is good sometime since you can get good bargains. I absolutely dis-agree, impulsive buying can never be good. What is the definition of impulsive buying:

An impulse purchase or impulse buy is an unplanned or otherwise spontaneous purchase. This can metamorphise into a serious disease.

• So if the purchase was not planned, it means the consumer actually do not need it and hence even if the product is free, it is a bad bargain. So it brings to another point is that when-ever you go on shopping make a list of items that you intend to buy and just stick to it. No additional purchases should be made even when it is so much necessary (it will automatically inculcate better habit of planning ahead more carefully for the next trip)
• I recently got invited to a birthday bash of a 1 year kid from my neighborhood. I was totally amused that how a 1 year kid would know at-all the difference between a small @ home birthday party vis-a-vis a lavish party in a fancy restaurant. It was an absolute useless expenditure and it was coming from the urge to show-off (I have loads of money or I care for my child etc etc) rather than a genuine focus on the child. I would rather invite only kids with their mothers in a small party at home, since seeing so many kids playing around will probably be more entertaining for the kid.
• Un-clutter your house, because clutter saps energy and money. Christopher Lowell says “Clutter is dandruff on the shoulders of your room”, so don’t give excuses for not de-cluttering your life. You need to get rid of “can’t-get-rid-of-that-because-it’s-valuable” gene, it is so harmful. check out this 9 Tips for Decluttering (Zen Habits)
• It is important to give up those harmful habits like cigarettes, alcohol or drugs. These not only save money in short-term, it also saves money in long-term by improving your health and reducing medical bills over the years. Invest that in a gym or personal improvement programs.

At every step in your life, while dealing with money, keep in mind that “Expenses have to be lower than what you earn”, and even after so many efforts in reducing your expenses you are hitting the debt, then it is time to look for earning more. That would be of-course another post.

Job Loss Insurance

Job loss always hurts, but people find ways to make money out of other’s misery. I knew about job-loss insurance being available in other countries, but recently it got introduced in India. So insurance companies are now willing to pay EMIs in case of job loss.

Under the cover extended by ICICI, customers will get their three EMIs paid in case of a job loss due to retrenchment or layoffs. Moreover the job loss due to the closure of a division because of poor financial condition or action taken by any public authority resulting in the closure will also be covered by the insurer.

Can a job-loss insurance give you a piece of mind after a job loss? I have my doubts!!

Excellent Article – Holes in the Ground

I earlier wrote about “why not to buy a house” (Part-1, Part-2). But I recently came across an excellent write-up from Deepak on a more balanced approach towards buying a house. He writes scathingly on the way builders cheat the prospective buyers:

Typical deals are: you sign on a piece of paper looking at a hole in the ground. The builder promises to give you a "ready" house in say three years. The apartment size is shown to you and the "amenities" you will get, like a swimming pool, a tennis court, water to drink, air to breathe etc. You then get a bank loan for 20 years for some part of it, and the rest will fall in place.

The most eye-opening was the youtube video by a Unitech buyer who got really pissed-off by the way the company delivered the house. This reminded me of one of my friend who purchased a flat (~1700 sq. feet) near Sarjapur Road at the exorbitant price of Rs 2350 per sq. feet. The worst it is located not on the main road, but almost 3-4 KM inside. He recently shifted with not even the compound wall completed (no question of amenities in place yet). It was shocking and I have begun to agree more so with Deepak that the best buy for a house is the one that is either “ready to move” or “second hand purchase” :

But I'll pay well to get a ready house: if I'm buying for emotional reasons I would rather not have the worry and pain.

So true!!

What to do on getting Pink Slip – Concrete Steps

One fine morning, you reach office and your manager says “Let’s talk”. You suddenly get hundreds of thoughts because these are tough times. Your manager (depends on how he handles it) gives you the pink slip. The first reaction is of-course the DENIAL. This could not be happening to me. Here are the things you should do on getting the pink slip:

• Keep in mind that pink-slip does not indicate you incapability or incompetence. This is extremely important to realize as quickly as possible, since self-confidence will open hundreds of other doors for you. A pink slip just indicates employer’s incapability to either keep you employed or to fit you in the organization. Period.
• Relax take a deep breath and discuss with your manager about
• Severance Package
• Other Policy details related to lay-off
• Thank your manager and ask him some contacts
• Call up your friends in office (if allowed to meet, do meet them), discuss the situation and make sure not to let people show mercy for you. Ask them for their help/contacts (note down their personal email address)
• The biggest mistake people do is not to discuss the lay-off with their family members (spouse/parents/kids). A family is meant to provide the moral support needed in the hour of crisis and here is one. So don’t be hesitant, you have not failed them, rather it is just a phase, so discuss it openly with them. Don’t be ashamed to talk about it and the reason for the lay-off, it helps them to understand your problems as well as a way for you to out-pour the frustration.
• Take a day or two off with your family and try to forget and think about it. Over-speculation on “why you” will lead to more frustration rather than getting any answers. It is really worthless to discuss/think on why you were chosen. Instead give your mind some peace, so as to deal with the crisis in a pragmatic manner.
• Usually it takes 1-2 days to finally sink that you have been fired. In those 1-2 days, thoughts fly at jet speed and the more you try to think or sort out, the more confuse you become, hence it is very important to take these initial few days as a vacation. It is difficult, but extremely important.
• Now start focusing on the financial aspect of your lay-off. It is not at all difficult and you need to keep telling yourself and your family that world is not about to end, rather this is the time for all family members to come together and provide inputs on how to handle the financial situation. What to do:
• List down your hard cash (at home, in banks, FDs etc)
• Do not touch the long-term investments, so don’t even think about them.
• List down the monthly expenses to extreme detail (include for e.g. toothpaste expense per month)
• Strike the items which can be done without (e.g. dining out, movies etc)
• The remaining list will tell you how much monthly money you need and how much cash you have will indicate how many months you can survive without earning.
• List down the loan EMIs, credit card balance to be paid etc. These are the items which will cost you the most. And these are the items you seriously need to re-think on “how to get rid of them”. Make sure not to panic and start offloading everything. Give yourself 1-2 months and see if you can get some job.
• Do not even think of using credit card or personal loans to tide the expenses. This is the time to reduce your debt and not to increase it.
• Start updating your resume. Also call in your contacts and start sending the resume. You can also search on google for some consultants or job search websites and upload your resume. Simultaneously, start refreshing your basics for any interview call. You need to be prepared for any sudden interview calls and give your best shot.This is the time when your networking helps you a lot.
• It is also important to understand that all work is good, just because you were earning a handsome salary of 1 Lakh per month doesn’t mean that now earning Rs 20000 per month on part time basis is a bad idea. The only thing important is that you are earning back as quickly as possible and the temporary job you are getting into is aligned to your field. As an example, if you were a software engineer, following jobs can be a good idea:
• Software consultant on part-time basis
• Teaching SW Engg in a college/training institute as a visiting faculty
• On-line software development projects or finding other genuine ways to earn money online [like documentation or creating SW training materials etc].
• You can even encourage your spouse to take up the temporary job (if he/she is not working) while making yourself available for the house-work.
• If you really ever thought of starting your own enterprise, this is the god-given opportunity. This is the time to take risk, since you can’t be worse off.
• Most importantly you need to be patient while searching for job and you have to have confidence on your own ability. Keep finding the doors which can lead you out of the crisis, it does exist!!

Stock Market FAQs

• What is a share?

Shares/Stocks are document which allows the holder to own a part of the company. This is an important definition, holding/buying a stock is just not holding a piece of paper (or in electronic form) but it is like owning a part of the company.

• Why companies sell shares?

Any company is initially owned by a single promoter or joint promoters with unlimited liability. The term unlimited liability implies that if the company goes bankrupt, the promoters are totally liable. Sometimes the company is owned by group of people (promoters & non-promoters) with limited liability.  The term limited liability implies that the owner’s liability is limited to their contribution to the initial capital.

When business expands, the owners decide to raise money. There are many ways to raise money, one of which is to approach the common public allowing them to own some part of the company for the money they will provide.

• What is the difference between debt and equity?

Debt: Similar to normal public borrowing from banks (loans). When companies issue debt instruments, they want to borrow money from specific investors or in general public. This is different from equity which is borrowing money by selling a part of the company ownership

 

Debt	Equity
No company ownership	Part of company owned by holders
Company legally bound to pay interest (similar to loans)	Company may or may not pay dividends (not called interest since it is not decided/declared)
High preference over Equity owners	Least priority

• What are primary and secondary markets?

Primary Market: The public buys the issue directly from company e.g. IPO (Initial Public Offering)

Secondary Market: The public (investor) buys the shares from other investors e.g. normal share trading (on NSE/BSE)

• What is Fixed priced Issue and Book Built Issue?

When a company decides to go public, it wants to float the IPO. This is essentially the first time the company shares will be sold and part of ownership given away to raise funds. So what should be the basis to decide the price of the initial offering?

Fixed priced Issue: The company decides the initial price of the share (taking the help from experts) and it is mandatory for the company to disclose in the IPO documents about the various factors that are being taken to fix the particular price. The price is fixed.

Book Built priced Issue: The company uses the free market to determine the initial price offering based on the supply and demand of the proposed shares. In essence, asking the public (taking bids) to decide what is the price they are willing to pay for the share.

• What is Face Value, Price Band and Cut-off Price?

Face Value: It is the value of the share printed on the share certificate. It is normally Rs 10. The importance of the face value is only for the company, in terms of the accounting entries. The actual value or price of the share is usually higher than the face value (the difference is called the premium).

Premium = Market Value – Face Value

The money generated by selling the shares of the companies are not entered in the same place in the accounting books of the company. For e.g. if the Face Value = Rs 10, Premium = Rs 90, hence the actual price that the company received for one share is Rs 100 (Rs 10 + Rs 90). If the company floated say 1 Lakh shares, then it actually received Rs 100 Lakh by selling those shares. In accounting books however, it will write :

Equity Increase (by selling shares) = Rs 10 Lakh

Reserves & Surpluses = Rs 90 Lakh

There are obviously benefits of doing this. Face value is also called Book Value and more information can be obtained from the wiki page.

In a Book Built Issue, the promoters/owners of the company decide a price range within which the bidding can happen. This is called price band. The final issue price decided by owners after the book-built process is called cut-off price.

• What is Red-Herrings Prospectus?

It is a preliminary registration statement that must be filed with the Securities and Exchange Commission or provincial securities commission. It describes the issue (IPO) and the prospects of the company.

LIC Jeevan Aastha – An eye opener article

Sandeep Shanbhag wrote an excellent eye opener article on LIC’s Jeevan Aastha. I am just re-reading it and admiring the author’s penetrating eyes to get the essential out of the marketing mumbo-jumbo.

Jeevan Aastha is a fixed-return investment plan that would offer a return in the range of 6.75% to 7.25% p.a in most cases.

Mutual Fund Tracking

Chandoo created this excellent Mutual Fund excel sheet that act as a simple Mutual Fund tracker. The USP of the excel sheet is that it fetches the MF NAVs from the website and uses that to track your funds. The problem with the excel sheet is that if you have subscribed to MF Systematic Investment Plan (SIP) then it is difficult to use the mutual fund excel sheet. So I modified the excel sheet to add your SIP investment tracking too. Here is the modified excel sheet. Here is a screenshot :

             

Here are the steps to use the excel sheet:

• Select the name of MF from the drop down list
• Enter the start date of MF SIP
• Enter the starting units (as of held today)
• Enter the amount per month

This will immediately give you the results for your portfolio. (Make sure to refresh the NAV sheet for latest NAVs).

You just need to open the excel sheet everyday. It will compare the today’s date with the MF SIP start date. If the date matches, it will automatically update the Units field (by using the today’s NAV and amount per month).