How to start investing in stocks?

Starting investments in stocks is not easy, especially with recent market crash, it would seem more like gambling than investment. It is well known that the greatest stock market myth is that stock investing is a form of gambling.

This can not be more untrue.

Photo courtsety J Kelley

If you want to start investing in stock market, there is a great trepidation, because it looks extremely complex. There are so many terminologies like P/E ratio, dividend yield, bull and bear market etc which imply lots of learning new things. But still you want to start quickly, because everyone seems to be making good money from stock market, except you. You do not want to be left behind right!!

So how do you start? The first thing to ensure is that you have the temperament (essentially patience and hard-work) for direct stock investing, since not everyone is cut out for it and if your are not made for it, then it is not necessarily a bad thing. You can invest in other avenues like mutual fund which can give you exposure to stock investment.

Okay, so you still want to directly invest in stocks! Great, so let us get started step-by-step on how to start investing in stock market.

Trader Vs Investor

I discussed about this in my earlier post comparing with the analogy of trader, with housing agents and investor, with end-user of a house. In short,

Trader: A trader will buy stock and sell it within a very short time to make quick profit. A day-trader tries to do this with-in a single day, while a swing trader tries to do it across several days predicting the “swing” of the stock market.

Investor: On the other hand an investor puts his money for buying a business rather than looking for short term profits. The short term for a investor typically ranges from 2-3 years with an eye on 5-10 years of investment. As Value investment guru, Warren Buffet says

Our favourite holding period is forever.

I assume that you chose to be an investor rather than a trader. So how to start investing in a stock for long term investment?

The first key principle to keep in mind is that you should equate investing in stocks to buying a house property. The stock investments need similar amount of hard work and patience that you would do for buying that near perfect house in a near perfect locality at a reasonable price with a reasonable expected growth of the price of the house. So when you invest in stocks, it takes hard-work and patience to find a near perfect stock at a reasonable discounted price with a reasonable expected growth of the price of the stock.

Step-by-Step guide to start investing in stock market

Step 1: Get yourself a demat account. The simplest way is to call up your bank, who would surely help you in getting you a demat account. You can also visit your bank website to get details. For example, ICICI bank provides the demat services.

Some more details:

Demat account can be thought of similar to your saving bank account but instead you can keep your stock shares into the demat account. There are only two depositories in India (NSDL and CDSL), but to make it easy for you, they have many depository participants (similar to bank branches) across India. Also most probably your bank will be one of them and hence visiting your bank is the simplest way to open a demat account.

With a saving bank account, you take the pain of deposit/withdrawal of your money, but with demat account you need a broker (who is member of the stock exchange) who can buy/sell shares on your behalf. Almost all banks who offer demat services would have mechanism of assigning brokers (most would open a brokerage account as well). When you visit a bank for demat account, they will by default also open a brokerage account for you with the bank so that you can buy/sell the stocks. Keep in mind that brokerage services are not free and every broker will charge you some amount for brokerage.

There are hundreds of companies/banks offering demat/brokerage services, and it is very difficult to choose the best. The choice is typically based on brokerage fees and how frequently you intend to transact in stocks. If you search Google, you will find lot of people comparing brokers in India, for example, check this link for one such site.

My recommendation: As a long term investor, the actual brokerage charges can be recovered over a period of time and hence you should choose your bank (where you have saving account) for the demat account, since they can link your bank account, demat account and brokerage account all in one. Once you learn more, you can change your broker.

Step 2: It is important that you find yourself a mentor, be it a friend, relative or even an online blogger whom you have read consistently for a long period. Tipguy is one such person. A mentor typically is a great resource who can act as a springboard for you to enter the chaotic world of investing.

Step 3: Learn through the help/demo, about placing orders from your stock broker. It is important to learn the various terminologies used while buying stocks before you start your investment journey. As an example, the long term investor is looking for “delivery based” option, which imply that the shares needs to be delivered to the demat account. Also whether you want to place a “market” order (implying using whatever market price of the stock at buying time) or a “limit” order (transaction happens only if the market price satisfies the given limit). Here is how ICICI order page looks like:

It will take some time to understand these various terminologies and you have to be patient and get help from your mentor to learn these things.

Step 4: Now that you are all set to start your journey, you need to find the right stock to buy. This step is the biggest step since it involves:

• Understanding your goals of investment
• Understanding and accepting the risks involved and potential gain
• Learning to short-list the types of business you want to invest
• Learning to analyze the business to find potential winners as per your goals and risk profile
• Putting your money into the near perfect business stock
• Reviewing and re-analyzing your investment over a period of time.
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The problem in executing Step 4 is at multiple levels including the chaotic environment created by millions of stock related websites, newspapers, magazines and the media channels. Some tips to execute Step 4 are listed below:

• Read, Read and Read the excellent investment books. For e.g. The Little Book (Rs 189 only), The Dhando Investor, The Intelligent Investor (Rs 509), The New Buffetology. Also read excellent blogs like Tipguy, Jago Investor, SubraMoney, Value Investor, InvestingValues.


• Learn to separate the wheat from the chaff. Learn to skip the various emotions generated by the media related to market crashes, specific company issues etc. It is important to be aware of the latest happenings but also important to not get carried away by it.


• For at-least two years, invest only that much amount which you are willing to loose entirely. Think of this money as a course fee you are giving for learning stock investing.


• Invest only in minor amount, never with big amount in single shot. Although most value investor talk about “big bets in small number of stocks”, to begin with you should invest “small bets in small number of stocks”. I recommend not investing more than Rs 10K for the first two years and not more than 4 stocks. In the meantime you should read, read more and understand and review your investments.


• As Warren Buffet says “Wide diversification is only required when investors do not understand what they are doing”, so keep in mind, not to invest in more than 4-5 stocks while you are still learning and as your confidence and understanding grows you can devise your own mechanism of investing and you may remove this restriction.


• Also learn not only to buy, but when to sell as well.


• Keep in mind that similar to buying a house, there is no need to time the market for buying stocks. It entirely depends on available cash with you, the goal you have in mind, your risk profile and available stock at appropriate price that you are willing to pay.


• Stock buying is a very subjective matter and depends on the requirements of the person buying, so never put your money just because someone else has done. It is much better to donate the money to a charity than buying stocks based on hot tips.

Failed to file Income Tax by the deadline, so what!

These are taxing times, especially since the Income Tax filing deadline is so near. In case you don’t know the IT-return filing date has been extended till 4th Aug 2010. So there is still hope that if you could not file the Income Tax return by 31st July, you have few more days to go.

It is said that “There are only two things in life which are inevitable : Death and Income Tax”. If death comes calling there is no escape, but fortunately there is some breather if you fail to file your income tax by the deadline.

Picture courtsey Jeremy Brooks

So what really happens if you fail to file the IT-return by the due date (4th Aug this year)? So IT sleuths are not coming to your house, nor you will be put in the jail or be asked to pay heavy penalty. Actually, nothing significant happens if you fail to meet the deadline, so do not panic at all.

When it comes to filing your Income Tax returns, the tax laws are not so stringent. Let’s first understand the terminology:

Income Year: The year in which you earn income. This year’s income you are liable for tax.

Assessment Year: The year in which you need to file the return or assess your income. The assessment year is next year of the Income Year.

Case 1: No Net Taxable Payable

Net Taxable Payable is any tax after the TDS/Advance Tax paid. In such case, there is no penalty for filing tax return till the end of assessment year.

For example: Income Year: 2009-2010 Assessment Year: 2010-2011. So if you fail to file IT return by 31st July 2010, you can still file it by 31st March 2011 without any penalty. Anytime, after that you need to pay a penalty of Rs 5000

Case 2: You have some Net Taxable Payable

If you have some Net Taxable Payable, the only difference with case 1 is to pay an additional 1% per month penalty on the Net Taxable Payable.

For example: Income Year: 2009-2010 Assessment Year: 2010-2011 Net Taxable Payable = Rs 1000. So if you fail to file IT return by 31st July 2010, you can still file it by 31st March 2011 with penalty of 1% per month on Rs 1000. Anytime, after that you need to pay a penalty of Rs 5000 + 1% per month on Rs 1000

In case you have any losses to carry forward, you can not if you do not file your IT return on the due date. The only exception is the losses due to “Income from house property”, which can be carry forward irrespective of whether you filed your return on due date or not.

It is known that IT department has started some random check on taxpayers (computer randomly selecting a taxpayer). The IT department can ask the taxpayer for proof of various income through investment, fixed deposits, stocks etc.

Consequences of not declaring miniscule income

So what happens if you “forget” to declare those small miniscule income like Fixed Deposit Interest or Bank Interest? For e.g. you accumulated an interest through FD/Saving account interest and fail to declare it to the IT department, with Rs 1000 as tax payable pending. In that case:

1) You are liable to pay a penalty of Rs 1000 – Rs 3000 (100% – 300%) of the tax not declared.

2) The interest on Rs 1000 @ 1.5% per month simple interest from the due date of tax filing to the date it is discovered that you missed declaring the income tax

3) If by adding this undisclosed income, you change the tax bracket (e.g. if your declared income falls on the border of 20% bracket and when adding this new undisclosed income you fall in 30% bracket), then additional penalty is applicable.

The interesting aspect is that most people file through CAs or Online tax websites or tax consultants. But when the above case happens with you, then you can not blame any of these agents. You and only you are entirely liable for such missing from IT return.

So don’t consider IT return filing as just another formality, take extra care to ensure it is error free.

Value Investing!! What's the secret?

The term “Value Investing” has been used and abused to such an extent that it confuses a lot of people. I have realized that “Investing” itself bring so many emotions and thoughts varying from gambling to luck to fear of losses and greed to earn quick money.

The amount of money involved is directly proportional to the seriousness of your emotion. The core principle of “Value Investing” requires emotion-less behaviour from an investor. But with so much of chaos surrounding us and TV/newspaper screaming at an extreme pitch about the “sensex” that emotions are bound to arise. If you ponder a little bit, you will realize the similarity of emotions generated by sex and sensex, the UPs and DOWNs, the fear and greed are similar, along with bringing similar sensational news in the media.

I have understood that most people who invest in stocks and looking for quick bucks rather than sustained growth over a long long period. This single biggest greed makes the stock investment risky and volatile despite the millions of theories and re-search in understanding the stock phenomenon. It needs to be repeated in our mind that “nothing in this world is free” and applies to stock investments as well.

It is important to distinguish between “investing” and “trading”, since although both involve buying/selling company stocks, but the key difference is your intention of getting involved. I would rather think of it as a difference between “buying a house for living” Vs “brokering a housing deal”. In both the aspects you would investigate a house property, buy/sell it but the intention is different. When you brokerage a housing deal, your intention lies in pocketing the brokerage amount rather than finding an ideal place to live for your customer. This is exactly similar to “stock trading”, where you are not interested in whether the company is worth investing based on it’s potential as a “lambi race ka ghoda” (long term value). As a trader you would not even care whether the company would exist even after a month. As a housing broker, would you care if the house you sell gets destroyed after one month of your deal? Surely not, with the brokerage you earned, you would be using that money to do more such sweet deals. Same with stock traders.

So what about stock investment? You would agree “buying a house for living” is a different ballgame than just being a broker. When you think of buying a house, you would spend so much time visiting the builders, visiting the sites, reading reviews, acquiring knowledge about buying (what is super built up area, how much is stamp duty etc etc). When you want to buy such a house, you would really care about the quality of the house, how much appreciation it will provide in long long time (not few months/1-2 years) and you would certainly wont invest if you get to know that the building will not exist after 10 years.

How many housing brokers you know compared to people who bought their own houses? The ratio will definitely be skewed towards people who own their houses. So it is for sure that handling a brokerage business is not everyone’s cup of tea, but this same principle people forgets when investing in stocks.

It is extremely hard to understand that the very same people who will spend so much of energy and time in buying a house for living into it, do not spend even half of that time in thinking of investments in stocks. They would rarely hesitate to put their hard-earned money into that “hot-tip” they received from friend or a magazine.

The simple reason for such behaviour is that most people do not think of stock investments as “investment for life” which they think about house investment.

The similarity between buying a house and stock investment is hard to ignore since have you seen people investing in 10 or 20 houses in a single shot, but they would not hesitate to invest in more than 20 stocks at one time.

The biggest point to keep in mind when investing in stocks is to think of “buying a business'” (similar to buying a house) and to think of stocks as an “asset building” activity (similar to buying a house) rather than a mechanism to make quick bucks. It is a myth to think that any retail investor can earn astronomical returns in a short period of time. So instead of wasting time/energy in pursuing those hot tips, read-read and understand the stock market and the philosophy you want to pursue to get decent returns. Warren Buffet has said this ”Read everything you can. Read, and then on small scale do some of it yourself. ”

If you want to be a value investor, stop watching CNBC/Bloomberg on a daily basis.

Web Hosting Fraud and how to be cautious!!

I have been mulling over moving this blog to a self hosted website. The thought came to me after seeing many awesome blogs as self hosted (like chandoo or tipguy blogs). The flexibility and control provided by self-hosting is immense (see 10 reasons to self-host a blog) and I felt it could be like moving one step further in terms of my blogging interests. Although there are people who are very popular online without any self-hosting blog (Rashmi or Rohit) but for me I thought let me research a bit on self-hosting before I move this blog.

So I started searching and found a super beginner’s guide for starting your own website. I realized that essentially I need two things:

1. A Domain Name [Similar to say Company Name]
2. A Web-Hosting Subscription [Similar to Office Space for rent]

I searched and found that there are literally millions of companies providing both the services with variety of choices, options, features, claims and rates. Also to confuse you further there are several websites providing the top 10 web hosting company lists. And after reading so many websites on how to choose the web-hosting companies if you could manage to choose some company, and if you search about the review of that specific company, you will find that there are equal number of positive and negative review comments, leaving you totally exasperated.

But the worst is yet to come. After all this (apart from sending emails to some folks like chandoo or find who-is information about popular self hosted blogs), I zeroed on to BlueHost web hosting company. I ignored the review comments and focussed on least price hosting company (I felt like gambling and thought let me taste the world of self-hosting). The one thing good about BlueHost is that they give the domain name registration free and the domain name is registered in your name. A lot of companies cheat by registering domain name in their name and then it is difficult for the customer to move away from them. Imagine you want to start a company and when you ask an agent to register the company, he did register in his name rather than yours. It amounts to blatant cheating, but who reads the “Terms and Conditions”.

One such cheating I came across when I tries to sign-up with the BlueHost company. Before I entered the credit card details, I decided to click on Terms and Conditions.

I was shocked to realize that once I enter the credit card details, the BlueHost can charge me on recurring basis unless I go and tell them not to charge. The terms indicate that all responsibility lies with me and they are legally free to charge me, if I fail to inform them that I no longer want their services.

When I searched the other hosting options, every single provider has the same mechanism, which virtually ensures that you stay with them forever. A recurring payment (also known as a 'continuous payment authority') is an automatic regular payment which is set up using your debit or credit card.

The biggest problem with recurring payments is that only the company can stop the recurring payment and you can not. So if you have to stop the payment, the onus is on you to convince the company to stop the payment. The company may put additional conditions or charges for cancellation of such recurring services. The worse is that sometimes it may not be easy for you to get the company to cancel the recurring payment.

The other aspect of recurring payment is that the company keeps your credit or debit card information on their systems for charging in recurring fashion. This may lead to privacy issues

BTW, if you think you are smart ass and can cancel the credit card to prevent the recurring charges you are wrong, since that makes you liable for legal charges by the company whom you have authorised for this recurring charge. Also if you try to tell the bank to stop payment to the company, bank will only act if you can prove that you did not authorise the company and it is a fraud. In any other case bank is obliged to honour the recurring credit card charges.

The only option for you is to work through the company by going through the cancellation policy that you probably did not read while signing up.

The one option that I think can work is to use virtual credit card (for e.g. HDFC NetSafe) which allows to create a virtual credit card with a chosen limit and validity. The other option is to use a pre-loaded card for such transactions which has a limit of transaction that you have pre-loaded. But be aware that this does not free you from the legal binding about accepting the recurring payment. It only ensures that the company has to chase you for the next recurring payment and not you to stop that recurring payment.

My Advice: Whenever using credit card (typically online), ensure to read “Terms and Conditions” specifically looking for recurring payment and cancellation policy.

As for my self-hosting journey, I need to find a company who will accept just a one time payment and do not force me to enter a recurring payment mode.

Infrastructure bonds: Some caveats

The budget this year was a low-key affair, at least from the political arena, it is just the petrol prices that is causing some stir. So apart from the tax slab changes, that brings more money into pockets of salaried employees, there is additional tax saving investment avenue that is proposed in this year’s budget i.e. infrastructure bonds.

What is announced?
The government has allowed a deduction of up to Rs 20,000 on investments in long-term infrastructure bonds. The deduction is in addition to the Rs 1 lakh allowed under Section 80C of the Income Tax Act.

What are infrastructure bonds?
These are bonds issued by government and the fund collected is utilized to bolster the infrastructure projects


What is the income tax section under which deduction can be claimed?
The investment of upto Rs 20,000 can be claimed under section 80CCF.

How much can I save?
Not much and here is the caveat, the maximum investment that can be claimed for deduction is Rs 20,000 and if you fall in the maximum tax bracket of 30%, then the maximum you can save is just Rs 6,180 in a year.

Is this a new great thing done by the Finance Minister?
Not really, the tax deduction for investment in infrastructure bonds was available till 2005 under section 88 (but within the limit of 1 Lakh), but 2005 budget scrapped individual investment limits and created section 80C where you can invest in any tax-saving avenue in any proportion. The only new thing here is that now, the investment in infrastructure bonds is in addition to the section 80C exemption.

Why it is added back with such a small limit?
Well, here is another caveat. The infrastructure bonds are a low-risk investment and hence does not yield very high returns (7-8%). So with stock market showing master-blaster performance, most people started investing in equity linked saving schemes and the investment dwindled in the infrastructure bonds. This step is probably to bring back the interest in these bonds.

What are the other caveats?
1) It is still not clear if the private companies will be allowed to issue these infrastructure bonds.
2) The budget mentions that only “long-term” investment in infrastructure bonds quality for tax-break, but fails to define the “long-term”
3) The interest earned from these bonds is not tax-free (the older section 80L, which provided such tax-free interest had already been scrapped earlier)
4) The interest earned from these bonds may not be anywhere spectacular, due to it being a less-risky investment.

What do you suggest?
So, it may not be prudent to invest Rs 20,000 for “long-term”, which provides you a return of mere 7-8% interest rate (with taxable interests) with providing just a meager tax-saving of Rs 6180 per year. I would suggest a wait and watch policy, till the clouds get cleared on this new announcement. Since anyway the investments will only qualify from next-year onwards.

Time Value of Money

You must have heard “Time is Money”, but do you know what is Time Value of Money? No… then blame the economists. I guess economists love to twist the common sense language into incomprehensible mumbo-jumbo to confuse the common junta.

(Picture courtesy Sam Fox)  Okay, here is another way to look at the this terminology: If you are offered 10,000 INR today or after one year, what will be your pick? Easy, huh. Only a nut-head would choose the later. But why? Well because money “NOW’ can be invested to earn more money later, or it can be utilized right now for any material gratification or who knows what will happen one year later!! What-ever the reason, everyone attaches some “time value” to the money.

                                                        

 

There are basically two reasons why people attach time value to money :

• Possibility of growing the money over a period of time
• Possibility of purchasing less in the same money over a period of time 

This simple concept becomes extremely complicated when we start applying this to practical situations. Here are some examples, where this concept is utilized:

1) How much is the present value of 100Rs paid after a year?

2) What is the monthly payment of a mortgage of Rs 200,000 at annual rate of 6% for 10 years?

3) If the investment scheme promises 10% annual interest, in how many years my present money of Rs 100 will get doubled?

4) In a different way,how much rate of interest should a scheme have if I need to double my money of Rs 100 in 5 years?

5) If I invest Rs 1000 for 20 years at 7% rate of interest, what is the final future value discounted back to its value today?

6) You are planning to retire in twenty years. You'll live ten years after retirement. You want to be able to draw out of your savings at the rate of Rs10,000 per year. How much would you have to pay in equal annual deposits until retirement to meet your objectives? Assume interest remains at 9%.

7) If you get payments of Rs 15,000 per year for the next ten years and interest is 8%, how much would that stream of income be worth in present value terms?

8) How much would you pay for an investment which will be worth Rs 60,000 in three years? Assume interest is 5%.

9) You are considering the purchase of two different insurance annuities. Annuity A will pay you Rs16,000 at the beginning of each year for 8 years. Annuity B will pay you Rs12,000 at the end of each year for 12 years. Assuming your money is worth 7%, and each costs you Rs75,000 today, which would you prefer?

10) You deposit Rs17,000 each year for 10 years at 7%. Then you earn 9% after that. If you leave the money invested for another 5 years how much will you have in the 15th year?

All these and many more questions can be answered correctly if you understand the concept of time value of money. If you are mathematically inclined, visit the wiki page or check out this video.

Superman syndrome

I came across an interesting term called “Superman Syndrome”. [Picture Courtesy: frazer4eos] If you try to google the term, you will be surprised by the lack of single concrete definition. You may find many books with title containing this word, but not a single definition. But each definition essentially contains a similar idea which imply:

“the concept of a supernatural ability, desire, drive to outdo and to overcome.”

It is not a positive term but rather connotes a negative meaning implying the exhibitionist attitude of a person busy in showing off and satisfying other people’s desires eventually working so hard that the person looses important things in life.

 "Life is what happens while you are busy making other plans." --John Lennon

I looked back and realized that many times in the past I have done one of the following:

1) Insisted on paying entire bill for friends at coffee shops

2) Bought cloths just because others think they look good on me

3) Purchased those expensive high-end cellphones when I went with friends, just to show-off

4) Purchases lot of junk items just ahead of  guests coming, since this may impress them

These are all behaviors of “Superman Syndrome", which essentially made me do things that are not based on prudent and realistic decisions but an attempt to satisfy other people's expectations and desires. But I was still fortunate that I did not spent large amount of money on buying house or that expensive four-wheeler just because I can impress friends, but  many do.

If you have done any of these or are still doing it, then you need to be extra careful and really need to think about why you are spending money on satisfying what other's value?

I have heard of many people complaining about busy lives, late night conference calls, 24X7 email/phone connectivity and hard life with this new information age. The entire idea is that "control of you life will come from within you",  so getting out of superman syndrome is most important task you will do for yourself and your family.

Robert Kamm writes in his book "The Superman Syndrome: Why the Information Age Threatens Your Future and What You Can Do About It,"

"the Superman Syndrome is a dangerous workplace success formula that forces men and women to leap tall buildings and outrun speeding bullets -- at the expense of personal lives, families, children and even business productivity. This represents a major hypocrisy implicit in nearly every boardroom in America: The belief that we should be accountable to work but not to our families."

Whether you spend money or your personal time or energy to satisfy what other people value most is surely a suicidal tendency towards life. If you are trapped in superman syndrome, take some concrete steps and hard actions to come out:

Actions to save your precious time which can be spent with family

1) Keep in mind that you do not need to answer that every email 

2) 24X7 connectivity does not imply getting addicted to emails and social networking

3) Work in an "interrupt mode" rather than "polling mode" with information high-way.

4) Keep aside minimum non-negotiable 4-5 hours of quality time everyday with your family, friends and kids

5) Celebrate a "no-gadget" day every week or at-least every two weeks.

Actions to save your hard-earned money

1) Keep in mind that you do not need to pay the bill every time you go out with friends

2) Limit yourself to spending not more than say 1000 Rs for impressing others, rest all purchases should be your value based.

3) Promise yourself to take that shopping list before going out for shopping and sticking to it.

4) Find other activities with friends that leads to least buying (e.g. jogging in park, going to library etc)

5) If your friends expect you to buy things for you, get new friends

6) Share "Superman Syndrome" and its effects with friends and family, spread the word and awareness

You will get, what you genuinely want. It is never too late or too early to ask for good life.

Buy Vs Rent

Tarak asked me

Don’t you think that staying in a rented house for long run (say 5 yrs) means waste of a huge amount. If you take 10k INR per month as rent for 5 yrs, then you are spending (5*12*10000) 6 lacks INR for nothing. Please share your view in this regard.

I think this is purely a quantitatively defined advantages of buying a house. This comment was prompted by my earlier posts on Why I think we should not buy a house? A quantitative study is important since it can help us provide valuable inputs before taking any significant decision, but should not be the only input. Consider this graphics (calculator is here).

You can do all sorts of calculations and try to predict which option, buying or renting a house, is better. But I think this is an absolutely wrong method of taking this important decision. There can not be one pill for all diseases and hence just thinking quantitatively can not be a solution for everyone to consider buying a house.

The Rent Vs Buy decision is far from just a simple financial calculation that most people get into, and it should be just one aspect of a well qualified decision.

A qualitative decision needs to keep every aspect of your life-style, both now and in future, with different priorities for each person. Here are some of the

1) Stress : Buying a house is never easy (building your own is much worse). As a tenant you can choose to end your tenancy at any point in time, but when you have issues in your house, either you have to keep adjusting or you need to go through the pain of selling the house and buying another house. If you are on a home-loan, the pain is tripled.

2) Freedom: As a tenant you are free of responsibilities, but as a owner you are not only financially but psychologically occupied. The psychological factor is extremely subjective and may vary from person to person.

3) Financial Imprisonment: It is said that you should not put more than 40% of your income into home-loans EMIs. In the world of uncertainties, job-losses and un-steady income it is a big investment and long term commitment which will certainly robe you of financial freedom. The money spent on home-loan EMI is tied up and it is not easy to access that money in case of emergency. As a tenant, you have more access to your own money and can be saved and spent with more financial freedom. It is a personal choice to become a grumpy old man with a large mansion who lived all life in financial constraints versus a happy man currently living in a small flat but who enjoyed all life with whatever money he earned. Also I am not disillusioned person who thinks my kids will be staying with me, when they grow up, in this house that I own when I be old.

4) Career Ambitions: I have heard of lot of folks, who entered executive MBA programs after 10-15 years of job. They use it as a springboard to boost their careers and ambitions. I also know lot of folks, who could not follow such career choices simply because they are tied up with their home-loans. Same goes with taking up another job in a different city or even in the same city (think of travel in cities like Bangalore and Mumbai), and people want to take up a job near their locality. If you have a house, you are definitely living in some constraints.

As I mentioned in my older posts as well that do not buy a house just because everyone is buying or it quantitatively it makes sense, think of other qualitative factors that can impact your life. Also buying a house taking home-loan is NOT an investment. An investment typically means, you want to grow your surplus money and not restricting your freedom to gain a white elephant. Here are the conclusions I wrote in my earlier post

Conclusion:

• Buy a house for living it in you old age.




• Don’t expect your children to stay with you (unless you keep them dependent on you)




• Don’t just buy because everyone is buying, think long term, where you want to settle in your old age. Timing and location are extremely important.




• Buy a house which you can maintain. In old age, it is difficult to spend huge money on maintaining big house. Security is also a concern.




• There are so many investment avenues other than house, think about that. In old age, big house won’t help, but surely the life long memories of your world travel can help. Spend money to enjoy life, and not to get imprisoned by the enormous house loan burden. Strike a balance.




• Keep accumulating small portion of money and buy a house when you are in your forties. At that age, your will be at the peak of your responsibilities, you can have your priorities clearly laid down.




• If you have loads of surplus money, then only buying a house makes sense as investment.

Please Vote for GIVE Foundation

As per the GIVE India Website “GiveIndia is a NGO that raises funds for the poorest of the poor in India by helping you donate money to 200+ trustworthy charities.” 

 

Chase Community Giving is having a facebook competition for voters to select the charity that will receive $1 MM.  Please vote for Give India.

It actually took me less than 5 minutes to vote. These 5 minutes may make a significant difference to some people.

Please check out the video

Why can’t we handle Personal Finance properly?

I came across this post from Ranjan asking “why can’t we handle Personal Finance properly”? The reasons he mentioned sounded very superficial to me; they are just shallow in my opinion (with all due respect to Ranjan).

As per my understanding, “Personal Finance” implies detailed analysis of financial flow of an individual at various point in time. Please carefully note that Personal Finance is not synonymous to having knowledge about stocks quotes, mutual funds, insurance or pension policies.

The single biggest reason why we can not handle personal finance properly, is because from childhood we are never taught to think about money in that fashion, making us believe that it is a materialistic entity that is just a means to satisfies our immediate material needs. 

How many people remember their first lesson in personal finance or handling money given to them during childhood? I remember, the first time I was given money (it was 10 paisa), which I could independently spend, I rushed to the near-by kirana store to buy that juicy candy bar. When was the last time your parents tutored you on personal finance and importance of setting financial goals? (I am not talking about parent pestering for buying property etc). Also whatever limited parental advise that most youngsters receive regarding personal finance is based on their personal experience at burning their hands with specific financial tools.

In India, at the least, I’ve never heard about creating personal financial goals from my parents and I have not met anyone whose parents told them about it. In effect, people start accumulating their debts and then the financial situation blows out of proportion. I guess, they themselves never heard about it from their parents and did not find it important enough to be delivered to their off springs.

The biggest confusion among most people regarding financial planning stems from the fact that:

• They fail to understand their financial dreams
• They fail to prioritize and reach their dream financial goals
• They fail to learn and make the strategies either individually or using some professional advisor to achieve their goals.
• They lack the persistence to transform their dream goals into reality by executing and re-aligning their strategies.

And this confusion is carried over from them to their next generations and generations. Unless people realize that managing personal finance involve setting goals, creating strategies to achieve those goals and sticking to it, Personal Finance will remain an arcane and unmanageable subject.

Legal Guide For Indian Bloggers

I came across an astonishingly detailed guide for US bloggers on the legal issues that a blogger can face due to various acts. It clearly mentions that the guide is exclusively for US bloggers since there is strong constitutional protection for speech. I tried to search a similar guide for India and failed to find anything useful. With the advent of social networking, blogs have become an extremely viral media, so apart from the financial risks of social networking, there are definitely legal issues for any public dissemination of information including blogging.

(Picture courtesy Over the Top of NY)

India has been typically laggard with respect to cyber laws, not only in implementation but unambiguously defining it as well. One of the biggest reason I would assume would be that law makers themselves may not be able to keep pace with the fast changing technology. The first indian IT law was introduced in 2000 called the IT Act 2000 [Summary Slides from IIT-M - PDF]. This act was further modified in 2008 The Information Technology Act 2008.

The pertinent question is “Why blogging cause legal issues?”. The problem is the extremely viral nature of blogging, since it has now become more ubiquitous with millions of people getting influenced by what they read on blogs.

I would provide you a real world analogy. Let us say you bought a product from Company X, unfortunately it turned out to be a junk and useless product with not keeping up to the promise that was given before you purchased. You go to the customer care or their office and nothing happens, no-body listens to your complaints. But instead of “chalta-hai” attitude you decided to tell it to few of your close friends and let them be warned about it. It is still fine with the company, but now imagine you called up a public meeting and started talking about your rough experience with the product. Initially there might be just few of your friends but slowly hundreds and thousands of folks joined your meeting and started getting warned about the junk product and the pathetic customer service from Company X. That is illegal, you just de-famed the Company X.

This is exactly what happens when you blog. You are disseminating information for public consumption which can have significant influence on people either in their behavior or opinions about something. The first indian blogging controversy happened for exactly same reason.

It is so difficult to read through the mumbo-jumbo of legal laws, as Mark Twain rightly said

Only one thing is impossible for God: To find any sense in any law on the planet.

So how do bloggers (just about anyone with internet connection can become a blogger) keep themselves safe from the legal wrangle? Here are some simple DO’s and DON’Ts that will help any blogger to avoid cyber law (typically applicable to Indian bloggers):

• When in doubt about any post violating any legal law, just don’t publish it. It is better to be safe than to be sorry.


• Do not write “hate messages” against popular personalities especially political people, you might get caught by police like Nitin Sajja from Hyderabad or Rahul Krishnakumar Vaid from Gurgaon.


• Do not write “derogatory remarks” against organizations which Ajith D learned the hard way. A similar tamasha was done by Shiv Sena for anti-Shivaji Community on orkut (TOI 1, TOI 2, Rediff 1, Rediff 2, NDTV, Financial Express). Some of the interesting articles that criticize these are by Amit Verma and Sevanti.

The ultimate expression of a government’s lust for power lies in a term coined by Orwell in 1984: thoughtcrime. Thoughtcrimes are thoughts that have been criminalized, and if the technology to detect emotions existed, It is not unlikely that the Indian government would ban hatred. Or, at least, hatred of things that it deems should not be hated.

• Do not write negative comments about any religious personality, deity or organization.


• Do not criticize any company’s products or services. You may not like the product or services but publicly criticizing it for spreading the word is not the right way. If you absolutely have to do it like a review of a book or movie or mobile phone, please put a disclaimer mentioning these are your own personal thoughts with no legal liability on you. Defamation is extremely complicated subject in the books of law, and so is proving your innocense.


• Do not post pornographic material including anything slightly sexually explicit (especially pictures or videos). It may be just a fun video or fun pictures for you, but it can hurt someone’s sentiments and hence an absolute NO NO.


• Do not publish any confidential information from within your company. I would suggest do not post anything related to what you do within your company (unless you own the company and want to promote it through blog). Any information on what you are currently working on or what are the future releases or any inside information say company want to layoff people or planning to acquire any organization, absolutely everything is confidential. This information is typically governed by trade secrets which are complicated.


• Do not plagiarize. If you copy paste the text from another website or you copy that beautiful picture or video without the consent from the original author and publishing it without providing the link to original source, then you are plagiarizing. One of the biggest and innocuous way of plagiarizing is to search that image you need from Google Images or Flickr and put it in your post without bothering about copywrite issues. You should only use legal pictures from flickr or any other website for your blog posts. Also it is illegal to edit the pictures or videos (removing watermarks or just any editing action like cropping) that you downloaded without permissions and then publishing it. Note that small actions can lead to copywrite violations.


• Do not publish any data, numbers, figures, charts that you do not own. Always reference to original source from where you found the data. If you do not have the original source, stop and do not publish it.



• Do not share private information about anyone you know without his/her permission. So you went with your girl friend on that famous beach and posted those pictures without asking her, think again. You just gave your friends contact details or wrote that caustic remark providing private details of the person you hate, beware you are surely violating privacy laws. I would advise not to even post edited pictures of film celebrities.



• But if fate decides to screw you, it can not be avoided similar to when it caught Lakshamana Kailash and what he got is 50 days with 200 under-trials at Yerawada Jail, finally ending with a “sorry” from Police and Airtel.

Read some more interesting posts like “Bloggers and Defamation” and “Restricting Freedom with Excuses of Responsibility” on this issue. Here is an interesting video on this subject.

Please note that this list is not exhaustive (and definitely not legally scanned and is not a substitute for legal advise) in nature but just the common sense approach to avoid any legal issues. Just to be on safe side, here is the disclaimer, that this list does not guarantee avoidance of law-suite due to material published by you, so I would not be liable for any damages :-)

Credit Card Visual History

Source: The Big Money

The first credit card was created, as you would guess, due to an embarrassing situation faced by Frank McNamara, while eating out at a restaurant. When the check arrived, he realized, he did not brought his wallet. This gave birth to Diner’s Credit Card.

Then came the BankAmericard from Bank of America. The earlier versions were flimsier and hence American Express came up with first real plastic credit cards.

 

Then came the credit cards with all its variants since various players saw a great business opportunity.

Check out the The Big Money for the entire pictorial history of credit card.

Another interesting video that presents how the American credit card industry became so pervasive, so lucrative, and so powerful.

This is a video from Frontline - “Secret History of the Credit Card (2004)”.

I could not find the history of credit cards in India, but it looks like that Central Bank of India, launched the first credit card in India called “Centralcard” in the year 1980.

It would be interesting to know if we can get hold of the picture of the first credit card that was launched in India. Anyone?

Super Tips to increase your debt

Yep! you read the title correctly. So you want to live your life King Size, in a royal fashion with the meager amount of salary that you earn (peanuts huh..). Here are some of mind-blowing tips to spend you money faster than you can blink your eyes:

• Never read money saving posts or weblogs which may contaminate your mind towards efficiently managing your personal finance. These are evil!!
• Spend more than you earn. This is not the “common sense” approach, but who needs any sense, common or uncommon. And if you are struggling to meet your ends every month, then you are just about learning this art. Keep it up.
• Never pay your bills on time. Would a royal king in older times, bother himself engaging in such mundane tasks, like paying those insignificant telephone or electricity bills on time? It is for those mere mortals, who would setup email reminders or use those large desk/wall calendars with sufficient space to write notes and remind themselves of paying up these irritating bills, month after month, on time, thereby saving those tiny-miny amount on late fees. Such money-saving tips are a kill-joy for living life royally.
• Never worry about emergency fund. What is the use of the money lying idle when it should be running around with you in shopping malls. Some crack-pot websites urge people to keep six months of expenses as emergency funds Why should you worry about keeping such a huge amount, since you will never get hit with any emergency. Those nasty accidents, job-loss (Job loss insurance, OMG) or sudden illness happens only to others and not to you. So why bother about emergency funds?

• Never pay-off your credit card debt. You should keep a poster of John Biggins of the Flatbush National Bank of Brooklyn, New York and make him your GOD, since he invented credit cards. This is the greatest invention of man ever (forget fire, wheel etc). I bet that humans would still love credit cards even if it would have been invented during the stone age. Why credit cards are so addictive: 

• You do not need to think, how much your bank balance is, just think how much credit card balance exists on credit card. It makes it so easy to remember, even if you never done any math subject in your life.
• Also credit card companies are know to be generous enough to increase your credit card limit over the period of time sometimes without intimation. But isn’t it a pleasant surprise to suddenly find, during an impulse buying that your credit card just worked when you thought the limit has been crossed.
• You can have as many credit cards as you want with so many flavors and banks. Just look at in India and you have so many choices of type of cards.
• RBI has so many regulatory rules for credit card issuing banks that you are very safe. It has been seen on so many occasions that credit card companies flout these rules and also charge exorbitantly, but these are just small blemishes spread by the enemies of credit card industry.   Here is an example on how credit card companies make money.
• Buy on credit card and pay a meager amount monthly. This is called revolving credit and it is a revolution. Some people try to scare you with revolving credit maths, like this, but you can safely ignore such realities.

  Let us take a simple example. If you are spending Rs 30,000 every month and repaying half of it, you end up spending Rs 3.6 lakhs in 12 months. You pay back Rs 1.8 lakhs and owe the bank Rs 1.8 lakhs. But what the bank wants back is 40,000 rupees more than what you've spent...and keep this going for another year…this will become a runaway figure...On the same amount of Rs 30,000 spend, if you take it really easy and pay back only the minimum due, that is Rs 1500 a month, you will owe the bank Rs 2.3 lakhs. The bank will demand back, Rs 3.5 lakhs back from you and that’s Rs 1.2 lakhs more than what you've spent. Keep compounding this and you can fairly figure out where this could go.

• Credit card can get you cash from ATM if needed, what if they charge so much extra on cash withdrawals, think of the flexibility.
• Credit cards also offer rewards to customers (see here and here), although very few people diligently and consistently try to re-deem those reward points. But isn’t it so nice of credit card companies to offer rewards, which we do not redeem even when it can lead to significant saving, but that is just a small niggle. It is a supreme gesture from credit card companies.

• Impulse buying is the name of the game. We are talking about folks who are obviously above “roti-kapada-makan”, the basic necessities of life. So what good your money would be if you can not spend it when you feel like buying something. It is separate matter whether the thing you buy has any real value in your life but why worry about it? If you got it, flaunt it and if you haven’t got it, credit card will help you flaunting it. 

• Planning your money is insane. Why waste time and energy into something which is inherently unmanageable. If big companies like Satyam or Dubai World can not manage it, how would you? As you must have heard that “Money is the root of all evil”, they why keep the evil with you or try to manage the evil, get rid of it as fast as you can and you will be happy. So turn deaf when you heard words like tax-planning, investment, saving, retirement planning etc. You obviously want to turn religious during old age in post-retirement life  (to repent all your life’s sin) rather than having crores of evil roots with you.

So if you follow this advise, this is a sure-shot way to leading a luxurious life. The one lifetime you have, live it King Size.

PS: This post was written in humorous jest, so if you seriously follow the advise, you would not have enough money even to sue me for wrong advise. So get real and serious about your money!!

Is peer pressure leading you to debt?

 

[ Source ]

Your friends and peers influence your life. Wikipedia explains that

Peer pressure refers to the influence exerted by a peer group in encouraging a person to change his or her attitudes, values, or behavior in order to conform to group norms.

Peer pressure often starts at very early stage in life and it never stops. The term “peer pressure” has come to connote a very negative thing (as the cartoon above indicates), but it can be a significant positive force also. (example1, example2)

There is no doubt that everyone needs a peer group to act share one’s emotions and feelings. But, the problem begins when one starts changing their behavior or act according to peer group, just to remain “fit” in the group. This is also a very common complaint from parents, when confronted with un-acceptable behavior from their children.

The most vivid memory that I have of dealing with peer pressure is during my college days. I come from a poor family and it can be easily seen from my cloths or my bi-cycle wherein my classmates used to come dressed up impressively or in their two-wheelers/four-wheelers. I felt extreme pressure to match up but never had the money, and so I could never “fit” or got accepted into the peer group.

I recently shifted to a new apartment (just few months back) and started interacting with my neighbors, and I realized that there are many folks who have a habit of “showing-off”, making them prone to financial debts. So their wives will sport an iPhone, spend Rs 2500 on window-shopping randomly every week, esp on apparels (and despite that they dress shabbily), keeping a full-time servant, chauffeur (without any real-need) or commuting daily by cabs (wouldn’t it be cheap to own a car) or spending evenings in lavish restaurants (I know for sure that these are not their company paid facilities).

The motivation for these actions is not any real need but peer pressure to fit in the group. If we are surrounded by people who are rich (or showing-off that they are rich), then we would also feel the need to upgrade our cars, cloths or throw lavish parties. The whole problem with why we succumb to peer pressure is because we feel the need for acceptance.

Peer pressure can lead to significant waste of money and it's not just ourselves who we have to worry about. If you have a partner or children you'll also suffer financially whenever they come under peer pressure. So at one end you may want to reduce your monthly expenses but on the other hand you may be forced to spend unnecessarily on useless things just to satiate your family’s emotional needs, so they be part of some crappy peer group.

It is extremely difficult to fight peer pressure, since it can come in from variety of ways:

• Keeping up with others in terms of buying big cars or expensive plasma TVs or mobiles
• Impressing your girl-friend/wife/in-laws in terms of expensive gifts to justify your love or caring not only to the concerned person but also to everyone in your peer group.
• One of the biggest pressure for newly married folks comes in the form of this question, “So where are you going to honeymoon?”. Most folks will burn-out their entire saving just to mention that they went to Singapore/Bangkok (crowded place) rather than an idyllic Kerala/Darjeeling.
• Buying bigger houses just because everyone in their peer group has bought a house. This is especially true in Bangalore, since most people coming here are in some kind of strange hurry to own a house. It is termed as “biggest investment of your life”, even if it turns out to be crappy decision. I totally oppose it.
• Sending their kids to expensive schools (I was aghast when I got to know that my neighbor’s one year kid goes to a school whose fees is 15 lakhs a year) or throwing a totally unnecessary lavish party as a show-off. How can a one year kid distinguish whether his birthday was celebrated in a high end restaurant or their own house? The consolation given by parents – I want to give my kid the best I can afford. Duh.

So how to handle peer pressure and how to stop yourself from bleeding financially? How to stop accumulating debt by resisting peer pressure? Here are some pointers

• Stop worrying about what “others think about me”. Others are probably busy thinking the same thing and don’t have time to think about you.
• Trust your own instincts rather than following the herd. If you are convinced about your choices and reasoning behind them, then stick to it. You can only decide what is best for you. You should have the confidence in what you believe and the boldness to stand for it.
• Recognize peer pressure. If you are trying to spend money on something, ask yourself critically, as to why you are buying it. If you really need it, then only go ahead with the purchase.
• Be absolutely clear about your monetary priorities and be honest discussing it with friends. Remember that everyone’s priorities will be different, so there is no “one fit for all” solutions in financial world.
• If some friends are just putting pressure despite your resistance, then ignore them and find new friends. A friend who does not care about your opinions is not worth friendship.

Remember that if you don’t want to get under any peer pressure influence, try not to put anyone (especially your friends) into it as well.

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!!