Need Help With Personal Finance Calculators? Meet Prof Excel!!

Believe me…Excel is one of the most powerful softwares you can get your hands on. But that’s only if you really understand what excel is capable of doing. I personally believe that God is hidden in one of the obscure cells of Excel. 😉

So with a tool so potent, you ought to respect someone who is really good in excel. And if he is a physicist from IIT, then you have no option but to listen to him. Even if that physicist is talking about your financial life!!

I am talking about Prof Pattabiraman and his extremely useful site FreeFinCal.

I once created a calculator for myself. And just for research sake, was checking internet for something similar. And that’s when I found Prof’s site and the calculator. I then decided not to re-invent the wheel. 🙂

As of now, I can safely point you all to Prof’s site for your needs related to personal finance calculators. And did I mention that all calculators are FREE?

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How To Become A Crorepati – The Ultimate Guide

Crore. One followed by 7 zeros. There is something about this word which puts a person in an altogether different orbit. It does not matter whether a person has a crore rupees or not. The word is magical. If a person does not have a crore, he aspires to be a Crorepati. If he has it, he wants to remain a Crorepati.
 
So ladies and gentlemen, boys and girls…
 
Please welcome the commonest of words, which we regularly come across when discussing rich people. A Crorepati.
 
It has been proven by psychologists that a person having 99 lacs does not feel as rich as a person having 1 crore (=100 Lac) 🙂
 
So assuming that you know the importance of being a Crorepati, let’s go back to our original question.
 
How To Become A Crorepati?
 
Now there are easy ways and there are tough ones. First lets list own the easy ones –
 
  • Win a Lottery
  • Marry a Rich Girl
  • Inherit from your rich aunt
  • Get lucky with your stock market predictions
  • Become the ‘Perfect’ Market Timer
  • Join Politics
  • Become a Criminal
  • Start with 2 crores ;p (It is far easier to lose money and come back to 1 crore)
Now lets see the tough ones…
 
John D Rockefeller once said – “I have ways of making money that you know nothing.” By the way, if you don’t know this guy, then you are seriously missing out on someone really important in world’s business history. He was the richest man ever. Worth more than 650 Billion Dollars (in today’s terms). That’s more than 10 times of what Bill Gates and Warren Buffett were ever worth. Do read about him here.
 
So when he said that he knew things about making money which we know nothing off, according to experts, he was referring to dividends and more importantly to the concept of compounding (read more here).
 
So can you become a Crorepati if you are not lucky, criminal, politician or an-already-rich guy?
 
I say you can. But its not easy. It is tough. It will take time. And more importantly, it might not be worth the efforts. Because, life is not just about accumulating money. But if you intend to be rich the hard way, here it is…
 
You would be required to invest (& not just save) every month for years. And depending upon your monthly contributions and expected rate of return, it can range from anywhere between 8 years to more than 22 years.
 
As far as the expected rate of returns are concerned, I have chosen 8% (Given by Recurring Deposits, Fixed Deposits, National Savings Certificates); 12% (Given by Index Funds, Good Mutual Funds); 15% (Given by ‘Very’ Good Mutual Funds over the long term). For monthly investments, one can go ahead with systematic investment plans (SIPs)offered by various mutual fund houses.
 
I did some number crunching and results are given below –
 
How to become crorepati
How to become crorepati
 
  • Assuming 8% returns (per annum), if you invest Rs 15,000 every month for next 22 years, you would reach your target of 1 crore. At 12% & 15% returns, it would be achieved in 18 and 15 years respectively.
  • Similarly, for monthly investment of Rs 30,000, years required are 15, 13 & 12 at returns of 8%, 12% & 15% p.a. respectively.
  • For Rs 50,000 per month, a crore can be achieved in 11, 10 & 9 years.
The graphs are more or less self explanatory. But the most important component of this calculation is the expected rate of return. I have taken 8%, 12% and 15%. You should understand that higher your expected rate of return, higher are the risks associated with instruments providing such rates. Please read the previous sentence once more for impact and to understand its importance. 🙂
 
But aren’t we forgetting something?
 
Have we taken care of everything?
 
No. We are forgetting something very important.
 
We have not taken inflation and erosion of value of money which it brings about.
 
One crore today is not worth one crore after 15 years.
 
So if we assume an average inflation of 7% over the next few years, today’s One crore would have following values after given number of years:
 
10 years- Rs.51 Lacs
 
15 years- Rs.36 Lacs
 
20 years- Rs.26 Lacs
 
25 years- Rs.18 Lacs
 
Never forget inflation. Never! It has a bad habit of disrupting the long term financial planning. And earlier you start your efforts to become a Crorepati, higher are your chances of becoming one.
 
And to help you with your calculations, here are a few tables which let you easily calculate the time / monthly contributions required to become a Crorepati. Click on the thumbnails to get the higher resolution images.
Calculation Table for 8% Returns
Calculation Table for 12% Returns
Calculation Table for 15% Returns
So since now you know quite a lot about becoming a Crorepati, what are you waiting for? Go out there and become one!!!

Mailbag: I am 45 years old & want to accumulate shares of good companies for next 20 years

A reader aged 45 had the following query. Though he asked the question on Stable Investor’s Facebook page, I thought it would be a good idea to share it with loyal website readers to know their views.
 
 
 
So here is his question:
 
“I am 45 years old and wish to invest in equities for long term. My goal is to create a corpus, which I may use when I’ll cross 65. Hence in which Indian companies should I invest? I plan to buy stocks of the chosen companies regularly in small quantities in “buy-and-forget” mode. I don’t want to be bothered about daily price fluctuations or viability of company’s business. Please recommend a few companies which you think would keep performing well for years to come. I assume that at whatever price I buy these stocks, I would eventually have significant capital appreciation over the next 20 years.”
 
Now this is what I think:
 
I am assuming that you are adequately insured and have sufficient money in your emergency funds. With this assumption, I would say that it is always advisable that one should invest in multiple asset classes, so that there is no concentration risk. I am assuming that since you plan to invest in the so-call-risky asset class, you already have decent positions in less risky ones like PPF, PFs, NSCs, bonds, FDs & RDs etc.
 
Now Buy and Forget kind of investing requires that you pick companies which you are sure are going to survive for next 20 years. These are companies which essentially, have a greater ability to suffer than other listed companies.
 
Once you have taken care of survival, you need to shortlist those which have a good probability of flourishing in next 20 years. Just these 2 filters would reduce the list of probable companies to less than 10-15. And that in itself is a pretty manageable number.
But having said that, I would digress a little from this topic of direct equity investment. You can, or rather should consider routing a substantial part of your planned monthly investments through index funds. You might argue that investing in index funds would eliminate the probability of picking up multibaggers, even when considering a 20 year time frame. That’s correct. But this would also eliminate the possibility of ending up with stocks of companies which might be very close to being shut down at end of 18-19 years of your stock accumulation period.
 
Now no one would want to accumulate shares of a company for 19 years, only to find that when he requires that money in 20thyear, share prices have crashed down and business is about to close. 🙁 So, I would suggest that you should give index fund investing a serious thought.
 
Sometime back, I had suggested a similar approach to two young readers who also intended to invest for next few decades! You can read those discussions here and hereBut if you still want to go ahead with a Direct-Equity-SIP sort of a program where you buy few shares of companies every month for next 20 years, you should stick to companies which pass the following criteria –
 
First
 
Provide products and services which would have increased demand in years to come and are ideally placed to benefit from India’s demographic profile over next 20 years.
 
Second
 
To meet this demand, these companies should depend as little as possible on debt and should be able to fund their expansion through cash flows itself.
 
Third
 
The companies should be run by trustworthy and proven management. You don’t want to handover your hard earned money to companies which are not run by people whom you would personally not like to interact with. Isn’t it?
 
Fourth
 
Personally speaking, dividend paying companies ring a bell for me. But you can choose not to consider this criteria.
 
So once you have shortlisted companies according to these criterias, you would have very few companies which you would like to invest for next 20 years.
 
One such company which comes to mind is ITC. You can create your own list of such companies.
 
It is always better to have a framework (structure) before you go ahead picking specific stocks. Hopefully, this post will help you in coming up with a correct framework to pick stocks worthy of long term investments.
 
This is what I feel should be done by the reader. What do you all think?
 

200,000 Hits & A new page for your Personal Finance Questions

Amid all bad news of falling stocks and rupee; and rising gold & oil prices, Stable Investor has something to cheer about. The site has received its 200,000thhit. In March this year, we celebrated 100,000th hit. Therefore, we are glad that though the first one lac hits took 16 months, the next one lac took just 5 months!!
Thanks.
To mark this small achievement, we have decided to add a new page to the site. It will be called Personal Finance Questions. You can post your personal finance related questions on this page in comments section. We will try to answer as many question as possible. Some by means of comment replies and other by individual blog posts (mailbags).

Please avoid posting questions related to individual stocks. We will not answer them.

Mailbag: 22 years old & ready to invest for 25 years!!

A young reader (Dhruv) in his early 20s asked us a question. He has 25K to spare every month. He wants to know his options if he wants to invest this money (every month) for next 25 years. As we mentioned earlier also in our previous post, we are delighted to see that people ready to commit to long term wealth building for decades and not years. 🙂
So in this post, as we promised, we will try to address our young reader’s query.
 
 
But remember, there is no perfect way. People might take different roads to the same goal. So, go ahead and do let us know of your views in comments section.
Theoretically, putting aside 25K every month for next 25 years in a simple PPF account itself would create a corpus of 2.6+ Crore. And that is without even taking any risks. These are sure-shot returns. Unless the govt. and everything else comes crashing down.
But since you are young, it makes sense to take some risks. And with time horizon which you have, many (if not all) risks of so-called risky assets can be evened out.
We don’t know much about you, your family or your financial background. We only know two things. You are ready to invest 25K every month. You are ready to do this for next 25 years. Due to lack of important information, it is fundamentally not possible (and unethical) to suggest anything concrete here. Therefore, we will make certain assumptions and then give our thoughts.
Assumptions
  1. You are ready to invest 25K every month NOW.
  2. You don’t have any liabilities NOW.
  3. Your income (salary, etc) will increase every year for next 25 years.
  4. Your liabilities will increase in future (not uniformly though). i.e., you would need to fund your higher education, marriage, honeymoon, parent’s health, property purchases, etc.
  5. Hence we assume that though your income would increase, you will not be able to increase your contribution to investments. Your investment contribution would remain fixed at 25K per month.
  6. You and your family are adequately insured.
  7. You and your family have adequate health insurance.
  8. Though glamorous, we have chosen not to include individual stocks as an asset class for your wealth creation plan. It requires effort and passion. Since we don’t know much about you, it is best to avoid it. 🙂
 
What We Suggest
  1. Before even thinking of investing, keep aside 6 month’s expenses worth of money in some liquid asset classes. You can keep it in a savings account or an online fixed deposit. These days it’s easy to make (and break) online fixed deposits when required. So this should take care of your Emergency Fund.
  2. From the 25K, you should put in 10K (8.33K to be exact as there is a limit of 1 Lac on investing in PPF each year)* every month in a PPF account. This would turn into around 85 Lacs in 25 years. Now this is separate from your and your employer’s PF contribution. Remember, you cannot touch this money before 15 years (though you can withdraw some after 6 years, let’s not get into those details).
  3. For the remaining 15K, chose 4-5 good mutual funds. As one reader suggested in the previous post, it is better to stick with index funds when considering such long term horizons. That way, dependencies on fund managers and his team are reduced to almost nil.  So you can go ahead with 3 index funds (4k, 3K, 3K = 10K). But it is also advisable to pick two well established actively managed funds (2.5K each). These funds should have been in existence for more than 10 years and should have proven the mettle in multiple market cycles. For names of such funds, check out our last post and its comment section. This 15K every month for next 25 years would create a corpus of around 2.2 Crore.
Problems which you might face in future
Now suppose that you want to buy a property after say 5 years. You would definitely be tempted to take money from this corpus which you would have created in last 5 years. Now though this approach looks sane and full of common sense, the problem would be that this would break the COMPOUNDING. Once compounding breaks and you continue to invest for next 20 years (after 5 years from now), your PPF contribution would have become 52 Lacs & MF would have become 1.2 Crore (Down from 2.2 Crore in previous case). So, you should plan your big expenses in such a manner that you long term compounding is not interrupted.
 
So how can one do this? Though it may not seem like a good idea at first, what you can do is to reduce this 25K contribution in PPFs & MFs to around 15-20K. Park the remaining money every month in some recurring deposits or income funds. This way, you would have started preparing yourself for future expenses and would not be required to interrupt compounding of your investments.


Hope that helps. Others are welcome to pour in their thoughts.

* – Thanks our reader Hemant Bhatia for bringing this to our notice.

Mailbag: I want to invest Rs 10,000 every month

A friend recently asked me about how to invest in mutual funds.
He said that he was aware of the concept of mutual funds and was ready to invest Rs 10,000 every month for next decade or so.
 
Mailbag
As a friend, I was really happy that there are still people in my generation who are interested in investing for decades and not months. I decided that it would be interesting to share what I told him with my readers too.
Before, I gave him any advice, I confirmed the following –
– He is adequately insured.
– He has health insurance.
– He has money in liquid assets to act as emergency funds.
– He is already using his 1 lac limit for saving taxes. So, I didn’t check for tax saver funds.
– He contributes to his PPF account regularly.
– He would not require this money which goes into mutual funds for atleast next 5 years.
– He is not interested in investing directly in equities.
The last one was to ensure that he was not investing in long term assets with an assumption of making money in short term. Also, anything less than 5 years may not be a good idea when discussing instruments which depend on equity markets.
I advised him to divide his 10K into 3 parts – 4K, 3K & 3K. I think 3 funds would offer sufficient diversification. I suggested him the following 3 funds to start a Systematic Investment Plan:
  1. HDFC Top 200 (link)
  2. HDFC Prudence Fund (link)
  3. Franklin Templeton India BlueChip (link)
mutual fund SIP
How to divide 10K among 3 different Mutual Fund Schemes
I chose these funds because these have been in existence for atleast a decade. Hence they have proven themselves over multiple market cycles, i.e. ups and downs.
These funds may not give the best returns among the available universe of funds. But they have historically stayed in top 10% consistently. And that is no mean achievement considering the volatile nature of Indian stock markets.
Also, these funds don’t fall as much as the market does during correction.
I also suggested that he should go for GROWTH option and not DIVIDEND payout or reinvestment one. This choice is based on the principle of compounding.
Now this approach may not be the best one or the perfect one. But it is sane, simple and easy to implement.

Unique way of investing in NSC (National Savings Certificate)

If you belong to the same generation as me (born in mid-late 80s), then chances are that you would have heard about NSCs, but would not have invested in them. But if you are of a generation prior to me, then chances are high that some of your money might be invested in this instrument.

NSC stands for National Savings Certificates. These are reliable, tax efficient (tax exempt under section 80C) and guaranteed by the govt. You can read more about it here.

national savings certificate
National Savings Certificate
So why is it that my generation is neglecting this instrument? 
 
The main reason behind this is instrument’s so called ‘lower returns’. Lower when compared to more glamorous returns claimed by riskier ones like equities, mutual funds and ULIPs. Returns offered by NSC are between 8.5% and 8.8% depending on the flavour (5 year or 10 year) you chose. But since interest is calculated six monthly, the effective rate ranges between 8.78% and 9.00%. And that is not all. Investment in NSC can be claimed as a deduction under Section 80C. Also, the interest income is tax-exempted. So returns are much higher than what it seems at first glance. And these are assured returns with almost no risk, unless the govt. decides to default. 🙂

But there is another problem with NSCs. These instruments have a lock-in of 5 years and 10 years. Now this is an extremely long period for our impatient generation. But there is a way in which this lock-in can be managed in a way that an investor receives some money at the end of every year. The approach which I’ll discuss increases the liquidity of NSCs, with a little help from Fixed Deposits. This approach reduces the return a little. But that is a price we need to pay for increased liquidity. 🙂
I’ll refer to this approach as the NSC-LADDER. We use NSCs and Bank Fixed Deposits (for initial period of the strategy) in this approach. So here it goes…
Suppose at the start of time (Year 0), you have Rupees One Lac (Rs 1,00,000) to invest. Though you are ready to invest for long term, you are not very comfortable with the lock-in of 5 years (or 10 years) and want to invest (safely) in some (reliable) instruments which have some amount of liquidity. The interest rates on NSC & FDs of different tenures is as follows – 
 
Interest Rates NSC
Interest Rates – NSC & Fixed Deposits

 

You start by dividing this one lac into five parts of Rs 20,000 each. You invest first in a bank FD with maturity period of One Year. Invest the second in a FD of 2 Years, third for 3 years, fourth for 4 years and finally fifth for 5 years.
After this, what happens is that you receive maturity amounts from respective FDs at the end of first, second, third, fourth and fifth year. The maturity proceeds are in turn invested in 5 year NSCs starting from start of Year 2, 3, 4, 5 and 6.

NSC Ladder : Click to enlarge


This is what exactly happens –

  • 1st Tranche: Invested Rs 20,000 in FD for One Year – Received Rs 21,600 at end of Year 1 – This sum is invested in NSC for 5 Years – Received Rs 32,750 at end of Year 6.
  • 2nd Tranche: Invested Rs 20,000 in FD for Two Years – Received Rs 23,545 at end of Year 2 – This sum is invested in NSC for 5 Years – Received Rs 35,699 at end of Year 7.
  • 3rd Tranche: Invested Rs 20,000 in FD for Three Years – Received Rs 25,901 at end of Year 3 – This sum is invested in NSC for 5 Years – Received Rs 39,271 at end of Year 8.
  • 4th Tranche: Invested Rs 20,000 in FD for Four Years – Received Rs 28,232 at end of Year 4 – This sum is invested in NSC for 5 Years – Received Rs 42,805 at end of Year 9.
  • 5th Tranche: Invested Rs 20,000 in FD for Five Years – Received Rs 30,073 at end of Year 5 – This sum is invested in NSC for 5 Years – Received Rs 45,597 at end of Year 10.
As illustrated above, you keep receiving maturity proceeds at the end of year 6, 7, 8, 9 and 10. These proceeds in turn can be reinvested in further NSCs of five years, maturing at end of year 11, 12, 13, 14 and 15. This system creates a Ladder-like System, where every year there is a payout. Our initial concern was that NSCs have a long maturity period with long lock-ins. This results in money getting stuck and reduction in liquidity. But this LADDER approach addresses this concern and generates cash (maturity proceeds) at the end of each year.
Money available at end of each year : Click to enlarge
Now, you can continue this ladder for as long as you like and see the magic of compounding take shape. I know it is tough to plan for 10-15 years. But here, the best part is that once you have invested Rs 1,00,000 in first year, it keeps on rolling without any further investments. Also, interest earned by NSC in first 4 years is tax exempt as it is reinvested and paid out only once at maturity. So tax benefits are immense.
So, is this product for everyone?
No. It is for those who believe in long term wealth building using stable, reliable and risk free instruments. NSC can be one of the instruments if you want to diversify your portfolio.

Pay Yourself First: What does it mean and How to do it?

Pay Yourself First. This has often been referred to as the Golden Rule of Personal Finance. So what exactly does it mean and how can you do it?


Pay Yourself First: What does it mean?

Paying yourself first means to invest or save before making any expenditures. This is equivalent of saying that you save first and then spend, rather than spending first and saving later. So when you pay yourself first, you make saving a priority.
Pay Yourself First
Save & Invest before Spending

As soon as you receive your paycheck, you should pay yourself first, i.e. Save & Invest, and then move on to spend anything. But this is easier said than done. For many people, it just seems too hard to save their money first because they feel that they have too many loans, bills and other commitments.  So how do we do it?

Pay Yourself First: How to do it?

Once you have decided that from now on, you are going to pay yourself first, it is time to take some action. And the best way to do it is to AUTOMATE IT.

  • In case you are planning to save for your retirement, ask your employer to automate your PPF, EPF, VPF deductions. In this way, you would have saved for your retirement, before even getting any money in your wallet!! 🙂
  • If you are interested in stock markets, you should make regular monthly investments (SIP) in good mutual fund schemes. This can be automated via an ECS mandate to your bank.

So, now that you have understood the concept and importance of Paying Yourself First, what is the best thing you can do right now??

ppf vpf
You Action Plan to pay yourself first.
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