Pawn - The future Queen, SIP - The Wealth creator

Chess teaches us that the smallest chess piece, the pawn, can become the most powerful one, the queen. Similarly, even a small amount of money has the potential to grow into a significant fortune.

 Just like the pawn's gradual progress on the chessboard, consistent and incremental investments or savings can accumulate and compound over time, leading to financial prosperity. This is known as compounding, where wealth generates returns or interest that are reinvested and further compounded, accelerating its growth.

 However, this journey from small savings to substantial wealth requires patience, discipline, and a long-term perspective. Just as strategic chess moves are crucial, making consistent financial choices is important too. Even though individual contributions may seem modest initially, the power of compounding ensures their impact multiplies over time.

 However, the transformation from a pawn to a queen in chess and from small savings to significant wealth is far more than just limited to compounding. Just as the promotion of a pawn to a queen opens up new possibilities, accumulating wealth opens doors to financial opportunities.

 Nevertheless, it is essential to be prudent and wise on this journey. Making strategic decisions, diversifying investments, managing risks, and seeking professional help are all vital for wealth creation. Informed choices and a well-executed financial plan maximize the potential of small savings.

 

The path from a pawn to a queen, or from small savings to substantial wealth, may have challenges. Patience and perseverance are key. Just as chess players analyse each move, financial decisions should be made thoughtfully.

To summarize, the transformation of a pawn into a queen in chess and the conversion of small savings into significant wealth demonstrate the power of incremental growth, compounding, and the potential for significant transformation. By recognizing the potential of small beginnings, making disciplined financial choices, and harnessing the power of compounding, individuals can embark on a remarkable journey towards building substantial wealth and securing a prosperous future.

 Remember, even a small amount of money has the potential to evolve into significant wealth. Start today, embrace the journey, and witness the incredible transformation as your small savings manifest into a force to be reckoned with. 

SWP – A fabulous tool for investors

Here’s how you can Understand & use SWP effectively

 

The four pillars of personal finance are Assets , Liabilities , Income and Expense.

Planning for your expenses or cash outflows are a vital component of your financial plan. Because of a range of reasons like inflation and anticipated and unanticipated exigencies regular Cash flow is vital for a smooth life. It is rightly said that in Business Working Capital is like blood to the business. Similarly it is vital for our personal finances too .

 

If you are looking for regular and predictable cash flow from your investments then the automatic choice for most of us would be the traditional avenues like bank FDs and postal deposits ( and Pension/ annuity plans if we are lucky to have planned for them) . However, the falling /low-interest rates on these schemes and inflation have made people worry about their future. The big questions are, will the cashflows it be sufficient and how long will the investment last?

 

Against this backdrop, Systematic Withdrawal Plans (SWPs) offered by mutual funds are increasingly gaining popularity and can be a great choice for investors looking to generate regular cash flow from their investments .. In this post, we shall seek to give some insights about SWPs.

 

What is SWP?

 

The SWP (Systematic Withdrawal Plan) is like the reverse of the popular concept of SIP wherein instead of investing money at regular intervals, investors withdraw/redeem a fixed amount from a scheme (in an automated way).

 

The SWP serves as a very good tool for planning for that phase in your life where you are dependent on regular cash inflows, for whatever reason. Here, the investor would typically make an initial investment in the chosen fund and then plan for SWP, either immediately or defer it to a later date. The investor has the flexibility to customize the amount as per their requirement, the withdrawal frequency, the period of withdrawal – whether fixed instalments or till the withdrawable balance is available in the fund. The investment lying in the fund would continue to grow, generating wealth for the investor, helping beat inflation and making sure that the fund lasts longer and the SWP continues for a longer period of time. The SWP is also a smarter and more tax-friendly way of withdrawing money. The growing corpus is also a good Estate Planning tool while the regular withdrawals ensure liquidity during lifetime of the investor.

 

When can SWP be used?

 

Typically SWP is a great tool to use in the following scenarios

 

1] Retirement planning /creating own pension/annuity

 

A very common use of SWP is in retirement planning. Here, a part of the retirement corpus is invested in a chosen Mutual fund scheme, typically with a mix of both asset classes - equity and debt, giving the best of both worlds. The equity is for the long term, for that extra boost of growth and the debt is usually for short-term safety. The choice of the fund category and scheme, however, depends on your needs, the risk profile, and the investment horizon, before the start of SWP.

 

2] Creating a secondary source of income

 

A SWP can also be started in situations where there is a temporary need to supplement your income, for example like the recent pandemic. If you have adequate investments, an SWP could be used to meet your temporary financial needs. Also, instead of withdrawing a big amount in one go, one can smartly use SWP to maintain some stability in your inflow .

 

 

3] Meeting specific cashflow needs for someone

 

Another smart use of SWP would be in scenarios where you invest for a specific objective/regular expense and an SWP is created to take care of that. The corpus would keep growing slowly while small withdrawal amounts would be credited to the bank account and from this, the intended expenses would be met. As an investor / donor , all you need to do you would only need to keep track of the fund balance from time to time and replenish it, if required. There can be many scenarios where such an approach can be used in financial planning. A few examples are cited below.

 

- SWP for education fees and pocket money  of Children

- SWP for monthly household expenses, etc.

- SWP for meeting regular  expenses of dependent parents

 

The right withdrawal rate :

 

This is an interesting question. What should be your sustainable or safe rate of withdrawal in order to make sure that your fund lasts for the required period of time and even longer? A complementary question would be, what should be my investment corpus to have the desired stream of money last for the required period of time? This is in fact at the heart of everyone trying to retire early and for those who are reaching retirement soon.

 

The withdrawal rate is the percentage of corpus you intend to withdraw every year. So a 5% rate on a corpus of Rs.50 lakhs would mean that you are withdrawing Rs.2,50,000 every year (Rs.20,833 monthly). Obviously, the lower the withdrawal rate and the higher the investment corpus, the better. Also, the expected returns from the fund also matter in replenishing itself and growing to finance withdrawals for a longer period of time. While a rate of up to 5-6% may be considered safe, a lower rate can help account for market volatility, uncertainties and lifestyle improvements. The withdrawal rate should be as per your need - a higher rate would mean that your corpus gets exhausted early and a lower rate would be insufficient. It also helps to invest and let the Corpus grow for some time before starting the withdrawals.

 

In Conclusion

 

SWP is an efficient tool and optimal way to plan for regular cash inflows. However, one must be careful and keep the financial objectives in mind. Remember, unplanned and unnecessary SWPs can cut short your wealth-creation journey. It is rightly said that compounding is the eighth wonder of the World and SWP is a need based tool to be used prudently. 

Lifestyle Inflation - A silent killer of wealth

 Lifestyle Inflation - A silent killer of wealth

 

Inflation is a common enemy of all in general and investors in particular. It slowly erodes your money's purchasing power. While inflation may be unnoticeable in day to day life, its influence gains considerable significance with time.

Lifestyle might simply mean, for some people, being able to live the life they want. This is a subjective thing and it means different things for different people. With rising income, we more often tend to upgrade our expenses. For example, if your income goes up by 1X times, you might spend 2X as much money on lifestyle based on your perceived improved lifestyle or social status. Thus, with time we end up in lifestyle inflation without even realising it has happened!

In this situation, when it comes to savings, you would hear people say that "I seem to earn more, but I still cannot seem to save money". Well, this is how lifestyle inflation operates!  It makes you spend more and more money to achieve a perceived higher standard of living. It can occur anywhere, from everyday expenses (like a cup of coffee) to big purchases (like buying a car). As a result, there is more money, but the problem is still the same (no proportionate savings or investments) . And that is how lifestyle inflation becomes a silent killer of your wealth.

Human desire is endless (this may seem like a philosophical statement but is actually very material and practical ) . When we reach one goal, we aim for another. It is nearly impossible to stop wanting more.

Suppose a hard-working employee at an MNC, Mr.Ashok, purchases a used small car for his commute when he starts his first job. After a few years, he gets promoted and upgrades to a new car. After a few years, that car is replaced by a new SUV. After a while, premium vehicles emerge, then better luxury vehicles emerge, and so on.

The same scenario can happen in every aspect of your life. These small upgrades may seem insignificant, but they can add up to huge expenses that can set you back financially.

A lifestyle inflation is like a hole in a tyre. You can pump air in, but you won't be able to fill the tyre until you fill the hole. Now you might be thinking, How can I fight this inflation?

The truth is, compromising on lifestyle and accepting something less than what you desire is challenging. However, if you want to maintain financial security and sustainability, you need to look beyond and take the necessary steps. It affects your self-worth, dignity, and any potential social perceptions. In this article, we will look at some strategies for avoiding/overcoming lifestyle inflation.

Don't Follow The Status Quo!

We live in an era of expectations. Many people feel the need to keep up with their neighbours and friends (The Joshis and the Joneses) . Buying an iPhone, a brand-new car or other luxuries, is not a necessity, but too many people make it one. The excitement of buying the latest gadgets can quickly fade, yet many people still spend beyond their earnings to buy these luxuries. They end up with expensive items and debt - not a good financial plan for anyone! It's important to stay goal-orientated and think about your future as well as your present. Planning your financial goals in advance can help you better determine what you need and what necessities are worth the investment. The key is staying disciplined by putting your long-term goals as a priority and regularly investing for them, so that you can have a life of financial stability that's free from debt and worry.

Consider The Priceless Value Of Your Purchase

Most people say that you can't put a price tag on relationships. That's why it's always a good idea to consider the non-monetary benefits of your purchases. For example, buying a BMW may give you some happiness, but it won't for much longer. This is a perfect example of the College time learning of the Law of Diminishing Marginal Utility . On the other hand, spending money on a family vacation for 7 days is guaranteed to provide you with long-lasting emotional benefits. Though it may be different for everyone, this philosophy will help you avoid overspending and make smarter decisions in the future.

Sort Out Your Financial Priority

Understand and identify if your goals are on track, by making a list of your needs and wants. Prioritize needs over wants to help balance your budget. Don’t increase your spending and compromise your long-term financial goals by building a gap in them. Save up for what you want before getting it! Learn and implement the difference between Good EMI and Bad EMI and Good Debts and Bad Debts. Prioritizing financial goals is the best way to ensure that you will be financially stable in the future.

If you set the financial priorities you are determined to meet, it helps to resist temptation. When you set and see regularly your top objectives, like providing for a sustainable lifestyle in your later years and a high-quality education for your children, you will consider buying a lightly used car and starting to build an education or retirement fund.

Having said this, you should also not discourage all your expenses. Just think carefully before spending and spend wisely. Be aware of your financial strength and your present lifestyle and keep investing via secured and trusted investment platforms. 

TEACHING GROWING CHILDREN ALL ABOUT MONEY

 TEACHING GROWING CHILDREN ALL ABOUT MONEY💴

Are you the one who used piggy banks🐖 in your childhood to store all the money gifted to you by your relatives? Do you also remember getting happy at unexpected big amount of money you managed to save?

For most of us, the simple piggy bank was our first exposure to the concept of savings. Today, probably in the digital age, the piggy bank is seemingly lost somewhere. The world has changed and children today have much more exposure to finances and money. Teens today are one of the most sought-after consumers for a large market, not just toys but things like clothes, entertainment, education, consumables, gadgets, games and so on. In such a world, our intent of exposing them to the basic personal finance principles and building good habits towards finance is a big challenge.

It’s time for us too to upgrade our approach. During the adolescent and character-building years of children, it becomes very important that we also build good money management habits and understanding amongst our children. The broad objectives for us as parents can be to:

1. Give understanding on the importance of money
2. Make them comfortable and confidently in handling money
3. Make them capable of managing money safely
4. Make them financially responsible
5. Develop enthusiasm for them to learn more and start saving for future

As parents who also happen to be investors, we surely can do a lot on this front with our children, especially when the usual academic education does no justice to this very critical aspect of life. Here are a few ideas on how we can pursue our objectives on money matters with our growing children…

 

Pocket Money

In many ways, the pocket money to children is not different than the salary you earn. This simple understanding opens up to a lot of things which can be done with the pocket money. Pocket money is often the first taste of financial responsibility for many people. Giving your child a set amount of money on a regular basis, as well as the responsibility of paying for something they want, allows them to good money management habit. With pocket money, we can imbibe the principles of budgeting, savings, planning for big expenses, being disciplined & responsible, and so on. So, the next time you think of giving pocket money, also think of so much more you can give along with just the money.

Budgets and Pocket Money

Understanding the value of money is crucial during the growing years. With most parents affluent today, they tend to pamper their child and fulfil most of their demands. Doing so, the child may not value money and the effort you have done to earn the same. We can always seek participation of children while planning for household expenses /monthly budgets for the family. You can also encourage them to do some household activities or tasks to earn some extra money besides the pocket money. How about asking them to properly wash your car say once a week and show how much the regular car washer is earning? With digital skills, you can also reward them for completing courses or doing some digital activities on your behalf. Making them understand the value of money will surely impact a lot of other money related behaviour.

Spending Money

There is no limit to how much children can spend today. From entertainment to dining out, to travel, to electronics, and so on. Monitoring their spending and asking them to limit their expenditure to a set budget is crucial here. As parents, we should also learn to say 'No' to a lot of unreasonable demands which children place on us. We can also help our children to learn from our own habits and money behaviour while planning our own /household expenses. So the next time you decide to a buy an phone, why not just have a random talk with your child and ask for inputs? If we show discipline in spending ourselves, the children will surely learn a lot more than preaching them something.

Working with Money

Handling and dealing with money is another great skill to have. You can ask your children to go and open bank account for themselves. Transfer a bit of money to the bank account and let them manage /handle their money digitally. You may also give them pre-loaded money cards instead of hard cash. Ask them to track their expenses online with budget apps. Having a bank account and letting your children manage it on their own is a real time skill required to be learnt soon.

Investing Money

Seeing money grow gives a very different level of learning to children. Experience is the best teacher and we should expose our growing children to some real investment /wealth management experience. Share with them how and where you are investing and let them listen to your discussions with financial advisor /MF distributor. It would be the best if we can actually open an online mutual fund investment account for your children along with a bank account and ask them to invest regularly with SIPs. Let them make some saving and investment decisions themselves and let them learn. Ask them to present and discuss with you on their investment choices and performance from time to time. Real-time experience on savings can really make a huge difference to their attitude towards money.

Being careful about money

Last but not the least, with the benefits of digital world, there is a dark side where all types of online frauds and scams are prevalent. A lot of children get addicted to games and there have been cases of spending absurd amounts on such online games. Further, with constant online exposure, children also need to be learn on how to be safe online not just with money but also with privacy and a lot of other things which are very risky. Teach them of all different types and ways of fraud, cheating, scams happening online. Digital security is something that needs to be put on the top of your list as parents of growing children.

Conclusion

As parents, we wish the best for our children and wish them to build skills, knowledge and behaviour that are essential to be successful in life. We do not wish our children to be attracted to money or materialistic life but a the same time, we should teach them how to smartly use money as a limited resource so that it does not become a problem in life. Learning the virtues of contentment, happiness, sharing, caring, self-reliance, discipline and delayed gratification are the true lessons we should teach our children beyond just money management skills. We are sure, with little efforts and planning, your children will surely be thankful to you for life for what you teach them during these growi

Mind Your Own Business (MYOB)

 Have you ever seen someone else's investment returns and ended up feeling disappointed? Do understand the importance of minding one's own business when it comes to personal investments. It's like sticking your head into a mysterious tent on the roadside, only to be smacked in the face with a surprise cream pie! It's crucial to have a long-term investment plan and stick to it, rather than getting caught up in short-term results of others. Remember, everyone's financial situation and investment goals are unique, and what works for someone else may not necessarily work for you. Trust the process, otherwise, you might end up with more than just cream pie on your face!

#StayFocused #MindYourOwnBusiness #TrustTheProcess #NoComparison #FinancialLiteracy  #InvestingHumor #BharadhwajInvestsmart  

VDO courtesy Whatsapp forward

DECLUTTER

The concept of simplicity has been emphasized by Leonardo da Vinci, who believed that it is the ultimate sophistication. It applies to all aspects of life, including relationships, work, home, money, and even the mind and heart. Decluttering is one of the most effective ways to achieve simplicity, which is the focus of this article.

The benefits of decluttering are many, including saving time, making better choices, prioritizing, focusing on what really matters, aiding memory, being consistent, and getting peace by removing complexities. To achieve simplicity, the following steps need to be followed:

1. LEARN - Learn how clutter and lack of simplicity affect the area of your focus, such as finance, productivity, or time. 

2. ADD : It would be rare that you would need anything to be added to your chosen target area of decluttering. However, it is possible and perhaps even a good time to add the most important things which you have been missing out since long. In finance for example , a comprehensive financial plan could be the one thing you are likely to be missing out.

3. PRIORITIZE : Prioritize and identify what is most important to you. What is the one thing you can and cannot live without? Organising into important and not important is an important step and you really would need to be strict here.

4. TARGET : The first step is to decide what to declutter? Since almost everything around us may be cluttered, deciding where to start is an important step. Choose an area or subject which you feel requires urgent attention and has been draining you out mentally or physically. This could be your finances, relationships or even your kitchen or wardrobe.

5. REDUCE : Reduce things that are unnecessary or hold no real value, such as consolidating investments, closing unused accounts, reducing debt, etc. Ruthlessly cut out the inessentials. 

In conclusion, Decluttering helps subtract the obvious and add the meaningful. It is important to remember that success in life is achieved when one only wants what they truly need. Few examples given above are with respect to personal finance as I found it easier to relate that one practical aspect of one’s life. 

We had earlier dealt with the same topic in our Digital newsletter

IS IT REALLY WORTH SAVING SMALL AMOUNTS PER MONTH?

 

IS IT REALLY WORTH SAVING SMALL AMOUNTS PER MONTH?

You may have heard the saying, "Little drops of the water make the mighty ocean". Well, this quote is suitable in different situations, and your savings are one of them. It's a no-brainer that we Indians have always been good savers. But with the changing times, our saving nature is also shifting. We are moving from good savers to smart investors, and saving is a vital part of the journey.

Saving money is the essential aspect of building wealth & stress-free financial future. Different driving factors have led Gen-X & Millennials to become more informative about their savings & investments. Indian youth is aiming for early retirement and financial independence in the coming years via smart investing. But too much information is passing around, raising more confusion than clarity!

Coming from middle-class background, the question of "how much money is enough to start saving or investing?" is the confusion most millennials are dealing with in their initial earning years.

Well, there are two ways to answer this question.

• First is with pure mathematics, data & facts; and
• The second is psychological.

In this article, we will discuss both.

 The Figurative Aspect (numbers):

Firstly, to be clear, there is no such thing as enough money for savings. To save, by definition, means putting aside something from your income. The amount of income or savings usually depends on the individual. So even if you save say Rs.2,000 per month from your salary, it will count and help you create wealth in future. Small savings may not seem like enough initially, but over time, they compound efficiently and contribute to growing your wealth, sometimes huge and sometimes small depending on the time given. In simple words, to save some is better than to save none!

Let us assume you are 25 years old, & your future saving scenario can be anyone from these two cases:

1. You start investing small amounts in SIP, say 2,000 per month at 25, and you grow your SIP yearly by 10%.
2. You don't invest a small amount and begin your SIP at 40. Where you are investing Rs. 20,000 monthly, and you grow this SIP yearly by 10%.

So, If you expect the returns to be at 15%, At the age of 60, you will have the following corpus:

 

Scenario	Case I	Case II
Age	25	40
Monthly Inv.	2000 (10%)	20000 (10%)
Term	35	20
Total Investment	₹ 65,04,585	₹ 1,37,46,000
Corpus	₹ 5,44,45,461	₹ 4,99,46,362
Wealth	8.37 times	3.63 times

 

As you can see, in case I, when you start at 25 with an amount as small as 2000 rupees and grow it annually by only 10%, your total investment comes to around ₹65 lakhs, but your corpus grows 8.37 times, a total of 5.44 Crore!

On the contrary, if you start investing late, say around your 40s, even with a total investment of 1.37 Cr., your corpus only grows 3.63 times, giving you a total of 4.99 crores. Now, this amount may look massive and appropriate, but if we consider case-1, it is definitely low.

In a nutshell, if you start an early SIP with a small sum and increase these deposits gradually in a disciplined manner every year, you will wind up investing less and building great wealth over time with the power of compounding. The mantra, therefore, simple, start as early as possible, even if small, but grow it regularly and let it grow bigger over time. Be patient a let the power of compounding do its magic.

So, if you also want to plan your wealth similarly by SIPs, you can refer to these easily accessible SIP calculators available on NJ Wealth Website.

 

The Psychological Aspect :

 Aside from these figurative benefits, there are also some psychological benefits of investing in small amounts.

 Helps to develop a habit of savings :

So, if you start investing small amounts from your earnings right from the beginning, you are forcing yourself to take that chunk of money from your monthly income and invest it somewhere. In this process, you develop the habit of saving money regularly, which is not easy to adapt when the world provides you with many distractions. Many people earn well and have a decent surplus, but they are unable to invest regularly because they don't have the saving habit! They have never done it before. And now suddenly they have to, so obviously they face difficulties.

 Can act as an emergency fund /kitty for spending :

Saving small instead of waiting for the 'right time' will help you save some money for emergencies. You can avoid many difficulties and life barriers by setting aside money with discipline. You can also plan for things like home appliances, gadgets, car upgrades, etc in advance with these small savings so that they don't pinch you hard at one go.

To sum up, the sooner you start, the better it is, regardless of the amount. It's never too early to start saving for the long-term. Procrastinating savings when you have enough never really works and you will never have enough till the habit of procrastinating is broken.

This article is an extract of our article published in August 2022 Digital newsletter