HAVE YOU MADE YOUR WILL YET?

 

The Covid pandemic made us realise the fragile nature of our lives. It has changed us in more ways than we can imagine. It has also made us think of our plans in face of uncertainties of not just income but also of our lives. The need for estate planning and succession plans was also felt by many. Not surprisingly, Will writing saw a significant rise during this period. To look at it differently, it perhaps took a pandemic for people to realise the importance of having a Will and to ensure that it is kept up to date. In this context, we shall talk about the importance, benefits of writing a Will and the consequences of not doing so. We shall try and avoid getting too technical or using legal terms here and instead focus more on the context and encourage you to learn more about it at the end.

Who should have a Will ?

If you are wondering if you really need a Will or not, let us ask two questions - are you an adult with a sound mind? If the answer is yes, you should be eligible to write a Will. Next, do you have any of the following:

• Savings, investments, bank accounts, etc.
• Own business /share in a business
• Own property, movable or immovable assets, jewellery, etc.
• Insurance policy
• Children
• Any dependent parents, relatives /siblings, etc.

If the answer to any of the above is yes, then you "must" have a will. Period.

There is a myth that a Will is only required by wealthy people or people who have huge assets or businesses. This is a complete misconception and in fact, a Will should be prepared by any person who falls in our criteria, irrespective of the quantum of savings or wealth you have. In fact, even if you do not have any of the above but you do have any wishes, owe any money to anyone, any last desires as to how you should be cremated or any such wish, a 'will' document should be on your agenda. There is also a myth that the appointment of nominees is sufficient and then there is no need for a will. Please know that in most cases, nominees are just trustees, custodians of assets to be distributed to legal heirs - who can be either chosen in the Will or as per law. They may only be entitled to receive the amount asset but are not entitled to own it.

What is a Will ?

Simply put, the Will or 'Vasiyat' or a 'Testament' is a legal document that communicates a person's last wishes specified before death. This can be a confidential document kept with a trusted person and which shall be made known post your death. It can be made to cover a lot of things, including but not limited to the following.

• How your own assets /properties /possessions will be distributed and/or handled
• How any minor children /dependents on you should be taken care of (guardian)
• How the share of minors will be handled till they become adults
• Any liabilities you have and how to settle the same. Also, include details of debt owed to you.
• Any wishes on how you should be cremated /last rites held
• Any wishes you have which can be carried out by your family
• Record all your assets, liabilities, etc at a single place ensuring nothing is missed by family
• Residual clause to manage asset left out
• Share details of key persons who manage your affairs
• Appointment of an Executor to administer the estate (management of all accounts and affairs)

 Benefits of making a Will :

There are many benefits of writing a Will and a lot will depend on how well you draft it. The main benefits can be as follows...

• Distribution /administration of your wealth /property as per your own wishes and not as per law.
• Smooth, faster and cheaper way to settle/distribute your estate.
• Avoid legal hassles, paperwork in difficult times. Quick settlement also helps ease financial troubles.
• Add a beneficiary who would have never been covered under the law. Note that a father is not amongst the first class of people to receive estate under Hindu Succession Act!
• Ensure the safety and security of your dependents, especially old age parents /children
• Protect your business as you would have wanted it
• Share details of all your accounts /assets /liabilities
• Help avoid disputes and fights between family members

 What happens when someone dies without making a Will ?

Simply put, for people who die 'intestate' or without a valid will, the law will follow its own course and this may not be to your liking. If there is no will, the property will be distributed according to the personal law of the deceased. The Indian Succession Act is diverse and states different laws of inheritance for different communities. We will not talk about the same in detail here but would encourage you to explore the same in detail and there is a possibility that you may be surprised as to what may be in store.

Further, all the benefits listed above will be lost in the absence of a Will. The amount of legal hassles and troubles your family may undergo at the time of bereavement to settle /transfer your assets will further add to their miseries. In case it is a big family, again there might be disputes in the family regarding the distribution of assets, especially things like property and business. All this could have been easily avoided.

Some things to be kept in mind :

The following are a few key things we think are important to know about wills.

• A Will should be written of free will, voluntarily by an adult of sane mind and with a clear intention.
• The language should be clear, easy to understand so as to avoid any confusion or disputes. Proper details of all accounts, properties and parties, etc. should be clearly mentioned.
• Shall cover only the property owned/created by the person and this does not cover inherited property
• A Will can be in any format, language and be written even on a simple page. However, it is highly recommended that it should be properly drafted in a legal format, covering all standard clauses to avoid any disputes. Formats are easily available online and there are even online websites offering the service.
• A Will should ideally be signed by two or witnesses and this does not include the beneficiaries under the Will and
• Registration is not mandated but recommended. There is no stamp duty and very nominal /token registration charges.
• Will should be kept updated to reflect any changes in property, family composition and so on. The Will can be changed/altered by a document called 'Codicil' which is considered as a part of the Will.

 Conclusion:

In most cultures, a Will is a taboo subject, not talked about and even avoided as a bad omen. Isn't this ironic that the same is not felt when buying life insurance when the event in question is the same? We see both things going together and part of the same coin. A Will document is not to be seen as just any legal document. It should be seen as part of your legacy and your expression of your love and feelings towards your loved ones. It is high time that it is also seen as a moral responsibility towards your family just like buying a life insurance policy. As part of succession planning, it should also be considered an integral part of your financial planning. In the end, let us ask you one last question - Have you made your Will yet?.... We leave the rest to your wisdom now.

This post is an extract from my November 2021 digital newsletter . . 

TOP BEHAVIOURAL BIASES IMPACTING INVESTMENT DECISIONS

Investment or financial behaviour and actions are driven by how we think. Knowingly or unknowingly, a lot of factors impact our decision-making. There is an entire field of study known as behavioural finance which is the study of the effects of psychology on investors and financial markets. It focuses on explaining why investors often appear to lack self-control, act against their own best interest, and make decisions based on personal biases instead of facts.

To be a successful investor in the long term, it's highly important to understand and overcome the common psychological biases that typically lead to poor investment decisions and mistakes. Most investors are likely to be influenced by these behavioural biases as they are hard-wired in the subconscious. Even the best of investors sometimes tend to take shortcuts, oversimplify complex decisions and be overconfident in decision-making. A better understanding of your biases will lead you to make better decisions, help you lower risk and improve your investment returns over time.

Following are a few very common yet key behavioural biases that usually leads to a bad investment decision:

Confirmation Bias :  It is a human tendency to seek or emphasise information that confirms an existing conclusion or a decision. Confirmation bias leads to investment mistakes as investors typically get overconfident because they keep getting data that appears to confirm the decisions they have made. Overconfidence can result in a false sense that nothing is likely to go wrong, which increases the risk of being blindsided when something does go wrong. To minimize this bias, one should attempt to challenge the status quo and seek information that causes you to question your investment opinions.

Information Bias : Information bias is the tendency to evaluate information even when it is useless in understanding a problem or issue. Investors are often bombarded with unimportant & useless information every day, from financial commentators, newspapers and stockbrokers, and it is difficult to filter through it to focus on relevant information only. In general, investors tend to make superior investment decisions if they ignore short-term market movements and focus on the long-term prospects for the underlying investments /asset class and look at their exposure in comparison to those long-term prospects. By ignoring routine market news, investors can overcome a dangerous source of information bias in the investment decision-making process.

Loss aversion/ endowment effect : It is a tendency for people to strongly prefer avoiding losses rather than obtaining gains. Whereas the endowment effect occurs when people place a higher value on a good that they own or have owned than on an identical good that they do not own. Investors refusing to sell loss-making investments in the hope of making their money back is the classic example of the loss aversion or endowment effect. This bias breaks a very important economic rule i.e. the measurement of opportunity cost. To be successful in investments over time; always measure the opportunity cost properly and not be anchored to past investment decisions based on the inbuilt human tendency of avoiding losses.

Bandwagon effect or herd behaviour : The bandwagon effect or herd behaviour describes gaining comfort in something because many other people do (or believe) the same. Speculative bubbles are typically the result of herd mentality. To be a successful investor, you must be able to analyse and think independently, which includes finding no comfort in the fact that other people may or may not agree with your decision. The simple solution is to be objective, factual, grounded and open-minded and not get influenced by fear or greed.

Anchoring Bias : Anchoring bias is the tendency to rely too heavily on or anchor to a past reference or one piece of information when making a decision. Anchoring bias can be hugely damaging to an investor’s research process. From an investment perspective, one obvious anchor is the recent share price. Many people base their investment decisions on the current price relative to its history. Unfortunately, where a price has been in the past presents no information whether a stock is cheap or expensive.

Familiarity Bias : Generally, we prefer things - be it food, people or places which we are familiar with. We like to stay within our comfort zone and hate change or new things. For example, a person investing in traditional investment products like bank deposits takes time to accept equities, even though it is in his best interest. Unknowingly this can push investors away from rational investing where they would prefer asset classes and underlying products of names /industries they are familiar with. In investing parlance, the familiarity bias dissuades us from investing in other assets or investment options that we are not familiar with.

Sunk Cost Fallacy : People often demonstrate a greater tendency to continue an endeavour once an investment in emotions, time, effort or money has been made. This is true when it comes to not just relationships, career, business, etc but the investment choices we make. This is the reason why are we likely to continue with an investment even if it would be rational to give it up. We become attached, we do not cut our losses, and instead, throw good money after bad while refusing to make the rational decision and make good of better opportunities.

Conclusion : The above are only some of the behavioural biases which are frequently quoted in literature. Through experiments, researchers have identified an enormous range of cognitive biases that can apply to financial decisions. For us as investors, we should accept the fact that much of what and how we think is being driven subconsciously by our psychology. These behavioural or cognitive biases, tendencies impacting our financial decision-making can potentially make or break our dreams. There is no doubt that investment behaviour and decision-making is at the heart of investing and the biggest factor for your success.

As wise investors, we should learn more on this interesting subject and aim to control or eliminate these biases, emotions from our decision-making over time. Financial decisions must be factual, data-driven and purely on merits rather than being impacted by anything else. Over time, we should all work towards establishing logical decision-making processes as we mature in our investment journey. The focus should be on the process rather than on the outcome. In the words of Warren Buffet, “investing success doesn’t correlate with IQ after you’re above a score of 25. Once you have ordinary intelligence, then what you need is the temperament to control urges that get others into trouble.” Simply put, it is not the intelligence or knowledge that matters for success – it’s your behaviour that will be the deciding factor.

The above post is a extract from my digital newsletter of December 2021

HOW MUCH LIFE INSURANCE COVER DO YOU NEED?

A lot of people go through their entire life without even understanding what life insurance is all about. There may be several reasons for this. The most common being that they would not be informed by the right person of the facts. Even if a person has been likely approached by a person (say insurance agent), there is every chance that you may have got inadequate information so that you could be sold what that person wanted rather than what you may have needed.

Insurance is perhaps the only product where you create an asset against a possible risk. Life insurance is nothing but a provision for providing for the financial future of your family in such a way that your absence does little or no financial harm to your family. The very critical element here is the amount of cover. Your life insurance policy cover should be adequate to provide for your family in your absence. In this article, we will attempt to give you some quick methods to estimate the same and give you some understanding and perspectives on calculating this cover amount.

One cannot pinpoint the exact amount of life insurance one needs. But there are many methods of arriving at a sound estimate for your coverage requirement. Here are a few ideas to let you start thinking...

Universal Thumb Rule:

This is a very simple and straight forward method. Here we would simply use a multiple of say 10 times and consider the gross, pre-tax income of the person being insured. Assuming a gross income of Rs.15 lakhs yearly, the insurance need would come to be of Rs.1.5 cores or between a range of 1.2 crores to 1.8 crores. The reason we use this is that it normally gives us just enough amount to meet the regular household needs for the family. However, a lot depends on the financial situation of the family/person.

Income Replacement Method:

There is another small variation to the universal thumb rule. Here we would consider the number of active earning years remaining, instead of a random number, for the net, post-tax, monthly income instead of the gross income. For example, for a person aged 40, having an in-hand monthly income Rs.100,000 and a retirement age of 60, there would be 20 years of active service left. One can now simply multiply Rs.12 lakhs yearly x 20 times. This will give you a life insurance need of Rs.2.4 crores.

Of course, we can stop here but there are some key parameters ignored here, and we could adjust this figure further to make it more appropriate. One smart way to do that would be to consider the adjusted investment interest rate which is calculated as [ (1+ returns) / (1+ inflation) – 1). This factor will adjust your figure for returns earned on the insurance kitty investment and the inflation over time. The idea is to discount the above figure of 2.4 cores for 20 years with this factor. Assuming 8% returns, 6% inflation, Rs.2.4 crore divided by the adjusted investment interest rate of 1.89% for 20 years [(1+1.89%)^20] would give you a kitty of Rs.1.65 crores which sounds more reasonable.

Withdrawal Ratio Method:

Under this approach, it is assumed that the policy money will be invested and the income/withdrawals from this investment should be sufficient to finance your expenses over the foreseeable future. Note that in the previous method we will consider the entire net income and here we are only considering a part of it which goes towards financing household expenses.

Let us see this with an example. Your monthly expenses are said Rs.50,000 amounting to Rs.6,00,000 yearly. With a withdrawal rate of 4%, the corpus needed would be Rs.1.50 crores (Rs.6,00,000 divided by 4%). The 4% is borrowed from the very popular rule under which people use this 4% to calculate retirement kitty. This can be applied here also. To be on a safer side, the withdrawal rate of 3% would give us Rs.2 crores (Rs.6,00,000 divided by 3%).

The Human Life Value Method:

This is a more detailed method of calculating the life insurance need. Here we consider all important elements like the earning years remaining, the present net income, the estimated income rise, the present liabilities, and the major financial goals the person is expected to achieve during this lifetime. We present the method here not to tempt you to calculate but to at least help you understand the concept.

Step 1: Calculate the present value of net income: In this step, the present value of all future net cash flows is arrived at. To arrive at the net income, we will consider the adjusted investment interest rate as calculated above. One may consider a growing income here while calculating the figures.

Step 2: Add present values of all future life goals: In this step, the present value of all future goals like child education, purchase of a home, marriage for the girl child, etc., is considered. We need to arrive at this figure by dividing each goal amount with the adjusted investment interest rate for the years remaining.

Step 3: Add all the existing loans/liabilities (less) assets: To the above-calculated figure, we need to add all existing loans/liabilities. This would include all home/car loans, credit card bills, personal loans, etc. This figure will be reduced to the extent of any existing assets that you have so that the life insurance need is reduced to that extend.

The above three steps should give you a fairly accurate amount of life insurance needed.

WHAT TO BUY :

We would first urge you to never mix investment with insurance. There are two basic types of life insurance products sold in the market – traditional life insurance policies and the pure term policies. For obvious reasons, the pure term policies are not suggested by many insurance agents to their clients. The general understanding among experts is that the traditional life insurance policies, which promise some returns in addition to the return of premiums paid and life cover, offer sub-optimal returns while offering a low life cover. They are generally costly and in the event of a death, the amount of life cover is often grossly inadequate to meet family needs. The purpose of buying such a policy gets defeated on day one itself.

Pure term policies, on the other hand, are cheap and offer the maximum life cover possible. This matches perfectly to our objective of family well-being in our absence. One can simply ignore the fact that there would be no return of premium amount, just like you do when you pay for say a car insurance premium. Any savings on account of low premiums can be diverted towards mutual funds SIPs to build wealth over time. Thus, this way, you get the best of both worlds – maximum cover from day one and long-term wealth creation through SIPs, if you survive.

CONCLUSION :

There is no perfect way to calculate the value of a person. We do not wish to do that as a human being can never be replaced. The absence of a person, however, does not take away the fact that life has to go on; the survival and fulfilment of the dreams of those left behind are what matters now. The aim of any method is simply to gauge the figure which can make sure that the lives of our loved ones are not compromised due to paucity of finances.

As already discussed, there are many ways and variations in methods of calculating the life insurance need. No one can claim that one method is perfect. The decision rests on us to chose and modify any particular method to suit our needs and requirements. We would strongly suggest that one approaches a qualified insurance advisor or a financial planner to help you make the calculations and arrive at the right figure. We also hope that you assess your present life insurance cover in the context of this article, take adequate life cover as soon as possible and enjoy peace of mind

THE 5 MUST-HAVE FINANCIAL GOALS

 

THE 5 MUST-HAVE FINANCIAL GOALS

 

Setting financial goals is the most important aspect that every person should think of. It is an important step towards becoming financially secure. Whether it is related to career, marriage, retirement or anything else, a clear awareness of resources and thorough planning is necessary. A goal sets you off in a certain direction and crystallises your aims, making it easier to visualise something that could be very far away, giving you focus and motivation.

But, most of us completely ignore this part and do not set financial goals due to a lack of clarity in financial planning. If you don't have any specific financial goal to work on, you're more inclined to spend more than you should. Later, when you get unexpected expenses, you might get stuck in the vicious cycle of loans. Eventually, you feel like you never had enough cash to save.

Even the most prudent person can't prepare for every crisis, as the world learned in the pandemic. What thinking ahead does is give you a chance to work through things that could happen and do your best to prepare for them. Financial goals will help you change your mindset, your habits and your life. You'll start to see how every decision you make matters to your greater financial health. Knowing your goals enables you to work out roughly how much money you might need to save in order to achieve them.

It can be hard to narrow down which financial goals are right for you. Here are some common, must-have financial goals that everyone should make a priority in their lives.

 1. Emergency Fund:

Emergencies can derail our financial health if we're not adequately prepared for them. Maintaining an adequate emergency fund will give you a stronger sense of security and ensure that emergencies are easier to manage when they strike as you have a cash reserve to fall back on, if necessary. These funds would help you tackle unexpected events such as job loss, a large medical expense and so on. It is advised that your emergency fund should be at least three to six times your current income.

 2. Comprehensive Insurance Umbrella:

Do you have a family who is dependent on your income? Do you want to be financially protected against risks to life and health? If so, you need to pay attention to your insurance needs. Having insurance is another important financial goal that will save you and your family from unexpected financial setbacks. It is also important that your cover /protection must be adequate for the purpose it is meant for. The must-have covers to consider are - life, health and personal accident. Health protection should be there for every individual in the family. Beyond this, you can also explore products like critical illness, top-up /super top-up health covers to enhance your health protection and a comprehensive home insurance. All this put together acts a big umbrella against the most common uncertainties we face in life.

 3. Being Debt Free:

Debt makes it almost impossible to effectively save for the future as a major part of your income will go on paying off debt along with the interest. But, not all debt is the same. Debt taken for depreciating assets and for consumables /expenses /holidays, etc are especially bad and a strict no-no. If you can't afford to pay for such expenses as a down-payment, then probably you don't deserve it. Before deciding to repay loans, identify the type of debt i.e. good debts and bad debts you have. Good debt like home loans can help you achieve goals and tend to have lower interest rates. Bad debt like credit card dues, car loans, personal loans drag down your financial situation with high interest rates. So, focus on paying expensive debt first to better your financial standing. This allows you to save more money and redirect funds to other financial goals.

4. Retirement Planning:

For most of us "retirement" could mean relaxing at home or enjoying life with passions. But, are these things possible without money and peace of mind? No, right. So, planning and saving for retirement is paramount. For most Indians, their kids are like their retirement planning. Is it fair and wise? To have financial independence and self-sustenance in retirement, regular savings is a must. Generally, people get serious about retirement planning only when they are about to reach their 50s. It's like running a marathon race and getting serious about winning when you enter the last mile. Start investing for retirement as early as possible. It should have started right when you started earning. The sooner you plan for your retirement the less you need to save and power will be the time available for power of compounding. When you start saving early, you have sufficient time to accumulate required funds for retirement. Thus, the task of building a large retirement corpus for your retired life becomes just a bit easier.

 5. Budgeting:

More than a financial goal, this is like a financial habit or behaviour. No matter how small the income or expense, you should keep track of it. Many people tend to spend without thinking, which results in overspending, financial stress and hardship. Creating and adhering to a budget will allow you to track everything you spend and question yourself where did you fall short in your saving goal and where is your money leaking through your fingers. This will also help you to avoid unnecessary expenses and become financially smart.

 The Bottom Line

Reaching a point of financial well-being in life has nothing to do with luck or magic. It's simply a matter of setting should financial goals and having a concrete plan as to how you will achieve them. By setting (and achieving) the above financial goals you can make the right start and before you move on to the more in-depth exercise of identifying and planning for other life goals. Till then, lets' at least focus on these five must-have financial goals in life.

 PS : Above post is part of what I circulate as a newsletter every month. Same is shared in social media and also personally in Whatsapp.