Paying off your debt is the Best investment.

Remember borrower is a slave to lender…!!!

The First Step of Successful Financial Planning is to get out of debt.

Paying off your debt is the Best investment. Why it is important to get out of debt because Interest charges on debt cost money. It is money paid for borrowing. Interest does not result in any increase of goods or quality of life. All it does is cost us money and enrich someone else.

However not all debts are bad, To understand difference between Good debt and Bad debt, 
Click Here.

Stop increasing your debt.

Unless you stop increasing your debt you cannot control it. Record and categorize your spending then make a budget based on your spending record. Credit card is the worst form of debt thus, cut down all of your credit cards and replace them with debit cards.

List all your debts


Figure out how much you owe, to whom, and on what terms, interest rates etc. List each of your credit cards. You'll want to include the outstanding balance, interest rate, and minimum payment.

Start paying it off.

Start paying off all your bad debt first. Start one with maximum interest rate.However snowball method suggest that List your debts in order with the smallest payoff or balance first. Do not be concerned with interest rates or terms unless two debts have similar payoffs, then list the higher interest rate debt first. Paying the little debts off first gives you quick feedback, and you are more likely to stay with the plan.

If you are in a deep debt than consider to sell off your some assets if require. Finally, keep in mind that this process still takes time. There is no magic method of paying off debt, so realize that it may still take months or even a few years to become completely debt-free.

Paying off your debt is the Best investment.

Remember borrower is a slave to lender…!!!

The First Step of Successful Financial Planning is to get out of debt.

Paying off your debt is the Best investment. Why it is important to get out of debt because Interest charges on debt cost money. It is money paid for borrowing. Interest does not result in any increase of goods or quality of life. All it does is cost us money and enrich someone else.

However not all debts are bad, To understand difference between Good debt and Bad debt, 
Click Here.

Stop increasing your debt.

Unless you stop increasing your debt you cannot control it. Record and categorize your spending then make a budget based on your spending record. Credit card is the worst form of debt thus, cut down all of your credit cards and replace them with debit cards.

List all your debts


Figure out how much you owe, to whom, and on what terms, interest rates etc. List each of your credit cards. You'll want to include the outstanding balance, interest rate, and minimum payment.

Start paying it off.

Start paying off all your bad debt first. Start one with maximum interest rate.However snowball method suggest that List your debts in order with the smallest payoff or balance first. Do not be concerned with interest rates or terms unless two debts have similar payoffs, then list the higher interest rate debt first. Paying the little debts off first gives you quick feedback, and you are more likely to stay with the plan.

If you are in a deep debt than consider to sell off your some assets if require. Finally, keep in mind that this process still takes time. There is no magic method of paying off debt, so realize that it may still take months or even a few years to become completely debt-free.

Story of Red Indians - the Power of the Compound interest.

DO YOU KNOW  that in 1626, the Red Indians in the east coast of U.S.A, sold Manhattan, to a group of immigrants for $24 in beads and trinkets.

Well, yes. The entire Manhattan (Where World Trade Centre was located), world's one of the costliest city was sold to USA by Red Indians for just $24. What do you think that, suppose if the Red Indians put that $24 in the Bank FD at the rate of 8% compounded annual return than today after 385 years can they buy Manhattan back from USA? Let me tell you that the approx valuation of Manhattan is $2 Trillion today. 

For Centuries they were subject to a lot of criticism and comment because of the apparently low value of sale. But it appears that the Red Indians seem to have got a better deal than the people who bought the island.

What do you think that, how much it will become after 385 years if you invest $24 at the rate of 8% annual return? Well, it becomes $8 Trillion and more….!!! This is the power of compound interest. Red Indians can not only buy back the entire Manhattan but they can also buy the entire London, Shanghai & Mumbai today. 

This example clearly brings out the power of compounding. Compounding is essentially reinvesting the earnings from a particular asset rather than spending it.  What this example tells us is that it's important for an individual to start investing early, so as to give enough time to the money to compound.

Moral: Start Investing as early as possible & stay invested for the long time horizon to build Wealth. The compound interest is very powerful and make you very rich over a time.

Why Budgeting is important?

Spend Less than You Earn

what is the importance of budgeting?

Unless you keep track of your all income sources and all kind of expenses, you will never know that weather you spend less than you earn or not? And spending less than you earn is the key of successful financial planning , build wealth and fulfill your financial goals.

I know that budgeting is the most boring part of the financial planning game. It’s most boring exercise but cant help  you cannot avoid it, its very important.

The idea behind Budgeting Exercise is, you minimize your expenses, increase your income and thus increase the Cashflow (Income – Expense) and divert this cashflow towards long term investing. Unless, you divert your cashflow towards investing to build wealth, you can’t be financially free and rich. So do budgeting periodically say month or a year and keep the track of all your expenses.

The simple words budgeting is, "You Should Spend Less than You Earn"

What is Budgeting?

Budgeting - The Most important Exercise

Budgeting is not a new concept, since childhood days we have been taught that we have to spend less than we earn. If we spend more than we earn then we will be in negative cash flow to avoid this we will always have to spend less than we earn otherwise we may not able to survive in long run.

Budgeting is the most important financial planning exercise. I know we all find it boring exercise, but cant help it’s very important and we cannot avoid it.

In simple words budgeting means keeping track of your each and every expense, income and cash flow. At a regular interval you have to check your cash flow. Do it periodically may be once in a month, once in a six month or a year. No need to make it complex just check how much you earned and how much you spend.

Once I saw a online complex budgeting tool on ICICI website but due to its complexity I didn't got interest in it. Of course there may be lots of other online software tools, I seriously doubt if anyone is using them. No need of any complex tool just keep a small diary or book and keep record of your each and every expense. You may also keep an excel sheet in your mail box and update it according to your cash flow.

Budgeting is the most important financial planning exercise without which you may not able to keep track of your cash flow.

Retirement Lane

This question may arise in your mind - How Much I require to Retire in India?

Well it totally depends upon ones level of lifestyle, in which city of India you live and how much you want to spend after your retirement and of course at what age you want to retire? I cannot say that you will require XX amount to retire with complete financial freedom. May be Rs.1 Crore is enough for you to retire peacefully or Rs.10 Crore is also not enough for you.

According to CCA (Compensatory City Allowance) classification of India, A-1 cities are Mumbai, Delhi, Bangalore, Chennai, Hyderabad, Kolkata. So if you are planning to retire in 2015 in A-1 cities with moderate life style than Rs.1 Crore may be enough to retire as it will generate Rs.6-7 Lakh post tax return every year but if you are planning to retire in 2030 in the same city with same life style than Rs.1 Crore may not be enough as the inflation will drive the lifestyle further higher.

Inflation is very important factor you have to consider before planning for retirement. If you consider Inflation and plan accordingly, you are the one who can predict how much is enough for you to retire peacefully. Consider each and every major and minor expense you will do after retirement. Do simple estimation and predict that how much capital you will require to generate that much of monthly post-tax income. And this much of capital should be your ultimate financial planning goal.

Don't ignore inflation while calculating your retirement goal. Depending upon your life style and retirement year estimate your retirement fund. No matter if your prediction goes wrong a bit. Atleast you will have satisfaction that you have tried.

Tips on How To Save Money, Successfully

1. Give Yourself A Target

Set a target for yourself, no matter if it is small. Let’s say by the end of the year I need XX amount in my bank account. Unless you set a target you may not be confident what to achieve by what time. If you fail to achieve brainstorm on it why u failed? And try to avoid those mistake for next time. If you achieve it, it will give you a confidence for next higher target.

2. Budget Your Expenses

Budgeting is very important exercise. Note down all your cash flow, your income and your expenses. Look for your "must haves" and "nice to have" needs. Cut down all your unnecessary expenses and save those money.

3. Get Out of Debt

Getting out of debt is very important for successful financial planning, because if you are in debt you have to pay unnecessary interest. As far as possible try to avoid unnecessary debt for luxurious lifestyle like Cars loan, Holiday loan, Shopping EMIs etc. Paying off your debt is the Best investment.

4. Grow your income

Another great way to get out of debt faster is to make more money. Look at ways you can make money on the side - or ask for a raise or get a better job. Take 30 minutes to brainstorm. Are there ways you can start a small business online? Sell your valuables on eBay? Start freelancing on the side? Get a part-time job? This only has to be temporary, but the more money you make, the faster you'll get out of debt.

We all know these simple steps, but still many times we fail to follow it. Give yourself a target and try to achieve it by budgeting your expenses. Try to get out of unwanted debt and stay away from unwanted debt in future. Also look alternate ways to grow your income.

The Power of Compound Interest

START EARLY & WIN THE RACE…!!!

Before starting Financial Planning know The Power of Compound Interest.

In the game of Investment Time is the important player. Investing only money cannot win the race. You have to invest both time and money simultaneously.

Albert Einstein once said that, "The Compound interest is the greatest Force in the Universe". He also said that. "The Compound interest is the 8th wonder".

Youngsters in 20s and early 30s those who have just started earning may argue that retirement is still decades away so why to hurry?

Let’s look at a small example.

Ramesh started investing Rs.5000 each month for 10 years from the time he became 25. Umesh started investing Rs.5000 each month for 25 years from the time he became 35. Note that Ramesh invested Rs.5000 monthly for only 10 years. Umesh invested Rs.5000 monthly for 25 years.

Now what do u thing who will have more money at the age of 60.

Assuming that their money grows at 15% per year, at age 60 Ramesh will have Rs.4.6 crores (Rs.4,61,18,004).

Umesh will have Rs.1.46 crores (Rs.1,46,82,718).

You might wonder how this happened, even though Umesh invested Rs.5000 for 25 years still he is much behind than Ramesh who have started investing just 10 years early. Initially your money will grow at a slow rate. But once the money grows to a big amount the rate of growth will be very very high! So, basically you need a lot of time to reach a very high rate of growth. Hence time and money both are important factor in investment.

Morale: No matter at what age you are, If you have not started investing start it now. The best time of investment was 10 years before & the second best time is NOW.

Financial Freedom

What does term Financial Freedom means? 

Myth: If you have hundreds of crore rupees in your bank accounts then you are financially free.

Truth: If your monthly expense is Rs.10,000 and your monthly passive income is more than Rs.20,000 than you are financially free.

In simple words after or before your retirement if your passive income is more than twice of your expense then you have financial freedom.

Financial Freedom = Monthly Passive Income > = 2 * (Monthly Expense)

Now understand Passive Income

Passive income is the income for which you don’t have to work. Weather you work or NOT, this income will keep flowing into your bank accounts for the rest of your life.

 

Examples of Passive Income:

Interest income, Royalties, Rental income, Investment income, Stock dividend, Web properties etc.

Web properties are the best example of passive income. Web properties could be Blogs, Forums, Websites, Domain names etc.

If you can generate ample passive income before your 40s or early 50s then you can think of retiring early with financial freedom.

Also consider inflation before planning retirement because retiring financial free today in 2011 you may require 1 crore rupees and retiring financial free in 2031 you may require 4 crore rupees.

Financial Planning in India

Every individual knowingly or unknowingly does financial planning. Since centuries our forefathers are doing financial planning in India. However in 21st century due to wide range of financial products available in market have made financial planning a difficult task.

Now a days People have started realizing the importance of financial planning as a result there has been a significant increase in the number of financial products in India. Because number of products available in Indian market today, one is dilemma where to invest their hard earn money. I observed most of us are concern of security of money than growth of the money.

Today due to inflation various expenses are rising such as education expenses, medical services, lifestyle expenses and many other expenses and that’s why day after day it is becoming more and more difficult for the people to retire with the financial freedom.

In simple words if I have to explain importance of financial planning - if you do not have a financial plan, how can you achieve your financial goals? If you do not have a plan, how do you know what you need to do by when?