Budget: How you can be a crorepati!

No great surprises in this Budget. I never thought I would thank the Left parties, but their pressure seems to have have put EET (Exempt-Exempt-Tax) on the backburner. Considering that there is no social security whatsoever, there is no reason to tax savings that are the only social security available for the middle class and rich.

But read on, you might still end up a millionaire.

As I have mentioned in my earlier article, claim your mind! But it is never easy as temptation always gets in the way.

Most of my working life was spent in the State Bank of India, where salary is a little less than what one might desire. Nonetheless, there were many people and there are many honest people, who managed to save and grow their financial assets while working for SBI.

So, it boils down to the choices we make, and creating financial independence is a choice, like any other. Now the opportunities to earn are greater and the choice of avenues to invest in are more.

Choice inevitably creates responsibility. If you have seen Spiderman The Movie, you would remember the line: 'With great power comes great responsibility.' Choice is power and has to necessarily be exercised responsibly.

When the markets were highly regulated and things like mutual funds were non-existent, it was easier to invest in PPF (Public Provident Fund) and such like which gave peak returns of 12% p.a. compounded half yearly and were secure as well.

No longer! The government will make it difficult for you to milk it and to get higher and yet secure returns. Further, there is the threat of EET or exemption, exemption and taxation. If you put money, say, in insurance, the exemption from tax can be claimed on your investment and on the accumulation, but not on the proceeds at maturity.

Quite obviously, there will be no free lunches. So, in such a situation, what should the lay investor do?

I will answer all this and more in the subsequent part of this article.

First, affirm to yourself that you are responsible for your money and will do everything in your power to make it grow and to take yourself to total financial independence. In Secrets of the Millionaire Mind, T Harv Eker suggests that you make the affirmation with your hand on your heart and then to point to your head and say, "I have a Millionaire Mind."

I suggest that you say loudly to yourself, with your hand on your heart, preferably in privacy, " I am responsible for my financial independence and will do everything in my power to grow my money and take me there as soon as possible. Financial independence to me means being able to live life on my terms with my money and to be free of all financial worries."

Point after this to your head and say loudly to yourself: "I have a Millionaire Mind."

Suggest you do this everyday for three weeks at a stretch to get your mind to accept that you are serious. So have I come down to some hocus pocus? No. This is taught in workshops that people pay thousands of dollars to attend.

To reclaim your mind, you have to programme yourself. Why then do batsmen and bowlers talk to themselves? This is a necessary, but not sufficient condition. The action is closer to the ground!

For anything to be achieved a goal is absolutely essential. First start off with your goal. How much income every month do you think you need to keep you in comfort for the rest of your life?

This, of course, is something that would vary depending on the kind of life you are used to leading. Believe me, when I say that your needs tend to follow a sine wave or normal distribution pattern.

Your needs are minimal at the time of your student days, increase steadily once you start earning and progress upwards before again coming down slowly. Life tends to fuel your desires and then bring them down after some or all of them are fulfilled. Hence, inflation is really immaterial.

Start off with an income that keeps you in comfort as a single person and add 50% extra for marriage, and another 25% for each child you have. This is a thumb rule and is not sacrosanct. Use this as a guidepost and add more if you think you need more.

Let us say that you have arrived at a figure of Rs 15,000 per month as the base figure after taxes. Now add Rs 7,500 if you plan to get married and Rs 7,500 for the two apples of your eye (in future).

So you need a net income of Rs 30,000 to keep yourself and your family in reasonable comfort for the rest of your life.

Start working backwards. What is the capital you need to keep aside to ensure that you have this money always? One of the formulae I have learnt is 200 times the desired monthly income. This is based on the fact that 200x invested at 6% p.a will give you 'x' as income every month.

Do not be daunted by the figure it throws up. By investing smartly and the magic of compounding, you can get to that figure and even better it.

There is another dimension to this. If you have a family to support, would you not want them to have this money should any calamity happen to yourself? What I am getting at is that insurance has to be a part of this plan. Again this figure has to be in liquid assets or cash assets that are investible and fetch you the targeted income.

Next if you have children or plan to have, you need money for their education, marriage and any contingencies. Scared already? No need to be! Just the creation of a goal brings in the energy needed to achieve it when you focus on it adequately and review it periodically.

Again let's remember our target of saving only 10% of the gross. Rs 30,000 net income translates into roughly Rs 36,000 gross. An amount of Rs 3,600 saved every month and assuming an increment of 10% p.a. invested at just 6% p.a  would fetch a sum of Rs 1.26 crore (Rs 12.6 million) in thirty years, and this will cover all contingencies.

If you invest smartly and are able to generate a return of 10% p.a, that is possible by investing in a judicious blend of equity, mutual funds and debt, it is possible to get an end amount  of Rs 2.45 crore (Rs 24.5 million).

This is for people on the ground floor or those who are at the start of their careers. Change the figures and come up with different possibilities. Let us go by the assumption that you have a career span of just 20 years and have started saving only now.

On the assumptions made above, you would end up with Rs 59 lakh (Rs 5.9 million) at that stage. Assuming that my major readership is of people below 30, a period of around 30 years residual working life is a distinct possibility and an increment of 10% is almost de rigeur in any organisation.

If some are in business, the increases could be even more. If you can discipline yourself to touch this money only for the purposes that you have set out for yourself you are well on your way to financial independence.

If you can set aside a larger percentage based on your own propensity to save, it is possible that you end up with a better capital sum.

For our hypothetical case, what is the money that is required to take care of education and marriage of children in addition to the income to be generated for a comfortable life after retirement. My estimate is as under:

Retirement nest egg	Rs 60 lakh (Rs 30000 x200)
Childrens' Education	Rs 15 lakh
Childrens' Marriage	Rs 15 lakh

These are figures that are fair and conservative. You could think of less or more depending on your own experience or estimate. I have actually made a spreadsheet and the results are quite fantastic.

For instance if a person starts with an income of Rs 36,000 p.m and continues working for a period of 30 years, with an incremental income of 10%, he or she can end up with an accumulation of Rs 2.66 crore (Rs 26.6 million).

A person whose income increases by 20% every year can reach Rs 12 crore (Rs 120 million) by investing 10% of the income every month for a period of 30 years.

Mind you, this should be in the form of liquid assets and yet those that remain untouched by you till the end of the period when you have to use the earnings from the accumulation.

I had suggested allocation of monies saved in the previous article and I reiterate that this is again a balance of  liquidity needs and investment to obtain the best returns thereon.

In my book, one house acquired by you to live in is not an investment as it is a necessity. If a house is purchased for the express purpose of renting it out, this is an investment. Payment of instalments on the housing loan, the tax benefits therefrom and the rent received on the plus side must combine to give you a surplus in terms of cashflow.

On this you should calculate the returns on your investment. For example, you purchase a house for Rs 20 lakh (Rs 2 million) and get a rent of Rs 20,000 p.m. on it. Your instalment on the housing loan is Rs 17,000 and the amount you have invested is Rs 4 lakh (Rs 400,000).

At a rough estimate, the interest would be say Rs 1.15 lakh (Rs 115,000) and the income reduction for tax purposes on that and the instalment paid by you is Rs 1.35 lakh (Rs 135 million). Overall, assuming that the marginal rate of tax on your income is 30%, the overall tax benefit is Rs 0.40 lakh (Rs 40,000) p.a.

Add to this the benefit of reduction in gross rental income by 30% and also that on house tax and assuming tax is Rs 5,000 p.a. on the house in question, your real income on the property would be Rs 0.71 lakh (Rs 71,000). So on an investment of Rs 4 lakh, your yield is 0.71 lakh or 17.75%.

Please do not do this for your own house and also ignore the appreciation in property value for calculating the income on it. The above calculation does not take repairs into account but these will have to be factored in the later years.

Insurance:

Insurance is a necessity and the insurance you take must allow your family to meet their income needs and also the education and marriage expenses of your children, in case of any calamity happening to yourself.

A thumb rule is roughly 10 to 15 % of your savings. However it may be more in the initial years of earning as the income may not be sufficient for the purpose and insurance has to be the base of your allocation strategy. This could go up to 30% of your savings. The plan must be such that the sum assured covers the above.

A good insurance advisor would be able to prepare a plan for you that takes care of your basic insurance needs and also savings and capital requirements. Always ask hard questions of your advisor and ensure that his ignorance does not jeopardise your interests.

Remember that any wrong decisions would affect your family in the event of a calamity. Please also know that the middle class and rich have no social security.

Hence your loved ones deserve some thought! Expect no returns from this money. This is strictly for protection except for the ULIP where you can plan to use top ups judiciously to increase returns. However, first cover your bases in terms of sum assured before embarking on adventures.

Liquidity:

Savings with liquidity and safety should be the next layer and this would include bank FDs, PPF, NSCs and so on. There are some mutual funds that provide an ATM card for investing in their systematic investment plan, but there is a risk factor to be reckoned with and hence do not put all your eggs in this basket.

Ensure that around 25% of your savings go into these avenues. These are likely to yield 6 to 8% p.a. And keep your expectations at around 6.5% and work towards that figure.

PPF gives 8.5% and others around 6%. However, PPF is less liquid and hence care needs to be taken to balance your liquidity.

Higher Returns

The first principle of investing is risk and return, and therefore the greater the risk the greater the expected return. Put the rest of your savings in the following:

Mutual funds through a systematic investment plan with provision for top up and free fund switching.

Equity investments, through IPO or from the secondary market. This money should be in blue chips or good profit making companies or those with good profit potential.

Wild hunches that may or may not work. Risk only 5% of your savings or less on this last category and do it, as far as possible, only when you are young.

Investing in mutual funds and equity is tricky business and needs some thought. Firstly, check the track record of profitability and capital appreciation. The liquidity of the instruments is also essential.

All this will ensure that exiting is easier when you find something better or if that specific fund or share is going down. As your income goes up, diversify your investments, viz. choose different mutual funds or shares and keep track of your investments. So this involves work but so does living!

For your wild hunches, have method in madness. Choose companies that are turning around and are likely to start becoming profitable in the near future.

Also if you have a hunch about companies involved in new areas of technology or some new services, choose to invest in these. Be ready to risk but within limits and some of these may appreciate fantastically and pay you well for your intuition.

Last stop on the investment express

Private equity and real estate, purely for the purpose of holding for appreciation, are areas that are highly risky and yet highly promising. When you reach a stage at which your living expenses are met by 30% of your income and 20% is at hand for luxuries, you can afford to put some money in these channels.

At that stage, you can also choose to invest in art, the riskiest of all. Since you have the money, why not! However, you need to insure your collection and ensure its safety. Best of Luck, but I am no expert in the last category at least!

Happy Investing and here's to your financial freedom!

Note: The author, who is based in Bangalore, is a former banker who is now a consultant for banking and finance. He has worked in several areas of banking such as Retail (including branch banking), Treasury, Risk Management, Corporate and Retail Credit and in Product Development for three decades. He is also working in the Insurance sector.