:: May Newsletter :: issue xxxviii

Vast majority of parents say they are good financial role models for their children but they may be kidding themselves. A new survey suggests that parents fail to pass along even basic financial skills to their teens, and that they are sloppy themselves in the way they manage money. And remember: Teens see everything!

There’s a real disconnect between what parents think is important for kids to learn and what they are actually teaching them. More parents teach their kids how to shop rather than how to save. Only one family in five involves their teenagers in family budget matters.

Here are some ways to be good role models for your kids and also to teach them the basics of money.

• Give them some

An allowance is crucial to a child’s ability to learn to manage money. So is the leeway to make mistakes. Encourage them to spend some of their money on fun things, to save some for their own longer-term goals and donate some. When they spend it all on candy the first day, don’t bail them out for weekend movies.

• Match savings

Offer to match the amount your kids set aside for the long term.

• Encourage them to play online games

There are a variety of kid-focused calculators and money games on line.

• Make them work for it

Teens should have jobs. Kids who work have more pride in them and much more interest in learning to manage their money correctly. They’re better savers, too.

• Model good behavior

If your own credit cards are maxed out, that’s what your kids will think is normal. If you’re fixing the situation through belt tightening and extra monthly payments, do talk about that at the table. You don’t have to let your kids see your pay-cheque or know the intimate details of the family’s finances, but they should see you saving and investing, and talking about money in a way that is calm, healthy, and not fraught with emotion.

• Talk about family choices

Instead of just saying ‘yes’ or ‘no’ at the supermarket or toy store, say things like ‘if we buy this today, we won’t have enough money for pizza night on Friday’ Have a dinner conversation about how the family’s ‘fun budget’ might cover a flat screen TV or a week at the beach, but not both.

• Do a few formal lessons

They don’t even have to be fun. Sit down at the table and show your older child or teen how to balance a cheque-book, how to write a budget and the mechanics of paying bills on time. Teach them how to use their check register whenever they use their ATM/debit card.

• Increase their responsibilities as they get older

Give a teen his own clothing budget. Make a driver buy her own gas. Get a credit card for high-school seniors or college students as soon as they are old enough to qualify, but make sure the credit limit is low. Even if you’re supporting them at school, make them pay the bills.

• Don’t worry about it all sinking in at once

Some kids are just more money-oriented than others, just like adults. The better the financial behavior they see, and the more formal and informal lessons you’ve been able to deliver, the more financially stable they’ll be in the long run. Even if they have to eat a few late fees and overdraft charges to get there.

There is no substitute for the joy that one experiences in buying the first house.
Most Indians have never bought a home before; and are actually first-time buyers. Buying a home is going to be the biggest investment that you will make in your life. Here are some tips to give you a lasting experience.

Don’t budge from your budget

There is too much choice in the market — you must understand what your budget is so that you can narrow your search into a manageable process. Otherwise, your real estate broker will spin you around. Give the broker your budget and tell them that it’s not movable. Don’t believe them when they say your budget is too low. There are properties of all types available in India today.

The budget is not just the cost of the property — it must include numerous non-obvious costs such as broker fees, lawyers fees, stamp duty, registration fees and home insurance premium.

If you are buying a new home, you will also need furniture, fittings and gadgets for the home. Alternatively, if you are getting an old home, there might be renovation or redecoration costs involved.

• Affordability

There is no point in searching for the house of your dreams if you cannot afford to live there, you must also think about whether you have enough cash flow to support your lifestyle, after you have paid for the property.

Do not stretch yourself and take a personal loan to fund the down payment towards the property. This will only increase your risk exposure. Ensure that you can naturally afford the down payment through your savings.

Additionally, don’t stretch your budget to get a more expensive home because that will mean stretching your EMI payments. Remember to keep your EMI manageable so that you can continue to afford the lifestyle you are accustomed.

• Location

This is the key that will affect the quality of life that you have in and around your home. Additionally, a better located property will get a much better resale value if you decide to sell.

Before you put in your life’s saving into a property, you might want to consider renting in your desired location for a few months. It will give you a good flavor of what life could be like in the area.

When thinking of a location, you must consider the following: proximity of schools, your commuting time to and from work, modes of transport around the property, local amenities and shopping convenience.

Finally, the traffic and noise situation might often be very different from weekdays, so do check the desirability of the location at different days and times of day.

• Define your specifications

Prioritize what is important to you. Otherwise, smooth-talking real estate salesmen will take advantage of you by showing you too many different properties on criteria that will not be important to you.

Is a large kitchen important to you? Do you need an attached bathroom for every room? Do you want lots of storage capacity? Do you need a study for your home office? Do you want to buy an old construction and aged plumbing, or will you only look at new modern homes that will come at a premium?

• View it twice if you like it

Of course you are not going to buy the property without seeing it. But, don’t make the mistake of taking your entire family with you the first time around. If they get over excited, the real estate broker is going to sense this, and then will exploit this to his advantage.

You must also visit the property at least a few times. Note how you instinctively feel about the property. Why do you feel this way? Can you really call this place home? Maybe at your second or third visit you can take the extended family with you to get their reactions as well.

Maintain a viewing checklist, on which you can rank the different properties you are visiting on the criteria that you have prioritized. Remember, you do not want to regret that you were forced into a decision to buy under pressure from a real estate broker or because you had very little time to view the property.

• Learn how square footage can disappear magically

Get familiar with the language and conventions used in real estate. When some one gives you an area for the property, always ask them what definition of area they are using. Here is why this is important:

Typically, the area that you pay for is higher than the area that you actually get. For instance, you will pay for 2,000 square feet flat, but your usable area might only be 1,500 square feet. You will face a reduction in the area. In this example its 25%, but it could even be more in actual cases.

The square footage that you have lost is your share of the floor space of common facilities like walls, corridors, lifts, etc.). But, you will have to pay for the entire area, including the area that is lost.

Always ask what is the carpet area that you will get, i.e., the area over which you can actually spread carpet across the entire floor if you so wanted to do it. This, effectively, is the area that you will have for your end use.

• Review your financing options simultaneously

Just finding the right home is of no use to you if the deal falls through because you have not organized your funding. Often you will need to demonstrate that you have access to the funds to finance your purchase. Therefore, organise the money before you need them.

If you are self-funding your purchase, ensure that you have enough funds that you can access at short notice if your deal comes through and you are required to pay immediately.

If you need a loan, file an application with your chosen lender and get it approved. You can get approved even if you have not yet identified the property. This will save you time and emotional hassles later on in the process. Typically, such approvals last for six months which should give you sufficient time to identify a property.

• Black, white and grey areas — buying directly from the developer versus the investor

These are boom times for real estate development in India. Developers are coming up with new projects all the time. Many investors have bought properties for investing purposes. You need to understand that there is a difference in buying directly from the builder versus from the investor in a property.

If you buy property directly from a developer in a project, it is likely that you will not have to pay any cash component and the entire payment can be in cheque. On the other hand, if you buy from an existing owner of the property (even if its under-construction), the owner will expect to earn a return on his/her investment, and might expect a large part of the payment in cash. You need to be aware whether you are capable of making cash payments. This is a reality in India and in many cases you will not be able to avoid it.

• Your current buy doesn’t mean game over

As you and your family grows, so will your needs. You might get married, have kids, your parents might move in with you. Some unplanned events might also occur; for instance, you might get transferred to a new city. Don’t see your current purchase as a dead end. You can upgrade to a different property in a few years. Maximize what you need to fulfill over the next few years. Remember, you can always sell this property and use the sale proceeds to get another property.

Finally, with a little bit of attention to detail and awareness, you can become more confident even before you start the process. There is absolutely no substitute for the joy and pride that you will experience at your first home purchase.

Here are some payment options listed for the summer vacation
With summer vacations set to begin soon, many people are busy drawing up detailed travel plans. After all, traveling — especially to international destinations — calls for meticulous planning. While flight booking, closing deals with tour operators, packing their bags, etc, dominate travelers’ plans, it is important to pay equal attention to other aspects such as zeroing in on the best tool for managing expenses abroad.
An Indian traveler embarking on an overseas leisure trip is allowed to spend 4, 00,000 Rs or the equivalent amount in the respective currency per calendar year. She/he can carry 80,000 Rs in cash and the rest in the form of traveler’s cheques or cards. For a business traveler,

the cap is 10,00,000 per trip or its equivalent in any other currency. Students and travelers going abroad for medical treatment, however, are allowed to spend 40,00,000 per academic year and 40,00,000 per trip, respectively.

• Traveler’s cheques

While plastic money is becoming increasingly popular among travelers, the good old traveler’s cheque hasn’t been completely sidelined. The key reason why it continues to be in demand is that it is a trusted and a secure method of carrying money as against hard cash. In addition, it boasts of considerable acceptability worldwide. In case it is lost, the holder is entitled to a complete reimbursement, after following the requisite procedure. If the traveler’s cheque is encashed at an American Express branch, a Thomas Cook outlet or an Amex-authorized moneychanger, the transaction may not attract any commission, or nominal charges could be levied.

If the traveler’s cheque is encashed at American Express branches and fee-free encashment centres, no charge would be levied. If the traveler gets it encashed at a money changing firm that is not registered with Amex, commissions varying from 3% to 12% (depending on various factors) could come into play.

The traveler’s cheque comes with certain limitations, though. The primary disadvantage is that unlike plastic money, it can’t be used throughout the day. Once the money changers down the shutters for the day, it cannot be encashed. Besides, to put it into use, the traveler may need to carry his/her passport for identification purposes.

•Credit & Debit cards

This is the key that will affect the quality of life that you have in and around your home. Additionally, a better located property will get a much better resale value if you decide to sell.

Finally, the traffic and noise situation might often be very different from weekdays, so do check the desirability of the location at different days and times of day.

• Pre-paid travel cards

This shortcoming associated with credit and debit cards leaves scope for pre-paid travel cards to step in. A pre-paid travel card is an electronic form of traveler’s cheque. It can be used either by swiping the same at various merchant outlets or the traveler can withdraw cash in local currency by using the PIN provided. Such cards are available in various currencies. Here, you would need to load the card with the amount you desire to spend abroad, in relevant currency.

In addition to offering the convenience that credit/debit cards offer, the other advantage with prepaid cards is that the exchange rate prevailing on the day you buy the card is applicable throughout your trip. In the event of unfavorable currency fluctuations, you won’t take a hit because you would have loaded the card already.

For obtaining the card, the traveler would need to submit copies of passport, Form A2 and PAN/Form 60. The charges for loading the card could range from Rs 110 to Rs 150, depending on the bank. If you make withdrawals from ATMs, the charges would amount to one unit of the local currency. If you withdraw cash in currency different from the one your card is loaded with, a cross currency charge is levied.

Also, if you decide to extend your stay, you can reload the card after issuing instructions to deposit the required amount with the issuing bank. A re-load attracts a fee of Rs 55-100. The reactivation procedure usually does not consume more than a few hours. Also, like credit/debit cards, you can issue instructions directing the bank to block the card, in case it is lost. Upon your return, the issuing bank arranges for a refund of any unused balance on the card in Indian rupees. The options are aplenty. Take your pick!

A rider in giant wheel feels more frightened when he is at the top. Similarly as we climb the hill the fear of falling from it increases. Exactly same way when stock market rises we should be feel more nervous. Interestingly speculators follow exactly the reverse behavior. When equity markets are high they feel safe and when they fall they feel nervous. In reality equity markets are less risky at 15000 levels than at 21000 levels.

However all speculators find equity markets risky at 15000 and not at 21000. Putting it differently, under normal circumstances all of us always prefer to buy any goods and services at lowest possible price. In case of equity investing speculators always prefer to buy at higher prices.

There are two reasons for this behavior. Firstly there is what is called as anchor effect. We tend to link our decision to previously demonstrated number. Suppose if market has moved from 10000 to 21000 to 15000. Firstly at 21000 levels we would have 10000 levels in mind and hence we will feel euphoric. At 15000 levels we would have 21000 levels in mind and hence we would feel dejected. At 15000 levels we forget about 10000 levels.

Having anchoring effect is like driving the car only by seeing into rear view mirror. If we keep driving the car by only seeing in rear view then we will surely bang the car. To move ahead, we must see in front. Rear view mirror only acts as guiding post.

Secondly most of us invest in any class of assets without aligning those investments to our goals. Our behavior is like of a passenger who sits in a train without knowing where he wants to get down. While this may sound absurd, the fact is speculators always behave in absurd manner. If we sit in a train without knowing the station we want to get down then at every station we will feel restless. Same thing happens to a speculator who has deployed funds in equity market without aligning it to his financial goal. A speculator will always feel restless. At every piece point he would want to know whether he should sell, buy or hold.

On the other hand an investor, who has aligned his investments to his financial goals, does not feel restless at every price point. A train passenger who is sure of his station will not feel restless even though at every station there will be passengers who will alight and board the train. He knows his station and hence the moment train reaches that station he will alight the train. Similarly an investor knows the financial goals for which he is investing his funds. The moment he nears the goal he will liquidate his investment.

Suppose if we are saving for a financial goal, which is eight years away, then eight bad months should not bother us. However if we have not aligned our investments to our goals then we will panic even if equity markets fall for eight weeks. Usually investing in equity markets is recommended for a financial goal, which is more than 7/9 years away.

Lastly remember, we make investments so that we get peace of mind. If our investments make us feel worried and restless then rest assure we have not properly aligned our investment to our financial goals.

One conventional saying in Italy is - "There are three ways to make money. You can inherit it. You can marry it. You can steal it." You can marry the rupee to distinguish yourself from a poor man and the secret is a secret indeed, which rich people will never tell you. We will show you here the five lessons and we bet, you can implement them in your personal life to become rich if you are tired of competing with others, for success

Lesson 1:

Cut down your monthly unnecessary expenditure by Rs 500 only and get Rs 11 lakh in 30 years.

Annual Saving	Rs 6000
In 10 years	More than Rs 1 lakh
In 30 years	More than Rs 11 lakhs

Consideration:
Investment option- Monthly
Rate of interest: 9.5 percent

• Lesson 2

If you think, stock market is a place for gambling, then you are wrong. There is nothing called free lunch in the market place and if you want to become rich, take a little risk and start investing in stock market. You can start investment with as low as Rs 2000 and educate yourself with the ins-n-outs of the market before jumping into this place. Take 10-12 months to understand the market pulse and broker operation and always look for the best advice available at free of cost to select the stocks. Take a long breadth and plan a nominal investment at the beginning of your ‘become rich’ operation.

• Lesson 3

Use less branded items in every segment of your life and save Rs 3.33 per day to get Rs 2 lakh after 30 years.

Think twice before you purchase any branded garments. The price of these garments are sky-high now, after the budget imposed an additional 16 percent surcharge on these products. You need to prioritize now between your dream of becoming rich and using less branded items. There is a scope of cutting down at least Rs 300 every month from your monthly budget expenditure starting from sugar to stainless steel, shoes to toothpaste, in every necessary item. And if you are unable to save Rs 300 in a month, plan to squeeze your monthly household budget by 10 percent, which would give you an additional Rs 100 minimum in your hand.

Annual Saving	Rs 1200
In 10 years	More than Rs 22,000
In 30 years	More than Rs 2.22 lakhs

Consideration:
Investment option- Monthly
Rate of interest: 9.5 percent

• Lesson 4

Plan your dream house worth of Rs 15 lakhs after 5 years and start investing Rs 1665 per month from now.

We are not showing you the way to becoming rich overnight, but we believe that one can become rich over a period of time, in a disciplined manner. Our definition of rich includes not only the generation of monetary wealth, but also the generation of valuable fixed assets in your life - your own house too. If you want to be rich, you should plan for your own house (if you do not have your own one now). The main reason behind this argument is that, a fixed asset like your house will always appreciate in value over a period of time.

We suggest you become capable of clearing an EMI (equated monthly installment) of Rs 12,000 approximately first. It does not matter if you are unable to meet this EMI requirement now, but aim at meeting this EMI requirement after 5 years. If you start investing Rs 1665 every month (monthly investment) with an initial investment of Rs 10,000 now, you get Rs 1.44 lakhs (rate of interest is 9.5 percent) after 5 years. This will take care of your first year EMI requirement of your housing loans of total period of 20 years.

But, you need to become capable of clearing the EMI of Rs 12,000 approximately in these 5 years for next 19 years and start reducing your spending as much as possible to meet this requirement.
Consideration:
Loan requirement- Rs 10.5 lakhs (70% of the property value)
Tenure: 20 years
Interest: 13 percent
EMI: Rs 12,456

Condition: The finance company/ Bank will finance maximum of 85 percent of the value of your dream house and thus, in the above case, you need to be ready with Rs 4.5 lakhs approximately after 5 years to acquire your dream house.
If this is a lesson very difficult to implement, then take the last one.

• Lesson 5

Drive in your own and enjoy Rs 10 lakh in 15 years.

Do not plan a new car at the beginning of your ‘become rich operation’. The best option is ‘no car’ or the ‘second-hand car’. And, if you already own a car, never employ a driver. Save the amount that you would incur by employing a driver and check the magic of compound interest. When your present investment is Rs 30,000 (Rs 2500 * 12 months) and afterwards, monthly investment is Rs 2212, you get Rs 10 lakh in a period of 15 years. The choice of second hand car over a first-hand can save you at least Rs 1 lakh at any point of time in any city in India and you can invest your savings in any one of the above options.

All the above rules are easier said than done. These rules are not new to many, but hardly few implement them in their daily lives. The road to becoming rich is not an easy one. It has lot of speed breakers, ups and downs. But can be crossed with a disciplined and a cautious driving. Once this road is crossed, the ones ahead are smooth and safe. Committed to become rich in your life now?

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