Tuesday, August 25, 2009

Why we fail to keep up our (financial) resolutions and how to change it?

Have you ever come across the following scenario, frequently or occasionally?

You are inspired by something. Say you read a great article in this blog (or another), or heard a great lecture from your favorite speaker. You are convinced that you need to change to be successful. So you decide to develop a new habit (say track your expenses).

You are sold that, tracking your expenses is a great habit and is your ticket to lasting financial success.

You get all excited, you want to start and today is the day. You adopt a tool or plain old pen and paper to track your expenses meticulously. You are on a roll doing the tracking expenses, surprising yourself for the first few days.

2 or 3 or x days later, you start to back slide. All of a sudden the prospect of tracking expenses, appears too much to do , and not worth the return on investment of your time. Over the next few days, you gradually give up and you get right back to where you started, or worse off than that.

This can also more commonly be observed among people trying to get rid of bad habits (e.g. quit smoking).

It is simplistic to dismiss it as a will power, interest, motivation or genetic (or a lack thereof) issue . You are still interested. It is possible that you still have power, you are motivated in certain other areas of life. but the damn effort seems overwhelming for some type of changes you are about to make.

It has happened to me a lot. I have always looked for a convincing explanation for this phenomenon, when I stumbled upon a possible answer in the book "Mastery: The Keys to Success and Long-Term Fulfillment" by George Leonard.

This is a small yet a great self-improvement book that talks about how one can achieve Mastery of anything in life. Note that it is not a book on Personal Finance.

It explains that Mastery is a continuous journey and process to be enjoyed in itself , rather than a destination or product to be reached. That Mastery is achieved by persistent practice and not by short cuts or hacks contrary to what our consumerist culture preaches us.

Leonard argues that Back sliding is a universal experience and that all of us resist significant change. Our body, brain and behavior have a built-in tendency to stay the same within a narrow limit and to snap back when changed. For e.g. when the body temperature or blood sugar or heart rate change significantly (say + or - 10%), our internal mechanisms tries to bring it back to normal (to avoid fatalities and protect us). This kind of equilibrium and resistance to change is called Homeostasis.

Leonard's contention is that all self-regulating systems from bacteria to humans to family to organizations are characterized by Homeostasis.

As a practical example of homeostasis in non-human systems, consider a simple home heating system, where you have a thermostat that measures the room temperature. When the temperature crosses a set point, there is a feedback loop that tells the heating system to stop the heating, so the equilibrium is maintained.

In the case of humans, the homeostasis mechanism is made up of millions of neurons, that provide the feedback to the Hypothalamus area of the brain, which acts as a thermostat. These neurons pick up the tiniest change in body temperature, or blood sugar, or blood pressure and feed it to the brain. Even social systems (read your friends, colleagues, relatives) and cultures have homeostasis mechanisms that resist significant change.

What is the problem with Homeostasis? The problem is that, it tends to keep things as they are, even when they are NOT good.

Homeostasis is why, when you decide to get fit, and start a jogging routine, after the first few yards , you begin to feel dizzy, sick to stomach, your feel that your heart is about to explode etc., The Homeostatic alarm signals scream 'Warning! Your heart rate has significantly increased, your metabolism is high. Stop what you are doing!'.

As you can see, all changes are resisted. Change for the better is interpreted as a threat. So you give up jogging, and decide to adopt another method.

Note that smaller changes are easier to accept. Homeostasis is fine with it. However if the change is not within your comfort zone,you'll meet with Homeostasis sooner or later. You might sabotage your own efforts.

How to work around Homeostasis to keep up with our resolutions?

Leornard suggests the following ideas:
  • Be aware of Homeostasis: First recognize and accept that Homeostasis is normal for everyone. When Homeostatic alarm signals go on, it doesn't mean you are crazy or lazy. Take it as a signal, that life is changing. Don't panic and give up at the first sign of trouble. Expect resistance from friends, family, co-workers. Note that the entire system changes, when a part changes. People who you love start to covertly or overtly undermine your self-improvement.

  • Be willing to negotiate with your resistance to Change: This is key. Negotiate your way through on everything. Don't back off or bull your way through. If you ignore warning signals, you risk daring the system (which is not sustainable). If you bull your way through, you are almost sure to back slide. Stay alert. Be prepared for a serious negotiation on the magnitude, frequency and/or schedule or any other aspect of change.

  • Develop a support system: Try to team with other people with whom you can share the joys and perils of the the change you are making. Tell them what you want to achieve and seek their support. Seek mentor ship and mutual support from relevant people. Your mentors will brace you up when you back slide. For e.g. ask that your friend at the Gym to be a whistle blower, when you don't show up for more than 2 days in a row. If you are alone, ask for other people (close) to support you and be your conscience.

  • Follow a regular practice: Here Leonard gets in to his pet theme for Mastery, but this topic is very relevant for making a change. By regular practice you gain stability and comfort on a regular basis. Any regular practice provides a sort of underlying homeostasis, a stable base during the instability of change. So, get ready for regular practice. Successful athletes, and artists, are great examples of the power of practice.

  • Dedicate to life long learning: Leonard exhorts us to continuously educate ourselves for our entire lives. To learn is to change books, body or behavior. Don't stop education at college or at age 40, 60 or 80. The best learning of all involves learning how to learn, i.e to change.
I would like to add a few things to this list that can make the process of making change easier and permanent. That way you are likely to honor your resolutions more often than not.

I have observed the following things to be very helpful in my personal life
  • Accept change as inevitable and prepare for it ahead of time (Change is the only thing that remains constant)
  • Take on changes in baby steps, instead of as giant leaps
  • Reward yourself when significant milestones are reached
  • Choose appropriate tools depending on one's orientation and preferences (for e.g. if you are a visual person, you are not going to enjoy audio lectures about a change you want to make)
  • Champion the benefits of change to others.
What do you to making permanent changes in your life? How do you change your bad financial habits in to good ones , or good ones to better ones? Let me know your comments.

Thursday, August 20, 2009

Green Behavior, Health and Wealth - The Not So Apparent Connection

Building Wealth can get very boring if you think of it in terms of stocks, Mutual Funds, Bonds, Investments, Savings and Personal Finance Only. There are several other dimensions to it, that are not so apparent, yet very important. A Sustainable Environment is one such an important dimension to wealth.

Flash back to the 1990s. I graduated out of St. Joseph's College Trichy. It is a Great Institution that not only taught academics, but opened my eyes to the real world issues. Helped me develop a broad perspective on real life issues and more specifically the importance of nurturing the planet we live in.

Prof. Arulsamy of the Dept of Chemistry was a great influence on me, specially when it came to environmental issues. Figuratively, he planted the seeds of Green Behavior in me. He would deliver fine lectures about how our ancestors lived a nature friendly life, and how in the name of becoming modern and industrial, we were indulging in behaviors that started causing a big dent to the planet.

He would elaborate on how the green house effect, has started poking holes in the Ozone layer exposing ourselves and our posterity to harmful UV radiations, increasing our exposure to cancerous diseases, and causing dangerous shifts in weather patterns causing natural disasters and catastrophic societal issues like drought.

His views on the importance of living a simple life, leaving a smaller carbon footprint, using the earth's resources in a minimal and sustainable manner, planting greenery around our environment, and protecting natural resources and species had a profound impact on me as a young man.

He took students (like us) through several tree planting initiatives in surrounding villages, and we could see for ourselves what kind of simple living our people in villages happily lead. It was a humbling experience. (I think every institution should be mandated to carry out such education and practical experience in Green initiatives)

Protecting the environment and living a sustainable life got engraved as one of the core values, deep in my brain.

I planted several saplings around my ancestral property, that are trees now.

Flash forward to today, I don't have to tell you how polluted our cities and even towns have become. We are depleting the forest cover rapidly, emitting toxic chemicals in to the environment with our automobiles, A/C, landfills and such. We are destroying our trees to make way for concrete flyovers and not compensating for it by planting more trees elsewhere.

We can directly feel the impact. Our life, water and air quality are deteriorating rapidly. We are causing climate change and global warming.

Our summers are getting hotter, our winters colder, our water resources are drying up.

We are losing our health with hitherto unknown diseases, cancer and such. We are beginning to make the same mistakes as Americans by orienting ourselves in to a consumerist society and mindlessly accumulating stuff (whether we need them or not). We may make more money, but lose much more to hospitals to fix our health issues (year on year).

Before you despair, I want to let you know that there is a ray of hope. Some smart people have started to wake up to this reality. They are doing many things about it. You can do your bit for the environment too. You can participate in many Green Initiatives, by just contributing your time. Not even money.

First to get a handle on how we are wreaking havoc on the environment by accumulating "stuff", check out this cute movie "The Story of Stuff" by Annie Leonard. It was eye opening to me.

Annie explores where these stuff come from , and where they go to. She explains the system in crisis as a linear system on a finite planet, and how Corporations are systematically depleting the natural resources to make stuff (for money), how we are indirectly responsible for hurting people and natural resources in the process.

Root cause? Our mindless accumulation of "Stuff". By our adopting mindless Consumption as a way of our life.

I believe that her message applies not just to Americans, but to all of us equally (specially the city dwellers in India), as we get more and more globalized with every passing day.

Please watch this movie, and show it to your kids, your friends and relatives. Spread the awareness. Annie does not only cite the problem but shows practical things that we can all adopt. Subscribe to her blog if you like.

Dear Readers, what Annie shows as solution is not new to us. This is how our ancestors lived by design or default ( a nature friendly way). Paying respect to the forces of Nature and living a sustainable life. We just got lost somewhere along the way. We just need to get back to our roots.

Another good site that you want to check out is "No Impact Man", that talks about environment issues and what we can do to end the crisis, and lead a happy life.

I am not saying we go back to the stone age or give away all our modern day conveniences or technology . Just requesting that we be more mindful of the environment and incorporate simple practices that make a tremendous impact when carried out by all of us.

What Green Behaviors do I adopt in my practical life?

(1) I have reduced accumulating"stuff": Before I decide to buy any thing (not needs), I sit on it for atleast a month before I buy. Only if I am convinced after 30 days that I still need it, I go for it. The waiting period of 30 days is enough in many cases to deflect me away from impulsive shopping or duplicating products that I may already have. I make sure the products I buy are least hurtful to the environment. Stay away from plastic as much as I can.

(2) I recycle my "stuff" . When I finish using stuff that is in decent condition, I donate away to charity or friends, and make sure not to dump it in trash. That way I extend the life of the stuff.

(3) I try to use my car as little as I can. If I have to go somewhere alone, I tend to use public transportation or walk or use my bike. I ensure that my automobiles meet the latest emission norms.

(4) I buy things locally, from local markets. For example I buy my vegetables or fruits from local/street vendors, who are farmers or source it from directly from farmers. I minimize what I buy from retail shops and chains, which have a longer supply chain.

(5) I try to minimize the use of paper as much as I can. I try not to print papers unless absolutely necessary.

(6) I watch less television than I used to ( < 1 hour a day, and no TV on week ends).

(7) I minimize the use of electricity, and even lesser use of A/C. I switch off lights and appliances when and where they are not needed.

(8) I talk about the environment with my friends and family and encourage 'Green Behavior' in them also.

(9) I drink water and naturally occurring fluids like milk and coconut water. No Soda Pop. Sorry.

(10) I avoid any form of processed food like plague. I don't smoke or drink alcohol.

What are other things that I plan to do?

(1) Plant a little garden in my home (that I'm building now)

(2) Participate in atleast 1 Green Initiative in Bangalore that contributes in a remarkable and visible way to the society, that resonates with my Green Beliefs.

(3) Continuously educate myself on issues with environmental impact and what we can do about them.

  • In a nutshell, No environment, No health. No health, no Wealth. What's the point of Wealth without Health?
  • Green behavior is simple to adopt, mostly congruent with frugal behavior and is also gentle on your wallet. I am saying mostly congruent with frugal behavior, because in some cases, your upfront investment (e.g. solar technologies) may be higher, but the overall total cost of ownership comes down with time.
  • That is our only hope of leaving the world a better place for our posterity, than when we came in to.
Do you subscribe to any Green Behavior? Do you believe in it? What do you think? Let me know your comments.

Friday, August 14, 2009

Why now is the best time for buying or building your house?

Buying a house is one of the Most Important and Biggest Decisions that you may ever make in your life. It has huge implications on your finances, and can make or break you.

There is always a holy war between the buy vs rent lobbies, when it comes to housing. I'm a "buy" advocate, specially when you are buying a house for the first time. Finance apart, the idea of owning my house gives a kick out of me.

Once you buy a house, it is for you and your posterity for ever (unless you get in to any kind of a financial mess because of it). You can protect yourself and family with a roof above your head. You are not at the mercy of a land lord. You are protected from rental inflation. Once the house is paid for, you are protected from any changes in interest rates also.

Timing wise I think this is the best time to buy a house. Here's why:

In the current situation, I feel that the house prices have bottomed out to a large extent (in India), there's not much scope for any more reduction.

The overall improved sentiment from the US Fed Reserve , points to the beginning of an economic recovery in the US atleast by 1st quarter of 2010. (This despite the discouraging unemployment rate numbers in the US). Like it or not, the Indian sentiment is directly tied to the US recovery (although we are not technically in a recession).

Any signs that the US economy is recovering, is very likely to heat up all our down beat markets (stocks, jobs, real-estate etc.,). It's better to buy your home in a down beat economy (now) than in a overheated economy (that is likely in 2010).

In addition , the Indian Government has also introduced some fiscal stimulus measures, to kick start our economy.

The housing loan interest rates by banks are also very competitive now. I don't expect it to stay low for too long. When the economy heats up, interest rates tend to rise.

Hence you can save a lot of money by going for a housing loan and leveraging on low interest rates now. This will which directly translates to low EMI payments atleast for the first few years.

Recently SBI started this (low) interest rates war by offering loans of Rs. 5 lakhs at 8% p.a for 5 years and cutting 50 - 75 basis points (i.e reduce interest by 0.5 to 0.75%) for loans from Rs. 30 lakhs to Rs. 50 lakhs. Other banks are feeling the pressure and following suit. As a smart customer, leverage it.

Comparison of housing loan interest rates across 3 big banks
For floating rate home loans for amount of Rs 30 Lakhs to Rs 50 Lakhs.
1st year (%) 2nd Year (%) 3rd Year (%) 4th year onwards (%)
HDFC 9.00 9.00 9.00 9.00
SBI 8.00 8.50 8.50 PL-275bps
ICICI 9.75 9.75 9.75 9.75
(Source: Newspapers and websites of respective HFCs/banks. Rates of SBI and HDFC are after the recent cut in interest rates)

Before you take a plunge note the following:

(A) Make sure to exercise due-diligence on the property you want to buy and the price you are willing and able to pay. Don't get carried away by the sales pitch of legitimate or illegitimate housing companies. Know and get all the paper work and ensure they are originals. Get a legal opinion without fail. Get multiple opinions from experts. Satisfy yourself, that what you are paying for is reasonable market prices (do comparisons, market research, peer checks of prevailing market rates), the property exists, it is legally being sold, free from encumbrance, and the seller is legit.

Reputed builders are safer but not guarantees. They can take your money and keep you waiting for months if not years, before they deliver the project.

Understand that buying a property is both an art and science. Hence your emotions and intellect should both play a crucial role in the selection of a property.

If you are careless, you can get cheated big time and very easily.

(B)Ensure that you can afford the housing loan. First take stock of how much down payment you can afford. More the merrier (say atleast 25%).

Banks will do their due-diligence, on your affordability of the housing loan and the property itself, even before granting you a loan. You shouldn't however be counting on the banks to do it all for you. After all, banks are in the business of making money out of you (as interest on the loan). If you aren't careful and lose money on the property or lose the property itself, the bank will come after you anyway for the loans.

A rule of thumb is that a housing loan shouldn't exceed any more than 2.5 times your annual gross salary. The EMI should not be more than 25% of your take home pay. Shorter the duration of the loan, the better. If for example you make Rs. 5 Lakhs an year, the ideal bank loan is Rs. 12.5 Lakhs (worst case Rs. 15 Lakhs - which is 3 times your annual gross).

(C) Read the Fine Print: Don't get carried away by the interest rates alone. Look critically at all hidden costs. Some of the banks charge 1% processing fee, some mandate some form of insurance etc., Understand any prepayment penalties (ideally none to 2%). Most banks don't offer fixed interest rates now, but you may want to compare them with floating rates (if available). Know that most fixed rates are not truly fixed rates in the sense that the banks can under circumstances still increase the interest rates.

(D) Don't count on tax breaks on housing loan interest as an incentive for taking a housing loan. Although the tax breaks exist today, to the tune of Rs. 1.5 Lakhs, in the proposed new tax code the Government is planning to do away with that tax break. The party is coming to an end.

Good luck with your Housing decision, and let me know your comments.

Wednesday, August 12, 2009

New Tax Code - Pay 10% income tax up to Rs. 10 Lakh - Dream Come True for the Indian middle Class!

I was pinching myself as I read the report in the "Economic Times" that the Govt. is rationalizing the income tax structure, and reducing the overall tax burden on individuals.

Please read the full article here.

In a nutshell, here's what is proposed for Individuals:

Other highlights:

  1. Increase in the tax deduction on savings of Rs 3 lakh and all perks to be added to income for taxation purposes. Currently under section 80C, we get an exemption of Rs. 1Lakh only.
  2. For corporates and multinationals there are some tax sops but I leave it out since it doesn't concern individuals as much.
  3. The part I didn't like that much is this: With regard to PPF and other pension fund schemes, the code said the government should continue the tax exempt status to withdrawals of amounts accumulated up to March 31, 2011. After this time, it is proposed that the withdrawals from Personal Provident Fund (PPF) be taxed. This is not good news.

Folks, please re-read the table above, until it sinks in to you . This is GREAT NEWS for Tax Payers and specially the middle class ones. As smart individuals, we should maximize our contribution to PPF, Pension Plans (e.g. NPS), ULIPs and other tax saving instruments to the tune of Rs. 3 Lakhs!!.

If you plan your taxes wisely, this proposal can result in savings from ranging from a few thousand rupees to a few lakh rupees. That's a lot!!

Note that this is not law yet, and the bill is proposed to be passed during the winter session of the parliament. I hope no one in the parliament dares to challenge such a great Income Tax reform benefiting the Indian public, that is long over due (48 years to be precise).

At a strategic level, this is a huge win for the government, and I'm sure it will help broaden the tax net, reduce the black money circulation.

Kudos to Pranab Mukherjee and P Chidambaram!

Hip hip! Hurray !!

Friday, August 7, 2009

The Exit of Entry Load - Burden of Exit Load - Mutual Funds in India

Recently SEBI had passed a regulation to ban entry load (being charged to individual investors) by Mutual Funds, effective Aug 1st 2009. I didn't write any post cheering this move, because I knew that the fund houses would find a backdoor entry to charge the investor back.

My suspicion has been confirmed.

In a bid to counter the No-Entry load rule, which became effective from August 1, many fund houses have increased the exit load and the tenure for the inapplicability of exit load to 3 years.

This means you (the investor) will have to stay invested in mutual funds for 3 years if you wish to avoid paying exit load. Earlier the exit loads were applicable if the investor redeemed within a year.

This can impact you in two ways:

(i) This will prompt you to stay invested for the long haul, which is important while making equity-oriented investments.

(ii) You should watch out for distributors who can coax you to churn your portfolio too often, in order to earn commission through exit load. Distributors are entitled to receive a maximum exit load of 1%.

What is a sensible approach? Couple of rules that I have decided to to go by:

(i) Always choose a fund, which is capable of meeting my objectives and matches my profile.

(ii) Stay invested in the fund as long as they serve that purpose.

(iii) Invest in Index Funds, where the overheads are generally low.

To research mutual funds before I invest, I go to Mutual Funds India. This is an excellent, comprehensive portal to research all available Mutual Funds in India. It shows the historic performance, NAVs and simply all information that you want around various types of Mutual Funds .

Check it out before you take a plunge. More on this site later.

Thursday, July 30, 2009

How to detect fake currency (Rs.100 and Rs. 500 notes)?

The Times of India carried an alarming headline on 7/31/2009 titled "Watch out, your Rs 500 note could be fake".

In a nutshell the report claims that currency to the tune of Rs. 169,000 crore is in circulation in the Indian system (Not sure how they precisely estimate this. Or is it sensationalism at its best?), and that even banks and establishments are struggling to tell the original from the fake.

If this is true, it can be devastating to the economy and individuals. If you are like me, and would like to avoid dealing with cash as much as you can, then you have less to worry about. You can write checks or use debit cards or credit cards, and forget worrying about this issue.

Nevertheless, in India it is impossible to lead a life without handling hard cash. Most of the vegetable vendors or news papers or even certain shops require the use of cash. Most establishments have a minimum spend limit within which you can't use any of your cards.

I thought, it would be a good idea for common people like you and me to know and detect fake currencies to the best of our abilities. We don't want to carry fake currencies or get arrested for our negligence.

As I was searching around, I was able to find films officially produced by RBI, in public interest in their site itself.

Out here, you find very short films that describe the security features of Rs. 100/- and Rs. 500/- notes.

For some reason, I was not able to view the movies on my FireFox browser (ver 3.5), but it worked fine on IE V7.0.

What better way to learn this than from the RBI, and that too in audio-visual format? Check it out and let me know.

What methods do you adopt to detect fake currencies? I'm curious to know. Let me know your comments.

Friday, July 24, 2009

How to select the best money transfer service and get the best exchange rate for your money?

If you say you simply go by ads and claims, then you need to do more homework. You're smarter than that. Aren't you?

All money transfer services tout themselves as the "best money transfer" service to India. They guarantee security of the service, 24 *7 customer support, no fee, any bank to any bank in India, secure transactions, 4 day delivery and what not.

No doubt your money's security and other attributes like speed of transfer are important. But what about one of the most important attributes "exchange rate"? Everyone claims theirs to be the best in the world. You get confused. No wonder then you go back to what your friends do and just choose that service.

Remember when you get an exchange rate that is low, you are potentially losing a lot of money. For e.g. if your service pays Rs. 0.30 lower (than standard) per $ or #, even if you are transferring $1000, that translates to Rs. 300/-. With increasing amounts and frequency, you can win or lose money depending on the service you choose.

Many times you don't care to check, and the service makes money big time. How then can they cover their cost?

The tricky thing is from the moment you initiate the transfer, your service will pay the exchange rate 2 or 3 days later. They publish their daily rates in their own sites. DO NOT trust this rate as a good bench-mark.

There really is a much better way to measure your money transfer service provider. Here's how.

Everyday, the RBI (Reserve Bank of India) , publishes a reference rate for all major currencies against the rupee. This is a standard rate that the RBI expects the bank to provide to customers. It's usually published in the home page itself. I am providing a screen shot for reference. Check the exchange rate on the RBI Site on the day of you initiate the transfer and for the next few days.

Compare what's in RBI site on the day with what you get from your service provider. If you are within + or - Rs. 0.15, then your exchange rates are decent, and the service provider is reasonable. If it is outside this range, then you need to call up the service provider , show the data and ask him what's going on. If you don't get a comfortable response or remedial action, don't hesitate to ditch the provider for another.

Although there are popular service providers like Remit to India and Money to India, my experience with them was not positive. Sometimes I got lower exchange rates, sometimes delayed remittance, sometimes poor customer service when there was an issue, sometimes all of the above.

I have been using State Bank of India's Online Money transfer service, for the past 6 months or so. Online SBI offers competitive exchange rates (validated against RBI rates) and all the other security features without much ado. The portal is very simple and user friendly to use. You don't have to have an account in SBI in India or in US, to use their services.

All in all, I'm a very satisfied customer. Note that this is not a paid ad or anything. Just my personal experience.

Who do you use for money transfer? What's your experience? What tricks do you use to get the best exchange rates?