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?

Tuesday, July 21, 2009

One Habit that will help you make Sound (Financial) Decisions

David Ramsey in his popular book “The Total Money Makeover” makes an excellent point. Personal Finance is 80% behavior and 20% head knowledge.

I couldn’t agree more.

I have experienced this multiple times in my personal life. I have made some bad investment choices in life and many good ones too.

As I pondered about it, I came to the conclusion that although there are a lot of good qualities that are important, a key behavioral quality ranks highest, in making good financial decisions (from my own personal decisions).

And that is: “Asking the Right Questions” before you invest or spend your hard earned money.

Think about this. You earn money the hard way, spending months or years. With poor financial decisions, you are blowing away not only money, but all your efforts, energy and time that you spent on earning it. Remember you are emotionally invested in it already.

Answer honestly.

When it comes to savings and investments: How many times do you act hastily on financial tip-off from friends, relatives and media? How many times did you thoughtlessly plunge in to stocks and mutual funds that plummeted in value soon after or sold investments that skyrocketed soon after? How many times did you buy insurance policies clueless about the coverage or details, and whether you really need it? How many times have you been sold investment products that you have the faintest idea of, that have given you poor or no returns or blew your principal away?

When it comes to spending: How many times did you spend on products that you didn’t quite need or want? How many times did you have to throw out the products because you didn’t have space to store them or because another product that you had already addressed the need more effectively? How many times did you feel remorseful about buying wrong things, or overpaying for those and/or not being able to return or exchange them? How many times did you buy software when a comparable one was available for a free download? How many times have you made impulse spending decisions that you couldn’t even resell at a lower price?

Did you ever wonder Why? I think it is because you are not asking the right questions. You are either not asking anything or asking wrong questions or dumb questions.

How does “Asking the right questions” lead to good decision making?

(a) You do the research : In order to ask the right questions, you need the knowledge. Right? Hence you start doing the research before you invest or spend money. If you want to invest in stocks, for example you get to know the industry, the economic and business context, the business model of the company you want to invest in. What is their revenue? How profitable is the company? What is the P/E Ratio? What is the market capitalization? How does it stack up against competitors? Is it a growth or value stock or neither? How long has the company been around? Etc.,

Similarly before you spend, you begin to do the research. You begin to ask if you really need this or want this, if you can afford this, by how much are you postponing your goals achieving your financial or other goals, or if you have something already that can serve the purpose, what comparable products exist in the market, price comparison, reviews, quality comparison, Is some one giving away for free or cheap in Craig's List, or free cycle? You cover the whole nine yards.

You get invaluable information out of the research that will help you make a better decision.

(b) You take time to make decisions: You need and take time to do the research. That psychologically detaches you to an extent from the decision you are likely to make. With the additional time, you tend to get more rational than emotional or impulsive. You are not a kid in the candy shop any more. The time taken itself improves the quality of the decision. Even if you lose a specific opportunity because of the time taken for research, you are still better off, because you will be prepared the next time.

(c) You become an organized planner: You begin to realize that to make use of investment opportunities and to make the right spending decisions, you need time and research (as above). To do the research, you get the right tools. To not get overwhelmed you begin to prioritize and organize. You start planning ahead of time, set goals and milestones to measure yourself. In short, you organize your life smarter,

(d) You turn off bad advice, and attract good company: Because you are not naive anymore your bad friends and influences begin to retreat, knowing that you won’t listen or act on what they want you to bite off. They realize that you are not gullible anymore. You have developed some good habits and continue to build them. You have gone through a profound personality change with this habit.

On the hand, you attract people who share your philosophy. You are in the company of people who are sensible, and financially well-behaved. Your ability and chances of cultivating good habits are much higher.

You build synergy that leads to very wise investment decisions. All by Asking the Right Questions.

What is your experience? If you have to list One Key Quality or habit for better decisions what will that be? If you were to choose 1 good Habit what will it be? What’s your experience?

Sunday, July 19, 2009

Credit Score and Credit Bureau in India - The Chitragupta of your Credit Karma

You have a great relationship with your bank. Say you built it over a period of several years. You have been paying your credit card dues well in time. Your rent, bills, EMI have never been late. No impulse spending. Your credit situation is well under control. You want to apply for a new housing loan at your bank.

Let us say your neighbor next door has a questionable credit record. Say you know it. He doesn't pay his credit card bills in time, or has too much debt. In India, it is not hard to know it. There are several sources. Let us say, he also wants to apply for a new housing loan at your bank.

Today, more likely than not you both will get the same interest rates. Same terms and conditions. No discrimination. This is unfair, of course. Although we all may know your neighbor's credit problems, the lending institution may not know. The bank may not know the gravity of the problem, unless your neighbor confesses it to the bank. Which is unlikely. Hence you both are the same to the bank.

The Good News: This is about to change or changing already. Each one of us are going to be assigned a Credit Score in India.

A Credit Score is a three-digit number that will be used to evaluate your credit worthiness by lenders. If you have a good score, you can get lower interest rates for loans. You can get better credit cards more easily.

In the US, for example, where credit scores range from 300 to 850, a person who has a score of anything above 750 is likely to get loans at a rate that is about 1.5 percentage points lower than somebody with a score of about 600. This directly translates to a lot of savings every month in the mortgage, or other forms of loans that Americans have. In fact, many employers do a routine credit check of their employees in the US, and can even use it as a ground to deny employment, if the history is not good.

The Credit Score is based on a set of criteria that includes, among other things, past loan history, number and amount of loans taken, number and amount of loans defaulted, filings for bankruptcy, credit card payment delays, balance outstanding in various loans and the like

The concept of Credit Score has taken off in India. Thanks to CIBIL. i.e Credit Information Bureau (India) Limited. This is a credit bureau that is going to track your credit card and EMI payment history, your car loans, your banking history in India. Think of it as the equivalent of a Chitragupta for your day to day Karma.

CIBIL is jointly owned by a consortium of banks as of now, and more and more banks are joining it. As of writing, SBI, HDFC, HSBC, ICICI, GE Capital, PNB, Standard Chartered bank, Citicorp etc., have varying stake in CIBIL.

The good news is for responsible consumers and banks. Those that pay their bills in time, every time. Those that don't take on loans, that they can't afford. Those that take financial responsibility seriously and get them all organized properly. Those that have a good Credit Karma. There is a clear incentive for such responsible behavior. The rewards for those folks are easier loans, better interest rates, better credit cards and endless other benefits.

The banks stand to benefit because they can precisely know the credit worthiness and risk profile of the customers before they make key decisions like granting loans, issuing credit cards or selling any products or services. Banks can know with a reasonable and objective level of confidence, as to how likely a customer will (or not) pay his EMI or other loans.

The bad news is for people who are not responsible, because every action is getting tracked meticulously and can very well form the basis of their eligibility for future credit.

I must mention a few other shortfalls of the current system before I sign off:

(a) Unlike the US, at this point, the Credit Score can't be obtained by individuals (like you and me) directly from the CIBIL. Only the banks , where you apply for loans or open deposits can pull this from the Credit bureau and share it with you

(b) There are some unpleasant experiences of individuals who got a bad credit score because of the misinformation from lenders and possibly the CIBIL itself regarding customer's records. In order to dispute or fix these, you to deal with the concerned bank that gave wrong information about you to CIBIL and can't directly approach CIBIL. It's therefore bureaucratic.

(c) The algorithm or formula for computing the Credit Score is not transparent to individuals and is proprietary to CIBIL. This can lead to bad credit scores and possible misinterpretation. Individuals won't have a way of knowing what kind of behavior is rewarded and what is not. For e.g does your credit score improve, when you have a few or more credit cards? when you have a home loan or not?

(d) It's not transparent as of now, how they track the information about individuals. Is it based on PAN Number, or Passport Number or what? What if some one doesn't have anything and still has a credit card and/or paying an EMI? How are multiple names, formats in India reconciled and ensured that the credit record of the correct individual is updated? This is an implementation difficulty unique to India, where the concept of SSN (like the US) doesn't exist.

Despite these and many other issues, I welcome the concept. The kinks will get worked out. Over a period of time, the system will get better, specially with the entry of additional players like EquiFax in to India. No system is perfect on day one.

To overcome the above issues, at an individual level you can do a few things. Be conscious of the importance of maintaining your identity private, consistent and unique. Identify theft can lead to very bad results. A separate post on this later.

Choose the same name (formats) all over and stick to it. Not one name in your PAN and one for your passport.

Pay your bills in time, and don't have any debts looming over your head. Don't default on any payments.

For additional information, please visit CIBIL's web site. They also have a comprehensive FAQ section that answers many questions that you may have.

We really have to feel proud, that a system is falling in place to track and reward good financial behavior. As the saying goes, A Good beginning is Half Done.

Remember the Chitragupta is watching your financial behavior now.

Thursday, July 16, 2009

All about the New Pension Scheme (NPS) in India

Salient Features:


Eligibility: Any Indian Citizen can invest


Minimum Investment per year: Rs. 6000/- Maximum: No limits


Tax Exemption: Up to Rs. 1 Lakh under section 80C


Term of the investment: Suitable only for the long term (Pension), for average, individual investors. Not recommended for short-medium term investments or speculation.


Risks: Investment subject to market risks, but cushioned to an extent by the investment in GOI Bonds and the % exposure (not to exceed 50%) in equities.


Who is the Regulatory Body?


Pension Fund Regulatory and Development Authority (PFRDA)

The investor's account will be maintained by a record keeping agency appointed by the PFRDA.


Who are the Fund Managers?


The fund will be managed by six fund managers, appointed by the government at annual fees of 0.0009% of the invested amount, which is less than one paise per Rs 100. The fund managers appointed by the PFRDA are SBI, UTI Asset Management, ICICI Prudential Life Insurance, Reliance MF, IDFC Mutual Fund and Kotak Mahindra.


How/when do I get the investment back?


Money invested in the pension fund during the your working life will come back partly as a lump sum and partly as an annual payment or pension.


How are my funds Allocated and Risks Managed?


The fund gives investors the option of deciding what level of risk they want to take, given the fact that higher returns are typically associated with higher risk investments. The fund will be invested in three kinds of assets — equity, government bonds and corporate bonds — and it is for the investor to decide how much should be invested in each of these.

Investment in equity is, however, subject to two significant constraints.

(1) It cannot be more than 50% of the amount in the investor's account.


In my opinion, This clips the level of risk exposure but it also can be found to be very conservative and limiting specially for people who are young and who can afford to take more risks.


(2) Fund managers cannot invest in shares of individual companies, but only in index funds linked to the BSE's sensex or the NSE's Nifty.


In my opinion, this is really a great idea. It has been historically and consistently proven that over a real long term (say 25-30 years), Index funds have outperformed other types of funds consistently, although they are vulnerable to all market risks. Very low overheads and fees are involved in Index funds, which means more of your money goes to work efficiently. In fact, they are the best vehicles for average investors wanting to invest in stocks.


For those who would rather leave it to experts to decide what the balance should be, there is `auto choice' option. Under this option, for those aged 18-36, 50% of the amount in their pension account will be invested in equity, 30% in corporate bonds and the remaining 20% in government securities. From age 36 onwards, the proportion of investments in equity and corporate bonds will decrease annually while that in government securities will increase till the mix reaches 10% in equity, 10% in corporate bonds and 80% in government securities at age 55.


How do I open a pension account?


Approach the branches of any of the 22 `point of presence' (POP) service providers selected by the authority. These include State Bank of India and all its seven subsidiaries as well as ICICI Bank and Punjab National Bank. PFRDA.

Who will I have to deal with for my day to day transactions?

You (the investor) will need to interact only with the POP, where you can deposit your monthly, annual contribution.


What if I want to change my fund manager?


You have the option of shifting from one fund manager to another, merely by instructing your POP to do so. The POP will inform the same to the record keeping agency, which will shift the fund to the new fund manager, selected by you.


What if I have additional questions?


Please contact the nearest branch of SBI or affiliates, ICICI, UTI Asset Management, ICICI Prudential Life Insurance, Reliance MF, IDFC Mutual Fund or Kotak Mahindra.

Tuesday, July 14, 2009

Top 10 signs that your Personal Finance Situation is in Trouble


1. Your idea of Savings is what (if anything) is left out of your paycheck after all your expenses for needs, wants and wish list items are taken care of.You park it in your checking account, for easy "liquidity"

2. You believe that Financial Analysts, some of your friends and media are clairvoyant specially when it comes to accurately predicting the stock market trends, stock prices or mutual funds' NAV. You base your stock picks wholly and solely on their tip off (and not based on any research).

3. The only context in which you hear a goal is football or a sport like that. The only context where you have heard of bond is when it is prefixed with James.

4. You firmly believe that planning is for businesses and corporates, expense tracking and budgeting are for accountants, expert research and investing is for financial experts and impulsive spending is all that is for you. And You do it systematically.

5. Your source of long term education funding is your parents.You believe that they totally owe it to you (and even your children) any time.

6. You believe that any form of debt is like Good Cholesterol (HDL), the Higher the better. Minimum payment due is like Bad Cholesterol (LDL), the lower the better.

7. You don't have the time to go through ever increasing pages of credit card statements. You choose to view and pay off the minimum payment due instead.

8. You believe that friends, relatives and credit cards are the only and fully trusted sources of emergency funds.

9. You firmly believe that you are going to live healthy for the next 100 years, and hence it is too early to start "spending" on health or life insurance premiums, or any time taking care of your health.

10. Your idea of retirement planning is to bet on winning a lottery or counting on an inheritance.

Thursday, July 9, 2009

Interest Rates Comparison Sites in India?

An NRI Friend of mine returned to India recently, after a prolonged stay in the US. He was complaining about the lack of comprehensive comparison information sites about interest rates across various banks.

In the US you have www.bankrate.com that does a great job of getting the best rates of interests in a comparison format so you can make informed choices about where you invest your money, or take loans from.

I took up the challenge, researched on this topic to help my friend. I came up with some interesting findings with respect to comparison sites that I thought would be useful for you as well. As you invest in various products in various banks, you definitely want to have a good idea of prevailing interest rates in the market, and how your bank stacks up.

I am a huge proponent of simplicity and sticking to 1 or 2 bank accounts. However when the amount to be invested is higher, it does a make difference to know if someone is offering a higher rate of interest, and be open to going with them. This also applies in the case of Home Loans or Credit Cards. You can get the best deal by comparing the banks and pitting them against each other. That will directly contribute to your savings. The higher the money and the longer the term, the greater the savings.

If you don't want to go with the respective bank or institution, you can use the information as a negotiating lever with your current bank to get a better rate.

Two Sites came close to Bank rate in the US.

Disclaimer: I am in no way affiliated, employed or have any fiduciary interests in these 2 sites below, and it is for informational purposes only. I don't own any shares of these 2 sites. This is not a paid advertisement also.



Here they are in no particular order:

(1)Ecompare:

The Home Page looked as below.




I chose Fixed Deposits 1-10 years, and the site showed me results with about 38 banks (private, foreign and nationalized banks) and their interest rates. I have shown a small subset of the results for convenience only. You can check it out yourself. The gray highlighted column shows highest interest to lowest interest rates (descending order) across banks.



I didn't check out the other portions of the site like Credit cards or loans. That is the home work for you. The site didn't ask me for the types of banks I'm interested in, or any other criteria like whether I'm a senior citizen or what was my location.

(2) Ratekhoj.com

The home page showed up as below.

Unlike eCompare, this site let me chose the types of banks, that I was interested in, location and certain other details like whether I was a senior citizen. It also gave me the option to compare with Company FDs and Post Office Products.

I chose the location to be Bangalore, restricted the search to Nationalized banks, and it listed about 39 banks (small subset shown for simplicity) as below.


Boy, I would have no way predicted that State Bank Of Patiala would be the bank with the highest interest rate for this group. I didn't know it even existed. It also showed links to the terms and conditions, premature withdrawal rules, finding location etc.,

As far my friend, I'm sure he is convinced the capabilities exist. I'm not sure if he's going to use it or not, but I'm sure you will give this a shot, before your next deposit in to any FD or shopping for the next housing loan or credit cards.

What sites or methods do you use to determine , compare the interest rates? Please share your experiences.

Tuesday, July 7, 2009

How to find the Best Financial Adviser?

You might wonder if you really need a Professional Financial Adviser. It depends on your financial situation and psychological makeup. In some cases, you may not afford one. Or you may truly believe that you can afford one, but (you also believe) that you have the experience and knowledge in Personal Finance. In some cases, you may simply be uncomfortable sharing your financial situation with a III Party , even if a professional PFA.

In either cases, you can be your own best financial adviser. In fact, there can be none who can work as much in your best interests other than you (strictly speaking). I suppose you have minimal conflicts of interests with yourself (unless you self sabotage yourself), and best interests of yourself in mind.

If you are a high net worth individual and/or you believe you need expert advise on Personal Finance matters, it is definitely recommended that you have one. I mean a Good one. If you are convinced that you need one, you want to obviously exercise due-diligence in selecting a good one.

Unlike other professional relationships, you have to recognize that a Personal Financial Adviser (hereinafter PFA) is in for the ongoing possibly lifetime processes, and the stakes are quite high. This person is going to know and help you with possibly confidential Financial situation, and for the long term. Hence you want to build a long term relationship based on trust and good will.

In today's market, the word Financial Adviser is pretty loosely defined. How do you recognize a genuine PFA ? Can your PFA be a fee only planner? A qualified stock broker? Life Insurance Underwriter? A registered investment adviser?. The right answer could be one or more or none of the above. Here are some possible options

Reference from your other professional relations or friends or colleagues: E.g. Your attorney or accountant may recommend some one. Probe as to why they like the PFA.

Interview Potential Candidates as if it is a Job Interview. It is. Ask them a lot of questions. Here are some examples (in italics). You should add things specific to your situation.

(a) How long have you been in the Personal Financial Planning Industry, who did you work with previously, and for how long? Can I reach out to some of them to have a discussion? You should get multiple references and do thorough background checks on their credentials and follow through. You don't want to trust some one on face value and regret later. It could turn out to be a costly mistake.

(b) How many clients do you have? Note that you don't want to be a drop in a bucket full of clients. You run the risk of not getting much attention if the PFA has too many clients.

(c) Describe some of your clients (without names of course), their income, net worth and occupation. This is to get an idea whether or not you are a typical customer profile for your PFA.

(d) What is your investment philosophy? What type of vehicles do you invest in? What is your experience with life insurance, MF, Stocks, Real Estate, Tax Planning, Business Planning, Retirement Planning, Education Funding (and whatever other areas you are interested in) ?. This is to understand the breadth of skills of your PFA. Broader the better.

(e) What have been your highs of your career? How much wealth did you build for your typical client (without names), and/or how much did you help manage?

(f) What is your approach to black money? This will give you an idea of their overall personality and integrity.

(g) What are some magazines and journals/periodicals you follow? How do you keep with the latest trends? What are technologies you use?

Questions for background check with references:

(a) How long has the PFA handled your affairs?

(b) Is the PFA related to you or your personal friend? If so , for how long?

(c) In a scale of 1-10 how happy are you with her services and how would you rate her?
(1 worst- 10 best)

(d)
To what extent does she monitor your investments How frequently do you have reviews?

(e) Does the PFA call with good investment or ideas?
Changes in tax laws up to date? What do you believe her investment philosophy to be?

Look for experience AND education: A PFA is not meant to just tip you with the hottest stock of the week. It is about committing you to a program and accomplish your objectives. They should be well rounded in various areas like education funding, retirement, business succession planning, gifts, insurance and investment management. You don't want an educated kid with no experience offering you theoretical advise. A PFA should have atleast a decade worth of experience before they are on their own to help you. As far education , a CA, CFA, MBA or some grounding in Finance is recommended. With a plethora of courses these days, there may be several others that may qualify.

Ask about compensation and fees for services: Some PFAs get paid for study,reviews and investment management on commission basis or fees. Fee only planning refers to planning only. These folks gather the information and present to you their findings and recommendations on an hourly basis or a flat rate based on your portfolio.

Fee based planning for example can be up to 2% for Rs. 1Cr. 1% for up to 10 cr. and 0.5% above that amount. The % should decrease with increasing portfolio size.

Commission based planning: These folks charge nothing for planning, but charge for product purchases through the planner on a commission basis. They may have arrangement with brokerages.

Some may be flexible about the payment terms. Make sure you truly are comfortable with the compensation model and amount.

Concentrate on building relationships: A PFA should be someone who will place your needs above their own. They have to be fairly compensated for their work but should not be someone who will wait to make money out of you no matter what.

Don't ever buy an investment over phone from someone you don't know. Do business with those who you choose to. At earlier stages of relationships let the business be done face to face only. If your comfort level improves, you can consider doing some business possibly on the phone.

Don't give anyone authority to trade your account other than your trusted Professional Invest manager with whom you have a written contract. Even then, retain the final decision making authority to yourself.

Focus on relationships, not the speed of transactions: Relationships, Integrity, Trust and sound principles are more important than the speed with which they execute your transactions.

If you are not fully convinced about your PFA, don't go with him/her. If you are partially convinced, and would like to proceed, expose a part of your portfolio and make a final decision based on how they manage that slice of your portfolio.

These are just some suggestions and starting points. By no means, these very specific questions are exhaustive. You have to build on these. Do your own research, and let me know who you find. Good luck!

Friday, July 3, 2009

Why it pays to Organize your Finances? - Baby Steps to Organization

Last week my wife and kid were down with viral fever. Friends pitched in with food. I didn't want to bother them much. The prospect of getting food from restaurants didn't appear healthy, nor did I have the time for frequent trips. Therefore I decided to put my culinary skills to test.

I have decent skills in cooking from the past. I know a limited set of Indian recipes. However, I make it a point to prepare those limited items well . Plus I never hesitate to learn new things or improvise my cooking "on the go".

I must mention that it has been quite a while since I cooked full-fledged meals.

My wife is a fairly organized person. She takes great pride in keeping the kitchen clean. Despite all that, I still had to wake her up frequently and ask her a lot of questions about where the ingredients were placed in the kitchen. I felt bad to ask her for too many things when she was sick, but I wasn't patient to search also, plus I was making blunders. Although she knew where things were, it was not intuitive to me.

No wonder an impatient newbie like me, couldn't spot things easily in the kitchen (whether it was sugar or cashews or turmeric). Hence I used the marker to put labels on those containers for added clarity, and used certain other organizing hacks to improvise it a little better.

Anyways, within a day, I learnt the ropes and I was buzzing in the kitchen. I couldn't but help appreciate her ingenuity in the placement of groceries based on her need and style. And whether or not it because was my food, my family got well in the next couple of days.

When it comes to Personal Finance , things are no different from a kitchen. The more organized you are, the easier it is for you to focus on important Financial issues without feeling overwhelmed. You will feel a sense of control and purpose. You will feel secure in the belief that you know where you stand on Finances, know what your priorities in life are, where you need to invest your time and money in , where you need to cut down and make realistic decisions that are in your best interests.

You will not make stupid financial mistakes like paying overdraft charges, paying late payment fees, choosing wrong financial products or services. You name it . Above all, when something happens to you (even if temporarily), your loved ones can run the show.

If your Personal Finances are cluttered up, you will find it very uncomfortable and your loved ones will have a hard time sorting things out in your absence (should a need arise). Your bad organization skills will cost you and your family dearly and financially.

What are the essential steps in organizing your finances?

Eliminate : Before you try to organize your Personal Finance , you should really focus on eliminating redundant or unwanted accounts. Too many accounts are overwhelming to maintain. Plus by consolidating them in to 1 or 2 accounts, you are (a) reducing your administrative fees, (b) saving yourselves the pain of reviewing multiple statements and (c) address your minimum balance needs more effectively. You get a better leverage and customer service with the 1 or 2 banks.

Can you cut back to just 2 bank accounts (instead of a dozen that you may have)? Can you keep just 1 or 2 credit cards and close all others? Can you reduce the number of brokerage firms to just 1 and/or see if your bank itself provides investment services? What are other things that you can cut back on without losing the service? Please be ruthless about elimination.

Automate:
Make sure to automate your payment infrastructure. When your pay gets deposited on a given date (say 1st of every month), provide online or standing instructions to let the money flow in an automated manner for various savings and expense buckets.

For e.g. Designate and move a certain % to Recurring Deposits meant for various purposes, a certain % to SIP (Systematic Investment Plans). See more in Organize section.

Make sure to schedule online bill payments for your service providers (electricity, water, gas, telephone, maintenance etc.,). You shouldn't be wasting your precious time standing in a line to make payments

Organize and Keep it Simple:
Do some basic organizing. Open separate Recurring Deposits within the 1 or 2 banks for various things. As an example, you want an RD A/C each for your home maintenance, for your house construction, for your Personal Provident Fund A/C (for the next year) . Open 1 or more SIPs for a mutual fund and funnel some money in those (monthly) as well. Open Fixed Deposits where you don't need the money for the medium term (2-5 years).

Setup online access to these accounts, that consolidates and shows you all the various types of accounts in 1 portal. As an example, here's how my HDFC Bank portal looks like.


As you can view in the screen shot, this portal shows me my various types of accounts (RD, Fixed, Savings) on the left hand side navigation. My scheduled bill payments, HDFC Credit cards, Mutual Funds and Demat Accounts (for stocks) are available in the various tabs (to the right).

A portal like this, makes the process of getting a snapshot of your stocks, MFs, Savings, Fixed Deposits, RDs, SIPs all in 1 place consolidated. Simple. I believe most Indian banks provide this level of functionality and flexibility.

As another important step, get your statements delivered online to your personal e-mail id, instead of through regular mail.

Create separate folders for the various banks by various months and store the statements in those folders.

While the above will give you a reasonable idea of your Net Worth, it doesn't include your real estate holdings, gold and certain other types of investments like insurance.

If you are old school, then buy the necessary stationery (like folders, binder clips, post it, label maker etc.,) from an Office supply store and organize the physical statements. These statements should be stored in the respective folders, for your reference later, with an index page that states which statements reside in which folder. These come in handy, when you apply for loans, or file Income Tax returns.

In one of the later posts, we'll illustrate a simple spreadsheet that shows an approach on how to go 1 step further, and consolidate all your investments in to a single view. For now, this should be adequate.

As far as your stock, Mutual Funds Portfolios if you are not happy with what is offered by your banks, you can also setup your portfolio in portals like finance.yahoo.com using your yahoo id. The screen shots below show an outline of how to accomplish adding stocks to your portfolio step by step, so that you can easily track the performance of your stocks or MF since you bought them.








Payments:

For your bill payments , if you don't get your bills by e-mail , or get an e-bill, then please setup reminders in your google or yahoo or plain old traditional calendar to alert you for payments. (You can save loads of late payment fees and feel very good about it).

For your investment payments a similar approach will help. Get the reminder early so you can plan for the payment ahead of time.

Receipts:

I personally don't enjoy this much, but it is important for tracking your expenses and for income tax purposes. If you are a tech geek, then you can use a camera or scanner to scan the receipts, and store them electronically (by month). If you are old school, clip and store the physical receipts and retain them atleast for 1 year.

Educate and improvise Continuously: Keep your eyes and ears open for sites, books, people that keep you educated on how to simplify and organize on a continuous basis. If you have a spouse or loved one who may need to be educated on where your holdings are and how to view, access them, you must keep them informed and educated as well.

Remember, all human beings are mortal. It's important for family to move on with financial life after our life.

At the same time, there is not a single system that can fit all our styles. If you don't like to do it the way I outlined above, by all means develop your own. But don't ignore this important aspect of Personal Finance.