Invest in PPF - Tap the Combined Power of Compound Interest, Tax Savings, Safety and Simplicity

An equally good title for this post could be: How to convert Rs. 5833.33 a month to Rs. 20.5 Lakhs in 15 years?

I heard of PPF (Public Provident Fund) accounts in my thirties. That's sad in a way, but good in another way. I'll explain.

We have seen in our earlier post on Asset Allocation , that Fixed deposits and safe instruments are an essential part of any investor's portfolio.

PPF is a safe (backed by the Govt. of India), but long term investment, not suited for short-term. But a quick primer on PPF first:

The Public Provident Fund was established by the central government. Any Indian citizen can open one. You don't have to be a salaried individual, you could be a consultant, contractor or non-earner also.

Any individual can open a PPF account in any nationalized bank or its branches that handle PPF accounts. You can also open it at the head post office or certain select post offices.Note that Private banks can't help you with this account.

The minimum amount to be deposited in this account is Rs 500 per year. The maximum amount you can deposit every year is Rs 70,000.

The Interest rate is 8% compounded annually. The accumulated sum is payable to you after 15 years.

The entire balance can be withdrawn on maturity, that is, after 15 years of the close of the financial year in which you opened the account.

It can be extended for a period of five years after that. During these five years, you earn the rate of interest and can also make fresh deposits. The amount you invest is eligible for deduction under the Rs 1,00,000 limit of Section 80C.

On maturity, you pay absolutely no tax. There are some provisions to withdraw up to 25% of your deposits starting the 3rd year, but I'll leave for you to do the research.

In my mind, whether or not you are a risk averse investor, you should have this in your portfolio, and max it out also.

You should ideally invest the max. amount i.e. Rs. 70,000/- every year by April 1st week to get the maximum interest benefits and tax savings. Note that this account is a once in life time opportunity for all individuals .You can't open multiple PPFs in your name at multiple banks.

Hence it is better to be aware of this account, but open it when your earnings are such that you can max out Rs. 70,000/- every year (as otherwise, you may not realize the full interest and tax savings). Which is why, I don't regret knowing about it in my 30s.

I sat down to do the math and came out with the following calculations that explains how your money grows (picture below).



The power of compound interest is evident with the passage of time. Just observe the interest column (every year).

In the initial years the interest is somewhat low, but towards the end of the maturity period, you get more annual interest than even your payments

For example, in year 10, you pay Rs. 70,000 but you accumulate Rs. 81,125 in interest. In year 15, you nearly earn Rs 1.5 Lakhs in interest itself. Bear in mind, it attracts 0% taxes. Hence the effective yield is nearly 12%. So much for the snowball effect.

A smart strategy is to open up a 1 year RD A/C in the prior year and invest Rs. 5,833 every month. At the end of 12 months, your RD will mature to give you Rs. 70,000 + some interest. You can use Rs. 70,000 for the subsequent year's PPF deposit, and the interest for something that you want for yourself. If you make the monthly RD Payment as an automatic deduction from your salary account on your pay day, you won't even notice the difference.

Imagine receiving a lump sum of Rs. 20.5 Lakhs tax free after 15 years. Isn't it exciting?

Note that these calculations assume that you systematically invest Rs. 70,000/- every year at the beginning of April . If you make lower yearly contributions or make them at a later time period (than in April itself), then the interests and maturity amount will vary (to a lower amount) correspondingly.

Aren't you headed to the nearest SBI or postoffice yet?

How does the stock market work? A Cute Movie from 1952

How does the stock market work? A (20 mins?) cute and simple animated movie from 1952 titled "What makes us tick", tries to present a simplified model of the stock market. It's available in the publicly available collection of movies from Prelinger's archives .

It is set in 1950s . The story unfolds, as seen as through the eyes of a typical worker living in a typical neighborhood in a typical city or town, Mr. John Q Public and his dreams. A fictitious company called Oil Drum Manufacturing company is shown as growing from a small company to a publicly listed company in NYSE.

It shows a simplified model of the role of investment bankers, SEC, NYSE, brokers, buyers, sellers, Board of Directors and how the trading happens from end to end. From the time a buyer in Colorado orders shares till he gets it executed on the floor of the exchange.

The John of the movie can be any Ram or Shyam in India . Substitute SEC (Securities Exchange commission) with SEBI (Securities Exchange Board of India), and NYSE with BSE or NSE. This can very well illustrate the Indian story, even though we are way smaller in scale. It shows how public participation of the stock market can fuel the growth of a Nation to economic prosperity, while leading to individual prosperity.

The movie closes with a caution on risks, and exhorts you to Get the facts before you put your money to work. Couldn't agree more!

Critics pick on the movie and indicate that this is an oversimplified model, confines to manufacturing (and not services), and presents an idealistic scenario of Capital Markets.

So what? We didn't foresee or anticipate Enron or Satyam scandal at those times. A short movie can only pack so much stuff without mixing up the messages

If you would like to teach your kids about stock market, here's a very good way. Please check out. I simply loved it. What do you think?

Asset allocation, Diversification and Risk Management

We all intellectually know, the all too obvious Personal Finance Equation:

Savings = Income - Expenses

It is obvious that in order to increase savings we need to Increase our Earnings and/or decrease our expenses.

With the savings that we got, if we don't invest it properly, Inflation will ensure that we are poor for the rest of our life.

As an example, a flat (apartment) that costed Rs. 30 Lakhs 5 years ago near our locality, costs more than Rs. 90 Lakhs, in this downbeat economy today (in 2009). That is more than a 300% increase. Remember, we are talking Bangalore.

Let us say, that I had Rs. 30 Lakhs 5 years ago. If I had invested in that property, I would have made close to 300% profit before taxes. Of course, this is not a guaranteed return, and there are years when house prices drop big time. This doesn't factor the depreciation costs for the house also. These 5 years just happened to have been good overall.

If I had parked the money in the bank as a Fixed Deposit @ 8% for 5 years, that amount would have become approx Rs. 44 Lakhs, before taxes (assuming compounded interest).

If I had let it stay in a savings account @3.5% interest, it would have become Rs. 35 Lakhs in 5 years.

If I had invested it in stock market, depending on my portfolio and the state of the economy, the amount could have gone up by a certain % or it could have gone down in value also. It's hard to predict the exact return.

The message is clear. Greater the risks, greater the reward.

The more conservative you are, the returns are somewhat predictable, but may not keep with inflation. If the inflation in the past five years is 4%, then even if you get a guaranteed 8% annual return in a Fixed Deposit, your effective actual return is only (8 - 4 = ) 4%.

Inflation explains why and how your great grand parents who were getting a few hundred Rupees a month or year were able to lead a decent life, save and were even able to afford housing in their lives. It explains how You, having an exponentially higher income than them, still end up solving the same (or more) problems that they were trying to solve.

Asset allocation: We all allocate in our day to day life in some shape or form. If you are a home maker, you allocate your budget for the kitchen across groceries, milk, vegetables, fruits and meats. If you are a professional, you allocate time for work vs family, you allocate money for entertainment, education, groceries,kids etc.,. If you are a student, you allocate time for studies vs. play vs rest.

Asset allocation is similar and simple. Given your age, investment potential and risk tolerance, how do you allocate your investment as to get maximum or optimum returns, especially over the long term? Asset allocation is determining the right mix of asset classes for your investments. One that balances risk and rewards.

Is there a standard rule of asset allocation that will fetch maximum returns ? No. Are there some rules of thumb/guidelines? Yes.

In the US, the rule of thumb they apply is to subtract your age from 100, and invest that much percentage of money in stocks. Going by this formula. if you are 25, you can invest up to 75% in stocks, and the remaining in relatively safer instruments.

The reasoning is that when you are in your 20s, you have a longer time horizon. Therefore you are better able to withstand even wild swings in the stock market, and are not in a hurry to sell when the markets are down. As you get older, your risk tolerance reduces and hence you move to relatively safer instruments like Fixed Deposits that give you more guaranteed but lower returns.

But India is not a developed market. We are not a fully capitalist society. The stock market is much more volatile. I tend to use 75 instead of 100 (to factor in fluctuations and risks). For e.g. in my world, if you are 25, you can invest up to 50% in stocks/mutual funds.

If you are more conservative than me, then use 60% or even 50% depending on your preference and risk tolerance. But have atleast 20-25% of your money invested in stocks and mutual funds atleast until you are 50. If you are more aggressive than me, by all means stick to 100 - your age formula.

Asset Classes: There are too many asset classes that keep popping up every day for me to list all of them (e.g. commodities) in a blog. Granted some of them are confusing and risky to invest in, unless you are a pro.

In general, I have the following rules: If I don't understand or believe the ingredients of a food, then I don't eat the food. If I don't understand or believe the investments, then I don't invest in them.

What you see in the picture at the top, are broadly the asset classes, that you need to be aware of. We'll discuss them at length later. For now, just the concept is sufficient. Note that I've deliberately not provided any % of allocation, as it depends on your age and risk tolerance.

Diversification: This is very closely related to Asset Allocation. It represents one more level of how you spread your investments within each asset class so as to minimize and spread your risks.

For e.g. within Real Estate, you can invest in Residential and/or Commercial Real Estate. Within Stocks, you can invest in various classes of stocks. E.g. Technology, Manufacturing, Health Care, Retail, Automobile, Bio-Tech are some examples. Within Fixed Deposits, you can invest in Post Office deposits vs. Bank Fixed Deposits vs. PPF.


What if I allocate but don't diversify? You ask. Back in mid 1990s, many of friends invested heavily in NASDAQ (US Stock system that tracks technology stocks). Being techies, they thought they knew Tech stocks.

They enjoyed a great ride for the most part of 90s, when many technology stocks split and/or provided great returns (sometimes as much as 100% or more).

But then when the dot com bubble bust in 2000-2002, several tech stocks went belly up. Many of them lost incredible amount of hard earned money, sometimes their principal.

If they had diversified and invested in other types of stocks also (in addition to technology stocks), their overall return might have been lower, but their returns would have atleast been protected by the upswing in other types of stocks like manufacturing or health care. At the very least, the losses would have been lower.

The point of Diversification is that, when the stock markets go down, the bonds, and short term, Fixed deposits may hold up well, protecting your overall portfolio and thus giving you the required financial and emotional strength to ride over the rough patch.

When tech stocks down, for example bank stocks may do well that particular day offsetting your losses. If the entire stock market is down, bond markets may be up or gold may be up. Atleast they may not be all down by the same magnitude. When residential real estate may be losing value, commercial real estate may move up and make your day.

Risk Management: Many of us wrongly assume that the stock market is risky or real estate is risky. Fixed Deposits feel safer. I would like to emphasize that this is only a feeling and not so much truth.

Risk is only a relative term. Granted that your principal is safer in many fixed term instruments like NSC (National Security Certificates), or Fixed Deposits.

However if the inflation is high year after year, your buying power goes down significantly with time. If your investments don't earn handsome returns as with bank deposits, you really lose money in inflation, life style terms. Is that not a huge risk in itself?

In the flat example quoted above, if I had left the money in any other instruments (than buying the property in 2004), my position to buy a flat in 2009 would have been much weaker than in 2004. (Let me remind you. I didn't have 30 Lakhs, and I didn't invest it anywhere. The flat price is true though ).

Stock markets sure go through wild swings. It is scary to see your portfolio's value go through wild gyrations (specially if you are one to watch your portfolio every day). However, if you are invested for the long term, stock markets (on the right kind of stocks or indexes of course), have historically been proven to produce exponentially higher returns than relatively risk free securities/ Fixed Deposits.

In their white paper about ,The Equity Premium, published by Rajnish Mishra of UC, Santa Barbara and National Bureau of Economic Research , they argue the case for the above fact and produce the following figures, based on RBI Data:

Real Terminal Value of Rs 1 Invested
Investment Period	Stocks (BSE 100)	Bank Deposit	Ratio
1984–2004	Rs 19.25	Rs 1.28	15.04
1991–2004	Rs 4.68	Rs 1.18	3.97

I hope this puts the definition of Risk in its perspective and convinces you to consider the stock market favorably, as a significant part of your Investment Strategy.

In other words, you can't eliminate risks by staying away from the stock market altogether. But you can manage the risks, by applying serious thoughts on asset allocation and diversification. And then once or twice a year, say during your birthday and/or Diwali, you should review your portfolio and re-balance if necessary.

Note that I'm not discounting Fixed Deposits or PPF or NSCs or arguing against them. In fact, you very much need those as well.

The question is in what ratio you allocate and diversify your various assets. The answer depends on a lot of factors including but not limited to your age, risk tolerance, investment objectives (do you want to turn a millionaire by 40 and/or do you want to save for your kids school and/or do you want to plan for your retirement? etc,.), the priorities of these investment objectives, your commitments in life, your values etc., That's something you can get addressed for your specific personal situation, by reading up good Finance Literature and hearing from Professional Financial Planners and/or Experts, that don't have any vested interests in selling you any specific product. They should genuinely care about you and your Financial Welfare (More on that later).

What if I don't have that much money to invest in all these asset classes? you ask. We'll see the detailed answer later, but you have mutual funds, Systematic Investment Plans, Recurring deposits that can get you started with as little as Rs. 500 a month. You need to have the grit, knowledge, discipline and willingness to take a plunge.

I want you to note one thing. You may mistakes in the process of following these strategies. You could even lose some money. Warren Buffet has made mistakes. No one is immune to losing money or making mistakes.

Rest assured, the learning out of these mistakes are invaluable. You should do it in such a way, that you minimize your losses and maximize your gains. You should do it such that in the long run, you are able to meet or beat your objectives. That's the whole objective of Personal Financial Management and that's one of the reasons I started this blog.

Getting started - Baby steps to Manage your Personal Finance in India

This post outlines the basic steps in getting started on Personal Finance in India. If you have already covered one or more or all or more than what I outline here, Congrats! If not, please read on.

When we talk about Building Wealth, I mean it in perfectly legal ways. Meaning, you keep the Financial Records straight for yourself and the Government. You pay the taxes that you have to, while taking full advantage of all legally available breaks.

My definition of Wealth includes Health. One without the other is usually pointless. I am sure you don't want to spend sleepless nights, spoiling your health, hoarding money from the Government, and/or anticipating Income tax raids.

Here are simple things you should get started on, specially if you believe in doing things Online:

If you are the traditional kind and/or prefer to call up your broker, or get your maid to pay your bills, you can conveniently skip the parts relating to the Online/software stuff.

1. Get your PAN (Permanent Account Number). This is required for you to file your income taxes. PAN is nearly equivalent to SSN in the US. Now a days, it is not only desirable, but mandatory for even the most basic things in India (like opening a bank account).

Please visit http://www.incometaxindia.gov.in/PAN/Overview.asp for more details

2. Open 2 Savings Bank (SB A/C) accounts each with 2 (types of) banks. (1) A Nationalized bank like State Bank of India, Indian Bank, Bank of India or whatever (2) A private bank like HDFC or ICICI or foreign bank like HSBC. Make sure to get ATM Cards, check books and above all, access to Online Banking.


2a) Confirm if atleast 1 of the above banks supports Recurring Deposits (RD A/Cs), and understand how to open 1, on the fly, ideally Online or in Person (later). If they don't support RDs, then consider another bank. Recurring Deposits are important vehicles for Building Wealth. More on this topic later in a separate blog.

(For the uninitiated, Recurring Deposits are those that support depositing a fixed amount of money every month. The interest is compounded periodically, and you get a bulk amount that equals the principal + interest at the end of the term)

2b) Confirm if the bank supports opening Fixed Deposits (FD A/Cs) online, from your savings account. HDFC Bank supports this feature.

2c) Please make sure that atleast 1 bank supports Free Bill Pay Service.

2d) Understand all the Terms & Conditions and Fees. Make sure that there are no unreasonable fees for ATM use, check book privileges or draconian overdraft policies. Ensure that the interest rates are reasonable and in line with the general market. Ensure that this is a bank that respects you and treats you well in every aspect.

(For those from US, savings bank accounts in India, are the equivalent of checking accounts in the US. You can write checks against these accounts. The interest rates of savings accounts, are lower than other types of accounts, but are still way higher than the US)

The reason I recommend opening with 2 banks, is mainly to avoid risks. Not with your money itself, but your ability to access it everyday.

Although Govt/Nationalized banks are getting more efficient and they sometimes offer superior products/interest rates, they are notorious for their tendency to go on strike once in a while (e.g. if the employees or unions get upset with the Government regarding their pay).

With private banks you get efficiency and great Customer Service, but certain products are simply unavailable or not comparable with Nationalized Banks.

You open 2 types of accounts to hedge your bets. I have my account with HDFC Bank and I have enjoyed their service. The only flip side I have observed is that the number of ATMs in smaller cities and villages are low.

Note that your money in most commercial banks is backed up by the Reserve Bank of India (RBI) to the extent of Rs. 1,00,000/- per depositor per bank. For details, visit the RBI Site at http://www.rbi.org.in/Scripts/Cn_FAQs.aspx?Id=64 .


3. Open an investment/demat account with one of the above banks (Preferably private) so that when you buy shares or mutual funds, you can usually see them all in 1 website (portal). Plus the funds transfer between your savings account and the investment account is seamless. E.g. When you buy shares or mutual funds, money goes out of your savings account to your investment account. When you sell, the reverse flow happens. On top of it, your dividends (if any) flow to your savings account automatically without your having to do anything or deposit checks.

3a) Make sure the investment account also supports SIP (Systematic Investment Plan). SIP is a great vehicle to ride over and average out smartly, irrespective of Market Ups and Downs. More on this later.

4. If you don't already have a PC or laptop or a Mac (with all Virus Protection, Firewall, Malware/Spyware protection enabled), please get one. Please install broadband connection at Home, and install a secure browser. Another obvious one is to get a gmail or yahoo or hotmail e-mail id, which I am sure you already have.

I view these as investments (specially PC and broadband), as these will pay off in short order.
(I'm assuming that you don't abuse the PC or Internet for something else or spend most of your time downloading movies).

The Savings you are going to accumulate, in simply avoiding trips to banks and other places through the power of online banking, bill pay and certain other facilities will offset all your investment costs. In fact, handsomely.

For browser, I prefer and use OpenSource/free comparatively secure FireFox latest edition available for free download from their official site http://www.mozilla.com/en-US/firefox/personal.html .

For free virus protection, I use AVG Antivirus (Their basic free edition, not the paid one). As of writing, Microsoft is coming out with their free antivirus software Morro. Beta edition available for limited downloads from June 23rd 2009 at : http://www.microsoft.com/security_essentials

5. An office Program with basic spreadsheet capabilities (tracking expenses, doing calculations, reports, graphs etc.,). If you have MS Office installed, Great. If not, there are several comparable, competitive, sometimes better free/open source options available. I personally use (and love) Open Office available for free download at http://www.openoffice.org .
Another free and good one is Lotus Symphony available at http://symphony.lotus.com/software/lotus/symphony/home.nsf/home

6. Watch videos or demos or review manuals or get trained by the bank personnel on how to do basic operations on the online site. These concepts differ from site to site, bank to bank, and there's no way for me to generalize and teach you.

e.g. At a minimum, learn the following regarding your savings account:
(a) How do I review my a/c balance, review the checks posted, get recent statements or any period statements, transfer money to another a/c within the bank or outside the bank
(b) How do I order a DD (Demand Draft)?
(c) How do I use Bill Pay
(d) How do I open an FD, RD online?
(e) How do I contact the bank online?
(f) How do I change my statement delivery options?
(g) How do I change my personal profile, passwords?
(h) How do I call customer service?
(i) What happens if I forget my id or password?

Regarding your investment accounts, you should know the following
(a) How do I buy, sell shares/mutual funds?
(b) How/when does the money get transferred to my investment accounts?
(c) How do I review the list of shares/mutual funds I own?
(d) How do I review, know the value of my stock, MF portfolio?
(e) What is the brokerage commission on buying/selling shares?
(f) How do I call customer service?

With the above baby steps completed, I think you are in a very good position to Invest in various vehicles.

I'm getting concerned a little bit now. Before you get too excited and jump right in to invest in stocks, I strongly recommend that you read and understand certain important Personal Finance Concepts from good blogs and excellent Personal Finance literature. These will teach you about relatively risk free and smarter, ways of Investing.

As an alternative or In addition, you can wait to watch my own blog here for some sage advice shortly.

Important Note: If you prefer to do online banking, certain important security requirements are in order:

(a) Create Strong Passwords. Store your ids and passwords in a secure place or using encrypted /password protected software.

I use Opensource, Highly Secure and Free "Keepass", but there are several other options available that you can Google or Bing for.

(b) Don't reveal your user ids and passwords even to your close relatives and friends.

(c) Don't fall victim to phishing scams and/or reveal your id/and/or passwords to strangers or even bank reps. Most banks have a clear policy about what they can and can't ask you. Be clear.

(d) Frequently backup your hard drive to an external media, specially with all your online bank statements, passwords, sensitive personal data etc., and secure that also.

CAUTION: Don't take your Personal and Sensitive Data and Privacy Issue lightly . You could lose all your money and assets, just by being careless about your Sensitive Personal Information. Learn and adopt all the security steps and precautions thoroughly before you consider online banking.

Developing Sound Financial Habits - The Foundation of Building Wealth

I grew up in India. When I was a kid, my uncles used to visit us during summer vacations. During their visits, we used to have a good time. We used to go out to watch movies, eat out in restaurants, visit parks, zoos, temples and such.

My uncle Raghu was a little different. Aside from the fun, he would probe as to what kind of magazines I was reading regularly, whether I was even aware of Ren & Martin and what my vocabulary level was. He would even ask me some pointed questions in English Grammar, and General Knowledge. If you haven't guessed yet, English is not my first language.

He would emphasize and encourage that I regularly read magazines like "The Hindu" (English News Daily) , Reader's Digest and Frontline, to develop myself . I didn't cherish the idea. Not just because they were not interesting to read (at that young age), but they had certain words that required me to keep the dictionary by the side for ready reference. It effectively doubled the time required to learn and appreciate the content.

I used to feel uncomfortable and sometimes even intimidated, secretly hoping that he would return to his place sooner than later.

His constant prodding however had a surprisingly great side effect in me. Just before his visits, I used to pick up the magazines in question and come up to speed, lest he should find me dumb. It sure meant that I had to drop watching a few episodes of "Ramayan" or "Mahabharat" or to cut back on certain other magazines and activities, that were not totally "productive".

Although I didn't initially cherish the idea, I started learning certain new words, better grammar and pronunciation. I was able to spontaneously put them to better use in conversations at school. I got good grades in English. I got recognized and appreciated for the same. I even got my "Letters to the Editor" published. Seeing my name in print and that too in a National Daily gave me a kicker.

There was a certain momentum that started building. In due course, I started picking up and finish reading good books and magazines out of my own interest, rather than for uncle Raghu. I found reading good books to be a passion. My world view started changing dramatically. My perspective broadened and deepened.

I could clearly visualize and validate the benefits of learning English and Reading. I developed a habit out of reading. I haven't looked back. Today, I find it so hard to not read a good magazine or book in a given day atleast for 30 mins a day. I thank him, to this date for his prodding at that age.

You get the underlying message and the method. Good Habits are hard to learn and take time. Good Financial Habits take even more time. But with practice, they can be made to stick. Humans resist change, naturally and automatically. You have to overcome them. I found the following steps useful in developing good habits:

(a) Identify a good habit that you want to badly adopt and develop. Set it as your goal. Visualize the advantages of the Good habit. Be completely sold on it.
(b) Determine the time commitment needed for this good habit (Is it 15 mins or 30 mins daily or weekly?)
(c) Deeply analyze as to what bad habits can be kicked out to accommodate a good habit, or to make way for the time required. (Can you stop watching that favorite Soap of yours (free up 1/2 an hour a day), Can you curtail your daily pointless chit chat with that friend? (free up 15 mins a day)? Can you delegate that weekly shopping trip to your spouse? What are other things that you can cut back on?)
(d) Adopt the habit for at least 30 days continuously. Make efforts.
(e) Have a check point review on the 31st day. How did it go? Have you started to see some benefits or do you want more time to adapt this habit?

If you have seen benefits, by now you have already incorporated the habit in your life. Congrats!

If you haven't seen any and would like more time, continue with adopting the habit for some more time. Have another checkpoint. If after a few iterations, you don't develop this habit or don't have a passion for it, then it is OK to move on.

Here are some Good Financial Habits that form a solid foundation for Wealth. I compare these to good workouts for the physical body. Just as you can't build muscles without physical exercise, you can't build lasting wealth without building some good financial habits.

(1) Track your expenses and review them regularly. It can be on an excel sheet, or a fancy software, or plain old pencil and paper. But you should clearly know where your money goes every single month. Review your bank and credit card statements. That's the first step in finding out where you stand on Finances and spending. Even if you don't do a single thing about it, just make it a habit to watch it regularly. It'll cause magical changes in your spending patterns (for the better).

(2) Make it a habit save at least 25-40% of your net income every month (higher if you can). This may sound way higher than what the western authors recommend (which is typically in the 10-20% range). I will have a separate post on why you have to and how you can save higher in India. Automatically withdraw money from your savings account to a Fixed Deposit or Recurring Deposit or Systematic Investment Plan, every month. In India we commonly call this as "Standing Instructions" to the bank.

(3) Periodically assess your Net Worth and review against your Financial Plan. Every month just list your assets and liabilities and see how they stack up. Subtract Liabilities from Assets. That's your wealth.

Build a Financial Plan spanning short (1 year), medium (1-5 years) and long terms (> 5 years), that outlines where you want to be in terms of Net Worth, assets and liabilities. Don't feel intimated, just make up a simple list of assets and liabilities.

Compare your Net Worth against your Financial Plan, and see if you are on track. If not, make course corrections.

(4) Follow at least 1 or 2 good financial news magazines for 15-30 minutes a day. I tend to follow The Economic Times . But there are several other good ones. The Hindu Business Line, Financial Express to name a few. Choose the Online or Print Edition. Choose what suits your style. You may not get the meaning of all the news items and articles instantly. I personally found many articles to be Greek and Latin when I started. Over the course of time, I was able to get 99% of the information clearly, specially after I started investing. If you have to kick out reading some other magazines, please do. (Disclaimer: I don't work for, or own any stocks of any of the news magazines I recommend)

(5) Regularly follow good blogs on the subject. I personally like JD's blog (Get Rich Slowly) , Trent's (The Simple Dollar) , Ramit Sethi's ( I will teach you to be Rich). There are scores of other good blogs too. Visit them regularly. They are very enlightening and practical. If you use an RSS reader, please subscribe to their RSS Feeds without fail.

(6) Practice donating a small % of your income for charity or some good cause. This may be hard for some of us, but this is a must have habit for the truly wealthy. We'll have a separate blog on this topic later. If you can't start with a 5% goal, can you start with a 2% giveback to a charity or a good cause that aligns with your values?

As we know, poverty is widespread in India. There are people who are much worse off than those who can read this blog. It's easy to point fingers at Government or someone's respective destiny or Karma, but I think we all need to do our bit. It will simply feed your soul. It can only be experienced. I have made it a habit over the past few years, and my favorite cause is orphanages for children and old age homes. You can select your own cause.

(7) Read at least one Personal Finance or Self Improvement book in a month. I started my self-improvement journey with Dale Carnegie's "How to Win Friends and Influence People", and "How to stop worrying and start living". My personal finance favorites in no particular order are:, Robert Kiyosaki's "Rich Dad Poor Dad", David Bach's "The Automatic Millionaire" and David Ramsey's "The total Money Makeover".There are scores of others which we'll refer to later, but this is a good starting point. Create your own wish list of books to read, and go to the nearest library. If you have to pay to become a member, I would consider that a good investment (so long as you intend to develop a habit)

(8) Make it a habit to ruthlessly Simplify every aspect of your life: Contrary to popular perception the wealthy are very simple not just in their appearance and dressing, but in their mind. Review every aspect of your life critically and see what you can cut back on, to free up time, money and energy for what you truly want.

For e.g. Do you have too many bank accounts, and/or credit cards, and finding it hard to manage them? If so, can you cut them back to 1 or 2? Do you have too many cars and not using them, but paying for fuel, maintenance and insurance? Can you cut back to 1 ? Do you have too many books or clothes or CDs or DVDs that you have bought that you don't need or use any more? Can you donate a few to some who really need it?

(9) If you have kids, make it a habit to teach them the value of money and investment at as early an age, as you can. Lead by being an example yourself. Children don't do what you tell them to. They do what you do.

One of the best things you can do to your kids, is to educate them and make them financially responsible at an early age itself. We'll look at specific tools and techniques later in this blog.

(10) Make it a Habit to stay in the Present Moment and have fun. The goal of Personal Financial Management is to continuously improve your financial behavior, to let you reap the fruits of True Financial Freedom. It doesn't mean that you have to rob yourself of all fun things in life. It's not always about being miserly or delaying or denying gratification to a point where you lose the charm of life.

The goal is to have fun in a balanced manner. In such a way that your fun today doesn't become an obstacle to your freedom tomorrow. As you make progress, stop and thank yourself for making the progress and give yourself and your loved ones some rewards. Just ensure that you don't overspend or over do it!

What are good financial habits that you think are important to your building wealth? What would you add or delete from this list? What do you think?

Can I be Financially Independent?

I was born and raised in a small town in India. My family was essentially lower middle class. My father was in Government Service and my mother was a stay at home mom.

State of Personal Finance in India in the 80s and 90s:

When I grew up in the 80s and early 90s, the concept of Finance was non-existent in many parts of India. India was not the same. We didn't have the technology or Internet or mobile. A land line telephone required a wait of 2 years, and was considered a luxury. To call long distance, we had to book what is called "Trunk calls". It was expensive.

Mom and dad utilized Dad's pay, spent for essentials (and sometimes non-essentials). They were as frugal as possible in avoiding wasteful spending. Whatever was left was saved in a bank account by default. Fortunately We didn't have any debts.

Sometimes we bought jewels for sisters. We didn't buy any stocks or real estate, or invest in anything. We didn't worry as much about retirement planning or investments because most employed were in government service, which was pensionable anyway.

The primary financial goals of families (to my knowledge) were to get the daughters married, and sons decently educated. A luxurious addition was a roof over one's head. The Opportunities for an average salaried person in a town in India was low. The awareness was even lower.

People who were above average, had the courage to invest in UTI (Unit Trust of India) for their mutual funds. Those living in big cities had share brokers, who helped them buy shares. Real time stock quotes were not for everyone.

Personal Finance in India in the 21st Century:

Flash forward 20 years: India as a country has made giant strides despite all its challenges, thanks to globalization, Internet, Technological and Other Innovations. Foreign investment started pouring in to India thanks to the liberalization policies of the governments starting in 1991 . Proliferation of TV Channels, Internet Media, Foreign banks, Broadband and Even mobile Internet are available even in remote villages, at affordable prices. Valuations have skyrocketed to ridiculous levels (specially cities). Cell phones have made ubiquitous communication not only possible, but very cheap also. As an example, Our servant maid , auto driver and news paper boy can all be contacted easily only by mobile phone.

The magnitude of changes that India went through over the past 20 years is perhaps higher than any other country in the world in the corresponding period.

I find that a few enterprising people (especially in cities) have taken some commendable initiatives to grow their wealth.

A majority haven't even thought about it, although they have equal facilities and access to technologies and communication.

Most salaried people still seem to be busy fighting daily issues, oblivious to financial risks of poor or non-planning. Many are working hard yet not getting anywhere financially. Most of the jobs are non-pensionable, yet people don't seem to take notice or plan for their life after retirement. Credit card debts are climbing, yet people seem to use it more regularly than cooking oil.

Those that are only saving but not investing, are silently falling prey to Killer Inflation.

The basic financial objectives of many, have not kept pace with time. They seem to be the same as 20 years ago. Get my kids educated, and get my daughters married. Not that these objectives by themselves are bad, they are just plain inadequate to address the complexities posed by today's challenges (financial and societal).

Many other questions that beg an answer are still open. Will I be even able to pay for my kids' higher education? What about my post retirement life? What after my kids get educated? What if they turn too busy to care for us?

Are the gold ornaments possibly the best gift for my daughter? What if something catastrophic happens to me or anyone in family? Can the remaining lead a decent life ?

I don't mean to point fingers at anyone here. Just that this is a reality that I find. Personal Finance Education is not taken up in schools and colleges with a level of seriousness it deserves.

OK. Back to my personal story.

When I completed my education and got a job in IT , and my income was considered higher than average. However, years later in to my job, I realized that although I had some savings, I had not invested.

I was not even keeping up with inflation. This struck me quite hard when I searched and could not even afford to buy a decent apartment in Bangalore, despite foreign trips. I had made some poor decisions in the stock market. I lost a good chunk of money.

I realized that I had not been very different from my parents and ancestors when it came to Personal Finance, although my earnings and exposure to technology were significantly higher than them. As I thought deeply about this topic, it hit me hard, that I am not even eligible for a pension. I was not positioned well for the financial future.

I was foolish to not even give retirement a thought leave alone other difficult questions I posed earlier in the post.

My ancestors didn't have much opportunities to invest in those times, and hence they didn't invest. The general awareness was low. It was conceivable that they were that way.

In today's world, we have so many opportunities and access to technologies and information. Yet I didn't take advantage of them. I blew those opportunities with missteps, due to lack of fundamental Personal Finance Education. What I did, was worse than them.

I wanted to turn the situation around, and I knew I could. I took expert guidance and mentoring in Personal Finance from savvy friends and well-wishers. I got exposed to some excellent Personal Finance literature, Concepts and applied sound fundamental principles to reduce debts, save money and investing it meticulously. I developed good Financial Habits. I persevered and to this date I do.

Ever since this realization, I have come a long way in the past few years. I have learnt some hard financial lessons that I wanted to share with you and in the process learn from you.

I am not a millionaire or even anywhere in that league, but I am happy with my progress. I am in reasonable control of my Financial Destiny. I am closer to Financial Independence than I used to be years ago (when I didn't even have it as a goal).

I am sure some of my hard learnt lessons, must be very encouraging for you, and save you ample time, money and frustration. You shouldn't have to make the same mistakes that I made. That's my intent of starting this blog.

I learnt that Growing Financially Independent

• Is not necessarily linked to having a High Personal Income. While higher income helps, Personal Discipline is a more important Factor.
• Requires radical thought process AND behavioral changes. If you continue to do what you have always done, you will get what you have always got. You have to show willingness to make these changes, but you can do it.
  
• Requires deep passion, commitment, ability to set and realize goals and perseverance. You have to badly want to be Financially Independent. If not, your results could be mixed (at best) to dismal (at worst).
  
• Takes time in learning and applying sound principles consistently. Reading good literature consistently is a very important prerequisite, but it is fun.
• Requires action. You can't sit idle and hope to be wealthy by magic.
  
• Requires you to take calculated risks, and the realization that you can't be 100% right all the time. The best learning is when you mistakes. You can cut your losses in those situations by using time tested principles.
  
• Requires you to discover your own personal goals and chart your destiny. You can't adopt some one Else's path, and assume that you'll get similar results in similar time lines. Every one's situation is different. It's like a tooth brush. You can't borrow some one Else's.
  
• Requires flexibility on your part to make course corrections as required. You can't adopt a one size fits all approach, invest and forget.
• Doesn't mandate the use of high-technology. But you have a significant advantage if you are tech savvy in some basic technologies, and use of software. Prosperity can be more easily built with at PC and a broadband connection at home.
  

Although fundamental principles of investing are the same across the globe, implementation of principles in the Indian Market has some specific nuances that you need to be aware of.

You have to tailor the advice of Western Financial Experts, to suit the Indian needs.

I also learnt the following:

• If an investment scheme to make you rich sounds too good to be true, it perhaps is.
• It's impossible to get sustainably rich overnight unless you are a victim or perpetrator of a Ponzi Scheme.
• Credit cards require a certain Financial Maturity. If you are not sure you have it, you are better off without credit cards.
  
• Day Trading, and speculation are not for everyone. It won't make you rich specially if you have a job or business as a main stay.
• Shortcuts can make you temporarily rich but potentially and very likely broke.
• Not planning your Finance is a very bad idea. It could devastate you and/or your loved ones.
• Although saving is good and a lot better than spending, it is not good enough. You need to learn to invest in the right instruments. Inflation is the worst enemy of savings.

In summary, I think to answer the headline of this post, it IS VERY possible for you or anyone with even an average income to build wealth with time by learning, planning and applying sound Financial Principles. You can Be Financially Independent. In fact you can turn wealthy.

It can't happen overnight. You can have a good answer for some of my disturbing questions . Personal Finance is a discipline much like Engineering or Medicine that takes time. However it is not complex. If you can do basic math and show willingess and ability to apply the principles, you can master it.

Those are some of my lessons. That's what I plan to share with you, as my experiences through this blog. They may not be all 100% correct, but they will get your thought process started in the right direction.

What are Personal Finance Topics that are of interest to you? What would you like me to write about? Please let me know your comments.

Gigantic Disclaimer: I am NOT professional when it comes to Personal Finance. I am not a certified Financial Planner. I don't work for any financial institution or any brokerage. I don't have any vested interests in promoting a particular share or institution.

The intent behind this blog is to share what I personally learnt over the years, and continue to learn from myself and others. I think there is a good potential that others can benefit out of it.

I'll try and keep the focus more on the general concepts than on individual stocks or mutual funds or other investments. I want to demystify and make certain complex Personal Finance topics easier and actionable,so that you can get started on your own way to Financial Independence. My goal is to share some concepts that I have learnt and applied.

My goal is not to turn in to a Personal Financial Adviser to you, or to tip you off on that hot stock that's taking off today or a mutual fund that's going to go bust.

Take my advice, and experiences at your own personal risk if you like it ! If you apply these and you are not successful, just discard it. If you are successful, please come back and post your comments!!