She made her little contribution...Have you?

So often, we are faced with situations in life where our contribution to change things around us seem just so little, so tiny that it seems like a waste of effort. Again, it is about how we look at it. A different perspective can change things around, and give us the motivation, desire and the energy to continue to seek change.

How powerful can compound interest be?

The other day, my 12 year daughter came to me after checking her online account, and started to discuss about the interest that was credited to her bank account. She had done some mental analysis, and wanted to understand how powerful compound interest can be?

The Power of Simplicity

"Simple" has immense power.

Doesn't the above quote look too simple? Yes, it is. But why do we need to complicate it if it conveys the message that we want to convey. Most of us, in life, either ignore or undermine the power that simple things can bring. We either believe that such simple things cannot bring success, else everyone would have achieved it or we get satisfaction out of complicating things for ourselves.

Know more about Company Fixed Deposits

What are company fixed deposits?

Fixed Deposits in companies that earn a fixed rate of return over a period of time are called Company Fixed Deposits. Financial institutions and Non-Banking Finance Companies (NBFCs) also accept such deposits. Deposits thus mobilized are governed by the Companies Act under Section 58A.

How are they different from Company Equity?

when you purchase a Company Equity (shares), you become a part of the company and share the profit and loss of a company depending on the company performance. Unlike being a shareholder of a company, here you are loaning a fixed amount to a company for a fixed tenure so that they can go ahead with their business . investments. You expect a fixed return irrespective of the company performance.

How are they different from Bank Fixed Deposits?

Company Fixed Deposits are done directly with companies and not with intermediate banking institutions. Since you are directly depositing your money with the company, you have more risk and also you get more returns.

Why to invest in Company Fixed Deposits?

a) Company fixed deposits will give you a higher return than comparative bank fixed deposits. This is because of the additional risk. e.g. Shriram Transport Finance FD was offering 12% CAGR during August 2012 when the maximum FD return available from a Bank FD was 9.5%.

b) You can invest for a shorter lock in period like 6 months.

c) Company Fixed Deposits are non transferable that means there is no fear of FD receipt being stolen. In case it falls into wrong hands ,it cannot be misused. The FD holder in such a case should write to the company which shall issue duplicate deposit receipt upon execution of an indemnity and cancel the previous one. 

d) No Income Tax is deducted at source if the interest income is up to Rs 5,000 in one financial year. Investment can be spread in more than one company, so that interest from one company does not exceed Rs. 5,000

 

What are the risks associated with Company Fixed Deposits?

a) These deposits are unsecured, i.e., if the company defaults, the investor cannot sell the documents to recover his capital, thus making them a risky investment option.

b) It is difficult to choose the right Fixed Deposit in the absence of a 'rating'. This is because apart from NBFCs and housing finance companies, other companies need not go for a rating for their fixed deposits.

c) Company fixed deposits have higher risk than bank fixed deposits because these type of deposits are unsecured, if the company goes bust you will lose your money, and unlike banks, they don’t have any backing of the RBI. RBI does not rate company fixed deposits, and in case of default by the company – RBI is not going to back them in any way.

d) Company fixed deposits may be unsecured debt, which means there is no underlying collateral, and in case of default, you won’t get the funds back by selling off your documents.

How to chose a Company for a Fixed Deposit?

a) Do look at the financials of the companies. The company must be making profits and paying dividends year after year.

b) If the company is posting sustained fall in revenues and profits, it is a cause for concern. Simply avoid companies that are making losses

c) You will be better off looking at taxes and dividends paid by the company. Since these two are cash expenditures, paid to outsiders such as government and non-promoter shareholders, there is little accounting jugglery possible here. A sustained increase in taxes paid and dividends indicates that company's business is doing well. If you can do some number crunching, do look at the interest coverage ratio - just divide 'earnings before interest and tax' by the interest paid by the company. Higher the number, the better it is. You can also look at the debt-equity ratio - total debt divided by shareholder funds. Lower the number, the better it is.

d) Look for a good rating on the deposit scheme wherever available.

Other important notes on Company Fixed Deposits

a) Company fixed deposits are rated by Rating Agencies. The rating agencies hand out ratings to the particular offering, and that can help you make a decision. For example, The Shriram Transport Finance FD scheme was rated tAA (investment grade) by Fitch. These ratings can help raise flags if any offering is rated low, and you can possibly avoid such fixed deposits.

b) Today, investors have many such options like Ansal Housing, Apollo Hospitals, Unitech, Bilcare, Godrej Properties and Unitech. Typically, one can earn around 9-12% from these company fixed deposits.

c) In case of companies listed on stock exchanges, you can get yearly and quarterly numbers of these companies on websites of the exchanges.You can get most of the information about a company when you go to your securities account or visit other common websites like http://www.nseindia.com/ or http://www.moneycontrol.com

d) Company fixed deposits are not always unsecured debt. In some cases, they issue secure debt as well.

Like most investing decisions, whether you invest in these things or not, and how much money you do will depend on your particular circumstances. If you prefer safety over everything else, then it is best to leave these things alone. If you have a moderate risk appetite then you might as well try investing money with some of the better known companies.

A beginner in this field may be lost in the numbers game. Hence it is better to stick with companies that are accepting fixed deposits for a long period of time. A long track record surely offers some comfort.

An extra 1 to 2 % of interest earned through thoughtful investment in a consistent manner in company fixed deposits can go a long way in fast pacing your financial freedom. The reason for that is simple. There is an amazing power in compounding.

Cheers

Manoj Arora

Related Links :

Amazing Power of Compounding

You have no choice but to get into Stocks

Ladder your Fixed Deposits

What and when to teach Kids on Money Management

We saw in Part-I of this post that how important it is for all of us to teach our kids about money management. This time, we would cover on specific aspects of what they should be taught by what age so that they are ready to face the world with confidence by the time they start their jobs / own businesses.

Open their individual savings accounts

- By the age of 2 years, make sure that every kid has his or her own Savings account.

- These account(s) can be linked to your own savings account for monitoring and control.

- Make sure you are transferring some minimum fixed pocket money to the kids account every month. You can do this online as well or you can also opt for auto transfer of this pocket money.

- This sets up the base for all future education on money management that you going to impart to them.

Show them their account balance and interest credit every month

- By the age of 4 years, make sure that you have a regular habit of showing them their account balance every month.

- Show them the interest capitalised and credited to their account balance every month

- This would help them understand that savings grow to a healthy amount if you collate them and also that more the savings, more is the interest credited by the bank.

Tell them about the Amazing Power of Compounding

- By the time they go to proper school (5-6 years), teach them the concept of Compound Interest. They need not know any formulae as yet but they should realise that the money grows exponentially if allowed to grow in an undisturbed manner.

- Show them that the interest getting credited every month is also getting invested and that they earn interest on interest next month.

Let them take their own decisions wrt Saving vs Spending

- By the age of 7 years, make sure that they are making their own decisions wrt what part of pocket money they are spending and what part they are saving.

- By this time, they would already have realised that the more they save, the more the money would grow by itself. So, they would be able to take informed decisions in life on Spending Vs Saving. 

- This habit and decision making would go a long way in their lives to help them in money management.

Explain "Inflation" to them

- While they are 8 to 9 years old, tell them how the price of things keep increasing with time and that the value of money keeps going down.

- Explain them that they have got to beat inflation if they want to maintain their same life style and buying power with the money they have in their accounts.

Expose them to other forms of "investment"

- Before they reach the age of 10 years, they should understand all other forms of investments whether Fixed Deposits (FDs), Mutual Funds or Stocks.

- These will give them the options to beat inflation.

- They should also start investing some part of their money in FDs (which can also be done online). 

- Show them how a Fixed Deposit earns more interest than a savings account and helps them beat inflation (to an extent).

Well, if you have done this much, you have done what no school or college would ever do to their lives. You will start seeing sparkling results very soon. I have realised this with my 2 daughters. Today, they know much more about money management than any other grown up adults around them. They may not be earning money yet, but they exactly know how the money can be managed well.

When asked about what she wants to be when she grows up, my elder daughter, who is now 11 years old, snapped "I will see Dad !!, I know that i would be financially free by the time i start my job - so i have to really think - may be a Sea Animal Trainer". You are amazed !!, I am not... I know kids are great at learning and can outclass you. Trust them and give them the opportunity they deserve.

Happy money management !!

Cheers !!


Manoj Arora




Facebook : http://www.facebook.com/RatRaceToFinancialFreedom
Twitter : @manoj_216
Blog : http://ratrace2freedom.blogspot.in/

Teach your kids to manage money (Part-I)

Are Kids capable of managing money?

How many times have you been surprised by a certain response form a child? I am sure that there may have been numerous occasions when you might have experienced that children are much more smart and intelligent than most of us truest them to be. They can do unexpected things, and then can do them surprisingly well. Why? Because they have a mind which can think positive and does not carry any restrictions, fear or boundaries in their thinking process. These fears and boundaries constrain so many of us from achieving great results. 

Well, if that is the case, never ever think even for a moment that they cannot manage money better than what you do.

Why do we not allow Kids to manage money?

There are two major reasons that i see why we do not normally allow our kids to handle money:

1) In most parts of the world, and especially in India, we traditionally keep children and money apart from each other for the major part of their growing and learning years. Probably, because money has not been considered such a "good thing" by our parents. In one of my earlier posts - Yes, Money can buy happiness :) , i explained that how money is a dead element and is neither good or bad. It depends on the person who is possessing it. So, as long as, your children are brought up in a morally and ethically sound environment at home, be assured that they will make the best use of the money that you ask them to handle. 

2) Add to this, the second major reason for the kids not managing their money is the issue of money management or personal finance not being taught in our schools and colleges. While schools do teach the concepts like simple interest and compound interest, shares and dividends, they never go on to show the impact and importance of implementing these concepts in their own lives. 

Because of both these reasons, our children go on to start their jobs and families and lead their lives with only theoretical knowledge about money and no idea on how to leverage that knowledge. Nothing different happened in my life. Well, later on, i went on to acquire the practical aspects of implementation of this knowledge is a different story that you would read in ore detail in my book "From Rat Race to Financial Freedom". I was one of the rare fortunate human beings who accidentally got into experiencing, reading and writing a lot of stuff around dreams, financial freedom etc, but that is not going to happen for most of us and our kids. The only way this will work out with our kids is by giving them deliberate exposure to this knowledge.

What if i can leave a big chunk of money for my kids ?

Many of us work hard to earn money. When i asked some of my friends as to what will they do with so much money at the end of their lives, many of them had an expected answer : " We will leave this for our children so that they can enjoy their lives" after we have enjoyed ours. I can understand the love and affection for that the parents would typically have for their kids, but do you think that the children would be able to sustain this inherited wealth and put it to right use, unless they know how to invest, manage and grow their money? Almost all the studies conducted on this topic has shown that 95% of the inherited wealth is lost within 10 years of inheritance, and the biggest factor responsible for this has been that the inheritor had no idea how to manage the inherited money. In most such cases, the inherited money either got invested incorrectly, or was lost in lottery or spent on unwanted luxuries, or was plainly outnumbered by the inflation monster. So, more important then collecting money is an effort to learn money management and money investing

How can i help my kids learn money management ?

Years would just fly by before you know it. By the time you decide to be doing something with your life, your life would have reached to a point of no return. You may decide to be different but this happens to more than 90% of the people in this world. Do you think something different would happen with your kid's life, unless you teach them something about money which you were not taught at that age? No, their life would be the same as yours. It has been said very wisely "It is insane to keep doing the same thing and expect different results".

So, start teaching your kids some fundamentals about money, have them open their own independent bank accounts, tell them the concept of bank interest, savings account, fixed deposits, compound interest and its power, give them monthly pocket money and then let them decide what they want to do with their pocket money - how much they want to spend vs how much they want to save every month. Show them how their money is growing in the bank and show them specifically when bank credits them interest, and then what happens to the interest, and what can happen if it is allowed to grow with time leveraging. Now a days, it is so easy to show all these things online to them. 

You got to take these steps when your child is still at a very young age - much before they are burdened with the pressures and responsibilities of life. If you have not done some of these things and your child is more than 2 years old, you are already late. You are late, but not everything is lost. You can recover. You can take a decision to start doing something about teaching them basic money management.

I know that some people would like this post, some would feel happy about it, some would also share it with their friends but what next? I am not sure how many but i am sure some of you would act now !!. Because knowledge without implementation is as good or bad as having no knowledge at all. Don't just read and appreciate the post. Act today..time is running..

This was Part-I of the post. In the next part of the post (Part-II), i will share with you as to what all i feel you can teach your child at different age groups so that the child learns money management in a disciplined and incremental manner. All that will be based on my personal journey with my kids.

Don't just leave money for your Kids... Teach them how to manage money

Happy teaching !!


Cheers !!


Manoj Arora




Facebook : http://www.facebook.com/RatRaceToFinancialFreedom
Twitter : @manoj_216
Blog : http://ratrace2freedom.blogspot.in/

What hell will break loose by the "Amazing Power of Compounding"

"Time is the most powerful element". No other mathematical formula proves it better than the formula to calculate the Compound interest.

Each one of us have studied "Simple Interest" and "Compound Interest" as a part of our mathematics education in our primary schools. Most of you understood the formula, though there must have been  many like me, who mugged them up. We also might have also scored 100% marks in the questions related to these topics. We also knew (and still remember) that Simple interest was about getting interest on the principal amount while Compound Interest talks about giving interest on the Principal as well as the interest.

Fundamentally, that is it about Compound Interest. It is so simple. So, what am i trying to prove with this article.? I am trying to shake you up and trying to help you realize the immense power that lies behind the simplicity of these definitions and formulae.

Most of us think that what big difference does it make. I mean, if i am earning a meagre interest on the Principal (via Simple Interest), what hell will break lose if i earn a fraction more interest on the interest (Compounded Interest). I mean, it does not have any major impact on my life...may be i can afford one extra ice cream with that. Though anything "extra" is welcome in life, well, most of the times it may not be worth paying that extra effort. It is just "some extra money".

That is exactly where we all missed the point. That is where all the hell broke loose. That is where the "Time" played its magic and we were not even aware of the same.. Let me ask you a very simple question. I give you a normal sheet of paper (lest say roughly 0.1mm thick)paper and ask you to fold the paper once. Now, i ask you fold it once again all over. Remember, it is becoming thicker as you are folding. OK, hold on, before you lose patience, just try and judge the thickness of this sheet if you were able to successfully fold it just 50 times. Well, let me tell you.... the paper will become so thick that the thickness would cover the distance from the earth to the moon. Cant believe it? I also did not believe it in the beginning but you can do the calculation..it is very simple to calculate. It is the power of compounding - remember - you did not take out any of the thickness when doubling the next fold (that is earning interest on interest)... and do you want to know what "Time" did. If you did just one more fold - just one more - you new thickness can take you back to earth as well. What you achieved in the first 50 folds was achieved in the last "1" fold.

Is the hell breaking lose now? It really breaks lose if you let the same concept apply on your money.

You have literally no idea what magic can happen to your wealth if you allow time and power of compounding to work together in an undisturbed manner (don't touch your money or its interest while it is compounding to realize its amazing power)

So, we all studied the definitions of simple and compound interest, mastered it but never realized the potential it has when applied to your own money. It is the single most important cog in the wheel if you are looking to achieve Financial Freedom in life. Just one extra year of compounding can separate a millionaire from a billionaire. It is that powerful !!

As you would go through my book (From Rat Race to Financial Freedom), you would find various ways to utilize the power of compounding to your advantage on your journey to your own personal financial freedom.

Happy Compounding !!

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Twitter : manoj_216
Blog : http://ratrace2freedom.blogspot.in/