Ladder your Fixed Deposits

What is a Fixed Deposit

(Fixed Deposits) FDs are the deposits that are repayable on fixed maturity date along with the principal and agreed interest rate for the period. Banks generally pay higher interest rates on FDs than the savings bank account, but may also charge you penalty in case of pre mature withdrawal.

What is the issue with doing Fixed Deposits

We all know that the interest rate on Fixed Deposits keep varying over time. While that is true with most investments, we must have a strategy to make sure that we get an almost consistent rate of return so that our income from our corpus is not impacted heavily because of change in interest rates.

How do we ensure consistent returns year on year from FDs

We can make sure that we get a consistent stream of income from Fixed Deposits by leveraging a concept of Laddering of Fixed Deposits

What is Laddering of FDs

Laddering is a process by which an annual stream of FDs is created for a long period. Let us take an example. If you create a stream of 5-6 FDs each year (one FD every 2 months interval), and do this for 5 years and after the 6th year, when they start maturing, you can re-invest them at the prevalent market deposit rates. This makes sure that your rate of return from FDs is reasonably consistent.

As a long term investment, Laddering will give you an average return and help you prevent your corpus from maturing at the lowest interest rate cycle. This concept of laddering applied to FDs is very similar to the concept of SIP (Systematic Investment Plans) applied to mutual funds or stocks.

The book "From Rat Race to Financial Freedom" will talk in detail about Fixed Deposits and how is this debt based investment tool different from other investment tools - its advantages and disadvantages

Happy investing

Cheers

Manoj Arora

Do I need Life Insurance ?

What is Life Insurance?

There are many complicated definitions about Life Insurance, but in subtle and simple terms, life insurance, as the name suggests is to economically , insure a life. This means that if a person whose life is getting insured, dies because of any unforeseen circumstances, the insured sum is handed over to his nominees as per the insurance contract between the two parties.

Is it necessary to have Life Insurance?

Family Security is the key motive behind life insurance. Though Vehicle Insurance is mandatory in India, some critical elements to be insured like Health Insurance and Life insurance are not. This discretion does not mean that we should not get our lives insured. In most cases, my recommendation would be to make sure that the family is secure, at least from an economic point of view, under any eventuality.

What kind of Life Insurance should be done?

There are so many insurance products available in the market that it can definitely become confusing on what insurance product is right for which family member. The book "From Rat Race to Financial Freedom" digs deep into what kind of insurance products should we buy to have maximum security with min investments and what should be the amount of insurance for each family member. There is logical reasoning and common sense in buying life insurance but most of us buy the wrong insurance products at the wrong time and pay unnecessarily high premium. The book will explain you what you need exactly.

Why do we do Life Insurance?

The whole objective of doing life insurance is to make sure that that the family whose bread earner has been lost unexpectedly, does not suffer at least on an economic front and the family is able to take care of its financial needs to a large extent in the unfortunate eventuality of the bread earner's death.

Whose Life should be ensured?

Since the aim of life insurance is to maintain continuity of incoming money to the family with or without the presence of the income earner, it has to be the person(s) in the family who is contributing to family income whose life must be ensured.

Does a Financially Free person need Life Insurance?

That was a very interesting question that came up during one of the discussions on my blog. Once you become financially free, you are no more a source of income for the family. Sounds difficult to gulp, but this is the fact !!. Yes, this is the fact that a financially free person is not a source of income. This is exactly that person comes out of the Rat Race. The source of income in such a case is the portfolio or the nest egg that has been built. It is the nest egg that is generating family income and not the person who created the nest egg. Thats the magic of financial freedom. 

In such a case, if something needs protection or security, it has to be the nest egg and not the person who created the nest egg. In nutshell, if you are financially free, your family is not dependent on you trading your time with income for the family and hence you need not get any life insurance done for yourself !!. This happens to be one of the bi-products advantages of being financially free !!

Post your comments on the blog if you have any queries and i would be happy to answer.

Cheers

Manoj Arora

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

Introduction to Corpus or Nest Egg Amount

Introduction

As promised in my yesterday's post, today we will talk about the Corpus Amount. This is also referred to as Nest Egg Amount by many financial advisers.

What is Corpus / Nest Egg Amount?

The Corpus or the Nest Egg is a collection of money that, by itself, is self sufficient to take care of the following two parameters for the rest of your life span:

1. Your average monthly expenses (and any other planned / unplanned expenses that you factored in) - extrapolated by inflation

2. Average annual Inflation

Remember that the key here is that the Corpus is self-sufficient, which means that once you have accumulated the Corpus, then you are financially free since you do not need to trade your time for money.

Why do we need to know our Corpus Amount?

Each one of us are running after money in our day to day lives. Not only this, many of us compromise frequently on our health, family, relations and other important things in life because we need to earn money. So, the key question is : "How much money is enough?". Should we madly keep running after money just to compete with each other or we must have a target amount of money, which would then make us and our family secure. 

Corpus Amount gives you that target money that can not only make you feel secure but can bring you of the race of making money, so that you can spend your time to more fruitful things in life.

Running your life without knowing your corpus amount is like driving a car at a very high speed but not knowing which city you are headed.

Is Corpus Amount unique for me?

Corpus Amount calculation is very individual based, and is unlikely to be the same for any two individuals. It is always better to calculate your own Corpus amount rather than assuming it to be similar to someone else's.

What are the inputs needed for Corpus Amount Calculation?

At a high level, you need the following inputs to do a corpus amount calculation:

1) Your current corpus - in case you have some investments that you have kept separately. IT can be amount starting from Zero

2) Average Annual Inflation in your country - This is the average annual inflation over the last 10 years.

3) Your balance life span - If you are 35 years today, you need to assume your balance life span - lets say another 65 years, if you assume a safe age of 100 years

4) Annualized Return on Investments - Frequently abbreviated as ROI, you need to be handy with what rate of returns are you able to get on your current corpus amount

The book "Rat Race to Financial Freedom" will give you a detailed view of each of these inputs and also will provide a link to our website from where you can download the Corpus Calculator. The downloaded Corpus Calculator will allow you to provide the above inputs and will provide you with an year on year balance of the Corpus amount and the total Corpus you need today so that it is self sustainable till the end of your life.

If you have any questions regarding any of the inputs, or how to calculate the Corpus Amount or if you want any help in calculating the Corpus amount for you, please feel free to leave a comment on my blog and i will try and respond.

Cheers

Manoj Arora


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

How much time does it take to be financially free

During my recent interaction with some of my friends who are following my blogs, i realized that one of the top apprehensions in the mind of these Financial Freedom seekers is that they can never imagine themselves accumulating the corpus that is needed to get financially free.[Refer to the post -We are all so different... Know your own Corpus Amount ]
As per them, this amount is too big to be accumulated. Well, i do not blame them at all. First reaction can very well be of hopelessness.

Yes, the target Corpus amount definitely seems big relative to the current corpus that anyone may have. But in all such cases, my friends do not still seem to have realized the amazing power that compounding has. If they allow Compounding to work in combination with Time, it is never a linear extrapolation of your savings. Those who have studied mathematical and geometric progressions would quickly understand that Compounding is an exponential extrapolation. This, in simple terms, means that what they can accumulate in 10 years - the same amount can be accumulated in just one more year, if they allow it to grow. Refer to another post that was published just a few days before ie What hell will break loose by the "Amazing Power of Compounding"

Let us assume for a moment that they come to truly understand the power of Compounding and Time (though most always feel that they understand it). The biggest question that people have after this is how much time will it take for them to achieve that Corpus amount. While that is simple to calculate with reasonable accuracy, my personal experience has been that if you start from scratch (Zero Corpus), it takes anywhere between 5 - 8 years for anyone (yes, anyone) to get financially free.Well, if you start with some initial amount, the time duration obviously goes down. Beware that the assumption is that you would continue with the same lifestyle as you are having today (and would not suddenly want to shift to a different luxury zone, knowing now that you are financially free !!)

Does this time period depend upon your income? This is the next standard question i often get. But the answer to this surprises most people. The answer to this question is a clear"No". It does not matter at all how much you earn. What matters is how much you save and invest, rather than how much you earn. What matters is how much of time and compounding you are able to leverage. What matters is whether you have the fundamental understanding about money and money management. What matters is whether you can sustain the discipline needed to invest and manage money wisely. Someone earning twice the amount as I am, may never be able to get financially free in his or her whole life while i got financially free in 8 years time starting from scratch.

So, go on and get started. Calculate your corpus and get going. Time is the biggest factor to multiply your money. Every day you delay starting in your goal, you are diluting the power of compounding.....

From Rat Race to Financial Freedom provides you with a step by step guide starting from calculating your corpus and time duration needed to creating your monthly goals and also provides great free downloadable templates to track your goals.

Get ready as the book gets ready for a launch in less than 2 months from now..

Happy Starting !!

Cheers !!

Manoj Arora

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

We are all so different...Know your Own Corpus amount

We are all so different...Know your Own Corpus Amount

  Every human being is different. Every family is different. Each individual's earning potential and spending habits are different. Success to everyone is likely to look different. We stay in different cities, states, countries, regions and also varying economic conditions. The way each one of us invest is different. The way we utilize the returns on our investment are different. There will always be something "unique" to each individual's economy.

Well, with so many differences, do you think there can be one single magic number for the "minimum Corpus" you need for financial freedom? The answer is very obvious....Absolutely NO. It has to be different and very unique for each and every person who wants to get financially free. It has to be very very specific to the person's earning and spending habits, cost of living, individual and family behavior, economic environment in which the person is staying...even to the extent of attitude and discipline that the specific person possesses.

Let me first try and explain you what this minimum "Corpus" is and why is this important for Financial Freedom. Literally, "Corpus" in English dictionary means a "large collection". In economic or financial terms, the word "Corpus" is generally referred to as that minimum collected amount of money that an individual needs to be financially free. To elaborate this further, what it means is that if i collect that "Corpus" money, then i have crossed a threshold value and from then on, i do not need to "earn" any more money (though i may still willingly continue to do so). The Corpus becomes "self financing and self reliant" to fund itself, fund your and your family's lifestyle, negate inflation and continue to do so till you survive on this planet.

 We are all running after money. I don't say that is bad at all. We all need money. In fact, one of my earlier blogs this month was titled "Yes, Money can buy Happiness". It surely can, because money is not bad at all. So, we all need to earn money. We all need to maximize our earnings without creating an imbalance in our lives. But hold on, take a step back... what is my target? How much money do i want to earn? what is that Corpus amount that will be enough? Is it endless? Does it keep changing with time? If not, then can it be calculated? Yes, of course it can be calculated to a reasonable degree of accuracy, based on certain fundamental inputs.

And here is the biggest irony of all so called "smart money earners" in our generation. Of all the people i have met in 40 years of my life, i have never met a single individual who knows what Corpus he or she is targeting? If we do not have a target and we keep running, what happens? We are very likely to get exhausted soon with no goal to reach. One of my earlier blogs also talked about "The Power of Goals" and another one about "Hope". So, before you run another day, try and see if you can have a Goal in mind. You will feel better and more satisfied with yourself and your life.

Let us now come to the process of Corpus calculation. Is is SIMPLE.
Here are the 4 essential inputs that you need illustrated through an example.
1) Family Monthly Expenses as on date (if you are not tracking it, better start doing !!) (Lets assume it is Rs. 50000)
2) Average Inflation Rate (Lets assume it is 7%)
3) How many more years would you live in best case (Lets assume it is 60 years - I am already 40 and i target to hit 100 !! :)
4) Annual Rate of Return on your investments (again, i am so sorry if you do not know what you are getting back on your investments !! - better start doing) (Lets say it is 11% - wont happen if you are not investing in stocks or real estate)

With all the above assumptions, you would need a corpus amount of Rs. 15,500,000 for the corpus to be self financing. Well, of course if you cant manage the rate of return of 11% or the inflation goes up beyond 7% or if you survive beyond 100 years, this corpus amount goes up. In the same fashion, the corpus amount similarly can come down as well. No one can predict it with 100% accuracy, but this amount reflects reasonable accuracy of the target money you should be going for.

The "Corpus Amount Calculator" would be available for free download to all my book readers (From Rat Race to Financial Freedom) from my website that would be launched with the book.

If you have any queries on your individual Corpus amount, you can let me know your 4 essential inputs and i can try and respond to a few of you with what amount you should be targeting. Once you have a target, you can divide it into shorter goals and milestones to achieve the target. Life becomes all the more meaningful with such goals to look forward to, instead of endlessly running in this Rat Race.

So, go ahead, and have a target money in mind...and go all out to achieve that money target !!

Happy Earning !!

Cheers !!

Manoj Arora

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