Do you know your Return on Investment (ROI)

What is Returns on Investment (ROI)?

Almost everyone i know "invest" money in some or the other investment tools. Some of us may not know whether they are investing in equity based or debt based tools, but we do surely invest money to get better returns on our investment

Why do we invest?

The returns that we get from our savings accounts in the banks is around 3-4% while the inflation running in India would be around 7-8%. So, in effect, you are losing money every day (in terms of its purchasing power) if it continues to stay in your bank savings account. So, if we got to beat the "inflation" monster, you do not have a lot of options but to effectively "invest" the money

Do we know the returns on our investment?

Sometimes, we do know the annual rate of returns or the rate of interest that the Fixed Deposits offer, but that is not what i am trying to ask. Because the rate of return that you get from the Fixed deposits is subject to income tax before it becomes your Annualized Rate of Return. So, the rate of return that you get on your money in your hand is the interest minus the tax deducted. If you are in the top tax bracket, it would be roughly 30% lower than the annual interest rate that the bank has offered. Only after deduction of taxes, can you compare it with the Inflation figure and see if your investments are making any sense.

Add to this the complexity of the fact that you do investments not only in one type of investment tools. We do also invest in Mutual Funds, Recurring Deposits, may be in Gold and Stocks as well - all of them of different tenures with investments happening through SIP - monthly quarterly or annual, returns coming at different times of the year. Add to this another factor of different tax slabs on your returns depending on the time for which the amounts were invested. With all these complexities, do you think do you know what are the exact annualized returns on your investments ? Sadly, most of you would not know it because it is a pretty complicated exercise.

The book "From Rat Race to Financial Freedom" would provide you with the formulas and freely downloadable templates needed to quickly calculate your annual returns on investments for each type of investment that you can possibly do.

Why we must calculate the Returns on Investment ?

This is like asking why should i know my body temperature when i am having fever? I mean, i know i have fever but why should i measure it at regular intervals? 2 simple reasons - you need to monitor whether the temp is going up or down to understand whether the medication is working or not and second, if it is going still higher, i may need to change the medication itself. Unless i measure the temperature regularly, i am taking a big risk in my life.

The same applies to money. You are taking a big risk in your financial life if you are not regularly measuring the returns on your investments. If i do not know how much is my annual rate of returns on the money i have invested under various investment options, there is no way i can know whether my investment selections are correct or i need to do some changes. I do not know whether i am growing faster than inflation or not - which means that i do not know whether my money is actually growing in "true value" or is it depreciating each year. I also do not know what changes i need to do in my investment portfolio - whether to invest more in Mutual Funds, Golds or Stocks or in FDs.

If i have to have a measure and grip on money management (which is so critical to be Financially Free), i must know what each of my investment tools is giving me on an annual basis, and then only i will be in a position to arrive at some conclusions and take investment decisions for the next year.

Happy calculating !!

Cheers !!

Manoj Arora

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

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/

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/

If you fail to plan, you are planning for failure

 

How important is Planning

If having a strong dream was the first step to achieve anything of significance in life, creating a plan for your financial freedom just follows after that as the next step. If you have not yet created a month on month plan for your financial freedom, then there is no way you can move ahead in your journey.

Do we know how to plan?
Most of us live our lives the way we it comes to us. We try and face the set of situations that we are confronted with and just try and come out of them. This is typically called as Reactive Planning. Imagine how beautiful your life can be if you can proactively "design" and "plan" your lives the way you want it to be, and then go on to execute that plan end enjoy and cherish each milestone on the way. In fact this is what a human soul is supposed to do on this planet. We are very capable of designing and planning our own lives, the way we want it to be. But the unfortunate part is that almost all of us "react" to the situations and circumstances for the most part of life and have no clue where we are headed.

We often come up with statements and excuses like "Let us see where our fortune takes us" or "Everything is already destined to happen". But the fact remains that none of these beliefs are true. Yes, fortune does play its role, but that is something which you have no control over.

Assuming that fortune or luck will support you, how many of us have a documented plan for our live?. Hardly anyone ? Why ? Don't you plan when you go out on a vacation trip ? Don't you plan when you go out for shopping ? Don't you plan when you go on an official trip ? Don't you plan when you have to appear for an exam ? Don't you plan when you have to go out for a movie or a picnic? Don't you plan when you have to buy a house or a car? Don't you plan your work in office or at home everyday? You do it, you do it every time you do any of these activities. Some of these plans may be in your head, some on a piece of paper and some very well documented. All this means that you know how to plan, and plan most of the things pretty well.

Then what stops you from planning our life's journey? Is it not important to plan this ? Or we just don't care ? or is it that we never thought that life is going to end, so what is the point planning. Well, you are not going to live forever, so if you have a start date (your birth date) and end date (the date you die), then you got to plan out what you are going to achieve in these in between "x" years. and better you plan it well, because i do not know whether you will get another chance or not.

What happens if you do not plan?
Imagine what happens if you go to a movie without planning for the same. Unless you are extremely fortunate, either you would not get to see the movie of your choice or you will not get the seat of your choice or you may be late for the movie itself or you may feel hungry right at the time the movie starts. In each case, you would repent at the end of the movie that you should have planned it better to have a more enjoyable experience.
It is exactly true with our lives. If we do not plan it well, we would repent at the end of our life. We would get the feeling that i had a chance and could have planned it much better. Now, remember that the risks involved in not planning your life are much more critical in nature than the risks involved in not planning for a movie.

Most of us still do not plan
So, here we are with the irony - We know how to plan very well but the fact remains that most of the people i have met till date did not have a documented plan for their lives. This documented plan can be of any nature  like these are the 10 things i want to achieve, these are the 100 things i want to do before i die and these are the dates i am targeting to achieve them. Forget about documenting the plan, if i ask you to tell me about your life's plan, most of you would laugh at me or look with strange looks, thinking that what kind of absurd and crazy question is this..but think about it - it is neither strange nor crazy. If you do not want to repent at the end of your life - it is better you have a plan and you are working on the same.

Does planning apply to Financial Freedom?
Of course it does !! The same principle applies for Financial Freedom. If you have not yet created a month on month financial freedom plan, then of course, there is a very rare chance that you are going to achieve it. Whether you need financial freedom or not depends on your other goals in life, but if it is important for you, then having a month on month plan is mandatory entry criteria for this journey.

The book"From Rat Race To Financial Freedom" would talk about this in great detail. It will guide you to create your own step by step plan on Financial Freedom plan - something that would be very customized to you. The book will show you how i planned with real examples and templates, but will also tell you at each step, how you should plan for yourself.

In the next post, at a very high level, i will share with you the inputs you need for creating such a plan. Some of you who would be keen to get a plan created can write to me and i can work with them one-one to help them create their own month by month financial freedom plans.

But remember that planning your life or financial freedom is a must.
Because if you fail to plan, you are definitely planning to fail in life !! So, dont be surprised or feel dejected at the end of life.

Happy Planning !!

Cheers

Manoj Arora


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

The power of negative energy

What is negative energy

We hear a lot about positive thinking and what miracles it can do to our thought process, our actions, our goals and ultimately our lives. Yet, we see so many people around us talking negative things. Pick up a newspaper, tune into a TV channel or just have a group chat over tea with some of your old friends - you are most likely to come out of the discussion in a more "negative frame of mind" than positive. Are these negative statements really detrimental to us or can we harness this "immense" negative energy into our benefit? Let us see.

Negative Energy is still an Energy
While negative energy is not what we want, it is still an "immense source" of energy and it depends on wwhether we can potentially convert that "negative" energy to "positive" energy. If we can do that, imagine the amount of energy that we would possess and the kind of thrust this can provide to achieve our seemingly tough goals.

Can we transform negative energy to positive energy

Those of you who are parents must have surely witnessed this. Even those who are not parents but have dealt with a small child can also relate with this. A child wants a particular glass showpiece which you bought from an exquisite store and have nurtured it till date, and obviously, you do not wan to part away with that beautiful and admirable piece of glass. To prevent the child getting his hand to it, you place it at a higher level in your showcase. What we are unknowingly trying to do here is that we are passing a negative energy to the child saying that he cannot reach the target now. What do you think the child does? Does he get demotivated by this negativism or he still tries to reach his target - this time with even more energy to reach the same target. My experienced fellows would say that the later is true. So, what the child has done is that he has converted the negative energy (someone telling him that he cannot do it) to a positive energy (the child becoming more adamant to get it). So, it is possible to convert energies from one form to another. Just like we can convert electric energy to heat energy in an electric heater, our mind can convert the negative energy to positive energy and we all know that there is no shortage of negative energy around us.

What transforms negative energy to positive energy

It is always the strength of your goals that would transform this freely available negative energy to positive energy. I remember that every time someone used to tell me that I cannot be financially free or I will find it difficult to write a book, i used to smile at the person but my mind used to conceptualize thoughts like : "I am going to show him now that i can do it", " I am going to prove him wrong" and all these thoughts provided lot of positive energy to my goals. At that stage, I had no evidence that i can achieve my goals, no one had ever written a book in my family history, no one in my known group had ever achieved financial freedom but i was clear with my dream...and that dream was acting as a convertor to convert all the negativity around me to positive energy which boosted my belief in my goals.

So, go on, strengthen your dreams and collate all the huge amount of negativity around you, and then use the power of your dream to convert that into immense positive energy which can fuel your goals even further.

Cheers !!

Manoj Arora

Your results will keep you going !!

 

Some of my friends that follow my blog and regularly interact with me gave some specific comments on Financial Freedom. Their point of view was that they are very eagerly awaiting  the next steps on how to get financially free. They are very keen to know what are the steps 1 to 10 that they must follow so that they can be financially free as fast as possible. While they want to know the steps, I am still focusing my posts on dreams, motivation, drive, inspiration and passion. Why am i not hopping over to the actual steps to achieve