How Bad Debts Sabotage Your Plans to Achieve Financial Freedom

Your daily choices have a direct impact on your finances. If your daily choices lead to more bad debts, you are letting your goal of financial freedom slip away. If your choice is to buy and grow your assets, you will get closer to your goal every day.

Big Financial Decisions
Getting into big bad debt often is the result of poor financial choices. Buying a house in an affluent, keep up with Joneses neighborhood can lead you mounting bad debt. So is buying a car that is several models above your financial capability. Those are big financial decisions leading to constant struggles of bad debt.

Everyday Financial Decisions with Big Impacts
Then there are smaller financial decisions that also lead you the same way. Any unplanned purchase is a bad financial decision. It doesn't look like much when you pick a shiny toy just because it looked nice. It may also seem insignificant that you pick a few packets of potato chips while waiting in line at the cash counter. Those small financial decisions can add up.

Every time you go to the local super market, you buy more items than you planned. The super markets are designed in such a way to entice you to pick items that you have no plans to buy.

Similarly, when you visit ecommerce sites, you will find items that you don't need and will buy anyway.

You purchase items you don't need and won't probably use for a long time.

Such purchases satisfy you at the time of the purchase, but will come back to haunt you later. Why did I buy that? You ask yourself and find no convincing answer.

Practice Conscious Purchase Decisions
Write down the list of every item you want to buy at least two days before the actual purchase. Keep the list visible to you by placing it somewhere your eyes reach very often. You will be able to strike off items once the initial attraction is gone. Then buy the items left in the list.

If in the store you find a new item that you want to purchase, repeat the drill. Put the item in a list, see the list many times over two days, and purchase it if you still want it.

Even if you can't stop all your impulsive purchases, this is a surefire way to minimise them.

Practice Saving and Investment Habits
If you spend all the money you earn and have nothing left as savings or investments, you are a bad debt magnet. Bad debts will find their way and will ruin your finances.

The one biggest rule of financially successful people is the one rule to live by: Pay Yourself First.

Every time you have a paycheck, send at least 15-20% of the amount to a savings account.

If the rest of the money is not enough to pay your bills, you still are in financial struggle. You need to increase your income.

Saving is not investing. Saving means you keep money aside so that you can support yourself manage unplanned expenses.

Once your savings grow enough to support you through at least three months of joblessness, start investing your money.

Investments give you returns on your money. Start with debt funds and stocks. Do your own research. You only need to invest in less than 0.01% of the stocks listed in the market.

That is, you can safely ignore thousands of companies and start with the 30 stocks in index funds. Those companies are picked for index benchmark because they are large, has huge potential and have a history of retaining a healthy balance sheet.

Picking the stocks and funds that don't lose your money is as easy as looking at the 30 companies that form the market index. Start with the index companies that have the highest dividend yields.

Spend Money to Increase Your Net Worth
Buying every item you see in the supermarket has negative effect on your net worth. Buying the shares of the companies that sell those items will grow your net worth.

Your journey to responsible financial decisions in three steps:

1. Start with conscious purchase decisions
2. Pay yourself first – send 15-20% of your paycheck towards saving
3. Invest in funds and stocks that won't lose you money

Rich Thought, Poor Thought: Why the Rich Gets Richer and Poor Stay Poor

There is one resource the rich have in abundance, but the poor don't. Even with a mega lottery winning, the poor don't get a chance to utilize this resource. When the rich people lose access to this unique resource, they won't stay rich for long.

What is that special resource that keeps some rich and others poor? One clue. You can't buy it.

Before we go further, we need to put the word poor in perspective. In this article, poor means people who struggle to make ends meet, have less money than they need, and can't increase their net worth.

The poor are also hardworking people, often working more than 10 hours a day. If hardworking alone makes one rich, these people would become rich a long time ago. While hardworking is a good quality, that quality is not a big friend of the poor.

They work in the days. They wake up in the middle of the night, feeling horrible about their financial situation. They worry about the future of their kids. The loans they have to pay. The food they have to buy.

Rich Thought, Poor Thought

Simply put, they spend all their mental energy worrying about their existence. Something the rich don't have to do and there starts all the difference between the rich and the poor.

The lack of financial worries is one advantage the rich have over the poor. How does the lack of financial worries help rich become richer? Let's find out.

The rich can think about ways of growing their net worth. Instead of worrying about paying electricity bill, they can think about the assets to purchase. They can scrutinise the various investment opportunities coming their way. They have time to seek new passive income opportunities. And, they discover new business ideas.

At the same time, the poor are worrying about paying bills, feeding themselves and sending their kids to school.

The rich have the luxury of thinking about improving their net worth. The poor have their mental resources exhausted by constant worries.

Both the rich and the poor are spending the same mental energy. When they think about money, the rich have positive thoughts and the poor have negative thoughts.

Now think about this for a moment. Do the difference in thought has an influence on their financial conditions?


The poor don't have time to think about investing their money. They tell you they have no money to invest. They tell you they can't make any progress in life.

They utter sentences like: I can't invest. I can't put aside a percentage of my money. I can't pay my bills on time. I can't send my kids to good school.

Can they make a difference by stopping negative self talk? What do you think will happen if they back themselves up, learn to put aside a portion of their earnings towards savings, and make some income-generating investments?

Even if they don't become rich in a year or two, they surely can become financially independent in five to ten years.

If they can't put aside at least a tiny percentage of their money towards savings and investments every single month, they can't support themselves in the long run. A single jobless month can make them bankrupt, homeless and sick.

For most people it is a big leap. If you are committed enough, you can utilise your mental resources to change your financial situation for the better. Once you commit to it, you will discover ways of becoming financial independent. You will then worry little about keeping a roof over your head, feeding your family or giving your children the best education they can get.

Image credit: Bill Brooks

Freedom 251 Lessons on Dominating Free Publicity

It is not everyday that an unknown company appears in the horizon, create shock waves and dominate media attention.

Ringing Bells, a company that 'plans' to manufactur smart phones did exactly that. They announced a smart phone, for the cost that doesn't even buy one lunch for a family.

The Freedom 251 Smart Phone, which costs just Rs.251, and Ringing Bells claims to start shipping in four months, is the news of the town.

If not for the price, Ringing Bells would never get 1/1000th of the media attention. Otherwise, they'd need to burn a good fortune on advertising, which is beyond the scope of a startup.

In short, with a price tag of Rs. 251, Ringing Bells got publicity worth several crores.

The claim of Ashok Chadha, President, Ringing Bells, that Freedom 251 recoups cost and become profitable simply by scale and volume, doesn't hold much water. If they can prove otherwise, fine. But, until they prove the economies of scale works at these levels, I hold my judgment.

What Ringing Bells can however do is this: Sell 100,000 or 1,000,000 units of Freedom 251 for this price, next batch of same numbers for Rs. 1000, and then for regular prices of Rs.2000 to Rs.4000.

By the time of first and second batches, Ringing Bells can establish themselves as a reliable brand.

The price tag has given them the headstart they desired. Now the onus is on the company to prove themselves right.

Until the theory of scale is proven right (or wrong), I won't put my money in.

Invest in Gold - Ornaments, Coins and ETF

Gold seems to be the choice of investment in the short, mid and long terms. And, several financial experts foresee gold prices touching Rs.8000 per gram in 2015 or 2016.

In addition, gold has been traditionally the safest investment for hundreds of years. Physical gold in the form of gold ornaments has served the men and women of India in their times of distress.

Now, you can also buy gold coins and gold bars - from jewellers and banks. Banks sell 99.95% pure gold. The prices are different for different banks.

Buying Gold from Banks

Corporation Bank and Union Bank of India seems to have best deals for gold coins. See today's 24 carat gold prices at: http://www.coziie.com/gold-coin-rates (today's gold offer available from different banks in India).

Although you can buy gold from banks, you can't sell gold back to the banks. You can sell them to jewellers.

Buying Gold from Jewellers

Gold jewelleries across the country sell gold coins. Contact a few jewellers in your city to find out who have the best deals. Gold coins and bars have lowest making charges and are better investments than ornaments.

If you plan to take gold loans, you had better opt for gold ornaments, as lenders won't accept gold coins/bars.

Buying Electronic/Paper Gold

You can buy gold ETF (exchange traded fund). SBI Gold ETF, UTI Gold ETF, Quantum Gold Fund, etc are some of the options. SBI Gold Exchange Traded fund gave the best returns in the past three years (recommended).

The biggest advantage is, gold ETF has no risk and expenses of handling real gold.

It is always a good idea having at least 30% of your investments in gold. It may show losses and devaluation in the short term. However, gold has stayed a faithful servant over several centuries.

Four Stocks to Buy, & Hold for (At Least) Five Years

Just four stocks to buy every month for the next 12 months and to hold for at least 48 months there after.

Tata Motors
Tata Steel
HUL
GAIL

Manappuram, Muthoot Stocks - to Buy or Not to Buy

Reserve Bank of India circular dated March 21 required non banking financial companies to cap loan amounts at 60% of the value of gold pledged. Traders responded by selling off both companies.

Manappuram Finance dropped to Rs.38. Muthoot Finance dropped to a new low of 130.30 on the day the news of RBI diktat reached the markets. However, both stocks bounced back on the very next day.

Does investing in these two companies guarantee returns in the future? Will these two companies strive in the future? Can these companies sustain the monstrous growth they have been exhibiting in the past many years? All these questions are well worth the considering. I don't have the answers, really!

Gold Loan Business in India

Rural and urban Indians would pawn their gold jewellery to meet financial emergencies. Almost every Indian bank has counters for gold loans. State Bank of India and its subsidiaries now offer gold loans at interest rates as low as 4% per annum.

There are also thousands of tiny finance companies (micro lenders) offering loan against gold. The interest rates are 12%, 14% or more, depending on where you are doing business.

Muthoot Finance is the first major brand to offer gold loan through a network of offices set up across Kerala and in almost all parts of India. Manappuram also followed suit and they too witnessed some major growth in their gold loan business.

Gold as Security

People can take loan against jewellery only. Coins or bars are not accepted. Traditionally, women would buy gold ornaments, not only as ornaments, but also as an investment. They have few investment options.

Needless to say, these ornaments have more than monetary value for the women who own them. In many cases, the gold ornaments are handed over to daughter from mother. The gold jewellery has deep sentimental value too.

People pledging the gold would try their level best to close the loans and to take the jewellery back. This is why gold loan is very profitable for banks, non-banking finance companies like Muthoot Finance, Manappuram Finance, and for thousands of petty lenders spread across the country.

RBI Diktat

Gold loan companies compete against each other to lend money against security of gold. In some cases, they lend more than the value of gold. I have seen advertisements telling you could get 125% the value of gold as loan. In most cases, you can get 80% to 85% of value as loan. This is where RBI stepped in.

Indian banking is fairly conservative. Being conservative was one reason why Indian banks survived the past decade, which saw hundreds of American banks shutting down.

On the face value, it looks like RBI diktat would cripple the growth of gold loan in the non-banking sector. On closer look, you can see it is about doing business the conservative way. You don't blow the value of gold out of proportions.

There will always be borrowers who can't repay what they have borrowed. While the value of gold could offset any loss, it is prudent to lend only 60% of the value of the gold.

Currently, a borrower can get a loan of more than Rs.12,000 when you pledge 8 grams (one sovereign) of gold. Earlier, they could get more than Rs.17,000. The gold jewellery costs Rs.20,000 for eight grams.

Back to Muthoot and Manappuram

Both the companies were growing at 50%. According to news sources, Muthoot has loans worth Rs.24,000 crore against jewellery worth Rs.40,000 crore. Manappuram has loans of Rs.11,000 crore. On average, both the companies are lending just more than 60% of the value of the gold.

Is it Wise to Buy Muthoot and Manappuram Shares Now?

One point. It is not wise to sell them now. These companies can stay in the business despite the diktats. Both the companies get hundreds of new customers every day from almost all parts of India.

In addition, they are forced to be conservative and to be safe against volatilities of any kind. Now we have two non-banking companies acting almost like a bank.

In addition, these companies have non-lending money business too - money transfer from foreign countries. Money transfer in association with Western Union Money Transfer is a major business, especially in Kerala, from where the youth are packed to the gulf countries, Europe and to around the world for employment.

Is it good to hold to these companies? (NO GUARANTEES): It is good to buy and hold on to these companies. Both of them have big, growing networks, reaching out mainly to the rural people, who don't get enough banking services.

If there are bad signs, we can see them in advance. As of now, the RBI directions only secure them against volatilities that have sank many a banks on the other side of the world.

Penny Stocks, Big Profits

Identifying penny stocks with huge potential is a big plus for any investor. The problem is, in most cases, you can't identify the stocks that would soar in five to ten years.

A case in point: Hawells India

Five or six years ago, our electrician recommended Hawells switches, cables and other electrical fittings. I thought Hawells was a big company.

When I checked the stock prices of the company, it was around Rs.15 per share. Now, the stock is trading for Rs.450. I didn't buy the stock then. If I invested just Rs 1500, I would have Rs 45,000 today. That is, my investment would have grown by 3000% in less than ten years.

Needless to say, I didn't invest anything and I didn't get anything. However, now I know one thing. If you can find a company that sells good products, that company is worth buying. Sweeter is the deal if the company comes as penny stock (a term for shares being sold at dirt cheap prices).

I did look for a few penny stocks, but didn't feel comfortable about most of them. However, I decided to earmark five percentage of my investments for penny stock only. If I get just one stock that grows by 3000%, my whole portfolio would benefit.

Maybe, if I see some success, I'd increase it to 10% or even 20%. That is good business, right?

Top Indian Stocks for Long Term Investment

Identifying companies with long term potential and holding the stocks of such companies for several years is the real key to making profits from the stock market. Smart investors have done it all the time. As smart people say, if you have the patience of nine people, try to buy and hold the following stocks. I think the following stocks would bring big returns in the next one to three years. I think it is good not to sell the stocks even if the stock prices rise in the next one or two years. In other words, hold them for more than five years to see real returns.

(This is a blog. The opinion are purely personal. BUY THE STOCKS AT YOUR OWN RISK. ABSOLUTELY NO GUARANTEE!)

SAIL - Steel Authority of India Limited as a company is strong, has potential and makes profits. The company is beaten in the share market. The management is good. The business is not bad. SAIL is for investors looking for long term, safe stocks.

Similar stock – Hindalco

TATA Motors - Risky, because of this company's exposure to European market and competition from foreign automobile manufacturers looking for bigger market share in India. Apart from NANO, TATA motors is doing good, selling Indica Vistas, trucks and buses. I'd back this Indian icon. Mahindra and Mahindra is also a strong contender.

Other stocks from TATA family – TATA Global Beverages (among the biggest in the world), TATA Steel (another global winner), and TATA Chemicals.

State Bank of India - You can't ignore this large cap stock for long. The basics look good. Everything is hunky dory about this bank. Will hold for more than 10 years. I believe the stock prices would then cross Rs.10k mark, may even reach 15k.

Pantaloon Retail would show short term gains in 6-12 months. Not going to hold it for long term.

Keep in mind these are only my stock picks and these are the suggestions and reasons I gave my friend. I didn't pick any from Reliance family, telecommunications, and technology sectors because of my own reasons.

Sampadyam -Malayalam Magazine for Newbie Investors

Sambadyam (a savings and investment magazine in Malayalam)

Type: Magazine
Language: Malayalam
Frequency: Quarterly
Topic: Investment, Insurance and all Personal Finance Topics
Price: Rs.15.00
Published by: Malayala Manorama

Sambadyam is a Malayalam magazine, dealing with money related topics. The tagline of the magazine reads 'nikshepakarude vazhi kaatti' (investors' guide).

Although the magazine claims to be a guide to investors, I think the magazine is good for newbie investors only. It is good for newbie investors, but seasoned investors find it grossly inadequate.

After the odd feeling of reading finance and investment topics in Malayalam is over, I could find the magazine as a guide to insurance policies, mutual fund schemes, stocks and tax planning.

The magazine has stock suggestions, without ticker symbols. The writers pick a few stocks and ask readers to consider them. Though the stocks are good bargains at the prices mentioned in the magazine, they are already trading at double the prices by the time I checked the prices. Buy the stocks at available prices and you are making big speculations. I do not expect anything better from a magazine, which is published once in three months.

Both issues had in the last page, a Tax Corner feature, where tax related doubts by readers are cleared. The questions mailed in by the readers are answered straight, clearly and in simple language.

The magazine has several pluses and a few minuses. The strong points are Tax Corner, insurance advice and mutual fund advice. The write up on systematic investment plan (SIP) offered by different fund houses was an insightful one and would inspire youth to separate a monthly sum towards investments.

The writers could do a better job by introducing better-managed funds. I miss funds by DSP ML, Fidelity and Reliance MF (although it featured Reliance Tax Saver fund).

The column titled 'Portfolio Doctor' is the weakest link. This column generally discusses the asset allocation of an investor and suggests a prescription for weaknesses in portfolio allocation. The writer has to identify some weak points in the asset allocation and suggest a remedy for a selected portfolio followed by an investor. The prescriptions are hurriedly prepared and do not qualify as studied suggestions.

The November issue discussed a portfolio (of Dr. Saji P Soman and Bindhu). The first prescription was to diversify the stocks to different stocks (I approve the suggestion) from current domination of infrastructure stocks. The second suggestion is to entrust a portfolio management to handle the stocks (Nov 2007 issue, p.66). I think a portfolio management service is not necessary for someone who has significant levels of investments in mutual funds and knows what he is doing with his money. Moreover, Warren Buffet has told you to "make your own firewood, it warms you twice".

The investor doesn't go for a PMS, but will reduce risks by diversifying his stocks to pharma, communications, entertainment, tourism and banking sectors.

The asset allocation of the couple revolves around stocks only. That is the weak point of the portfolio. It doesn't involve any real estate and gold. The saddest part is the writer starts the column by praising the absence of real estate and bullion in the portfolio – the writer also encourages average families to copy the investment style (a big mistake).

A good suggestion would be to lock in the profits from stocks, at least three years before a significantly important event and redirecting the investments to assured return funds. This step is important. Even though the good stocks can perform well in the long run, it can go down in short terms. You will lose money, if you are forced to redeem cash during a dip in the stock market. You will insulate yourself against such risks, if you redirect your cash to assured return funds.

There was a review on Benjamin Graham's world renowned book, The Intelligent Investor, which is a necessary read for everyone investing in stocks (or anything). The facing page (p.72, Nov 2007) has day trading tricks, which includes buying a stock if it has breached the 52 week high. Benjamin Graham in his book talks in detail about concepts like 'margin of safety', which is about identifying the real value of a stock and buying it at a price lower than the real value. While day trading is the recipe to burning your shirt (and underwear), 'margin of safety' is something that protects you from the volatilities of markets. I find it a bit odd to print these two concepts in face to face pages.

Who makes the good readership?

Anyone who doesn't have any insurance, mutual funds and stocks, but likes to get started. The Tax Corner is also good for tax payers.

People with some experience in money and investment matters feel this magazine inadequate.

Give Time: Your Mutual Fund Investments will Grow

I was once talking to a person in my family. I know this man had no investments and is past retirement age. I just wanted to introduce him to the world of mutual funds. I asked him to calculate the returns on an investment of Rs.6000 if it grows at 20% per year for 20 years.

He is good at math, but wants the number of years reduced to three, saying it'd be easier to calculate. I gave him a calculator to do the original problem I had given him. He returned a number – 230,025.60.

I asked him if he could invest that money for that many years for this return? After a long pause, he said: "How much return will I get in one year?"

He just told me an investment of Rs.6000 could turn to Rs.230k plus in 20 years. But, he now wants the math for one year.

Though I appreciate his situation (cash flow, not value growth is important in retirement), it kept me thinking. I think and think and . . .

If he invested Rs.6000 in a fund, which grew 20% every year for 20 years, he would have Rs.230K now. (And he could invest more than 500 a month 20 years ago and could invest 15000 a month five years ago. That sums, if he did invest, would have grown to a nice sum now. Nothing happened.)

Do you plant a seedling today in hopes of plucking its fruits tomorrow? The obvious answer is no. However, when it comes to investments, people believe the seedlings become plants and bear fruits in a few days.

You read about a well-managed fund giving 30% returns per annum. (Mutual funds giving returns 70% is not rare in India, thanks to the Bull Run).

If a fund can give you returns of 20%, your money can double in just four years. Many so called investors are happy to redeem their earnings, once they see their money doubled in less than four years.

If you close your account at this stage, you miss major gains.

You read it right. You are missing out major opportunities, even if you see your money doubled in four years or less.

Leave the investment running for another four years. Your investment quadruples. Leave your investment for 15 years in total, growing at 20% and you see your investment growing by 15 times.

Keep invested in additional number of years and you will see your investment growing more times than the number of years. Stay invested for 20 years and you will see your money growing by more than 38 times. Stay invested for 25 years and you will see your money growing by 95 times. Stay invested for 30 years and you will see your money growing by 237 times.

OK. No one can expect a fund to grow by 20%, consistently for 30 years. I agree. There will be dips in the market, corrections, recessions, etc that will negative affect the performance of your investment.

However, with a professionally run company, you can normally expect a return of 15%, even in volatile market conditions.

How much will your money grow if it is growing by 15% per year?

5 years – 2.01 times
10 years – 4.04 times
15 years – 8.14 times
20 years – 16.36 times
25 years – 32.91 times
30 years – 66.21 times

There is no comparison of 237 (with 20% growth) and 66 (with 15% growth). The point is find funds capable of giving your returns more than 15% (investing in index funds can give you that returns) and keep invested in the fund long enough, for the money to grow and bear more money for you.

Disclaimer: I used the following formula to calculate returns.

FV = PV (1+r)^n

PS: I am not good at math. It will be helpful if you do your math and correct me if some errors have crept in.

Yet, my point is simple - by maximizing n, which is the number of years you allow your investment to grow, you will also maximize the chance of multiplying your money.

To maximize the advantage of n, keep investing and stay invested for as much as you work and earn.

See what Motley Fool has to tell about this formula.

CIBIL-TransUnion Credit Scoring System Launched in India

Lenders in India will now have a clear system to identify the credit worthiness of persons, while borrowers can effectively bargain for lower interest rates, citing their clean repayment history.

Credit score is new system in India, launched on Thursday, November 29, jointly by Credit Information Bureau of India (CIBIL) and TransUnion.

CIBIL-TransUnion score tells lenders about the credit worthiness of a person, based on his/her repayment history. The score is a number between 300 and 900. Individual credit worthiness increases with the credit score.

Reserve Bank of India, the central bank is yet to issue directions and rules for co-operative banks to be members of CIBIL.

Repayment of credit card bills and personal/home/auto loans is the main criteria of a credit score.

According to Geoffrey Miller, vice president, TransUnion said, "The scoring model factors in the payments history, outstanding debt, credit account history, recent credit enquiries and the different types of credit the borrower has availed of."

The lenders however will not get data on job status, type and salary of the borrower.

Only persons who have taken a loan six months back will have a credit score.

Presently, there are 77 banks, 32 Non-Banking Financial Companies, six state financial corporations, 10 financial institutions and two credit card companies are members of SIBIL.

Insurance companies and telecom companies also express interest in CIBIL memberships.

Similar credit system exists in the US

Although this system is new in India, similar system exists in the US. There are mainly three credit-reporting agencies – viz. Experian, Equifax & TransUnion.

Apart from the repayment of loans and credit card bills, timely payment of utility bills like electricity, phone, etc also play a role in individual credit score.

Before applying for loans, individuals can check their credit score from the agencies for a nominal fee. They can also ask to remove any false information. Credit history that is older than seven years is removed from the reports.

The message to borrowers is clear - if you want to take a loan, be punctual in repaying your credit card bills and do not delay the payment of loans of any type – personal loan, vehicle loan or home loan.