Understanding Your Current Financial Status - Part 2 - Net Worth Statement

 Net Worth Statement

A net worth statement tells you, what, is your financial situation at a given point in time. 

                                           

                         Net Worth = Assets – Liabilities 

There are 5 types of Assets, which are

1.      Equity which includes Equity Stocks, Equity MFs and ULIPs
2.      Debt which includes FDs, Debt funds, PFs ,Post office investments, Traditional life insurance policy premiums (money back or endowment, etc).
3.      Liquid which includes Cash, Savings account and Current account balance and Liquid Mutual Funds.
4.      Gold which includes Coins, Bars, Gold Funds, Gold ETFs
5.      Real Estate which includes house, land and commercial space

Liabilities would include all your loans.

We have excluded cars and jewellery out of the assets as we may think they are our assets but we seldom sell these. We have included the house you live in assets as we have taken home loan in liabilities. We hardly sell this asset as well.

Now as we talk today net worth can be positive for someone or even negative.  A negative figure hints that we should make plan to eventually move towards the positive and build our assets so that our financial goals are achieved.

Understanding Your Current Financial Status - Part 1 - Cash Flow Statement

Understanding Your Current Financial Status:

You need below 2 statements to understand your current financial situation:

1.       Cash flow statement
2.       Net worth statement

1. Cash Flow Statement

Cash flow statement tells whether you are generating surplus income post taxes and life style expenses. This data should be taken for a financial year, as some expenses would be yearly.

Some professionals and business owners might at times have no clue if their expenses are exceeding their income, as their income is variable and people might fail in keeping track of all the inflows and outflows.

Now putting together a cash flow statement would tell you how much of investible surplus you have. And below simple formulas…which have been found to be useful, most of the time…. Could be used to finds the problem areas and take corrective steps.

And even if there are no problem areas, below ratios should be checked if our surplus is enough for us to reach our financial goals.

Savings/Take home pay= min 30% (saving for your long term goals such as kids higher education, retirement, etc.)

(Debt+All household expenses)/Take home pay=max 50% (households expenses would be ones like food, entertainment, education, fuel, rent)

Floating expenses=20%(Short term goals like vacation, car, electronics, etc. and emergency fund for medical expenses, etc.)

In Next Blog, we will talk about Net Worth Statement.

50-30-20 Rule of Budgeting

 50/30/20 rule of budgeting

It is such a cliché, we get educated so much, work hard in life so much to have a decent living or to simply put ‘earn well’, but once we start earning, we don’t know what to do with it.

Most of us think, finance is a pretty heavy topic, something we would not understand much about, but to manage our own personal finance, we just need to know some basic things about personal finance, and that is it!

I know, at times when you have a sizable expense, it keeps you wondering, whether you have over spent on the item or was it ok, or when you take a loan, you wonder whether you have over borrowed or no.

With this article, you would know a simple and a really handy rule to track your budget, which we call the 50/30/20 rule.

It would help you know, whether you have borrowed well enough in your capacity to pay back, at the same time save enough for your goals and manage your day to day expenses too.

So, here it goes, as per the representation above, all your expenses like utility bills (grocery bill, electricity bill, phone bill, etc.), expenditure on fuel, entertainment, education, outside food, etc. and rent or Home loan EMI should not cross 50% of your take home salary.

You should allocate 20% of your take home pay i.e. salary after paying taxes, to your short term goals (goals within 3 years) like buying a car, going on vacation, buying any electronic item, putting together an emergency fund for sudden medical expense, for sudden job loss situation, etc.

And you should be able to save and invest 30% of your take home pay for your long term goals (goals beyond 3 years) like kids’ higher education, their marriage, your retirement, etc.

Now, check your own take home salary and check whether fixed expenses and floating expenses are well within above limits or no. And, if no is the answer, you need to put it right and save at least 30% of your take home salary henceforth.

So, with this handy rule, budget well. Stop worrying about money and start loving your budget. After that, I am sure you would save well. Meet you in the next article. Until then happy budgeting!

Children Education Planning

Children Education Plans:

Let us discuss about Child Education Plan (Graduation) in this post.

Current Cost of Desired Education (Engineering) : 10,00,000/- 
Current Age of Child : 5 Years
Age of Child when Corpus is Required: 18 Years
Expected Rate of Returns: 12% p.a.
Inflation : 8% p.a.


With some planning, you can provide your child the best education – the very best. Here’s the calculation that lets you understand what’s in store financially, to fund your child’s Graduation (Engineering) that currently costs Rs.10,00,000/-

If the rate of inflation is 8 % p.a. the cost of your child’s education when they turn 18 in 13 years would be Rs. 27,19,624/-. 

You will need to invest a lump sum of Rs. 6,23,266/- or make a monthly investment of       Rs. 7,307/- at an annual return of 12 %, to successfully meet your child’s education cost.

Suggested Portfolio:
Mix of Large Cap, Midcap and Multicap Funds.

Retirement Planning

Let us discuss a Retirement Planning case in this post.

Current Age: 35 Years

Retirement Age: 55 Years

Inflation : 8% p.a.

Current Monthly Expenses: 1,00,000/-

Life Expectancy: 80 Years

Rate of Return: 12% p.a.

Retirement is a new way of life in many ways. Apart from adjusting your work life, you also need to adjust your financial life to the new reality. Here’s what you need to do to build your retirement corpus, if your current monthly expenses are Rs.1,00,000/-, and you expect to retire in the next 20 years.

If you consider the rate of inflation at 8 % p.a., you will need to build a retirement kitty of Rs. 9,35,18,569/- (Rs. 9.35 Crore) to live comfortably. 

You will need to invest a lump sum of Rs. 96,94,767/-  or invest Rs. 94,534 each month, at an annual return of 12 %, in order to enjoy your golden years.

For getting 12% p.a. return, you will have to invest in Equity Asset Class. 
A balanced portfolio can also achieve this goal.

The only problem which can occur post retirement is you will still have to keep allocation in Equity Asset Class. If you do not want to do that post retirement the investment amounts and retirement corpus amount  will change drastically.