Saturday, April 18, 2009


Anand Chokkavelu from wrote a very interesting article where he has discussed 10 numbers that have a deep impact on the person's wallet. He has talked about things like the minimum contribution in 401k account by Americans, America's saving rates etc.Some of the numbers mentioned there are unique to America and has little relevance for Indians, So I thought of listing down my own list of 10 numbers that affect the financial health of an average Indian.
This is the total charge under New Pension Plan in paisa terms. The total charges that an investor needs to bear in New Pension Plan will be just 9 paisa for every Rs 100. This is the lowest that any investment tool charges in India as on today. The second best cost effective options available in India is mutual funds which charges Rs 2.25 for every Rs 100. This difference in the charges over a period of 25-30 years result in huge difference in savings. NPS is expected to be launched for everyone (till now it was for govt employees only) since 1st May 2009. So you must look at investing in it for your retirement.
This is the proportion of equity you must have in your investment portfolio. Here X is your age in years. for example, for an adult of 35 years, he must have 65% of his investment in equity instruments like shares,equity mutual funds etc. Equity is the best class of investment when it comes to delivering returns over long term. Historically Indian equity markets have delivered returns in excess of 15% compounded yearly in last 30 years. Compared this to any other investment option and you will see equity will come up with trumps.
This is the number of years in which your investment will double. X denotes the rate of return generated from the investment.For example, if your FD gives you an interest rate of 8%, then your money will double in 72/8= 9 years.
This is the amount of investment that is tax exempt under Sec 80C of the IT Act. These investment have to be made in defined instruments like ELSS, FD, NSC, PPF, EPF , NABARD bonds etc.This is available to every person who is earning and is liable to pay tax. One must take full advantage of this benefit to save tax and also build long term wealth in the process.
This is the average rate of interest charged by credit card companies on the outstanding amount you have on your credit card. This is by far the highest rate of interest you will pay for any financial products, discounting the rates money lenders or some micro finance companies charge for lending to sub prime borrowers.You will agree that paying 40% interest rate pa is atrocious and hence the first thing that we must do is to pay off the credit card balances. Revolving outstanding on credit card should be strict no-no.
Reducing Balance Rate=2XFlat Rate
There is a huge difference in the interest rate charged on reducing balance basis and the interest rate charged on a flat rate basis. Under reducing balance interest , the interest is charged only on the amount of your loan that is outstanding at the beginning of the defined period (monthly,quarterly,annual etc). For example, if your initial loan amount is Rs 1000 and your EMI is Rs 100 and the reducing rate of interest is 10%, then, after you pay your first EMI your principal outstanding becomes 900(1000-100). Now the interest will be charged only on RS 900 and your total interest component will be Rs 90. Whereas in the same example, if the rate of interest was flat, then the rate of interest would always be charged at Rs 1000 irrespective of the outstanding amount. This results in a person paying almost double interest under flat rate. Some banks give you the option of reducing balance rate, but, some don't give that option and charge you only at flat rate (Example - Citifinancial Consumer Finance). so in that case how would you know what would be the rate of interest had it been reducing rate? Just multiply the flat rate quoted by 2 and you get the reducing rate. Now go to the other banks and compare their reducing rate on loans with the ones who tell only flat rate. The one offering you the lowest rate is where you should do the deal.
This is the how many number of times of your annual income should be your life cover. Some experts (like Suze Orman of CNBC fame)argue that it should be 20 times. My take is that you must decide basis your liabilities and if you can afford 20 times of your income as life cover, go for it,but, if you cant pay so much premium , then you MUST have life cover which is atleast 10 times your annual income to ensure that your dependents are not faced with any financial stress after you. So check your life cover. If it does not meet this , then call your financial planner or the neighbourhood LIC agent now.
This is the total savings rate of Indians in percentage terms out of their total earnings. On an average , the 33% of India GDP is ploughed back in the economy as savings and investments. This tells you that you must save AT LEAST what fellow Indians are saving. So next time you get your salary cheque, the first thing you must do, is set aside 33% of it as your saving. Anything less than that will mean that you will be falling behind others in the quest to getting financially independent and wealth accumulation.
Your Home loan EMI should not be more than 30% of your pretax monthly income for your financial well being over a long period of time. Since home loan EMIs entail long term commitment , anything more than 30% of your monthly income will mean that too much of your life will be dependent on this one factor alone. Your chances of saving, providing for kids education , own retirement, meeting exigencies etc might be compromised.Hence try and keep your home loan EMI at 30% of your pretax monthly income.
This is the number of endowment policy you should ever buy. Endowment,ULIPs etc are big scam and should not be bought under any circumstances. Why do I say this? Check out Always go for term insurance.
If you manage to keep these 10 numbers in control, then I dare say that financial independence wont be wishful thinking for you anymore.
Stay wise n stay wealthy...

1 comment:

  1. Information given are True and i thank the writer for giving valuable information so that others can use them.
    Abhay Kumar