Wednesday, 23 November 2011

PPF interest rate increase. Ponzi Alert! Like Social Security? (Part IV)

I started off this series of posts, in response to the change in rules governing the PPF scheme.  The interest rate for the next financial year has been raised to 8.6% from the current 8% for the PPF scheme.  I believe any defined benefit scheme that promises returns well in excess of market rates is no different from a Ponzi Scheme.  This is because no scheme can maintain a pre-defined level of returns which are not linked in any way to market returns.  Just because the scheme is backed by a government does not make it viable!  The government backing may ensure safety today, but in the long run the scheme cannot maintain itself.  We are already seeing this in the US with social security benefits.  The social security scheme in the US is also in some sense a defined benefits scheme, wherein you are guaranteed to get a certain payout when you retire that is linked to your prior years income and investment into the Social Security Scheme.  However, the payout from social security is not necessarily linked to market returns.  Hence, the scheme is under tremendous pressure to fulfil its obligations to payout to the millions of Americans from the baby boomer generation, as they retire. 

Tuesday, 22 November 2011

PPF interest rate increase. Ponzi Alert! Like Social Security? (Part III)

The Public Provident Fund Scheme, or PPF is arguably the most popular savings scheme currently available for small investors in India.  Literally millions of Indians, participate in this government backed scheme with the full confidence that their money is safe, and will grow over the years.  There are several detailed articles that you can find on the web, describing the benefits of the scheme, how to invest in it, and the rules and fine print for deposits and withdrawals.  You will also find every financial planner, first checking if you have a PPF account, and if not, encouraging you to open one, not just for yourself, but also for your spouse and minor children.  It is almost automatic today, for every earning adult (and in fact their minor children as well) to have a PPF account with money being stashed away dutifully every year, just like our parents did before us. 

Monday, 21 November 2011

PPF interest rate increase. Ponzi Alert! Like Social Security? (Part II)

Here is a picture of Charles Ponzi, carrying a gold handled cane and a diamond stickpin from August 1920 in New England, USA.  In my earlier post, I had shared with you the story of Mr. Charles Ponzi, who started as a small time con artist, and grew to become one of the most notorious, and certainly the earliest large scale swindler of all time. 

By the late 1920's, Charles was living the big life, with his business scheme seemingly unstoppable as more and more investors poured in their money to participate in his highly profitable business activities.  However, the banking authorities were beginning to get suspicious about this time, about the nature of his business, particularly since he seemed to spend very little time managing his business, and almost all of his energy talking about it and advertising it in the local newspapers. 

Sunday, 20 November 2011

PPF interest rate increase. Ponzi Alert! Like Social Security? (Part I)

Charles Ponzi was born Carlo Pietro Giovanni Guglielmo Tebaldo Ponzi on the 3rd of March, 1882 in Lugo, Italy.  He grew up in Italy and came over to the US in 1903.  He started off by doing odd jobs, including working as a dishwasher in a restaurant and later waiting tables.  He then went to Montreal, Canada and worked in a bank for a while as a teller.  Here he got his first taste of handling other peoples money, until the bank failed and the bank promoter ran away to Mexico.  Penniless, Charles was soon driven to frustration, and he forged a cheque, was promptly arrested, and ended up spending a few years in prison.  It was here in prison, that he met his role model, Charles Morse, a wealthy wall street businessman with a penchant for swindling his clients. 

Wait a minute, you might ask!  What does this biography about Mr. Ponzi, have to do with the PPF rate increase in India?  And where does the Social Security angle come in to play?  Well read on my dear friend, and soon all will be clear. 

Saturday, 12 November 2011

LBYM : Dining out, A Luxury? In India !!

If there is one thing that I like to splurge on, it is food.  Both my wife and I like to sample different cuisines, and between us we have a wide range of foods that we enjoy dining on.  However, one constant source of disagreement that comes up at home is regarding how often we get to eat out.  I think we don't eat out often enough, while my wife feels that eating out is too expensive and she'd rather experiment with home cooking to expand her already wide portfolio of tasty recipes.  I usually disagree, and feel that it is too much effort to slave away in the kitchen day in and day out, and eating out twice or even thrice a week is completely justified.  Given that my wife works as well, I think it is only fair that we reduce as much work at home, while spending on something that we both enjoy, i.e. dining out.  Something happened this Friday though, that has made me re-think my stance on how often we should be going out to fancy lunches and dinners.

Thursday, 10 November 2011

Cost of Living in India : Light South Indian Lunch

Last weekend we had gone out for a bout of shopping, and stopped at a small road side hotel for a quick lunch.  The plan was to grab a few South Indian snacks like idlis, dosas, vadas etc and make a lunch out of it.  We were both hungry and so was the baby, so we figured a couple of dishes each would do the trick.  The place we picked was part of a larger chain that is supposedly popular down in South India.  A small outlet, with self service, and seating for about 15 people.  Well maybe it was the time of day (around 12:30pm) that we picked, but they had run out of idlis.  They didn't have masala dosas either, so I settled for a plain dosa.  Mrs. B decided to go with a plain uttapam, and we decided to supplement with a plate of lemon rice.  Lets just say that we have had better when it comes to South Indian fare.  The taste was authentic, but not necessarily top notch.  It was the cost that took us by surprise.  Each of the 3 dishes cost Rs25, for a total lunch bill of Rs75.  For the level of service and ambiance, which wasn't spectacular given that we were in a roadside outlet, and the taste which wasn't something to reminisce about, we thought the food was very overpriced.  Needless to say we will not be eating there again.  There was a time when South Indian snacks were considered to be the cheap fast food of India.  I guess at Rs75 for 3 dishes, the inexpensive status is being challenged.

Cost of Living in India : Flat Maintenance

Most of us in Tier1 (or for that matter Tier2, Tier3) cities in India live in apartment complexes or buildings.  We all share common amenities with our building/colony neighbours, and typically pay a monthly maintenance fee to help maintain the shared amenities.  The more modern complexes boast everything from swimming pools, children play areas, tennis courts, badminton courts, squash courts, fancy clubhouse, library, gym, jogging track, etc.  There is also the general upkeep of the building that needs to be considered including lifts (elevators for those of you in the US) lobby area, water pump, building exteriors etc that needs monthly spending. 

Wednesday, 9 November 2011

How much home loan can I get? (Part II)

In the Part I of this post, I had described a seemingly well set couple; Gaurav and Sneha, planning to buy their first home.  They had taken all the right steps in budgeting their home loan eligibility and are ready to take the plunge into home ownership.  Their financial planner approves of this step, and has given them the go ahead.  However from an early retirement aspirants perspective, they are making a huge mistake, that will potentially ruin any chances they might have of exiting the financial rat race early.  Where did they go wrong?  Isn't owning your own house a good financial milestone?

Sunday, 6 November 2011

How much home loan can I get? (Part I)

Buying a home in India, or for that matter anywhere in the world, is a big decision for most people.  It is most likely the single biggest purchase you will ever make in your lifetime.  Gone are the days when one used to save for a lifetime, before finally being able to afford a small home towards the end of your career.  Today India is growing by leaps and bounds, and the average home buying age in India is dropping every year.  The Associated Chambers of Commerce and Industry of India (ASSOCHAM) estimates that the average age for home buyers in the 1980s was 55-58 years in India.  In stark contrast, since 2000, the average age for first time home buyers for personal use has dropped to 30-38.  Many first time buyers are either just married, or many times choose to buy a home even before marriage.

Inflation in India

Inflation is a much maligned but sometimes poorly understood phenomenon that has the most significant impact on any personal finance plan.  Particularly in a emerging country like India, inflation can be so rampant as to be the fundamental parameter that influences all investing decisions.  Inflation is usually defined as a rise in the general level of prices of goods and services in an economy over a period of time.  In the words of noted economist Sam Ewing, it is the reason why you pay $15 for the $10 haircut that you used to get for $5 when you had hair. 

Friday, 4 November 2011

Is 1 Crore enough to retire on in India?

If you had Rs 1Cr (approx USD $200,000) would you be able to retire right now in India? If you need to meet retirement expenses over 30 years, would Rs 1Cr suffice?  How much can you spend monthly, if you need the Rs 1 Cr corpus last over 20 years.  To understand these and several related questions, read on.

Compound Interest 101

Compound interest is the single most interesting and critical factor that impacts all projections of investment growth, retirement corpus accumulation, loan EMIs and payback tenures, etc.  For a concept that is so fundamental to financial theory, compounding can be exceedingly difficult for the average person to understand and fully appreciate.  This is fundamentally because with compound interest, the total corpus grows or declines in an exponential manner.  It is widely believed that the human mind has difficulty comprehending exponential behavior.  For example, Albert Bartlett a US scholar, once commented that "The greatest shortcoming of the human race is our inability to understand the exponential function".  In economics the exponential growth model is also known as the Malthusian growth model, after the Reverend Thomas Robert Malthus, who authored "An Essay on the Principle of Population", one of the earliest books on population growth rates.

Tuesday, 1 November 2011

Generational Finance NOT Personal Finance

Just do a google search for Personal Finance, and you will see tons of websites, blogs, articles, marketing pitches etc, all doling out advice on personal finance and how to go about achieving the various goals, investment decisions, savings rates etc associated with it.  It is amazing how much information and guidance gets dished out and consumed relating to this topic.  I guess, Personal Finance gets down to the core of who we are, what we do, and how we do it, and touches every aspect of our lives, which is why it is so hotly discussed, debated, talked about, and basically flogged to death on every financial TV channel, news media, or personal finance blog that you come across.

ET Wealth : Family Finances : Oct31-Nov6 2011

The ET Wealth Online personal finance weekly magazine has a Family Finances section that features one family every week for personal finance advice.  This week they featured a family with a monthly income of Rs 54000 (approx USD $1100)  The article is titled Low income likely to pose a big hurdle.  The first thing that struck me is the financial planner characterizing Rs54K per month as low income.  For an emerging economy like India wherein the average monthly income is in the Rs3000-5000 per month (~USD $100), it is a little strange to consider RS54K per month to be low income.  Probably the planner was taking into the account the financial goals of the family while pronouncing their income as low.

Household Savings Rate : How do we measure up?

It is the last day of the month, and our only sources of monthly income, i.e. our paychecks hit our salary accounts today.  I had talked earlier about shooting for a 85% savings rate, and the need to be able to track this religiously, if we want to have any chance of hitting this super aggressive goal.  We have always struggled to come up with a system to track our expenses.  Either we get too ambitious and try to record every single penny we spend, and end up failing miserably in the attempt, or we become too lazy and forget to track any spending at all.  So we figured the first step was to come up with a simple way to monitor our overall monthly expenses and then refine the method if we see the need for it.  So instead of messing with tracking spreadsheets, notebooks, etc, my wife and I came up with this pretty simple method, that was staring us in the face.  Today, I simply added up my wife's and my monthly October paycheck, and I withdrew 10% of the amount in cash from our nearby ATM.