APPRECIATING AND DEPRECIATING ASSETS!!!

Appreciation

Refers to the increase in the saleable value of any asset over a time period and

Depreciation

Refers to the loss in such value due to usage over a time period.

There are no assets which always appreciate of depreciate but their types and characteristics are discussed in brief. Wrong or incorrect or untimely investments in assets have a considerable effect on the net worth of an individual. These figure as reasons why even high salary people do not have high net worth after working for many years.

Types of assets are :

1. Real Estate

2. Bank deposits

3. Retirement funds

4. Gold and Silver

5. Equity Investments

Note:While I plan to write another blog on asset allocation later stage once my investment strategy and process has been explained in brief. A point to be noted is as regards personal finance, one house, life long needed to stay in, is not considered an asset. Rest assets are just to be taken note of at present as some of these have been discussed in earlier blogs and those not discussed so far are on the agenda for the future blogs.

On Assets in Brief

Assets in general get acquired by the prudent savers and investors who invest in learning and making themselves worthy of owning and preserving such assets. Some times these are also inherited.Entrepreneurs create assets for their organizations and their personal by leveraging bank loans too. Individuals mostly take loans only for a house.

1.Real Estate

Investments in real estate and related factors or variables on which appreciation or otherwise depends have been discussed in Blog No- 21.

2. Banks Fixed Deposits again has been a subject of my Blog No-11.

3. Retirement Funds- one important avenue for this is Public Provident Fund (PPF) which has been discussed in Blog No-20

4. Gold and Silver and Equity Investments will be discussed in the blogs to follow.

Their characteristics as regards appreciation or depreciation are in brief as under

1. Real Estate - Real estate is generally considered as an appreciating asset but it is not always true and depends on locality or area and other factors discussed in Blog-21.Appreciation must consider the inflation factor and be better than that to be really beneficial. Fairly secure but less liquid.

2. Bank Deposits- These generally give appreciation as interest earned which is lower than the inflation rate.However these are very liquid, secure and serve well as an emergency fund.

3. Retirement Funds- PPF is a very good Compound interest scheme and has been discussed in Blog-20. National Pension Scheme is another essential scheme which must be used by the salaried class as well as others to save for retirement. Backed by the state these are most secure but less liquid.  

4. Gold and Silver. I plan to discuss this in a future blog but easy liquidity globally is its main characteristic as its utility as “Stridhan” is a lot less with changing times but its appeal to women continues.

5. Equity Investments. Direct equity investments is the best course for investments and its simple but not easy. They are liquid, appreciate given long time and grow and beat inflation and are tax friendly too.

It is not time consuming once mastered but developing the right mind set and skill to make such investments requires one on one sustained support and guidance. My aim is to exactly do this and make a difference to the lives of those few who are worthy of learning it.In this we are our own enemies I am discovering mainly because of procrastinating and getting psyched and confused by the media promoted by vested interests in many cases diverts learners away from real learning.    

I plan to share my leanings, in brief, in future blogs for those who can by DIY (Do It Yourself)method and teach to those who are keen to learn it after getting prepared.

Thumb rules for investing in these assets

1. Pre-pone buying an appreciating asset.

2. Take a loan for appreciating asset like a house especially the first one

3. Postpone buying a depreciating asset

4. Never take a loan for buying a depreciating asset - most common mistake is buying a new car on sizable installments or EMI in early stage of the career. As this affects their savings and net worth in the long run by loss of compounding effect.

5. Equity investments have inherent risk so never take loans to invest in equity.

6. Equity investments require initially making investment in learning and developing right attitude as well as making some preparations before starting. This is required to minimize risk.

HEALTH AND MEDICAL TREATMENT EXPENDITURE AND ITS EFFECT ON PERSONAL FINANCES!!

Expenditure on treatment of a family member young or elder is the last but surely not the least reason, besides wrong investments is depreciating assets, for high salaried people not having high net worth even after working for long years. Such expenditures have a very severe and drastic long term effect in case of poor and those earning modest salaries. This expenditure for this class forces them to take debts many times at high interest rates which make them bankrupt or force them to sale their assets be it land , house or gold.This is a major reason for a large majority of poor people remaining below poverty line or adding to it.

As many poor people starve due to hunger and suffer from various diseases as the rich who suffer due to over eating or drinking and other excessive indulgences.While rich pay from their wealth poor pay a very heavy price.

Better late than never after seventy years of independence present  government has addressed and faced the issue head on by making poor people bankable, giving very small premium accident and life insurance cover and now the health insurance of five lakh to these families below poverty line.Its called PM Jan Arogya Yojana (PMJAY).These policy actions alone are deserving of  people’s support for such a government for future development of the nation. A project of this magnitude and relevance will take some time to mature and overcome the initial issues or problems.

Educated and high salaried people also need to take adequate health insurance for all family members and need to increase it as the cost of medical treatment increases. A difficult point to note is that don’t let those left behind to live with financial sufferings due to debts after the sufferings of diseased family member are over with death. No amount of money can stop a death for which time has come,people and medical faculty both have to realize it.  Along with these measures to make medical treatment available to all those below poverty line ,there is a need to promote health education right from school days. Yoga and its promotion is one part of it but much more can be done. Preventing disease and making living a healthy and balanced life a priority will reduce need for increasing medical infra structure like hospitals etc.      

To ensure good health for the future generations major reforms in education are required where basic primary education is not only free but of excellent quality and educates future generations and motivates them to lead a healthy and balanced life. Physical fitness, self discipline and sports have to form an essential part of the syllabus.Private schools may have to be closed and admissions made compulsory in schools closest to the residence of parents. Parents have to be actively involved in the management of these schools. Development without discipline in a democracy is very challenging and nation needs to be disciplined speedily as slow pace of development is not acceptable any more.

Health is not merely the absence of disease or making treatment affordable and available but a sense of complete well being which leads to a life of happiness and purpose. Less population with better health will make Bharat strong and developed.

Will our people and politicians ruling the nation realize this and act on it ?? We live with hopes and think positively.

MARRIAGES AND CHILDREN EDUCATION EXPENDITURES AND FINANCIAL PLANNING

These are two major reasons why even those who work for many years with good salaries retire with not so great net worth.While lack of planning is the reason in many cases in some cases usual planners mechanically prepare a file with very long term plan based on the inputs given by an individual. While I am all for Financial Planning I am against such long term plans as there are too many variable and in most cases these plans don’t work as planned savings or SIPs are not done due to unforeseen expenses etc.

It may be better to plan for 3-5 years ahead with goals like , I would like to contribute as much as possible for children higher education or save for marriages or giving support to children when they get married. Like charity begins at home ,one must give balanced consideration to own  needs present and future first.    

Marriage Expenses

In India many people have accepted as absolutely essential expenditures on marriages.Marriage is no doubt a big event for the couple getting married as well as their parents. Close relatives will join in to make it memorable too. Rethink is required in cases where the expenditure is excessive because it is :

1. Not affordable and not planned

2. Merely to show off wealth

3. Being made from loan taken rather than savings

4. Unplanned and beyond budget so will affect the parents’ retired life

Other reasons why expenditure in marriages needs to be curbed are:

1. It leads to unhealthy competition in society

2. Parents repay loans over a long period

3. It needs to be compared with use for the couple to settle down versus one day enjoyment

4. Newly wed couples can consider bonding better by visiting some near and dear ones rather than meeting all in one day when they don’t even remember their names but get fatigued with constant smiles.

Children Education   

This again has become an issue because the cost of private schools and higher education is rising and either such expenditure is not planned or planned amount is not enough. External factors beyond control can at times very adversely affect the finances of a family especially if the education involves going abroad.

Money and expenditure alone is not enough to educate a child well to become a good human being.

If a student takes loan for studies abroad specially in USA in present scenario then the loan is usually guaranteed by the parents. If a student is not bale to find employment and has to return to India repaying this loan with earning in India even if one gets a job is very challenging and parents too may lose their retirement funds if they have to repay this loan.

Even some young parents earning well spend a very high amount which affects their overall savings and financial planning in the long run on private coaching and private schools.    

Prudent Financial planning, saving and investments will help and can be started at any age and will lead to a happy life too.

This week’s blog deals with two major causes why people with high salaries also do not have high net worth after long service

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For those worthy few who want to learn it from me and achieve their Financial Freedom better option is to enroll on www.moneymonk.me

Why do many salaried people in India have great salaries, but not great net worth after working for many years?

This question and one answer by Mr Subramanian was brought to my notice by a friend, searching for the source of it , thanks to Google, I found out where it came from and also another answer by Sravani Ramayanam, which serves as her personal example to provide backdrop to discuss the relevant issues . Its from “Quora”. Let us have a look at these two answers reproduced below for ease of reference.

Subramanian Venkataraman, Strategy Advisor and Author at Self-Employment (2015-present)

Answered Sep 21, 2018 · Author has 293 answers and 355.1k answer views

“Following or any combination of them could be the reasons:

1. Expenditure way beyond their means on daughter’s marriage, son's sacred thread ceremony etc.

2. Taking a large home mortgage in early career that leaves almost nothing to save for future

3. Due to lack of knowledge on financial matters (including finance people), investments made in bank FD, LIC and ULIPS that gave a post tax returns barely matched inflation or even lower

4. High investments in gold

5. Almost no Investment in equity / equity mutual funds

6. For some, a lifestyle that mimicked their more well off neighbors and relatives

7. Little or no budgeting skills

8. Medical emergencies, especially on dependent elders, who are not covered by employer provided insurance policies

9. Educational expenses'0 inflation that is way beyond increase in income

10. Additional tuition expenses which, at times, exceed even the school fee

11. Too many long distance travels to attend family weddings. “If I don't attend, they won't attend my children's wedding” syndrome!”

Sravani Ramayanam, Working in Finance domain from past 3 years

Answered Sep 21, 2018

“The question seemed interesting ,i wanted to answer with mix of my experience and observations.

First thing first,

We are week on financial education.(most young engineering graduates)

The basic financial instrument like Recording deposits,fixed deposits and some Policies were introduce to me once i became financially independent. .

No clue of future investments,i kept on investing in gold(rather purchasing)

One good thing was i started PPF and some ULIP plans on my first increment.

I was not spendthrift and not frugal either.

But lack of guidance made me save very little.

After 10 years of earning and married for 7 years with kid of 1 year.

I have not been bale to have enough savings to cover basics for 6 months.we bought a car of 5.5 lakhs

We purchased a house in 2011 and other in 2016.the loans  of both still exists.(95%on first and 80%on second remaining).

The rents we get from them are 38% of what we pay emi.

We stay in a rental those rent is same as what we get on both together.

We have a reasonable lifestyle.

We have good memories on vacation.(which we take at least once in an year)

We could not build wealth in past years,on a serious note,we are looking at it.

Most of the decisions were impulsive on money matter.Due to which though we both earn reasonably well,not much wealth or assets or liquid funds present.”

While I could not find any empirical evidence to support above statement I believe it to be true from my general observation and knowledge of cases.

While I agree with the causes well summarized by Mr Subramanian I feel it may be worth while to identify the ones that have been covered in some details in my earlier blogs and those which I plan to cover in some details in the future blogs to follow.I hope that helps those interested in learning how to overcome the reasons which lead to this undesirable and surely undeserved situation for many. If you act now surely you will not fall in this category. 

1. Planning and preparations required before you invest in equity -Blog 23 refers

2. Home buying - Blog 15 refers

3. Real estate as an investment- Blog 21 refers

4. Financial Knowledge- Fixed deposits and Banking - Blog11refers

5. Budgeting skill- Blog 5 refers

6. Savings- Blog 7,8 as also 10 refers

7. Insurance and how to get out of endowment policies- Blog-2 and 3 refers

8. Mutual funds- Blog16 refers  

9. Behavioral aspects - Blog 14 refers

10. PPF - Blog 20 refers

11. Finance basics- Blog 12 refers

The following subjects merit some detailed thought and blogs on these subjects are planned and will be published in the following weeks.

1. Asset Allocation

2. Appreciating and depreciating assets

3. Investing in gold and silver

4. Marriages and expenditure

5. Expenditure on higher education of children

6. How to start investing in equity after you are ready for it

Those interested may like to follow my blogs and DIY or enroll on my web site www.moneymonk.me for one on one learning and though I am doing it as public service its not free because I believe that anything offered free is not valued.Unique aspect is you get to decide what you pay per audio video on line session after initial introductory session and the money so collected goes to charity.All the money so far collected has been already donated to Kerala floods affected people and some other needy ones.

WHY NOT TO INVEST IN A HURRY AND REPENT AT LEISURE BUT PLAN, PREPARE AND THEN INVEST TO BE HAPPY AS WELL AS WEALTHY IN LIFE !!!

I was frantically asked by some near and dear ones after the recent ongoing correction in the equity markets if they could buy and invest now. There can be no one word or general answer of yes or no , hence this blog to explain in some details.

Every individual has his own unique life position and financial situation which will govern if its right to make any investments in equity when opportunities like this present. There are other issues like are you ready to make use of such opportunities??

I recommend making and learning equity investments only directly and not through the mutual funds route only when you are ready for it. If process is right and you are ready to make investments then timing the markets or waiting for such corrections may not be required as it becomes not so relevant for you. What is more important is you remain happy and also become wealthy in life. Adherence to a process and following it thus becomes the key.

“ Happiness is nothing but a state of mind that we create by the way that we process and interpret the events in our life…”

What preparations are required before one starts to learn and practice making equity investments ? I have discussed some of the issues in my previous blogs already but here is a check list of sorts

1. Term insurance adequate to cover financial risk to the family for all earning family members

2. Health insurance

3. PPF accounts if resident Indians for all family members

4. One owned house to stay in or rent and rent one at a different place.

5. Habit of making a monthly budget , noting down expenses and reviewing the budget with the actual at the end of the month.

6. Focus on regular savings

7. Making a list of your assets and liabilities and reviewing it every quarter

8. Having an emergency funds for six months of family expenses.

9. Your monthly budget must be known to all family members except children below ten and prepared jointly.

10. Believe that giving some small part of your income to any needy person without expecting any return or benefits only helps in growing your wealth. ( Don’t know how but it works that way)

What else you need to be prepared for learning making equity investments :

1. Basic knowledge of finance and equity markets

2. Developing right attitude towards money

3. Discipline and patience required to grow your investments

4. Ability to ignore the market media hype and keeping away from vested interest advisers like banks, insurance agents, share brokers and even a few friends giving free information

5. Complete faith and trust in the process to achieve your Financial Freedom.

6. Some savings to begin investments and regular savings every month to follow up and invest as a SIP.

7. Selected list of companies in which you want to invest over long term

8. Some basic skills and techniques to manage risk inherent in equity markets like stop loss or when and how to buy and sell.

9. Believe that money is only a means which can lead you to happiness in life and hence essential to have just enough of it to achieve Financial Freedom and not an end by itself.

10. Deciding if you need a truly independent teacher to help you or you can manage it your self.

SHARP CORRECTIONS OPPORTUNITY ONLY FOR THOSE WHO HAVE THEIR STRATEGY AND PROCESS IN PLACE !!

Te answer can be yes only to those who have the strategy and process in place and are regularly investing in selected equity of companies systematically.

Such investors can invest a little more than normal and make use of such opportunities without being greedy and taking any undue risks or trading even in their own selected companies.

WHY NOT AN OPPORTUNITY IF NOT READY AS DISCUSSED ABOVE !!

There are a very large number of companies listed on the exchanges and fall in their prices at such corrections is not even and can be very risky as so will be the rise when the prices recover from the correction. Many may not recover but fall further so its not worth taking such risk which is akin to gambling.

As an example please see the fall in prices of some of the companies many of which were being recommended by vested interests and media manipulators and resulted in losses for the investors.

Probability of your buying equity at such times which will grow your savings is very less if you are not prepared and ready to make use of such opportunities as discussed above. Its only to explain and not scare you. Similar but much shorter will be the list of companies which have not fallen or have risen despite the trend. But your ability to correctly identify the winners and keep risk within control will be the same even if you were to buy from such list.

Similar is a longer list of mutual funds who have lost value but the difference is the fund houses and managers have no risk and all risk is taken by the investors who pay them too fees.