Compounding …do you know ALL about it ? (continued)

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 Maybe, you don’t …..READ ON …………..

We saw last time how Compound Interest  is  calculated compared to Simple Interest.

A few interesting points to discuss on Compounding which some of you may not be aware of  

are as under :

  1. Do you know that the frequency of compounding also plays a role ?

The frequency can be monthly, quarterly, half yearly and yearly.

So you need to check in which instrument / asset class you are investing and find out the frequency of compounding. This will help you to get better returns.

Did you get a smile on your face ?   Bet you did.

Recently, RBI has issued a new circular which says that Savings account interest will be calculated quarterly.

Albert Einstein had truly said well that “ Compounding is the 8th wonder of the world”. It surely is and you have to believe it.

  1. Do you check the rate of return you are getting ?

Sometimes,  we  don’t even realize that 0.5 percent difference on a big amount and for a longer period may increase our returns much more without us knowing it.

We think what difference will 9.0% and 9.5% make ?

 But it does so next time while investing look out for good bargains between banks. 

http://www.moneycontrol.com/fixed-income/banks-deposits/

Check out for all bank Fixed Deposits on the above website and compare interest rates which are favourable  as per your need.  

  1. Compounding works better in the latter years than the earlier years.

If you invested Rs 1000 p.m. for 5 years, then the returns in the 1st 2-3 years do not show a significant increase. It is only over the last few compounding cycles that the returns are seen growing substantially. Its often happens that we don’t have the patience to wait so we pull out the money and complain that we did not get enough returns.

Hence we recommend to invest for a long period.

Something more for you :

http://youtu.be/UmgpMuKyVxs

Check this video out from IDFC Mutual Fund which well explains the concept of Compounding so well.  Listen to the story of the king….its a beautiful story and drives home the concept.

More next time ….

    

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The 1st Turn on the Journey ….

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Let us start with at the 1st turn of the journey and follow some ground rules if you have to know how to go about investing in today’s times…..you can be a woman of any age, background that does not matter….its like going to kindergarten …all have to go through the ABC….the building blocks.

What is the 1st thing that comes to you when we start investing….?

We need a basic thing as a Savings Bank Account …I am sure most of us have….but if you don’t that is the beginning….

If you have a Savings account, how often do you use and do you put in all your surplus money in there.

Normally, it is the father, spouse or brother who would be handling the bank accounts.  Maybe, they do. But we encourage to open a separate Bank account which you operate and let your surplus money be it your salary, your inherited money, your extra pocket money, etc  and let that accumulate.

Surplus money or investible surplus ( you will come across this term quite often while dealing with bank personnel).  It only means  surplus you have left over after meeting your commitments and expenses.

When you have extra money lying in your bank account,  a lot of us let it lie in the account without doing anything about it. You know how much we get on a Savings Bank account  : about 4%. Some banks are offering maybe more like 6% but those are very few.

Hence, don’t you want to earn more….of course . So what does one do ?

You park your surplus money in a Fixed Deposit  for the period which gives you a higher rate of interest. You can go online and check which banks are offering high interest rates.  So, go and open a Fixed Deposit.

If you already have Fixed Deposits, have you checked if your interest is simple or cumulative.  Which option have you chosen ?

Are you thinking what have you ticked in the form ?  A lot of us don’t fill the form, we only sign and leave it to the bank staff to fill the details. What we are doing at this time is giving the control to the bank employee to decide what option to choose. And we end up many a time, not knowing what has been finally chosen.  Even if you do via netbanking, we just tick many a time without really thinking through.  

So you may think, what is the big deal ?

Let us take an example :

Let’s say you have about Rs 10,000 to invest for a period of 1 year at the rate of 10% p.a.

You choose without really knowing the implications in detail.

The option you choose is Simple interest and the Interest gets credited quarterly to your Savings account. Hence every quarter, Rs 250 will be credited to your Savings Account for 4 quarters.

Let us see the chart below :

Sr. No

Fixed Deposit Amount

Interest @10% p.a payable quarterly in Savings  Bank Account

Explanation

1.

Principal : Rs 10000 (at the beginning of the year )

250 at end of Quarter 1 goes to Savings Account

 

2

 

250 at end of Quarter 2 goes to Savings Account

 

3

 

250 at end of Quarter 3 goes to Savings Account

 

4

 

250 at end of Quarter 4 goes to Savings Account

 

5

Principal of Rs 10000 remains as is.

 

As you can see in this example, the Principal remains as is on maturity. Over a period, the Value of Rs 10000 decreases. (This will be explained in detail later).

The interest of Rs 1000/- has been credited to the Savings Account which would lie in the Savings Account or would get spent. The amount is too small to get reinvested elsewhere.

 

 

Rs 1000 total interest earned.

 

Total Amount receivable on maturity : 10000 + 1000 = 11000

What we have seen here is Simple Interest calculation….which I know most of you maybe aware of.  We learnt in school in all languages. But we tend to overlook this simple detail.

On the other side, we talk of compound interest.  It is when we allow the interest to be credited back to the principal and take the cumulative amount payable on maturity.  

In our example above, the total amount payable on maturity would be Rs 11,038 which works out to an effective rate of  10.38.

You may think it is only Rs 38 difference but if you increase the amount and the period, the compounding would grow even higher.  Isn’t that great ?  

This is how money works for you…

So, now you go and check in all your Bank Fixed deposits…is it simple or compound interest that you are earning……of course, if you need the cash flow to come at regular intervals then it is fine.

But remember, I believe that Rs 200 is better in my pocket than somebody else’s pocket….

Until next week, wish you all and your families a Merry Christmas !!!!

 

The Journey ahead

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As we embark on a personal finance journey, the word money 1st comes to mind –
What does it mean to each one of us ?

For me, it was a necessity to get the right things in life to get a good life.

I went about asking this question to a few of my close friends and family and was surprised at some of the various responses :

1. A friend who is a housewife said : I cannot relate to it, this is for my husband to take care.

That was a normal response.

2. Another friend who is a working executive said – about 28 years old – it helps me to get an identity of my own. A sense of independence and achievement.

That’s what lots of us feel who are working or self-employed.

3. Spoke to a older relative who had managed the family’s finances for over 3 decades :
It is of extreme importance to know the business of money. Stocks, bonds and all that. There is no other way in life.
Was told very emphatically.

I was indeed impressed with her answer…at that age and of that vintage (about 60 years – non-working)

4. A daughter of a dear friend is studying in the city and I am her local guardian :
She said something interesting again : When I stayed with my parents it was cool, now I try to find food items of daily use at a wholesale outlet or try to get some bargains.

Youngsters learn fast don’t they ? She said I must save….things are becoming so expensive. I was impressed with what I heard.

5. A leading doctor professional responded : I think managing money is more important than earning a lot of money. I work hard but somehow the money just slips and by the month end I feel that there is hardly left to save. But I do manage.

She had a good standard of living but savings was low.

So the various responses got me thinking – is there a structure a girl/ woman /lady could follow to manage her personal finances…be it a student, working executive, professional, a Senior management executive or a Senior Citizen itself ?

I browsed the net and looked up and found that there is not really a structure they could follow in the Indian context…there is lot of information available but no structure like a Do it Yourself (DIY) …so should I work towards making a structure is what I thought ?

And I think I am going to discuss about that in my next byte…

Cheers for now and happy investing …..

Next one article

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I have been trying to think what to write so that the subject picks up and there is continuity and also if somebody reads only this page then it should be complete in itself. 

So here I go…..

You know when somebody asks me What do I do as a profession, I am say I am a Certified Financial Planner (CFP).

For a lay person, it means nothing. So the next question I get, what does your work involve ? (Actually it is a polite way of saying what does it mean ? )

Then I explain that in today’s times managing investments has a new meaning. It is not like it used to be earlier. 

I get a puzzled look.

So what has changed in so many years ? You keep money in a bank and then you get interest and that’s it. 

For people who have tasted equity, the highs and lows know it all. Atleast that what is communicated…..I know it all…been there, seen it, experienced it….

But then I have to explain the basics of investing…and how it impacts our real wealth today…..

Saving is so easy for an Indian..you don’t need to explain to them…they know all of that. Its when you tell them what is investing and the difference of simple and compound interest ….they start realising how it impacts them. Some still don’t realise. 

In my workshops I give them examples : Have they ticked simple interest or cumulative on a Bank Fixed deposit form and they say they think it is cumulative but they don’t seem sure. They say they will go to the bank and check. This is because they have not filled the form themselves, the young MBA banker has done that as per his thinking.

So this way I give a simple example and go to explain further what is my role ? It is like handholding them at every stage where there is a financial decision involved mainly with big goals like education, marriage, divorce, retirement, dependents and so on. 

A CFP or a Financial Planner has  a generalist and a specialist role to play many a time. He is there at every event to take the person ( the client – though I don’t like to use that word)  through various events in a person’s life. For me, a client is an extended family. 

The banks have specialised areas / departments called Priority Banking, Private Banking , Preferred Banking and many similar sounding terms. 

A small boutique firm is like a family doctor attending to you to help / aid you in your life’s financial decisions, be it a loan or an investment. Its important to see the credentials and the number of years of experience behind the firm. This is an evolving area and an important one which can impact your family’s wealth. 

We have seen what is a role of a Financial Planner. Will get more in to detail next time…..sounds interesting ….wait….but study the above….and keep it in mind….

Cheers

 

Vow 1st time blogger

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Hi Friends, 

I finally got down to creating a blog after a wonderful 2 day workshop of Jago Advisor. Nandish and Manish so lucidly told us how to carry our practice and reach out to Community. 

As far as my practice goes, I think it is all planned as it should be. Attending this program was like building more blocks of the foundation laid earlier at Orlando. The kind of people of the fraternity I am interacting with has been rich and enlightening. The exchange of ideas and the nudge ( this we learned at the FPA Conference – meaning we push each other gently to take action) has been very supportive to take strong and sincere action with goals and deadlines and all that. 

You know its like changing mindset, but feel an umbrella of positiveness around in spite of personal challenges. 

Its  like faith working on the capabilities and skills I am developing and that it will be meant to benefit a large audience which would make a difference in their financial decision making.

I am working with a motto to Serve since when I do that my mindset and my business environment will give me different results than what I have been getting in the past.

What I am sharing here sounds so different from my thoughts but I am nevertheless penning them down as the 1st post on my blog.

May I be able to get the consistency and persistence to peruse this new area of work I have taken up. May Goddess Saraswati bring the right thoughts and thereby make me take the right action to better the financial future of people I come in touch with alongwith my fraternity. 

Once again lots of gratitude for high learnings. 

Tejal 

Posted on Dec 1, 2013