Not long ago, I asked the WBC team to tell me what some of the issues members were facing were. I wanted to find out if readers were struggling with debt and credit problems.

A large number of members, I was stunned to hear, were struggling with debt.

Thinking over this result I came to this conclusion: WBC readers aren't immune to the debt and credit problems most of the world faces.

And that led me back to a thought I had after reading several letters from debt-strapped readers over a year ago: We have an opportunity to create added value to our business by developing a program to assist people with getting out of debt and repairing their credit ratings.

Debt Is a Serious Issue

Not all debt is bad, but all debt is serious.

In prior essays, I've explained that debt is a useful tool for building wealth when (a) it is not expensive and (b) you have a near-certain chance of using it to increase personal income and equity and/or business cash flow and long-term profits.

In future essays, I'll expand on this subject: the proper use of debt. But right now we are talking about how most people use debt - to finance lifestyles and purchase depreciating assets. Credit cards are a big part of that.

This sort of debt is bad. It is expensive. It erodes your wealth. But it also makes you poorer psychologically because it causes stress and anxiety, depletes your energy, and distracts you from profitable pursuits. This sort of debt is also the most common factor in marital problems.

Credit is related to, but different than, debt. Debt is what you owe, credit is what you can borrow.

You can be in debt and have good credit. You can also have zero debt and have bad credit.

Your creditworthiness is the measure of how likely you are to repay future debts. This is a valuable asset. You may believe you are creditworthy - and you may well be. But there are outside agencies that rate your creditworthiness… and banks and other financial institutions go to them-not to you-to determine whether they will lend you money and how much they will charge you for any loans.

Whether you know it or not, credit information bureaus (such as CIBIL, Experian, Equifax, HighMark) watch your credit behaviour quite closely and provide for a credit score which denotes our credit worthiness.

We may think this is not an issue in India yet, but it is becoming one. Lately, the Reserve Bank of India (RBI) has addressed this issue by specifically suggesting banks to use credit scores even to price loans optimally.

Credit rating agencies assess your debt and payment history and give you credit scores. A high credit score is good. A low credit score is bad.

The higher your credit score, the better. It will make it easier and quicker to borrow money if and when you want. And those loans will be cheaper.

The lower your credit score, the more difficult your financial life will be. It will mean higher monthly charges and less ability to take care of routine bills. Ultimately it may mean a downward spiral in the quality of your life.

What We Can Do to Help

I started the Wealth Builders Club to help “not-yet-wealthy” people achieve financial independence in seven years or less. Knowing that so many of our readers have debt and credit issues, we have committed to developing a comprehensive and effective coaching program to eradicate debt while simultaneously building good credit. As you know, one of my top rules for creating wealth is to become a little bit richer every year.

It's hard to do that if you have significant debt and/or credit problems. But you can do it. And you need to do three things simultaneously.

First, you must increase your income. I talk about increasing your income in my Creating Wealth essays, it gives you practical ways to make more money in the club's Extra Income Project series.

Second, you must use a good portion of that extra income to reduce your debt.

Third, you must decrease the amount of money you are spending on your current lifestyle (what we call your lifestyle burn rate).

Those will be the three key behaviors to remember while you go through our debt - and credit-coaching program.

The Benefits of Taking This Course

Here's what you can expect from this course…

We will help you address and resolve your debt problems - this is serious work. It will require some sacrifice, but it will be worth it. In the beginning, you will make progress in small degrees.

But things will speed up over time. This will be especially true if you are able to generate more income, as we will be urging you to do.

We will also talk to you to improve your credit scores… Not so you can rush out and borrow more money. But because increasing your credit scores will reduce the amount of money you need to spend on debt service every month.

The goal of this part of our coaching program is to gradually but steadily help you understand and raise your credit scores so as to qualify you for the best interest rates on your house, cars, investment real estate, and even business loans.

And you'll breathe easier anytime a situation arises for which you need good credit.

Our program will then show you how to maintain good credit scores going forward.

Know this: Reducing your debt and increasing your credit scores have similar results. They both lower the amount of money you send to other people every month. This keeps more money in your pocket. This money is what you'll use for saving, investing, and starting your own business. And that's how you're going to get richer every year.

How We've Structured the Course

This program will have two focal points.

One is a focus on debt. That's because debt is the root cause of many financial worries. By correcting your debt situation, we'll fix several financial problems at once (low credit scores and low savings rates are just two of them).

To start, we'll look at the role of debt in your life and where you are today. Then we'll give you a roadmap to help you get out of debt as quickly as possible.

We'll end our analysis of debt by covering a few instances in which debt can actually be helpful. I'll say no more about that now.

The second focus of this program will deal with credit; specifically, how to improve your credit scores… no matter what they look like today.

A company like Credit Information Bureau of India Limited (aka CIBIL) keeps all record of your borrower behaviour and will give you your credit score.

We'll work with our partners at PersonalFN to tell you the best places to get your credit reports and scores - without getting scammed or paying a fortune.

Finally, to complete the credit section, we'll give you a plan to maintain your good credit. It's important to keep scores high so that you receive the best credit rates and terms in the future. This alone can save you thousands of rupees each year.

If you follow the advice we lay out for you in this course, you'll be on your journey to getting (and staying) out of debt. And you'll be armed with the knowledge of how to achieve and maintain high credit scores.

But we realize it doesn't end there. Keeping your debts low and your credit scores high is a lifelong process.

That's why I want you to view this course as a reference manual. Come back to it and review the material over and over again as your circumstances change. This repetition will help cement the lessons.

Commit to taking action on everything we send you. Before long, you'll feel (and be) richer.

Best, Mark

P.S. I hope you're ready to commit to the action steps we'll give you. Many people think they are ready, only to find that they become discouraged and quit early in the process. After all, facing the reality of your debts can be difficult.

That's why, before you even get started, I'd like you to do a realistic assessment of your current situation: Where are you financially… and emotionally? That means thinking about your current state of indebtedness. Most people avoid thinking or talking about their debts at all, which is a major problem-it means, most likely, that they will never take the actionable steps that are required for getting out of debt.

Tell us about your issues with debt. Your responses will help us arrange this series to better meet our readers' needs.

Dear Wealth Builders Club Member,

Back in the day, Indians used to give each other blessings, 'may you always live happy,' 'may you live for a hundred years.' One of these blessings was interesting - 'may you never fall into debt'… never become a 'karzdaar'.

We were right to hate debt. Moneylenders would squeeze the lives out of us for the smallest of loans, with the cruellest of terms. It was a sure-fire way into financial hell.

Today, however, we have forgotten how evil it can be. We cavalierly pull out the little plastic moneylender from our pockets to charge every little thing in sight. But even though the credit card is more sophisticated than the local moneylender, it is as capable of gouging our eyes out.

According to a report of Dec 2014 on the National Sample Survey Organization (NSSO) survey of debt in India, nearly a third of rural households and a quarter of urban ones are indebted. The scale of indebtedness revealed is astonishing: between 2002 and 2012, the average amount owed by each family has jumped seven times in cities and more than four times in rural areas. About 22% of urban households were indebted and the average debt per family was Rs 84,625, up from Rs 11,771 in 2002.*

That's a lot of debt for us to be carrying around at any given time. That's why, before you even get started, Mark would like you to do a realistic assessment of your current situation: Where are you financially… and emotionally?

In today's essay of our new Debt and Credit Solutions series, our Partners at PersonalFN write to us about the rules to follow for healthy credit card use… and tips for maintaining a healthy credit score.

To your wealth, Anisa Virji Managing Editor, Wealth Builders Club

A couple of years ago, one of the readers of our website, Shyam, reached out to us. He wanted to meet with one of our investment consultants.

Since it was the first meeting, our investment consultant was eager to find out what his concerns were and see how we could help him deal with his finances.

The meeting started out well, the consultant started to understand Shyam's current situation, and his expectations from us. But in the course of the meeting, the consultant realised he had learned the root of Shyam's problems.

The 3 core mistakes of Shyam's financial life:

Mistake# 1: He relied too much on borrowed money

Mistake# 2: He often missed paying his dues on time

Mistake# 3: He had accumulated interest on interest, which in turn left him with a huge credit card debt

This all part of the same problem - he had borrowed too much money.

Yes, he had huge credit card debt. He received several intimations from the bank to clear his dues. The recovery team of the bank often called him for money.

The credit card is a two-faced friend - while it gives you a certain amount of freedom with your finances, and you can certainly enjoy the benefit of holding a credit card, it can easily turn around on you and put you in a financial hell.

If you choose to go down the dreaded card route, you must ensure that your increased spending is not stretching beyond your means; which, as in the case of Shyam, can jeopardize your long term financial wellbeing. He used his credit card wherever possible even if he needed to make a tiny payment at a grocery store. And things just got out of hand.

While we guided him on how he can settle his dues, we also told him about 6 rules that should be followed while using credit cards.

Rule# 1: Read all terms and conditions carefully before you opt for a credit card.

If you find anything in the terms and conditions of the credit card that was not conveyed to you, or is contrary to what was conveyed to you; seek a clarification from the bank. If you are not satisfied with the clarification, do not hesitate to cancel the card.

Rule# 2: It is important to be aware of the amount of annual fees that the bank is going to charge you each year.

This is one issue which credit card users often come across. Some banks also issue 'life time free cards' i.e. no annual fees are charged on usage of such card. However, it is best to double-check with the bank what the executive has promised. Don't go by his tall claims, which in most cases is - annual fees will be waived off, cash back offers, more reward points, etc. This will help you from any surprise in future. Do not forget, the annual fee will be levied even if you do not do a single card transaction in a year.

Rule# 3: Do not fall for minimum payment due.

Minimum amount is the amount that you need to pay for the purchases done in that month so as to not attract a penalty for default on payment of card dues. Our suggestion is that you should pay the entire sum on the due date, as carrying forward your payment to the next monthly cycle will lead to a higher amount due in your next bill due to high interest rates plus taxes levied on the credit card.

Rule# 4: Avoid payment by EMI.

Whenever you make a large purchase (usually over Rs 10,000, although the amount varies across banks) you may get an offer from your credit card issuing bank to opt for the EMI (equated monthly instalment) facility to spread your payment across several months. You should ideally give the EMI facility a miss as the interest on the EMI can be exorbitant. To put it simply, pay your credit card bill in totality before the due date in one go.

Rule# 5: Do not borrow cash.

You might have received calls from a tele-calling executive of your bank, making you aware that your credit card can not only be used for making purchases on credit but also for borrowing cash. While making purchases on your credit card (so long as you pay on time) is okay, borrowing cash on your credit card is a very expensive affair and hence must be avoided. It is a strict No-No! While the annual interest on cash borrowings may vary from bank to bank, it can be as high as 30% to 36% per annum.

Rule# 6: Miss the Insurance benefit.

Many credit cards are known to offer an insurance cover. You should ideally ignore this benefit and go for the core offering - credit card. If the card has features that suit you, then you can opt for it even if there is no insurance cover. This insurance cover is unlikely to be sufficient for you and more often than not is linked with many terms and conditions and may even be difficult to claim. Do you know, using your credit card imprudently may have a big impact on your credit score?

If you are one of the many people making use of your credit card to fund your shopping, entertainment, holiday spending, and not worrying about repayment; here are some facts to bear in mind that will keep your credit score healthy.

We will tell you how to be a smart borrower i.e. how to know your credit score, how to keep it high, or make it higher than it is, and give you 3 top tips to get out of too much debt and keep your credit score healthy.

Let's start…

But first, what is a Credit Score?

Your Credit Score is a score provided by a credit information company (for example companies such as CIBIL, Experian, Equifax, HighMark) to a prospective lending institution, that will tell the lender how good or bad a borrower you have been.

The clear indication is that the higher your credit score, the better a borrower you are. This means that you probably make your payments on time. Hence the lender who is ready to lend you money knows that he will face a lower risk of you defaulting on your payment schedules and vice versa. The lower your credit score, higher the risk that you will default.

Hence you should aim to always keep your credit score high. A lower score means that if you want a credit card or want to take a loan in future, you are probably going to face a difficult time. As the situation stands today, lenders will restrict you if your score is poor by possibly charging you a higher rate of interest on a loan, but sadly they are yet to reward those borrowers who have a high credit score.

Now how do you find out your Credit Score?

A company like Credit Information Bureau of India Limited (aka CIBIL) keeps all record of your borrower behaviour and will give you your credit score. You just have to follow the simple steps given on the CIBIL website.

There is a nominal fee of around Rs 470, which is non-refundable and you can have access to your credit report within 3 business days.

If your Credit Score is low, how do you fix it?

There's no shortcut here.

If you have a low credit score due to poor borrower behaviour in the past, you can still improve your credit score by paying your dues on time. Repay any pending dues and ensure that you do not default on any payments in the future. While this will take time, but your small steps will definitely help raise your credit score.

If you come across your credit report and find that your credit score is low, not due to past indiscipline but due to an error on the part of the lending institution or on the part of CIBIL, you should immediately notify both - the institution as well as the CIBIL.

Who can help you get out of debt and fix your Credit Score?

Some of you may not have even realised when you built up too much debt and now you don't know how to handle it. Your credit score is certainly suffering. Repaying your debt and emerging from the debt trap should be your first priority. Doing so will automatically improve your score.

You can even approach a good credit counselling organisation that can help you fix your debt situation. These organisations are typically non-profit organisations, so fees are minimal, if there are fees at all. Such credit counselling organisation can help create a debt management plan for you, help negotiate with the lender on your behalf, and even try and get you a lower rate of interest to repay your pending debt. Simply knowing that you are not alone in your struggle of repayment of debt, you will also receive some peace of mind.

You can contact a credit counselling agency you deem fit, to help you out for both situations i.e. correcting an error or getting out of a debt trap.

Now let us help you with 3 top tips we promised …

Your 3 Top Tips to Keep You Out Of Debt Trouble And Keep Your Credit Score Healthy

Tip# 1: Make your debt payments regularly and on time. This will have the most significant impact on your credit score.

Tip# 2: Try and avoid having more than two credit cards. This will ensure that you don't keep credit limits that you don't really require. Even multiple loans should be avoided.

Tip# 3: If you are planning to apply for a new credit card or a new loan, do it in a short span of time - don't drag out the process. If you stretch the process over months, it will look like you have spent a lot of your time seeking credit, which will reflect negatively in your credit report. Do your research quickly, and take the loan.

'Rather go to bed without dinner than to rise in debt.' - Benjamin Franklin

It is better to cut down on your expenses as far as possible rather than borrowing in order to pay for a kind of lifestyle that is well beyond your means. Make sure you don't take more debt than you can handle. You should have a proper financial plan in place. One of the many benefits of planning your finances is that it will show you how your cash flows are structured year on year, and accordingly you will know how much EMI you can afford to pay in the coming years.

This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm known for offering unbiased and honest opinion on investing.

The Times They Are a-Changin'

Bob Dylan called it. Things are very different today than they were a generation ago. For one, today's generation spends a lot more than what our parents and grandparents did.

The cost of living has gone up, but a culture of credit-backed consumerism has played a vital role. Walk into a mall and the picture is evident: everyone swiping credit cards and opting for easy finance options - all the fancies of life without a second thought.

Along with rise in income, our aspirations have stretched bounds. We want to live in our dream homes, drive the latest fully-loaded sedan, take exotic vacations abroad, avail the plethora of lifestyle choices… We want it all, and we want it now.

However, without much cash available in the bank account, we fund it all with loans and access to easy credit… at the risk, of course, of personal finances going awry, very awry.

We're often unaware that credit information bureaus (such as CIBIL, Experian, Equifax, HighMark) watch our credit behaviour quite closely and provide for a credit score that denotes our credit-worthiness.

Here are some of factors they take into account when assigning a credit score:

Payment history Credit usage Duration of the account Type of loans (consumer, home, etc.) Number of enquiries to avail credit

Based on these factors, they assign you a score ranging between 300 and 900.

The higher the credit score, the better a borrower you are. As a responsible individual, you should try to keep your credit score healthy. This means you should make your payments on time. This tells lenders that there is a low risk that you will default.

If you maintain a low credit score, here are a few problems you may encounter:

You may find it difficult to get a loan in future Lenders may charge you a higher rate of interest Lenders may charge a higher loan processing fee

Why? Because a low credit score means lenders are exposed to a high risk of default.

So, how do you improve your credit score?

If your credit score is low, here's what you need to do…

Pay your credit card bills on time, and ensure that the outstanding amount is paid in full
Avoid payments by Equated Monthly Instalments (EMIs) on credit cards
Avoid withdrawing cash using a credit card
Do not opt for multiple credit cards or apply for multiple loans
Use your credit cards in moderation - set a monthly limit for yourself
Do not rely too much on borrowed funds
Pay your EMIs on time for all kinds of loans

Remember, when you close your loan account(s) in full, do not forget to obtain from your lender a closure letter or No Due Certificate (NDC), statement of account(s), original documents that you may have submitted to the lender, and remove lien on assets… all this would act as evidence for you and help you elevate your credit score in the future.

Once your loan accounts are closed, enquire with your lend to ensure they inform the same to the credit bureaus. If the lender has not intimated the closure of your loan account to the credit bureau, do it yourself (by writing to them and submitting the requisite documents as proof).

If you notice that your credit score is low due to an error on the part of the lending institution or the credit bureau, you should immediately notify both, the institution as well as the credit bureau.

By maintaining a good credit score now, you keep yourself eligible for cheap finance in future, when you might really need it.

Today, barring few large banks, most of the other banks are using flat loan pricing model wherein good credit behaviour is not incentivised and neither the bad ones are penalised. In India, credit scores have so far been used only to determine whether to accept or decline the credit application of the borrower. But lately, the Reserve Bank of India (RBI) has addressed this issue by specifically suggesting banks to use credit scores even to price loans optimally.

If banks start following this practice widely, bargaining with banks for cheaper loans based on your credit score might soon become possible for borrowers.

When negotiating a loan, in addition to your credit score, banks may also consider:

Your income and occupation Your saving account history Even your income tax returns for the past few years

It may seem invasive, but banks need a fair idea of your financial behaviour to determine their lending risk.

What if you are unable to fix your credit score by yourself…

If you’ve fallen victim to the debt trap, a host of credit counselling organisations can help. They may be able to help you with a debt management plan and even negotiate a lower rate of interest with the lender on your behalf. These agencies are typically non-profit organizations, so don’t worry about fees. They are minimal. Simply knowing that you are not alone in your struggle is a great relief.

Concluding points…

Taking calculated risk can be a good way to build wealth and meet certain life goals, but overindulging in credit and debt can be hazardous to your wealth and health.
Stretch within your means, and do not take leaps so long that they could jeopardise the financial well-being of your family.
To ensure you don't take on more debt than you can handle, have a prudent financial plan in place.
Remember: if you are a safe borrower, you will score well on your credit worthiness.

This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm known for offering unbiased and honest opinion on investing.

Ask Nobel Laureate Muhammad Yunus about the positive role that credit can play in the world and he'd hasten to tell you that credit can transform lives. A Bangladeshi scholar, entrepreneur, social leader, economist, and the founder of the Grameen Bank, Yunus believes that credit is a fundamental, universal right.

Yunus pioneered the concept of micro-credit in his country and around the world. He made eradicating poverty look simple. How? Empowering the poor through credit.

But what about creditworthiness?

As Mr Yunus teaches, we must prepare even the poorest person to handle debt confidently. Let's not forget so-called creditworthy companies have caused Indian banks trouble.

State of today's banking system: Those who need loans can't get them. Lenders chase those who don't need loans. The debt-averse eschew debt-creating opportunities. The debt-addicted ruin their finances and put the entire banking system at risk.

So how does one act sensibly and build wealth with borrowed money?

Moderation is the key. Too much of anything can be bad.

Greece is bankrupt because of high levels of debt at every stage of society. People borrowed beyond their capacities. Banks lent beyond their capacities, sometimes even leveraging their own positions. The introduction of the euro suddenly raised Greek purchasing power and supported unrestrained consumerism. Productivity and export competitiveness died slowly. Easy and borrowed money created asset bubbles only to get pricked badly.

If you only considered the state of Greece, you might conclude that all debt is bad. But Mr Yunus proves that even the poorest of the poor can use moderate debt to create wealth.

Greece's bad example teaches two important lessons about debt…

#1 Don't borrow beyond your capacity to repay.

You must ensure that you don't over-borrow and put a strain on your finances. Just as countries track their debt-to-GDP ratio, there is a similar way you can check whether you are over-leveraged – your debt-to-income ratio.

Debt to income ratio = Total monthly outgoings on liabilities (EMIs) Total monthly income from fixed sources

This ratio tells you the proportion of your monthly income you spend on servicing your debts. Ideally, it should not be more than 0.35 (or 35%). The more you exceed this number, the more strain you put on your income.

So, before taking a loan, assess your monthly income and expenses to see how much additional outflow you can afford. This will help you decide how much loan you can comfortably handle.

#2 Don't borrow to fund luxuries or speculation.

Never borrow to buy luxuries such as posh cars, iPhones, or holidays. And never borrow to play a horse race or gamble in a casino or even to speculate in stock markets. If you lose money in betting, you have to service your liability without having made a single rupee.

But do not shy away from borrowing for productive purposes or to create productive assets. This is the single most important factor you must consider while borrowing: Will this debt fund productivity?

If you borrow to start a business, your business should generate cash flows and help you service your debt.

If you purchase a house with borrowed money, besides earning rents, you may also enjoy capital appreciation, which you use to pay down the debt.

Mind the cost of borrowing

Loans that don't require collateral for approval are usually costly. This is why personal loans cost 14%-16% per annum, whereas home loans, although floating, charge interest of about 10%-11% per annum.

If you are buying a house to live in, you may only bother considering the affordability of the house and your capacity to repay the loan on time. But if you want to create an asset, such as a business or a second home, you must make sure that your expected cash inflows from the asset exceeds the cost of the loan. If you can manage this, a loan becomes a powerful tool of wealth creation.

For example, if you want start a business, you must assess not only how much capital (that is, debt) you need to fund the venture but also how long it will take you to break even with the cash you generate from the business. If the gestation period of the business is short and your risk capacity is high, borrowed money may help you create wealth. On the other hand, if your potential business is going to take a long time before it pays off, borrowing too much up front may be a bad idea.

Similarly, when you buy a property with borrowed money, you must factor the scope for further appreciation in that locality and how long before tenants can occupy the space. If demand outpaces supply, your property will appreciate. And completed, ready-for-possession properties carry less risk and can generate cash inflows through rents immediately, helping you service your loans comfortably.

Now…if you have concluded that borrowing to invest in stocks to make higher gains than the interest on your debt, you are mistaken. Equities are far more volatile than the real estate, and Indian markets are largely driven by foreign investors, who aren't much different than Flamingos: They come in search of food, and when they have enough, they return home. Or a crisis back home may force them to flock back immediately.

Don't assume that just because you are borrowing in the hope of asset creation (rather than luxury) it's a good idea. Borrowing to play the stock markets is more like borrowing to bet on the horses. We're not saying you shouldn't invest in the markets or that the Indian markets don't offer great wealth creation potential. However, they are far too volatile and carry far too much risk to merit borrowing to fund your stock investments.

Are you prepared to borrow and become rich?

Mohammad Yunus and Grameen Bank changed the fate of thousands of beggars in Bangladesh by providing moderate loans to fund genuine wealth creation. Creating wealth with borrowed money is certainly possible. You won't build wealth if you borrow to fund luxury or speculation. However, moderate, mindful debt used to fund productive purposes has the power to transform the world.

This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm known for offering unbiased and honest opinion on investing.

'My life is an EMI,' said Mr Desai as he began a consultation with one of our investment advisors.

'Could you elaborate?' asked the advisor.

'Well, practically whatever I've bought for this house [where we are seated], including the house itself, I've bought on credit. This 50 inch 3D LED TV, the home theatre and sofa sets, my iPad, and many other things for my family, I've bought on instalments,' he told us as he pointed around to the various comforts he and his family enjoyed.

Our advisor looked concerned. But then Mr Desai said…

'But now I want to get my house in order for the financial well-being of my family. I have two little daughters studying in a good school, and I want to provide for their higher education in whichever stream they choose and get them married in style. I want to fulfil all my responsibilities wisely and eventually live a blissful retired life.'

Our investment consultant then provided a few wise words on financial planning, and Mr Desai decided to enrol in our personalised financial planning service to correct course before it was too late.

In our era of consumerism and competition, we all have aspirations. But we do not all realise that we might be aspiring, consuming, and competing beyond our means.

Home theatres, huge TVs, tablets, laptops, mobile phones, lavish interior decor…perhaps all of it was bought on credit. Finance options are readily available in the form of easy EMIs and credit, and they are designed to lure us into the debt trap.

It's one reason malls and electronic shops are seeing a good footfall. Customers gush over discounts, and the shops are eager to promote them. This, of course, is just another lure. The offers make us think we're saving money, but they are merely another lure designed to encourage us to exchange our long-term financial well-being for items we don't need.

'If you buy things you don't need, you will soon sell things you need.' - Warren Buffett

Credit has a way of becoming a habit, and spending can easily turn reckless. It's easy to get caught in the debt trap. But indulging in the occasional shopping spree can harm your long-term financial health. And it can derail your most important financial goals, such as your children's education, their marriage, and even your own retirement. And sadly, unlike Mr Desai, not every one realises they need to correct course before it's too late.

It is vital to ensure your spending habits do not affect your priorities. Here are some tips to avoid reckless spending…

Determine you monthly budget

To do this, you must first list your financial goals. Then determine when you want to achieve these goals and how much money it will take. Don't forget about inflation! The next step is to calculate the amount you'll need to save every month, taking into account the rate of return on investments. These figures will help you determine your monthly budget.

Plan for personal expenses

To avoid indulgent purchases, you need to account in advance for your family's personal expenses such as clothes, accessories, etc. Include these expenses in your budget, and make sure all family members stick to it. It is smart to purchase items that are on sale, but don't let these marketing strategies entice you into buying unnecessary items you didn't plan to buy. If you are having trouble saving for your financial goals, explain the situation to your family. Only when they too recognise the situation will you be able work together towards reducing your overall family expenses.

Plan for household expenses

Apart from personal expenses, your budget should also plan for all household expenditures. All shopping trips must be well planned so as to save on transportation costs. When grocery shopping, account for spoilage…and make sure your family doesn't waste food. Likewise, ensure that fans and air-conditioners are used thoughtfully. Same for mobile phones and data plans.

'Don't save what is left after spending; spend what is left after saving' - Warren Buffett

Find an alternate source of income

Sometimes reducing expenses may not be enough to correct course after years of particularly damaging spending. And so you might also need to find an additional source of income. Even if you are already working full time, you might need to take on a part-time job to make up for past recklessness. Perhaps you will need to become a dual income household with both spouses earning an income.

The idea here isn't complicated: reduce expenses and increase savings. But correcting course does require discipline. Just remember that it's all in the interest of you and your family's long-term financial well-being.

Now, if your bad spending habits have led to deep credit card debt, here is a five-point approach you could follow…

Assess all your credit card dues: The first step to eliminate your credit card debt is to evaluate all your obligations. Take note of all the credit cards you own, analyse your online accounts and paper bills, and the interest rates applicable on each card. This will help you to determine the total amount you owe and the cards that bear the highest rate of interest, which are the ones you should pay off first so as to save on interest payments.

Renegotiate the rate of interest on your credit card: You can try to reduce the interest rate you are paying on your credit card by contacting each credit card company. Even if you manage to reduce the rate by a small percentage, it can help you save a huge amount on interest payments. Your credit card companies may or may not renegotiate interest rates, but there is no harm in asking.

Create a budget to pay off your credit card dues: In addition to your budget for household and personal expenses, you will need to account for credit card debt repayments. Include in your budget the exact amounts you will pay off each month. You might need to prioritise these payments over your personal and household expenses. Meaning you may need to eliminate outings or ration your 'essentials' such as electricity and mobile use. It goes without saying, but don't add to your debt with unnecessarily credit-fuelled shopping sprees. If you have extra credit, don't give in to the temptation to use it. It will only lead to unnecessary purchases and put you back where you started.

Utilise windfall income to repay your debts: Any windfall gains, such as lawsuit judgments, inheritances, divorce settlements, insurance settlements, or retirement packages, should be used to pay down your debts. Even if you had other plans for this money, it is wise to repay your debts first if you want to boost your financial health and meet your longer-term financial goals.

Implement your debt repayment strategy: Once you have determined a method to budget your expenses and pay off your dues, you must start to implement it. Do not delay or procrastinate these payments, as the interest will only mount higher with every passing day. It is also prudent to keep a track of your progress. Revisit your finances regularly to ensure that you have not deviated from the plan.

A debt-free life is achievable. But it takes practical planning and a bit of discipline. As Dave Ramsey, a personal money management expert, likes to say, 'Live like no one else now…so that you can live like no one else later!'

If you feel yourself slipping into the debt trap, don't hesitate to seek the guidance of a financial expert or credit counsellor. Typically non-profit organisations, their fees are minimal…if any at all. And a good credit counselling agency will create a personalised debt management plan, negotiate with the credit card companies on your behalf to get you a lower rate of interest, and perhaps best of all, provide you with peace of mind knowing that you are not in it alone.

At PersonalFN, we hope that you will keep all this in mind the next time you go on that credit-fuelled shopping spree.

This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm known for offering unbiased and honest opinion on investing.

Ask your dad if, before your time, he used credit for everyday purchases and I'm sure the answer will be no. Traditionally, Indian consumers have been averse to buying on credit. But that was the past.

Today is the golden age of plastic…'plastic money'!

Now, thanks to credit, the fancies of life are available before we even earn an income. Gadgets, appliances, accessories, bikes, and more! But, as American humourist Evan Esar said, 'A batch of credit cards fattens a wallet before it thins it.' It's all fun until you have to foot the bill.

Credit cards aren't inherently bad, though. It's about how you use them. If not prudently, it's all too easy to fall into the credit card trap and ruin your financial health.

Here are some points to keep in mind when selecting the right credit card for you:

Credit limit

Your credit limit is the maximum amount you can spend on a credit card. If you are a first-time card user or an avid spender, it's better to opt for a card with a low limit, say Rs 15-20,000.

Be aware that sales personnel from banks may try to push a higher limit on you. While you may indeed deserve one, just remember that a higher limit could permit you to spend beyond your means. This is how the credit-debt trap begins.

Some lenders allow you to exceed the credit limit subject to terms and conditions, but it's best not to indulge in this unless there's a dire need.

It is possible to borrow cash from your credit card, but the interest rates are very high and can damage your financial health. It's best to avoid cash advances unless, again, the need is dire.

Interest rates

When shopping for a credit card, research the interest rate the bank charges for partial and delayed payments. Normally, the interest rate levied is 2% to 3% per month. To avoid paying higher interest and falling into the trap, it's ideal to pay your dues in full and on time every month. Also be aware of any annual fees or other fees attached to the credit card and do a comparative analysis of different banks.

Annual fees

Check if the bank levies annual fees or charges to use the card. If so, look into having them waived. It is common for banks to waive the annual fees / membership fees for the first year. In the second year, fees could be applicable. It's possible to be promised a fee waiver for the second year as well, but you must authenticate this claim with the bank directly to circumvent a 'mis-selling' trap.

Lifetime free cards

'Lifetime free credit cards' are relatively new. While there was a time when most banks charged annual fees on their credit cards, annual fees are being phased out. In effect, clients are offered 'lifetime free cards' - that is, no annual fees for life. Again, double-check any telesales personnel promises with the bank.

Grace period

Another factor to evaluate is the extra time or grace period the bank offers you to pay your outstanding dues without interest. The longer the grace period you have, the better. This can offer a cushion, though it's better to pay off the outstanding dues before you need the grace period.

Rewards and incentives

These days, most credit cards offer reward points and incentives on purchases or dining out that can be redeemed or used at a later date.

For instance, some credit cards allow you to redeem reward points at certain stores or shopping centres. If you are a frequent shopper at these outlets, then consider a card that offers rewards there. Likewise, if you are moviegoer, opt for a card that offers reward points on entertainment. Analyse your spending habits to determine which card suits your needs best.

Irrelevant benefits

Banks smartly advertise their credit cards by adding on auxiliary services and products these days, however be astute enough to assess whether this makes sense to your needs and lifestyle. It may happen that various benefits are offered, like an insurance cover coupled with the credit card, but makes little sense if you already have an insurance provider. As attractive as they might be, be wary about such offerings because the core utility you're looking for is the benefits of a credit card. If a card has features that suits you, opt for it even if there is no insurance cover or other add-ons.

Terms and conditions

Remember, the devil is in the fine print, so take the time to read the terms thoroughly. Unfamiliar terms and conditions can jeopardise your financial well-being. If you find anything, jargon or otherwise, in the terms and conditions section that was not conveyed to you or is contrary to what was conveyed to you, seek a clarification from the bank and avoid taking or using that card.

Once you begin to use the card, it is assumed that you have read the terms and conditions and have agreed to them.

Choosing the best credit card for you is just the first step. How you use this plastic money will determine your long-term financial well-being. Here are few tips to empower you:

Have a budget and spend within your means

Avoid converting large purchases to EMIs

Pay-off your credit card dues in full and on time

Claim waiver on annual fees by keeping a good repayment record

To swipe or not to swipe? That's the question. It's all very simple: Be a wise spender and use credit cards with caution. Avoid opting for many credit cards as it could cause a debt storm if you aren't careful.

PersonalFN believes that owning a credit card can be convenient as long as you have the means to pay off your dues every month.

This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm known for offering unbiased and honest opinion on investing.

A leap of faith can change one's life. But the impact of the change depends on how, when, and from where you jump.

Jumping up and down is excellent cardiovascular exercise. Jumping into a swimming pool is great fun. Bungee jumping is a real thrill. But every jump requires prudent safety measures…no matter how strong your faith. Faith and reason are not mutually exclusive.

Entrepreneurs looking to take a leap of faith in their business should also enact safety measures…no matter how confident they are about their business.

What separates a successful business from an unsuccessful one? Good judgment regarding risk. Launching a new product is as much of a risk as it is an opportunity. And taking a business loan can be a double-edged sword. If the funds are used productively and prudently, they could provide the springboard your business needs. Without careful planning, however, borrowing on a whim or during a crisis is the like bungee jumping without a harness.

Before you apply for a business loan consider:

Why you need funding How long it will take to pay it back Entrepreneurs might borrow for many reasons - from business expansion to working capital requirements. But it is best to borrow to scale up existing business activities or to start new ones. Borrowing to run an existing business should be a last resort. Ideally, a business operates on the cash it generates. Regularly borrowing to sustain your business will cause difficulties sooner or later.

That said, borrowing to expand your business does not automatically make the loan less risky. But it does give you a higher purpose.

Before you apply for a business loan, you need to know how you will earn additional profits to be able to service and retire the loan. Be clear with your business plan. Predicting future cash flows is extremely complicated. And it's not what you aim to earn; it's what your business is capable of earning, which depends on…

The economy Your industry Demand Competition Regulations Common Mistakes When a businessperson starts getting more orders, they tend to become bullish about their business and highly motivated to expand. One more product…one more store…one more market…and so they borrow - sometimes more than they should.

All-out expansion can be risky. Imagine this: After a boom in the automobile industry, a small auto-component maker thinks about doubling his capacity. His business has a reasonable surplus and little debt. He has an aggressive expansion strategy that he's confident he can implement. A bank grants him a loan. But the automobile industry enters a rough patch just as the expansion nears completion. A double whammy: The business has invested heavily in new capacity, but now even the pre-existing capacity is underutilised.

We do not wish to encourage pessimism but a 'wait and watch, slow and steady' approach.

Smart Borrowing is Simple Before you calculate how much you will borrow, you must understand industry trends and dynamics. The pricing power of producers and service providers in your industry is a good signal of the pace of activities. It's the job of the entrepreneur to judge how long that pricing power will last.

More competitors and less demand can puncture the industry wheel. Avoid borrowing when the balance sheet shows all-time high margins and revenues. That's often the end of a cycle. True, not all businesses are cyclical, but demand-supply dynamics are not constant, and no industry is immune to change.

Keep in mind that a strong business with a promising future will always be able to find a financer. If a conservative bank refuses to lend, there may be a lacuna in your analysis. Consider the bungee instructor who prohibits an obese person from jumping. Banks, prudent banks, serve a similar function. They will not let you jump to your death. It's not good for business.

So hash out the details again. But don't waste time on elaborate project reports. Coaxing a loan from a bank through affected presentation may get some success, but it's detrimental in the long run. A loan proposal that is strong at core will see the most success.

When you propose a loan to a bank, they will want to know your:

Personal credit history Trade credit history Business cash flows Collateral security Firm's net worth If you or your business score low on any of these items, a bank will be reluctant to lend you. So before you apply for a loan, take a 'business fitness test'. And don't jump unless you are fit.

Before the financial crisis in 2008, a friend of mine TD invested the bulk of his retirement money in a couple of stocks he was excited about.

One happened to be Lehman Brothers.

As you know, Lehman Brothers went bankrupt in September 2008 and sparked the onset of the financial crisis.

With a significant amount of his portfolio in Lehman, TD's portfolio was decimated. It forced him out of retirement and back to work.

Risk is an element of every business and investment transaction. But it can be managed. We've distilled the “best practices” we developed over the years for managing risk. We've narrowed them down to an essential three.

We are calling them The Wealth Builders Risk Management Strategy. Three simple protocols based on three common - but very dangerous - mistakes.

The first mistake is having too much money invested in only one or two asset classes - most commonly, stocks or bonds.

The second mistake investors make is putting too much money in only one or two investments within an asset class (as TD did when he loaded up on Lehman Brothers).

The third mistake is keeping your money in an investment as values plummet, hoping for a correction - a very common mistake that is easy to fix.

Our Risk Management Strategy has a solid and dependable solution for each of these three mistakes.

Our strategy involves asset allocation, position sizing, and exit strategies. For the purpose of simplicity, think of it as a three-legged stool of safety.

1st Leg: Asset Allocation

The most important risk-reduction strategy is diversification by asset allocation. By that, we mean dividing your investment capital into different asset classes. This way, if one asset class tumbles, you have additional money invested in other classes that may not drop as fast. Or that may hold strong. Or that may even increase in value.

To show you how important asset allocation is, let's look at what would happen to three different investors in case of a stock market crash. We'll assume each used a different allocation strategy.

First, let's look at Ravi. Like TD, Ravi invested 100% of his money in the stock market - let's say 1,000,000. In other words, he had no diversified asset allocation plan. That meant his money was wide open to stock market volatility. So if the market dropped 30% that year, Ravi lost 300,000.

Our second investor, Naina, also invested 10,00,000. But she took a more conservative approach. She followed a traditional asset allocation model - 60% in stocks and 40% in bonds. Let's look at the difference it made.

Like Ravi, Naina lost some money. But she had less money in the stock market. Therefore, she lost less than he did. That alone makes her strategy superior. But it gets better…

Bonds are typically inversely correlated to stocks. So if the stock market is plummeting, bonds might actually rise. Let's say they rose by 5%. So while 60% of Naina's money dropped 30% (the stock market losses), the other 40% of her money actually rose 5% (the bond gains). This means Naina actually lost only 20% of her money - 200,000.

This is a better result. But we have a far better way.

In our view, the two-asset class model is far from optimal. We prefer to diversify over five additional asset classes. Our Asset Allocation Model could include the following seven asset classes:

Cash Bonds Precious Metals Real Estate Options Stocks: shorter-term Stocks: longer-term

Had you diversified your portfolio this way in the face of a financial crisis, you would have had the best results of all our three scenarios.

Let's look at our third investor, Sejal. To make it simple, let's say Sejal spread her 1,000,000 equally between the above seven asset classes - about 14% in each category.

Note: Our official asset allocation model does not weight each asset class equally. Instead, we weight the asset classes based on what counts: how much money you have available to invest and how many years you have left before you want to retire. We provide different categories to fit the wide scope of our many readers' financial and retirement situations. But for simplicity in this example, we're assuming an equal weighting in each asset class.

Now assuming this is how the market moved:

For cash, the average money market fund was up 2%.

For our bond asset class, we'll use the same return from earlier - 5%.

For our precious metals/gold allocation, the price of gold rose 4%.

For real estate, a 15% appreciation.

In our options asset class., let's assume a loss of 15%.

Our asset allocation model divides the “stock” asset class into two categories: shorter - and longer-term stocks. These returns are harder to quantify.

Let's assume the two stock asset classes would have lost 25% overall.

Add up the returns of these seven different asset classes. And you'll find Sejal lost only 8% on her entire portfolio, or 80,000. That's almost 80% less than she would have lost with 100% invested in stocks. And 60% less than the second model (stocks and bonds).

The main advantage of our expanded asset-allocation strategy is obvious from this example: less downside risk.

These seven asset classes are not correlated. That is a good thing. It means less volatility and less damage when things get crazy.

Our asset allocation strategy is unique. But having seven asset classes is only one component. We also provide guidelines as to how much of your money you should have in each class which we'll discuss in the next essay. Stay tuned.

Best, Mark

In my last essay, I introduced you to our unique Risk Management Strategy. We discussed the 1st Leg of the three legged stool system: Asset Allocation - the importance of dividing your investment capital into different asset classes. Today, I will reveal to you the other two legs keeping your investments safe.

2nd Leg: Position Sizing

The second leg of the safety stool is position sizing. This is a simple strategy dressed up in a fancy name. The idea here is to limit risk by deciding you won't put more than Rs X or X% of your capital in any single investment.

Asset Allocation Whereas asset allocation reduces overall risk, position sizing reduces the risk within those asset classes. You do this by putting a limit on what you can put in any one investment.

For example, if you had Rs 7,000,000, you might put 1,000,000 in each of our seven recommended asset classes. That's asset allocation. Position sizing would determine how much of that 1,000,000 you invested within those asset classes. You might say that you'll invest no more than 70,000 in any one deal (7,000,000 x 1% = 70,000). So if that one investment of $70,000 went down to zero, your investible net worth (7,000,000) would go down by only 1%.

Position sizing is how conservative investors protect themselves from catastrophic losses. I am a strong proponents of position sizing. I recommend you pick a limit and stick to it. Especially if you find yourself wanting to “go big” on some gamble like TD did with Lehman Brothers.

And keep this very simple axiom in mind: The smaller you can make the limit, the safer you will be. Currently, my position limit is 1% of my investible net worth. But when you are starting out, it will be hard to set such a small limit. A good rule of thumb for most people is 3-5%.

Okay, we've covered two legs of our three-legged strategy. But you don't need to know much about physics to know that stools cannot stand well on two legs. For maximum safety, we recommend a third strategy. This will further protect you by limiting the amount of money you can lose on any individual investment. I'm talking about having an exit strategy or what I call a “Plan B.”

3rd Leg: Exit Strategies

I'm going to explain the exit strategy by referring to one of the asset classes we identified above: stocks that fit into your long-term portfolio.

You buy these stocks in order to outperform the stock market. When you buy stocks using our position-sizing strategy, you are protected in that you have limited your potential losses to a percentage of your portfolio (1% for me - 3-5% for you, perhaps). But you can further reduce your risk of loss by attaching a “stop loss” to each stock you buy.

A stop-loss price is simply a preset price at which you or your broker will sell the stock if its price drops that low. For example, if you set a 25% stop loss on a Rs 20 stock, you or your broker will sell it if its price drops to Rs 15.

This further reduces the risk you are taking to 25% of your position size. Getting back to our earlier example, if the position limit you set was 70,000, you would never invest more than 70,000 in any one stock. If that stock position's value dropped to 52,500, you would sell it. You would take a loss of 17,500 and no more. Thus your total loss on that investment wouldn't be Rs 70,000 - or 1% of your investible net worth - but 17,500 or only one quarter of 1%.

As you can see, stop losses keep your losses to a minimum. And you have can control what you're willing to lose.

Stop losses are very effective. They remove emotion (an investor's great enemy) from consideration when a stock, a group of stocks, or even the entire stock market is tumbling.

As you can see, when you combine stop-loss limits with position sizing, you reduce risk dramatically. To reiterate, position sizing limits the loss you will take on any one particular investment. Stop losses limit the loss you can take in that particular investment to some predetermined percentage (in our example, 25%).

One more example to make sure you get it:

Let's say you have investible assets of 1,400,000. And you divide that equally into each of our seven asset allocation models. Your risk in any particular asset class is 200,000 or about 14% of your total investible net worth.

Let's say again that you decide never to put more than 2% of that, so Rs 20,000 in any one investment position. That 20,000 is your position size.

You wake up one day and decide to add Super Stock Co. to your portfolio. You plunk down 20,000. And tell your broker to use a 25% stop loss.

You buy the stock at Rs 10. Suddenly, it goes down to Rs 7.50, setting off your stop-loss limit. You sell it, taking a Rs 5,000 loss (25% of 20,000).

Your entire loss at Rs 5,000 is only one-third of 1% of your investible net worth. Not much to fret about. Don't you agree?

Now, there is much more to tell you about how to use stop-loss limits. One thing, for example, is setting a “trailing” stop loss.

There is also much more to learn about how to allocate assets and we will bring you more in future essays.

In Summary

I believe that the first rule of wealth building is “never lose a lot of money.” The best way to follow that rule is to utilize all three of these strategies every time you invest in anything. Remember, a stool can stand very well on three legs. But fails to stand on one leg or two.

Editor's Note: I recently asked some members of the Wealth Builders Club whether they would like any tax-related information. JJ wrote saying, ‘Yes, tax related matters could be of use to most of the members.’ But tax is a broad field and to start with. Another member, SS suggested that we start with personal finance. Luckily for us, personal finance advice is easily available to us because of our partnership with PersonalFN. So here is your first essay on Tax, in our Financial Planning series.

Anisa Virji Managing Editor

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I'm too worked up these days ­- juggling between my business and the constitutional duty of paying taxes. Now I'm rushing to my CA's office to set things right on my tax filing.

According to my CA, I'm liable to dole out a large sum as income tax, despite having made all necessary tax saving investments. I'm wondering how I can lower my tax outgo with some last minute tax planning.

- One of our clients

It's that time of the year again. As the last day to file approaches, many of you are feeling the heat and rushing to your CA's office with (or without) all the requisite documents to file your income-tax (I-T) returns.

You see, paying taxes is not only your legal, but also a moral responsibility. It earns for you the dignity of consciously contributing to the development of the nation. Not to mention that Income-Tax (I-T) returns validate your credit worthiness for financial institutions… and that can help you in accessing many financial benefits such as bank loans and much more.

Due dates for individual returns have been extended from the usual July 31 to August 31. But to avoid the rush at the end of the extension, the finance ministry has asked taxpayers to file early.

Below we've answered some of our clients' most frequently asked questions…

What if I miss the tax-filing deadline?

If you don't file your I-T returns by the due date, you can still do so before the end of the assessment year without penalty. As per Section 139(4) of the Income-Tax Act 1961, one is allowed to file his/her I-T return up to one year after the relevant assessment year or before the completion of the assessment, whichever is earlier.

For the financial year 2014-15, the relevant assessment year is 2015-16. So if you miss filing your income tax return by the due date (July 31, 2015), you can still file before the end of the assessment year (March 31, 2016). This is the latest you can file with out penalty. If you fail to file before March 31, 2016, the Assessing Office may levy a penalty of Rs 5,000.

What if don't pay my taxes on time?

If you don't pay your taxes on time, then a penalty interest of 1% per month (simple interest) will be levied on the amount of tax due or balance tax payable from the due date to the actual date of filing. However, if you are lucky enough to have no tax payable, you won't be liable to pay any interest, even if you file your return after the due date but before the end of relevant assessment year.

What is advance tax and what if I miss paying it?

If you are liable for more than Rs 10,000 in tax, then advance tax needs to be paid in three instalments. At least 30% of your tax payable is due by September 15. At least 60% is due by December 15. And 100% is due by March 15.If you defer any of these payments, then a simple interest of 1% per month penalty will be levied.

Filing your return on time comes with two major benefits:

The right to make amendments:

I-T returns aren't above human error. If you file your return by the deadline, you enjoy the right to correct any errors or make as many changes as you like before March 31 or the date your returns are assessed, whichever is earlier. You should always strive to file a complete and correct return, but if you notice a mistake or forgot to claim a significant tax-saving benefit, as long as you filed on time, you can go back and make the necessary additions or corrections.

The right to carry forward losses:

If you have a capital gains loss in your investment portfolio, the Income Tax Act allows you to carry forward losses to adjust against future gains. However, if you haven't filed your returns on or before the due date, you are disallowed from carrying forward losses. If you do file on time, you may carry forward losses for the next eight years!

On the other hand, not filing your I-T return on time can bring peril, such as:

Risk of prosecution, which may lead to imprisonment from six months to seven years, plus the fine

Difficulty in obtaining bank loans, credit cards, visa application approval, and registration of immovable property

So make sure that you file your I-T returns and pay your taxes before the due date. Even if you aren't earning income which comes under the tax bracket; it is always advantageous to file your returns. But while you do so, make sure the correct form is filed.

Recently, the Central Board of Direct Taxes (CBDT) announced a few changes in the I-T return forms, making them simpler but at the same time taking measures to curb black money. Here are the changes…

Particulars Current Forms New Forms Number of Pages Consists of 14 pages Will consist of only 3 pages, any other detail, if applicable, needs to be filled in the schedules Foreign Travel Those making foreign trips need to furnish the following information: - Details of your passport number, - Name of the place where the passport was issued, - Countries you visited during the year, - Number of times you visited foreign countries (in case you are a resident taxpayer), - Expenses you incurred during your foreign trips from your 'own sources' is required to be provided Those making foreign trips will need to furnish: Only the passport number will be needed to be provided in ITR-2 and ITR-2A Exempt income In case of an exempt income higher than Rs 5,000, ITR-2 is required to be filed In case of exempt income, of any amount, (barring agricultural income of more than Rs 5,000), ITR-1 (Sahaj) will be needed to be filed Individuals and HUFs having income from more than 1 house property ITR-2 is required to be filed by individuals and HUFs having income from more than 1 house property and capital gains Individuals and HUFs having income from more than 1 house property but not capital gains, foreign income/assets or income from business/profession; ITR-2A will be required to be filed Bank account details CBDT expects you to give the following disclosures while filing returns: - All bank accounts held during the year for which income is being reported (including addresses of banks, IFSC codes etc.) - Information about joint holders - Bank-wise closing balance in all accounts as on March 31st of the fiscal year for which income is being reported Going forward, the bank-wise closing balance in all accounts will not be required to be disclosed. Moreover, you won't have to give disclosures for dormant accounts that have not been in operation during the previous 3 years. Only the following details are required to be disclosed: - Account numbers for all the accounts (current and savings) held at any time during the 'previous year' for which income is being reported - IFSC Codes Disclosure of assets held by foreign nationals Foreign nationals who have become ordinary residents in India are required to disclose all their assets held abroad Going forward, foreign nationals who had acquired assets when they were non-residents won't be required to disclose them, as long as no income is being earned from them in the 'previous year'

Moreover, CBDT has made it mandatory for all individuals with a taxable income of over Rs 5 lacs to file their I-T returns online.

If you have an Aadhar card number and have used it to file your I-T returns, you will not need to submit the verification form in a physical form to the Central Processing Centre (CPC) in Bengaluru. An Aadhar linked Electronic Verification Code (EVC) will be used to verify returns filed online. This is how it will work…

Filing your return online with an Aadhar card

Filing your return online with an Aadhar card is hassle-free and ensures your refund won't be delayed. The card also eliminates the risks of sending physical verification forms to the CPC in Bengaluru.

Even if you do not have an Aadhar card, go ahead and file your I-T return on time and be sure to make all necessary disclosures. Don't attempt to hide your income! Not only would it be a grave injustice to your constitutional and moral duty, but the risk of getting caught and the damage that would do to you and your family simply isn't worth it.

That said, it's certainly possible to save on your taxes without violating any law. But that requires prudent tax planning from the beginning. Don't run to your CA or tax advisor at the eleventh hour. It's far too late.

PersonalFN believes that tax planning is much more than merely filing returns and paying taxes. It is a detailed process that considers your larger financial plan and accounts for your age, financial goals, risk tolerance, and investment horizon.

With proper tax planning, you take a crucial step toward meeting your financial goals and ensuring long-term wealth creation. You cannot take this step at the last minute.

This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm known for offering unbiased and honest opinion on investing.

Have you ever felt the sting of fear when trying something new? It's the fear of failure. And it comes from our past.

Every time we have a bad experience, a failure or rejection, it leaves a mark on our impressionable minds. It piles up like baggage in storage, cluttering our minds with emotions.

When making decisions, sometimes we get so influenced by our past that we can't be objective anymore. We start relying on emotions.

When it comes to trying something new, starting a business, exploring a new extra income opportunity… we can become choked by fear. To overcome this fear, we need to rely on rational thinking, risk assessment and strategic planning.

Your investment decisions are usually based on your past investment experience and your willingness to take risk. If you have had a successful investing experience, you might become too aggressive and invest only in high-risk assets. But if you have been burnt in the past by losing money in stocks, you might be too conservative and now prefer instruments that are low-risk, low-return.

This is why investment decisions should come not from past experience, but from rational and strategic asset allocation. In this series of essays, we will talk about how to design a good investment strategy.

We will answer the question: Is there a way to identify the ideal asset allocation for your financial situation?

Asset Allocation Balancing Risk and Reward

Asset allocation simply means all the asset classes where you invest your investible surplus - such as equity, debt, gold, real estate or even cash for that matter.

By allocating your portfolio across assets, you are going to balance your portfolio's risk and reward keeping in mind: your risk profile, your financial goals, and your investment time horizon.

The three most important things you need to know about Asset Classes for investment planning -

All asset classes do not move in the same direction at the same time.

This means that when one goes up, another might go down. And that, actually, is a great advantage for investors.

Because if you diversify your investment portfolio across various asset classes to correctly balance your investments - even when one asset class goes down, another will go up, making sure that you are safe and don't lose all your investments.

If stocks are witnessing a bear market, it is unlikely that other asset classes such as gold, debt instruments, real estate will also be witnessing a down-turn at the same time.

That's why you should invest in more than one type of instrument. This will help improve your chances of achieving your long-term investment goals with minimal ups and downs.

You can generate greater returns by thinking ahead, planning well, and knowing yourself

Most people just invest in whatever they like, whenever they like. But as you can imagine, investing willy-nilly in whatever catches your fancy is not the best way to invest. In fact, if you follow this method you don't even really know whether you are getting enough return on investments to achieve your financial goals.

You have to understand your own, personal risk appetite, before figuring out the best strategy for you to invest. If you are going to invest like your buddy, or your brother, that won't work. You need to invest in a way that is uniquely you, and that will give you the most financial satisfaction.

As always with investment, you have to remove yourself from your emotion just a little bit, and focus on strategy. A proper asset allocation actually meant uniquely for you will help you minimize risk and take you towards achieving your financial goals.

Taxes will eat away at your returns

The taxman, as usual, is going to come around to get his share. If you are in the highest tax slab i.e. 30% tax bracket and invest all your savings in fixed deposits (which are considered safe investments), then you are going to have to pay huge tax on your interest income.

You need to keep tax consequences in mind when planning your investment returns, looking at post-tax returns on investments rather than pre-tax returns. Proper asset allocation will help you determine the right investment products that can minimize taxes on your investments.

So turns out there are quite a few things you need to keep in mind to come up with the perfect asset allocation plan - one that will earn the best possible return, minimise risks and taxes, and take you to your financial goals.

So how should you allocate your increasing pile of investible money wisely?

7 factors to keep in mind while defining your own perfect asset allocation -

Your Age

As usual you can get away with a lot more when you are young.

If you are, say 20-30 years old, you can allocate a large chunk of your portfolio towards risky assets, such as stocks. Being young gives you the time and opportunities to recover from any possible setbacks in the value of your portfolio.

If you are middle-aged of course (30-55 years), you still have flexibility but a little prudence is called for. A moderately risky portfolio balancing risky and non-risky assets is probably best at this time.

If you are an aged investor nearing retirement (55 years & above), you might choose a more conservative approach while planning your asset allocation. As you know, Mark Ford himself doesn't believe in taking high risks - he calls himself a timid investor. You should opt for safety as well. Your preference can be debt or fixed income instruments so as to preserve your principal amount and generate regular flow of income. But to beat the inflation bug, you need to maintain a small portion of your portfolio (say 15 to 20%) inn slightly risky assets that can generate higher returns.

Your Income

The amount of income you earn helps you decide the amount you invest. If you are a salaried individual drawing a fixed salary every month, you can allocate your savings systematically to both risky and safe instruments depending on your age.

However, if you are a businessman your profits and losses are not fixed. While higher profits in a year will help you expand your business or invest in various financial instruments, a year of losses will have a direct bearing on your investment plans. So allocate your assets keeping in mind the growth potential of your future income.

Remember, a key component of the Wealth Builders Club is for you to generate extra income that you can then invest for future wealth.

Your Expenses

Living within your means and curtailing your unnecessary expenses can help you keep your financial health in pink in the long-term. While certain expenses such as loan repayments, rent, grocery bills etc. cannot be avoided; you can always streamline few of your unnecessary and extravagant expenses. This will enable you to increase the net free cash available for asset allocation, which if invested wisely in suitable asset classes can help you to create more wealth and fulfil your financial goals.

But cutting expenses doesn't mean cutting down on quality of life. The Living Rich series shows you how to live the best life possible without overspending.

Nearness to Your Financial Goal

If you are many years away from your financial goal, you can allocate a big portion towards risky asset class like equities, and less towards fixed income instruments. If you are closer, make sure your investments are liquid enough to provide for your requirements when you need them. Some investments have a lock-in period and can't be redeemed within that period.

For e.g. if you are contributing towards your Public Provident Fund or PPF account or have investments in an Equity Linked Saving Scheme (ELSS) offered by mutual funds, you cannot withdraw them before compulsory holding period.

If you are planning to invest money that you might need within a year, then these aren't the right investments for you, no matter how good these investments are. Similarly your investments in real estate are sort of illiquid in the short-term. Equities are considered very risky in the short-term while the risk moderates in the long-term. Debt is considered relatively less risky, the returns being much lower, possibly too low to beat inflation even.

It is a good idea to rebalance your portfolio as and when you reach closer to the achievement of your financial goals. And when you are less than, say 3 years, away from your financial goals, you can shift your corpus to fixed income instruments to avoid wealth erosion.

Your Risk Appetite

Your willingness to take risk which is a function of your age, income, expenses, nearness to goal, will be an important determinant while framing your financial plan.

If you are aggressive i.e. your willingness to take risk is high, you can skew your portfolio towards equities, an asset class known for compensating risk with high returns.

If you are conservative, i.e. your willingness to take risk is relatively low, your portfolio can be skewed more towards fixed income instruments.

Moderate risk takers can take a mix of equity and debt respectively.

Your Assets

When you started on your wealth building journey you made an assessment of your physical and financial assets. Analyse your existing investment portfolio before allocating your funds further. For instance, if a huge chunk of your portfolio is dominated by real estate or equities, then based on the factors we talked about before, you can diversify your assets to reduce your risk.

Your Liabilities

If you have high liabilities, your financial conditions won't let you take high risk. This would make you a risk-averse investor. Irrespective of your age, willingness to invest, nearness to your financial goals, risk tolerance or any other factor, you will be forced to only make lower return generating safer investments, as you cannot afford to let your investments suffer any setbacks from market swings.

Also, this doesn't necessitate saying, but avoid taking loans or increasing your liabilities as far as possible. Read Mark's essay on debt and credit solutions. Also never invest borrowed money in risk assets such as equities, as any losses endured here might worsen your financial situation.

So an effective asset allocation offers the following 4 benefits -

Lowers your investment risk Reduces your dependency on a single asset class Protects during turbulent times Makes timing the markets irrelevant

So here are some examples of asset distribution…

If you are a long-term investor with an aggressive risk appetite, then you can invest upto 70% in risk assets with a long-term view such as equities and real estate, around 20% in safer asset classes such as debt and cash instruments and around 10% in gold.

If you are a moderate investor aiming to provide some stability to your portfolio along with capital growth, then you should invest upto 60% in equities, around 30% in debt and cash and the remaining 10% in gold.

Conservative investors looking for protection of their capital must invest upto 70% in debt and cash, around 10% to 15% in gold, while the rest can be diversified by investing in quality equity instruments.

Asset allocation safeguards the overall value of your portfolio from the misfortune of any particular asset class. This is not a one-time process so keep reviewing your asset allocation regularly to keep it aligned with your financial goals.

This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm known for offering unbiased and honest opinion on investing.

Has crisis ever rattled your investment portfolio?

The stock market crash on August 24, 2015, wiped out almost Rs 7 lac crores of investor wealth in a single day and shattered investor sentiment across the world.

Investors were glued to their TVs and tablets as the financial experts fuelled the panic with predictions of a deep crisis ahead.

Of course, few experts thought to guide individual investors with actionable advice…

PersonalFN has years of experience educating and guiding clients and readers with their personal finances. For this reason, many people seek our counsel during extreme conditions.

As soon as he saw the BSE Sensex had shed 1,624 points, one of our clients, Mr Wilson, a 70-year-old retiree, called our investment consultant and asked him to suggest a few good equity mutual funds.

'Be fearful when others are greedy and greedy when others are fearful.' - Warren Buffett

Mr Wilson is very sensitive to his investment portfolio. He closely monitors his investments every single day, though we often tell him that it is not necessary given his well-balanced portfolio. But as a retired individual, every penny matters to him.

After seeing the markets tumble, Mr Wilson wished to invest a huge sum of money in equities to capitalise on the crash. It seemed Mr Wilson wanted to follow the advice of the world's most successful investor.

The Made in China crisis caused a huge sell-off in almost all emerging markets, including India. Everyone became fearful. According to the Sage of Omaha, it can be wise to tap opportunities during such times (especially if you have a relatively long investment horizon).

While this is true and Mr Wilson is right to want to capitalise on the crash, we always advise that risk appetite should correspond to age and financial goals.

An individual in their 30s will have much higher risk appetite vis-à-vis an individual in their late 50s and nearing retirement. Likewise, a 60-year-old retiree will likely have very little risk tolerance.

Considering Mr Wilson's age and the fact that he's retired, his appetite for risk should be lower. Going overboard with equities may not be prudent since his retirement portfolio is the only source of income to take care of his retirement needs.

PersonalFN considers asset allocation as an important element in your investment portfolio; it is crucial in the process of achieving your financial goals, particularly retirement.

By allocating investments across various asset classes, you can make a strategy to minimize risk and possibly increase gains in the long run. But you also stand to benefit from any extraordinary opportunities the market may offer. Proper asset allocation will allow you to take advantage of a crisis.

How this works is that while following an asset allocation strategy, if you see a substantial increase in exposure/profits in any asset class, say equity, then you can rebalance your portfolio, book the profits and move to other safer asset classes, say debt. This way when there is a correction in the markets, i.e. if equities show a great fall, then you can get an opportunity to buy equities again, as Mr. Wilson saw.

So how should you allocate assets in your retirement portfolio?

For individuals between 25 and 35 with a time horizon of 25 to 35 years

Life Stage - Accumulation Phase (Portfolio Type - Aggressive) Asset Allocation You are in the accumulation phase of your life. Hence you may be looking for wealth creation in the long run since you have sufficient time before you hang up your boots. Apart from retirement, you may also have financial goals in the interim such as buying a dream home and car and getting married and starting a family. You will need to prioritise each of your financial goals. Nevertheless, with a sufficient time horizon until your retirement, you can afford to take a higher risk with your retirement savings.

Therefore, there's scope to position your portfolio aggressively by allocating 65-85% of your portfolio in equities and around 5-20% in debt. Based on your preference, you may also hold a 10-15% position in gold for further diversification.

For individuals between 35 and 45 with a time horizon of 15 to 25 years

Life Stage - Mid-asset Accumulation Phase (Portfolio Type - Moderately Aggressive) Asset Allocation You are in the mid-asset accumulation phase of life. You may be planning to buy a house, a car and invest for your child's education. You need to plan your income well and streamline it towards achieving your goals and life style. With a time horizon of around 15 to 25 years on your side, you can take relatively higher risk to grow your retirement portfolio.

Hence your portfolio can be positioned in the moderately aggressive risk profile by allocating 60-70% in equity, 20-35% in debt and holding 5-15% in gold.

For individuals between 45 and 55 with a time horizon of 5 to 15 years

Life Stage - Protection Phase (Portfolio Type - Moderate) Asset Allocation You are in the protection phase of your life cycle. In this age bracket, you may still have life goals to fulfil such as your child's higher education or marriage, or you might still be dreaming of that big house. Hence this is a phase when you need to streamline your finances - both inflows as well as outflows. You need to keep aside sufficient funds for your retirement portfolio. It's still possible that you will fall short on your retirement corpus. But since you have a time horizon of 5-15 years, you can afford to take some amount of risk and not be too conservative.

Hence your portfolio can be positioned moderately by allocating 40-60% towards equity, 35-50% towards debt and 5-10% in gold to hedge the portfolio.

For i ndividuals between 55 and 60 with a time horizon of less than 5 years

Approaching Retirement (Portfolio Type - Moderately Conservative) Asset Allocation You are on the verge of retirement by now. Your regular source of income will soon stop. Hence you ought to be conservative in your asset allocation. It is not advisable to have a high exposure to equities.

You should position your portfolio such that 20-30% of your portfolio is in equity, 60-80% in debt and 5-10% in gold as a hedge.

For individuals above 60 and already retired

Life Stage - Distribution Phase (Portfolio Type - Conservative) Asset Allocation You are probably retired by now. If so, you have completed the conservation and protection phase of your life and have entered the distribution phase. You now have limited income or even no regular income. Thus, at this stage, you may need to dip into the savings and reserves you've built over the years. Hence while you invest to take care of your retirement needs, your portfolio needs to be positioned conservatively.

Around 70-80% of your portfolio should be in fixed income generating instruments to generate post tax returns of at least 7-8% per annum, assuming annual inflation expectation is at 7%. Equities should only be 10%-25% of your portfolio. And 5-10% should be in gold for a hedge.

A note on rebalancing…

Once you have defined the standard allocation to your portfolio, you ought to review your portfolio on a regular basis, say yearly, to check if it needs realignment. This is because the allocation to an asset class may drift significantly away from your initial allocation due to appreciation or depreciation.

If you notice wide deviation in your portfolio allocation due to swift rally or swift fall in any of the asset classes - say a swift fall in equities due to crisis ­- you can consider trimming around 5-10% of your exposure to other asset classes, say debt and gold, and reallocate that amount towards equity and equity mutual fund holdings.

This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm known for offering unbiased and honest opinion on investing. The images are obtained from PersonalFN research.

It's not easy to get yourself to sit down and think about what would happen if you got really sick, and were unable to make sound financial decisions. Worse, we definitely don't want to think about… being no more. Quite an unpleasant scenario.

Instead, we hide behind these thoughts…

“I am too young to prepare a will” or “I don't need to prepare a will”…

…Because it's unpleasant to think about. We know anything can happen at anytime. We know we want to protect ourselves and our loved ones. That's why we get insurance in the first place.

But we also know what we need to do.

Leaving the world intestate (without preparing a will) can lead to various complications and disagreements among your heirs. You work your entire life to build wealth and a sustainable livelihood for your family members. But you can't even imagine the mess and inconvenience that might be caused to your loved ones because of your unwillingness in not drafting a will for them.

Even if you don't have great wealth or piles of assets, that doesn't matter. You still need to figure out and take the necessary steps to ensure the smooth transfer of assets from one generation to another, also known as estate planning.

Here are some advantages of Estate Planning: You can decide who receives what share of your assets You can decide how and when your beneficiaries will receive their inheritance You can decide who will manage your estate in your absence Estate planning saves your family and loved ones from going through the additional burden of reverting to the law to distribute assets.

In fact, as soon as you start accumulating assets, start figuring out where it would go if you weren't around, and leave clear directions. You don't need to wait till you own lots of assets to transfer or till you turn 65 to create a will.

As we've told you one too many times in this guide (only because we care about you), life is unpredictable and uncertain.

If you care about the people you will be leaving behind, you will take the steps necessary to protect their quality of life when you are gone. So get planning…

The 10 points below will help you while preparing a will:

A will can be prepared by anyone who is 21 years of age, of sound mind, and free from any coercion, fraud and undue influence. With old-age come physical and mental illnesses, people become incapacitated and might even lose their ability to comprehend. A will created at such an age, when a person might not be in his or her right senses might create misunderstandings, doubts and disputes in the family later. So prepare your will while you are still young and healthy to avoid conflicts later.

You must use the title 'Last will and Testament Of (state your name here)' to make it clear that the document is your will and legal. Make sure to state your full name, current address, and the fact that you are of sound mental health and under no duress from any one to make the will.

Name an executor, a person who will carry on the tenets of the will. A trust worthy person should be named as an executor and you must seek their permission before nominating them. This is because if they refuse to become an executor later, then there might be no one to execute the will, leaving it to the court of law to appoint an executor.

A will can be handwritten or typed out. No stamp paper is necessary. You can write a will on a simple A4 size paper, sign and date it with 2 witnesses, and put it away safely. You need not register your will with the Registering Authority; but in order to avoid frauds and tampering, it is better to get it registered. If you wish to register your will then it can be done with the registrar/sub-registrar by paying a nominal registration fee. You need to be personally present at the registrar's office along with witnesses for this. Also, it is better if the witnesses signing your will are not the immediate beneficiaries of your estate or wealth. Any two people who you trust can do it. Also, it would be wise to inform the executor and family members about the whereabouts of your will in order to avoid confusion later.

If you have bequeathed your assets to any minor children, make sure you appoint a guardian for the assets till the time the said minors reach an adult age.

It is extremely important for a will to be simple, precise and clear. Otherwise some people might misconstrue your intentions and your assets might not be transferred to your choice of beneficiaries.

It is possible to make changes or minor alterations in a will if you wish to do so. If there are too many, or major changes, it is better to start over and just make a new one. Always date your will. If more than one will is made then the one having the latest date will nullify all other wills.

Each page of the will should be serially numbered and signed by the Testator (that is the person making the will) and the witnesses. This is to prevent the will being substituted, replaced, or pages being inserted by people intending to commit fraud. At the end of the will you (the Testator) should indicate the total number of pages in the will. Corrections if any should be countersigned.

While writing a will along with the laws of the country, one's religion also plays an important role. Keep that in mind while making your will. For example, in case of Hindus, any assets that you have acquired on your own can be bequeathed as per your wishes. However any property which you have inherited from your father cannot be transferred according to your whims and fancies, as the laws of inheritance will apply to them.

Although it is possible to draft a will on your own, it is always better to take the advice of a trusted lawyer or advocate while writing a will. This will reduce any chances of misinterpretation or frauds from relatives and also reduce the probability of the will being claimed as invalid in the court of law.

All of us have certain wishes about what should be done with our fortune (however big or small) after us.

Unless you appropriately document this in the form of a will, there is no certainty that the assets created by your life long efforts will be transferred to your loved ones.

The law does not know that you wished to leave a larger portion of your wealth to your financially weaker child or you wanted to leave a token of appreciation to some special friends.

There is no guarantee that your special heirlooms will be passed on to those family members who you knew would value them.

Estate planning is one of the most essential aspects of our lives and should not be put off until it's too late. It is a dynamic process, which needs to be reviewed This is an exercise you should repeat every few years, and after every major life change, including marriage, divorce, death, and birth.

This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm known for offering unbiased and honest opinion on investing.

Don't put all your eggs in one basket.

Surely you've heard this proverb before. It makes perfect sense: Carry your eggs in one basket and a single accident could destroy them all. What's more, one bad egg can rot the lot. Yet, many of us ignore this admonition and keep our “eggs” together.

We all seek convenience in our day-to-day lives. While convenience is good, we are sometimes tempted into taking the easy way out. Rather than going the prudent way, we take the shortcut. And our misdirection hinders our potential growth.

The great financial author, Robert Kiyosaki, wrote: “Your future is created by what you do today, not tomorrow.”

It's a well-stated reminder to remain undeterred by the easy way and to choose the prudent route instead.

The way to go…

In your journey to wealth, it is vital that you allocate your money wisely across asset classes.

You should base your investment decisions on your risk appetite. Conservative investors may want to invest only in fixed income instruments because they fear losing money. On the other hand, aggressive investors may want to take on high-risk, high-return investments because they are young and can afford to take chances.

Regardless of your approach, don't forget assets don't all move in the same direction. This is why it's important to diversify your portfolio across asset classes. Even if you have a high appetite for risk and look to equities for big returns, you ought to have exposure to other asset classes including debt, gold, and real estate. They will come to your rescue during a crisis.

Asset allocation is an investment strategy that will help you define a road map for your investment portfolio.

How to go about defining asset allocation…

The thumb rule for Equity: 100 minus your present age.

Say you're 30. You have the benefit of time and can take on high risk. Therefore, you can invest 70% (100-30) of your portfolio into equity and the other 30% can go into safer, income-generating debt instruments. This places you in the category of the ‘aggressive investor'.

Asset Allocation by Thumb Rule

As your age progresses - say you're now 40 - the formula calls for a less risky 60% (100-40) of your portfolio and the remainder in debt.

Asset Allocation by Thumb Rule

Now say you're 70 and already retired: A predominant portion - 70% (100-70) - of your portfolio should be in safe debt and fixed income generating instruments. That's because, assuming you have already met your major financial goals, your appetite for risk will be low. However, a small portion in equity to counter inflation is still a good idea.

Asset Allocation by Thumb Rule

On the other hand, if you are still investing to meet financial objectives, it would be better to allocate investments among different assets such as equity, debt, and gold. Your allocation should of course be based on how close you are to your goal.

For example, individuals with a 10-year financial goal should allocate a dominant portion of their portfolio towards equity (around 75%) and to the remainder to gold and debt (about 15% and 10% respectively). But as you near your financial goal, the largest portion of your portfolio should be allocated to debt. This can help not only to diversify your risk across different asset classes but also help rebalance your portfolio.

With this in mind, you must still undergo a holistic assessment considering…

Your age Your income Your expenses Your existing assets & liabilities Your risk appetite Your nearness to financial goals

We'd like to now share the examples of Mohan, Vijay, and Sanjay - clients who asked us to help chart their asset allocation. The following chart will help you understand how to ideally determine asset allocation.

Case Study Name Mohan Vijay Sanjay Age 30 45 60 Life Stage Unmarried Married with 2 Kids Retired Income Medium High Low Expenses Medium High Low Assets Low Medium High Liabilities Medium High Low Time Horizon High Medium Low Willingness towards Risk High Low Medium Overall Risk Appetite High Medium Low Our Advice for Ideal Asset Allocation Equity 80% 65% 20% Debt 15% 25% 75% Gold 5% 10% 5% (The table above is for illustration purpose only.)

Young, unmarried individuals, like Mohan, who have just started earning, may have only few assets. But their time horizon will be long (25-30 years) and their overall risk taking capability is high. So people in this situation can put a majority (around 80%) of their portfolios in equity and the rest in debt and gold. This aggressive portfolio can be expected to yield high returns in the long run. Given the financial situation and time horizon, the portfolio would have a lot more time to recover from the short term jitters of the equity markets.

As in the case of Vijay, high-income earners in the 45-50 age group will likely have dependents and liabilities. Their risk appetite would be moderate, and their time horizon may be 10-15 years. We, therefore, advise 65% of the portfolio in equity, 25% in debt, and 10% in gold. This balanced allocation may be expected to give sufficient returns to achieve future goals.

Just-retired individuals, like Sanjay, may only have a dependent spouse. No longer able to rely on income, they must rely on assets and investments for day-to-day expenses. Their time horizon is short and therefore their overall risk appetite is low. Recognising the need to preserve capital, they should have a predominant portion (around 75%) in debt and fixed income generating instruments, a slight (20%) allocation towards equity, and a small (5%) position in gold. This is low-risk, low-return portfolio, but it's ideal for capital preservation while generating a steady income.

To conclude…

Defining an optimal asset allocation is easy once you understand the basic rules. Asset allocation isn't a one-time process. It must be reviewed from time to time to ensure you achieve your financial goals. But once prudent asset allocation is in place, you can be rest assured that you will earn adequate return, minimize risk and taxes, have sufficient liquidity, and ultimately achieve your financial goals.

This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm known for offering unbiased and honest opinion on investing.

Diversify, diversify, diversify!

Financial planners are happy to remind us over and over again that diversification is vital in investment planning. However, despite the recitations, investors rarely follow a correct and complete diversification strategy.

'Stock markets are risky! I lost a lot of my wealth during Lehman crisis in 2008. I am not going to invest in stock markets again.'

'Bond markets are complex. I don't know how they work. So, I prefer to stay invested in fixed deposits. It would double my money in 8 years.'

'Gold! My wife likes to wear gold ornaments and I have bought some gold bars as an investment for my daughter's marriage.'

'There is an upcoming complex in Pune, and the builder is offering a 52 inch LED TV for free if I book within next 15 days. I am going to sell all my investments in stock markets and if need be, mortgage my wife's gold ornaments to book the flat. It will be my next investment.'

Have you heard statements like these from friends, relatives, or colleagues?

Through experience, we can say that many investors buy various stocks, mutual funds, and debt instruments on an ad-hoc basis and believe they're diversifying their portfolio.

But is that really diversification?

We believe diversification is meaningless if it does not counter market uncertainties and reduce risk. True diversification requires wise and effective asset allocation.

Each asset class commands a different risk-return relationship and behaves differently over time. When you allocate assets across the various classes - equity, debt, gold, real estate, cash - you are essentially adopting an investment strategy. Your aim should be to balance your portfolio's risk and reward in accord with your risk profile, financial goals, and investment time horizon.

Wise and effective asset allocation offers a host of benefits.

It minimises portfolio risk.

Wise asset allocation can help protect from market ups and downs. A well-diversified portfolio faces less risk. Growth prospects aren't limited by a single risky security, but spread over a basket of securities of varying risk, in addition to debt, gold, real estate, and cash.

It optimises portfolio returns.

Equity, debt, and gold do not move together. An asset class attracting investors today may be out of favour tomorrow. It is tough to predict when an asset class will perform well. Therefore, allocating your portfolio across different asset classes is a sensible investment approach.

An effective asset allocation, in addition to minimising risk, can optimise your portfolio returns. But you must not invest ad-hoc. This heightens risk and can derail your investment objective. Running behind momentum isn't likely to clock optimal returns.

It aligns investments and time horizon.

Your risk profile and your investment time horizon are crucial in deciding your asset allocation. Where you are in relation to your financial goals determines how to chart your asset allocation in equity, debt, gold, real estate, and cash.

If you have a long way to go to realise your financial goals, a large portion of your investible surplus should be skewed towards equity and less towards debt.

An investor with a shorter investment horizon, of say three years or less, should allocate more funds towards fixed income and a small portion of their portfolio to riskier assets such as gold or equity.

A medium term horizon of more than five years calls for an allocation to riskier asset classes (to take advantage of the higher risk-reward ratio) while maintaining a healthy allocation to fixed income instruments as well.

It makes market timing (almost) irrelevant.

If your asset allocation takes into account your risk profile, your financial goals, and your investment time horizon, timing the market almost becomes irrelevant. This is because your portfolio is well-aligned to your needs.

While traders may enjoy timing the market, the risk to their wealth and health is ominous. If you were invested in the Indian equity markets during the sub-prime mortgage crisis, or you've been burnt by other market downturns, you will know how painful it can be. And you will agree that a well-diversified portfolio with prudent asset allocation can offer protection, and even growth, during times of volatility.

It maintains adequate liquidity.

Liquidity is another vital consideration when making investment decisions. Some investments have a lock-in period and can't be redeemed within that time frame. For example, investments in Public Provident Fund (PPF), tax savings fixed deposits, and Equity Linked Saving Scheme (ELSS) offered by mutual funds carry a minimum lock-in period. While you might enjoy the tax benefits these instruments offer, you will have to wait to withdraw your money. Prudent asset allocation will ensure sufficient liquidity to cover financial goals and emergencies as required.

It minimises your tax outgo.

Most of us are busy making a living. We earn, pay taxes, and invest our hard earned savings. The returns we earn on our investments too are taxable. But one can avoid unnecessarily high taxation by aligning investments, financial planning, and tax planning activity wisely.

If you're in the 30% tax bracket and invest all your savings in fixed deposits to keep your investments safe, then you are making a big mistake: You are paying a huge amount in taxes that could have been saved legitimately.

Tax consequences are different for every individual. But if a prudent asset allocation plan is drawn, it will not only allow you to have the right asset mix, but also facilitate a legitimate optimal-minimal tax outgo, provided your investments are made in tax efficient instruments.

But defining asset allocation is challenging…

Yes, defining an optimal asset allocation is not easy. You must take into account a host of factors, such as:

Age Income Expenses Assets Liabilities Risk appetite Time horizon And most importantly your financial goals

Under ideal circumstances, if your broader objective is capital appreciation, and if you have an aggressive risk appetite, you can invest up to 70% of your portfolio in risky assets such as equities and related instruments and the remaining 30% in safer asset classes such as debt and cash instruments.

If you are aiming to provide some stability to your portfolio along with capital growth and have a moderate risk profile, 60% of your portfolio can be in equity and the remaining 40% in debt and cash.

If your priority is capital protection, and if you are conservative, a predominant 70% of your portfolio should be in debt and cash and the remaining (30%) can be diversified in quality equity instruments.

Please remember these are general, ideal models. You must consider your unique circumstance and goals to draw the most appropriate asset allocation for you.

Also remember you cannot set your asset allocation once and for all. You must review and rebalance based on your age and distance to your financial goals; any windfall gains, unexpected losses, or other changes to your financial circumstances; and any changes in outlook for a particular asset class.

Once you have a prudent asset allocation in place, you can be rest assured that you will earn adequate return, minimize your risk and taxes, have sufficient liquidity, and achieve your financial goals.

This article has been authored by PersonalFN, a Mumbai-based Financial Planning and Mutual Fund research firm known for offering unbiased and honest opinion on investing.

We read about these family feuds in the papers, where wealthy siblings are fighting over an estate that a parent passed on without distributing properly. And we think that it doesn't apply to non-crorepatis. It doesn't matter if I pass on without dividing my estate, because I don't really have much of an estate, you think.

But it matters more how you divide your assets if they are smaller. If a wealthy man has two houses eventually his kids will fight and end up with one each. But what will happen if you leave behind one flat without clarity? What if your children are unable to resolve this by themselves, and it breaks up your family?

The closest relatives have fallen out over money. That is the power of money - you may call it a curse - but it doesn't need to be. A little clarity is all that is needed.

Planning your estate is more than just writing a will, or gifting your assets.

Maybe you leave a will, which allows you to create clarity on who gets what when you die. But that doesn't cover everything.

Estate planning includes taking steps that ensures the quality of your life and the lives you leave behind.

Luckily, the necessary documents are easy to create, and don't cost much to put together. A lawyer can get these done for you for a few thousand rupees, or you can do it yourself. (It's safer to use a lawyer especially if you have a particularly complicated family situation in which someone might challenge your wishes.)

Here's what you need to do.

Step 1: Create a Durable Power of Attorney for Health Care

If you're suffering from an illness that incapacitates you and you can't make medical decisions for yourself, who do you want taking decisions for you? Empower someone you trust to act on your behalf, and in your best interests.

This is not only for older people. Remember, illness, accident and injury can occur at any point in your life.

Choose your decision-maker carefully…someone who can understand the complicated options available to you, make tough decisions, and follow through when others are trying to sway them. Someone who can put their own emotions aside, and act in your best interests.

Talk to this person, and discuss what you want them to do for you. Make sure that they are comfortable with your decision and the responsibility they will be taking on.

Step 2: Create a Durable Power of Attorney for Your Finances

It's possible that you trust the same person to make the best financial decisions as health decisions. But that's not necessarily so. So think about who the right person would be to manage your money, pay bills, take care of your property and so on, and make a separate power of attorney.

You can define exactly the scope of responsibility of this person - do you want them to deal with day-to-day transactions, manage your property, sell your assets and so on.

This must be someone you trust, but also someone competent in handling financial matters. Someone who can work with tax attorneys and other finance professionals to get things done.

Step 3: Create a Living Will

Even though you have empowered someone you trust to make your healthcare decisions, you should put your own medical choices down in a living will, that expressly states your wishes. A living will defines what medical procedures you do and don't want, and your decision-maker can use this as a guide to make decisions for you at the end of your life if you're not expected to recover.

Step 4: Name a Guardian for Minor Children

It is important that you decide who would raise your children in your absence, and put this down explicitly in a will. If not, the child could end up with someone you didn't choose, or worse, could lead to custody battles over the child.

If you plan ahead you can choose someone who shares your values, and will love your children like their own, ensuring that their lives will go on unharmed. Again, make sure this person is aware and willing to take this responsibility.

Now, you should also think about who will take care of the money or property that your children inherit, to create a checks-and-balances system that separates control of your children from control of their money. Your children can inherit their money as soon as they come of age, or you can create a trust for them.

Step 5: Update Beneficiaries for Life Insurance

If you have purchased a life insurance policy the sum assured will go to your beneficiary in event of your untimely demise. You need to keep your beneficiary updated. Perhaps you got the policy when you were single and now you are married, and have children. So take a minute to ensure the beneficiary for your policy is the person who you actually want to receive the money from the policy.

Step 6: Update Beneficiaries for Financial Accounts

Banks and brokerage firms also let you name a beneficiary who gets access to your account when you pass on. And in fact, those beneficiary forms override your will. So if you don't want someone to get the money from your accounts and investments, better make sure their name is not on your account.

Take the time today, and regularly, to make a list of all your accounts and review your beneficiaries. Do this every few years, and after every major life event, including marriage, divorce, death, birth, and adoption.

Sitting across one of our investment consultants in a meeting room at PersonalFN, sipping his cup of tea, Mr Sharma described himself as a spendthrift. As vice president at a reputed IT firm in Pune, he was used to a luxurious lifestyle. Thanks to his healthy pay cheque, he could afford it. Nevertheless, he was upset with his spending habits. With 15 years left till retirement, Mr Sharma was growing anxious about that phase of his life…

Mr Sharma has an 18-year-old son and a daughter who's 16. He has set aside some money in bank fixed deposits and gold for their higher education and marriages. He thought his monthly contribution in an employee provident fund (EPF) and pension plans would be sufficient to take care of his post-retirement needs, but he now knows this isn't enough.

Until now, he had never given serious thought to his own retirement.

Could he save enough for his retirement? Would he be able to maintain the same lifestyle post retirement? What uncertainties could impact his income? What if his kids do not look after his wife and him during the retirement years? Such questions bothered Mr Sharma.

It's easy to become so engrossed in our social and business obligations that we ignore the importance of planning for our future needs. To be sure, planning for your future is as important as providing for your current needs. But what future events do you need to plan for?

The obvious answers are buying a house and providing for your child's future. You may also be hoping for a holiday abroad. No doubt, these are important and must be planned, but the most important financial planning activity, and one of the most neglected, is your own retirement.

One reason for this is people believe they can rely on their savings. Perhaps you've saved a bulk of money in your bank's savings account and in fixed deposits. You might have investments in stocks and mutual funds. If you are salaried, you'll have your contribution to EPF and PPF. But even this might not be enough.

Here we have outlined five steps that can help you determine the amount that you will need to be put aside to take care of your post-retirement needs.

Step 1: Decide the age at which you wish to retire

The most common retirement age is 60, but it depends on you. You may want to work beyond 60 or you may wish to retire at 55. Estimating your retirement age is the first step. Once you retire, your regular income stream will stop or reduce considerably (in case you are eligible for pension) and you'll depend on your savings and investments to take care of your daily lifestyle needs.

Once you have zeroed in on your retirement age, deduct your current age from it to calculate how many years until your retirement. This is how much time you have to plan for your retirement.

Step 2: Determine your post-retirement expenses

It is important to make an accurate estimate of how much you will require to maintain your present lifestyle post retirement. For this, first ascertain your annual expenses at present. Then factor in inflation to calculate how much your present expenses will amount to at the time of retirement. This is the amount you will need every year to meet your post-retirement expenses.

Assume that your present annual expenses amount to Rs 120,000. If you have 25 years to retire and expect the rate of inflation to be around 7%, your annual expense then will be approximately Rs 651,292.

Step 3: Get a check on your annual savings and find their future value

How much you are able to save every year after meeting all your expenses plays a crucial role in building your retirement corpus. Your saving is the surplus after deducting your annual expenses from your net income. The ideal way is to earmark a portion of your savings for retirement. This part of your savings should be treated as sacred and should not be disturbed unless it is an emergency.

After estimating how much you will be able to save annually, the next step is to find out its future value. To determine this, you have to factor in the expected rate of return on your investment. This is the value of your savings or investments at the time of retirement.

For instance, if you are able to save Rs 100,000 annually for your retirement, and you invest this at a 10% rate of return per annum, then you will have a retirement corpus of approximately Rs 9,834,706 in 25 years.

Step 4: Find out whether your savings can cater to your post-retirement expenses

To extend the above illustration, let us assume that you invest your retirement corpus (in this case Rs 9,834,706) to generate a post-retirement income. The investment is made in an avenue that offers, say, an 8% rate of return annually (rate of return may vary depending on your choice of investment avenues). So, at the end of every year, you will earn a return of Rs 786,776. This is your post-retirement income from your investments.

If your post-retirement income is higher than your post-retirement expenses (in this case Rs 651,292, from Step 2), your savings and investments are enough to cater to your post-retirement needs. But if they are lower, then you have to make prior arrangements to plug this shortfall.

Step 5: If necessary, engage the services of an unbiased financial planner

Admittedly, the above steps are a bit confusing and complicated. An honest and competent financial planner can help. Your financial planner should be able to come up with a relatively accurate retirement corpus, which can help you plan your retirement. More importantly, the planner can advise you how to go about investing your savings based on your risk profile.

Remember that in the process of determining your retirement corpus, you have to make few crucial assumptions - such as the rate of inflation or the rate of return on your investments. These factors are not fixed and are bound to fluctuate over time (depending on how much you can save or spend in a given year).

You must regularly review your calculations to ensure that you are always on track to achieve your retirement corpus. Your financial planner should be prepared to help you with this.

Now let's see what you should do while investing in order to achieve a hassle free retirement.

Have a proper investment plan

As a mutual fund research and financial planning company, our views on the financial planning process are inherently positive.

This is because we've seen clients go through growth phases - not only financial growth, but personal growth. When clients come to us, the state of their investments ranges from the slightly unstructured to the completely messy. If you don't know where your money is, you won't know what it's doing. Our clients come to us slightly confused, unable to articulate their financial goals, and looking for financial help. They leave with a sense of empowerment, discipline, and clarity - not to mention a solid plan they can follow.

If you don't want to hire a planner or an advisor, do it yourself. Just be sure you have a proper investment plan. The plan should cover not just retirement, but for all your life goals - your child's education and marriage, your second home, foreign vacations, etc.

Diversify and rebalance your portfolio

Don't make the mistake of thinking that it's all about equity and property. Different asset classes such as debt and gold are also important.

How you allocate your money across asset classes has nothing to do with your age. But it's got everything to do with your investment time horizon.

If you have a goal that's less than 3 years away, you need to be predominantly in debt/fixed income products. This is not the time for equity. If your goal is between 3 and 5 years away, you can have part exposure to equity, up to 45%, with 15% in gold, and 40% in debt / fixed income. If your goal is more than 5 to 7 years away, you can have anywhere between 45% to 60% in equity, with 15% in gold and the rest in debt. For a goal 7-10 years away or more, you can opt for 75% in equity, 15% in gold and 10% in debt.

Remember that as your goal-time horizon changes; your asset allocation must change. Rebalance your investments to reflect the right asset allocation as per the time horizon to your financial goals.

Save Now, Spend Later

It's true.

The more you invest today, the more (much more) you'll have to spend when you're 60.

The numbers are straightforward: If you invest Rs 10,000 per month for 10 years, you will build a corpus of around Rs 23 lakhs assuming a growth rate of 12% per annum. Increase this to Rs 12,000 per month, for the same time period i.e. 10 years, and you'll build a corpus of Rs 27.60 lakhs. Increase this to Rs 15,000 per month, and you've got Rs 34.50 lakhs.

Get a grip on your spending, save more, invest more, to retire earlier and richer.

Don't spend more than you have to on the taxman

Paying taxes can sometimes leave you with a 'what a waste of money' feeling.

In order to avoid this feeling, and also to save and invest more money, go through the following little tips:

Make the most of all your deductions Save medical bills in a shoebox throughout the year and claim Rs 15,000 worth of deductions Buy medical insurance (for the medical insurance) and claim the deduction on the premium paid Claim the benefit of principal and interest repayment in case you have a home loan If you live in a rented apartment, see if you can restructure your salary to claim the maximum HRA possible Invest in PPF and don't withdraw from it until you retire

Remember, a penny saved (in this case from the tax man) is a penny earned.

Planning for your retirement might seem like a tedious task, but you need to keep it simple. Once you create your plan, you should form a habit of investing regularly. Select good mutual funds and other investment instruments, with a strong track record. Moreover don't try to time the market, or churn your portfolio unnecessarily.

Time is a valuable asset and you should make the most of it.

Sitting across one of our investment consultants in a meeting room at PersonalFN, sipping his cup of tea, Mr Sharma described himself as a spendthrift. As vice president at a reputed IT firm in Pune, he was used to a luxurious lifestyle. Thanks to his healthy pay cheque, he could afford it. Nevertheless, he was upset with his spending habits. With 15 years left till retirement, Mr Sharma was growing anxious about that phase of his life…

Mr Sharma has an 18-year-old son and a daughter who's 16. He has set aside some money in bank fixed deposits and gold for their higher education and marriages. He thought his monthly contribution in an employee provident fund (EPF) and pension plans would be sufficient to take care of his post-retirement needs, but he now knows this isn't enough.

Until now, he had never given serious thought to his own retirement.

Could he save enough for his retirement? Would he be able to maintain the same lifestyle post retirement? What uncertainties could impact his income? What if his kids do not look after his wife and him during the retirement years? Such questions bothered Mr Sharma.

It's easy to become so engrossed in our social and business obligations that we ignore the importance of planning for our future needs. To be sure, planning for your future is as important as providing for your current needs. But what future events do you need to plan for?

The obvious answers are buying a house and providing for your child's future. You may also be hoping for a holiday abroad. No doubt, these are important and must be planned, but the most important financial planning activity, and one of the most neglected, is your own retirement.

One reason for this is people believe they can rely on their savings. Perhaps you've saved a bulk of money in your bank's savings account and in fixed deposits. You might have investments in stocks and mutual funds. If you are salaried, you'll have your contribution to EPF and PPF. But even this might not be enough.

Here we have outlined five steps that can help you determine the amount that you will need to be put aside to take care of your post-retirement needs.

Step 1: Decide the age at which you wish to retire

The most common retirement age is 60, but it depends on you. You may want to work beyond 60 or you may wish to retire at 55. Estimating your retirement age is the first step. Once you retire, your regular income stream will stop or reduce considerably (in case you are eligible for pension) and you'll depend on your savings and investments to take care of your daily lifestyle needs.

Once you have zeroed in on your retirement age, deduct your current age from it to calculate how many years until your retirement. This is how much time you have to plan for your retirement.

Step 2: Determine your post-retirement expenses

It is important to make an accurate estimate of how much you will require to maintain your present lifestyle post retirement. For this, first ascertain your annual expenses at present. Then factor in inflation to calculate how much your present expenses will amount to at the time of retirement. This is the amount you will need every year to meet your post-retirement expenses.

Assume that your present annual expenses amount to Rs 120,000. If you have 25 years to retire and expect the rate of inflation to be around 7%, your annual expense then will be approximately Rs 651,292.

Step 3: Get a check on your annual savings and find their future value

How much you are able to save every year after meeting all your expenses plays a crucial role in building your retirement corpus. Your saving is the surplus after deducting your annual expenses from your net income. The ideal way is to earmark a portion of your savings for retirement. This part of your savings should be treated as sacred and should not be disturbed unless it is an emergency.

After estimating how much you will be able to save annually, the next step is to find out its future value. To determine this, you have to factor in the expected rate of return on your investment. This is the value of your savings or investments at the time of retirement.

For instance, if you are able to save Rs 100,000 annually for your retirement, and you invest this at a 10% rate of return per annum, then you will have a retirement corpus of approximately Rs 9,834,706 in 25 years.

Step 4: Find out whether your savings can cater to your post-retirement expenses

To extend the above illustration, let us assume that you invest your retirement corpus (in this case Rs 9,834,706) to generate a post-retirement income. The investment is made in an avenue that offers, say, an 8% rate of return annually (rate of return may vary depending on your choice of investment avenues). So, at the end of every year, you will earn a return of Rs 786,776. This is your post-retirement income from your investments.

If your post-retirement income is higher than your post-retirement expenses (in this case Rs 651,292, from Step 2), your savings and investments are enough to cater to your post-retirement needs. But if they are lower, then you have to make prior arrangements to plug this shortfall.

Step 5: If necessary, engage the services of an unbiased financial planner

Admittedly, the above steps are a bit confusing and complicated. An honest and competent financial planner can help. Your financial planner should be able to come up with a relatively accurate retirement corpus, which can help you plan your retirement. More importantly, the planner can advise you how to go about investing your savings based on your risk profile.

Remember that in the process of determining your retirement corpus, you have to make few crucial assumptions - such as the rate of inflation or the rate of return on your investments. These factors are not fixed and are bound to fluctuate over time (depending on how much you can save or spend in a given year).

You must regularly review your calculations to ensure that you are always on track to achieve your retirement corpus. Your financial planner should be prepared to help you with this.

Now let's see what you should do while investing in order to achieve a hassle free retirement.

Have a proper investment plan

As a mutual fund research and financial planning company, our views on the financial planning process are inherently positive.

This is because we've seen clients go through growth phases - not only financial growth, but personal growth. When clients come to us, the state of their investments ranges from the slightly unstructured to the completely messy. If you don't know where your money is, you won't know what it's doing. Our clients come to us slightly confused, unable to articulate their financial goals, and looking for financial help. They leave with a sense of empowerment, discipline, and clarity - not to mention a solid plan they can follow.

If you don't want to hire a planner or an advisor, do it yourself. Just be sure you have a proper investment plan. The plan should cover not just retirement, but for all your life goals - your child's education and marriage, your second home, foreign vacations, etc.

Diversify and rebalance your portfolio

Don't make the mistake of thinking that it's all about equity and property. Different asset classes such as debt and gold are also important.

How you allocate your money across asset classes has nothing to do with your age. But it's got everything to do with your investment time horizon.

If you have a goal that's less than 3 years away, you need to be predominantly in debt/fixed income products. This is not the time for equity. If your goal is between 3 and 5 years away, you can have part exposure to equity, up to 45%, with 15% in gold, and 40% in debt / fixed income. If your goal is more than 5 to 7 years away, you can have anywhere between 45% to 60% in equity, with 15% in gold and the rest in debt. For a goal 7-10 years away or more, you can opt for 75% in equity, 15% in gold and 10% in debt.

Remember that as your goal-time horizon changes; your asset allocation must change. Rebalance your investments to reflect the right asset allocation as per the time horizon to your financial goals.

Save Now, Spend Later

It's true.

The more you invest today, the more (much more) you'll have to spend when you're 60.

The numbers are straightforward: If you invest Rs 10,000 per month for 10 years, you will build a corpus of around Rs 23 lakhs assuming a growth rate of 12% per annum. Increase this to Rs 12,000 per month, for the same time period i.e. 10 years, and you'll build a corpus of Rs 27.60 lakhs. Increase this to Rs 15,000 per month, and you've got Rs 34.50 lakhs.

Get a grip on your spending, save more, invest more, to retire earlier and richer.

Don't spend more than you have to on the taxman

Paying taxes can sometimes leave you with a 'what a waste of money' feeling.

In order to avoid this feeling, and also to save and invest more money, go through the following little tips:

Make the most of all your deductions Save medical bills in a shoebox throughout the year and claim Rs 15,000 worth of deductions Buy medical insurance (for the medical insurance) and claim the deduction on the premium paid Claim the benefit of principal and interest repayment in case you have a home loan If you live in a rented apartment, see if you can restructure your salary to claim the maximum HRA possible Invest in PPF and don't withdraw from it until you retire

Remember, a penny saved (in this case from the tax man) is a penny earned.

Planning for your retirement might seem like a tedious task, but you need to keep it simple. Once you create your plan, you should form a habit of investing regularly. Select good mutual funds and other investment instruments, with a strong track record. Moreover don't try to time the market, or churn your portfolio unnecessarily.

Time is a valuable asset and you should make the most of it.

'…but in this world nothing can be said to be certain, except death and taxes.'

- Benjamin Franklin

Everyone engages in economic activity, and most of us work really hard to earn a living. Unfortunately, our earnings mean we have to work that much more…that is, if we want to minimise our tax burden.

Many of us think of taxes as simply a chore, something to attend to once a year. And some of us, especially the younger ones, put off tax planning till the eleventh hour.

Of course, it's never too soon to start tax planning. But it can be too late. With just a couple of months left before the close of the financial year, we at PersonalFN believe the best time to start the annual tax-planning exercise has passed.

Investments for the purpose of tax planning (the ones you can deduct from your gross total income under Section 80C) are no different from conventional investments. They require the same degree of effort and planning. Likewise, it is vital that tax-saving investments are in line with your risk profile.

And starting early gives you a sufficient amount of time to diversify your tax-saving portfolio.

To help you understand how to better allocate assets from among the gamut of tax saving instruments, we have divided the tax-paying community into three distinct age profiles.

The reason we have chosen age as the distinguishing criteria is because an individual has various life goals that needs to be planned for and attained at each stage of life. It is one's commitment level at each stage of life that would significantly impact one's appetite for risk and therefore the return expectation.

If you are 25-35…

You are in the prime of your life, probably married, and may even have children. If you are the sole breadwinner in the family, then your position in the family assumes even more importance. If you aren't insured already, then getting a life insurance cover should be of utmost priority. Buy a simple term insurance plan to get maximum life cover at a low premium. The premium you pay on your term insurance plan qualifies for deduction under section 80C.

Given that you have more years on your side, a tax-saving mutual fund (ELSS) fits well into your risk profile. You can consider investing a higher amount in ELSS.

We always recommend clients start planning for retirement at very early stages of their life. You can open a Public Provident Fund (PPF) account and start contributing small amounts to it every month. This will be over and above your monthly contribution to your Employee Provident Fund (EPF), which might be automatically deducted from your salary by your employer.

Being a young salaried individual, you might want to consider buying a house property at this stage. If you take a home loan, you can claim a tax benefit on the interest (under section 24b) as well as on your principal repayment (under section 80C). If residing in the new house immediately isn't an option just yet, you can lease it out to earn a regular secondary income.

If you are 35-45…

You may be fairly settled professionally and personally. During this phase, you need to review your insurance portfolio. You may need to consolidate your portfolio by taking on additional insurance as you move up the 'lifestyle chain' and your personal net worth witnesses a surge. With increased responsibility, the insurance cover you bought ten or even five years back might no longer be sufficient to cover your life.

At this stage, a significant exposure to ELSS can still be considered. With age on your side, ELSS is a decent option to boost your capital through equity. This can help you meet some of your long-term financial goals.

You can continue investing in your PPF and even add small amounts in avenues such as NSC (National Savings Certificates) or tax-saving bank fixed deposits for the next five years. Consider investing equally in these instruments to benefit from interest rate movements in either direction. The interest rate in NSC and tax saving bank fixed deposits is locked for five years, while the PPF interest rate is revised at regular intervals with prospective effect.

For instance, the current interest rate on five-year NSC is 8.5% per annum, while PPFs offer 8.7%. If interest rates are expected to fall over the next one year, and even if the PPF rate is revised downwards to, say, 8% per annum, your investment in NSC will continue to earn 8.5% for next five years.

However, if the scenario were to turn and rates went up, then your PPF investment would benefit as the rates could be revised upwards, whereas the NSC and tax saving bank fixed deposits rates are locked.

Moreover, if you have one to three years left before your PPF matures, you may consider increasing your PPF allocation as you would be getting your money back a lot sooner than the minimum seven years period.

If you are over 45…

Your insurance needs are probably taken care of already. If they aren't then, you can bridge the shortfall by taking some additional term insurance.

As your retirement is less than 15 years away, your investments need to be more retirement oriented towards. A mix of pension benefit and the money that you have accumulated in your PPF account are meant to take care of your retirement needs. At this stage, your PPF account is probably close to maturity; in which case, it makes more sense to increase your investments in it. You not only receive a tax benefit, but can also make withdrawals relatively sooner.

Moreover, you can invest a smaller amount in ELSS provided you aren't too close to retirement; in which case, the risk-return profile of a mutual fund scheme would work against your own.

To reiterate, while you have a host of tax-saving investment options available under Section 80C, following an asset allocation model (for your tax-planning exercise), in accordance to your age, ability to take risk, and investment horizon is going to make your tax-saving portfolio more prudent.

Model Asset Allocation while saving tax under Section 80C Age Estimated Life Insurance Premium (Rs) [only term plans] EPF/PPF/NSC/ 5-Yr Bank FDs ELSS (Rs) Total (Rs) 25-35 15,000 30,000 105,000 150,000 35-45 22,500 52,500 75,000 150,000 45-55 30,000 75,000 45,000 150,000 55 and above 30,000 90,000 30,000 150,000 Source: PersonalFN Research

As a prudent tax-planning practice, look beyond the ambit of Section 80C. You may easily exhaust the Rs 150,000 limit and still find it insufficiently reduces your tax liability. Instead, access the other deductions available under Section 80 and the exemptions too.

PersonalFN thinks that, even as you employ the assistance of a tax consultant, a self-study approach to your tax planning is necessary. You should be well versed with at least those tax provisions that will directly affect you. And on this note, we wish you all Happy Tax Planning!

Editor's Note: As you may remember the Wealth Builders Club promises to be a one-stop solution for all your wealth related ideas. In an effort to make sure every avenue of wealth is covered, we noticed that there was one prominent savings opportunity that we had not as yet addressed - and that is frequent flyer miles. These miles can essentially be a second currency if collected and used wisely. There are pitfalls that go with it, actually, just as with any kind of credit, but we will show you in our special report below that they can be quite beneficial to your bottom line.

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We travel not to escape life, but for life not to escape us. - Anonymous

We have one life to live.

Many of us want to fly around the world, explore places, and obtain the unique experiences that come with each destination - be it the culture, cuisine, music, wildlife, and much more.

Those who've had their passport stamped will agree: travelling offers a host of benefits. You meet interesting people and make friends for life. You share special moments and amazing adventures with loved ones. You can enjoy luxurious pampering and much-needed relaxation, or you may stumble across humble towns with heart-warming locals.

But no matter what kind of travel you pursue, you learn about life through these experiences and your interactions with the people you meet along the way. But along with these benefits, one hopes you also benefit from the accumulation of frequent flyer miles (FFM)…

Whether for business or leisure, if you fly, you should consider signing up for a frequent flier account to accumulate FFM points, which you do by flying with particular airlines, using specific credit cards, and booking rooms with hotels that have partnered with the airline.

Each FFM point equals a monetary value; the more you fly, the more points you earn, and the more rewards you enjoy. You can redeem your points to save on airfare, upgrade seats, buy merchandise, and many other things.

Now, you're probably already aware of these programs, but you many not know how to best employ your FFM points.

Without further ado, here's how to get more mileage out of your frequent flyer miles:

Each airline company offers different frequent flyer programs. Whichever airline you have an account with, if you wish to utilise your miles to travel, it is always better to book redemption seats as soon as possible; as airlines allot only a few seats for redemption purposes.

Call up the airline's customer care and don't merely rely on the online portal for information, as the airline may accommodate a seat if you pursue them rightly. Spending FFM on airline tickets will be more effective if your preferred date and time of travel is not rigid, keeping in mind the limited availability of redemption seats. For domestic travel, Air India has very good availability of redemption seats, sometimes four or more economy seats in a flight.

Don't be trigger-happy when redeeming points. Check the number of points that each perk/offer will consume. If a low-grade perk requires too many points, pay with cash instead. Some airlines permit redeeming FFM for merchandise or access to airport lounges. In any case, assess the number of points that will need to be redeemed. Many of these offers simply aren't worth the points.

Be aware that, though you may redeem FFMs for free airfare, you might have to pay for airport taxes and charges. Sometimes these hidden costs are very high, turning the entire essence of using FFM for a free ticket sour.

Some airlines allow frequent flyers to accumulate points from transactions on certain credit cards used to dine out, book hotels, etc, allowing you to earn points while you make merry. Jet Airways, for instance, has partnered with credit card issuers, magazines, retail stores, hotels, and restaurants.

Some credit cards also allow you to use the credit card points to buy flight tickets. Citibank's PremierMiles credit card allows you to redeem your credit card points directly with online travel booking portals. A lot of banks - such as HDFC Bank, State Bank of India, ING, and IndusInd - have their own portals where you can redeem your points to buy flight tickets.

Several international airlines have alliances with one or more domestic airlines. Watch out for these tie-up offers to stretch your FFM. Keep this in mind the next time you book tickets for connecting flights. Though the airline you frequently fly with might not fly a particular route (for instance, from Mumbai to Bangalore), its partner or alliance airline might. Etihad is the majority owner of the Jet Airways' JetPrivilege frequent flyer program, so you could use Etihad miles to travel domestically on Jet Airways.

If the airline company permits booking another individual's ticket from your frequent flier account, club miles with your spouse or look at opening a family-pool account. JetPrivilege (the FFM for jet airways) offers you a family pool, called MyFamily+, to allow the miles of the entire family to be pooled into one account and used for redemption tickets.

Redeem FFM points before they expire. Every airline has different expiration timelines and fine print of rules and regulations. Don't hoard your FFM points, hoping to redeem them all for a ticket to your dream destination. Double check with your airline customer services department about its rules and keep track of your FFM account frequently.

All jet-setters should study airline loyalty programs like the Holy Scriptures and do the math to avoid frivolous point redemption. It can be daunting initially, but eventually you'll master the art of managing the FFM points.

“Retirement: It's nice to get out of the rat race, but you have to learn to get along with less cheese.” Gene Perret

Like most people, I began to think about retiring at about the same time as I started a family. I was relatively young - 29 at the time - and my expenses were increasing quickly. However, my income was increasing slowly, which is typical of most salaried jobs.

I knew that if I worked my way up the corporate ladder, I'd eventually be able to own my own house and give my children what they needed: food, clothing, an education, and some little comforts.

I also knew that I would not be able to afford to send them to private schools, pay for horse riding and tennis lessons, or take them on exotic vacations. That didn't matter so much. I didn't have those things when I was growing up, and I didn't miss them.

But what I couldn't adjust to was the realization that I would probably never be able to stop working. Even back then, in the mid - 1980s, when everyone in my country believed retirement was a national entitlement, a little arithmetic proved to me that it was not going to happen.

I could have induced myself to be happy with the idea of working till I keeled over. But I didn't want to. I wanted to be able to retire. And not in 40 years. I wanted to retire sooner than that. Much sooner.

So at the tender age of 29, I set a goal: to make enough money to buy a house and two cars and have a nice wad of cash sitting in the bank…as soon as possible.

In my book, Automatic Wealth, I explained how I achieved that goal. By getting serious about my income, I was able to pay off a mortgage on a $175,000 house, buy two decent cars for cash, and have something like $100,000 in my bank account.

I did it in about three years, if memory serves. And you might think that made me happy. It didn't. I felt anxious. Worried. I didn't feel rich, and I certainly didn't feel like I could retire.

That house I had worked so hard to own seemed suddenly too small. Our Hondas seemed too dull. And it was clear that a nest egg of $100,000 wasn't going to be enough to pay for college for our three kids, not to mention my retirement.

“Okay,” I thought. “I simply underestimated how much I need to retire.”

So I set a new, much more ambitious, goal. I would swap my starter home for a fancy one in an upscale neighbourhood, my starter cars for luxury vehicles, and boost my retirement savings to a cool million dollars.

Three or four years later, I hit my marks. We were living in a spacious $600,000 home in a “gated” community. We owned two Lexus sedans. And I had more than a million socked away.

I had the goodies to prove I had “made it,” and enough in the way of “liquid” assets to take care of the future. I should have been thrilled. I wasn't.

For one thing, I had bigger bills to pay. I had no mortgage, but my property taxes at $12,000 a year were equal to the mortgage payments on my first house. My kids were going to private schools - another $12,000 a year. And everything we were buying - from furniture to vacations - was more costly than what we used to buy.

So there I was, a millionaire but still worried about money. And to make matters worse, my house seemed suddenly too far from the beach and my luxury cars too commonplace.

So I upped the ante again. This time, I was going to really do it. A multimillion - dollar house, super - expensive cars, and at least $10 million in savings and investments before I reached my 39th birthday.

Once again, I hit my goal.

And so I retired. I stopped working and started living off my interest and investment income. I spent 18 months doing something I loved - writing short stories.

Some of them got published!

I won three literary prizes!

And I earned a total of $900 (barely Rs 50,000).

Meanwhile, my property taxes ballooned to $100,000 a year and upkeep on the house was another $30,000. Our $60,000 cars were very ordinary in our new neighbourhood. To impress my neighbours, I‘d have to spend much more on everything - clothing, furniture, etc., etc. That meant I had to go back to work.

I am sure this sounds disgustingly self - indulgent to you. It was. That's my point.

I finally recognized that something was seriously wrong. And it wasn't with the world. It was with me.

The secret to feeling “rich” enough to retire happily, I realized, was not just to have enough money to live comfortably. More important, it was learning to be satisfied with what you have. In other words, the trick to financial independence was to be content with some reasonable level of wealth.

It wasn't easy for me, but I forced myself to stop ratcheting up my desires. I decided I was going to be happy with what I had. And the amazing thing was that the moment I decided that, I was!

I know now that I could have been happily rich years and years ago. All I needed to do was be happy with the things I had and with what I could afford to pay for out of the money I had put aside. That way I could enjoy my life without worrying about working. In other words, I could retire.

So that is the most important thing about the retirement game: training yourself to be happy with a reasonable level of wealth.

But that raises the question: What is a reasonable level of wealth?

I answered that question in Automatic Wealth - but I made it unnecessarily complicated. I suspect lots of folks who read it thought, “This sounds good, but there's no way I'm going to do all that.”

Since then, I've simplified my answer. My current thinking is that your primary financial goal should be to (1) own your house outright, (2) have no debt, and (3) have sufficient savings to pay for your expenses.

The main factor in this equation is the house. Because the cost of your house is what determines most of your other expenses. Not only the cost of your taxes and upkeep and so on, but also, as I suggested above, the cost of the cars you are likely to buy, the amount of money you will spend on leisure - time activities and “things,” and so on.

Once you have an affordable house that makes you happy, getting completely out of debt is the next big thing. That means paying off the house as quickly as you can, as well as anything else you may have borrowed money for.

The rest of the program is to get that retirement account funded.

How much will you need in your retirement account? I've already given you a way to figure it out…

Take the cost of the house you can be happy to retire in. Multiply that by 40% to get what it will cost you, in after - tax income, to live. Given a reasonable rate of return on your investments, you can now determine how much of a nest egg you will have to have in order to generate the amount of annual, after - tax income you will need.

[For a shortcut to your retirement number, use the Retire Rich calculator]

Once you've done that, you will realize what I did when I first ran the numbers 30 years ago: With a normal income, you will never earn enough money to put that much aside.

I have made this point in every book I have written about wealth building. But none of the politically correct, bestselling authors want you to believe this. They have made their millions by convincing their readers that they can retire simply by scrimping and saving. That simply isn't true. In fact, it's a big, fat lie.

If you want to retire while you're still young enough to enjoy it, hear this: You must create an extraordinary income for yourself.

There are only two ways to create an extraordinary income: as an entrepreneur or as an intrapreneur.

I have written extensively on both of these subjects, so I won't get into them here. Suffice it to say that of the several dozen people I know who can afford to retire, about two - thirds of them are entrepreneurs and one - third are intrapreneurs. I know nobody rich enough to retire who has earned his money by being an ordinary employee.

So that's the formula:

Buy the most affordable house that will make you happy. Pay off your mortgage - and any other debts you may have - as fast as you can (and don't acquire any new debts). Get yourself on a trajectory to enjoy an extraordinary income through entrepreneurship or intrapreneurship - and start socking money away.

This is a great time to get started. Although much of the world is in financial peril, some businesses (such as information publishing) are growing in leaps and bounds. Now is the time to get in - either by creating a side business or by becoming an invaluable employee of a business someone else owns.

Get started now, and you will be able to retire in 5 to 15 years.

You may not want to retire yet. You may be having so much fun that you'll decide to keep working. But it will be your choice. And that's the idea, isn't it? To have that choice?

Nassim Taleb, author of The Black Swan, has come out with a book called Antifragile. You may have heard about it. If not, I recommend it. It's one of those rare books in which I find myself savouring every line - as much as I enjoy a dinner of macaroni and cheese.

Antifragile can be seen as a sequel to The Black Swan, which can be seen as a sequel to Fooled by Randomness.

Taleb's argument is that (a) people underestimate how much randomness there is in life (Fooled by Randomness), (b) the most important events are often unpredictable (The Black Swan), and © it is possible not just to protect yourself from such events but also to benefit from them by being antifragile.

If I hadn't read Taleb, I'm sure I would have resisted his ideas. I don't like the idea that you can't predict everything. I'd prefer to think that if you had enough data and enough computer power, you could.

But Taleb is a very seductive writer. He loves to poke fun at conventional wisdom - whether it is on the subject of health (cholesterol is bad), economics (the Fed can manage the economy), or traffic regulations (more streetlights mean more safety).

In Antifragile, he picks up on the “Black Swan” idea. He points out that there are some things in life we can predict. Others, we can't. We can predict when a comet might pass into our atmosphere. Or how fast a DC-9 plane will fall from 10,000 feet.

But try as we might, we cannot predict when an overvalued stock market will crash. Nor can we predict when the global community will lose faith in the dollar.

We can't predict “Black Swans,” Taleb argues. But what we can do is determine whether something might be destroyed by one. A glass vase, for example, is likely to be destroyed in an earthquake. A stuffed bear is more likely to survive.

So rather than spending time trying to predict the unpredictable, we should try to understand whether our practices, programs, and possessions could be destroyed by Black Swans. And if they can, we should work to change that. One thing we can do is find ways to make them more robust. More likely to survive catastrophic events. An even better thing we can do - and this is the core message of Antifragile - is to find ways to profit from Black Swans.

Robustness, Taleb says, is the quality of being able to endure ruinous events. A very healthy person, for example, is more likely to survive pneumonia than someone who is sickly.

I very much enjoy my subscription to Mark's letters. Subscriber DC. But nature has given us the ability not only to survive some stressful events but also to benefit (profit) from them. Surviving the chicken pox, for example, makes you more resilient - even sometimes immune - to a second exposure. His thesis is that, when it comes to the economy (among other things), we should do things that make us antifragile to economic disaster. This is more helpful than trying to predict catastrophes.

I'm sure you are thinking that this is just common sense. But as Taleb points out in Antifragile, this is the opposite of what many financial experts do.

Many “market experts,” for example, spend their careers trying to predict the ups and downs of the market. Most technical analysis is based on the same presumption.

It is inspiring to read tales about people who get rich by “foreseeing” a market move. But Taleb and others who have studied these stories have concluded that these are cases of luck, rather than science.

Getting back to the risk of a stock market crash or the dollar losing its global credibility: According to Taleb, we cannot predict when or even if these events will occur. But we can say that, if they happen, certain institutions and investors globally will be wiped out. In other words, we can observe who is financially fragile.

As a wealth builder, you have a choice: Adhere to the idea that markets can be timed and search out the best models for predicting them. Or accept Taleb's thesis and become an antifragile investor.

Growing to Fear Black Swans

I knew little about risk theory when, in my early 30s, I decided to become wealthy. But even then, I understood that predictions never seemed to work all the time. So, rather than trying to become an expert at stocks and bonds, I made a plan. I see now that my plan was aimed at becoming antifragile.

I bought safe bonds and index funds and real estate. I eventually bought gold too, but not as a means to make money (which happened). Instead, as a store of wealth and a hedge against inflation. I collected art for the same reason. I figured that the value of my art might go up while other assets were going down.

And all the while, I kept investing in small businesses that I understood and could control as the main shareholder. This gave me not only the chance of great future gains but also a steady flow of income. I could then devote that income to growing my passive asset holdings.

I bought gold because I had been reading Bill Bonner. This was back when gold was trading at about $450 per ounce. Bill's thoughts on the economy scared me. Without gold in my portfolio, I felt fragile. So I bought gold coins, not to profit from a price surge, but to protect myself.

Likewise, I got out of the rental real estate market when prices were getting too high. Everyone was sure prices would keep rising. I wasn't sure. But if they did crash - as some of Agora's writers were predicting - I wanted to be safe. So I got out of the market around 2006.

I got into gold and out of real estate to protect myself from a possible financial disaster. Buying gold cost me money. I saw it as an insurance premium. And a cheap one at that. Getting out of the real estate market felt like I was giving up future profits. But I considered that too a sort of premium - to protect the profits I'd already made from the properties I owned.

Using Taleb's terms, buying gold and selling real estate was a move to make myself less fragile. Getting out of real estate for two years made me robust. Buying gold made me antifragile.

Let's Look at Our Programs

I'd like to move the conversation to Common Sense Living's wealth-building programs. The question we must ask is, “Are we safe from economic and financial Black Swans?” And “Are we in a position to profit from them?”

10 Signs of Financial Fragility You are betting that the bull market will continue for years to come.

You have all of your stocks and bonds with one brokerage.

You are betting that the dollar will collapse in some number of years.

You have all of your money in stocks, bonds, gold, etc.

You have full faith in your broker/insurance agent/financial planner.

You have or are planning to given up your active income.

You don't have cash and gold set aside for unlikely financial challenges or misfortunes.

You have no tangible, portable, non-reportable assets such as gold coins, fine art, rare stamps, etc.

You have no legal and financial documents to protect your estate against legal challenges and wrongful taxation.

You don't believe you need protection against identity theft, credit card fraud, invasions of Internet privacy, etc. As you know, our strategy at the Wealth Builders Club is a multichannel approach. It involves seven investment classes (cash instruments, bonds, growth stocks, value stocks, real estate, gold, and options).

We provide specific advice in each of these areas. And we also provide asset allocation models. These correspond to how much money you have and how many years you have before you “retire.”

In every sector, we find ways to reduce risk. When buying bonds, we buy debt that seems resistant to economic downturns. When buying stocks, we favour companies that will endure even if the stock market drops. And we avoid - at all costs - speculations and investment picks that are based on predictions.

Thank you for your wonderful newsletter. It is not only educational, but also fun to read. Subscriber DI. All of these things help make us robust investors. We are protecting ourselves against the Black Swans of the future. I've been doing this for a long time, so I have more safeguards than most Wealth Builders Club readers likely do. I have, for example, more than seven streams of income from private businesses. This money flows into my bank accounts every year. Likewise, I have income from more than 30 rental real estate properties. I also have a start-over fund hidden in case I ever need it. And I hoard cash.

As I said, the program you get with Wealth Builders Club is comprehensive. If you are not yet rich and feel at risk, you should certainly check out the ideas we share in Creating Wealth and the extra programs we offer in the Wealth Builders Club.

[If you're not already a member, we are opening membership soon…]

Meanwhile, consider the following:

Best Ways to Achieve Financial Antifragility Diversify your assets into at least four and at best six of the following categories: cash, bonds, stocks, gold, options, and real estate.

Invest in both growth and value stocks. I would define a growth portfolio as robust because of the quality of the stocks and the trailing stop-loss feature. I would define value stocks as antifragile because of the long-term approach, the policy of buying more stock during downturns, and the fact that these kinds of stocks rise quickly after drops.

Create a “start-over” fund that is equal to at least six months' income. Also, have a “start-over” plan. It must be enough to cover your projected costs of starting over.

Develop your cash-producing assets (options, performance stocks, bonds, and rental real estate) so that, in time, each one will give you ample yearly income.

Don't give up your active income. If you don't have a job now, get one, even if the income is small. (For ongoing ideas on income opportunities, join the Wealth Builders Club, if you haven't already, when membership reopens soon. Pay special attention to the club's Extra Income Project series.)

Have some or all of your start-over funds hidden.

If you don't own a business, start or invest in one. Make sure it is a business that you understand and over which you can have some control.

Get insurance - but only what you really need - to protect your health, your house, and all of your other valuable possessions.

Learn about the realities of identity theft and defend yourself accordingly. (We will be publishing a report on that soon.)

Get privacy guards for all of your Internet activities.

In the mid-1980s, a few years after I “decided to get rich,” I bought my dream house. It was a 4,000-square-foot chateau-styled, custom-built, five-bedroom home in a very nice gated neighbourhood called Les Jardins in Florida.

The cost of the house was about $600,000 (almost Rs 3.6 crores) - more than I ever imagined I could afford. But thanks to the success of a business I had started, I had socked away about $125,000 (Rs 90 lakh), and that was enough to cover the down payment and closing costs.

Telling the real estate agent, 'I'll take it,' gave me a great, memorable feeling of the power of wealth. I knew, even then, that this purchase would be a milestone in my life.

What I didn't know was how many different lessons I would learn from it.

Deciding to buy my dream home was euphoric. But signing the loan documents evoked a very different emotion: an ominous weight.

The title to this magnificent house was in my name. But I owned only one-fifth of it. The real owner was the bank.

I didn't like the idea that if things went awry, I could lose “my” house to this corporation. So I decided to devote every extra dollar I made toward paying down the mortgage. I put no money away for my children's education or my retirement. I didn't even have an emergency fund. It all went toward my goal of really and truly owning my house.

What a great feeling it was when, only three years later, I handed that last payment to the bank. I would finally be rid of that burden, I thought. I would finally be master of my own domain.

But life had more lessons for me. Just a week or two after paying off the mortgage, I received my property tax assessment for the year. It was something like $22,000 (around Rs 13 lakh).

“Oh no,” I thought. “That's more than my wife and I ever paid for rent. And I've got to pay this every year, without fail, as long as I own this house.”

You and the entire staff have made a deep and provoking impact on my decisions and me. You have caused me to look in the mirror and see what can be changed and will be changed.

I am deeply thankful for your entire organization, a group that I can trust to tell the truth, the whole truth, and nothing but the truth, and that is what is important. Wealth Builders Club member JB. The next week, I received a notice about the homeowner's association fees: They would be going up to $4,000 per year (Rs 240,000). And then, the following week, I wrote checks to cover our monthly bills. These included about a half-dozen expenses that related directly to the house: electricity, gas, lawn maintenance, etc.

I realized that even after paying off a mortgage of $600,000 (3.6 cr0res), I was not in any way financially free. To possess and occupy that house was going to cost me more than $30,000 (Rs 18 lakh) per year - for as long as I “owned” it.

I learned two important lessons from this experience:

Holding title to something doesn't mean you have absolute control over it. Having paid for something doesn't mean it no longer costs you anything to use it. Later, I realized that the same rules applied to buying a car. Getting title to one doesn't mean you own it. And owning it doesn't mean your car will be cost-free.

The same is true for boats and planes and beds and exercise equipment and machinery and so on. This rule applies to about everything you buy that cannot, like food or medicine, be consumed.

Thus, my happy delusion about ownership was shattered. But it wasn't a bad thing. Not at all. It gave me a very useful insight into the cost of possessing things - an insight that has helped me make countless buying decisions since.

A New Way to Think About Ownership

Nowadays, when considering the purchase of a car or boat or a set of golf clubs, I don't pretend that I will have them forever. I take a deep breath, calm down my greedy little heart, and make a realistic estimate about how many years I will actually use this desired object. I then calculate its total cost of ownership on a yearly basis.

In other words, rather than telling myself that this car is going to cost me $25,000 (some Rs 15 lakh) - because that's the sticker price - I do a full calculation of everything I'll likely pay to own it for, say, 10 years, and arrive at what it will cost me, on an annual basis, to possess it.

I'm sure there are plenty of smart people who do the same thing. But I've never heard anyone say so. Nor have I read about it among the books on finance that I've read. So lacking a dictionary term name for this idea, let's create one. Let's call it the cost of possession.

And to reiterate: The cost of possession is the full cost of using any non-consumable good, from a house to a car to a fountain pen, over a given period of time.

I said that understanding this idea has helped me become a better consumer. Let me give you an example - an issue that comes up all the time that you may have wondered about yourself.

An Old Debate: Own or Rent?

Many people believe that owning a house is always better than renting one. They point out that when you own a house, you get the benefit of price appreciation.

“Why should I fork over several thousand dollars per month in rent if, at the end of the day, I have nothing to show for it?”

The answer to this question becomes clear once you apply the principle we've just discussed - the cost of possession - to the decision at hand.

Today, for example, I'm shopping for an apartment in New York City. K and I are looking for a pied a terre (just a fancy word for a flat) in downtown Manhattan so we can be close to two of our sons who live in New York. I could afford to buy the apartments we are looking at, but because I now think in terms of the cost of possession, I'm pretty sure that would be a bad deal.

A little bit of arithmetic will demonstrate what I mean. Let's say I want to get an apartment in Mumbai. To make calculations simple, let's assume I bought an apartment for Rs 1.5 crore and held it for 10 years. What would be the cost of possessing it on a yearly basis?

The first step is easy. We take the price and subtract it from the net price I think I'd be able to sell it for in 10 years. Assuming an annual appreciation of 4%, the apartment would be worth Rs 2.2 crore. I would stand to make a profit (a capital gain) of Rs 66 lakh.

That's an argument for ownership. But now I have to figure in the opportunity cost of plunking down Rs 1.5 crore in cash. The opportunity cost refers to the money I would have made by investing that same Rs 1.5 crore in another investment or group of investments. Assuming I could get a 4% yield on that Rs 1.5 crore, I'd turn that into Rs 22,200,000 too. At the end of the 10 years, it is a wash.

Okay, it's tied at one-to-one

Now let's look at the other costs of possession.

First, when you own real estate, you have property taxes. Let's just assume a 1.5% on the appraised value of the apartment. The appraised value would very likely be the price I paid for it. That is a cost of Rs 225,000 per year.

Then you have the association fees: The apartments I'm looking at average about Rs 3 lakh per year.

Then there is insurance, maintenance, and so on: I'm estimating that will run me two and a half lakh per year.

So the total cost of possessing that apartment on an ownership basis is Rs 8 lakh per year.

Now let's look at renting.

You would think that if the rental market were “efficient,” the rental costs would amount to about the same thing: Rs 8,00,000 per year. In fact, because of factors we don't need to discuss here, it would cost me less than that to rent these apartments. My best guess is that it would cost me Rs 50,000 per month, including fees, to rent an apartment.

The bottom line: It would be about Rs 200,000 per year cheaper to rent than to buy. Over a 10-year period, that's a savings of Rs 2,000,000.

So, in this case, renting is the better choice.

You can do the same analysis with cars. Rather than pretending that the sticker price of that Mercedes you want is the cost of owning it, consider all of the costs of possessing it, such as insurance, gas consumption, maintenance, and depreciation (i.e., cost versus resale value). Then make a realistic judgment about how many years you will keep it. And then you will have your annual cost of possession.

By approaching it this way, it will be very easy for you to compare renting versus owning. You won't make the mistake of thinking that either the sticker price or the monthly lease rate is your cost.

Understanding the cost of possession has saved me hundreds of thousands of dollars (if not millions) in these past 30-odd years. Discovering it was a big, big eye-opener. I hope this has had the same impact on you.

What I want you to take away from this essay is this: When making decisions about buying, renting, or leasing anything, always remember to include all of the costs involved. Then divide them by the number of years you expect to use the thing you are buying.

This will give you the real cost - the cost of possession. Once you get the knack for the arithmetic, it's easy to do. You will make smarter decisions and have fewer regrets. And the salespeople you deal with will begrudgingly admire you!

I'm too stressed-out these days - trying to do some last minute tax planning. The HR department of my company is sitting on my head, constantly reminding me to submit proofs for tax saving investment declaration. Almost every day I receive an email or message from them.

With a wedding in the family, honestly I've been so awkwardly placed of late that this important task has gone ignored. I'm afraid if I don't furnish the required documents on time and invest some portion of my investible surplus in tax saving instruments, a higher sum will be deducted as TDS (Tax Deduction at Source). And I don't want to carry forward the task of claiming a refund later through my CA (Chartered Accountant). It's such a hassle, you see, to get the refund on time. Hoof! - A PersonalFN client.

We're talking about that time of the year when many salaried individuals panic…and their human resources departments pester them for supporting tax documents.

Blame the stress on the human tendency to procrastinate. As a salaried individual or employee, if you want to live a financially stress-free life and honour your constitutional duty to pay taxes, it's better begin your tax planning right away. Or better yet, at the beginning of each year.

If you get a raise, you'll need to consider the tax implications. Perhaps your salary structure could be amended to include more allowances and leave you with more net take home (NTH) pay. The more allowances you have, the less tax you will pay. So discuss your salary options with your employer.

Below are some areas where salary restructuring can be done:

Basic salary: It is important that you agree on the optimal basic salary. Your basic salary constitutes 40-50% of your cost-to-company (CTC). A high basic salary will result in a higher tax liability. And it will reduce the benefits you receive, such as house rent allowance (HRA), leave travel concession (LTC), superannuation, and so on.

House Rent Allowance:Suppose you live in a rented house and your salary structure includes HRA, you can lower the tax liability by availing the HRA exemption under Section 10(13A) of the Income Tax Act, 1961. In India, if you live with senior parents in accommodation owned by them, you can contribute to their savings by paying the rent and enjoying the tax benefit for HRA too.

The table below covers the maximum HRA exemption you can enjoy:

In Chennai/ Delhi/ Kolkata/ Mumbai In other cities Least of: Least of: Actual HRA Actual HRA Rent paid in excess of 10% of salary* Rent paid in excess of 10% of salary* 50% of salary* 40% of salary* *Salary for this purpose includes basic salary + dearness allowance (if in terms of service) (Source: PersonalFN research)

Remember to submit rent receipts to your employer for the entire lease period for which you wish to claim an exemption. If you receive HRA of less than Rs 3,000 per month, a rent receipt is not required.

As per the Central Board of Direct Taxes (CBDT), if you are paying an annual rent of more than Rs 1 lakh - i.e. Rs 8,333 per month - it is mandatory to report the Permanent Account Number (PAN) of your landlord to the employer. (Earlier, one had to furnish a copy of the landlord's PAN card only if the annual rent exceeded Rs 1.80 lakh, or Rs 15,000 per month). If your landlord does not have a PAN card, you are required to file a declaration to this effect from your landlord along with their name and address.

Here's a noteworthy point from a tax-planning angle: If the rent you pay is higher than the HRA limit, it would be wise to pick a company-leased accommodation (if the company offers it). This company-leased accommodation would be considered as the perk value. Therefore, 15% of your gross income would be taxed. Wisdom says, though the perk value is taxable, it still works out to be more tax efficient than opting for an HRA that doesn't fully cover your rent.

Leave Travel Concession: During the year, if you have travelled with your family for holiday within the Indian subcontinent, avail of the LTC benefit conferred by Section 10(5) of the Income Tax Act, 1961. A tax concession is granted for the travel fare, either on your own or with family (your spouse, children, parents, brothers, and sisters who are mainly or wholly dependent on you). This exemption is limited to the LTC amount received OR the actual amount incurred, whichever is lower.

The exemption is only for two journeys in a block of four calendar years. The current block of four calendar years is from 2014 to 2017 (i.e. from January 1, 2014 to December 31, 2017); the next block will be from 2018 to 2021 (i.e. from January 1, 2018 to December 31, 2021).

If you haven't availed a leave or have travelled just once in a block of four calendar years, you are allowed to carry over the concession to the first calendar year (2018) of the next block (2018-2021), but only for one journey. This is in addition to the eligibility to travel two more times in the new block of four calendar years.

Here are the particulars:

Particulars Amount exemptible Where the journey is performed by air Amount of 'economy class' airfare of the national carrier by the shortest route to the place of destination or amount actually spent, whichever is less. Where the journey is performed by rail Amount of air-conditioned first class rail fare by the shortest route to the place of destination or amount actually spent, whichever is less. Where the places of origin of journey and destination are connected by rail and journey is performed by any mode of transport other than air. Air-conditioned first class rail fare by the shortest route to the place of destination or amount actually spent, whichever is less. Where the place of origin of journey and destination (or part thereof) are not connected by rail

Where a recognised public transport exists First class or deluxe class fare by the shortest route or the amount spent, whichever is less.
Where no recognised public transport system exists Air-conditioned first class rail fare by the shortest route (as if the journey is performed by rail) or the amount actually spent, whichever is less.

(Source: PersonalFN Research)

Use your leave smartly, and enjoy a holiday in India with your loved ones. It will not only be enjoyable, but also help reduce your tax liability. Remember to keep your travel tickets and boarding passes as you’ll need to submit them to your employer.

Education and Hostel allowance: If your salary structure includes education and hostel allowances, you can avail of the tax benefits, no matter how dismal they are. The exemption extended for education allowance is Rs 100 per month for a maximum of two children (Rs 2,400 per annum total). The hostel allowance is Rs 300 per month per child for a maximum of two children (Rs 7,200 per annum total).

Meal Allowance through Food Coupons/Food Cards: If you have the benefit of food coupons/food cards, exercise this option instead of opting for a higher NTH. Availing food coupons/food cards can help you reduce your tax liability with a maximum exemption available of up to Rs 2,500 per month (or 30,000 per annum).

Medical Reimbursement: During the year, if you or your dependents visit a doctor or buy medicine, these expenses too could help reduce your tax liability. The maximum annual deduction under the Act is Rs 15,000. Keep the medical bills, and submit them to your HR department to claim the tax benefit. If your employer pays or reimburses your medical insurance premium, it will not be subject to tax. If your company provides medical facilities in a hospital or clinic owned by them, a local authority, or the central or state government, any expenses incurred there would not be subject to tax.

In the next part of this report, which you will receive later this week, we will walk you through the different provisions of the Income Tax Act of 1961, and show you a number of legitimate ways to reduce your tax liability.

In the first part of this report, we broke down for you the structure of your salary, so you could see exactly what allowances you get and increase your net take home (NTH) pay. The more allowances you have, the less tax you will pay. Today, we will discuss other provisions of the Income Tax Act, 1961, so you can be certain to maximise your overall tax :

Section 80G: Those who do not receive HRA and are paying rent can claim a deduction if they satisfy the following conditions: 25% of your total income Rs 2,000 per month Rent paid in excess of 10% of your total income

Be sure you file a declaration under Form 10BA as per the income tax rules to claim this deduction.

Section 80C: This section offers a host of popular tax saving investment instruments such as Public Provident Fund (PPF), Employees Provided Fund, National Savings Certificate (NSC), five-year tax saving deposits, Senior Citizens Savings Schemes (SCSS), insurance plans, Equity Linked Savings Schemes (ELSS), pension funds, etc. Use these instruments to avail a maximum deduction of Rs 1.5 lakh per annum. You'll need to assess the most suitable instruments for your risk profile (aggressive, moderate, or conservative).

This section also allows you to adjust for your children's tuition fees, stamp duty and registration fees for a new home, as well as the principal repayment of a housing loan within the deduction limit of Rs 1.5 lakh per annum. So use it judiciously…and forward copies of the respective documents to your HR department.

Section 80CCD: A deduction of up to 10% of your salary can be claimed under Section 80CCD(2) if your employer contributes to the National Pension System (NPS). The deduction under Section 80CCD(2) can be claimed over and above the permissible deductions under Section 80C. So, if you alone contribute from your income towards NPS, it will be considered within the limits of Rs 1.50 lakh per annum under Section 80CCE. (As per Section 80CCE, the aggregate deduction under Section 80C, 80CCC, and 80CCD(1) cannot exceed Rs.1.50 lakh). Section 80 CCD(2) is applicable only if your employer contributes to NPS. To avail this extra tax exemption limit, convince your employer to contribute to NPS.

In the Union budget 2015-16, the government inserted a new sub-Section 80CCD(1B) that provides an additional deduction of Rs 50,000 for contributions made by an individual assesse under the NPS. (To this additional contribution, the ceiling of Rs 1.5 lakh under Section 80CCE is not applicable).

Section 80D: The premium you pay on the medical insurance policy (commonly referred to as a mediclaim policy) to cover you, your spouse, and your dependent children and parents qualifies for a deduction under Section 80D. The Union budget 2015-16 increased the maximum deduction amount allowed annually to Rs 25,000 (from Rs 15,000 earlier) for non-senior citizens paying for self, spouse, and dependent children. And for senior citizens, the maximum deduction increased to Rs 30,000 from Rs 25,000.

If you pay the medical insurance premium for your parents (whether they are dependent on you or not), you can claim an additional deduction of up to Rs 30,000 for senior parents or Rs 25,000 for non-seniors. Within this limit, a deduction of Rs 5,000 is allowed for expenses towards preventive health checkups. This means if you are paying a premium of less than Rs 10,000, you may avail this benefit to save on taxable income. Just be sure to furnish all the premium receipts and necessary documents.

Section 80G: Under the Income-tax Act, 1961, you may consider donating to certain specified funds, charitable institutions, and approved educational institutions and enjoy a tax benefit. The amount you donate will qualify for a deduction under this section. The maximum will be either 50% or 100% of the amount donated, subject to the stated limits under this section.

Section 24(b): If you've opted for a home loan to buy your house, you can claim the interest on this loan as a deduction under Section 24(b) of the Income Tax Act, 1961. The maximum you can claim, if you are occupying the house as a primary home, is Rs 2,00,000. If you lease the property, the actual interest paid is eligible for deduction, so it is not subject to a maximum limit. This applies even if you have two home loans for two different properties (one self-occupied and the other leased).

Similarly, if you have taken a loan to reconstruct, repair, or renovate the property, you can avail a deduction under Section 24(b). This is, however, restricted to Rs 30,000, irrespective of whether it is self-occupied or leased. There's more to tax planning that just Section 80C. A number of legitimate ways to reduce your tax liability are available. A holistic assessment is necessary to optimally and legitimately save on taxable income. And you need to begin your annual tax planning at the beginning of the financial year. There's no point running to your CA or tax advisor at the eleventh hour or when the financial year is drawing to a close.

So get going; save tax!

Dear Reader,

Let's face it, inflation is, and has always been one of the biggest wealth destroyers in India. Hovering at dangerously high levels year after year it corrodes away the value of the savings we so carefully build. If inflation had its way, we would never get wealthy. Thankfully, it won't have its way.

In this letter, Mark Ford answers the question 'What can you do to protect yourself from the damaging effects of the inflation we already have?'

Read on and stay protected,

Anisa

* Let's talk about “inflation” - one of the best-known but least - understood economic terms in common parlance.

Technically, inflation is “a rise in the general level of prices of goods and services in an economy over a period of time.”

Is that bad?

It's good if you have a fixed-rate mortgage or loan. It's usually good if you are in the business of selling oil and gas, timber, precious metals, etc. Inflation is usually good, too, if you own real estate, art, and other physical property.

But it's bad if you are a bondholder or own any sort of fixed-interest debt. It's bad if you run a freight company. Or if you own any sort of fuel-dependent business in an industry in which it's tough to raise rates.

And if you are like most retired people - living off a fixed income - inflation can be flat-out malicious.

Imagine, for example, that you have Rs 1 million hidden under your mattress. And let's say that the inflation rate spikes to 10%. We expect it will stay at that level for 10 years.

At the end of that period, you still have that Rs 1 million. But by then you will be able to buy only 39% of what you could have bought today.

In other words, your Rs 1 million would have depreciated by 61%.

Why Inflation Is Invisible to Some People Inflation levels are a worldwide phenomenon. Indians think they have high inflation, and the US does not. But that's not exactly true… Let me explain how.

Most North Americans don't worry about inflation. That's because (a) it's relatively modest today, compared with other times in history, and (b) because the government tells us that it is half of what it really is.

The US Bureau of Labour Statistics says the inflation rate has averaged 2.6% since 1990. In fact, it's at least twice that much. And could be four times that much.

You see, in 1990, the US government changed the way it calculates inflation. It conveniently removed certain costs from the CPI calculations. Those included the prices of fuel and other commodities.

[“CPI” stands for “Consumer Price Index.” The Bureau of Labor Statistics defines this as “the measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.”]

The government did this to fool people. It didn't want us to understand the damaging effects of putting more dollars into circulation. You see, the CPI is the most widely followed metric of inflation.

By printing or creating money, prices of everyday goods we use go up. The CPI would show large increases. This would tip people off that inflation was getting bad.

But by removing certain items or weighing them differently, the CPI can read lower than it actually is.

If you use the older, more credible government calculation, inflation for the last 20 years in the US would average 6.5% per year. And according to the American Institute for Economic Research, it is actually closer to 8%!

That sounds like a more real number here in India too, right?

An inflation rate of 8% means that 100,000 in cash today will be worth only 46,319 in 10 years, 21,455 in 20 years, and an abysmal 9,938 in 30 years.

Or to put it differently, it means that every 8-10 years, inflation cuts the wealth you have in cash by half.

Inflation may seem invisible or unimportant right now, but if you take a longer-term perspective, you can see how dangerous it really is.

What About Hyperinflation? You may have heard the term “hyperinflation.” Hyperinflation is basically inflation on steroids.

In Germany after World War I, for example, inflation hit 29,500% in October 1923. (You read that right: twenty-nine thousand five hundred percent.) This made the German currency worthless and destroyed the German economy. It also set the stage for the rise of Hitler (who believed Germany's inflation woes were due to, among other things, capitulating to Jewish bankers at the Treaty of Versailles).

I wasn't around after World War I. But I was alive from 1975-1991, when Argentina experienced soaring inflation, hitting 12,000% in 1989. As it did in Germany, hyperinflation made Argentina's peso worthless and destroyed the fortunes of tens of thousands of wealthy Argentineans.

The negative effect in Argentina is still present: If you want to buy a house there today, you will have to buy it with a suitcase full of cash. I'm not kidding.

Over the past 10 years, I've read numerous essays arguing that the U.S. is primed for a period of hyperinflation. I've found those essays to be credible, but what do I know?

And what that would to do other world economies? I can only guess that it would be a disaster.

Happily, my approach to wealth building does not require me to know what will happen in the future. What I must do is be aware of future risk and “buy” insurance against it.

Inflation in India today is definitely high enough to be a wealth destroyer. And there are many reasons it could go higher - and possibly much higher. It doesn't have to hit hyperinflation levels to destroy your future wealth. Moving up into the 15% range would be enough to make me a lot poorer.

It would be foolish to ignore this as a possibility.

The “Wall Street” Way to Protect Against Inflation What all of this means is that the question isn't 'How much inflation can we expect over the next 10-20 years?' but 'What can you do to protect yourself from the damaging effects of the inflation we already have?'

The most commonly talked-about way (i.e., the “stock market” way - what all the pundits tell you) is buying inflation-sensitive assets. These investments tend to appreciate along with rising trends of goods and services.

Hard assets are such investments. Hard (meaning tangible) assets include precious metals, real estate, and collectible art. As a Creating Wealth reader, you've read my recommendations regarding investing in gold and collectibles.

I've also said that certain stocks - such as our partners recommend in their value investing services - tend to keep pace with inflation. That's because the types of blue-chip, safe companies can usually charge more for their products as their cost of goods increase with inflation.

The stock exchange, your typical money managers, and other financial professionals will point you to investing or allocating your savings into these types of inflation hedges.

That's their answer to beating inflation.

But investing in inflation-protected assets is just one small part of a three-part strategy I'm recommending today.

Why Investing Alone Won't Protect You From Inflation When most people think about arming themselves against inflation, they think in terms of investing: investing in hard assets and value stocks, as just discussed above.

They are great inflation hedges. But will they really help you?

Sure, but not nearly as much as stockbrokers would have you think. That's because they protect only a tiny part of your overall cash flow.

Let me ask you this: What percentage of your income do you save every month?

If you are like most U.S. citizens, you save a paltry 5.8% of your income. If you are Indian, you probably save a few points more. And if you are British, you save a few points less.

When you are spending 80%-plus of your income every year, it is difficult to protect yourself against inflation. This is because investment hedges (such as the ones I described) benefit only the cash you put into them. And your savings is less than 20% of your wealth.

Let's use some numbers as an example to make the point clearer.

Say you earn Rs 100,000 of income. And let's say you're fortunate enough to save 20%. You put it in a traditional inflation hedge, such as gold or real estate.

Next, let's say inflation spikes 10% in one year. We'll assume that means your inflation hedge will increase by the same amount. If your inflation hedge rises 10%, it will increase your overall net worth only 2%.

[Rs 20,000 in an inflation hedge such as gold that goes up 10% means your investment increases by Rs 2,000. But Rs 2,000 of your overall income - Rs 100,000 - is just 2%.]

I hope you're beginning to see how the stock market's laser focus on nothing but inflation-hedge investments is incomplete. It's kind of like going to the emergency room for a broken leg, but the doctor insists everything will be okay if he just Band-Aids the scratch on your leg.

The bottom line is this: Only putting a small portion of your money in inflation hedges isn't enough to protect you from inflation. Even if we focus on investing in inflation hedges, we simply don't save enough - and therefore invest enough - to make investments alone the solution to beating inflation.

What else can you do then?

I have two strategies for you.

Anti-Inflation Strategy Part I: An Old, Ugly Secret When you first joined the Wealth Builders Club, I told you something that - at least until I said it a few years ago - I'd never heard anyone else in the investment world say.

'You cannot hope to get wealthy by investing alone.'

I said that you need to base your foundation of true wealth building on (a) increasing the proportion of your income that you save (b) and increasing your income.

These same strategies are also the solution to beating inflation.

Think about it: How can you grow wealthy when 80%-plus of your costs are going up because of inflation, yet only 10% of your income is in an inflation-protected asset? How can you grow wealthy when your boss gives you only 5% yearly cost-of-living wage increases, but inflation is rising at 7%?

The truth - the boring-yet-powerful truth - is that the two most effective ways to combat the pernicious effects of inflation are to decrease the amount of money you spend every year and to increase the amount of money you earn.

Let's talk about saving first.

Nobody talks about this. I don't know why. Perhaps it is because the financial media and investment industry know that their customers don't want to think about spending and saving. Where's the fun in that?

But we must talk about it. When it comes to inflation, it is the big, smelly elephant that we can't ignore.

Every extra Rs 1,000 that you save by spending less (in an inflation-protected investment) will give you Rs 1,000 more protection against inflation.

Spend less. Save more. There is no better strategy than that.

Practical Ways to Spend Less In order to save more, you need to spend less. It's that simple. But how do you do this, when most people spend over 80% of their income - and rightly so?

Lifestyle changes.

You must make certain lifestyle changes that will substantially reduce your need to spend money, thereby increasing your ability to save it.

But this isn't about living a lower quality of life, as you'll see. It's about increasing your quality of life while spending less.

Let me begin with the biggest and most powerful thing you can do: moving into a smaller house.

Not everyone has the option of sizing down - people with growing families, for example. But retirees usually can sell their homes and move into smaller and less expensive abodes. This will radically decrease your need to spend.

Big homes are expensive. And not just because they carry larger mortgages or rents. They're also more expensive because all the upkeep - utilities, maintenance, repairs, etc. - tend to be much more expensive.

I've discussed this in depth in my essay titled “The Cost of Possession.” You can review that here.

My second recommendation relates to the first. Consider moving to a different part of the country. Move someplace where living expenses are less costly than they are in Mumbai, Delhi, etc.

I'm spending a month in New York as I write this. My breakfast every morning costs me $15 with the tip. I get the same thing at the Green Owl, my favourite breakfast place in Delray Beach, Florida, for $8.

The difference in a meal in Mumbai and a meal in Bangalore is about the same.

[And if you do live in a less-expensive state now, you can move to a less-expensive part of the city or state. If I wanted to reduce my breakfast costs to below $8, I could do that by moving north, toward the center of Florida. You see what I mean. Read why the Subramanians moved to Coimbatore in the Top Retirement Cities in India series.]

A third strategy, if you are not yet retired, is to locate your house within a mile or two of your office. Again, many people can't do this, but many retired people can. By living close to your place of work, you can drastically reduce or even eliminate petrol expenses. You might even be able to get rid of that extra car. Or better yet, work from home. The Extra Income Opportunity series can help you identify work from home opportunities, and businesses that you can build from your kitchen.

A fourth strategy - are you ready for this? - eat less, but eat better. You'd be amazed at how you can knock down the cost of feeding yourself and your family if you restrict your caloric intake. Lower your consumption to healthy levels and make fresh vegetables a big part of your food supply.

Other strategies, depending on your circumstances, might include:

Get your clothes tailored for a fraction of the price of branded stores. Throw the TV in the garbage. Cancel your set top box contract. Use Netflix on your computer (where you can see all your favourite old black and white movies) and read. Shop around for cheaper health insurance (another big inflation item). Increase the deductible. [See PersonalFN's essay on that.] Keep the car you have for 10 years, instead of three. These are just a few ideas. Spend a few hours this week thinking about it. I'm sure you will come up with a dozen more.

Think of the difference these ideas could make…

Anti-Inflation Strategy Part II: Increase Your Income Follow me for a moment as I use an analogy: Imagine a water faucet pouring into a bucket. Your goal is to fill the bucket. But in the bottom of the bucket, there is a hole that's leaking water.

You probably know where I'm going with this. The faucet is your income - filling the bucket (your wallet) - and the hole in the bottom of the bucket is inflation - draining it.

The first strategy we just talked about - spending less and saving more - would be like trying to put duct tape over the hole in the bucket to stop the leaking. All the strategies I just gave you will help plug that hole.

But what if it's not enough? What if the bucket is still leaking too much water? What if you're still losing ground to inflation?

Then we turn to the second strategy: In our analogy, that means focusing on how much water is pouring out of the faucet.

In other words, you need to increase your active income. You need to make sure it's increasing at the same rate as the inflation rate, if not faster. For every drop of water leaking out of the hole, you need at least a drop - if not more - pouring in from the faucet.

But your boss doesn't want to protect you against inflation. That's because the only way he can do that is to give you raises every year that match or surpass the actual rate of inflation. (I'd guess that fewer than 1% of companies worldwide give their employees wage hikes that match or exceed the true inflation rates.)

If the true inflation rate is 8% and you are getting a 5% cost-of-living increase every year, you are getting 3% poorer.

You can put a sensible percentage of your savings into an inflation hedge. And it may protect those savings from the ravages of inflation. But it won't protect you from making less (in real money) every year and seeing all of your expenses continually go up.

There are two primary ways around this.

One, you become so valuable at your current job that your bosses reward you with a higher salary.

To achieve this, do everything in your power to become the most valuable person in your company. Arrive early. Work hard and work smart. Volunteer for projects. Take initiative. Become the “go-to” person for ideas and solutions. Become indispensable.

I've written about this idea several times, including here. And be sure to check out Chapter 5 of my book, Automatic Wealth. That way, your boss (or even your boss's boss) will reward you with bigger raises and compensation (pay raises that are at least as much as the annual increase in inflation).

But if increasing your salary from your primary job isn't a possibility for whatever reason, you must focus on the second way of earning more income: finding or creating a new stream of income.

There is any number of ways to generate extra income. Working a second job. Freelancing… consulting… blogging… copywriting… the possibilities abound.

As I have explained many times, 'There is no faster or surer way to become wealthy than by creating extra income and allocating it toward one's investments.' And that's why, for you as a Wealth Builders Club member, we've designed a unique program, the Extra Income Project.

How You Can Start Fighting Inflation Right Now Wall Street declares that you can beat inflation by simply investing in the right kind of assets. And yes, while that is important, that strategy alone will not beat inflation.

The best way to combat and beat inflation is to spend less and earn more.

Here's what I want you to do right now to tackle this problem.

First, sit down with your bank and credit card statements. Look at what you're spending your money on. Identify ways you can cut back. Come up with 10 ways to spend less right now, and start doing them immediately.

Second, think hard about your job. What could you do that would set you apart from the other employees? What could you do that would truly add value for your boss or the company? What actions could you take today that will get you noticed as valuable and irreplaceable?

I'll give you a hint. Your job is to produce long-term profits. In other words, your job is to help your company make more money.

The secret to getting above-average raises each year is to accept that as your fundamental responsibility - and to transform the work you are doing now in such a way that it will produce those long-term profits. The better you can do it, the more money you will make. It's as simple as that.

Third, consider new ways to create extra income. As I wrote above, there are countless possibilities. But the key is to begin looking right now. Start a Google search. Make a phone call to ask questions. Set up an informational interview to learn more about a possibility. The point is, take action. And read the Lost Principles of Creating Wealth.

If the idea of thinking about spending less or acquiring extra income is depressing, please make sure you go back and reread the Living Rich essays we've sent you, or reread the cash flow ideas I've collected in the Extra Income Project series.

I can promise you this: A month after you start implementing these three strategies, you will feel much better about the threat of inflation. And as time passes, you will be able to sleep comfortably at night. You'll know that you are immune to inflation's malicious effects.

Can a corporation take its customers for granted?

Not anymore. Consumers have become savvier and more brazen, and brand loyalty has gone out the window. The smartphone generation keenly experiments with options. Sometimes it works; sometimes it doesn't, but this doesn't discourage new-age buyers from changing their buying patterns and choices, posing several challenges to sales personnel.

Until recently, business was based on relationships, and brand value played an important role. But today, especially in the personal finance sector, maintaining good relationships with clients is just the beginning. If the services, products, and deals aren't pro-customer, the client will leave without a second thought. And who can blame them?

Shopping for alternatives can save a lot of money. You should always be on the lookout for better products, better services, and better deals…always keeping in mind the ultimate goal - wealth creation.

Sudip and Manasi took a giant step forward in their journey of wealth creation a week ago. Check out their story below. We think it might encourage you to move closer to your wealth creation goals.

Get to know them better… Mr Sudip Chatterjee and his wife Manasi have a two-year old son who recently started attending a play group. Sudip works for a reputable multinational software company. Manasi, a pharmacologist, works for a big pharma company in Mumbai.

As consumers, Sudip and Manasi are modern but don't follow fads. They spend a good deal of money but aren't impulsive buyers. They experiment with available options and don't waste any opportunity to save money.

Three years ago, they moved from Calcutta to Mumbai and rented until they saved enough to make a 20% down payment on a home of their own. They wanted to buy an apartment that was ready to move into in a plush locality. About one year ago, when Manasi resumed her job after maternal leave, they felt they had enough money to make the move. They opted for a home loan with the large private-sector bank where Sudip holds his salary account.

Acquiring the loan was a breeze. Their total income was approximately Rs 18 lakh post tax. Apart from a credit card each, Manasi and Sudip hadn't taken out any other credit assistance. They saved first, and spent on improving their lifestyle later. This made the lender comfortable enough to offer them a loan of 80% of the cost of the property.

For a year, Sudip and Manasi have been paying an EMI of Rs 86,852 (Rs 1,042,223 per year).

Loan repayment schedule Loan repayment schedule A U-turn Sudip takes an interest in investing and finance. One day, he reads about the RBI's monetary policy, and he learns how banks are stubbornly hiking up lending rates. The RBI had been slashing interest rates aggressively, but his bank wasn't passing any of the cuts on to borrowers like him. The article also mentioned that many lenders aren't transparent in their dealings with borrowers and depositors.

Negotiations and offers… Since he avails of various services from the bank, Sudip enjoys being a valued customer. His bank relationship manager visits to share new loan and investment proposals. He remembers their birthdays and anniversary and even sends them gifts at Diwali.

Last month, during the relationship manager's visit about a car loan at a subsidised rate under a new scheme, Sudip requested him to consider slashing the interest rate on the home loan.

The discussion ended with Sudip foreclosing the loan from the bank and transferring it to another bank. The relationship manager couldn't believe. He never expected Sudip to ‘switch his loyalty' for 0.50% in interest. He tried his best to convince Sudip that he was making the wrong decision…

But it wasn't an impulsive decision… After Sudip read about the banks not extending rate-cut benefits to borrowers, he decided to look into alternatives. Any deal offered by a bank hungry for new business was out. He'd read about malpractice at these banks, the most prevalent being hidden charges; Sudip knows the devil's in the fine print.

Finding the best… The couple stayed with Sudip's bank until they could find a good substitute.

Manasi has a salary account in a smaller but still credible bank. When they enquired, the bank was happy to refinance the couple's home loan. Sudip took some time on a Saturday afternoon to work out the math. His calculations revealed that his existing bank was costing him 0.5% more.

Like any loyal customer, he first decided to bargain with the bank before leaving. It wasn't long before he realised his efforts were in vain, and he foreclosed the loan.

Now, Sudip was under the impression that the new bank would take over his outstanding loan balance for the remainder of his repayment schedule. But to his surprise, the new bank offered him two options:

Start a new 20-year loan with the outstanding loan value Opt for shorter tenure of 15 years Unlike the previous relationship manager, the executive of the new bank suggested the right option. When he learned Sudip and Manasi could afford a higher EMI, he suggested they opt for 15 years at a rate of 9.5%.

Savings! Savings! Savings! Savings! Savings! Savings! Let's compare options… Option I If the couple opted for a new 20-year loan of Rs 8,851,074 at 9.5% interest, their total savings would be Rs 52,175 over 19 years (they can delay payment for one year with the new loan). If they invested the difference in a fixed deposit fetching post-tax returns of 8.0%, it would earn Rs 21.62 lakh.

Sure, this rate is not fixed; it will go up and down. But the point is to show the potential worth of a 0.5% difference on a home loan. Don't forget you can refinance other loans too.

Option II The new 15-year loan at 9.5% for the Rs 8,851,074 is the best option for Sudip and Mansi, as it saves them Rs 31.65 lakh over the next 15 years. (Refer to the last column of the table given above and compare row 1 and row 3).

Sudip did his homework and took a smart decision.

Before you contact your relationship manager to bargain for a better loan, take some time to read what the RBI has to say on the subject at its first bi-monthly policy meeting for FY 2014-15: Consumer protection is an integral aspect of financial inclusion. The Reserve Bank proposes to frame comprehensive consumer protection regulations based on domestic experience and global best practices. In the interest of their consumers, banks should consider allowing their borrowers the possibility of prepaying floating rate term loans without any penalty. Banks should also not take undue advantage of customer difficulty or inattention.

Furthermore, in a notification issued on 7 May 2014, the RBI asked banks not to impose foreclosure charges and pre-payment penalties on all floating rate term loans for individual borrowers, with immediate effect.

Moral of the story… Never underestimate the impact of a decision, even if it seems petty on the surface Always hunt for better deals Better deals do not mean cheaper deals Opt for shorter tenure loans if possible We encourage you to revisit your home loan schedule straight away, by using PersonalFN's online calculator.

Many commonly accepted 'facts' about wealth building are, in fact, fallacies.

Take these six as examples:

'Risk and reward are inversely correlated. If you want to acquire great wealth, you have to be willing to take great risk.'

'Wealthy people are stingy for a reason. Pinching pennies is a necessary part of building wealth.'

'The most important factor in building wealth is ROI - the rate of return you get on your investments. When investing in stocks and bonds, therefore, look for high ROIs.'

'A well-balanced investment portfolio is comprised primarily (80% to 90%) of stocks and bonds, with the rest (10% to 20%) in cash or cash equivalents.'

'The surest way to acquire enough money to retire is to buy the most expensive house you can afford and gradually pay off the mortgage.'

'Asset allocation is the single most important factor in building wealth.' Those are the fallacies. Here are the facts:

Fact No. 1: The intelligent wealth builder takes advantage of safe bets and avoids risky ones. He does this as an employee, a business owner, and an investor. He understands that smart financial decisions are cautious decisions. When he must take a risk, he does so with some sort of loss limit in place. He never loses more than he is comfortable losing.

Fact No. 2: Spending money prudently is an economic virtue, but being stingy - i.e., paying less than market value for goods or services simply because you can - is a flaw. The rich man who undertips does so not because he has learned the value of money, but because he is simply a cheapskate. It's as simple as that.

Fact No. 3: The most important factor in wealth building is not ROI but the accumulation of net investible assets, the amount of money you're able to devote to investing after you've paid for all your regular expenses - car, home, debts, and loans. Plus, individual investors, chasing yield, typically get ROIs that are less than half those of market averages. This is why the intelligent wealth builder devotes the lion's share of his wealth-building time to increasing his income and setting realistic goals for his stock and bond portfolios. By 'reasonable,' I mean market averages plus or minus 10%.

Fact No. 4: The typical portfolio of stocks, bonds, and cash - however allocated - is an inadequate approach to building and safeguarding wealth. The intelligent wealth builder will also include other assets, such as income-producing real estate, tangible assets, alternative fixed-income investments, and direct investments in cash-generating private businesses.

Fact No. 5: Buying a more expensive home every time you get a big raise is a great way to ensure that you will never get rich. What you want to do is find the least expensive house you can “love long time” and keep it. The longer you keep it, the more net investible income you will have to invest in income-producing assets that will eventually make you rich.

Fact No. 6: Asset allocation is indeed very important, but it is only one-third of a larger strategy that truly is most important. I'm talking about risk management. Risk management has three parts: asset allocation, position sizing, and loss limitation. The intelligent investor pays equal attention to all three.

Four More Facts Okay, those are six facts that dispel the common fallacies. Got a few minutes more? Here are four more facts, some of which are very basic but often ignored.

Bonus Fact No. 1: The biggest mistake retirees make is giving up their active income.

Yes, I know that's exactly what you hope to do. But to keep your wealth for a lifetime, you need multiple streams of passive income. Your goal should be to build each stream of income to a level where you can live on that and that alone.

Bonus Fact No. 2: The 'miracle of compound interest' applies not just to money but also to skill and to knowledge. If you want to get rich and stay rich, you need to invest as much of your spare time as possible in acquiring financially valuable skills and learning about your business.

As a general rule, buying makes you poorer, whereas selling makes you richer. If you want to develop a wealth builder's mindset, develop the habit of asking yourself every time you buy or sell anything: Is this making me richer or poorer?

Bonus Fact No. 3: Every type of financial asset has its own unique characteristics in terms of growth potential, income potential, and risk. Expecting more growth or less risk than 'normal' from any investment is a bad idea. And that is why 90% of ordinary investors have results that are far poorer than market averages.

Bonus Fact No. 4: There are two ways investments can build wealth. One is by generating income. The other is through appreciation - an increase in the value of the underlying asset. Asset classes are inherently structured to increase value, preserve value, or do both. Investments that provide both income and appreciation are generally superior to investments that provide only income or only appreciation. But in developing an overall strategy of wealth building, the prudent investor will incorporate all three types of investments.

You may find some of these facts instantly sensible. Others you may disagree with, be confused by, or see as unimportant. But don't just read them and dismiss them, please. Give yourself a bit of time to think about them. For me, they are useful and important because they worked for me and for people I mentored - and they worked over and over again. Which means, of course, that they might work for you.

There is a misconception that is prevalent in our society that every individual needs insurance.

This is not true.

Neither is it true that every earning individual, a subset of the former category, needs insurance.

Insurance is needed in some cases: If you have financial dependents, and you need to plan and provide for their life goals; or if you have liabilities such as a car loan, home loan or any other loan, and you do not want this loan to devolve onto your financial dependents in case of uncertainty. In these circumstances, you do need adequate insurance.

In fact, because insurance is so important, it should be one of the primary aspects addressed in one's financial plan.

While your life is definitely priceless to your loved ones, it is however important to put an actual number on the value of the breadwinner in the family, so that you know how much insurance you actually require. This way, in case of any unfortunate circumstance, your loved ones might have some income that they will receive, which can help them meet their financial needs.

These days, with greater awareness due to more advertising, more and more people are wondering whether they are adequately insured or not.

But the first question they should be asking themselves is…

Do I need life insurance at all? Contrary to popular belief, while most people do need life insurance, this need doesn't apply to everyone.

Let's see why…

Life insurance, and by this we mean pure-term insurance, makes a one-time lump sum payout on the death of the policy holder, to the beneficiary or nominee registered with the insurance company.

What purpose does this serve?

The Sum Assured is meant to replace the income of the life insured; so that in absence of the breadwinner, the dependents don't suffer financially, and don't have to compromise on their standard of living.

Alternatively, one's death should not financially hurt his loved ones.

This implies 2 things:

If you want to insure your life, you are doing it for the benefit of your financial dependents. If you have a liability of any kind, you should insure yourself at least to the extent of the liability, so that in case of uncertainty, it does not devolve on to your loved ones. Keep in mind that situations change constantly. While you may have no dependents and no liabilities today, tomorrow you may be the sole breadwinner, with kids and a home loan. In this situation, life insurance is not just required, but it is vital.

Similarly, today you may be the sole breadwinner and have dependents and liabilities, i.e. kids and a home loan. But tomorrow, your kids will grow up and become independent and you might have even paid off your home loan. In this case, once you have completed your role of a breadwinner, life insurance may not be required.

Hence, if you are on the verge of your retirement and you have no financial dependents and you have no loans, you don't actually need life insurance.

How much life insurance do I need? In the case you do need life insurance, the first step is to check how much life insurance you need.

As you know, insurance in its purest sense is protection against a financial loss/uncertainty which includes the risk of illness, disability, damage to property, and the most final of them all - one's demise.

The value of your loved one's life is a very sensitive issue as your loved ones are priceless.

But it becomes necessary to evaluate a human life in terms of money, in order to safeguard from problems caused by under-insurance.

The amount of insurance you require can be calculated in a few different ways - but a comprehensive method of calculating this is the Human Life Value (HLV) method. HLV of an earning member in the family could be defined as the amount that the family would require to retain the same standard of living in the absence of the earning member. This would be the maximum amount for which a person can seek insurance protection.

How to calculate Human Life Value (HLV) Mr. Saxena, aged 40 years, earns Rs 1,500,000 per year. Of that he spends Rs 450,000 per year on himself. The rest, a net income of Rs 1,050,000 p.a. goes towards his family. Therefore, as income replacement, his family would require Rs 1,050,000 p.a. for 1 year of life expenses. Each year, with inflation, the family's expenses would proportionately increase, which must also be taken into account.

To calculate HLV, first determine this number, the 'family spend' amount - the amount the family uses annually (excluding the person's own expenses).

Next, add specific goal-related needs.

For example, if Mr. Saxena has a son and a daughter both of whom would require Rs 10 lakh for their educations, i.e. a total of Rs 20 lakh. In Mr. Saxena's absence, this amount is still required such that his children's educations do not suffer. Plus their weddings would be another big goal for Mr. Saxena. This goal amount can be added to the financial value of Mr. Saxena's life.

Mr Saxena should also consider his liabilities i.e. the outstanding loan amount. No one will want to pass on their liabilities to their loved ones. The motive of having adequate insurance should be to avoid any financial burden on the family members in your absence.

HLV = Family Spends + Goal Needs + Liabilities

You can find Personal FN's HLV calculator here. How to choose the right insurance Once you have an approximate HLV figure, and it might be larger than you anticipate, the next step is to choose the appropriate insurance product to cover your needs. There are a number of insurance products available in the market today - from term plans to ULIPs to endowment plans, money-back policies and so on. It is important to assess the available products and select the right insurance for your needs.

You should ideally opt for a straightforward term insurance plan.

A term plan is a simple pure life insurance plan which provides a sum assured in case of the policy holder's unfortunate demise. However, most people are not in favour of a term policy, as there is only a death benefit. Also, it is believed that since insurance is available only for a particular term after which there is no cover, it is not a comprehensive policy.

But the reality is that term policies are the purest form of insurance available today. They are very cheap compared to other insurance policies.

You should try and stay away from other kinds of life insurance, such as endowment policies, money back policies, and ULIPs. There are many policies available, which merge insurance with investments. We always advise our clients to keep their insurance and investments separate.

Common Mistakes You Should Avoid While Buying Life Insurance Insurance products are sold very aggressively during tax-planning season. And that is a huge problem. Insurance products are largely sold (not bought) for the tax benefits they offer. For those of you who may not be aware, contributions towards life insurance premium are eligible for deduction from gross total income under Section 80C of the Income Tax Act.

The 'insurance' aspect itself is often overlooked or just incidental. This is a huge mistake. When buying insurance, do not get swayed by the tax issue… carefully consider why you need insurance.

The primary purpose of insurance is to indemnify the insured's dependents from loss of income, in the event of the insured's demise. Your decision to buy insurance should be solely based on your needs for protection. The tax benefits must be treated as incidental. Insurance must find a place in your portfolio irrespective of the tax or any other issues such as those below…

The insurance rush Waiting for the end of the financial year and then making a hasty investment decision is not a good idea. Insurance should be bought when the need arises and not simply because it's tax-planning season. Furthermore, buying insurance in a rushed manner at the end of the year might deprive you of the opportunity to conduct a thorough evaluation of the available options. By opting for the wrong policy, you run the risk of not only buying the wrong thing, but still being underinsured.

The 'ignore insurance' approach Many people tend to ignore buying insurance altogether. Instead, they count on things like investments, or the presence of friends and relatives, to provide for their dependents, if an eventuality occurs. Such an approach is fraught with risks. In dire circumstances help from all quarters is always welcome; however, relying solely on this is not smart, or fair. A sound life insurance policy in place is therefore a good option. Investments and a support system (family) can always play a vital, but secondary role.

Beware of mis-selling Even in you are convinced about the importance of insurance and decide to buy it, you still have another obstacle to face in the form of mis-selling. Mis-selling is a rampant practice in the insurance segment. Over the years, several insurance advisors have been guilty of mis-selling products that were right for them (because they helped them earn higher commission incomes), but wrong for the investor. They conceal relevant facts about the product, thus misleading the buyer. This is not always the case, and not all mis-selling is blatantly a lie, but we caution you to be careful.

To know more about health insurance, please refer to Retire Next Year #12: What To Look Out For In A Health Insurance Policy and Retire Next Year #16: Health Insurance - Make a Resolution for No Medical Bills

Also, unit linked insurance plans (ULIPs) would easily qualify as both the most popular and mis-sold products. So having a competent and ethical advisor is vital. You should also acquaint yourself with adequate information before zeroing in on any product.

Folks, it is that time of the year when many rejoice their pay raises - making merry and indulging in the goodies of life.

But amid the exuberance, let prudence prevail.

To achieve your financial goals, you must get your personal finances in order. And as boring or daunting as it may seem, you must begin tax planning at the beginning of the financial year.

We all procrastinate. We're all tempted to push tax planning to the eleventh hour. But mind you - with better pay comes higher taxes. And if you don't plan well, taxes can take a huge chunk of your take-home pay.

Moreover, you'll want to compliment your tax planning with investment planning. You see, you can take a number of tax saving investment avenues, but it is vital to own the ones that suit you best.

If you are an aggressive investor, meaning:

You are young Earn a high income Are willing to take risk Are accumulating considerable assets Have limited liabilities and not many dependents Have far-off financial goals …you may consider market-linked tax saving instruments. You have multiple options here: Equity Linked Savings Scheme (ELSS) - Also known as tax saving mutual fund schemes, an ELSS is a diversified equity portfolio. They allow for indirect exposure to equities with the objective of alluring inflation-adjusted returns. An ELSS is distinguished by its compulsory lock-in period of usually three years. The minimum application amount is as little as Rs 500, with no upper limit.

Unit Linked Insurance Plans (ULIPs) (equity oriented plans)- Well-selected ULIPs can add value to your investment portfolio, but insurance and investment needs should be dealt with separately to ensure optimal insurance coverage. Only when you've exhausted all the other tax saving options should you consider this avenue. To indemnify risk to life, consider only term insurance.

National Pension Scheme (NPS)- This government scheme permits you to invest in three asset classes: equity (E), credit (C), and government bonds (G).

Besides these investment avenues that offer a deduction up to Rs 1.50 lakh per annum under Section 80C of the Income-tax Act, 1961, you also have: Rajiv Gandhi Equity Saving Scheme (RGESS) - Introduced in the Finance Act, 2012, this scheme provides a deduction under section 80CCG over and above the Rs 1.50 lakh limit prescribed under Section 80C. This is available to new retail investors whose gross total income for the financial year in which the investment is made does not exceed Rs 12 lakh. 'New retail investor' means a resident individual who has not opened a demat account, or has one but with no holdings. The maximum investment to claim the RGESS deduction is Rs 50,000. You are eligible to a 50% deduction of the amount invested from the taxable income for that year.

Now, if you are a conservative or risk-averse investor, meaning: You are retired or near retirement Will soon lose your regular income Manage many assets Have a low risk appetite Have many dependants Have vital short-term financial goals …you may consider tax saving instruments offering assured returns, where risk of capital erosion is almost zero. You have multiple options here as well: Public Provident Fund (PPF)- This is a government scheme. If you do not hold a PPF account, open one right away at your nearest post office or a public sector bank. It will help you plan your retirement corpus, provided you contribute to the account prudently and astutely. PPFs currently enjoy an E-E-E (Exempt-Exempt-Exempt) status, meaning the contributions you make to the account are eligible for deduction under Section 80C, interest is tax-free, and the maturity proceeds too are exempt from tax. It is one of the most tax efficient investment instruments, offering at present an interest rate of 8.1% compounded annually.

National Savings Certificate (NSC) -This is another scheme floated by the government of India. It is popular but not tax-efficient as a PPF. A five-year NSC at present carries a pre-fixed interest of 8.1% compounded half-yearly (giving you an effective interest rate of 8.26% per annum). The interest accrues annually and is reinvested in the scheme till maturity or premature withdrawal. NSC interest is taxable in the year in which it accrues; but the accrued interest of the relevant financial year, besides the principal invested, is available for deduction under Section 80C. If you are conservative and have near-term goals to meet, NSC is a good investment avenue available through India Post. If you have no income apart from interest income, to avoid Tax Deduction at Source (TDS), submit a declaration in Form 15-G or Form 15-H (if you are a senior citizen) to the post office.

Five-Year Tax Saving Bank Deposits and Five-Year Post Office Time Deposits (POTD) - The former, as the name suggests, are offered by banks while the latter is from India Post. Both carry a five-year tenure. The interest on bank deposits vary bank to bank. For the five-year POTD it is 7.9% per annum (compounded quarterly) paid annually, giving you an effective interest rate of 8.14% per annum. In both cases, the interest is taxable. But if you have no other income apart from interest income, to avoid Tax Deduction at Source (TDS), you can submit a declaration in Form 15-G or Form 15-H (if you are a senior citizen) to the bank(s) / post office(s). Premature withdrawals are not permitted with five-year tax saving bank deposits. They are with five-year POTDs, but only after one year from the date of deposit. In that case, the interest will be 1% lower than the five-year term deposit.

Non-Unit Linked Insurance Plans or Traditional Insurance Plans -Insurance schemes abound, but broadly you have two options: pure term life insurance plans and insurance-cum-investment plans. Ideally, you should opt for the former to optimally indemnify risk to life. The latter - which consists of endowment, money-back, etc - should be avoided. Don't blindly buy insurance with a motive to save tax. Make a prudent choice, and remember: It is best to keep your insurance and investment needs separate.

Pension Funds -These are offered by mutual funds and allocate a predominant portion of their assets to debt and the rest to equity. So they are somewhat risky vis-a-vis more assured investment avenues. But they have a higher potential for greater returns over the long run than assured returns products. In addition to tax planning, pension funds can be an effective instrument to plan a peaceful retired life. When you retire, you may choose to withdraw regular fixed amounts through Systematic Withdrawal Plans (SWPs) to meet your retirement cash needs.

Senior Citizen Savings Scheme (SCSS) -If you're a senior citizen, or are 55 or older and retired under the voluntary retirement scheme, you could also consider investing in a SCSS - another government scheme to provide financial security to senior citizens. An SCSS account, which has a maturity period of five years, can be opened at your nearest nationalised bank or post office. Currently, the interest rate is 8.60% payable quarterly (on March 31, June 30, September 30, and December 31) every year from the date of deposit. The interest is taxable. Withdrawals are permitted after one year of opening the account

Assured return investment avenues too, like market-linked tax saving investment instruments, qualify for a deduction up to of Rs 1.50 lakh per annum under Section 80C of the Income Tax Act, 1961.

Here are a few more tax saving avenues:

Tuition fees paid for children's education- If you're a parent paying tuition fees to a university, college, or other educational institution in India, you can claim a deduction under Section 80C up to Rs 1.50 lakh per annum for up to two children per spouse.

Principal repayment of a housing loan- If you have availed a housing loan to purchase, construct, or renovate a home, ‘repayment of principal amount' makes you eligible to claim a deduction of up to Rs 1.50 lakh under Section 80C. This benefit is available irrespective of whether you live on the property (Self Occupied Property - SOP) or rent it (Let Out Property - LOP).

Likewise, the interest paid on the housing loan can deducted under Section 24(b) of the Income Tax Act, 1961. The limit is Rs 2.00 lakh for an SOP, but there are no restrictions on LOPs. For ‘first-home buyers, the union budget 2016-17 allows a deduction for additional interest of Rs 50,000 per annum for loans up to Rs 35 lakh, provided the value of the house does not exceed Rs 50 lakh.

But, if the loan is taken for the purpose of reconstructing, repairing or renewing the property, the maxium deduction you can claim under Section 24(b) is Rs 30,000, irrespective of whether one lives on the property or lets it out.

The Income-tax Act, 1961, also gives deductions for medical insurance premiums, medical treatments for dependent handicapped, donations to specified funds for specified causes, monetary contributions to political parties or electoral trusts, higher education loans, and to individual suffering from specified diseases.

Options galore - Snapshot of deduction under other 80s Section Description of Deduction Deduction Limit 80C* Key investment instruments eligible for deduction under this Section include ELSS, PPF, EPF, NSC, SCSS, five-year bank fixed deposits, five-year POTD, life insurance premiums, housing loan principal repayment, etc A maximum of Rs 1.50 lakh per annum 80CCC* Contribution to Pension Fund of Life Insurance Corporation or any other insurer referred in section 10(23AAB) A maximum of Rs 1.50 lakh per annum 80CCD* Contributions National Pension Scheme Rs 1.50 lakh p.a. + vide sub-section 1B an additional deduction of up to Rs 50,000 is allowed for contribution towards NPS by the employee. If the employer has contributed to the NPS on behalf of employer, under Section 80CCD(2) the deduction is 10% of the salary of an individual. 80CCG Investments RGESS 50% of the amount invested 80D Medical insurance premiums Maximum of Rs 25,000 for non-senior citizens and Rs 30,000 for seniors. 80DD Medical treatment for a handicapped dependent Rs 75,000, irrespective of the amount incurred or deposited. However, in case of disability of more than 80% a higher deduction of flat Rs 1.25 lakh shall be allowed. 80DDB Medical treatments Actual incurred, with a ceiling of up to Rs 40,000 or Rs 60,000 in for seniors, whichever is lower. For those 80 and older, the deduction is Rs 80,000. 80E Higher education loan repayment Maximum deduction for interest paid for a maximum of eight years or till such interest is paid, whichever is earlier. 80G Donations to certain funds and charitable institutions Maximum deductions is 50% or 100% of the donation, subject to the stated limits as provided under this section. 80GG Rent paid on property occupied for residential use Maximum deduction is Rs 2,000 per month, 25% of total income, or excess rent paid over 10% of total income, whichever is lower 80GGC Contribution political parties or electoral trusts Fully exempt 80T Savings bank deposit interest A maximum of Rs 10,000 or actual interest, whichever is lower 80U Person suffering from specified disability(s) Rs 75,000, irrespective of the amount incurred or deposited. In case of disability of more than 80%, a higher deduction of flat Rs 1.25 lakh is allowed. *The deduction limit is upto Rs.1.5 lakh aggregated across section 80C, 80CCC, 80CCD(1) (Source: Personal FN Research)

So you see, there's more to tax planning than just Section 80C. Whether you've earned a raise this year or not, pay close attention to the various components of your salary such as the dearness allowance, house rent allowance (HRA), transport allowance, education allowance, meal allowance, leave travel concession (LTC), and medical reimbursements. We suggest you seek to restructure them with your employer.

Of course, these aren't the only avenues to reduce your tax liability. A holistic assessment of your individual tax circumstances could help you optimally and legitimately minimise your tax liability.

At PersonalFN, we believe it's a good idea to seek the opinion of an honest tax consultant while filing your returns. A self-study approach is also necessary, as one should be well-versed with at least those tax provisions that affect one directly. Finally, remember that leaving tax planning for the eleventh hour will not only cost you more in taxes, but can jeopardise your long-term financial well-being.

With India emerging as one of the world's fastest-growing economies, there may come a time when the arrival counters at Indian airports see a huge footfall of NRIs. Not long ago, many Indians dreamed of Silicon Valley. But now the trend seems to be reversing. Today, India offers tremendous career growth opportunities, and many NRIs are coming back to start ventures. Furthermore, young Indians would rather take the risk to realise their entrepreneurial aspirations than work for a top company.

Ernst & Young's global job creation and youth entrepreneurship survey 2015 revealed that 95% of the respondents were confident of the domestic economy. Of the Indian respondents, 91% were confident about their career aspirations, and 86% of the surveyed youth wanted to run their own business.

Money was not the only objective for these potential entrepreneurs. The surveyors asked what, apart from profit, made them want to start their own business. The responses were interesting. Have a look:

To leave behind a positive economic legacy To make a positive contribution to the wider community To inspire others to follow their aspirations To provide local jobs To train local labour markets To achieve social change To provide a business role model for young people Fortunately, the ecosystem for entrepreneurs has been constantly evolving. But as young entrepreneurs take risks and aggressively chase their objectives, they tend to forget age-old wisdom.

Ignoring retirement planning for example. But even…or especially…entrepreneurs need a sound retirement plan.

It's uncommon for beginning entrepreneurs to think of retiring from their own business. Entrepreneurs passionate about growing their business tend to invest their savings in their enterprise, not their retirement. But retirement is like a business plan: You need funds and a plan if you want to execute.

How should an entrepreneur plan for retirement? Retirement planning is a four-step process.

The first step is to decide at what age you want to retire. Once you have determined a tentative retirement age, check your family history to approximate your life expectancy. If members of your family lived beyond 75, you are likely to have a longer life expectancy.

This exercise gives you two inputs for further planning: 1) the time you have to build a retirement corpus and 2) how long you will depend on the corpus. For example, suppose you are 40 and expect to retire at 55. You would have fifteen years until retirement and should plan for 25 years of post-retirement life, assuming you live till 80.

The second step is to determine your monthly post-retirement expenses. You may initially find this difficult to calculate, but it is not. Start with your current monthly or annual expenses and subtract all the expenditures that won't apply in retirement. For example, the money you currently spend on your children. A common figure people arrive at is about 80% of pre-retirement expenses.

But don't forget about inflation. If inflation rises 5% every year, your monthly payments will naturally go up. For example, if you calculate your post-retirement annual expenses to be Rs 4.8 lakh per year today, adjusted for 5% annual inflation, this amount would climb to a little under Rs 10 lakh.

You are now very close to your magic figure - the retirement corpus you will work towards during your entrepreneurial lifespan. If you plan to draw Rs 10 lakh every year for the 25 years of your post-retirement lifespan, how much would you need to accumulate by the time of your retirement?

Assuming your real rate of return (the inflation-adjusted rate of return) on your corpus is 2.0%, you would need about Rs 2 crore at retirement. To reach this goal, you will have to invest a little more than Rs 6.25 lakh every year for the next 15 years, assuming 10% returns.

Current annual expenses (CAE) (Rs) 600,000 Post retirement annual expenses (Rs) @ 80% of CAE 480,000 Long term inflation rate 5% Annual expenses post retirement (Rs) 997,886 Corpus needed at the retirement (Rs) # 19,871,818 Money you should invest annually (Rs) ## 625,441 For illustration purpose only # Assuming you will invest your whole retirement kitty at 7% for the remainder of your lifespan after retiring and rate of inflation will be 5% ## You could earn 10% returns for 15 years; i.e. for the time left from now till you retire

To do these calculations, you might want to learn a few MS Excel functions or you could simply use online retirement calculators.

The third step in retirement planning is to create a personalised asset allocation. Asset allocation is nothing but the mix of various assets in your portfolio. Ideally, the assets will have a negative correlation to one another in a fixed proportion. Equity, fixed income, gold, and real estate are the most common asset classes. You should adjust your asset allocation based on your risk appetite, return expectations, and how long you have before retirement.

Within each asset class, you have a number of investment options. For example, if you plan to invest in stocks, you have thousands of listed companies to choose from. With fixed-income assets, you can invest in bank deposits, debentures, company fixed deposits, and so on.

The fourth and last step is to review your plan periodically and invest regularly.

Entrpreneurs tend to have more uneven cash flows than salaried employees. Irregular flows can make it difficult to commit to monthly investments. However, PersonalFN believes that setting annual investment targets and breaking them down into monthly commitments will ensure that you meet your annual investment targets.

Retirement: It's nice to get out of the rat race, but you have to learn to get along with less cheese. - Gene Perret

If you don't want to settle for less cheese, store extra cheese in the deepfreeze. A retirement planning professional can help you maximise your store.

Many individuals conceal their income in an attempt to dodge the income tax (IT) authorities. But few recognise the repercussions of such tactics.

Mind you, IT authorities are looking for tax evaders. In the last few months, the IT department has heightened efforts to ensure tax compliance, and they've introduced new rules to check tax leakages. If you're evading tax, you could be on the radar of IT authorities.

Below are common blunders you should avoid when filing your IT return:

Concealing interest income

If you invest in fixed deposits or fixed income instruments, the interest earned is taxable. Many don't consider it necessary to disclose this income since tax is deducted at source (TDS) on the interest earned.

However, in addition to the TDS, the interest income earned needs to be reported under 'income from other sources', which would then be taxed as per one's tax slab (i.e. marginal rate of taxation). Until a couple of years ago, TDS came into play when the interest income earned from one bank branch surpassed Rs 10,000 per financial year, leading to investors split their deposits across bank branches to avoid TDS. But the rules have changed. At present TDS comes into play when combined income from all branch deposits surpasses Rs 10,000 in a financial year.

Also, don't mix deduction under Section 80TTA of the Income Tax Act, 1961 (which provides for deductions up to Rs 10,000 from gross total income), for interest earned on your savings account. Hiding foreign assets

'Integrity is doing the right thing, even when no one is watching.' - CS Lewis

It is possible to legally buy and park assets abroad. But mind you, the IT authorities are watching, even more after the Panama Papers. Take care to report all foreign assets with all relevant details. Not reporting tax-free income

'Truth never damages a cause that is just.' - Mahatma Gandhi

You are required to report interest earned from tax-free bonds, public provident fund (PPF), income from life insurance policies, dividend income (up to Rs 10 lakh), long-term capital gains from equities, agriculture income, and much more.

While not a serious offence, honest citizens should report all sources of income, even if it's tax exempt. So disclose all such incomes in your income tax return (ITR) form, and then claim exemptions under the various sections of the act. Skipping IT returns

Even if you're not earning more than the basic exemption limit, you must file a return. But many people do not think so, especially senior citizens. And then they receive a tax notice, perhaps because they earned a substantial 'income from other sources'.

On the other hand, if you are in the prime phase of your career and you skip filing, it can hurt your credit and you may not be able to get a loan when you need one.

And remember, if a tax liability isn't paid, it will attract a tax penalty. So if you haven't filed your tax returns, do it right away. The Income Tax Act allows you to file delayed returns. Either do it yourself online, or seek the services of a tax professional. Not reporting income while switching jobs

Don't forget to report income from previous job(s). The IT authorities are aware that you have a higher tax liability. Your Form AS26 would reflect deductions on income earned from previous jobs, and this glaring discrepancy will be a red flag. Misuse of Form 15G and 15H

As per Section 194 of the Income Tax Act, banks and financial institutions are bound to deduct tax at source on all interest payments exceeding Rs 10,000 in any financial year.

Investors often use Form 15G and 15H to avoid TDS. But the fact is only individuals who are below 60 and who satisfy both of the below criteria can submit Form 15G:

The final tax computed on the total income as per the provisions of the Income Tax Act should be nil The aggregate of the interest and other income received during the financial year should not exceed the basic exemption limit as per the prevalent tax slabs

Now, Form 15H is only for individuals who are 60 and above and whose final tax on total income is nil.

Filing a false declaration can not only attract a penalty, but is a serious offence - punishable with jail for three months and up to two years. Misuse of clubbing provisions

Some individuals invest in the name of their dependent spouse and minor children to minimise their tax liability through the 'clubbing provisions' of the Income-tax Act, 1961. But they fail to recognise that the income generated through these investments attracts tax clubbed with the income of the giver, and is taxed accordingly.

For example, if the husband invests in a recurring deposit in the name of his dependent wife, the interest income earned from it will be taxed as the income of the husband (i.e. the giver), irrespective of whether the wife's income is below the basic exemption limit or not. But in contrast, if the father invests in, say, a recurring deposit in the name of his minor daughter, the interest income earned from would be treated as an income of the higher-earning parent, with an exemption up to Rs 1,500 per annum for each minor child.

It is imperative to be informed and mindful of the tax implications. If you want to save tax, opt for tax-efficient investment avenues such as PPF or tax-free bonds. And if you're investing to meet financial goals for your children (education and marriage), consider the Sukanya Samriddhi Yojana, particularly for daughters. Selling a house taken on a loan

If you buy a house on a home loan and sell within five years from the date of purchase, it will result in a tax burden for the seller. You see, the deduction for principal amount under Section 80C gets reversed in such a case, resulting in a thick tax liability. However, the interest paid on the home loan is not reversed. Forgetting to deduct TDS when buying a property

If you buy a property for more than Rs 50 lakh, remember to deduct a withholding tax of 1% when you pay the seller. The tax amount needs to be deposited with the government using Form 26QB within seven days from the date of the transaction.

The withholding tax ought to be calculated on the sale price mentioned in the agreement minus stamp duty and brokerage. The buyer ought to issue a tax withholding certificate in Form 16B to the deductee (the seller).

Non-compliance will invite a tax notice from the IT department with a penalty interest of 1% per month on the amount of tax from the date it was deductible to the date on which tax is actually deducted.

Further, as a buyer, if you've deducted the tax but failed to deposit it by the due date, the interest rate applicable is 1.5% per month, plus potential penalties.

Many are unaware of the above rule and end up with a nasty surprise. It should be noted that this applies for transactions with another individual. For transactions with a builder, TDS is automatically adjusted. Splurging beyond means

Amid competition and materialism, many stretch beyond their means. But you should know that the IT department is watching. Be careful when you go on credit-fuelled shopping sprees. Your bank is sharing a transaction report with the IT department. Don't compromise your long-term financial wellbeing by indulging in short-term gratification. Rather than dodging taxes and the IT authorities, it is best to undertake tax planning honestly and legitimately, right from the beginning of the financial year. There's no point running to your CA or tax advisor at the eleventh hour. Hardly anything can be done then. Leaving your tax planning exercise for the last moment sabotages the essence of holistic tax planning.

PersonalFN believes tax planning isn't limited to filing returns and paying taxes. It is a process that considers your larger financial plan and account for your age, financial goals, ability to take risk, and investment horizon. Proper tax planning can help you can meet vital financial goals and ensure long-term wealth creation.

Tax filing is not only a legal but a moral responsibility. It earns you the dignity of consciously contributing to the development of our nation, and you want to build financial credibility and keep a clear track record in the government's tax books. Moreover, it validates your credit worthiness at financial institutions and makes it possible to access finance when needed. Let's step up and become responsible investors and citizens of India.

For many, 'Service to man is service to God' is a maxim. Lending a helping hand to someone in need is a duty.

However, it is easy to misplace altruistic values. Even friends and family can act in bad faith at times. The hard-hearted aren't afraid to take the warm-hearted for a ride.

One of our clients recently lent Rs 1 lakh without thinking twice to a relative who was facing a medical emergency. Although the relative promised a timely repayment, he never got around to it.

But the worst part was when our client learned there was no medical emergency at all. Our client later bumped into his relative…who was driving a new car…and realised he was had. All attempts to recover the money went in vain. Someone he trusted and helped had betrayed him…

Dear readers, lending to friends and family is a common practise and can be very noble. But it's important to lend mindfully and responsibly. And emotions must be kept at bay. Here are some important considerations before lending to friends and family…

Get a reference/background check: Lending money demands a background check, even for relatives. Be sure the borrower is creditworthy. Acquaintances and common relations can provide references that will help you get a better sense of the borrower's financial history and current obligations. This will also help you gauge just how much you should lend, if at all. Your own finances: Being generous and kind is virtuous, but you need to evaluate how your altruism impacts your own finances. In helping the wellbeing of others, you don't want to jeopardise the long-term financial wellbeing of your family and dependants. Before you lend, ensure it won't hinder your financial goals. Also make sure you have a sufficient contingency reserve in place in case the borrower fails to meet the terms of the loan. Set repayment terms: Avoid any misunderstanding and ambiguity about timely repayment and get the terms and conditions of the loan in writing. This will infuse the borrower with a sense of responsibility. Don't worry about what the borrower thinks; be firm as you come to their rescue. Glossing over the details only jeopardises your long-term financial wellbeing. Don't hesitate to impose a penalty for late payment, so that borrower takes the repayment plan seriously and doesn't take you for granted. Follow up: Friends and family don't always show an urgency to repay borrowed money. But if you've signed a repayment schedule, don't let it slide. Follow up regularly. It is better to get your money back late than never. Now, if you aren't comfortable lending in the first place, avoid boasting about your financial status or flaunting it any manner. People may try to capitalise on this information and show up on your doorstep asking for help - most likely out of genuine need but perhaps also to swindle you.

And if you are approached and still aren't comfortable lending, you can help by offering advice. For instance, if they're a salaried individual, you could counsel them to approach the human resource department for an advance salary. Similarly, if they have investments, you could suggest they could consider a loan against their investments. They could also bank on gold, a safe haven during times of economic uncertainty.

'Neither a borrower nor a lender be; for loan oft loses both itself and friend,' wrote Shakespeare in Hamlet. So if you aren't comfortable lending to friends and relatives, politely but firmly decline citing Shakespeare and your policy against loaning to friends and family.

A highly successful engineer at a global investment bank in Mumbai is waiting in his plush lakeside office for his PersonalFN investment consultant (IC) to arrive. He's prepared a list of questions and has all relevant documents handy. He needs clarity on his insurance policy, which he'd purchased two years ago without giving it much thought. Now it's starting to pinch him. After paying twenty-four months of premiums, he's still not exactly sure how his policy works.

Today's meeting had been scheduled for July 1, but he pushed it up to June 27. Why?

Well, about a fortnight prior, our engineer had approached PersonalFN to see about a personalised financial plan. He hadn't intended to make a financial plan for himself…until he came across PersonalFN's article on insurance planning. He didn't waste any time. He knew he needed expert advice and got in touch with an IC at PersonalFN.

At the first meeting, his IC gathered the information he needed to create a sound personalised financial plan for his client. Being open-minded and task-oriented, our engineer shared crucial information about his goals, ambitions, investments, expenses, and other monetary commitments.

Now, our engineer had always been sceptical about his insurance premiums. So he asked his IC to have a look at the policy. The IC decided a separate in-person meeting was in order. But as the day of the meeting approached, our engineer became anxious. He had a feeling his mistake was becoming very costly. So he moved the meeting to June 27…a few days before his next premium was due.

June 27, 2016, 5pm…

The IC reaches the engineer's office right on time, and after brief small talk, they get down to business. Our engineer wants to know if he's wasting Rs 20,000 every month on the policy. The IC has to break the news: Yes, he'd bought a policy that added little value to his financial needs. The most disturbing part, though, for the engineer is that his insurance agent seems to have promised something that the policy might never actually pay.

According to the agent, the policy had a tenure of 35 years and an annual premium of Rs 2.47 lakh. And this would fetch returns of Rs 5.2 crore at maturity. The basic sum assured was Rs 1 crore. But according to the agent, the company would also pay a bonus of Rs 4.2 crore at maturity (in addition to the assured Rs 1 crore). So if something were to happen to our engineer before that that time, his family would receive Rs 1 crore and the prorated bonuses.

How our engineer interpreted it… Our engineer thought Rs 5.2 crores would be the minimum amount he would get at maturity. His insurance agent led him to believe the bonus was guaranteed and could go even higher at the discretion of the company.

But now, for the first time, our engineer was now hearing that no insurance company promises bonuses or pays fixed amounts every year. But another nasty surprise was in store: His existing policy, despite costing Rs 2.47 lakhs every year (and would continue to for 33 more years) wouldn't have satisfied his insurance requirements for the rest the policy's tenure.

Our engineer isn't the first face this problem, and he won't be the last. Very few people know how much insurance cover they need and what policy they should buy.

Our engineer had bought an endowment policy - that is, a policy that is not market-linked. These policies are costly not very transparent.

He should have bought a term plan - a pure insurance cover with no savings component. At his age, it would have cost him Rs 10,000 to 15,000 for a cover of Rs 1 crore. He wouldn't get bonuses at the end of the term, but considering the poor returns of the endowment policy, the term plan would have been much better.

The most common mistake people make is not buying pure insurance. Insurance agents would rather you buy endowment and money-back plans.

Commission-driven insurance agents try to gauge the financial position of their prey. As soon as the agent found out our engineer was a young 28-year-old guy earning a hefty package and shouldering no significant responsibilities, he dangled the 8.0% tax-free returns the policy could generate.

What our engineer should have done… As he has no financial dependants, he should have either started with a smaller amount or completely avoided insurance until he got married. Remember, you always have the option of buying more coverage.

Despite earning Rs 1 lakh per month, our engineer had no investments apart from having a few fixed deposits. So instead of buying insurance, he should have started investing his savings in fixed deposits, gold, and equities in a proportion consistent with his preferences and risk appetite.

Takeaways… Many insurance agents promote plans that earn them big commissions - not only upfront but recurring commissions as well. That's why you should carefully study the product before committing your hard-earned money. Keep in mind that insurance is a long-term contract. An abrutp end to the agreement can cost you a pretty penny.

Fortunately, our engineer realised his mistake in the first two years. Of course, he is going to lose much more if he cancels the policies, but the potential losses would have been steeper when one calculates payments being continued for 5-6 more years.

If you have any insurance needs, term insurance is the way to go.

'Start with good people, lay out the rules, communicate with your employees, motivate them and reward them. If you do all those things effectively, you can't miss,' says Lee Iacocca, the American automobile executive behind the Ford Mustang and later the Chairman of Chrysler.

Small businesses have the potential to hit the BIG league. The problem is many founders are reluctant to expand their horizons. They keep business controls to themselves or family members.

But at some point, decentralisation will be necessary for the business to make it BIG. Founders will need to assign authority and trust employees to execute. Without doubt, skilled and competent HR is critical to business success. After all, employees can be your most valuable assets.

Though it might not show up on the balance sheet, building a team and ensuring its happiness can go a long way. It can help you run a business professionally on auto-pilot mode…and ensure succession planning.

'Succession planning helps build the bench strength of an organisation to ensure the long-term health, growth, and stability.' - Teala Wilson

Have you considered…

What will happen to your business in the case of any unforeseen event? Who will take charge of the business after you've hung up your boots? Succession planning is a process. It takes effort, time, skill, and patience. It can take years to groom a successor - whether they be external, an employee, or even a family member.

In India, many businesses are family owned. And in the absence of a legal testament, when the head of the family business dies, the eldest son will automatically take the reins. Moreover, due to the extended or joint family system in India, all members of the family contribute and play a vital role in the family business. In light of this, here are some questions that need answers:

Are your children the best choice to run the business - do they have the inclination, acumen, experience, and skills to run it successfully? Are more capable and experienced non-family members better suited for the job? Will the stakeholders be happy with your successor? In today's business world, you must keep all stakeholders satisfied. That includes the shareholders, creditors, employees, and customers. Your succession decision will not only affect the future of your business, but the livelihood of your employees, creditors, customers, shareholders, and customers. Succession planning will dictate the future of your business. Not to mention your family.

Poor or no succession planning has led to many family disputes and ruined many promising business ventures.

Here's a step-by-step guide to succession planning for your business…

Identify your successor: As a business founder, promoter, or owner, your aim is to grow your business BIG over the long term and secure the earnings for the benefit of your family and stakeholders. If you want your business to continue to operate with the right spirit after you leave, you'll need to carefully evaluate all the available options so that you leave your business in the right hands. The objective is to choose the candidate who is capable, committed, and willing to take up the responsibility. If your eldest son wants to pursue another career or is not interested in heading the business, then don't hesitate to assign the responsibility to a worthier candidate. Take the case of Tata Group, where Mr Cyrus Mistry was appointed as a successor to Mr Ratan Tata through a long-drawn process. Similarly, Mr Vishal Sikka was appointed head of Infosys after the retirement of founder Mr Narayan Murthy.

In absence of a successor, you can even think about transferring your business to a family trust, through which you can allow your family members to continue to participate in the profits of the business.

Grooming your successor: The successor-to-be should be introduced to each and every aspect of the business and should also be involved in all important business meetings and decisions. If you have overseas operations, different candidates could be groomed to head the various overseas branches. During the grooming process, it is imperative to assign authority and loosen your grip on the business. Being open and transparent: It is necessary to be open and clear about succession with all stakeholders and family members. This will help you identify any resistance…not to mention the most capable and interested candidate. Lack of communication is often the cause of unnecessary disputes leading to family disintegration. Acknowledge the opinions of family members in succession planning. A family constitution may help strengthen understanding and resolve any potential conflicts. Writing a proper will: It's easier to avoid succession-related disputes when the first level of inheritance of the family business is between a father and his sons. Thornier problems arise when the business is jointly managed by the father and his brothers and the next generation of each of the brothers start to join the business. There may be kin in the next generation who aren't willing to, or may be too young, to join the family business. So how would one split up the business in this case? In the absence of proper succession planning, family businesses undergo partition or disputes at this stage. The owners of the family businesses should construct a legal will and testament to avoid family disputes later on. The founder, promoters, or owners, in consultation with the family members, should ensure the will states their wishes on inheritance. They may even appoint an Executor of the Will. Large family businesses often take professional help to write the family constitution and put in place the right legal structures to avoid legal disputes among family members.

To avoid any misuse of shareholding, some family businesses will keep their shareholdings in a trust, instead of holding the shares in individual names, so that other family members may have the right of first refusal if family members want to sell. Some families even look for a mixed structure of will and trust for succession planning. Any such disputes and conflicts can be avoided by seeking proper professional help while succession planning.

Mentoring your successor: After you have assigned authority, when the successor is familiar with the business dynamics, vision, value, and culture of the company, mentoring is the last important step. You should be available to guide your successor through dilemmas. Like Mr Narayan Murthy, it may even be necessary to come out of retirement to mentor the company's successor. Succession planning is complex, but it is a must for the long-term sustainability of your business. It will ensure a smooth transition of ownership. Professionals may aid in the strategic and efficient succession planning of your business.

How do you ensure a blissful retired life?

Retirement planning is actually a simple exercise. The only requirement is a disciplined investment approach, which can be summed up in the following five steps.

Determine how much you will need every month during retirement Many people underestimate how much money they need for a hassle-free retirement. And just a few years into retirement, they realise they will run out of money at the rate they're going. It can be a horrifying realisation.

Just as we have daily, weekly, monthly, quarterly and annual targets in our working life, consider retirement as a mission and set monetary goals. For example, if you want to retire in twenty years, you need to calculate how much you'll need to fund all of your expenses after retirement. Don't worry if you don't know how to calculate that. You may use PersonalFN's online retirement calculator to find out your target retirement corpus. Once you know your aim, you can set your pace.

Start now If you want self-sufficient golden years, it's crucial for you to stay focused from the day you draw your first paycheque. If you think you are already a few too many cheques behind, start right now.

Now, if you think you can catch up by investing higher amounts, you are probably miscalculating. Here is an example that might clarify things.

Mr Turtle and Mr Hare are the same age and will retire at 58. Mr Turtle is a disciplined investor who put Rs 5,000 away every month since he was 25. On the other hand, Mr Hare will start investing for his retirement when he turns 45. He thinks if he invests Rs 15,000 per month for 13 years, he will have adequate funds to retire peacefully. Check out the table below. This is the power of compounding and the magic of starting early.

Mr Turtle Mr Hare Present Age 25 45 Amount invested per month Rs 5,000 Rs 15,000 Assumed rate of return 10% 10% Corpus at the age of retirement (58) Rs 15,575,375 Rs 4,808,995 Do not start late assuming you can compensate for lost time by investing more. The right approach is to start with a smaller amount but invest regularly and top up your investments whenever you manage to save more.

Mind your asset allocation Your risk appetite and how long you have till retirement will determine your asset allocation. Asset allocation refers to how much you invest in various asset classes such as debt, equity, gold, and real estate. These asset classes have different risk considerations and return potentials. So you need to strike the right balance.

For example, Mr Cautious can invest 70% in fixed income instruments, 15% in gold, and 15% in equity. On the other hand, Mr Aggressive can invest 70% of in equity, 15% in gold, and 15% in fixed income instruments. Asset allocation is one of the most important parts of a peaceful retirement.

Rebalance regularly If you start early and invest regularly, you might not pay attention to the performance of your investments, considering the long wait till your retirement. But this could undo all your hard work and forethought. It is imperative to review the performance of your investments regularly. Just how regularly will depend on your asset allocation. If you have more investments in equity shares and equity mutual funds, you might want to revisit the portfolio once a year. If you have more exposure to real estate or gold, you may not review your portfolio as frequently.

Buy a health insurance policy when you are young You may not need an explanation to understand the impact of rising healthcare costs on your retirement planning. Unless you buy an insurance policy, you will have to pay for medical expenses out of pocket. And frequent and high medical costs can severely erode your retirement kitty. To avoid such an erosion, buy a health insurance policy when you are young. If you postpone this till your 50s to save on insurance premium, you run a risk of not getting any coverage from the insurance company as they prefer not to cover elderly people with pre-existing ailments.

A few concluding points… Avoid breaking into your retirement kitty. If you are short a few lakh rupees to buy a new car, consider postponing the purchase until you have saved enough for it. Similarly, foreign trips and luxurious indulgences should fall low on your priority list. Cut down on unnecessary expenses wherever you can and channel the additional savings into your retirement corpus. If you have a high exposure to equity and real estate assets, you should gradually cut down the exposure as you near retirement. Every year after you turn 50, for example, you could reduce your equity exposure by a few percentage points, ultimately to 0%-10% by the time you reach your retirement. 'Retirement from job does not mean retirement from life! It is the beginning not an end.' - Ravi Samuel

Editor's Note: After discharging their responsibilities towards dependents, many people dream of a blissful retired life - and some even plan for it.

But your responsibilities don't end there. Long-term wellbeing of your loved ones comes with prudent 'estate planning' - and it would be unwise to ignore it.

Through this new series we attempt to take you through the nitty-gritties of sensible estate planning. We recognise that during your golden years you require peace of mind, and want to see your family in joy and peace.

Hence, we bring to you a holistic perspective for effective estate planning.

In this world nothing can be said to be certain, except death and taxes. - Benjamin Franklin

Benjamin Franklin, the renowned polymath, author, political theorist, civic activist, statesman, and diplomat has so aptly quoted. But despite being aware of this fact, most people avoid thinking about it, or defer estate planning to another day.

What is Estate Planning? Estate planning, in simple terms, refers to the passing assets / investments down from one generation to another. You decide how much of your estate - be it property(s), car(s), personal accolades, financial investments, etc. - you want to pass on to whom and how, after your demise.

It is a dynamic process that needs to be reviewed at regular intervals to absorb any changes that might happen in our life or in the laws of the country.

Why do you need to plan? Dying intestate (i.e. without a legal Will in place), can leave various complications for your family. There could be serious disputes among family members over your estate that can devastate the peace and happiness you've always sought for your family.

In a ruthless and materialistic world we live in today, people unfortunately behave like hounds, wanting to grab a bigger pie. The tragic sagas, of families being disrupted over money matters is rather disturbing…and what's alarming is that such stories are unfolding every day. A scenario has evolved where one can't have complete faith in his/her own family members.

Here's a tragic saga of Mr Suhas's family…

Mr Suhas, was a flourishing businessman. As an enterprising individual he earned a healthy sum, but never planned for his family's future financial wellbeing. He perhaps, thought that his business would suffice to all the needs of family members - his two sons Raghu and Shyam, and his wife Sunita (a housewife).

He envisioned growing his business to a scale where Raghu and Shyam would inherit and run it successfully and make way for his retirement. In this endeavor, he had been taking loans, but the family was not well apprised about the whereabouts. Then came a time when there was a slip between the cup and lip. A few of his ventures failed. He began to siphon funds from his successful venture to unsuccessful ventures in an attempt to bring them around. But that didn't help either, and as a consequence his successful business too was overthrown.

The family went through hardships. Mr Suhas was shaken and had lost confidence. With banks and other creditors knocking the door for money, he was under constant pressure. That time his children - Raghu and Shyam, were merely in college; there was very little they could do. In a few years of constant pressure, Mr Suhas suffered a massive heart attack and he breathed his last - leaving his family with assets and liabilities to handle. It was an irreparable loss to the family. Raghu and Shyam were almost in their late 20s and mid 20s respectively, a ripe age when this untoward incident happened.

As time passed, both started having arguments over property and unsettled debt. The environment in Mr Suhas's family got unsavoury by the day, and the happiness once fancied, never materialised. It was a sorrowful scene for Mrs Suhas to see them both fighting like hounds. Till date the situation hasn't resolved.

Never say you know a man until you have divided an inheritance with him. - Johann Kaspar Lavater

Hence in such times, the aforesaid quote of Swiss poet, writer, philosopher, physiognomist and theologian, Mr Johann Kaspar Lavater seems apt, when even blood relations fail to act rationally.

Being optimistic is a good thing, but it is vital to anticipate the unexpected and take necessary steps towards estate planning - while we build wealth to sustain ourselves and our families.

You need to involve your family in financial matters… It is imperative that you involve you family in financial matters. In addition to taking their views on matters such as planning a vacation, shopping, etc., involve your family members in crucial aspects of life - such as financial planning and estate planning - and discuss them with enough depth and comprehension.

The following points will help you recognise the eminence of discussing your financial affairs with family:

Involving your spouse: In our country, most financial decisions are taken by the bread earner or the head of the family. In this process, the views of the spouse (usually the wife) are generally not taken into consideration. This may be because the spouse lacks financial knowledge or interest in the financial affairs of the family. However, as irrelevant as this may sound to you, it is extremely important to include your better half while planning or reviewing your financial plans. You might be surprised at the inputs your spouse may provide while planning your finances. While her views regarding each goal and how she would prefer them to be realised might be different, her opinions about various subjects can bring a great deal of clarity and another perceptive to you while thinking about the long-term financial wellbeing of your family. Creating awareness among children: You see, children learn a great deal by observing. Many of you would agree that today's generation are very smart and fast learners. They have the enthusiasm and curiosity to learn. Therefore, discussing with them will create curiosity in their minds and help them understand financial matters better.

Schools today are educating teaching children on personal finance; but as a parent it is vital that you too involve children while taking financial decisions for the family, especially the ones that will affect them, and instill in them the value of money (no matter what your economic status is) and morals. As parents, the earlier you create financial awareness and values among your children, the lesser mistakes they would make as they grow up. Make it a team effort: 'Together Everyone Accomplish More'…that's pretty much what team work can do. So, if you as a family approach financial matters as a team it would bode well for the long-term financial wellbeing. But enough discipline and efforts from all the family members is necessary. Discussing and developing a plan of action together will increase the chances of bringing your wishes to fruition. Without team work between members, financial wellbeing can be at risk.

Financial independence: Involving your family in financial matters can help them become financially independent in the long run. It will help them to appreciate the importance of budgeting, financial planning and estate planning. Remember that while you involve your family, pass on all vital information to your family members. Also, be open and honest regarding the financial history of the family. Let your experiences, whether favourable or unfavourable be a learning lesson for them. Let them not be under a fallacy that may have ramifications. This will avoid the confusion and stress that may occur in the future. Please note that discussing money matters with family is not a taboo. Thus, start sharing all financial issues with your family before it's too late. Don't follow what Mr Suhas did, who didn't share much details with his family member although he imtended the best.

If you aren't confident, take help of an expert who stands as guardian, judiciously guiding you and your family.

Where there's a Will, there's a way. - Benjamin Franklin

A Will is a legal declaration of the author's (the testator's) intentions for his property after his death. A Will can:

Provide clarity to the asset distribution process among loved ones Avoid family disputes, provided the prescribed distribution is explicit and rational Make provisions for minors and children with special needs Disinherit troublemaker relatives Address the transfer of online assets Address the transfer of offshore assets Be presided over by an executor of your choosing Specify funeral wishes Prevent financial and legal grief Bring peace of mind Be considered the cornerstone of estate planning. Who can make a Will and when? Anyone who is 18 years of age or older, of sound mind, and free from coercion, fraud, and undue influence can prepare a Will.

Most people think they are too young or don't need to prepare a Will. But unwanted complications are common and you don't want to leave your family with grave inconvenience.

We all know life is unpredictable - best to prepare a Will when you are young and in the pink of financial and physical health. You don't need to wait till you are wealthy or 65. With old age comes physical and mental problems. People become incapacitated or even lose their ability to comprehend. A Will created at such an age, when a person might not be in their right senses, could create misunderstandings, doubts, and disputes in the family later. That's why we advise you to prepare your Will when you're young and fit. Remember, you can always revise your Will as your assets grow.

There's no specific age at which you should draft your Will (as long you're a 18 or older). But if any of the following circumstances apply, you should consider writing a Will right away…

Married or in a committed relationship: A Will can pervade financial security to your partner, strengthen your bond, and usher in peace and happiness. Have a family: If you have children or dependents to support, the responsibility rests on your shoulders. Along with financial planning, consider writing a Will during the 'accumulation phase' of your life and revisit it regularly to accommodate any changes. This will avoid complications later. Think of the long-term financial wellbeing of your family. Divorce or remarriage: In the case of a divorce, an existing Will may need to be rewritten considering alimony. Likewise, in you remarry, you may need to amend the existing Will. Of course, if you don't have one, you should write one right away. For instance, a remarried couple could have children from a previous relationship…and you'll want to safeguard the interests of your loved ones. You can also specify how would like to deal with matrimonial home, an inherited property, and a host of other finer issues. Terminal illness: God forbid, but if you are diagnosed with a terminal illness, and you haven't written a Will, you need to do so before health deteriorates. You don't want to add financial and legal grief to your family's emotional grief… Here are some questions to consider while writing a Will:

To whom would my assets be passed if I died intestate (i.e. without a will)? Who would look after my child/children if something were to happen to me or my spouse? Who would become the legal guardian of my children? Have I apprised my spouse and children to my assets and investments? Will children living abroad face inheritance taxes? In the case of an inter-caste marriage, what are my rights regarding family property? What are my and my family's rights regarding ancestral property? Who should I appoint as the executor, or trustee, of the Will? And so on… The disadvantages of not writing a Will are many:

Your family won't know where your assets are or how much you left behind, which can cause stress in a time of grief Other family members and a court could decide who will look after minors There will be no executor, no guardian…and appointing another person could risk delays, additional expenses, and even a loss There could be bickering in the family over assets Your spouse and children could be left fighting legal battles Your assets will be distributed as per the laws of your religion rather than your wishes Assets you wanted to keep within the family could be sold In the case of a common disaster, where your whole immediate family passes away, your assets may be passed on to relatives who you may have never spoken to or weren't on good terms with (rather than passing them on to charity, for example) Transmission of moveable and immoveable can get expensive and time consuming The list is far from exhaustive, but we're sure you can imagine many complications that could arise in the absence of a valid Will. So we repeat: Plan ahead and make a Will.

Today, a host of online portals can help you write a Will quickly, cheaply, and confidentiality.

But should you write a Will online? Well, if you have a small family (husband, wife, one child) and you have no controlling interest in any business but earn a salary, you can consider making a Will online if there aren't any complexities involved.

Most online Will writing portals are backed by legal services firms. They typically tie up with financial services providers for credibility and client access.

The concept of an online Will is slowly gaining popularity with nuclear families today. In most cases, the process is very simple:

Create an account on the service provider's website Log in and enter your information into a prescribed form Legal experts will then scrutinise the form Your Will be drafted and delivered via email (or in some cases, even at your doorstep) You will then have time to revise the Will if you find it's not drafted as per your requirements or to account for any changes in circumstances.

Some Will writing portals offer add-on services such as Will registration and the appointment of the executor, but they are binding on the customers.

If you are considering writing a Will online, www.willeffect.in offers a good service.

Now, for more complex cases - you are a citizen of another country, ancestral wealth involved, assets are substantial, several legatees must be accounted for, you are raising grandchildren or step children, you've remarried, you foresee the Will might be contested, you have a business, and so on - it may be wise to take the offline route with the help of an expert, an estate planner or attorney.

Who should stand as witness to the Will? You'll need a witness to your Will. Select yours carefully. The best practice is to have a trusted doctor or lawyer witness and sign the Will. It is not mandatory for a witness to read the contents of a Will before signing it. Their role is only to confirm that the Will has been signed by the testator in their presence.

However, if your Will is vague, one may have to review the intention of the Will (which the court will look at). In this case, it may be better to have a close confidant as your witness. But note that a beneficiary cannot be a witness, nor should a witness's spouse be a beneficiary. However, a beneficiary can be the Will's executor. A Will should have at least two witnesses.

Who should be the executor of the Will? The executor is in charge of carrying out the tenets of the Will. It's a role of great responsibility. Only a trustworthy, meticulous person with a reasonable grasp of financial matters should be named the executor of your Will.

An ideal executor will:

Be in touch with the beneficiaries of the testator, keeping them informed Record all estate transactions and decisions Petition the court if any terms in the Will are unclear Keep the affairs of the estate confidential Avoid conflicts of interest Meet all required deadlines The executor of your Will should stand for high fiduciary standards, as the estate beneficiaries can sue the executor in case of:

Conflict of interest Failure to prudently distribute the assets of an estate Dealing with the estate on their own accord The sale of assets Inappropriate decisions Losses incurred from irresponsible decisions Leaking confidential information Irregularity in maintaining records Unnecessary delays in settling the estate Any other problem Before you nominate an executor, seek their permission. If they refuse the responsibility after your death, the court might have to appoint an administrator.

If you can't decide on an executor for your Will, you may hire a professional such as a lawyer or chartered accountant. Increasingly, testators are considering 'professional executorship and trust companies', which by law have perpetual successions and are independent experts in the domain. That is, outliving your executor the issue of individual biases will never be an issue.

You might consider the opinions of your spouse and children while selecting an executor. And once you do choose your executor, inform that person as well as your family of the location of your Will to avoid uncertainty later.

Registration of Will It is not mandatory to register a Will. But if you wish, your Will can be registered with the registrar by paying a nominal registration fee.

To register your Will as a testator, you and your witnesses must be present at the registrar's office. If the registrar is satisfied with your documents, an entry will be made in the register and you will be issued a certified copy. If the registrar refuses to register the Will, you can file a civil suit in a court of law (with jurisdiction), and the court will pass a decree of registration of the Will if it is satisfied with the evidence you furnish. But remember, a suit can be filed only within thirty days of the registrar's refusal.

Note that once a Will is registered, it is in the custody of the registrar. It cannot be tampered with, mutilated, stolen, or destroyed. And if you want to amend a registered Will, it's better to re-register a newly drafted Will.

A registered Will does not provide legal sanctity, nor does it give any special status. A Will can always be challenged in a court of law. Registration merely serves as evidence of the genuineness of the Will.

Can liabilities be a part of the Will? No, liabilities cannot be part of a Will. Including liabilities in a Will would mean you expect your obligations to be met by your successors; but in reality, not even your loved ones would ever take them up. A Will with a liability can never go through. In fact all it can leave back is an unsavoury environment. Hence, while you may indulge in credit, ensure that you stay within your limits and the long-term financial wellbeing is not jeopardised. After all, you envision that your loved ones live happily and in peace, isn't it?

I am not an investment professional. I have never made any money managing other people's money. I went from rags to riches the old-fashioned way: by working hard and then investing my income as carefully as I could.

Because I'd done well on my own, I never considered seeking financial advice. Then a funny thing happened. I woke up one day with the thought that I should have a 'professional' manage some of my money.

I interviewed two firms. One was a boutique business based in New York City that a friend recommended. The other was a private banking facility for one of the world's largest brokerages.

The boutique firm was happy to take $100,000 of my money to get started. The other company wanted a minimum of $10 million. They both had fancy offices and pretty marketing brochures. But such frills scare me. They make me think 'Gee, these guys must be charging their customers a lot to afford all this stuff.'

Notwithstanding my trepidations, I worked with both of them for about six months. I answered their questions about my tolerance for risk (little to none). I listened to their presentations. And then I did something that I bet few of their clients ever do.

I started asking them questions. And I kept pushing them to explain why I should believe that they could help me become wealthier.

What I got instead was clever circumlocution. A financially sophisticated version of what you'd expect from your teenage son if you pestered him about why he didn't come home until four in the morning.

Those discussions convinced me that these guys could not manage my money better than I had been managing it.

To be fair, they certainly knew more about investment products than I did. But they didn't know more about how to become wealthy.

These guys were smart. They had graduate degrees from great schools. They spoke eloquently. They seemed so…so…inside the game. I wanted them to be better than me. I really did.

But they really didn't seem to care whether their services would make me richer or poorer. The contracts they wanted me to sign were going to put money in their pockets regardless. That didn't feel right. In the end, I told both of my elite financial planners to take a hike. And I went back to managing my money.

Seeing Only 20% of the Big Picture The investment advisory industry is a huge multibillion-dollar business based on hard work, clever thinking, and sophisticated algorithms. But also on one teensy-weensy lie.

The lie is that you can grow wealthy investing in stocks and bonds.

It's not a big black lie. But the unfortunate truth is the financial establishment rarely looks beyond stocks and bonds. And if you think about it, why would it want to? It makes its money by ushering you from one 'hot' stock or 'amazing' fund to the next.

Stock Markets around the world want you to think the stock (and sometimes the bond) markets are the only places you can make money. And because they know that you have heard that 'diversification of assets' is good, they give you the illusion of diversification by having your stock portfolio invested in businesses that are 'diversified' into manufacturing, retail, global trade, natural resources, etc.

This is, as I said, an illusion. At the end of the day, it's all invested in stocks or stock derivatives. The result? More risk and less potential wealth gain for you myself.

So start by deconstructing the little lie.

Building wealth involves much more than just investing in stocks and bonds. Most rich people get that way by consistently doing the following nine things:

Giving top priority to increasing their net investable wealth with more income, not maximizing returns Spending less as a percentage of net income as it grows so they can save more Understanding debt and using it occasionally and strategically to build wealth Investing in stocks and bonds with discipline - i.e., without expecting to get returns that are much higher than market averages Insuring themselves against 'black swan' events but not investing with the hope of profiting from them Owning tangible, portable, and non-reportable assets as a reserve that can be tapped into at opportune moments Investing in safe real estate - i.e., income-producing properties Investing directly in private enterprises and other 'outside-stock market' opportunities Keeping a substantial store of cash to be used when 'cash becomes king.' As you can see, investing in stocks and bonds is only 1 of 9 strategies you must follow to become rich, but that was the only one the two money-management firms I tried cared about.

How to Ensure Financial Growth and Security on Your Own So if you can't reasonably expect to get rich with just stocks and bonds, what can you do?

You can model your investing behavior on the behaviors that have been proven, time and time again, to actually work.

I'm talking about asset allocation. Asset allocation is the process by which you spread your wealth across different sorts of investments.

You might think that something so dull as asset allocation could not possibly be that important in acquiring wealth, but numerous studies have shown that it may be the most important factor. Because of an early financial disaster, I became an emotionally compulsive diversifier of practically every dollar I could save, putting some of it in bonds, some in stocks, some in cash, some in real estate, and so on.

Over the years, I have made hundreds of individual financial decisions - buy this, sell that. Some of them were quite good, a few of them were quite bad, and most of them were in between. And yet, overall, my net worth had increased considerably and consistently, without any down years, for more than 30 years.

I could see very clearly that this was not due to the particular buy/sell decisions that accounted for this good fortune. It was the general decisions about asset allocation that paid off.

Since I discovered this, I have been telling my readers about my own asset-allocation decisions every year. Not because I think my portfolio is the best possible exemplum of diversification but just to illustrate my belief that one needs to go well beyond some combination of stocks, bonds, and cash to win at the wealth-building game.

The following will give you a bird's-eye view of what I do:

Stocks - I have several stock portfolios: one that you might call 'legacy' stocks, one that I call 'performance' stocks, and a third group that includes what would conventionally be called 'growth' and 'speculative' stocks. The lion's share (maybe 80% to 90%) of my stock money is in the legacy stocks, a handful of big, dividend-giving companies that I'm happy to keep on a 'forever' basis. A smaller percentage is in dividend-giving companies with growth potential. And a tiny percentage are speculations - stocks I'm quite sure I'll lose all my money on, but I want to own them just for fun.

Fixed Income - Historically, bonds make up this asset class. At one time, bonds (govt bonds) represented as much as 40% of my net worth. My strategy was always to hold until maturity and buy them in 'ladders,' replacing them when they matured. But I haven't bought them since the rates dropped below 4.5% and I have sold some I didn't like much. Today they represent about 5% of my net investable wealth. I also own an annuity and a life insurance product. These are not the typical insurance products. Most annuities and life insurance products are very expensive and very complicated. You have to be very careful with those.

Rental Real Estate - Next to business ventures, income-producing property investments have been the largest contributor to my wealth-building success. I invest for the income and see appreciation as a bonus. As with insurance products, real estate investing can be tricky for the inexperienced investor. Most mainstream real estate advice is bad. But if you do it properly - focusing on income - this asset class will do huge work for your portfolio.

Direct Investments in Entrepreneurial Businesses - This is, by far, the investment class that has given me the best results. If you do this right, you can expect terrific, steady income and the potential for enormous growth. The trick here is to invest only in companies you understand and have some control over.

Chaos Hedges - This asset class is not - for me - an investment. It is, as the name implies, protection from times of turbulence - a market crash, bankruptcy, lawsuits, etc. In this class, I include gold, silver, and platinum coins (bullion and one or two 'rare' types). Gold has gone up and down since then, but at today's prices, it looks good again.

Collectibles - This is a category of investing that you will probably not be interested in, unless you want to enrich not just your net worth but also your experience of living each and every day for the rest of your life. My preferred collectible is fine art and first-edition books, but you can invest in anything from baseball cards to vintage cars to surfboards.

Options - Although my cardinal rule is not to invest in something I don't understand, I found a way to trade options that I understand and also believe in. Like real estate and insurance products, most options strategies are speculations. I'd advise against them. But the way I do it, selling puts on 'legacy'-type stocks, or blue chip stocks, has worked very well for me.

Cash - I call this a 'Cash Opportunity Fund.' You keep a store of money you add to every year. That way, when the crash comes, you can use this fund to swoop in and buy a bunch of great assets at bargain prices.

A trust is an agreement between the settlor and the trustee to transfer legal ownership of assets to the trustee who then holds it for the benefit of the beneficiaries as specified in the trust deed. A trust has has four components:

Settlor: The author of the trust Trustee: Individual or entity appointed by the settlor to administer the trust Beneficiary: The person(s) for whose benefit the trust is created Trust property: Movable and immovable property, e.g. cash, jewellery, land, investment instruments, etc. To create a legal trust, it is necessary for the settlor to comply with four conditions:

Make a binding and unequivocal declaration Outline the purpose of the trust Clearly specify the beneficiaries Transfer the identifiable property under an irrevocable arrangement to the beneficiaries Indian law classifies various types of trusts depending on their purpose. The two most popular are…

Public Trust: A public trust is constituted wholly or mainly for the benefit of the public at large. These are usually religious or charitable in nature.

Private Trust: A private trust is constituted for the benefit of one or more individuals who are, or within a given time, identified. It's governed by the Indian Trust Act, 1882, but if such a trust is created by will, it shall be subject to the provisions of the Indian Succession Act, 1925.

Why consider a private trust? You want to… Ring-fence assets from any litigation and avoid the rigmarole later Ensure assets are used for specific purposes Distribute assets based on a contingent event (e.g. the beneficiaries reach a certain age) Ensure your children are well looked after Ensure prudent tax planning A private trust can help with effective estate planning, but the terms must be well documented so that the beneficiaries indeed benefit from what's bequeathed to them. Remember, a trust can be created during the settlor's lifetime (for the benefit of loved ones, who may or may not be dependents, and for the settlor himself as he ages), or after the settlor's death (to bequeath assets to loved ones).

Wills vs Trusts With a trust, the author can avoid issues that sometimes arise with a will, such as determining the authenticity of the will, the mental soundness of the author, etc. Wills can be challenged on numerous grounds, and it can take years to get probate on a contested will and can be expensive.

On the other hand, a trust deed is Creating a private trust resolves most of the problems and can be highly efficient never disclosed to anyone and is highly confidential and there is no need to obtain probate in the management and distribution of assets.

Although a private trust is the best way to bequeath assets, it is ideal to have a combination of both will and trust. But it will all boil down to the individual, the extent of assets, the objectives, and the constitution of the family.

A private trust does have limitations though…

Cost: Stamp duties on the transfer of immovable property differ from one state to the other and can be high. Trustee: The success of a trust depends upon the selection of the trustees. An incompetent trustee can defeat the entire purpose of setting up the trust in the first place. Trust Deed: Drafting a trust deed is more difficult than writing a will. If not drafted clearly, a trust deed is difficult to execute. Also there's less flexibility to a trust.

Now that we have understood the benefits of writing a Will and holding a private trust, let's address a common misconception in estate planning - nomination.

'I have nominees on all my investments? Do I still need a Will?'

Most individuals assume nominees to be a legal heir. Counterintuitively, that's not true. A nominee is the trustee of your assets, to whom the mutual fund company, insurance company, and so on will transfer your funds. But this does not mean that the nominee will always be the owner of your assets. The owner of your assets will be your legal heir as per your Will. Or if you have died intestate (i.e. in the absence of a Will), the transmission would be as per the country's succession laws.

Let us understand who will be the beneficiary of the following assets:

Financial assets For most financial assets (such as mutual fund investments, bank accounts, and so on), a nominee is not compulsorily or necessarily the beneficiary, but only a trustee responsible for distributing the assets to your legal heirs as per the Will or succession laws.

However, for some financial assets such shares and debentures, the nominee can be the owner of the assets after your death and not the legal heirs. The Honourable Bombay High Court in its judgement in the 2010 Harsha Nitin Kokate case ruled that the nominee and not the legal heirs would inherit the shares.

Later in 2015, in the Salgaonkar-Ghatalia case, judgement the aforementioned was overruled by Justice Gautam Patel of the Bombay High Court and upheld the view that rights of the heirs override those of the nominee.

One way to address this ambiguity and avoid a messy court battle is to appoint the intended beneficiaries as nominees. It is also advisable to pen down a clear and unambiguous Will, which shall automatically supersede everything else as per the honourable court's latest judgement.

Insurance Earlier, the nominee was not necessarily the beneficiary of the policy and had to distribute the insurance claims of life insurance policies to the legal heirs. However, the new Insurance Laws (Amendment) Act, 2015, has addressed this efficaciously. There is a separate category now called 'beneficial nominee'. If you nominate someone as your beneficial nominee, that person does not have to share insurance money with other legal heir. A policyholder can appoint multiple 'beneficial nominee' mentioning their share.

It is also possible to appoint a 'collector nominee' who will simply receive money from the insurance company and facilitate the transmission to the legal heir based on succession laws.

New rules have also made it clear that a nominee has a right to claim money even at maturity in case the insured person survived the term of insurance but died before claiming the maturity benefits. What's more, earlier, original nomination used to stand cancel on assignment of policy as collateral to a loan. However, new rules say that insurer will pay-off the creditor first, but will have to directly transfer the rest of the amount to the nominee appointed by the policyholder. The new rules have not only made nomination more effective but also made the process of nomination more meaningful.

Property With property, the nominee may not be the ultimate beneficiary of the assets but may be required to pass assets to the legal heirs. Nominees who are unwilling to pass the asset(s) to the legal heirs in good faith can be taken to court. The legal heirs would then need to substantiate their claims by producing a succession certificate or a probated/registered Will.

Hence, to transmit your assets to your loved ones smoothly, you may nominate your intended beneficiaries as nominees to avoid confusion. You can also make a Will and clearly state the name of the beneficiaries of every asset in your Will. In the absence of this, someone else might claim your assets and your family might have to go through lengthy and complex legal procedures to obtain what's rightfully theirs.

Simply nominating a person while creating an asset does not necessarily make them the beneficiary of the asset after you are gone. Every asset is governed by different laws that could change over time. Estate planning is necessary to ensure the easy transmission of your wealth.

Nomination versus Assignment With a life insurance policy, the new Insurance Laws (Amendment) Act, 2015, makes nominees - restricted to immediate family members such as spouse, parents, and children - the beneficiary so that the insurance money can go to the intended recipient. Nomination is a right given to the policyholder to appoint person(s) to receive the money after the death of the holder. One can appoint multiple individuals as nominees and specify their shares of the policy proceeds in percentage terms.

However, for the assignment of a life insurance policy, the nomination automatically stands cancelled.

An assignment of the policy automatically transfers the right of the policyholder (assignor) and their nominee to receive the sum assured on death of the policyholder or on maturity of the policy to the assignee. Assignment must be in writing and a notice to that effect must be given to the insurer. But the catch is that once the assignment has been done, it cannot be revoked. After assignment, the assignee will be eligible to receive the proceeds from the policy, and not the assignor, even if you survive the tenure (unlike nomination).

The assignment of life insurance policies can also be used as collateral while taking a loan. If an insurance policy is assigned to the lending bank and the policy holder expires during the tenure, the insurance company shall pay the outstanding loan amount to the bank and the remainder (if any) will be paid to the legal heirs of the policy holder. In this case, if the holder survives the tenure, the bank will reassign the policy back to that person.

When everything goes to hell, the people who stand by you without flinching - they are your family. - Jim Butcher

India is blessed with rich tradition and a somewhat rare joint family system. We understand the importance of the joint family. It helps pass on values and culture from one generation to another. A family that lives together - grandparents, parents, uncles, aunts, and their children - share the merits of patience, discipline, and respect for elders.

The Hindu Undivided Family (HUF) is a kind of 'joint Hindu family' that enjoys a separate tax status under the provisions of Section 2(31) of the Income-tax Act, 1961.

The HUF is automatically constituted under the Hindu law by a Hindu male living together with his wife and children and is even extended to their wives and their children. It can be created by members of a family, wherein the members are lineal ascendants or descendants. The concept of HUF is not only applicable to Hindus, but even those professing Sikhism, Jainism, or Buddhism.

The affairs of the HUF are managed by the senior-most member of the family, who is known as the Karta (manager) of the HUF. A typical HUF consists of a Karta, wife, his sons, grandsons, great grandsons, and daughters. The daughter(s) on marriage continue to be the coparceners in her father's HUF, but are considered to be members in the husband's HUF post-marriage. The male members are by and large called the coparceners of the HUF. A HUF can consist of just two members, one of whom is a coparcener. It may also have several branches or sub-branches. The married male members (i.e. the coparcener or the son) of the HUF having their own families will form a branch of the HUF. Likewise, when the grandsons have families, they too will be sub-branches of the HUF.

To enjoy a proper status and rights of a HUF, one should manifest it in a particular name and get a permanent account number (PAN) and open a bank account. If you have an income-generating asset such as an ancestral property or a business that yields income for their entire family, you can easily get it recorded under the tax laws and even claim tax benefits under various sections of the Incometax Act, 1961. It is noteworthy that a HUF can also pay salaries to its members in case they are jointly managing a business, and can even provide loans to its coparceners and members for various purposes.

Now, before we go ahead with estate planning for HUF, let's understand the rights of coparceners and members of HUF…

Once a property is assigned to a HUF, all coparceners have an equal right to it. Even the Karta cannot transfer the property unless he gets consent from all coparceners. All coparceners can at any time, demand partition of an ancestral property assigned to a HUF by way of distribution of HUF property among the coparceners. While each coparcener would be entitled to a share of the property, the members would be entitled to receive maintenance from the HUF. If a coparcener decides to separate himself from the HUF, the others being his father or brothers may continue to be coparceners to the extent of their share. In case he has a family, then he will become the head of a new joint family. If he obtains any property on partition with his father and brothers, that property will become the ancestral property of his branch. The interest of coparcener in property on death shall transfer by testamentary or intestate succession and not by survivorship. The discrimination between son and daughter has been removed vide amendment to Section 6 of Hindu Succession Act 1956 w.e.f. September 9, 2005, which provides that all daughters of a coparcener who were unmarried as on the date of the amendment would be by birth regarded as coparceners in the same manner as the sons in the family. Consequently, she would have the same rights and be subject to same liabilities as the son. Hence, unmarried daughters as well as daughters married after the date of the amendment are regarded as coparceners and thus eligible to demand partition of an HUF, and receive equal share in the HUF property. It is noteworthy that this right is not extended further to next generations of such daughter. Further a woman can even claim to be the Karta of the HUF (vide a recent judgement of the Delhi High Court) if she is the eldest coparcener in the HUF. Properties or Assets that can be classified as the assets of a HUF are:

Ancestral property or assets inherited from father, grandfather or great grandfather Any property or assets received on partition of a larger HUF of which the coparcener was a member in the past Property or assets acquired with the aid of joint family property Separate property or assets of a coparcener, blended with the family property Any assets or property received as a gift by the HUF from close relatives or friends Assets bequeathed by a Will that specifically favours the HUF It is noteworthy that the term 'Coparcenary Property or Joint Family Property' is wider in connotation than the term 'ancestral property'. While an 'ancestral property' is the one inherited from father, grandfather, or great grandfather, in which the share is allotted on partition; 'coparcenary property or joint family property' is acquired by the coparceners with joint efforts - so for example, father and sons would be joint family and hold coparcenary property.

There may be an instance where a single male member in the family having no ancestral or coparcenary property, receives a gift from relatives or friends of members of family. If the single male member of such family decides to add this gifted property into joint family property, then such property would neither be ancestral nor coparcenary property but a HUF property.

While there can be a gift or a Will for the benefit of a HUF, it is immaterial whether the giver is male or female or a member of the family or an outsider. What matters is the gifted property is for the benefit of the whole family. The Karta of the HUF can make a gift of an ancestral immoveable property within a reasonable limit keeping in view the total extant of the property. The Karta can even gift his self-acquired property to the branch HUF of his son, through a Will, which will then become the ancestral property of the son's HUF.

What happens in case of death of the Karta? The Karta manages the family property, which is regarded as the joint property of all the coparceners. On the death of the Karta, his HUF can continue and the next senior-most coparcener of the family shall be the Karta. If under given circumstances, the senior-most coparcener is not in a position to discharge his obligation, then the next senior coparcener can be the Karta of HUF with the mutual consent. Hence with mutual consent, the HUF can also appoint any coparcener as the manager. The assessing income tax officer should also be intimated about the death of the Karta and the appointment of the new Karta.

In case of death of a coparcener, his interest in the property of a Joint Hindu family shall devolve by testamentary or intestate succession, as the case may be, and not by survivorship.

Section 6 of the Hindu Succession Act, 1956, as amended by the Hindu Succession (Amendment) Act, 2005, states that a coparcener is entitled to bequeath his share in a joint Hindu family property to any person of his choice, in any ratio, by executing a Will or intestate succession. A coparcener can bequeath only his share in the HUF property and not the entire property of the HUF.

The share in property can be bequeathed to his son and/or to his grandsons and/or to his great grandsons or any person of his choice. In case the coparcener does not execute any Will, the property will devolve as per the rules of intestate succession applicable to Hindus under the Hindu Succession Act, 1956, as stated below:

The daughter is allotted the same share as is allotted to a son; The share of the pre-deceased son or a pre-deceased daughter, as they would have got had they been alive at the time of partition, shall be allotted to the surviving child of such pre-deceased son or of such pre-deceased daughter The share of the pre-deceased child of a pre-deceased son or of a pre-deceased daughter, as such child would have got had he or she been alive at the time of the partition, shall be allotted to the child of such pre-deceased child of the pre-deceased son or a pre-deceased daughter, as the case may be. These guidelines will help you to take right decisions while transferring assets and properties of a HUF. Don't forget that the Will must be in writing, signed by the testator in the presence of two or more witnesses, who should also sign as witnesses on the Will. It is noteworthy that any part of the property can't be bequeathed to the signing witness.

Let's understand the concept of forced heirship with the help of some simple snippets:

Mr Vivek Shah (65), a Hindu, residing in Maharashtra, has decided to pen down his Will. He plans to distribute his assets between his wife, children, and 'YouWeCan' - a cancer charity in India. His children decided to challenge the Will, as they believed it's illegal for their father to bequeath his assets outside the family. Mr Shabbir Ahmed (60), a Muslim, residing in Hyderabad, has decided to donate 100% of his estate to 'HelpAge India' - a leading non-profit organisation caring for disadvantaged elderly senior citizens. His spouse and children were shocked and they don't believe he can do that. Mr Jack Pinto (75), a Christian, residing in Goa, has decided to break away from family customs and traditions and bestow his estate to his close friend Mr Jason Pinto. Is it mandatory for Vivek, Shabbir, and Jack to bequeath their estate to family members? Or can they give it to a charity, trust, social cause, or anyone else? Does the law allow it?

The Indian succession system is complex, confusing, and often cumbersome. There isn't a uniform civil code applicable to the whole of India. And religion plays an important role in inheritance rights.

Before we address the dilemmas of the Shah, Ahmed, and Pinto families, let us first understand the concept of 'forced heirship'.

Forced heirship is a rule of law wherein an individual is not free to dictate their estate heirs. The law automatically bequeaths certain individuals a certain portion of the estate.

These individuals are known as 'protected heirs' and typically include the surviving spouse, children, and other relatives.

The rationale behind forced heirship is family protection. If the deceased was a primary bread-winner with dependants, the forced heirship rule does not permit an individual to Will away his estate without providing for his dependants.

These restrictions apply irrespective of the terms of the deceased's Will, and there may be a situation where the stated wishes of the deceased may not be carried out by dissatisfied protected heirs.

However, the forced heirship provisions typically apply only to a portion of the deceased's estate and the balance may be distributed at the discretion of the testator.

So, how is forced heirship applied in India?

Hindus follow the Hindu Succession Act, 1956. Muslims follow Islamic Law on Succession - Sharia Law. There is a Parsi Law, a Christian Law, and a Special Marriage Act for spouses following different religions. Regardless, all Wills, except Wills written by Muslims are governed under the Indian Succession Act, 1925, for the purpose of execution, probate, etc of Wills.

The exception to the above rule is the state of Goa, where the Portuguese Uniform Civil Code applies, making it mandatory for all religions to follow a common law regarding marriages, divorces, and adoptions.

So, if you are Hindu, Parsi, or Christian, and don't live in Goa, you have the freedom to Will away your estate as per your wish, even against family wishes and social customs and traditions. So the rules of forced heirship don't apply to these individuals.

However, if you are a Muslim, the Islamic Law on Succession - Sharia Law, permits you to Will away only one-third of your property while two-thirds goes to the family, irrespective of a Will to the contrary. This restriction can be waived by all members of the family, in favour of the testator, permitting him to Will away his property as per his desire.

So, coming back to our snippets, the Hindu Succession Act permits Mr Vivek Shah to Will away his property to anyone or any charity that he pleases. It is the executor's job to obtain the probate to avoid any complications. (A probate is obtained from a court with the necessary jurisdiction proving that it is the last and final Will of the deceased written on a particular date.)

On the other hand, Mr Shabbir Ahmed and Mr Jack Pinto cannot give away their entire estate to charity or to a friend as the rules of forced heirship are applicable.

How to distribute assets is a question every head of household has to answer. Succession planning is never easy. And in a country like India, where social customs and traditions prevail, discussing succession planning is even more complicated. But it is essential if you want to ensure a peaceful handover the estate.

Lose money for the firm and I will be understanding; lose a shred of reputation for the firm and I will be ruthless. - Warren Buffet

Berkshire Hathaway owns almost 10% of Wells Fargo. The prominent US bank recently admitted to a massive scandal. The bank's management has made a mockery of Buffet's philosophy of corporate culture. Surprisingly, Mr Buffett has been tightlipped so far. Speaking to Fox Business a few days ago, he said, 'If I start commenting on that or anything else, it will lead down too many paths, so I will wait until November to speak about it, the election or any other subject.'

So until then, let's try to understand the severity of the fraud, the complexity of the problem, and its consequences for American society. One of the biggest scams in the American banking system offers lessons not only for the US but by every major economy. India must refer to it as a case study.

This Is What Happened at Wells Fargo Over the last six years, employees of Wells Fargo opened twenty lakh bogus accounts for their existing customers. Wells Fargo serves nearly four crore retail customers. So 5% of the bank's customers were victims of the fraud. The employees who opened sham accounts, allegedly, transferred funds from the customers' original accounts to these fake accounts without the account holders' consent. The fraudulent transaction made in the name of the customers earned real fee income for Wells Fargo. This fee income supercharged Wells Fargo's earnings and employees who committed the fraud got raises.

As this massive scandal has come to light, the bank is facing serious charges and various authorities have already imposed a collective fine of US$185. The bank fired nearly 5,300 employees. Furthermore, approximately US$2.6 million will be paid as compensation to customers who were overcharged.

Firing thousands of employees who had no say in the corporate decision-making process is a wishy-washy step and a rather poor response to save the image of the Bank that's already shattered into pieces.

But The Real Story Is This… Unlike many other top American investment banks, Wells Fargo is still a mainly conventional bank involved in the business of lending and borrowing. Naturally, net interest income (NII) forms a large chunk of its revenue, whereas investment banks earn primarily through trading activities.

In the aftermath of the financial crisis of 2008, the Federal Reserve slashed rates aggressively. Wells Fargo, being a major player in the mortgage market, was hit hard. It not only lost interest income, but the value of collateral came under severe pressure with the declining property prices. To compensate, Wells Fargo adopted a strategy of cross-selling products to existing customers to earn more income from fees.

The cross-selling targets were so steep that bank employees working for US$12-15 per hour found it impossible to withstand the pressure. Many of them felt their incomes were inadequate to support their families. And as we all know, the job market was fragile and switching jobs wasn't easy at all, especially in banking.

Wells Fargo made its employees cross-sell as many as eight products, meaning a customer who bought one product from the bank was expected to buy eight more products from the community banking division of Wells.

The logic for setting such high sales target was rather bizarre. While addressing the shareholders of Wells Fargo & Company in the Annual Report 2010, John G Stumpf Chairman, President and Chief Executive Officer wrote: 'I'm often asked why we set a cross-sell goal of eight. The answer is, it rhymed with “great”. Perhaps our new cheer should be: “Let's go again, for ten!”'

Whether customers needed as many as ten products, Wells set the targets. Then the management pushed employees so much that they crossed every line to produce the expected results. This happened right under Mr Buffet's nose, and surprisingly he never thought to question this madness. In fact, he hiked his stake.

The hidden motive behind promoting cross-selling was to attract the attention of the investor community. The success of the cross-selling efforts was seen as a positive development for shareholders. The stock price climbed relentlessly even when interest rates were near zero and the mortgage market was completely out of whack. John G Stumpf continued to boast. And he pretended that ethics meant everything to his bank.

If you open the Wells Fargo vision and value statement, you will find a quote from Mr Stumpf: 'Integrity is not a commodity. It's the most rare and precious of personal attributes. It is the core of a person's - and a company's - reputation.'

The value statement continues: 'We have to earn that trust every day by behaving ethically; rewarding open, honest, two-way communication; and holding ourselves accountable for the decisions we make and the actions we take.'

Mr Stumpf laid the foundation to make Wells Fargo a multi-billion-dollar company. From about US$100 billion in 2009, the market cap of Wells jumped to US$300 billion in 2015, making it the most valuable bank in the world.

Dishonesty went up along with the stock price

Soldier (Source: Yahoo Finance)

As per his own admission before the Senate, Mr Stumpf owns 65 lakh shares in Wells Fargo. In other words, when the scam was building, the Chairman and CEO of the bank was making a fortune on Wall Street. As the stock price appreciated more than US$30 between September 2011 and May 2015, his wealth grew a mammoth US$200 million. As the Chairman of the Board and CEO of the company, he was answerable only to himself. No one questioned him about his love for the 'figure 8'.

The investment rationale John Stumpf presented to Wall Street on numerous occasions was so strong that Wells Fargo became an investor darling. And over the last six to eight years, Berkshire Hathaway consistently raised its stake.

On the other hand, the battle to survive among employees drove many of them to addiction. But as Mr Stumpf publicly admitted, he hasn't fired anyone in the senior management. The board has so far fired only front office staff. Compliance officers, business heads, board members, and other high-level staff all have their jobs, pay packages, and incentives. They haven't returned even a penny of the personal wealth they earned while the scam brewed.

It's striking that the authorities couldn't detect the fraud all these years. And the timing of the scandal, only a few months from the presidential elections, is also suspicious. The fine imposed on Wells Fargo may appear massive, but the fact is it's not even a percent of its market cap. Only a percent of staff lost their jobs and what's the gain?

The stock more than doubled on the 'cross-selling story' over the last five to six years. Investors have been expecting that, as and when interest rates move up, conventional banks such as Wells Fargo that have solid customer relationships would do a lot better. It seems, in the 2010 annual address, Mr Stumpf was even hinting at making the stock ten-bagger when he said, 'Let's go again, for ten!'

Wall Street is addicted to growth stories. And conveniently shuts its eyes to reality.

The Wells Fargo expose has given rise to many questions that are yet to be answered. Meanwhile, Mr Buffet's million-dollar silence is palpable. How could Mr Stumpf manage to mislead the Oracle of Omaha. The story will unfold only after presidential elections.

What Are the Lessons for India? Cross-selling and misselling are used interchangeably in the context of Indian banks. But either way, it isn't new to Indians. However, the regulators have started taking strong actions lately against banks violating rules. Nonetheless, there is still enormous scope for improvements in the corporate governance of Indian banks.

The state-controlled public sector banks are on the brink of losing thousands of crores of rupees in bad assets due to mismanagement and shady loan approval processes. Many private sector banks have mastered the 'art of cross-selling' third party products.

Compare the pay packages of relationship managers of private sector banks with the pay packages of a person with the same post in a public sector banks. One could argue the difference might be an indication of the efficiency of the private sector banks. That might be true to an extent, but do you think private sector banks can afford to pay fat salaries and incentives to their front office staff in wealth management divisions just to maintain relationships, improve customer satisfaction, and do sales practices passively? Please recall how many times your relationship manager followed up with you to invest in an 'attractive insurance-cum-investment plan'.

On the other hand, political interference in public sector banks and the nexus of corrupt officials and corporates has been costing Indian taxpayers a great deal.

Bulls on Dalal Street, like their 'Big Bros' on the Wall Street, always chase growth. So, amidst flat credit growth, any bank that announces superior revenue growth receives a thumbs up. Many Indian banks have openly talked about their ambition of raising 'fee' income. But banking services in India, being nascent, have not driven any bank to the extent of Wells Fargo.

There is plenty of easy prey though. Many people in India still don't have adequate life insurance coverage, and banks make it a point to sell them any policy that earns them good commissions, whether it is suitable for the customer or not. Unfortunately, more than awareness, commission-driven misselling has been driving the growth in the insurance sector. Insurance companies controlled by banks or otherwise are now creating enormous wealth for their shareholders.

Although insurance is the most grossly mis-sold financial product, it's not the only financial instrument out there. Mutual funds, credit cards, and other liability products too are missold. Banks aspire to report higher growth in earnings per share (EPS) year-on-year. That boosts the stock price. In the name of nurturing relationships, many banks are misusing relationships to sell more financial products and improve the balance sheet.

It's high time for Indian banks to realise that value created for shareholders on Dalal Street would be ephemeral unless it is built on a strong foundation of customer satisfaction.

If you invest in banking stocks, you should go beyond what the management of a bank says and try to understand how satisfied the customers are.

To safeguard your interest as an investor and a customer of a bank, keep the following in mind:

Unless you understand the nitty-gritty of the financial products, you shouldn't buy them. Ask your relationship managers relevant questions and try to read his sales pitch. You may do some product research on your own or may take expert help. You should take pains to check your monthly account statements. The devil always lies in the details. Your account statement reflects all charges banks collect from you by directly debiting your account. Monitor the performance of products you buy and also assess how the similar products available in the market are doing. Request all communications in writing and know your rights as a consumer of banking and financial services.

One of the things we often miss in succession planning is that it should be gradual and thoughtful, with lots of sharing of information and knowledge and perspective, so that it's almost a non-event when it happens. - Anne M Mulcahy An estate planner plays a very important role in estate planning.

The qualities of an estate planner should not be judged in a single meeting, but spread over several initial meetings. During these meetings, you, the testator, ought to deeply engage with the estate planner, asking pertinent questions covering topics such as:

Their area of practice Their experience Their services (e.g. Can they institute a trust?) Their fees (fixed or on time basis) The services included in the fees (e.g. Do they provide a review and maintenance service to account for any changes in law or your personal circumstances?) …and many more!

You should also study any testimonials and get a sense of the service. Do research and reference checks; talk to people who've hired their services, but beware of a one size fits all approach.

It's equally your responsibility as the testator to disclose material information to the estate attorney. If you keep secrets, your family may face problems later. You also must assess if the estate planner is keen to have you as a client. It's important that you are comfortable with your estate planner; after all, it is a long-term relationship.

It's probably obvious by now that an estate planner carries substantial responsibilities. Here are the qualities to look for in a good estate planner…

Righteous: An estate planner should have absolute integrity and ethics. They ought to be morally upright and never compromise safeguarding and serving the interests of their clients. Highly proficient: Advanced degrees in estate planning laws and practice are a must. Make sure there isn't the slightest ambiguity to the documentation. Personality: You will be discussing personal issues, so a pleasant personality can bring the necessary comfort factor and help you to ask sensitive questions and share details without hesitation. Compassionate, communicative, comprehending: A good estate planner will always give you a patient hearing. They will display sensitivity and the ability to comprehend wisely and render prudent advice. Collaboration and communication are key. As a testator, do not consider making a Will or instituting a Trust as an end. It is just the beginning of your long-term relationship with the estate planner. Changes to your Will or Trust will likely come up from time to time, and you may need to incorporate them. So connect with your planner from time to time and keep them abreast of developments; this will help you take timely actions.

Passing Digital and Online Assets to Loved Ones The entire world has gone online.

Today, we can bank, invest, and trade…online from anywhere in the world. We can interact with and send data to anyone anywhere. We can communicate freely through email, messengers, and internet voice calls. Blogs and videos keep us informed and entertained. Social networks provide a platform to connect and share our lives with others.

And through it all, a lot of important private data - vital files, passwords, etc - are stored as 'online property'. Have you ever thought about what will happen to your online property after your passing?

You've probably considered the transfer of your physical assets - your land, jewellery, home, stocks, etc. But not many think about making provisions for the transfer of online assets and accounts - your email data, photos, videos, documents, passwords, and other digital property.

Providing for the transfer of online assets is serious. If you do not account for vital online information in your estate plan, it can be a herculean task for your loved ones to get hold of your digital property later.

For example, you could have important files saved on a cloud server or in your email account, but it may not be accessible to your loved ones. Many online account service providers won't be able to provide access to your loved ones unless they can produce adequate evidence to prove their relation with you.

So for a smooth transfer of online assets, follow these steps…

Just as you nominate a beneficiary in your Will to claim funds in your bank account, nominate someone to claim your digital assets. If you want someone to have access to you email and other online accounts, explicitly mention that in your Will. Store usernames and passwords in an encoded format online. You may also write them down and store them safely in a trusted bank locker. Just beware that both storage methods are subject to theft. Email account providers, social networking sites, and online banking and trading services may most likely have different provisions. Contact these companies to find out how to provide access for your loved ones. Hire a trusted lawyer who has expertise in planning the transfer of online assets.

Estate planning is an important and everlasting gift you can give your family. And setting up a smooth inheritance isn't as hard as you might think. - Anne M Mulcahy Indeed, irrespective of your level of wealth, effective estate planning can be an everlasting gift to your family. Today, in this last part of our series on estate planning, let's review some of the key benefits we've seen over these past weeks. Effective estate planning…

Prevents financial and legal grief to your loved ones Financial and legal grief is the last thing you want to add to your family's emotional grief. With prudent estate planning, you can ensure the long-term financial interests of your loved ones while minimising the legal rigmarole.

Avoids family conflicts The lack of an estate plan can lead to squabbling and bickering within the family. Furthermore, if you have young children or other heirs whom you'd rather wait for their inheritance, you may leave your assets to them under a Trust.

Ensures assets go where and to whom you want Estate planning ensures that your assets - physical, financial, and online - will be transferred to the people of your choosing. However, if you die intestate, the law is not likely to take into account your personal relationships and preferences as they distribute your assets. Provide for a loved one with special needs Besides leaving behind a corpus for an individual with special needs, you can also designate their guardian. Pass items of sentimental value to a specific individual Say you are defence personnel and wish to give your war medal to your daughter who has interest in war history; this is possible through prudent estate planning. Otherwise, such items of sentimental value aren't likely to be granted to the person you'd prefer. Prepares for contingencies

With systematic estate planning, you can determine who will handle all your financial affairs in case you were to become incapacitated tomorrow. Similarly, you can nominate a person to make your medical and health-related decisions. You can specify person(s) to take care of your estate and manage your finances after your death. Reduce inheritance tax

Yes, this is possible…with prudent planning. For instance, instead of bequeathing assets after your death, it may be better to gift them to your loved ones while you are alive. That's because, if left to the prevailing intestacy rules, higher tax will likely be applicable to your property and other assets. You can also make separate arrangements for tax payments. For example, you can provide for tax liabilities separately from your residuary estate if you don't want to reduce the inheritance value of assets by way of taxes. For these reasons (and many more), you should start planning your estate now. It is never too early. Estate planning is an on-going, dynamic process. Once an estate plan is in play, you can review it from time to time to account for any changes to your finances or family. We recommend you work with a trusted lawyer to ensure a legitimate and prudent estate plan.

Let us share with you a startling misconception…

Many investors 'perceive' investing in a bank fixed deposit as 100% safe!

But in the pursuit of high returns, they depict a penchant to deploy hard earned money in a bank, whose fundamentals may be on a shaky ground.

While some are aware that their deposits are secured under the Deposit Insurance and Credit Guarantee Corporation (DICGC), a holistic understanding of how the said scheme functions is missing…and often, investors undermine the instances of bank defaults and liquidation of banks as well.

The intent of sharing this story, is to make you aware of the potential risks you might be exposed to.

First, here's a backdrop… Over the last year and a half, banks in India have been lowering the interest rates on deposits. Lower demand from corporates for new credit has guided banks to go slow on deposit growth. Nationalised banks and large private banks, including foreign banks, have been the frontrunners in cutting deposit rates. This has led many investors, who have a dominant portion of their portfolio in fixed deposits, worried about its performance…and as result, induced them to look at other alternatives such as fixed deposits of co-operative banks who offer a higher rate of interest - which in some cases compared to a fixed deposit with a basis point depending on the term

But unfortunately, what comes along is often ignored or undermined.

Perhaps investors are compromising on the aspect of creditworthiness of banks… Have you heard of Baranagar Co-operative Bank Ltd and Shri Shivaji Sahakari Bank Ltd? RBI cancelled licenses of both these banks after repeated attempts to revive them failed. In other words, these banks hit the dead end as far as the business was concerned. While the former was a West Bengal-based bank, the latter was founded in Maharashtra. DICGC settled claims worth Rs 14.99 crore and Rs 7.27 crore respectively in case of Baranagar Co-operative Bank and Shri Shivaji Sahakari Bank in the last eight months.

Now if you're thinking these were just one-off instances due to the poor credit situation across the economy, here's the bigger picture.

As per the data disclosed by DICGC, it has settled claims worth Rs 2,473.55 crores over the last 10 financial years in 178 cases. This is not to say that all depositors recovered all their hard earned money. A report from The Hindu Business Line in February this year revealed even more startling facts - 69% of the total value of deposits held by investors was not covered by the insurance scheme.

More about the deposit insurance… It is vital to note that DICGC protects you against any default only upto Rs 1 lakh of your deposits held across branches of a bank and in various accounts.

In simple words, your deposits under a savings bank account, FDs, current account, etc would be pooled for the calculation of determining your exposure. The threshold of Rs 1 lakh also includes accrued interest as well.

The process of claim settlement is complicated, but DICGC is required to settle claims within two months of the date of receipt of the application. For any discrepancy in data or deficiency in compliance, DICGC may stall processing the disputed payment until it receives clarification from the bank. For example, if the list of payers and payees contains twenty common names and bank records fail to prove their identities and residential addresses (due to discrepancies), DICGC may adjust their liabilities against claims and pay the balance unless bank shows they are different individuals providing documentary evidence.

How can you avoid landing in trouble? Be very careful while trusting a cooperative bank or any bank with your money. Don't forget, banks that have undergone liquidation were mostly co-operative banks. Always open a fixed deposit with financially sound banks. Do check the health of the bank before investing your hard-earned money.

Keep away from banks that have a clear political dominance, although they might appear sound on paper. If at all you find interest rates offered by co-operative banks extremely attractive and wish to take advantage of the higher rate, invest intelligently. A deposit insurance scheme recognises the different ownership patterns involving the same people. For example, you can be a first applicant and your spouse can be a second applicant for one FD receipt. You can just reverse the ownership pattern for opening another FD with the same bank. By doing this, you can get an insurance cover for upto Rs 2 lakh. More than two owners will put you in an even better position. You need to satisfy one of the two conditions mentioned in the deposit insurance scheme - in the joint accounts, the names should appear in different order or names should be different.

PersonalFN counsels investors to be prudent and not take undue risk while parking hard-earned money in bank fixed deposits that offer a few percentage points higher than the rate of interest. This could save you some pain…and ensure your long-term financial wellbeing. Treat the compromise on the returns as the premium you pay to buy insurance for peace of mind.

Live within your means, never be in debt, and by husbanding your money you can always lay it out well. - Andrew Jackson.

Have you ever wondered what will happen to your debt when you die?

The fact is your debts do not die with you. And dealing with debt-overhang along with grief can be harrowing for your loved ones. Because, when you die, your debt becomes the responsibility of your estate.

This means your liabilities need to be defrayed from your assets. The executor of the Will is responsible to use the assets to defray the liabilities.

Here's how your family must deal with your various debts…

Credit card dues - The recovery agents of credit card companies will be at your doorstep, prodding your family members to clear the dues. But note that, unlike mortgage and auto loans, credit card dues are unsecured. So the onus may not fall on your loved ones. But if it's a joint card, the other cardholder would have to pay up. Auto loans - Auto loans are secured, so the lender has the right to repossess the vehicle. But the lender will first assess if a family member can inherit the vehicle and repay. Home loans - Home loans are also secured. But before repossession, lenders may seek recourse from the joint holder and/or guarantor. But sometimes, even guarantors turn down, and so the lender has no option but to auction the property. The proceeds, to the extent of the outstanding loan, go to the lender and the gains (if any) go to your legal heir. In the case of a loss, the heir must pay the lender the shortfall, which could be very difficult for your family. That's why lenders insist home loan borrowers opt for a home loan insurance plan, which covers the outstanding liability (besides the other benefits offered). Education loans - If you have an outstanding education loan when you die, the co-applicant - perhaps your spouse - or the guarantor would have to shoulder the responsibility. Personal Loans - Like credit card dues, personal loans are unsecured. If you've taken a personal loan jointly, the lender will recover the dues from the joint holder. The high interest rates (12-24%) of personal loans can be a millstone. But if gold and/or investments and/or an insurance policy are pledged, a cheaper rate can be entreated. Personal loans are insured, as lenders insist and the premium thereto is added to the Equated Monthly Instalment (EMI). This serves as an indemnification to the lender in case of default. Income tax dues - The liability is abdicated…not that you shouldn't pay your taxes! In estate planning, it is vital to account for debt and endeavour to defray. You don't want financial and legal grief to add on to the emotional grief of your family. So here is a five-point approach to ensure that you don't leave a posthumous burden of debt…

Live within your means - Draw a budget. Analysing your cash inflows and outflows. And ensure that you follow it diligently. Abstain from frivolous spending. Before using your credit card(s), find out how repayments are done to avoid fees. When you're borrowing, determine if it is for a larger financial goal in life - a house to live in, your children's education. But here too, stay within your limits so that EMIs don't become a burden later. A thumb rule is to ensure that the total monthly debt commitments (mortgage, credit card, car, etc) do not exceed 25% of your gross income. Renegotiate terms - If you're having trouble repaying your debt, renegotiate the terms of your loan or mortgages with your creditors. They may be willing to lower the rate or extend the loan repayment tenure. But you must ask them to find out. If the lender is extremely rigid and are unwilling to renegotiate, consider transferring/shifting the loan. Utilities windfall - If you receive a windfall income, first use it pay down debt. Insure optimally - A life insurance policy with an optimal cover could help your loved ones. The proceeds can be used to defray the debts. Among a host of insurance products, a pure-term insurance plan offers the best cost-to-benefit advantage. Nevertheless, select an insurance policy carefully before signing on the dotted line. And keep investment and insurance needs separate. Likewise, for medical and healthcare needs - have a health insurance policy with a sufficient coverage in place. Invest wisely - If you die with debt, your investments and assets can come to the rescue of your family and help defray the liabilities. So that's just one more reason to deploy your hard-earned money wisely and let it work for you and your family. It must beat inflation and generate an appealing 'real rate of return'. Don't invest randomly. Ascertain your risk profile, investment objectives, financial goals, and time horizon, and then allocate the investible surplus in different asset classes such as equity, debt, gold, real estate, etc, which add the benefits of diversification, reduce risk to the investment portfolio, and generate wealth. Moreover, adopt a research-oriented, unbiased approach. Remember, emotions are at bay when it comes to lending. If your financial condition is giving you sleepless nights, be courageous and put in place certain defence measures. Engage in prudent investment planning and estate planning as you pursue financial freedom for your family and loved ones.

Flipping through the documents, estimating the approximate value of his newfound wealth, Mr Fernandes, age 51, told our investment consultant, 'I have immense emotions about this windfall.' Then he asked an important question: 'How can you help me to put this wealth to productive use?'

(Windfall income is an abundant income from unexpected events like winning a lottery, inheriting an unforeseen fortune, etc.)

Mr Fernandes, or Willy as his beloved late auntie called him, is a humble man, emotionally and spiritually well-evolved. Prone to charity. Financially as well, God has been gracious to him.

Many of us, if we're fortunate enough to receive a windfall income, will binge on all the goodies of life - a car, travel abroad, a dream home, and so on. But Mr Fernandes preferred to get his finances in order put this wealth to productive use. His key financial goals were to get his daughter, Chrysel, married and later live a blissful retired life with his wife, Maria.

So here was our approach…

Set a cool-down period If someone challenges the inheritance, the cool-down period would help. Fortunately for Mr Fernandes, there were no such worries. But tax needed to be looked into. Further, the cool down period allowed him to revisit goals and reconsider his estate plan.

Boost emergency funds Nothing in life is permanent or guaranteed. So although Mr Fernandes was making a good income, we advised him to deploy money into liquid funds to boost his contingency reserve to at least 6-12 months of his regular monthly expenses.

Insure A review of Mr Fernandes' insurance portfolio revealed that he had a sub-optimal life insurance coverage. So before addressing any of his goals, we counselled him to indemnify risk to life with due respect to 'Human Life Value'.

Pay down debt Mr Fernandes had taken a home loan for a villa in Goa. The outstanding amount was substantial, a few million. Our advice was simple: Repay a portion of that debt.

Address life goals Mr Fernandes had two key financial goals - his daughter's wedding and his retirement. Most of his existing investments, however, were in fixed deposits, corporate deposits, bonds, etc. These are debt instruments that do not always yield an appealing real rate of return. And they don't always beat inflation, which can erode the purchasing power of hard-earned money. To beat inflation, you must invest in wealth-creation avenues such as mutual funds and stocks. So we skewed Mr Fernandes' portfolio toward equity. That way, he could compound his wealth in time for his daughter's wedding twelve years from now and his retirement at 65.

Avoid exuberance Some individuals, after a windfall, take extraordinary risk and invest all the money in risky assets. Fortunately, Mr Fernandes was wise and invested mostly in traditional products. He was conservative, but perhaps he was overlooking the fact that equity as an asset class, over the long term, can compound wealth more quickly. Taking a more risk does hold merit. Nevertheless, having recognised the advantages of investing in mutual funds, he made a structural shift to his portfolio, and today his investments are well on track to achieve his key financial goals.

Estate planning Estate planning refers to passing down of assets from one generation to the next. It can prevent adding financial and legal grief to the emotional grief of your loved ones after your death. And without proper estate planning, it is possible that the law will be in charge of your estate and will distribute assets to relatives who might not be your first choice. So we counselled Mr Fernandes to write a legal Will with the help of a lawyer with expertise in estate planning.

Spend! Everyone has some personal wishes. Mr Fernandes was inclined to travel to London and give to charity. So we advised 2% of his inheritance to be reserved for the vacation and left the amount for charity undefined.

How one handles windfall income can go a long way toward a meaningful and fulfilling life. Don't allow the rush of a windfall income to triumph over the prudent approach. Be sensible, invest wisely, and ensure long-term financial wellbeing before you placate your short-term gratifications.

Making good investment decisions is both a science and an art.

You can, for example, track investment sectors, fund managers, and even investment advisers with precision. You can see their successes and failures. But past performance, as we all know, is no indication of what will take place in the future.

You can calculate with reasonable precision global money flow, government and personal debt, unemployment, the gross domestic product, and so on.

But these data won't tell you with any certainty what and when some macroeconomic event might happen.

The problem is twofold. For one, the global economy is so damn big and complicated. Secondly, humanity's response to economic shifts is equally complex. And this is to say nothing of “black swans” - unpredictable events that cause major turmoil.

Which is to say that, for practical purposes, seeing the future is impossible.

Still, as lowly investors, we must try. We must make regular buy, sell, and hold decisions. And we must make general judgments about the market to assess our holdings.

As you know, I've been in the financial publishing business for more than 35 years. In that time, I've worked with many of the best investment writers and followed their advice. I've even been able to see unpublished analytics that track their performance.

I've concluded that most haven't a clue about the future. But there are some who are actually very good at making specific investment recommendations - for a time.

There are also some who are good at big-picture economic analysis. By good, I mean they are able to write arguments that convince me, a skeptic.

Of those few who are good, about half are perennial optimists. The other half, of course, are perennial pessimists.

What I do is this…

I read the best big-picture writers I know - not to “know” what the future holds, but to get a sense of what might happen. Then, I look to specialists for specific advice that would apply.

Around 2004, my favorite pessimists were predicting a collapse of the real estate market, the dollar, and the stock market. They predicted a serious economic recession as a result of the insanely overvalued real estate market and the government's love affair with paper money.

The optimists were saying not to worry.

I found the pessimists - especially my colleague and business partner Bill Bonner - more convincing.

So what did I do?

I did not sell all my stocks. But I did sell off any stocks I felt might not recover from a major economic collapse.

I did not sell all my real estate. But I sold most of the real estate that wasn't generating a rental income that would give me more than 5% returns even if rental prices dropped 25% or 30%.

And, for the first time, I started buying gold.

To keep things simple, I bought gold bullion coins. Over the course of two or three years, I bought gold every month until I had a tidy sum stashed away.

By tidy sum, I mean it was enough to support my family in the event of a sustained depression. But I did not bet the farm on gold prices rising because I had no certain knowledge of whether gold prices would go up or down.

My guess is that gold coins at that time came to represent about 5% of my wealth.

As it turned out, the pessimists were right. The economy went south, the stock market followed it, and the price of gold soared.

My stock portfolio went down but not terribly because I had nothing but what I call 'legacy' stocks. I owned companies, like Coca-Cola and Nestle, that I was pretty sure would do well even during a serious recession.

I didn't sell those stocks, because I had a long-term view. Now, of course, I'm glad I didn't sell. They are all not only above their lows, but also at near-record highs.

And although the value of my real estate holdings went down, I kept making good income from the properties I kept.

Making these adjustments - reducing my exposure to risky assets, focusing on income, and buying gold as insurance against disaster - was about hoping for the best but preparing for the worst.

The collapse of the real estate bubble made millions of middle-class Americans poorer and thousands of bankers, brokers, and other members of the financial-industrial complex richer.

It amounted to a multitrillion-dollar transfer of wealth from Main Street to Wall Street.

In a truly free market, a financial recession has a positive effect. Like a forest fire, it kills off unhealthy businesses and financial practices and replaces them with better ones.

But most economies, including the US and Indian ones, are not a genuinely free market. They are highly manipulated by large industries and businesses that persuade local, regional, and national government officials to pass laws beneficial to them.

On top of that, you have a political environment that compels politicians to spend money we don't have, jacking up the national debt.

All of which is to say that, despite what you sometimes hear from the financial media and bullish investors, the economy is still very much in danger of another major financial collapse, possibly one much larger than the 'Great Recession' we've been living through since 2008.

Shields Against Financial Disaster So what shall we do about it?

Here's what I recommend:

First…

Make sure you have what I call a 'start over again' (SOA) fund - a store of liquid wealth that can cover the costs of starting your financial life over again if all your intangible assets (stocks, bonds, and cash held in banks) disappear.

The amount of money you should have in an SOA fund depends on your situation. If you are an employee, make sure you have at least one year's income. If you own a business, make sure you have enough to restart it or a similar business.

Your fund should consist of gold coins and cash stored in easy-to-access places.

If things really do implode, you don't want to be calling a broker or banker asking them to cash in your accounts only to hear that the government has frozen such transactions.

Second…

If you can afford to buy real estate, do so. I've said this many times. Rental real estate is a great source of part-time income. It's easy to understand. And as long as the price is right, it can be very lucrative.

If you can find a single-family house in the right neighbourhood at the right price, buy it. Buy as much property as you can in the same neighborhood to make management easy.

If you can't afford the down payment, you can find partners to work with you. This is something any smart person can do. You don't need to have a lot of cash.

Third…

Review your stock portfolio to make sure that it is safely invested. This is not the time to be overly speculative. Try to buy only big, cash-flowing businesses sure to weather any 'black swan' event in the markets. I suggest you stick to the sorts of stocks I invest in.

Investing this way will ensure that your equity holdings survive a large-scale financial collapse. And if there is a collapse, the decreased stock price of these companies will present a great opportunity to pick up more shares on the cheap.

Finally…

Consider becoming an 'international' person. By that I mean having an offshore residence, business, bank account, and passport or residency permit.

This may seem like a very exotic option, but it's easier and cheaper than you might think. You could, for example, have all three of these things in Nicaragua or Panama for less than $150,000.

Looking offshore gives you several benefits: a safe haven to retreat to if living in your own country becomes dangerous, ways to earn extra income with big tax advantages, and a lower cost of living.

John D. Rockefeller once said that what gave him the “greatest joy” was seeing dividends flowing into his bank accounts.

Dividends are income - i.e., cash flow you've earned from investments.

Rockefeller was probably the richest man that ever lived. His dividend income was enormous. Yet I hope he was exaggerating to make a point. How depressing to be filthy rich and value money as your greatest pleasure. That's a grey, lifeless limbo of existence.

Still, I can imagine situations where income matters a lot.

Let's say you are retired. Between your pension and your and your spouse's, you have Rs 50,000 a month. Your monthly nut is 45,000, leaving you a measly just 5,000 for emergencies or even other stuff. What if you could bring in another Rs 20 to 30,000 a month? Would that help?

Most financial brokers and advisors focus on “rate of return” when they talk to their clients about investments. Not because they care about their clients but because they know that's what their clients want.

They know that their best clients (usually retirees with significant stock and bond accounts) want high returns because, for them, a return of 12% rather than 4% means the difference between eating at home and dining out.

They also know that the easiest way to sell their clients on big returns is with growth stocks (like small cap stocks), junk bonds, short selling, stock options, and other forms of speculation (yes, including bitcoins).

They know the financial media will devote 90% of its coverage to those investments so they don't have to push too hard to get you into them. They merely have to provide you with the opportunity to chase returns and make you sign waivers (that you don't bother to read and don't take seriously) when you are investing in a way that is clearly idiotic.

What the financial community should be doing is telling you some basic truths.

You need to know that every asset class has its natural, historic rate of return. Trying to get much more than that is a sure way to get poorer.

Growth stocks should have a place in your investment portfolio, as should speculative investments. But growth stocks should have a small place. And speculative investments should have a tiny place or no place at all!

The smart move is to invest in big, proven companies that have nearly zero chance of going out of business and a long history of providing dividend income to their shareholders.

I set up such a portfolio about five years ago. It was meant to be the sort of portfolio Warren Buffett might have established if he had been starting out (rather than as head of the huge and hugely successful Berkshire Hathaway).

My portfolio has done pretty well, if I do say so myself. Of dozens of portfolios tracked by a service I trust, it ranks number two in that time period with an overall return of something like 58%.

More about that another time. The main point I want to make here is that I recognize how important income is to retirees. And that's one of the reasons I believe that when you invest in anything you should invest for the income.

Forget about huge promises for the future. Forget about the amazing contract a company just signed. Forget about how it's going to change the world. Ask to see the dividends the company's stock has produced since its inception. That is what matters most. That is what will most likely give you an income when you need it.

My mother-in-law - whom I officially adore - has no interest in finance. She retired about 20 years ago at age 60. When she did, she had a nest egg of about $750,000. It sat - I don't know where - for 10 years until her hairdresser gave her a suggestion.

What was it? To put that money in the care of the hairdresser's son, “a nice young man” who had just become a broker.

Despite my gentle warnings, she was reluctant to move it to a broker that I recommended because - I'm not making this up - she didn't want to hurt her hairdresser's feelings.

The market went up and the market went down. After 10 years, I figured this broker must have grown my mother-in-law's account by $50,000 or so. Instead, her account had shrunk to $700,000, a loss of $50,000.

When the broker recently moved on to another company, it gave me the opportunity I needed. I persuaded her to move her account to another broker: one I could monitor. We moved it to my own broker, who gave me a breakdown of what had been going on.

I will spare you the details. But, as I'm sure you can guess, her portfolio was anything but good. Among other things, she was in bond funds and international stocks. She had also been sold an annuity - at nearly 80 years of age.

If you know anything about risk, you can understand how happy I was to be able to reposition her assets.

I had a very good idea about what I thought she should do, but I asked my broker for his thoughts. (It's always good to ask your broker questions from time to time to see where their ethical tendencies reside.)

He, rightly, asked me first about what her needs were. I told him: “She doesn't need the income. She simply wants to be sure that her account doesn't go down in value.” So he recommended putting half of her money ($350,000) in high-quality municipal bonds and the rest in high-quality stocks (like those I use in my Personal Portfolio).

I was once again reassured of the solidity of my broker's thinking.

The short answer for why I was happy with the municipal bonds is that they were good, safe, quality bonds paying 2-2.5% at the time.

What I want to do now is tell you why I was happy with my broker's suggestion that we put the other half of my mother-in-law's nest egg (the other $350,000) into the stocks that will compound over time.

YOU'RE GOING TO LIVE LONGER THAN YOU THINK If you are a 60-year-old female in good health, according to the American Academy of Actuaries, your life expectancy is 27 years. In other words, statistically speaking, you will live to the age of 87.

If you are 70, your life expectancy is 20 years.

And even if you are 80, as my mother-in-law soon will be, your life expectancy is still 13 years.

If my mother-in-law earns 8.5% annually on her Safe stocks (which is what we're projecting), she'll turn $350,000 into $1,010,775 in the 13 years she has left.

Now, as I said, my mother-in-law retired 20 years ago when she was 60. Consider this: What if she hadn't invested her $750,000 nest egg with her hairdresser's son? What if, instead, she had invested just $350,000 of that money in the Buffett-style stocks?

At age 60, she'd have 27 years left to live. Her $350,000 would be worth $3,167,167 when she turned 87.

The numbers speak for themselves. But there is another, more important reason I urged my mother-in-law to allocate part of her nest egg to what I have in my Personal Portfolio: increasing retirement income.

Right now, she is fine with the income she gets from her pension. She's not even using the income from her nest egg. But if she wanted to, she could.

As I write this, my stocks are yielding an average of 2.8%. So, if she were to put her entire $750,000 nest egg into these stocks, it would give her an extra $21,000 in income per year.

All of the stocks in my Personal Portfolio increase their dividends… between 6% and 15% each year. And they've done so for decades. Assuming that, as a group, they continue to raise dividends by 8.5% annually, her annual income will grow by the same rate.

She'd earn $22,875 in her second year, and $24,722 in her third year. In 10 years, she'd have grown the annual income from her Legacy stocks to $43,761.

Here's one last statistic to blow your mind.

If she didn't want the extra income, she could reinvest it to buy more shares. The stocks would continue raising dividends at an average of 8.5% per year. And their share prices would more or less follow along, increasing by an average of 8.5% each year.

So 13 years from now (when the actuarial tables expect her to pass away), she would have grown her $750,000 into $3,791,304!

And she could pass the stocks on to her grandchildren to continue the compounding process.

If you think you're too old to benefit from compounding your money, think again.

The stocks I recommend - like those in my Personal Portfolio - should be the first thing you consider as the backbone of your asset allocation plan.

Making money is not the most important thing in life. And getting rich shouldn't be your no. 1 goal.

But whether you're a young person embarking on a career or just past middle-age and feeling unprepared for retirement, wealth building should be on your agenda. Because - like it or not - your financial situation will affect your ability to enjoy every other aspect of your life.

The present program is based on wealth-building principles I developed and have written about for many years. But I've tailored the ideas presented here specifically to you.

As someone just starting out on the path to becoming wealthy, you have a powerful advantage that makes it easy to get rich - even easier, the more decades you have left. And the purpose of the essays in this series is to give you a blueprint for doing it.

If you start practicing the wealth-building skills that you will learn in this series (I'll show you how), you'll be on your way to financial independence before you know it.

'Wealth': What Does That Mean? When I've asked readers to define wealth in the past, here are a few of the hundreds of answers I've received:

Having everything you want Having more than you need A million rupees in the bank A million in savings Making several millions per year Living the life of a rock star. Even experts disagree on what it takes to be wealthy. Here are just two examples:

To Blanche Lark Christerson, director of the Wealth Planning Group at Deutsche Bank, wealthy is a net worth of $15 million. Christerson figures that for married couples with two young kids, today's 'pricey lifestyle' costs about $375,000 a year. If you are single with no dependents, Christerson says $10 million will do. (She's assuming that you'd have 45 years ahead of you and that you'd want to preserve capital and leave it to your heirs or charities. She's calculating a conservative 3.5% return on investments.) To certified financial planner Jon Duncan, it's a net worth of $7.5 million. Duncan is making the same assumptions as Christerson in terms of kids and life span, but he thinks it only takes about $200,000 a year to live rich. And because the stock market has historically yielded about 10%, he's figuring on you getting a much better return on your savings. So, yes, wealth is a relative concept. But in order to talk about it productively, we must agree on a definition. For the purposes of this essay, then, I'm going to ask you to accept this one:

Wealth is a store of something valuable, something you can use or enjoy later. Financial wealth, therefore, is the money you have put aside for spending in the future. I call this your 'net investable wealth.'

Your net investable wealth (N.I.W.) is the money you have saved that doesn't need to be used for any current needs or any current debts. That is to say, your N.I.W. is the amount of money you have put aside that is free and clear for future use. (I'm going to recommend you invest a good portion of it in ways I'll explain in upcoming lessons.) If I had to put a formula to it, it would look like this:

N.I.W. = Your Income Minus Your Expenses/Debts Minus the Value of Assets You Want to Hold

Some financial experts (such as Christerson and Duncan) classify wealth as your net worth. Net worth is the total of all your financial assets (e.g., cash, house, car, jewelry, etc.) minus all your debts (e.g., mortgage, credit card debt, etc.).

My definition - using your net investable wealth - is a little more stringent. I'm not letting you count the financial value of your house, your car, or any other key possessions that you wouldn't be willing to get rid of someday.

The reason for this stricter definition is simple: You are always going to need a house and a car, so you can't really count them as part of your wealth. (This is an oversimplification. If you figure your wealth this way, you will be erring on the side of conservativeness. That's a good thing. It means you will always be richer than your numbers say you are.)

The truth is: When I decided to retire for the first time at 39, I was confronted with this distinction. As I stopped bringing in active income and began spending down my wealth, I quickly realized there were many assets I would be unwilling to give up in retirement: my valuable art collection, my cars, my house, my wife's jewelry…

Therefore, I determined to keep some assets outside of my overall financial picture.

If you accept this definition - or even if you would rather count your wealth using the standard net worth formula - you must still recognize one important fact: You need more than a high income to be wealthy. It's amazing how many people, young and old, don't understand this. Too many folks equate making 'mucho dinero' with being rich.

A good example: the popular HBO television show Entourage. In Entourage, the main character is a fictionalized version of Mark Wahlberg after he became famous as a Hollywood actor. Mark's character and his friends spend all their time and money buying toys and chasing girls, while their accountant sits in his office and screams at them.

The entourage is hell-bent on spending every cent of the multimillion-dollar income their buddy is earning. And that makes them feel rich. The truth is, however, that they are just as broke as they were when they were living in Brooklyn. The only difference is that they are spending more.

To be truly rich, you need lots of money in the bank. A big income can give you a great lifestyle. But if you're spending it as fast as you're making it, when you stop working, or when a financial emergency arises, you'll very quickly find out how un-rich you really are.

The Sad Story of Mike Tyson: A Spending Fool During the 20-year span of his career, Mike Tyson's net worth exceeded $400 million. Yet in 2004, before his 39th birthday, this amazing moneymaker was $38 million in debt. He had some assets - equity in some mansions, some cars, and some jewelry - but insiders speculate that their total value was less than $3 million. For the sake of wishing him well, let's assume it was twice that much. That would put his personal net worth at minus $32 million.

Think about that. Minus $32 million!

With a negative net worth that large, Mike Tyson was 160,000 times poorer than the average wage earner from Sierra Leone, the poorest country in the world, with an average annual income of $200 per person.

By every recognized standard of accounting, he was poor. Extremely poor.

But he didn't think so. And that's part of the reason he got so poor in the first place. The faster money came in, the faster it went out. Stories about his profligacy are legendary. Tyson employed as many as 200 people, including bodyguards, chauffeurs, chefs, gardeners…

He spent:

Nearly $4.5 million on cars and motorcycles $3.4 million on clothes and jewelry $7.8 million on 'personal expenses' $140,000 on two white Bengal tigers and $125,000 per year for their trainer $2 million on a bathtub for his first wife, actress Robin Givens $410,000 on a birthday party $230,000 on cell phones and pagers during a three-year period from 1995-1997. The purpose of this is not to shake a finger at Mike Tyson, but to alert you to the dangerous temptation to spend more when you make more. As someone who grew up drinking powdered milk and wearing hand-me-downs, I understand the strength of that temptation.

But I should also point out that, nowadays, 'Iron' Mike has come around. He's working hard, acting, making appearances, and doing what he can to salvage his life.

I admire the new Mike Tyson - he shows you that you can recover from a terrible financial loss, even one that came from your own bad habits, simply by adopting a positive mindset and getting to work…

If you want to become wealthy - in terms of having lots of money put away for a rainy day or money to spend after you stop working for it - you are going to have to learn how to save and invest a significant portion of your income.

But here's the good news. This is a really good time for you to start saving money. No matter where you are in your life, it's not too late to break bad spending habits and start good saving habits. If you start now, you'll be rich before you know it.

But let's get back to this idea of stored value, which - in financial terms - translates into savings.

The purpose of saving money is so that if and when you stop working, you can draw on your savings to pay for your living expenses.

But that would require you to have to 'guesstimate' how much time you have left after you retire (and before you pass). You would have to apportion it such that you spend your final pennies on your final day on this Earth… unless you wanted to leave some behind.

Perfectly calculating how much time you have left and budgeting accordingly is absurd. That's why, for many people, the ideal situation is to have enough money saved that they can live off the interest they are making on that savings.

Let's say, for example, your lifestyle (including paying your debts) costs you Rs 400,000 per year. You have Rs 5 million in savings generating 8% interest (or Rs 400,000 in income). In this scenario, you are financially independent.

Another, rather crude, way of saying this is that you have 'Get Lost' money.

Get Lost Money. Isn't that a good objective? Wouldn't you like to have the ability to not work, tell your boss off, and yet continue to pay for all your living expenses? Wouldn't it be great to spend your time focusing on the activities that give you the greatest satisfaction in life, without worrying about money?

That's exactly what I'm going to show you how to do: Create a plan to get you from where you are today to a state of financial independence - which requires having a comfortable level of Get Lost money. (I'm assuming you are broke and saddled with debt now. If you are better off than that, my plan will work much faster for you.)

Okay. So how do we figure out how much in savings is enough?

The first step is to figure out how much income you think you will need to live the life you want to live…

I'll show you how to do that in the next installment.

Editor's Note: Welcome back to Foundations of Wealth. In the last installment, we left the discussion at the concept of 'net investable wealth.' Mark stressed that the purpose of saving money is so that if and when you stop working, you can draw on your savings to pay for your living expenses.

Today, he goes deeper into what financial freedom means, what good saving and spending habits are, and what your goal should be to achieve your desired quality of life.

As a young man, I never had any ambitions about making money. I knew nothing about business and didn't care to learn. My goal in life was to write a great novel, marry a beautiful woman (who liked my novel), and travel.

Apart from finishing that novel, I got what I wanted. And along the way, I also got rich…

It was 1983. I had just been hired as editorial director for a fledgling newsletter-publishing company in South Florida. And after turning myself into a financially invaluable employee, my yearly income grew to $100,000 per year. (That's about $250,000 in today's dollars. I explain how I did this in another Wealth Builders Club program, Intrapreneurship 101.)

This was more money than I had ever imagined I'd make. So I wasn't quite sure how to feel about it.

'You should feel very good,' Ron (my accountant at the time) told me. He found my innocent excitement amusing. Ron was used to working with high-income earners-most in the $1 million-plus category.

'Welcome to the world of the rich,' he said.

'Come on,' I said. 'A hundred grand is nothing compared to what most of your clients make.'

'It's time you learned something about money,' he replied.

I perked up and listened. To this day, I've never forgotten what he said: 'First of all, you have to recognize that as far as earning income is concerned, you are already in the top 5%. Second, you need to know that $100,000 is enough to live like a billionaire.'

'How can you say that?' I asked.

'Think of it this way,' he said. 'When you have a family income of less than $50,000, it's a struggle.'

'Tell me about it,' I replied. 'I have been struggling ever since I graduated from college.'

'Then, when you boost your income to between $50,000 and $100,000, you have everything you need… but you have only some of what you want.'

Since my transition to $100,000 had been so quick, I had never had the time to experience living at the level of income 'in between.' So I asked him what he meant.

'I mean this. You can afford a nice, modern, modest home. And you can pay your bills. You can even go out to dinner at a good restaurant once a week and spend a few weeks a year vacationing. But you can't do any of those things too elaborately, and you can't afford to buy yourself toys.'

'Toys? Such as?'

'Such as sports cars, boats, expensive watches, and so on.'

'My $35 Casio watch is fine for me,' I said. 'And I get seasick. But I wouldn't mind a little red sports car.'

'Well, guess what?' he said. 'Now you can afford that, too.'

'Do you really think so?'

'Sure. Buy yourself a little 5-year-old convertible for $3,500.' (Remember, this was 1983.) 'Keep it in your garage. Take it out on weekends.'

'I'd love that.'

'Now that you are in the $100,000 club, you can have everything you need and everything you want. You just have to be sure that you don't overspend on what you want.'

'Like limiting the money I spend on my sports car to $3,500.'

'Exactly. The only difference between your lifestyle and the way my wealthiest clients live - and I'm talking about guys who rake in eight-figure incomes every year - is the price of your toys. Other than that, you are living the same.'

'That's a great thought,' I told Ron. 'Very comforting.'

'And here's something else you need to know,' he said, as he packed up his papers and started to walk out of the room. 'You'll get just as much fun out of your $3,500 sports car as any of my other clients get from their Lamborghinis.'

That conversation with Ron left a deep impression on me.

It was definitely a turning point in my financial life. Were it not for the advice he gave me, I might well have gone on to do what most high-income earners do: spend my money as fast as (or even faster than) I made it.

Overspending is a major problem for high-income earners for several reasons:

They want to show off their income by purchasing status symbols. They want to reward themselves by buying expensive toys. They feel that as long as they can pay for what they buy, there isn't any problem. If they spend every dollar of what they make this year, there'll be plenty more dollars next year. The trouble with this sort of thinking is obvious: It makes it very difficult to save. And if you don't save money, you can't get richer.

Wealth is not about how much you make. It's about how much you have to spend in the future. Put in financial terms: Wealth is not your income…or many of your 'things'…but your net investable wealth.

Ron's conversation was immensely helpful to me, because he made me understand, at the beginning of my high-income-earning years, that spending extra money on ever-more-expensive toys wasn't going to gratify me. All it was going to do was put me on the same treadmill with everyone else in my category, most of whom would never end up wealthy.

Of course, the most valuable lessons are often hard won. I wasn't always loyal to Ron's advice…

When it reached the $250,000-350,000 range, for example, my family and I moved to a big, custom-built home in a fancy gated community, put our kids in private schools, bought ourselves luxury cars, and went to Europe or Hawaii once each year.

I liked living that way. I was proud of what I had achieved and eager to show off my material wealth to friends and family. It was also fun to splurge on stupidly expensive things (like booking a suite in the Hotel George V in Paris, easily over $1,000 per room per night).

But was the quality of my life better? Did the actual pleasure I got out of life increase when I was making double… quadruple… and then 60 times $100,000 per year?

It did not.

In fact, I liked that middle-class neighborhood much better than I liked the gated community. Our neighbors were not only more accessible but also more considerate and more authentic. (I'm still friends with many of them.)

And what about booking that suite in Paris?

I'm glad I did it once. But when we go to Paris now, we stay in smaller boutique hotels. They aren't cheap, but they're usually less than half the price of the George V.

So there you have it: When my income passed $100,000, then $200,000, and then $500,000 and beyond, I was able to spend even more extravagantly. That felt good for a while. But it was mostly the ego high of finally 'arriving' - the feeling of 'Holy crap! Aren't I great?'

But ego highs don't last. Like drugs, you need more and more to give you a lift. And ultimately, they leave you feeling empty.

You remind yourself that the best things in life are free, but you're addicted to the high you get from spending.

So you keep working and you keep spending.

You're also addicted to increasing your income because you have equated income with success. You have to make more money to prove to yourself that you're better than your friends and colleagues. It's all about keeping score.

So you keep working and you keep spending.

Am I going to tell you to stop trying to make more money? Of course not.

But I want to make sure you never fall into the income addiction trap.

That's why I'm stressing this important lesson now. As you follow the steps laid out in this program and begin to earn a higher and higher income (whether by becoming an 'intrapreneur' or developing multiple income streams on the side), don't fritter it all away by being lured into buying more expensive toys.

Master wealth builders understand this secret, which took me many years to internalize. You would do well to memorize it now:

You have to keep your spending down while your income increases. Let's take another look at the levels of income that Ron identified. I've amended them and translated them into today's dollars. You will pass through them all, so you must be aware of how they can affect your lifestyle and be prepared for what's coming.

Why Strive for Financial Freedom Anyway? The main purpose of this series is to help set the stage for you to achieve financial independence.

Think about the term financial independence. What does that mean? And why should you want it? Here are some possibilities:

You may want more freedom in your life - more choice about where you live, how you live, how much you work, and so on. You may want more leisure in your life. You don't want to feel compelled to work 8-12 hours every day, or five and six days every week. You may want more tranquility in your life - an end to the stress that lack of money sometimes causes. You want to be able to sleep easily at night and enjoy your days without worry. Those goals are all reasonable, laudable, and possible. And they are all attainable if you'll follow the advice in the program I'm laying out for you here.

The Relationship Between Income and Quality of Life: How Much Money Must You Make to Enjoy a Really Good Life? Here are six income-levels based on a family of four. For single people, couples, and one-child families, it could be lower. And it would vary somewhat depending your location. For example, it costs a great deal more to live in Mumbai than it does in any other Indian city.

Income Level 1: You're making less than Rs 500,000. For a family of four with a household income of less than Rs 5o0,000, life is tough. You are renting an average apartment or dilapidated house, driving a car that breaks down regularly, clipping grocery coupons (if not food stamps), and accumulating debt. Debt is always a huge, omnipresent problem because - for some incomprehensible reason - credit has been extended to you.

Income Level 2: You're making Rs 500,000 - 800,000. You are living in a small but decent place and driving an okay car. But you are struggling to pay your bills on time. You are trying to save money, but 'emergencies' keep eating it up.

Income Level 3: You're making Rs 800,000 - 1,200,000. You are living in a nice house, driving a nice car, and paying your bills on time. You want to save a decent percentage of your income, but to do that you have to forgo regular dining out and nice vacations.

Income Level 4: You're making Rs 1,200,000 - 2,000,000. Things are good. Your house is not showy, but you have everything you need…and a lot of what you want. You can drive a luxury car, but you may prefer to drive something more sensible. As you move up in this income range, you can go out to dinner whenever you like and take a nice vacation every year. Debt is manageable, even minimal. You're putting money away for the kids' college education and for retirement. You expect to be able to retire at 65.

Income Level 5: You're making Rs 2,500,000 or more. You've got it all: a nice house, luxury cars, dinners out, very nice vacations, and a growing savings account. In other words, a financially worry-free life. If you are smart with your spending, you can retire early.

Income Level 6: You're making crores! You can pretty much buy whatever you want without worrying about the cost. You're happy and comfortable - but no happier or more comfortable than when you were making Rs 2,500,000.

Look at the levels above - it will be apparent where you are on the totem pole.

So how much wealth do you really need?

Having a 'net investable wealth' about 10 times the amount you need to live on is, in my opinion, an adequate amount of wealth.

What it means is that if you earn an average of 10% interest on your savings, you'll be able to spend what you need for your lifestyle (barring financial emergencies) and never have to dip into your financial nest egg (your savings).

That's a good goal: to squirrel away an amount of money big enough to let you live off the interest.

But how much do you need to save to get there?

If you complete the steps in the next lesson, you'll have a good idea.

Dear Reader,

In this new series called 'In Conversation With Mark', we bring to you excerpts from the James Altucher show where Mark Ford gets candid about his journey and throws light on the incidents and decisions that shaped his path to wealth.

Since you are following Mark's life and business decisions closely, we believe you would like this series that unveils the many untold facts from the man himself.

James Altucher:

So, Mark. Mark Ford, thanks so much for joining me on The James Altucher Show.

Mark Ford:

Thank you for inviting me, I gotta tell you, like I told you before, as far as I'm concerned, you're a celebrity, I'm a big fan of yours, and I'm thrilled to be here in Delray Beach.

James Altucher:

No, I think people have to know what you've done. How many businesses have you either started or been involved in?

Mark Ford:

I don't know, but certainly, it's in the hundreds.

James Altucher:

In the hundreds, okay. Okay, so the average, let's say investor, expects an 85% failure rate. What do you think your failure rate is in all these businesses?

Mark Ford:

You know what, it's hard to tell.

James Altucher:

I know that you were an investor, because you started tons of these businesses.

Mark Ford:

Right. There are two prongs in answering your question. One is that I'm 64 years old, so it'll all be in retrospect. And you know in retrospect the vision gets cleaned up as you go. The other's that I'm Irish. So, my feeling is that 85% of them are correct, but the truth is I have no idea. I'll say this, I'm definitely not one of these people that have failed, and failed, and failed, and then finally made it. I never wanted to be that way. I've always been extremely cautious as an investor of my time, and my resources, and my money. So, my failures -

James Altucher:

I like how you put that, by the way - time, resources, money - money last. Time is the most valuable.

Mark Ford:

Absolutely, absolutely. Though, because of that - and of course, it took long time to learn - I would say that it doesn't feel like I've had a lot of failures. But where my failures have been are generally in areas that I knew practically nothing about. For example, investing - when my career was basically the career of starting as employee and turning into an intrapreneur, and then turning into an entrepreneur. And along the way, as I was making money - I was accumulating money - I didn't know what to do with it, so I would invest it according to whatever half-baked notion passed my way. And I did a pretty good job of losing a lot of that money. And I do talk about that.

James Altucher:

Welcome to the club.

Mark Ford:

Right. But I would say that generally, I think the general idea that to make more money you have to take risk is wrong. I feel the opposite. I feel that the way to make money, to give yourself the highest percentage of chance of making money, is to avoid risky things and to do things that are more like sure bets. I guess I'm the career equivalent of the parent that says, 'Forget about being an NBA player, forget about being a rock star. You can be a doctor or a lawyer, or maybe a plumber, and just stick with that.'

James Altucher:

But you haven't stuck with one thing. I mean yes, you started businesses, but they've been businesses in every category. And you say, for instance, you're not good at investing, and yet you've even started businesses obviously in the publishing industry about investing.

Mark Ford:

Right.

James Altucher:

So you've been able to take this skillset of starting businesses and apply it to any area, which is opposite you know, many people are told, 'Find your passion first, and then start a business.' What do you think of that concept?

Mark Ford:

Well, you know, I thought both ways about it. I think it's possible to find your passion, turn it into a business, and have a happy life. But generally, I think if you turn your passion into a business, you're going to lose your passion. And so I think that there were things that we call 'vocations' and 'avocations'.

And to me, the avocation is the thing that you love and you're going to preserve, your pristine - because the truth is, whatever we're in love with in terms of a career, we're in love with it because we know practically nothing about it. Being an astronaut, or being a doctor, or being a missionary - and when you actually end up being a missionary and you're riddled with mosquito bites and you're trying to help people, and they're ignoring you and they're just asking for more money, and you say to yourself, 'Geez I wish I'd known about this when I thought it was so wonderful.'

So, I think that for me, there are parts of my life that I've kept as avocations - I've never wanted to make a business out of. And you know what I really did is, I accidentally got into the business I got into. I wanted to be a writer; I started off as a writer, I was working for a small newsletter publishing company in Washington, D.C. writing about Africa. Well I wanted to write about African culture, but the job turned out to be a job writing about African commerce. And I knew so little about commerce. I mean, I had a master's degree at this time. It was called African Business and Trade, and I remember thinking, 'What is the difference between business and trade? In fact, what is trade?'

James Altucher:

What's business?

Mark Ford:

I kind of knew the concept of business but, I literally didn't know what 'trade' meant. And forget about countertrade, barter, and all the other things I had to deal with. So I ended up being in that business and in three years I figured out how to become the publisher of that you know - the top guy in a very small business.

James Altucher:

Is that what you mean by “intrapreneur”? You used that word earlier.

Mark Ford:

Yes, I would say you become either the most valuable - or one of the most valuable - and you get a compensation deal where it's tied to the sales or profits that you create. But rather than being the sole boss and owning the business entirely - having that satisfaction - you attach yourself to a larger group that maybe has a lot more potential than you. And that's the way I always felt, 'cause there were so many things I didn't know how to do, like make money. And I'd rather have 10% of a big piece than 100% of a very little piece.

James Altucher:

I think that's an important concept that a lot of people forget. They think they're either going to be in a cubicle, or they're going to be an entrepreneur. And somehow some consider being an entrepreneur some magical thing, and being in a cubicle some hateful thing. But there's this middle place where - as you call 'intrapreneur' - where you can figure out how your success within an organization can tie itself to your success.

Mark Ford:

Right. And I had noticed as devout reader of your stuff that one of your most popular essays is Quit Your Job or How To Quit Your Job and Do What You Love/ But I have noticed lately that you've been mentioning that it's possible within some kind of business environment where you're not the owner to become wealthy and have a good life.

And I think that that's true for me. If you go work for IBM or Merrill Lynch it's probably not going to happen because those companies are so big and so structured, that the way to become successful there is to just do what you're told and move through the ranks. But if you work for a smaller company like Agora - after Washington, D.C. I went down to Florida and decided whether to be a journalist.

So I decided to take a journalist - I was looking for jobs as a journalist. I decided to take three interviews in Florida, 'cause I thought I would get a tax deduction. I was trying to be clever. And I took the three interviews assuming I'd be getting none of them, 'cause in D.C. there were no jobs at the time. And I got all three.

I took a Dale Carnegie course and I realized that my big problem in life was that I had too many goals, you know? One, common problem is people don't have goals, and then they say, 'You don't write them down, you don't do this, you don't do that,' which I think is true for many people. But I had a lot of goals. And I was trying to follow them all at the same time.

And I remember we came to that chapter and it said, 'If you have this problem, you're going to have trouble with this exercise.' The exercise was to eliminate the - write down your top ten, narrow it to three, and then go in. The Dale Carnegie program that I took was 14 weeks and every week you'd read a chapter and then you'd go and you'd stand in front of this audience, and you would tell them what you're gonna do - you make a little speech and if they liked you, you got a pencil. I don't know if you've ever experienced this.

It sounds pretty corny, but this really changed my life. I got down to three - teacher, writer, and millionaire, you know, rich guy. And I could not decide. I was frantic. I was sweating driving there, my heart was pounding - because I felt that if I chose one, somehow, subconsciously I knew that it would change me, and I felt like I was giving up the others. And so as I was walking up to the podium, I had this thought, 'I need to just make the money, because if it turns out not to be what you think it is, then you just give it away.'

I said I was gonna do that. And that changed me. I mean, overnight, it changed me. Everything got clear.

James Altucher:

Did you have to pick one?

Mark Ford:

I had to pick one.

James Altucher:

Okay. So you had to write down ten, you had to narrow it down to three, and then that night you had to pick one.

Mark Ford:

And for the rest of the course, which was another 12 weeks or so - 11 weeks - you had to focus on nothing but that in terms of your goals. Both when you went in and talked about things, and when you were in your daily work.

James Altucher:

So you had to kind of for the next 12 weeks or whatever, you had to kind of come up with ideas that would move you forward to being a millionaire?

Mark Ford:

Exactly.

(Mark continues talking about 'intrapreneurship' in the next parts of the series, and reveals how to choose two things that you could do simultaneously. Stay tuned!)

Dear Reader,

In the previous article of this series, Mark Ford explained the meaning of 'intrapreneurship' and why one should not merge your passion with business. In this part, Mark explains how you can become an 'intrapreneur', move up smartly in the organization, and grow as an individual.

James Altucher:

You talk about this a lot in your books, particularly Ready, Fire, Aim, 'How can I (a) come up with the idea that will get me out of my cubicle and (b) how do I start marketing this?'

I forget if you said it or someone else said it, but school kind of teaches you to get a job, when no one teaches you to get several multiple sources of income. And so, how can I start from step one? I'm in the cubicle, and I'm scared. I think I don't like my boss, and he's gonna fire me. I have kids to raise, and I have the alimony to pay. My mind is telling me I'm stuck. What's the first step?

Mark Ford:

Okay. There are two things you could do simultaneously that don't compete with each other.

One is you have to figure out how to become the most valuable employee you possibly can be, and really the most valuable employee in your environment of your business, whatever that is - your department, your division, however far you feel you can contribute.

The other thing is you have to decide whether your business is the business where an entrepreneur can thrive - many businesses are not. I have to say that becoming an entrepreneur will not work - as I said - if you work in a very corporate environment.

If your business is political, it won't work. A political business is one where position and power are more important than creativity, and productivity, and profit. Profit is the purifying element of business.

When everybody's thinking about making profit first, then politics - what you're allowed to do, what you're not allowed to do - takes second seat to coming up with good ideas. So you have to be in that environment. And if you're not in that environment, I think you have to move. You do have to quit your job.

I always say - go work for a small business, that's growing.

'A rising tide lifts all boats,' and we all have different capacities and our own internal boat, where boats of our brains or emotional intelligence have different sizes…but if you're in a company that itself is growing quickly, your chances of moving up the ladder are much, much greater. And your chances of getting a cross-departmental experience are much, much greater.

I think it's very important to figure out whether your business is a business that would accept you if you were an entrepreneur that welcomes and lets people move up as fast.

For example - if you are working for Procter & Gamble however, they're not going to change, so you have to change. You have to move, and go into a small, fast-growing business.

But in the meantime, while you're waiting to get that better job, you should try to become the best employee you can.

Every business has a base of three pieces. They have the sales and marketing side, they have the product production side, and then they have the management staff.

What you need to do is understand - how does this or that work in your business? How does your business make money?

How do products get produced, and reinvented, and reproduced? And find out where you are - you in that mechanism - are you part of that, and if you're not, can you shift over? Can you start volunteering to at least learn about those things?

You know, it is a pretty strategic. You do have to promote yourself within a business, because if your business is at all big, there are plenty of people who want to take what you're doing, take credit for it, and put you in the closet. So, you have to know how to do that.

James Altucher:

That's interesting. My only real experience with big corporate America is that I worked for HBO - and you're right.

There was a production side, they made TV shows. There was a sales and marketing side, how do we get more cus- tomers for HBO? And then there was the whole kind of accounting/IT side, it was for the management side. And I was on the management/IT side, so we were in another building, no one to talk to. And the way I would try to succeed in HBO was moving myself into the production side where I was obsessed.

Mark Ford:

The person that's really making the ultimate decisions about who makes money in business looks at their employees in terms of the ledger. On one side of the ledger are the expenses, and on one side are the production people who help make money.

When you're an engineer, an IT guy, an accounting guy, even the legal guys - especially at Agora - you're on the expense side.

Yeah. I may need them, but you're a cost. And I want to reduce that cost, and I want to increase who help make money.

James Altucher:

Okay so we're in the cubicle, this is a good example of him being an intrapreneur… But now, what if I also want to make that transition to entrepreneurship? Again, I'm in the cubicle and I'm scared because I've never done that before.

Mark Ford:

I wrote a whole book for that person called Reluctant Entrepreneur. I myself was never an entrepreneur, per se. I was an intrapreneur. I created businesses within businesses, and then while I had businesses, I was making more money than I needed, then I would invest in other businesses, and start other businesses, with my partner or other partners.

My thing is, never leave your day job until the income from your side job is equal to your day job. Of the decisions I made after I decided to get wealthy was, I had this thought one day. I said, 'Wouldn't it be cool if every day I got just a little bit richer?'

And that was one of the first things I said, 'I will do whatever it takes, even if it's just a nickel richer. I will get richer every day. I never want to get poorer.'

And so I developed all these strategies, one of them was multiple incomes. You have to have multiple incomes. Another is, I kept a very minimum amount of money in volatile investments like stocks.

My recommendation for people who want to get outside of that to their own is - to keep your day job, start by working extra hours. You do have those extra hours, and you can be better than 80% of the other employees working 25 hours smartly a week.

Let's take a look back at the year so far. And make a promise for the future. Dear Reader,

I received a heartfelt letter from one of my favourite Wealth Builders Club members, RKG. He had not written to me for some time so I was very happy to see his mail. However, I could see from his letter that he was struggling. This is what he asked of me…

“Thanks for your relentless efforts and unperturbed way in which you carry out the task of sending us the mails twice a week. Whenever time permits I also read the Common Sense Living newsletters in addition to WBC mailers.

Honestly, with office work and also at times personal work I am not able to find too much time for going through all the mails. I wonder what would happen to my dreams of doing something on my own. With an intent to not letting this (enrolling into WBC) become a failed attempt I had paid the annual membership renewal amount too. I hope I would be able to do better in terms of acting on the nice advices that WBC provides in the coming year.

Anisa, I have a unique problem and I would like to ask you about it. I felt it better to ask a person who can look at it from a distance without any bias or prejudice and give me an independent view/response. So here is my problem…

I have slowly become a slave of my bad habits especially when it comes to time management. To explain it better, let me quote a few examples. My work in IT services doesn't allow me to go home early in the evening, which eventually leads to late night dinner and late to bed. All this results in getting up late and this has become a vicious cycle.

Throughout the day I keep thinking that I need to change my timings, go to bed early, get up early etc. but it doesn't happen. Day after day, month after month, this has been the case. However, please note that I am taking 3 meals a day with proper gaps, doing a bit of physical exercise late in the morning and getting adequate sleep. The only problem being the biological clock has shifted by nearly 2 hours when compared to others. My wife keeps asking me to join her for a morning walk and although I yearn a lot but unable to go with her.”

- Wealth Builders Club member RKG

RKG is asking for advice on how to manage time. He, like many of us, is struggling to live life to the fullest, to make the most of his time, to balance work, relationships, and health. To follow his dreams and follow-up on the life-changing ideas that Wealth Builders Club brings to each one of us.

Many Wealth Builders Club members write to me about the success they are having, the new endeavours they have started, the way their financial situation and personal confidence is developing. But some of us are still struggling…

You see, having access to a hoard of life-changing ideas makes us incredibly fortunate. But if ideas were rupees, we would all be millionaires. If ideas made us healthy, none of us would have bad backs and failing eyes. If ideas could bring success, who amongst us would be lacking?

I'm asking you today to reflect on what you have done so far with your ideas. With all the ideas we have shared with you. Have you done all you can with your access to this amazing club of riches?

Or have you not had the time?

Today, I'm going to give RKG and all of you the most important thing that Mark Ford has ever shared with me. For me, it is a bible, one I refer to constantly, one that reminds me how precious my time is and what I am capable of achieving if I use it right.

As Mark Ford puts it…

If you can use your time more effectively than others use theirs, you will move ahead of them. It's all a matter of focusing your extra time and energy. This is a big secret, one that most people don't understand.

Let's face it, life isn't fair. When it comes to money, beauty, intelligence, and talent, the distribu­tion is uneven and arbitrary. But one thing we all have an equal amount of is time. We each have 24 hours a day. Even the length of life you get is not fair. But the 24 hours you have each day is the same for everyone. And what you do with those hours will determine your success and happiness.

And to help you with your time management, with pursuing your goals, and with creating that wealth we are working to help you create everyday… I'm sending you Mark's time management guide.[report available in WBC Reports]

Whatever stage of your wealth building journey you are in, I hope you take this chance to go back to the pledge you made when you joined us, reaffirm your pledge, and reassess your journey.