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How To Control Discretionary Spending...

We have all struggled to stay in budget. Each time we get our salaries or income from the business, we vow to save more money and reduce expenses on unnecessary items but end up pushing the agenda for the next month.

It is important to have some sort of control over your spending

and being able to save some money for not just emergencies but also for the future. Any individual should save some, to make their future better, to be able to build assets and afford things which currently seem not affordable.
It is important that you understand the opportunity cost of spending money. Like, could the money you spent on the luxury watch be better used for your sons' education fund? Or could the expensive phone that you juts upgraded be avoided in order to save up for a better house?

While certain expenses like rent, loan EMIs, education and basic amenities are necessary and unavoidable, one can definitely control their discretionary expenses. Here are a tips which can help you to control your discretionary spending:

1. Monitor your expenses

You cannot change or control something if you don't know where you are going wrong. In order to spend less, you need to understand and realise where you have been spending more than what is needed or where you have been spending is unnecessary and avoidable.

So, note down as many expenses you can remember for the past few months and look at the areas where you have spent your money. You can divide them into groups, like basic utilities, travel, shopping, luxury items etc. Expenses on items like house rent, electricity bill, phone bill, groceries form a part of basic utilities and of course cannot be avoided but they should be kept in check. You should know how much you are spending. This will help you in realising how much of your spending is necessary and basic and how much is discretionary. Further, once you realise what your discretionary expenses are and where are these expenses mostly meant towards, you can control it.

For example, if you have been spending a lot on eating out and you realise this after monitoring and judging your expenses, you can be careful about it. Of course, you cannot and should not completely cut eating out, both change and socialising is necessary, however, you can control when you have been too lazy or too bored eat to at home.

Also, if you observe that you have been spending a lot on shopping for things you don't need, it maybe wise to go on a shopping hiatus for a while. Thus, monitoring your expenses will help you control them as well.

2. Make a budget

Making a budget is the very basic step to control your expenses. It is simple and effective. Once you make a proper budget, you will know how much you spend on a particular arena and thus it will be easier for you to control your expenses.

While, you may say that making a budget will not actually make you stay in one, whether you stay in it or not, you will still save more than general. This is because once you make a budget, you make a mental note on how much to spend on what. Now, while you are crossing that mental limit, you will realise that you are going over limit and thus will not be as reckless as you would have been without that reminder. Thus, even if you don't stay within the budget, you will at least benefit by spending lesser than general, which is the whole point of making the budget.

One point to remember while making the budget is to be realistic about it. You cannot expect to cut down your expenses by 40-50% in the very beginning. In fact, spending 40-50% less is very difficult even if you learn to spend less. Make sure that the budget you are making not just covers your basic needs but also gives you a little margin to spend on unforeseen expenses and also that it doesn't cut you out from everything but just helps you save some extra amount.

3. Cut yourself at the source

If you are someone for whom saving is extremely difficult, you can set automatic transfers which will leave you with lesser money. For example, you can get a different account and set up an automatic transfer at the beginning of the month. So every month a specific amount is automatically deducted from your account and saved in another account. If you want to be very stern with yourself, make withdrawal from the account difficult. Don't get a debit card for it or ask your family member to change the pin and not tell you.

Similarly, you can also start an SIP to a liquid fund or other instruments, which will help you save and invest more.

While there are many more ways you can save, these three simple step should cover you in a basic and extensive manner.

Source/Contribution by : NJ Publications

Understanding Inflation & It's Impact

Inflation in simple terms means general price rise of goods & services in a country. Inflation monster reduces purchasing power of money, rupee loses value with inflation as the same amount of money buys lesser goods/services with time or to buy same quantity of goods/services you need more money due to inflation.

In India inflation trend is broadly measured by Wholesale Price Index popularly known as WPI, tracking wholesale prices of basket of goods. This tracks prices at wholesale level and not the prices at which consumers buy goods. RBI mainly tracks WPI to take decisions regarding interest rates & money supply. In recent times too much fuzz is created around inflation numbers as it remains at elevated level of around 9 – 10% range which is not desirable for a growing economy like India. But why so much attention is given to WPI numbers and what is their significance in context of Indian economy?

WPI in India has very wide implications as many nodal agencies use WPI number to arrive at many important policy decisions. RBI uses this number to decide on interest rate & money supply measures, movement in WPI indicates price trend of essential commodities.

What causes inflation in a country ? 
As said earlier, inflation is nothing but general trend of price rise in a country. There can be multiple factors responsible for this trend of price rise:

Excess Money Supply: If money supply is increased due to loose monetary policy & low interest rates, prices go up as too much money chase too few goods. That is the reason why central banks increase interest rates in inflationary environment to reduce money supply.

High Level of Economic Growth With Low Investment: If economy is growing at healthy rate then income level of working population goes up and people start buying more goods and services which result in higher demand. To match this higher demand country needs to invest heavily in manufacturing sector to increase supply to match increased demand. If country fails to increase supply of goods & services against rising demand then it results in inflationary trend. Classic example is India where economy grew at a healthy pace of 9% in 2006-08 but manufacturing growth failed to keep pace with economy growth, and this resulted in higher inflation during the period between 2008 to 2012.

Deficit Financing : Emerging economies like India always remain in need of capital to finance various growth projects. As their imports remain higher than exports many a times governments of these countries lean towards deficit financing as a tool to fill the gap and narrow down the deficits. Deficit Financing means printing more currency to fill the deficit. This results in increase in money supply.

Impact of Inflationary Trend on You & Me (As Consumer - As Investor)
With rising prices from food to vegetables to petrol, common man like you and me always remain at the receiving end during high inflation environment. As discussed earlier in high inflationary environment on one end RBI keeps raising interest rates in an attempt to control inflation & on other end rising prices pinch common man's household budget. CPI (Consumer Price Inflation), the inflation number that impacts common man more than WPI as it is the measure of price rise at end user level has remained at around 9 to 10% level in last few months.

Higher inflation, rising interest rates, higher input cost & lowering demand affects corporate profitability and results in lower production, eventually affecting the economic growth of the country. If inflation remains at the elevated levels for longer period of time it affects investors as investment in fixed income instruments end up generating negative real return. With CPI hovering around 9 to 10% and your investment in Bank F.D., PPF or any other Postal instruments generate 8 to 9% return, as an investor you end up generating negative return.

The logical alternative for investor is to explore investment avenue with possible inflation beating returns like equity & gold. Investing systematically & in a staggered manner help investors in yielding inflation beating returns.

Financial Planning & Inflation:
Inflation is the single most important factor to be considered while planning for all your future goals. Considering an appropriate inflation number while estimating future cost of your financial goal determine your asset allocation & return expectation.

e.g. If higher education costs Rs.5 lacs today with inflation expectation of 7% this can grow to Rs.9.8 lacs in 10 years time if your kid is of 7 years of age and higher education age assuming at 17 years.

With ever rising cost of living due to inflation it is very important for investors to look at investment class which can consistently generate inflation beating returns. Time & again it is proved that equity can consistently beat inflation over a long period of time and so it is imperative to have equity allocation in your portfolio to keep your investment portfolio floating above inflation level.

Because of the negative cascading effect that high inflation can have on overall economy, high rate of inflation is not favorable specially for a growing economy like India. High growth rate with reasonable inflation of between 4 to 6% could be an ideal scenario for the economy and that is the reason why RBI is desperately trying to bring inflation level down to around 5 – 6% range.

Due to widespread implications of high inflation, it is mandatory for any emerging market economy to keep inflation under tight control. Controlling inflation is of course beyond control of you & me, but we can definitely add equity flavor in our portfolio and follow asset allocation to keep our investment floating above inflation.

Source/Contribution by : NJ Publications

Passive Income - A Wealth Creator

As investors most of us feel that creating wealth requires an active approach on our part. Frequent portfolio churning, be it stocks or mutual funds, multiple trading and demat a/cs and at the end of the year, managing the capital gains tax component. While some of us may feel that active management is the way to create wealth, let us understand how we can create wealth by just being passive investors.

LIQUID FUNDS:
This is one of the most underrated mutual fund product categories in the Indian MF space. Why? As investors, we tend to leave a lot of money lying around in our savings and current a/cs for liquidity or emergency reasons. We may have also come across investors for whom having a large bank balance is a matter of prestige and topic of discussion and comparison in their friends' circles. This fantasy is further fueled by the big private banks who provide goodies like high value credit cards with free add-on cards, international debit cards with high daily withdrawal limits, stylish looking cheque books with Platinum or Gold customer mentioned on the cheque leaves and a dedicated relationship manager to take care of all your needs. The only person who benefits in this whole game is the bank and of course, the relationship manager. The poor investor is worse off as over a period of time the money lying in the savings and current a/cs has actually de-grown if we consider the impact of taxes and inflation.
Solution:
Open a liquid MF a/c through NJ E-Wealth A/c which provides online buy / sell facilities through the mobile device of your choice. The entire process is paperless and also helps save the environment. You get your money back in 1 working day and the returns, depending on the option selected, can be either tax free dividends or capital gains. Some MFs also provide you with an ATM card which can be used at the bank of your choice for withdrawing upto 50% of your liquid fund balance. The card can also be used to pay for your groceries at supermarkets.
EQUITY LINKED TAX SAVING SCHEMES (ELSS):
This is a favourite with tax payers who want to take risk in their portfolio. The scheme has a lock in of 3 calendar years after which you are free to withdraw the money whenever you choose to do so. The money invested in year 1 can be redeemed in year 4 and reinvested to claim tax benefits for that year. Similarly, the money invested in year 2 can be redeemed and reinvested in year 5. This cycle can go on endlessly. The benefits to you are two-fold, namely: Tax benefits u/s 80C and market-linked capital appreciation. As an investor, you need to invest for only 3 years after which it becomes a self-generating investment.
PROPERTY:
Investors who are matured and have a large surplus can look at investing in property. The benefits to you are multi-fold. To start with, you can claim tax benefits if you buy the property on loan. Secondly, if you put the property on rent, you can generate a monthly income for yourself. Thirdly, this monthly income can increase over time. Finally, the property will also appreciate in value. If we were to do a survey of people who have taken a housing loan for a period ranging from 15 – 25 years, the interesting fact that will emerge is that majority of the borrowers tend to pay off the loan much before maturity. Thereby, saving on the interest component. Therefore, it makes immense sense to buy a house on borrowed funds and try to pay off the loan before maturity. You may then look at taking another property on loan and repeating the same process. The monthly EMIs can be funded from the income being generated from the earlier property. The result can be a chain of properties earning regular passive monthly income.
All the options mentioned above are applicable to salaried as well as self employed investors. The options are simple and easy to execute and, hopefully will not take much of your time. If the passive options are well executed, you may end up as a wealthy investor at the end of the day thanks to passive income. A word of caution: none of this will happen over night. It will require time and patience from you. The power of compounding requires time to work in your favour and help you create wealth.

The legendary investor Warren Buffett once said:

"No matter how great the talent or efforts, some things just take time. You can't produce a baby in one month by getting nine women pregnant."