Sunday, March 30, 2008

How to save more money?

The dilemma of ‘Saving more’ has two inherent questions, reduce expenses or make more money. Reducing expenses means that cutting down on frivolous expenses; this could mean eating at restaurants every other night, buying clothing that is not required, or maybe just taking public transport instead of your own car everyday to work. If we look hard we will definitely find frivolous expenditure, however, we often find ourselves in situations where in reducing expenses is no more an option. If after cutting down all expenses that are ‘frivolous’, we still find ourselves living paycheck to paycheck and not saving any money, we must ask what is are we doing wrong, answer: we are not earning enough money to save but only enough to live.

Take a look at some of the developing economies, such as India, China or Brazil, you would notice that savings rate is huge with comparison to some of the developed economies. This is not to say that these people are more prudent that the rest, it is the requirement of the times. There are no social structures in place to help a family if the bread earner of the family falls sick or dies, for example, health insurances are now being introduced and not even to full extend, they form a ceiling of the medical expenses that are allowed to be paid. Hence, the family has to depend on the savings to facilitate the process. Now this is an extreme example, however, many socio-economic benefits that one takes for granted in the developed world do not exist in the developing world. However, we must learn from this, savings help these families survive turbulent times, if they have lost their jobs, health problems, disability etc. Our world is also going through turbulent times and we are looking at safety nets that have been established. Why not create our own safety net?

We need to set our goals higher than just earning enough to live by; otherwise, we will never have anything to hold on if ‘tragedy’ strikes. We need to earn more money!!!

How do we earn more money?

Wednesday, March 19, 2008

What one must do?

Your question “what one must do?” is unfortunately being asked after the water has already passed under the bridge. The house is bought, interest rate has ballooned, equity has vanished as the house has lost more than 15% in value, and new loan standards are more stringent than of old, so a second loan isn’t possible. Right now all you can do is cut down all other expenses, take a second job and pay your bills, so you don’t lose your house. However, the correct approach, I feel is given by Robert Kiyosaki in his best seller “Rich Dad, Poor Dad”.It talks about 2 approaches to money.

Case 1- Is a guy earning, let’s say, 100K. He is a prudent guy, got a wife, 2kids, a dog and a house in Westchester. Wife works part time and also gets an additional 25K. Unfortunately even after grossing 125K, this family has no savings. Not because of lack of prudence. Where does he cut?
1) His house? He lives in a 3 bedroom apartment. He either lives here in a good school district and pays a premium for housing or goes to a cheaper area but pays private school fees.
2) They go out once a week as a family. Kids need outings.
3) They take once a year small week off vacation. Again, kids need a break.
4) All other expenses are on the kids incidentals. From new toys, to clothes, to school trips. You cant really cut out anything.
5) They have one decent van which is needed to ferry the kids around.
6) Both commute to work using public transport
7) They shop at Costco to save on household expenses.

So in short they do everything they can. But are still not saving. This is called the expense approach. This family has fixed income, fixed expense, no income generating asset. Now let’s talk about

Case 2 This is a guy who has planned his expenses before they incur.His planning started 12 years ago when he started earning money. That time his expenses were minimal. Lived with a roommate and paid 400$ as rent, basically after all incidentals, his total spending was 1000$ a month.Rest of the money he started putting away in income generating assets.This guy started at 50K, after all taxes and expenses, at the end of the year, he saved about 25K which he used as a 20% down payment on a small investment apartment which generated enough rent to cover payments on a mortgage and maintenance. A couple of years later he married and they decided to buy a small apartment with a larger down payment with the savings of both. Both of them worked full time and they earned total about 100K. They made sure that one income was sufficient to cover the mortgage of the apt they lived in and their other expenses, so that they could use the other income for investing.They always treated their primary residence as a non income generating asset and always looked out for investment opportunities which generated long term income.They invested some in stocks, some in other rental properties and slowly over next five years they built up an asset portfolio.They were now ready for a baby.Their assets were now generating a positive cash flow of around 2000$ a month so they decided to buy another larger primary residence after selling the old, putting the entire equity of the old house (which was sizable as they had bought with large % down+ they were paying down some principal over 5 years + there was a small upward valuation in their value) into a large % down payment of the new home so that their net mortgage + maintenance worked out to only $2000 monthly.They knew the wife would stop working so they didn’t want the house to become a burden. They were paying for this non performing asset using the net cash flow of the performing assets.The husband’s income was growing and they were still able to save money, which they continued to invest in either their other assets or bought new performing assets.They always planned for their expenses, (a kid is an expense) and made sure they didn’t commit to an expense till they had income generating for it. This is in gist what this guy talks about in his book.
1) Understand the difference in performing and non performing assets.
2) Strive towards building a performing asset portfolio
3) Commit to expenditure only off income generated through your performing assets
4) Use your primary income (your salary or your business) to buy other performing assets.
5) Treat your non performing asset as a liability and expenditure.

Your primary residence is an example of this. This is the way to not get into the trap of what you ask. All this is doable. But you must have a correct approach to money. Expenses are bound to happen, you can’t stop them. We work hard to live well. We all moved from our homeland to America to live better.So why stop spending? Instead, decide on what you want to spend, and think about ways to generate income so that you can continue spending and living the way you want to.
I am a complete consumerist and a capitalist at heart. So take what I write, accordingly.

Tuesday, March 18, 2008


Going back to Basics. Gaurav eloquently describes the fierce urgency of now. This urgency is the reason for our Successes and Failures. Basics are the virtues instilled from our parents, which we have forgotten in the Urgency of Now. We need to go back and re-educate ourselves and this time it is not going to be easy. Discipline is one of these virtues and self discipline is required to re-educate oneself in this art.

Self discipline is the training one gives themselves to accomplish a task or adopt a pattern or behavior even though one would rather be doing something else. Similarly, denying oneself the urge to buy the 55” Flat panel available on financing by Circuit City and using the funds to pay off the debt is definitely a good example. This is required in every aspect of our lives, and requires the WILLPOWER to do something. I was hearing an interesting piece by Dr. Sanjay Gupta on CNN when he talked about developing self control. Dr. Sanjay Gupta writes, “The good news is, there are solutions to all of these problems. Baumeister thinks the self-control muscle may be strengthened and trained — sometimes beginning with exercises as simple as remembering to sit straighter or drink enough water. Specific workout plans, like scheduling a gym visit with friends, can turn a general desire to exercise into a firm commitment” invariably advising us to be pro-active and not being stuck to the couch.

Monday, March 17, 2008

From a Friend to a Friend

Our times are increasingly complicated and tensed by our own undoings, among the actions of environment. However, in patching up existent holes we must not forget to not dig new holes, which will invariably be bigger and deeper than before. Our times indicate the fierce urgency of now. To same perusal it might actually be somewhat prudent to take a moment, breath a little, re-evaluate everything that we value in comparison to everything we should really be valuing.

Go back to basics and there is only where odds are acting in our favor to win a lottery, and nowhere else. Expenses are merely that: expenses, standards of yesterday, today and tomorrow must in all circumstance reflect a conservative ratio of our own fiscal capacities and not our perceived social, or for that matter real standings. Real social environment will value us for what we are, as much as for what we are not, but most importantly for what we have the potential to be.

From a real friend to a very real friend.

Friday, March 14, 2008

Prudent we are not!!!

As responsible & fiscally sound as we think we are, we find ourselves often in situations where in all our wits, prudence and wisdom are washed out by the decisions we are forced to take due to the overbearing situations that have caught up with us. In today’s environment, the first thing people relate to is the pressure of mortgage payments, we don’t want our houses to go away. Maybe the decision to take the house was not bad, which cost more than one could afford, but the 2 year arm mortgage, made the payments low and it seemed that this was the best investment. Whereas no one knew that 2 years down the line, the property market would crash, credit would tighten and monthly payments would increase more than 15%, as the rate of interest would suddenly rise from 6.5% to 8.5% or more. Now, no refinance is possible, as the equity has suddenly vanished (even the down payment one had put while buying the house), income is not high enough to the stringent standards of today and of course, credit is not 800. What one must do???