“AMMDANNI ATHANNI KHARCHA RUPAYYA”

“ AMMDANNI ATHANNI KHARCHA RUPAYYA; Bhayya,

Na Pucho Na Puhcho Haal; Natija Tan Tan Gopal”

The purpose of writing this song here lies in the meaning of this song. This song speaks the most basic and yet very powerful financial planning rule in our life. There is one thing common in Bollywood heroin and this article. Bollywood heroine revolves around the tree while singing this song while my article revolves around the central theme of this song itself.

In this article, I have tried to analyse typical life style of a kokani community, their spending pattern which has a big impact on their lives. I have scrutinised existing financial rules of thumb stated by many financial advisors & experts in order to assess whether these rules are really relevant to Kokani people. If not then what thumb rules are more useful to Kokani people. Also, I have mentioned the limitations of using financial rules of thumb. And finally I have created a case study of Munna bhai to demonstrate how he did his financial planning.

Background of this article:

A great Kokani community social worker brother Br. Akhlaque Naguthane, President – Danish Educational Welfare Society (DEWS)once wrote a great post on his DEWS Facebook group wherein he highlighted many social and economic issues & factors that are affecting us. He requested Br. Mohsin to publish few people’s articles on iKokani website and brother Mohsin in turn requested me and other writers to send their articles on iKokani website for the benefit of the community. Thus, this article is an outcome of movement initiated by Br. Akhlaque.

I also want to appeal all the Kokani writers to write articles that they think will benefit our community. I request one of my best friend, Br. Intikhab Chougle, a professional banker and businessman, to write an article on “investments in shares” or choose any other financial topic. Many people who know Br. Intikhab will agree with me that he is a guru in the field of finance & investments, and also a prolific writer.

Relevance of financial thumb rule:

If you search on Google, you will find pages after pages for financial thumb rules. When I did some research, I realised that most of the original thumb rules have either originated in USA or some other developed countries, however, they operate in different environment. Let us examine few thumb rules. There is a thumb rule that says you should have minimum fund available with you all the time to cover 3 months of household expenses to deal with an emergency. After probing the rule further, I came to know that the meaning of this rule is, if you lose your job then it may take 3 months to find another job hence you should have enough fund to survive during unemployed period of 3 months.

In developed countries, loosing job is normally considered an emergency because health, education and everything else is either received by social security system or insurance. However, in India the emergency is mostly due to medical problems or accidents, where someone in the family is diagnosed having heart problem; cancer problem or met with an accident. All of a sudden people need huge money for surgeries or costly treatments. If any kokani person saves 3 months household expenses for an emergency, would that be enough? This will help little bit. Small savings is still better than no savings at all, but the point is, 3 months saving will give false sense of security if any Kokani believed this rule of thumb.

Buying a Vehicle – The 20/4/10 rule

Rule says, when buying a car, you should put down at least 20 percent as a down payment. You should finance the car for no more than four years and spend no more than ten percent of your gross income on transportation costs.

All Kokani people don’t buy car but spend equivalent money on weddings. If unnecessary wedding expenses incurred for show off purpose is avoided then that saved money is enough to buy car. So, this rule is relevant for Kokani marriages & not for car.

In developed countries these % based rules work because everyone gets a decent salary. Even labourers & cleaners get enough salary that they buy cars and houses. But in India, if someone is earning only 20,000 Rs. / month, can he even think of buying car?

Now assume, someone is earning 1,00,000 Rs salary per month. We know that he can afford to buy car with this salary but is this rule good enough for layman to understand how much money he should spend on buying car? Let us put this rule to test. Assume, this person has saving which is equivalent to 20% of car value. As per rule, he would take car loan for 4 years which is fine.

Now coming to third criteria, which is, spending maximum 10% of his income on car which is 10,000 Rs in this case. But if you take car loan for 4 years then what we are talking here is that your EMI ( Equated Monthly Instalment) should not be more than 10,000. If you take car loan of 3,90,000 Rs at interest rate of 10.5% for 4 years then your monthly equated Instalment would be 9985 Rs. Again 3,90,000 Rs is 80% of car value obtained as car loan. This person will shell out his 20% so the cost of car will be 3,90,000 X 100/80 = 4,87,500 Rs. it means a person who has a salary of 1,00,000 Rs / month should not spend more than 4,87,500 on buying car.

I assumed that car loan interest rate is 10.5%. If interest rate is more than 10.5%, his buying power will significantly go down. To arrive at this figure, I had to do lot of calculations. How many people would be able to do these calculations & figure out the amount they can spend on car buying, as per their salary?

On the other hand, if you’ve got the cash, you might choose to pay for your car upfront rather than take on a loan with interest. Many Muslim people try to avoid interest if possible which is ideal. In reality, the rule wouldn’t apply to Kokani people who has no money to buy car, or someone who has down payment but does not want to take car loan to avoid interest or someone who has enough money to buy car outright.

Retirement

The 10% Rule

This is probably the most traditional rule of thumb when it comes to saving for retirement. Save ten percent of your income toward retirement.

Issues with this rule:

10% is a good start. However, the percentage doesn’t consider how much you’ll actually need in retirement. There is no way to understand how much money you will get back when you retire. It also doesn’t consider how much you’ve currently saved. If you’re playing catch-up, you’ll probably need to save considerably more than ten percent of your income. If you want to retire early, or more lavishly, you’ll probably need to save more than ten percent.

The Income Rule for Buying House

Don’t buy a house that costs more than three years’ worth of your gross annual income. If your monthly salary is 60,000 Rs. Then according to this thumb rule, you should not buy house that cost more than 21.6 lakh Rs. This rule falls short in many ways. In India, you need to pay 50% by black & 50% by white money to the builder so this rule goes out of whack.

Secondly, there are professionals with seven-figure incomes who cannot afford a I crore Rs property, and there are couples like Munna bhai in the case study just starting out who thrive on the financial discipline of stretching to pay for a home that is four or more times their income. Affordability is not necessarily a function of income, but rather what people do with that income. In my case study, you will see how much you can spend on home & realize that this is really crap rule.

The purpose of showing the limitations of above thumb rules is that Kokani people should not just blindly follow what they read on internet. I have noticed on Facebook & whats app group that people believe on whatever hoax mails they receive & forward to other contacts thinking that it is useful information without verifying authenticity or accuracy of the information. Although thumb rules stated on various websites are not hoax, they may be totally irrelevant for our circumstances. Since Kokani community’s life style & culture is different, these rules are worth reworking to our needs.

Financial advice is not an exact science. They are based on number of assumptions that can go wrong. But that is not justification for not having financial planning in place. That would be disaster. Fail to plan finance is plan to fail finance. Financial advice serves as a good approximate guideline for decisions, while everyone’s situation is different, these serve as a good starting point.

Not all thumb rules are crap though. There are some good thumb rules that I would like to highlight here:

In how many years my amount will double?

It’s a very simple & most common rule – if you divide 72 by rate of return you will get the number of years in which your money will double. For example, If you expect a rate of return of 12%; your money will double in 6 years (72/12=6) . What about if rate of return is 8% ? 72/8=9 years. This can also be used in reverse order at what rate your money will double in 5 years – 72/5=14.4%

Rules similar to rule of 72; Rule of 114 & 144

These can help you in how many years your money will be triple (114) or quadruple (144) at some rate of returns.

Rule of 70

You know it or not but inflation is our biggest enemy – rule of 70 will tell you in how many years value of money will be half. You just need to divide 70 with rate of inflation so if rate of inflation is 7% – 70/7=10 years. So in 10 years your Rs 100 note will be worth Rs 50.

Ready Reckoners

Financial investment involves very complex, tedious calculations. In fact the calculations are so complex that by and large people involved in finance are only able to understand the finer nuances of the finance & do the sophisticated calculations. Therefore, I have done all the calculations & put under the tables below.

How to use multiplier in above table:

Let me explain what the highlighted number below means:

Let us say, you invest 100 Rs every months for 30 years. Return on investment after taking in to inflation is say 7%. In that case at the end of 30 years, your maturity amount will be 3.36 times your investment. In above example, you invested, 100 Rs/ month X 12 months X 30 years = 36000 In return you will get 36000 Rs X 3.36 = 120960 Rs at the end of 30 years.

Let me give you case study to demonstrate how to do calculations in financial planning:

Munna bhai & Munni begum got married. They are blessed with one daughter & one son. To provide better education to kids, Munna bhai moved his family to Ratnagiri as there was no good school, water scarcity and lack of any other amenities in his village. He pays 5000 Rs. Rent for one bedroom apartment in Ratnagiri . Other family living expenses are 20,000 Rs. Per month. Munna bhai is an accountant in UAE and earns 60,000 Rs. /months salary. He needs 5000 Rs for his maintenance in UAE. Out of 60,000 Rs Of his salary, he saves 30,000 Rs / month. He got married at the age of 28. At his marriage, he spent 4 lakh Rs on his marriage & another 6 lakh Rs for house renovations. Now his age is 30. He will retire at 60. At the moment he has no loan whatsoever.

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Munna bhai has following plans in his life:

After 4 years, he wants to buy Nano Car. He expects to spend 2 Lakh Rs for car.

After 20 years, he wants to have following funds available to him:

Provision for heart surgery if required…. Rs. 4 Lakhs

Daughter’s wedding……………………………….. Rs. 5 Lakhs

Son & daughter’s education……………………….Rs. 8 Lakh

Hajj for two people……………………………………..Rs. 1.5 Lakh

Total: –18.5 Lakh Rs.

Munna bhai thinks that if he was a retired person today, Rs. 15000 / month would be enough to manage living expenses. Munna bhai knows that life expectancy in India is: Male 63.8, female 67.3 which is 7-8 years after retirement so he thinks that 20 years provision after retirement is good enough.  When he retires, he wants a fund that will last him for 20 years. So at the time of retirement, he needs Rs. 15000/ month X 12 months X 20 years = Rs. 36 Lakh.

After 15 years, Munna bhai wants to build decent house in Ratnagiri. Whatever money is balanced after 15 years, he will use that amount as a cash payment to the builder & borrow loan from bank if required.

Munna bhai created four portfolios to manage all his financial planning. One is retirement fund portfolio; second:- Car purchasing portfolio; 3^rd: home building portfolio, and fourth:- Mid Life Crises portfolio. Munna bhai does not want to invest anything in risky shares. He wants to invest only in Mutual funds, debentures, bonds etc. His promised return is 13% but after subtracting average inflation rate of 8% his ROI is 5%.

Munna bhai used my ready reckoners & did his financial planning as per below:

Since Return on Investment is inflation adjusted, there is no need to think about what will be future retirement expenses; wedding expenses or education expenses.

Since Munna bhai will invest same amount every month for 30 years with ROI 5% , his investment multiplying factor from ready reckoner table is; 2.32 as per below.

This multiplying factor of 2.32 means that Munna bhai will get maturity amount of 36 Lakh Rs at the end of 30 years if he invests 15,51, 274 (36 Lakhs Rs divided by 2.32). 30 years equal to 360 months hence per month investment required in retirement fund is 15,51,274 Rs/ 360 months = 4310 Rs. / month.

Mid life crises portfolio:

This fund is required after 20 years with RIO 5%. As per ready reckoner, multiplying factor is 1.73

Maturity fund required Rs. 18.5 Lakh

Investment required using 1.73 multiplying factor = 1850000 Rs/ (1.73) = Rs. 10,69,364 No of months invested= 20 years X 12 months = 240 months

Monthly investment required in Mid Life Crises portfolio= Rs. 10.69.364 / 240 months = Rs. 4455 / month

Car buying portfolio:

To buy car, 2 Lakh Rs required after 4 years of investment @ 5% ROI . Multiplying factor for this is 1.13

Fund required after 4 years @5 ROI is 2,00,000 Rs. Investment required using 1.13 multiplying factor = Rs. 2,00,000 / 1.13 = Rs. 1,76,991 to be spread across 48 months = Rs. 1,76,991 / 48 months = Rs. 3687 / month.

Home building portfolio:

Munna bhai has so far put Rs. 4310 / month (Retirement portfolio) + Rs. 4455 / month (Mid Life Crisis portfolio) + Rs. 3687 / month ( Car buying portfolio) totalling Rs. 12452. He saves 30,000 so balance amount = (Rs. 30,000 – Rs. 12452 ) Rs. 17548 will be invested in Home Building portfolio.

Munna bhai estimated how much fund will be available after 15 years after checking ready Reckoner.

His investment will be Rs. 17548 / month x 12 months X 15 years = Rs. 31,58,640 Multiplying factor from ready reckoner for this is 1.51

Therefore maturity amount at the end of 15 years will be Rs. 31,58,640 x 1.51 = Rs. 47,69,546

After car was bought, car buying portfolio was closed and Rs. 3687 monthly investment transferred to Home buying portfolio. It will continue for 11 years as first four years were used for buying car. So, investment in 11 years will be Rs. 3687 x 12 months x 11 years= Rs. 4,86,684.

Multiplying factor for 11 years @ 5% ROI is 1.35

Hence car buying portfolio transfer fund will be Rs. 4,86,684 x 1.35 = Rs. 6,57,023.

Therefore total fund available is Rs. 47,69,546 + Rs. 6,57,023 = Rs. 54,26,569.

As per original plan, he thought he will pay 54 Lakh by cash & checked how much loan he can afford to take from bank. After checking bank calculator, he realised that he can afford Rs. 28 Lakhloan from bank because EMI for Rs. 28 Lakh @ interest rate 10.5% for 15 years will be Rs. 30,951 /month. Therefore his home buying power is Rs. 54 Lakh + Rs. 28 Lakh = Rs. 82 Lakh

After knowing his buying power he saw property prices at prime location in Ratnagiri. He found one property which had 2436 Sq feet area @ the rate of Rs. 3093 / Sq feet. The total buy price of the house was Rs. 75,34,548. His bank loan reduced from Rs. 28 -7= Rs. 21 Lakh reducing his EMI from Rs. 30,951 to Rs. 23213.

Rationale behind case study:

Many of the thumb rules based on % of your income or expenses invented by so called financial experts are just crap. They are useless. Every community has different dynamics and characteristics depending on their value system, their traditions and psychological makeup. Hence every community needs to have tailor made financial model as a guide. Therefore, I have simulated Kokani community’s life style in case study that would make more sense than throwing some financial jargons & irrelevant thumb rules. Poor thumbs have to create rules for these experts besides showing direction up or down.

The idea behind walk you through case study is to make case study as a guide for DIY (Do-It-Yourself) kit for financial planning. Once you know how much money you can save per month, how much expenses you expects for the things you want to achieve in life, just follow the steps I showed you. You will only substitute numbers that are relevant to you.

Formula Used for Multiplying Factor of Ready Reckoner Table:

If I had to do manual calculations to find out multiplying factor for 30 years of investment with different RIO then it would have taken at least a week to do that calculation & it would be error prone as well. I have developed few formulae in the past so I was hopeful that I would be able to notice some pattern in the calculations that would enable me to develop formula. I found the pattern & developed the formula. However, I had to make sure that my formula is 100% accurate so I had done many manual calculations to check whether the manual calculations match with formula. It did match. Because of this formula, I could prepare Ready reckoner which is very handy for the user now. However, if anyone found out any discrepancy with formula, feel free to reach out to me.

Return On Investment (ROI) used in the Ready Reckoner Table:

Maximum ROI stated in table is 7% assuming that you invested in shares. I know many people will be shocked by this seemingly very low number. Share market is very volatile. If you do short term gambling in shares, you can earn significant money & many people have made good money. However, when share market collapses like how it doomed in 2008, many people’s lives were ruined as well. But if you just hang on there then in the long run investment in shares yields 7% ROI after subtracting inflation percentage. In India the RIO from shares investment in the long run is around 15%. However average inflation for last 10 years is 8% so if you take away inflation, the effective ROI is 7% only.

Where does this 7% ROI number come from?

My primary source for that number comes from Warren Buffett, who claims point-blank in this Bloomberg article that you should expect a 6-7% annual return in the stock market over the long term. In that article, Buffett describes the analysis that led him to that kind of conclusion:

Beyond that, the long-term data for the stock market points to that 7% number as well. For the period 1950 to 2009, if you adjust for inflation and account for dividends, the average annual return comes out to exactly 7.0%. Check the data for yourself.

Initially, I thought that I will include all calculations for ROI up to 15%. However, I realised that people who get gross return as 15% will mistakenly use 15% as ROI in that table. Inflation is the biggest enemy of investment returns. In India, 100 Rs today will devalue to 12 Rs after 30 years so making error in inflation would be disaster. To prevent this potential mistake, I have included ROI upto 7% maximum only.

Cushion Exercised in the Case Study:

In case study, the assumption is that current Rs. 60,000 / month salary will remain same until Munna bhai retires which is not realistic. All countries take review of compensation every 5 year & they adjust it according to market economic condition, demand & supply, and inflation as well. Besides 5 yearly adjustments, many companies offer pay raise every year. Middle East countries are not exception to this. As per research paper by Mercer, titled. “Economic, Political and remuneration trends in the Middle East” and in-depth survey Of IMA in 2012, majority people working in Middle East countries do get pay raise up to 5% annually except health professional because they are well paid otherwise.

To project realistic financial planning in case study, I thought of incorporating 5% pay raise every year however I dropped that idea for two reasons. Inclusion of pay raise would have made case study extremely complex & that would have defeated the purpose of simple to use Ready Reckoner.

Without inclusion of pay rise, Munna bhai’s home buying power was Rs. 82 Lakh .If pay hike is included in case study, then I am sure home buying power would surpass crores of Rupees. So, if anyone has any doubt whether financial outcome demonstrated in case study is achievable or not then I can say that calculations in case study are lot more conservative therefore definitely achievable. If someone starts working at the age of 25 then he has 35 years of career however I have done calculation for 30 years only so that is another level of cushion in the calculation.

Disclaimer: I am an Engineer by profession;and not a financial planning expert but being an Engineer, I am good at mathematical calculations & developing formulae. Therefore, I want to share  my knowledge with you. Having said that I am open to all constructive criticism to improve the quality of my write up & learn something from everyone’s knowledge. Therefore, let us share each other’s knowledge & become rich in knowledge.

For example, my article is based on an assumption that we all have one life & one wife on earth, However, if you are managing two wives then this case study will fall short of financial planning required in your situation. In that case, you share your knowledge of how you manage more than one wife and I will share my knowledge of investment calculation applicable to you. Jokes apart, but the point I want to convey through this crude joke is that you know where your shoes hurt you exactly. Therefore, if you think that your situation don’t fall under case study & if you need help with different set of investment related calculations then feel free to reach out to me. I am only one email away from you.

Who needs financial planning?

There is one criteria that decides eligibility. When you are born, you have breadth but no name, when you die, you have name but no breadth.. If you are in between this two states then you certainly need financial planning. Now a day’s people make planning for their funerals as well when they are gone. In short we all need a planning.

How long we need planning?

Simple answer is you need this during your shoulder to shoulder journey meaning; from the time your mother takes you first time on her shoulder when you are born until four people take you on their shoulder for your goodbye farewell.

The best golden rule we are taught by our ancestors:

“Live within your means.”

The following quote explains importance of living within mean succinctly.

“There is no dignity quite so impressive, and no one independence quite so important, as living within your means.

“Calvin Coolidge”

It is not about how much you make money, it is how much you save money & pass on makes difference to your life & your kids life.

On a lighter side, if someone challenge my above punch line with following quote then I don’t have answer for that.

“Dogs have no money. Isn’t that amazing? They’re broke their entire lives. But they get through. You know why dogs have no money? .. No Pockets – “ Jerry Seinfeld

Well, Jerry has point though. Now, whether you want to follow, Jerry or my article is your choice.

I can sum up my article with following tagline,

“KAL HO NA HO;

FINANCIAL PLANNING ZAROOR HO”

Shakur Tisekar’s native place is Tise -Khed Taluka in Ratnagiri district. He is a graduate Engineer from Bombay University, migrated to Australia & currently settled in Melbourne. He is a staunch supporter of Kokni community upliftment & proud of Kokani culture, language & kokani exotic food. Although he is living in Australia, he is till connected with kokani community by umbilical cord. He can be contacted by email. His email address is Shakur.tisekar@gmail.com

EDITORIAL DISCLAIMER:As part of our mission to provide our users with valuable information about matters of job, health, investments etc., iKokani actively seeks a diversity of viewpoints in its columns, consultancy, commentaries and other opinion-based content. Opinions expressed in these articles are not intended to represent iKokani editorial policy and do not necessarily reflect the views of iKokani’s staff, members or supporters.