Posted in Budgeting, Investing, Personal finance, Savings

FinTech – can you be immune to it?

Fin Tech – Financial Technology is everywhere now. From Internet only banks to robo-advisors to automated loan processing to auto-invest, auto-save, the automatic word has prevailed the personal finance world.

Gone are the days when people queued up in banks to deposit or withdraw money, fill up paper forms to open an investment account and wait for hot tips to buy that fateful stock.

With the financial world so much dominated by technology, there are some tools and techniques we should employ to make our personal finance more automated and efficient, thus leaving us more time to pursue real passions.

Here are a few areas of personal finance where I think we cannot avoid the best of automation.

Banking

This is a no-brainer, however people still flock to big mortar banks like Chase, Bank of America or Wells Fargo. If you read the reviews of these banks, there are endless complaints about non-explained fees, bad customer service and old style bureaucracy.

On the other hand, I bank with a Credit Union which does not even have branches in my state of residence, and another online savings bank which is linked to the checking account in the Credit Union.

In last two years in US (and same in India), I did not feel the need for a local branch. True, once or twice when I needed to withdraw cash more than the permitted limits in authorized ATMs, I could just go to one of their affiliate Credit Union branches in my city.

Thus moving your banking to completely Internet based and using mobile apps, you are in better control of your money than dealing with the brick-and-mortar banks.

9 Best Online Checking Accounts of 2019

Savings

All the internet banks provide goal based savings accounts, the one I use definitely has that feature. It makes it extremely easy to setup savings goals (5 minutes) and let it go automatic every month.

If you still don’t want to do the planning, budgeting etc. for saving money, check out Acorns or Digit, these are two advanced FinTech companies who help you save in the background.

Acorns helps you accumulate the spare change from your everyday purchases and siphons it away to an investment account.

Digit is a bit more sophisticated in that it analyzes your spending pattern from a linked checking account, and saves off what it can. Of course you can set it up in a way you like, but they also guarantee not to cause overdraft.

Before you try out these apps and link your account, please read through reviews and understand their fees. The fees has to be justified compared to the value it will add to managing your finances.

For example, I signed up for Digit but later decided to pull back, as I already know and have set up automated transfers for my savings goals.

There are other similar apps and the following link may help.

NerdWallet’s 4 Best Money Saving Apps

Investing

Like Acorns is a micro-investing app which pulls money out of your account and forces you to invest, there are robo-advisors for bigger and planned investment.

Wealthfront and Betterment are two companies that are revolutionizing the space of robo-advisors and has features like tax loss harvesting in your investments.

This can be a completely hands-off approach to investing and let the expert designed algorithms decide your asset allocation and investment product mix.

Here is a good discussion, again from nerdwallet.com.

How Betterment, Wealthfront and Wealthsimple Compare

Moreover, the brokerage companies like Schwab also has robo-advisor options.

Tracking

What gets tracked, grows. I don’t know who said that, but tracking your Net worth and investments is important.

While you can keep the overall numbers in your head if you check your accounts regularly, there is nothing better than having an algorithm do the data crunching and show your portfolio with all kinds of analysis and charts. It is even better if it can project future growth of Net worth with reasonable assumptions.

This can be done by plain old Excel sheets and I do the same before I could trust the online sites with a consolidated view of my personal finance.

Some of the websites and services are Personal Capital, Wealthfront, Mint and Betterment who aggregates all your finances and shows the analysis reports.

While this is very convenient and tempting to look at all the analysis available, do this if you are comfortable linking all your accounts to one of these services. Below is a detailed review of Personal Capital, but do your own diligence and research.

Personal Capital Review 2019 – Fees, Unique Features & General Overview

Real Estate Crowdfunding

This one is my favorite and real innovations are sweeping this field.

While real estate is the most lucrative (and hyped) investment of all, it comes with high degree of everything – risk, reward, hard work, expertise and complexity.

Traditionally real estate portfolio is built by acquiring houses and buildings with part cash and part leverage, and then managing the day to day affairs of keeping a tenant, fixing issues, chasing rent cheques, vetting and evicting tenants etc. You need a lot of knowledge, time, experience and most important of all, a team of real estate agents, lawyers, tax professional, property managers to run a successful business.

Simple investors who have a different passion than real estate (or loves their own job), do not have so much time and risk appetite to run a full fledged business of rentals.

This is where sites like Fundrise, Roofstock, Rich Uncles come in play. They are making it easier for small investors (even non-accredited) to get a flavor of real estate in their portfolios without the heavy lifting of managing rentals and tenants.

However real estate is an ill-liquid investment and may take 7-10 years to get back the principal. Proceed with caution and read the prospectus, investment style and restrictions carefully before diving in.

I have personally invested with Fundrise but less than 10% of my overall portfolio.

The main risk is once invested, you lose control of the principal as you cannot sell on your own. However the convenience outweighs the risks, if you know what you are doing. With Fundrise for example, your portfolio is invested all across the United States in commercial buildings. It is simply not possible to build such a portfolio directly, unless you want to be a full fledged real estate professional.

Similarly Roofstock enables you to actually own a rental property in different states of US but once invested, you own and manage it with the help of certified property managers.

Tread with caution, surely real estate crowdfunding is going to take off, unless it runs into a major scam or something.

Conclusions

With so much automation in the personal finance industry, it is difficult to stay away and not take advantage of these tools. At  the same time, it is scary to lose control of your money and investments.

Many people are still skeptical of online finance and not without reason, given the recent data breaches at Equifax and CapitalOne. Another reason for skepticism is due to the perceived loss of control. For example, lot of investors still prefer to hold physical real estate than trust online real estate crowdfunding. It reminds me of the obsession in Asian countries (especially India) of holding physical gold (bars or jewelry), till paper gold ETF came along and created lot more gold investors.

On the contrary, we leave so much control of our lives to experts. When we fly, we leave it to the pilots and the airplane auto-pilot system. When we are sick, we let the doctors take over. When we are educating our child, we send them to good schools.

So why should it be different for personal finance, if FinTech frees you from unnecessary headache and lets you concentrate on your real passions?

Let the experts and machines do the job (for a fee of course) but you have to do your research so as not to run into dubious sites and services.

The new mantra of personal finance – Learn, Automate, Delegate, Track.

adult ambulance care clinic
Photo by Pixabay on Pexels.com

Disclaimer – I am not promoting any of the services mentioned in this post nor my opinion should matter in your choice. Do your own due diligence, as I have done in selecting my own set of services according to my needs and risk tolerance. 

 

 

Posted in Investing, Personal finance

Know yourself and your investments

I am back after a long hiatus, as I enjoyed a fabulous vacation in India. These are times when I can introspect and know myself better and deeper. Nothing to do with the spirituality of India, but just an opportunity to separate my mind from the daily rat race, and consider what is really important.

Like everything else, personal finance is also very personal. You got to know yourself thoroughly to understand how to restructure your finances, savings and investments to fit and serve your own unique needs. It cannot be driven by advertised claims from pundits, or hyped up investment professionals.

There are several occasions when I made the mistake of trying out something which did not fit my personality or immediate goals. It was just giving in to the popular notion of what I should be doing, without thinking twice about it.

Once I was nominated or elected for a post in the HoA (Homeowners Association). While the work or responsibility was not very complex, but the surrounding politics and conflicts required a lot of different people handling skills. I utterly failed in this endeavor and quickly realized that it is not for me. I have better things to do and spend my time on.

Similarly as I read more on Real Estate Investing and the numerous strategies, I wonder is it possible for everyone to jump in and spend so much time or build such skills to be successful? Or is it better to stick to your own vocation and invest passively, thereby spend your valuable time doing what you can do best. This will also increase your income and put you through a better path to success. This is of course provided you like your job and not desperate to get out of the 9-5 routine.

Some of the investment avenues that people jump into without much education or risk analysis.

  1. Direct stock investment
  2. Real Estate investment 
  3. Life Insurance coupled as investment
  4. Crypto-currency 
  5. Exotic Art and collectibles

If you are like me, who likes to keep things simple outside his area of expertise – here is a no-nonsense investment plan.

  1. Try as hard as you can to stay out of debt. Create a budget to track your income and expenses and live within your means. See the post: Budget – Grow the tree upside-down
  2. Maintain an emergency fund and create a cash cushion. See the post: One essential comfort zone
  3. Invest in simple Index Funds and create a goal based portfolio. See the post: Investing in the High Five portfolio
  4. Keep emotions under check and have a realistic plan. See the post: Emotional Investing
  5. Last but not the least, Get Started. See the post: Shun that perfection
  6. Use the following tools to get started. See the post: The Starter Kit

Finally invest in what you understand fully and comfortable in dealing with.

Rest everything can be ignored and continue a stress-free financial journey.

gps on phone
Photo by THE COLLAB. on Pexels.com
Posted in Personal finance

Take off to the aerial view

Today I am flying to India. I am very excited and looking forward to visiting what is my second home now.

As the long flight from US started very early this morning, a few thoughts on personal finance hovered around my mind.

Before the flight takes off, there are a number of events that take place more like items in a checklist. As the plane’s technicians go through their routine yet stricter checks, as a passenger we too go through some disciplined steps like reaching the airport on time, checking in, clearing though security and finally boarding in a queue. All of these steps are important and must be done in sequence.

Then as I put on the seat belt and the plane takes off, the mind switches off from the low level sequence to a higher level composure. The plane rises above the clouds and I can see the world top down.

Personal finance is also the same. As you go through the low level details of controlling your expenditures, paying your credit card on time, automating a few bills on the way, you slowly but steadily reach the state of composure as if your financial life has taken off the grounds.

You no longer worry about petty coupons and discounts, or avoiding the crave for that latte, or even recording each transaction in your budget app.

Instead, now your systems are automated and you have a pretty good idea of how much is spent every month and how much you can invest.

Now your focus shifts to the clouds and you need to only take a top down view of the financial landscape. You start learning more about various investments, real estate, taxes and start strategizing on how to grow all areas of your personal and financial life.

You can now see personal finance is not just about money but when managed well, can allow you to cruise in other areas of your life as an aircraft in a turbulence free sky.

For example, this holiday is completely planned and paid for and I do not need to stress about credit card balance to afford the cost of the trip.

Complete the ground steps in a defined sequence as the suggested posts below, and then focus on the bigger clouds.

Budget – Grow the tree upside-down

One essential comfort zone

Investing in the High Five portfolio

The clouds that you can focus on once done with above are:

  • Taxes and how to find tax efficient investments
  • Insurance
  • Estate planning and wills
  • Passive income generation
  • Career goals
  • Your potential for earning more
  • Having fun

From time to time you do need to come down and go through the low level steps again, as I am in transit now in JFK airport.

I will be flying to my destination in a couple of hours again.

At the end the sequence matters. You can imagine how chaotic it would be to rush through security without checking in your bags first.

The cruise comes later when you are a disciplined traveler and follow the steps.

Posted in Budgeting

Budget – Grow the tree upside-down

Many people cringe at the thought of a budget. Budgeting sounds like nit-picking about finance and a lot of work to keep tabs on expenses, planning etc.

It sounds highly restrictive in the traditional sense. However there are ways to simplify it and make it automated, so that once you set it up correctly it works by itself.

There are many books and resources on the internet on budgeting techniques. Some of them ask you to be mindful of every dollar while others are more liberal in that they talk about setting and adjusting ratios (30% invest, 40% expenses and so on).

In my experience, a simpler technique worked wonderfully and nicely adapts to changes in income and lifestyle choices.

I call it the repeated divide into 3 parts and allocate.

To keep this short, lets take an example and work this budget out.

  • Income = $50,000/yr [Average range in America, taken just for illustration]
  • Taxes = $12,500/yr [It will vary based on filing status etc. average 25%]
  • Take home = $36,000/yr [$37,500 reduced by 401k contribution etc.]
  • $36000/year = $3000/mo

The first divide and allocation goes towards 3 main goals. 

  • Investment – Remember the Pay Yourself First?
  • Expenses – You have to live, don’t you?
  • Housing and Miscellaneous – Typically for most people, this takes about 30%

So from our example, now you have 3 categories – $1000 to invest, $1000 to live on and $1000 on housing.

This automatically challenges you to live within your means, invest and allocate money to whats important. And yes, without a ballooning credit card debt.

Now lets apply the next level division on each of them.

First we will take the Expenses. 

3 major categories are Food, Transportation, Utilities. I know there has to be the fun part too, but we will come to that later.

Here for simplicity or to start with, you can equally allocate:

$300 for Food, $300 for Transportation and $300 for Utilities.

Keep $100 for variation in any of these.

Over time, the ratios will be adjusted as you learn the spending pattern more. The reward – $100 towards fun if you are able to discipline yourself to keep the 3 categories within $300 each. More rewards follow, read on.

Next is Investing. Again we may divide by 3 into the simplest asset allocation. 

$300 – Stocks, $300 – Bonds, $300 – Cash

[Keep $100 for variations] 

These can be varied based on your risk profile, age etc. but to keep things simple or to get started, what works is an equal emphasis to all. The cash component is for safety factors (towards your emergency fund) or you can invest in REITs (Real Estate Investment Trusts), if you already have a safety cash cushion.

The last $1000 is for housing and miscellaneous. 

Now here there can be multiple scenarios. Lets consider some, or you can be creative applying the divide-by-3 rule according to your situation.

$400 – Rent or mortgage. 

$300 – savings for other goals – vacation, maintenance, taxes

$300 – Flexible. This is the amazing part – you have just budgeted yourself for free money.

I don’t care what you do with this, but having this is a huge peace of mind.

It is a reward for sticking to the divide-by-3 rule and making it work.

Conclusion

The budget grows like a tree upside-down. You can grow it as you further divide your categories. For example, Transportation can be broken down into gas, insurance and car payments.

Similarly savings can be broken down into vacation, maintenance or down payment for a gadget/car/home.

This model of the budget also adapts to raises year after year. All your branches will increase enabling you automatically to invest, save and spend more.

The more money you put on the top, the richer it makes you at the lower nodes, and improves your lifestyle, savings and investments. It directly encourages you to invest in your talent, increase your income and enjoy that dinner out.

A-labeled-ternary-tree-for-labeled-k-ary-trees-is-the-same-as-a-power-series-as-the

Plant your budget tree today. Water it, grow it and enjoy the fruits at the leaf nodes.

Information : We computer geeks call it a Ternary Tree. 

https://en.wikipedia.org/wiki/Ternary_tree

Posted in Liabilities and Debt

The Paid Piper of Hamelin

The title is from the childhood story where the Pied Piper helped a town get rid of the rats and drowned them in the river by playing his melodious music. The second part of the story is that after the rats were got rid of, the town did not pay him. So a very sad thing happened as he came back revengeful and wooed the children away.

I wish to relate this to the largest debt we take on in our lives, Home Mortgage.

One’s own home is a dream which everyone loves to live, but the mortgage is like the rat which becomes ubiquitous in our entire life (for 30 years and everyone holds one in his/her financial life).

The mortgage is usually a large amount (2-3x of annual salary) and the long period makes us imitate the Pied Piper with our finances.

The big question is should you pay up the mortgage, never have one at all, or let it continue while you build wealth by investing?

Mortgage has a number of factors – the monthly payment, interest rates, tax benefits, prepayment charges, points, refinance, fixed and adjustable, ARM and LEG and what not.

There are entire books on mortgage terms, strategies and nuances. Also there are countless arguments on which is better – paying off mortgage or investing the same money at higher risk/return.

The question is how do we become a Paid Piper from a Pied Piper? How do we get that relief when the rats are drowned? Or is life worth it when the rats are gone and the music has to stop? Will you feel betrayed like the Pied Piper once all your savings (hard work) are trapped between the walls?

This is a question I searched extensively for a solution but could not find any conclusive resources or guidelines.

Very recently as I bought a house in Texas, I have considered a number of strategies based on my prevailing financial situation.

I have no finance degree nor do I work in a bank or financial institution. But over the years I faced this question multiple times as I owned 3 houses (India and US), all bought with a mortgage and then paid up fully or partially.

This post is just to systematize this complex decision by taking into account a few personal finance factors. I hope this will help you make a better decision if you are grappling with the same question.

You can be in 3 situations that I have gone through and used all 3 strategies in the 3 real estate possessions.

  1. Lets call it A – The Paid Piper solution. You throw all your extra money towards the mortgage and pay it up as soon as possible. This is also the Dave Ramsey way, where Baby Step 6 says after you are consistently investing 15% of your salary and saving for kids education, you should throw all your extra money towards mortgage and become completely debt-free.
  2. Lets call it B – The Pied Piper solution. Here you keep paying the mortgage payment every month but also pay a little fixed extra, to keep chipping away at the principal. Although you can throw even more money, but you prefer to invest the extra money into stocks and REITs. Keep the music on and lead the rats slowly towards the river. Hopefully you earn from the residents of the town as they enjoy the music but gets rat-free as well. 🙂
  3. Lets call it C – The Rat Lover solution. Here the rat is kept controlled (by making regular payments only) and the music plays on for a long time and creates enough entertainment that the rat problem diminishes from the people’s mind. In other words, the mortgage is kept alive by making the payments while the investment portfolio (real estate or otherwise) keeps growing by acquiring more assets.

Now let us see what factors in your financial situation will or should make you follow either A, B or C strategies. These factors will never be exhaustive but the ones I am going to discuss are faced by me and used in my decision in all the 3 cases. You can apply them to your situation and according to your long term goals.

A – The Paid Piper of Hamlin 

  • The mortgage interest rate is very high compared to investment returns. An interest rate above 8% is almost always expensive as you will struggle to earn 8% on your money consistently from regular investments like stocks, ETF or mutual funds. It is a no-brainer that you should pay off as soon as possible, or refinance to a lower interest rate. If you manage to refinance, congratulations. You can follow B or C below.
    • This was my situation in the first house I bought in India where the interest rates were > 10%. I paid off the mortgage in little over 3 years as I absolutely hated the monthly payments and the stress on my budget. 10 years later, I still own the house which is now giving me a nice rental income with zero loan costs.
  • You have a decent rate 5-6% but not very low. You are not comfortable with debt and you really want to stay in the house for long term (10-15 years). This is your dream house and owning it free and clear will give you a peace of mind and pride too. By all means strive to pay it off.
    • This is Dave Ramsey way where he says wealth starts building up and you become generous when you have no more monthly payments.
  • But most important is to also look at your overall asset allocation if you have an affordable mortgage. How much do you have in Stocks and Bonds? A simple allocation is 33% Stocks, 33% Bonds and 33% real estate. You can modify the percentages according to your risk profile and age, but you get the idea.
    • Decide on an asset allocation and calculate where do your investments stand. Take into account the Equity you already have in this home as Real Estate. If putting more money into the Home is not going to disrupt your asset allocation and actually help build up the Real Estate Equity, go for paying up on the mortgage.
    • Be careful on this as you don’t want to be House Poor, where Real Estate allocation is like 80-90% and you are left with very little liquid investments. This can be really stressful when the economy is down and chances of emergency situations and job loss increase. Also not having cash means you will miss on the great investment opportunities that comes up during recession times.
  • All the above factors were justified in my case of my first house mortgage.
    • I had a high interest rate loan then and I did not see any way of refinancing. It was not so common those days or I did not bother.
    • I wanted to sleep better and own my first house. I happily stayed in the house for more than 10 years, paid it up and rented out when I moved to my second abode.
    • I was building my portfolio and paying it off just made the Real Estate part done. There was no REIT in India (they are coming now), and so the only real estate exposure was to buy a physical asset.

B – The Pied Piper of Hamlin

Here you play along but also have the task of paying off your mortgage in your plans.

This can be the real balanced approach and most financial advisers recommend this. You will read over the Internet about the biweekly plan, HELOC strategy, monthly extra payment etc. All these are good but lets see when you should employ this strategy.

  • You have a decent mortgage rate of 5-6% and you are a disciplined investor.
  • You budget every month and have the discipline not to blow up the extra money.
  • You are inspired by Dave Ramsey and you know after investing 15% of your salary into retirement accounts and investing for kid’s education, you have surplus that you can throw at the mortgage.
    • However this requires a lot of discipline and so Dave recommends a 15 year mortgage so that you are forced to increase your monthly payments.
  • I am a big fan of asset allocation. The beauty of this approach is that you can tweak the extra payments to balance your assets between Stocks, Bonds and Real Estate. If your real estate allocation is low, increase your extra payments and as the allocation comes closer to your desired one, reduce your payments and so on.
  • When I purchased my second house in India, I paid majority by cash (as interest rates are still high in the range of 8-9%) and took out a loan for the rest.
    • This let me continue investing in mutual funds and fixed deposits, while the mortgage payment earned me equity and further added to the Real Estate allocation.
    • I also paid extra every month due to following factors.
      • The house was brand new construction and my wife and daughter designed the interior beautifully. So we did not plan to sell it soon, but instead, planned to stay in it for the long haul like our first house. I eventually wanted to own it free and clear again.
      • The interest was high (typical in India) although the payment fit into my budget. The extra payment I could customize month to month and throw into the principal.
      • I could keep investing in mutual funds according to my worked out allocation, and at the same time apply for tax deductions on the mortgage interest.
    • However situations changed in about 3 years. We could not stay in this house for long, as my job required me to relocate to US.
      • Paying off suddenly became a priority if I had to keep the house.
      • Well I could have sent money from US every month, but that would have disrupted my other plans. More on that in later posts.
      • Due to complex international tax laws, I had to liquidate some of the mutual fund investments. It made sense to pay off the house than letting the money idle in savings accounts.
  • So if you have the discipline of working on a budget, you can chip away extra on your mortgage principal with two goals in mind.
    • Increase your Stocks and Bonds portfolio as you invest majority of your savings, thus keeping your asset allocation sane. The real estate down payment (typically 20%) itself creates a big skew in asset allocation. So you want to tune the extra monthly payments according to the asset allocation.
    • Eventually you want to pay off as you want to keep the house for long term.

C- The Rat Lover

Yikes!! Who loves a Rat? The investors of course… They love leverage and want their tenants to handle the rat, while they enjoy the music in terms of cash flow and asset appreciation. If you are really interested in this mode, I suggest read a lot of Real Estate Investment material to learn how to do it properly.

I have not done it intentionally but I have read a lot (I still scourge for such books and BiggerPockets.com).

In the USA, the real estate investing is popular due to the rent/value ratio being investor friendly in some regions and the overall mortgage rates are quite low.

So even if you maintain a mortgage, either the rent or your monthly budget can cover it. Of course, you should plan and budget well, and buy the house you can afford.

Now when should you play the Rat Lover? Dave Ramsey will not advocate this at any cost unless you are working on other high interest debt or you have no financial slack in your budget to pay off. The simple reason is this is risky and if you run into financial trouble, your beloved home can go into foreclosure.

But there is a deliberate situation of not paying off. I am not talking about real estate investing but as a homeowner like me. I bought my property in Texas in December 2017.

Here are the considerations and why I decided to adopt this 3rd strategy.

  • Since I did not have a credit score (no history in US), I could get a 7/1 ARM with a 3.625% interest rate. This was good as it perfectly fit into my budget owing to the low rate.
  • I did not then plan to keep the house for long term. It was a starting house in the US and everyone told me we will upgrade in a few years time (less than 7 years and hence the 7/1 ARM). So there is no point in driving down the mortgage with extra payments (except to save some interest).
  • Instead I should invest the surplus out of my budget in low cost index funds and increase my asset allocation. Note in my second house, as I liquidated some investments and paid off mortgage, my asset allocation is really screwed up hugely in favor of Real Estate.
  • Me and my wife renovated this house in Texas and brought the value up. I have not done an appraisal yet but I am sure it improved value by 10-15%. So now we want to keep this house for the long term. Even if we move out or move to another place, we can convert it to a rental as the mortgage interest rate is low.
  • Now there are two ways to hold this house long term.
    • I can focus on paying down the 7/1 ARM before it becomes adjustable and hits me with the interest rate risk (it will start floating in the 8th year). But this would have skewed my asset allocation further towards Real Estate.
    • I can refinance it to a fixed rate (now that I have a credit score and a decent one). I did exactly this and refinanced this month (the rates took quite a dip). Of course I could not get as low as the 7/1 ARM but very close to not affect the monthly payment too much.
  • Now I can invest entire savings every month and build up a portfolio of index funds. Once my asset allocation comes back in shape I will go back to strategy B and start paying off the mortgage.

Conclusion

Lets consolidate the factors and see if we can come up with a situational formula to decide what kind of Piper you will be.

Type A: The Paid Piper

  • You have a high interest mortgage. Always try to refinance to lower rates though.
  • Your asset allocation dictates you to increase the Real Estate portion. The principal payments towards your mortgage goes towards building the Equity.
  • You either have substantial liquid assets or are investing regularly to increase stocks and bonds allocation.
  • You want to stay in the house for long term and owning it free and clear will give you the peace of mind.

Type B: The Pied Piper

  • You have a decent mortgage interest rate (5-6 %) and can comfortably handle the monthly payments.
  • Your asset allocation is already balanced and real estate equity build-up is a part of your regular investment plan.
  • You plan to stay in the house for a longer duration, if not forever.

Type C: The Rat Lover

  • You have a good mortgage interest rate (< 5%). You obviously can comfortably handle the monthly payments.
  • Your asset allocation is already skewed towards Real Estate and adding more home equity will make your portfolio ill-liquid.
  • You have alternative plans of either converting this to a rental or you bought this property as an investment. Of course you should know how to manage rentals to generate positive cash flow.
  • You may move out of town or country in few years (the time is not fixed). You will have a choice then to sell it off or convert it to a rental. The fixed rate will not cause a change in your asset allocation or worry about interest rate movements.

Here are my 3 units portfolio.

 

So what do you think of the strategies mentioned? Let me know in the comments below!

Stay tuned for the next post on my blog about budgeting and executing these strategies.

Posted in Liabilities and Debt, Personal finance

How a cassette player caused debt aversion

I was very fond of music and used to break dance in my school days. We had a picnic some day and I wanted to arrange for music to entertain my friends.

But in my home, I did not have a portable music player except the turntable, which was not exactly portable.

So I borrowed my neighbor and cousin’s cassette player. I was very happy and proud at the same time to have arranged it. But I could not tell my father as he never approved of borrowing others’ material.

We started off for the picnic destination on bicycles and in midway, one of my friends wanted to play the music. So he started it (it was operating on battery) and the whole group was enjoying the music along the way to the picnic spot.

Now there is a saying in Bengali which means something like “When you fear the tiger, the sunset is imminent”.

As someone among my friends was fiddling with the cassette player, it slipped and came crashing down on the concrete road. The outer cabinet made of plastic were in pieces and I did not know what to do. There was no way it could have been put together and glued or taped to make it look like earlier. The only silver lining was that it was still functional.

Long story short –

We went from electronics shop to shop and everyone told us that this model is out of production. I still remember it was from Hitachi, the Japanese company and they were not making those any more.

Thus I was stuck with a broken cassette player that I cannot return to my cousin, nor get it fixed.

It caused me much embarrassment and punishment to go and hand it over (after a botched up attempt to fix it) to my cousin.

I learned another very useful lesson in my life: What is not yours is not Yours.

  • Leverage and O.P.M (Other People’s Material or Money) are buzzwords and better avoided.
  • Debt can reduce your self-esteem and put yourself into embarrassing and stressful situations.

 

Posted in Personal finance

The vinyl records

Many of us who grew up in the 80s and 90s will remember or would have seen Vinyl records on the shelf. I too had a turntable at my home and was very fond of it.

As I grew up, the turntable and the 4 records that my Dad possessed became a big source of entertainment for me. It was my first introduction to recorded music and HMV as a label etched a place in my heart. Two of the albums were from very famous compilations – Sound of Music and Anand, an epic Hindi film.

As I listened to those records (a total of less than 20 songs) again and again, it became a part of my everyday life. After school, it was a routine just to start it up and enjoy the music flowing through the room. I studied, played, read and sometimes just intently listened to the tunes and beats of the music.

There was something magical in the turning of the turntable, the careful handling of the vinyl records and the art of placing the play needle in the right place. The needle to me was symbolic of the control that I had over the songs, as I knew exactly which concentric track to place it on to play the particular track I wanted to hear at the moment. No buttons, no swipes, but a precise and delicate move. It made listening to music more intentional, and not something that is just playing in the background without you noticing.

With the advent of iPod and digital music, we have automated good music to an extent where we do not care anymore what’s playing. We take pride in owning thousands of songs in our playlist and talk about the abundance we have at no or minimal cost.

Of course the digital transformation of the world is nothing to sulk about, it has changed the dimensions of convenience to a level we had not imagined in those days. I myself work in the tech sector and enjoy every bit of the transformation I make to the world through my work. But there is a lot of non-tech aspects of a good life.

The same is true for personal finance in most people’s lives. They just go through the motions day in and day out, with the assurance that our banks and credit cards are abundantly full of money and we can keep using it as the songs on the iPod. However it is not as harmless as mindlessly letting your iPod play music. Sure it does eat up the battery and you have to charge it, but that’s a minor inconvenience as compared to the ill-effects of not being intentional to your finances.

I had spent few initial years of my working life in this mode. As long as the paycheck came and the yearly raises were guaranteed by the hard work I did, I cared less about taking care of my finances. It was all lumped into the default bank account set up by the payroll department and languished in a paltry interest rate savings account or simply vanished into thin air.

The statistics say no different.

Fact: Two-thirds of Americans would struggle to scrounge up $1,000 in an emergency, according The Associated Press-NORC Center for Public Affairs Research.

Source: https://money.usnews.com/money/personal-finance/saving-budget/articles/2017-05-16/8-scary-financial-statistics-and-how-to-avoid-becoming-one

In my later years, as I learnt more about saving, budgeting, investing and long term planning, I started enjoying money in a more tangible way as the vinyl record. When you spend on something with an already planned budget, it is a completely different experience than wondering at the end of the month, where all the cash went.

Do you see why I enjoyed playing the vinyl records and the control in dropping the needle at the right place and right time, and then enjoying it as it plays till the end of the record?

By the way, I just bought myself a turntable last year and my vinyl collection is growing. I guess I am getting old…. or just going back in time to the basic principles?

  • Be intentional about your personal finances and interact with money in a tangible way as you would with a vinyl record player.