Ranjan Varma

Changing the way we learn and manage our money

Archive for the ‘Calculators’ category

Planning For Your Child’s Future

March 16th, 2010

That’s a common mistake that all parents do. I mean taking a unilateral decision on what our children are going to do in future. In the name of arranging a suitable life for our children, we often super impose our old ( and obsolete) preferences and biases.

Your parents, they give you your life, but then they try to give you their life. (Chuck Palahniuk, Invisible Monsters, 1999)

The best way, obviously, is to help the child discover their own interest area and to facilitate that process.

Yesterday, I came across this press note from Aviva about a tool that help parents plan & calculate for their child’s higher education.

Here’s the link to the tool.

Educost

Aviva’s online insurance calculator, “Aviva Educost” helps to calculate the amount you would require to secure your child’s education. This application comes with 20 career options and a comprehensive list of 145 institutes across the world to choose from.

More interesting is that it claims to factor in the rate of inflation, hidden education costs like coaching/preparatory fee and application charges, cost of living if your child moves to another city or abroad, along with course fees, Educost gives you a fairly accurate idea of the financial implication of your child’s higher education.

I used the tool and got the following result:


: Shashwat Education Cost

My Wishlist:

I would have liked to understand the assumptions. For example what is the rate of inflation that has been factored in.

Is that amount required as on today, or is the inflation corrected amount after “n” number of years when my son will be ready to join FTII. And what is the assumption there about the number of years when my son will join FTII.

Conclusions:

In any case, education is undoubtedly the best gift you can give to your child. And a bit of planning for the child’s education is a good thing to do. And this Educost tool is a useful application to help you chart out a blueprint.

I also believe that life unfolds itself, and with utter disregard to your plans to achieve this or that. As Dwight D Eisenhower says:

Plans are worthless, but planning is everything. There is a very great distinction because when you are planning for an emergency you must start with this one thing: the very definition of ‘emergency’ is that it is unexpected, therefore it is not going to happen the way you are planning. (Eisenhower quotes)

Update: I asked the person who sent me the press note about the assumptions and their response is as under:
The assumptions are:

i. Inflation @ 8%

ii. Cost of Education : This refers to the current cost of Education or the course fee. The time period for calculation of this is 18yrs-Current age of child

iii. Cost of Living : This refers to the current cost of Living in the city/country where the particular course will be taken. The time period for calculation of this is: (18yrs+ total yrs of course )-Current age of child

iv. Cost of Preparation : This refers to the current cost of preparation for the course fee. The time period for calculation of this is: 18yrs-( Current age+2yrs)

v. The total cost is the sum of all 3 above and shows the cost required when the child will be eligible to undergo the course i.e 18yrs

Apart from this there is a standard disclaimer that the cost is illustrative and generic in nature and are based on the information collected from a random sample of public and private institutions in India.

Welcome back! Join me on this journey to improving our financial IQ and sharing what we know. Updates at RSS feed or Email. And spread the word please Thank You!

Coming Soon! A Personal Finance Workshop & Software "RupeeManager". Stay tuned

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Posted in Budgeting, Calculators, Children, Personal Finance Software

How to Get Yourself A Financial Plan

February 13th, 2010

Background:

I always believe that life unfolds itself, and with utter disregard to your plans to achieve this or that. But I guess, Dwight D Eisenhower is more articulate. Read on.

Plans are worthless, but planning is everything. There is a very great distinction because when you are planning for an emergency you must start with this one thing: the very definition of ‘emergency’ is that it is unexpected, therefore it is not going to happen the way you are planning. (Eisenhower quotes)

Financial Plan

Now, the financial services sector in India is a hot area and I’ve written about it before. Link, Link2.

I have written about InvestmentYogi and how their goal is to promote a holistic financial planning approach to investing and managing wealth.

I recently came across their online Financial Planning application and was immediately enthused to utilize the tool. After logging in, I found the user interface very cool and user friendly. Take a look:

There is a sample plan that you can download to see what kind of report is given by this financial planning tool.

Unless you have taken a bit of time to read the various things that your financial plan tells you, you will fail to see the importance of doing financial planning.

But once you see the various reports about your assets and liabilities, suggested asset allocation plan, networth, strengths and weaknesses of your financial situation, you would be compelled to take corrective actions.

I see it as this: What get’s measured, gets done correctly (atleast in future).

More Points:

A lot of people get phased out with numbers. Or may have difficulty understanding the numbers and the interpretations. That’s why, a Financial Planning exercise needs a trained consultant to help make sense of the numbers.

I also believe that a planning exercise is a blue print for further discussion and brainstorming. You can do this with your family members. But a trained consultant would add a lot of perspectives, I believe.

There are a whole lot of assumptions made to present the report. One should be able to understand those assumptions

Based on the above two points, I think it makes sense to have a fee based financial planning exercise. InvestmentYogi is charging Rs 5K for their fee based plan and to me it looks like a invitation price. Professional Financial Planners normally charge Rs 10K and above.

My Wishlist for a Financial Planning Tool:

InvestmentYogi’s tool assumes that you know your risk profile. I think that the newbie user may not be aware of his own risk appetite. That’s why it’s a good idea to ask a few questions and let the app decide your risk profile.

The assumptions they make in calculating various reports like the insurance cover required should also be clear to me. I would like to know the assumptions they make for all their calculations. I guess the fee based plan will give me that clarity.

Conclusion:

I really like this application and hope more and more people will use it. There’s the free version to start with. And if you can pay, I’m sure you would find value in your interaction with a trained consultant. (Okay, this is a general statement and I’m not recommending InvestmentYogi’s Consultants. Just recommending trained financial planners)

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Posted in Budgeting, Calculators, personal finance websites

Tags: Planning

How I Made Rs 1,27,535 in One Day!

August 12th, 2009

Okay, that looks like a scam. Well, it’s a header bait. But actually, I saved myself that amount of money by making an informed decision about my home loan.

Along the process of making an informed decision on my home loan, I learnt that paying 10% rate of interest is better than paying 8.75%. It’s a pretty unique situation of mine that makes it TRUE!!

How? Let me share you my story. But before I begin, a big Thanks to BankBazaar. Because the story starts and ends with them. On BankBazaar.com, you can get instant customized quotes for loans and easily compare the total costs of the loan offers made to you.

Let me share my home loan details. I took a loan of Rs 10 lacs in August, 2004. The starting rate of interest (ROI) was 7.25%. After going to a peak ROI of 11%, it has now come down to 10.25%.

The starting EMI was just Rs 7900.00 but as the rates skyrocketed, the EMI was raised to Rs 8951.00.

I have prepaid an amount of Rs 3 lacs from time to time. As on date, the outstanding principal balance is Rs 6.20 lacs. In other words, the outstanding balance would have been Rs 9.20 lacs if I had not prepaid Rs 3 lacs.

That also means that for the last 5 years when I have paid over Rs 5 lacs in EMI, the actual Principal that has been repaid is just Rs 80,000!! (Phew, the EMI principle is so skewed in favour of lenders!)

Anyway, let’s come back to my home loan story. The banks are beginning to advertise attractive rates for new home loans with some hovering around 9% ROI. And when I checked with my own home loan ROI, they said it’s still 11% and will be reduced to 10.25% from August, 09 onwards.

It was time, I thought, to look around for a better home loan and get my loan transferred to a better rate.

I knew about BankBazaar. It’s a very powerful engine to search for the best quotes on loans. In a few minutes, I figured out a quote which looked very attractive. I was offered 8.75%.

The support functions at BankBazaar worked really well and within a few hours I got the phone call from the Bank offering 8.75%. They offered to collect the documents from me. The document required were already specified in the BankBazaar process and they added a foreclosure letter to be obtained from my existing lender.

While getting the foreclosure letter from my existing lender, I also asked for the amortization schedule for my loan. This amortization schedule tells you the portion of interest and principal in your EMI and tells you the reducing balance principal after every EMI payment. You also get to know how long it will take to repay the loan. Check this Loan Amortization Schedule

Now I saw that the total number of EMI payable is just 110. So the loan will be repaid in roughly 9 years. The total interest portion that has to be paid is Rs 3.66 lacs. (A)

On doing a similar exercise for my new loan offer @8.75% for 14 years, the total interest payout is Rs 4.75 lacs. Add the prepayment charge of 2% to be paid to the old lender and 1% processing fee to the new lender, the total interest and fee works out to Rs 4.94 lacs. (B)

The difference between these two scenarios (A & B) is Rs 1,27,535.00!!

So even though I get an offer @8.75% instead of the 10.25%, my total interest/fee cost is less than the lesser offer!

Learnings:
Surprising? Not if you figure out that the enhanced EMI is enabling me to make a part prepayment every time I pay an EMI. So even though I had taken a loan for 20 years, the enhanced EMI is helping me prepay the loan in just 14 years!

Another learning is that it is important to consider the repayment term of your loan. If I go in for a loan @8.75% for 11 years, the difference in interest/fee would be negligible. For less than 11 years, I will make some savings by transferring the loan.

Check out BankBazaar’s powerful Refinance calculator

Do you have anything to share about your home loan? Or do you have any questions? The comments section is awaiting your response.

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Posted in Calculators, personal finance websites

Tags: Loans

Doing the Maths: Time Value of Money

April 24th, 2009

The Background
I often wonder why people avoid financial planning and one of the points is the fear of numbers in many of us.

Unfortunately much of financial planning is based on mathematics. But fortunately the mathematics is not really complicated. You probably learned the basic principles in School.

It is practically all based on the idea that principal multiplied by interest rate over time equals interest earned. Interest = Principal × Interest Rate × Time. Also, Readers know about my personal finance equation, which was:

Income(t) – Expenses(t) = Savings(t) + Investments(t) where time t signifies moving money, or purchasing power, backward and forward in time. So let’s talk about the time value of money.

The Time Value of Money
Let me take a simplistic example to make my point. Imagine you have Rs 1,00,000 with you and you have the following options (inflation rate is 5%):

Give it to a friend who will return Rs 1,00,000 after one year.
Put it in a Savings account which gives you 5% annualized return.
Invest in a Mutual Fund/Stock which can give you a return ranging from -50% to +50% (Isn’t it like trying to hit a sixer and getting caught on the boundary!!)

In option 1, The present value of the Rs 1 lakh that you get after one year is actually (1-5/100)(1,00,000) = Rs 95, 000. Do you realize that you have actually lost money? (Btw, I am not saying not to help a friend. Please do that whenever you have the chance, please. Friendship is bigger than a crore as your networth)

In option 2, the money grows by 5% to Rs 1,05,000 but once you factor the inflation (5%), you are back to the square one. Better to spend the money today rather than wait for one year.

In option 3 , your future value can be higher or lower than the present value.

These are very simple examples. And if you are hating me for stating the obvious, bear with me for a second.

The point I am trying to make here is that these are the basic principles of maths that you need to understand to manage your financial planning. And these concepts can help you with all your financial decisions like retirement planning, planning for your children,etc!

For example I know you may be having a lot more questions. They are:
1. How to find a Future Value using a Present Value over a period of Time and an Interest Rate when there are No Payments

2. How to find a Future Value using a Present Value over a period of Time and an Interest Rate when there are Payments

3. How to calculate the Payment required to Accumulate a Given Amount over a Given Time period

4. Calculation of Interest to Deplete a Given Amount, or Pay Off a Loan

5. Time required to Deplete a Given Amount, or Pay Off a Loan

6. Calculator for Evenly Spaced Payments of Equal Amounts

7. Calculator for Equally Spaced Payments of Unequal Amounts

8. etc, etc.

My point is that the basic principle applies to all these questions. And isn’t it simple?

Do get started on a spreadsheet and do some number cruching for yourself. The formulas are programmed into most financial calculators and several spreadsheet functions (such as PV, FV, RATE, NPER, and PMT). You’ll definitely find it very interesting to toggle with your assumptions and play around with numbers.

For starters, you may check out some spreadsheets here. Let me know if you want more.

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Posted in Calculators, Financial Awareness, Workshop

Personal Finance Tracker

March 8th, 2009

Technology excites me with the way it helps us to do something in a better way. Technology fascinates me when it solves problems, big or small.

So, perhaps, this fascination has helped me build the following tracker application. I do not have any technical qualifications and it’s difficult to teach an old dog new tricks. But as they say learning never stops and if you’re keyed on to something, you figure out how to handle it.

Zoho Creator has featured the application on their marketplace and that has given me the courage to write it on my own blog. And also the 400+ downloads along with encouraging comments about the clean and simple interface.

To manage anything, it is recommended that you measure it first. So when we talk about personal finance, the “Do’s” & “Don’ts” do not really register with most of us. The key is to “Get started” on managing your money.

So if you and I are serious about personal finance, there should be a way to track what is happening to this important resource.

Personal Finance Tracker is an easy and simple way to track your personal finance. You can measure and track your income and expenses, create your portfolio of your Investments, create alerts/reminders and go to your choicest financial calculators.

Personal Finance Tracker on Zoho Creator

You can also see pictorial representations of your budget, investments and expenses. You can filter them for what you need to analyse.

Expense Chart

You can further filter the chart on the basis of the category of expense, whom spent for, payment method, etc.

Similarly for the income chart, you can filter it out on the basis of various sources of income. You can see a pie chart for your budget categories as well as your expenses.

There’s calendar view of your alerts and reminders too.

Personal Finance Tracker: Calendar for Alerts

You can filter the calendar on the high, medium or low criticality of the alerts and the months of the alerts too.

And btw, if you think that only a techie/programmer can build all this, let me confirm that it’s been done by me alone. But it wouldn’t have been possible without the amazing Zoho Creator. It’s really friendly and intuitive and you can build a complete web application even when you are not a techie. Even techies can use the interface to build more complex applications, I’m sure.

Do try out the Free install of Personal Finance Tracker at Zoho’s Marketplace . Let me know what you think

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Posted in Budgeting, Calculators, Financial Awareness, Personal Finance Software

Tags: Personal Finance Software Tracker