Retire Rich Retire Young…- An effort to make your money work harder… Presented by:Vishal Thakkar M.Com, CA, MBA(fin) Managing Director Brianna Knowledge Resources Pvt. Ltd. Time & Money • • • Let’s begin with a story! There was a village with a drought. The Chief of the village found the two smartest men he could find and gave them each Rs.10,000. Their mission…..bring water to the people. The 1st man was a hard worker and started a business. The 2nd man was an investor and built a pipeline. And the winner is…… • Not only did the second man win the contest, but he found a way to have water (money) come in even when he wasn’t working. Both men started from the same background, with the same experience, and the same amount of money. The only difference was that the 1st man worked hard for his money and the second man had his money work hard for him. “The world is changing very fast. Big will not beat • small anymore. It will be the fast beating the slow.” – Rupert Murdoch Retire Rich & Young…What? Different People have different meanings – Some say good lifestyle, no pressure to earn money etc. While others say pursuing hobby, not going to work. Retire Rich & Young, to us, means, “subscribing to an increasing standard of living, without having increasing effort to maintain it.” Retire Rich & Young…Why? To do what I like to do & not just work for money. To pursue my hobbies, interests which were left behind in Rat Race. To spend more times with Loved ones, family & friends To help people, take up a social cause & to make this world a better place. Whatever be the objective, we all agree that there is a need…. Retire Rich & Young… How? That’s Precisely what this program is all about… Lets first Unlearn a few Concepts, that we have gathered during the course of our learnings in Life… Let’s Get a Little Practical… Job Earnings Other Income Monthly Expense Lets See what Robert has to say on this one…3 Types of You need a little help… House Rent Milk Petrol Electricity Bill Clothing Household / Monthly Expense Weekend Getaways Habits Traveling Expense Eating Outside Movies Mobile / Telephone Bill. Freedom / Wealth Ratio… Freedom Ratio = Income* Expense Other Monthly * The one which your money earns & you do not. 3 Types of Education ü Academic Professional Financial ü ü Lets See what Robert has to say on this one…3 Types of What Are Assets? Dream House Sports Car Gadgets Diamond Jewellery “Anything that puts money into my pocket is an asset.” INCOME EXPENSE ASSETS LIABILITIES What Are Liabilities? Housing Loan Car Loan Personal Loan Credit Card “Anything that takes money out of my pocket is a liability.” INCOME EXPENSE ASSETS LIABILITIES What Is Wealth? Dream House “Wealth- Number Of Days Sports Car You Can Maintain Foreign Trips Your Current Standard Of Shopping Living If You Lose Diamond Your Main Source Jewellery Of Income.” Lets See what Robert has to say on this one… Assets V/s Liabilities… Why Middle Class Struggle? INCOME EXPENSE ASSET LIABILITY Let’s Take a Break… Savers Are Losers… Ø How many of you have a Savings Account…? What is the Rate of Interest that you get on your Savings Account…? What about the average Inflation Rate…? Do You recommend Fixed Deposits…? Ø Ø Ø “If Savers are Losers, Borrowers would Win” Lets See what Robert Look at borrowing… Lets has to say on this one…Savers Arbitrage • • • • • Your Re.1 at work at the bank. Rs.10 for every Re.1. By RBI Rules, banks can lend out Rs.10 for every Re.1 that you give them. Meaning they have made up Rs.9 of borrow able money out of thin air. Where do I get some of that? They say open an account with us and we’ll give you anywhere from 1% to 5% interest. We’ll even give you stuff! Then they then turn around and lend you the money right back saying borrow money from us and we’ll only charge you 10% to 27% interest. And that is why banks have beautiful fountains, golden chandeliers, and marble floors. Your money paid for it! Your Expense, Bank’s IncomeTHE BANK YOU INCOME INCOME EXPENSE EXPENSE ASSETS LIABILITIES ASSETS LIABILITIES Your Mortgage Your Mortgage • • • • • Buy payment of 20% (Rs.20,000) and borrow the remaining balance Rs.80,000 at 8% interest with a 30 year term fixed loan. In five years you will pay a total of Rs.35,220 to the bank, Rs.31,276 for interest (that is only Rs.3,944 for Principal Repayment). With the loan taken to term, 30 years, you will have paid Rs.211,323 total principal and interest (Rs.131,323 paid in interest). Rs.131,323 more like 160% not 8%. You’re getting the truth, just not the whole truth. What is your interest rate……. really? Rs.100,000 Home, make a down Top Two Money Eaters… TAXES & Death are the two things which we cannot avoid, so we defer them ALAP. INFLATION is number two evil that eats away our money like a rodent Why do we follow the crowd? That’s right We are going to read your mind. read your mind! Ready….. Pick a # between 1 and 10. 2. Now multiply that # by 2. 3. Add eight to that #. 4. Divide that # by 2. 5. Now subtract the # you started with from that #. 6. Now what ever # you have in your mind, match it up with its corresponding letter in Having a hard time……….think Europe………….how about the alphabet. i.e. 1=a, 2=b, 3=c, get 4? At Denmark? You’re thinking of D right, you did d=4, etc. 7. O.K., Now have you country that starts with least you should thinkifof a did the math right. How did that letter. I’ll give you a second. we do that? 1. thinking of the equation would have led you to the number 4. When we invest, we are doing the same. The numbers start out differently, FDs, Post Office, PPF, KVP, IVP, NSC, Mutual Funds, yet your results are the same……...…dismal. We follow the crowd because it’s easy and because we are just No matter good number you were what at it! How Do We Get Out? “Albert Szent-Gyorgyi, a brilliant scientist who won the Noble Prize twice in his lifetime, stated, “Discovery consists of seeing what everybody has seen, but thinking what nobody has thought.” People often make the mistake of asking people who are trapped inside the same box (or way of thinking) how to get out of the box. What they don’t realize is, the instructions on how to escape that box are written on the outside. • Practice What They Preach? Ask your banker/financial planner these • • • questions! Where is the majority of your money coming from? i.e. commission, fees, salary vs. investments. How long did it take you to become a broker? Can you guarantee that return on my investment? i.e. the prospectus and small writing. You see, they the only brokers because “Wall Street isare called place that people they are a Rolls-Royce to get ride to in broker then you are. advice from those that take the subway.” – Warren • Time Is Your Friend • • • • Time: a young person’s biggest asset Compound interest is awesome For every decade that savings is delayed, the required investment triples Example: Rs.500,000 at 65; 10% yield – – – – Age Age Age Age 25: 35: 45: 55: Rs. 79 Rs. 219 Rs. 653 Rs. 2,141 per per per per month month month month Power of Compounding 3500 2800 2100 1400 10% 700 0 0 5 10 15 20 8% 25 Difference is quiet significant in long run. 15% Growth of Rs. 100/- More About Time • Time diversification reduces investment volatility The Rule of 72 – • 72/interest rate = doubling period 72/doubling period = interest rate – Years YEAR END SENSEX level 1 year 28.57% 34.90% 25.52% -2.85% 15.99% 44.24% 62.24% -11.10% -21.94% 79.13% 9.45% 49.54% 266.88% -46.78% 65.71% -13.71% 3.24% -0.17% 15.82% -3.92% 33.73% -27.93% -3.75% -12.12% 83.38% 16.14% 73.73% 15.89% 10/28 27.85% 35.71% 3 years 5 years 7 years 10 years 12 years 15 years 31-Mar-79 100.00 1 31-Mar-80 128.57 2 31-Mar-81 173.44 3 31-Mar-82 217.71 4 31-Mar-83 211.51 5 31-Mar-84 245.33 6 31-Mar-85 353.86 7 31-Mar-86 574.11 8 31-Mar-87 510.36 9 31-Mar-88 398.37 10 31-Mar-89 713.60 11 31-Mar-90 781.05 12 31-Mar-91 1167.97 13 31-Mar-92 4285.00 14 31-Mar-93 2280.52 Harshad Mehta 4,285 15 31-Mar-94 3778.99 16 31-Mar-95 3260.96 17 31-Mar-96 3366.61 18 31-Mar-97 3360.89 19 31-Mar-98 3892.75 20 31-Mar-99 3739.96 21 5001.28 Tech31-Mar-00 Boom 5,001 22 31-Mar-01 3604.38 22 31-Mar-02 3469.35 22 31-Mar-03 3048.72 23 31-Mar-04 5590.60 24 31-Mar-05 6492.82 25 31-Mar-06 11279.96 26 31-Mar-07 13,072.10 Probability of Loss Average Returns Probability of Loss (%) 29.61% 18.05% 12.25% 17.58% 39.49% 27.66% 4.03% 7.52% 15.24% 43.12% 81.76% 42.93% 47.90% -8.70% 13.86% -3.83% 6.08% 3.57% 14.17% -2.53% -2.47% -15.21% 15.76% 23.23% 54.67% 32.73% 5/26 19.94% 19.23% Performance of BSE Sensex Equities not risky in long run 19.66% 22.44% 27.05% 18.58% 13.50% 23.81% 17.16% 15.26% 53.04% 41.76% 39.57% 33.09% 23.58% -4.74% 11.29% -0.21% 8.93% 1.37% 0.64% -4.77% 8.37% 5.36% 25.63% 30.38% 3/24 17.95% 12.50% 28.36% 21.77% 12.61% 18.48% 20.52% 24.97% 42.80% 21.78% 33.11% 35.03% 24.81% 23.18% 18.77% -1.92% 11.87% -0.67% 0.89% -1.41% 7.54% 7.58% 17.08% 14.71% 3/22 17.36% 13.64% As Time Increases Volatility & Range Decreases 21.72% 19.77% 21.01% 34.71% 26.84% 31.45% 24.87% 19.35% 20.74% 25.60% 18.02% 20.40% 11.93% -2.09% 2.95% 3.99% 7.13% 12.85% 14.55% 1/19 17.67% 5.26% 22.73% 33.94% 23.95% 26.85% 25.60% 24.39% 20.63% 17.29% 18.05% 23.47% 14.45% 13.23% 8.32% 2.24% 9.11% 9.54% 12.27% 0/17 18.00% 0.00% 27.40% 24.05% 21.86% 20.02% 21.43% 19.92% 19.31% 13.03% 13.63% 14.53% 14.71% 15.16% 16.32% 7.72% 0/14 17.79% 0.00% After all, in the last 25 years, we’ve seen …. • Two wars • At least three major financial scandals • Assassination of 2 prime ministers • At least 3 recessionary periods • 10 different governments and • An unfair share of natural disasters, yet Sensex Growth from 1979 - 2007 However had one invested in the Sensex Rs 1 lacs in 1979 it has grown to 1.30 crs earning a return of 19% compounded annualized return. Rule of 72 • If you Put your Money at ‘X’ % then your Money is double in (72/X) years. For Eg: 1 Lac Invested for 36 Yrs Rate of Yrs to After 36 Interest Double Yrs 6 12 Yrs 8 Lacs • 8 24 9 Yrs 3 Yrs 16 Lacs 40 Crs Investing is NOT Risky… What is Risky is an “Investor” & not an “Investment” Fundamental Investing Technical Investing Buying Insurance Lets See what Robert has to say on this one…Investing Managing Investor’s Psyche The cycle of fear, greed and hope Fear Gre ed Hop e Z r h In a u ic u d Wrong emotion dominates at wrongdi Mut alFun time Financial Status of Rich Person INCOME EXPENSE ASSET LIABILITY Take the Steering Wheel in your hand… Invest In Yourself First… Learn the Language of Money… So what do we recommend… Climb the Seven Steps of Retiring Rich & Young… Make an Action Plan to religiously follow them… Review your progress at reasonable intervals… Let’s Take a Lunch Break… Investment Avenues… I know all of you have been waiting for this one… But not too soon… Let us first understand the difference between good Loan & Bad Loan “Here are 5 great reasons to carry a big, long mortgage and never pay it off.” - Ric Edelman, Author of The Truth About Money (1997 Book of the Year). 1. Mortgages Don’t Affect Home Value The value of your property is going to rise or fall regardless of whether or not you have a mortgage. You wouldn’t keep Rs.100,000 between the mattresses, why would you keep it in your house? Your Mortgage Is The Cheapest Money You’ll Every Buy People have a ton of debt, i.e. credit cards, auto loans, student loans, etc. By far, the cheapest loan you can get is a mortgage loan. Why wouldn’t you borrow against your house at 6% acquiring more assets to increase your R.O.I., instead of borrowing with a 18% credit card. 2. 3. You Might Need The Cash Financial Troubles? i.e. retirement, job loss, medical, family, marital, college, etc. Banks only like to lend money when they know it can be paid back. Tax Law Encourages You To Have A Mortgage. Mortgage insurance and interest is tax deductible whereas interest on other loans are not. In essence the government rewards you with cash back for paying interest on your mortgage. Mortgages Become Cheaper Over Time Depending on the loan you choose, your mortgage payment stays the same over time. However your income increases making the payments easier to make. 4. 5. Lets See what Robert has to say on this one…Good Investment Avenues Real Assets Real Estate Commodities Oil, Gold and Silver Paper Assets Stocks and Shares Certificate of Deposits Government and RBI Bonds Foreign Exchange Mutual Funds Public Provident Fund The Beauty of Real Estate! 1. 2. 3. 4. 5. 6. 7. Phantom Cash Flow (Depreciation) – Make money and count it as a loss Banks Lend You Money – Try that with stocks Leverage – Get more for your money Sec - 54 Tax Deferred Exchange – No capital gains tax The Bigger the Better Negotiations – Something is worth only what someone else will pay for it Appreciation 1. Dolf De Roos’s Four Q: How many Rupees worth of stock/property can you Questions buy with Rs.10,00,000? A: Rs.10,00,000 with stocks, but with real estate a whole lot more! Q: The moment you buy your Rs.10,00,000 worth of stock/property, how much is it worth? A: Rs.10,00,000 with stocks, but with real estate it could be a whole lot more! Q: When you buy your Rs.10,00,000 worth of stock/property what can you personally do to increase the value? A: With stocks pray or write the C.E.O. of the company and ask him to ease up on the private jet trips. But with real estate you can paint, put in new flooring, landscape, or even add a room. Q: Once you have bought Rs.10,00,000 worth of stock/property and it has doubled in value what must you do to enjoy the gain? A: With stocks sell them and pay capital gains, but with real estate you can sell, trade, refinance and enjoy limited and even 2. 3. 4. Commodities Buy and Sell Commodity Futures New to Indian Market Timing of Purchase Knowledge and Skills Oil, Gold and Silver Oil Futures can be traded as a commodity Timing of Purchase Knowledge and Skills Stocks and Shares Do it on your own Give in for Portfolio Management Service (PMS) Discretionary V/s Non-Discretionary PMS Let us do a Mass Role Play Which Company will you choose to invest in? Name of Company: Wise Co. Prudent Co. Sales Rs. Crore Net Profit Profit Margin 12% Equity Capital Debt Funds Return on Equity 200 200 60% 40% 1000 120 25% 500 100 800 200 There are other financial / non-financial factors that would influence investment decisions. Certificate of Deposits Use Rule of 72 for your advantage Banks, Corporates, Post-Office etc. Even Indira Vikas Patra and Kisan Vikas Patra come Under this asset classification Lacks Liquidity and Flexibility Yields meager Return post inflation and taxes Government and RBI Bonds Safety of Capital Lowest Return Mostly to Balance the Investment Portfolio Tax Saving at other times Foreign Exchange Hedging Instruments Now used for Investment because of Volatility Large in Base, Deep in Scope Booming because of Foreign Institutional Investment Inflows Mutual Funds Collective Investment Schemes Open Ended Schemes Close Ended Schemes Equity Linked Saving Schemes (ELSS) S-I-P’s (Systematic Investment Plans) Concept of Fund of Funds. Public Provident Fund Fixed Obligation Every Year 15 years Lock in Good for Tax Saving Introduces Concept of Forced Saving Let’s Take a Break… Step 1: Seven Steps To Retire Rich & Young… “Decide your Age of Financial Retirement Now.” Step 2: Seven Steps To Retire Rich & Young… “Buy Liabilities to the Extent of Need and Not Desire.” Lets See what Robert has to say on this one…Don’t Live Below Your Means Step 3: Seven Steps To Retire Rich & Young… “Link Liability Targets to Asset Targets.” Seven Steps To Retire Rich & Young… Step 4: “Plan Liability Acquisitions at least a Year in Advance.” Seven Steps To Retire Rich & Young… Step 5: “ Increase CASH by Increasing K.A.S.H.” K = Knowledge A = Attitude S = Skills H = Habits Seven Steps To Retire Rich & Young… Step 6: “Work Smarter, Make your Money Work Harder.” Seven Steps To Retire Rich & Young… Step 7: “ Have Targets for Job Earnings and Freedom Ratio.” Freedom Ratio = Other Income Monthly Expense Lets See what Robert has to say on this one…Life’s Four Action Plan… What is the Average Age Let us begin with a little quiz when one starts Earning? 25 Years What is the Average Retirement Age? 60 Years What is an Average Income of an Middle-Class House-hold? Rs.15,000/- p.m. How much can a person save on a regular basis? Rs.5,000/- p.m. If a person can save Rs.5,000/- per month What will be his wealth when he retires? Assuming: He increases his investments by 5% every year Invests in an Asset class that gives returns of 20% At Age 60 his wealth would have been Rs.27 Crores THE TRUTH Creating Wealth is Easy We can all be Wealthy How can you create wealth? Start Saving Early The longer you save, the more you make Save in the Right Asset Class This will dictate how much wealth you create … Save Regularly Even a small amount saved regularly, is good Starting Early Ram Savings Starting Age Savings - Monthly SIP Saving Years till age 60 Total Amount Saved (appx.) 25 Rs.5,000/35 years Rs.57 lacs Shyam 40 Rs.15,000/20 years Rs.62 lacs 27 Crores* Give time to your investments rather than timing 4.90 Crores* 25 years 40 years 60 years Assumptions: (a) Savings grows at 5% annually (b) Returns assumed at 20% CAGR Selecting Right Asset Class Equity market (represented by BSE Sensex) has outperformed all other investment avenues Sensex Company Deposits Bank Deposits Inflation Gold Past Performance (BSE Sensex) Year 1979 Sensex 100 Investment Rs. 1,00,000 2006 10,000 1,00,00,000 In past 27 years BSE Sensex has given about 18% returns This is in spite of … • • • Two wars At least three major financial scandals Assassination of 2 prime • • • At least 3 recessionary periods 10 different governments and An unfair share of natural Save Regularly Disciplined Investing through Systematic Investment Plans (SIPs) is the ideal way to reduce risk Twin Benefits of Investing Regularly Rupee Cost Averaging Automatic Timing Average Purchase cost will be less At higher prices – less units At lower prices – more units Falling Market Rising Market Market Units Purchased Units Purchased Market Give Time rather than Timing the Equity market Investing in the BSE Sensex – 25 years 16.90% 15.07% 16.02%02% Fixed investment at highest sensex value every year Fixed investment at lowest sensex value every year Fixed investment on 1st day of every month Market timing does not matter over the long term Data source: ICRA MFIE Wisdom • “We do not need to be wealthy to be an investor …But we can be wealthy if we are investors” The Right way to create wealth … • X X Buying potential big winning stocks X Successfully timing the markets Following Expert Advisors recommendationsX Saving a lot of money • Wealth can be successfully created if we just follow the three basic principles ... Starting early and saving for long Investing in the right asset class Investing Regularly – big or small Conclusion So the question is…………. What are you going to do with your time and your money? “Only a fool does the same thing over and over again and expect a Questions… Thank You… v Wish you good luck.