Formulae To Help You

Here are some formulae to help in your financial journey! None of these rules is infallible, so consider them as guides, not real rules!

1. Rule of 72 (Years It Will Take To Double Your Money)

2. Rule of 114 (Triple your money)

3. Rule of 144 (Quadruple your money)

4. Rule of 70 (Inflation)

5. The 4% Withdrawal Rule (Suggested Safe Rate of Withdrawal)

6. The 100 Minus Age Rule (Suggested Asset Allocation)

7. The 10, 5, 3 Rule (Expected Returns)

8. The 50-30-20 Rule (Guide to Budgeting)

9. The 3X Emergency Rule (How Much Do You Need for an Emergency)

10. The 40% EMI Rule (Maximum Amount You Should Pay as EMI) 

11. The Life Insurance Rule (How Much Life Insurance Do You Need)

 

1. Rule of 72

 Number of years required to double your money at a given rate, just divide 72 by interest rate

Eg. To know how long it will take to double your money at 8% interest, divide 72 by 8 to get 9 yrs

At a 6% rate, it will take 12 yrs

At a 9% rate, it will take 8 yrs

 

2. Rule of 114

To find the number of years required to triple your money at a given rate, just divide 114 by interest rate.

For example, if you want to know how long it will take to triple your money at 12% interest, divide 114 by 12 and get 9.5 years

At 6% interest rate, it will take 19yrs

 

3. Rule of 144

No. of years required to quadruple your money at a given rate, divide 144 by interest rate.

For example, if you want to know how long it will take to quadruple your money at 12% interest, divide 144 by 12 and get 12 yrs.

 At 6% interest rate, it will take 24yrs

 

4. Rule of 70

Divide 70 by current inflation rate to know how fast the value of your investment will get reduced to half its present value.

Inflation rate of 7% will reduce the value of your money to half in 10 years.

5. The 4% Rule for Financial Freedom

Corpus Required to retire on = 100 divided by what you consider a safe rate of withdrawal. If 4% is your safe rate of withdrawal, you need 25 times of your estimated Annual Expenses.

If your annual expense after 50 years of age is 500,000 per year and you wish to retire, then the corpus you require is 1.25 cr.

Put 50% of this into fixed income & 50% into equity.

Withdraw 4% every year, i.e. 500,000.

 This rule works 96% of the time in a 30 year period, provided a black-swan event does not occur.

 

6. The 100 minus your age rule

This rule is used for asset allocation. Subtract your age from 100 to find out, how much of your portfolio should be allocated to equity.

Suppose your Age is 30, then (100 - 30 = 70)

Equity : 70%  Debt : 30%

But at Age 60, you should hold 100 - 60 = 40 in equity.

Equity : 40%  Debt : 60%

7. The 10-5-3 Rule

One should have reasonable returns expectations

10% Rate of return - Equity / Mutual Funds

5% - Debts ( Fixed Deposits or Other Debt instruments)

3% - Savings Account

 

8. The 50-30-20 Rule - a Guide to Budgeting

 Divide your income into

50% - Needs  (Groceries, rent, EMI, etc.)

30% - Wants  (Entertainment, vacations, etc.)

20% - Savings  (Equity, MFs, Debt, FD, etc.)

Try to save at least 20% of your income (50% if you are single and have no responsibilities)

Save more if you can, your day of financial freedom will arrive much more quickly!

 

9. The 3X Emergency Rule - Your Emergency Cushion

Always put at least 3 times your monthly income in an Emergency Fund for emergencies such as loss of employment, a medical emergency, etc. If you are self employed and your cash flow is unpredictable, you will need a bigger cushion.

 3 times Monthly Income

To be on the safer side, you may choose to have a bigger cushion (6 x Monthly Income)

Save this fund in liquid or near liquid assets - these should be readily accessible.

 

10. The 40% EMI Rule - Maximum You Should Pay as EMI

Your expense on EMIs should be within 40% of your income, at the maximum. Finance companies will not generally lend you more! But of course, if you can postpone your expenses and save more, your day of financial freedom comes earlier.

So if you earn 50,000 per month, your EMIs should not be more than 20,000.

 

11. Life Insurance Rule - How Much Life Insurance

Always have a Sum Assured of 20 to 25 times of your Annual Income to provide for your dependents. This amount will depend on your current savings, whether your spouse has an income, how old your children are, what you need to provide for the care of your parents and so on.

If your expenses are 500,000 annually, you should have 1.00 to 1.25 crore in insurance if you have no savings, your wife has no income and if your children are young.

Which type of insurance (whole life, market linked, term or other) is another big question. If you are interested in a blog post on this topic, please post a request in the comments below.

Arrange Your Financial Matters to Reduce Your Taxes

 Can you arrange your finances to reduce your taxes? Are you allowed to do so?

The answers are yes and yes again!

Here is one way to do that:

The information provided here is my take on finding the best investment options for me and for general informational purposes only and is not intended to be a substitute for specific individualized tax, legal or investment planning advice. Where specific advice is necessary or appropriate, consult with a qualified tax advisor, CPA, financial planner or investment manager. 

Which ETF or Mutual Fund?

Fidelity or Vanguard?

See what Rose says:

Fidelity has a number of index mutual funds with zero expenses. How do they do that? With costs coming down, Fidelity absorbs the cost, hoping to sell you other services. Also by following an in-house index, they do not have to pay license fees to S&P or any other indexing service. Returns are also better because the stocks they own are 'lent' to other brokerages and earn additional passive income.

Pros:                    

• No minimums on the first purchase
• You can purchase fractions of the fund, you do not have to buy a full share
• You can automate your investment

Cons: 

• The price at which you purchase the fund is not set until the close of market

With the zero expense funds, the difference between Mutual Funds and ETFs has just narrowed!                

US Total Stock Market Funds/ETFs:

      FZROX - Fidelity Total Stock Market Fund - Expense Ratio 0.0%

    VTI - US Total Stock Market - Expense Ratio 0.03%

   SP500 Funds/ETFs:

      FNILX -  Fidelity Zero Large Cap Index Fund - Expense Ratio 0.0%

     

      FXIAX - Fidelity 500 Index Fund - Expense Ratio 0.04%

VOO -  Vanguard S&P500 Index Fund - Expense Ratio 0.03%

      

   International Stock Market Funds/ETFs:

      FZILX - Fidelity Zero International Index Fund - Expense Ratio 0.0%

      VT - International Stock Market - Expense Ratio 0.05%

Growth Funds/ETFs:

      QQQ - Invesco QQQ Trust tracks the Nasdaq  - Expense ratio 0.2%

      ARKK - Actively Managed -Technology ETF - Expense ratio 0.75%

      TAN - Actively Managed - Invesco Solar ETF - Expense ratio 0.71%

      

       PBW - Actively Managed - Invesco WilderHill Clean Energy ETF - Expense ratio 0.70%

       ARKG - Actively Managed - Genomic Revolution ETF - Expense ratio 0.75%

Bond Funds/ETFs:

VBTLX - Vanguard Total Bond Market Index Fund Admiral Shares - Expense Ratio 0.05%

Dividend Funds:   

      NOBL - S&P500 Dividend Aristocrats 2.28% - Expense Ratio 0.35%

      SCHD - Schwab's US Dividend ETF - Dividend Yield 3.44% - Expense Ratio 0.06%

      VIG    - Dividend Yield - Dividend Yield 1.81% with Growth - Expense Ratio 0.06%

      VYM  - High Dividend Yield 3.5% - Expense Ratio 0.06%

      SPHD - Dividend Yield 5.5% - Expense Ratio 0.3%

Check out the ETF screener at the Fidelity ETF Research Center. Here is a sample of what you can expect to see:

Data from public sources, prices and data may have changed. Please reconfirm before committing any funds or making any investment plans. Copyrights and attributions as mentioned.

The information provided here is my take on finding the best investment options for me and for general informational purposes only and is not intended to be a substitute for specific individualized tax, legal or investment planning advice. Where specific advice is necessary or appropriate, consult with a qualified tax advisor, CPA, financial planner or investment manager. 

Are All Target Date Funds The Same?

 That was the question I set out to answer.

And here is one answer I found at mymoneyblog:

Mediocre Target Date Funds

It could cost you $250,000 or about 12.8% in just 10 years to just hang (HODL = 😲) on to a Target Date Fund. Surprised? I wasn't! Convenience comes at a price!

But one size does not fit all. So there may be circumstances when a target date fund might be right, especially if you are unable to rebalance your index funds from time to time. And all target date funds are not the same either. So here is some more information from moneyunder30:

Index Funds v/s Target Date Funds

The Vanguard Target Retirement Funds with an average cost of 0.17% and the Fidelity Freedom Index Funds which are different from the Fidelity Freedom Funds win our seal of approval.

The information provided here is my take on finding the best investment options for me and for general informational purposes only and is not intended to be a substitute for specific individualized tax, legal or investment planning advice. Where specific advice is necessary or appropriate, consult with a qualified tax advisor, CPA, financial planner or investment manager. 

Investments for a Roth IRA - Asset Allocation

Your Roth IRA is just an account. Once you make a deposit into your Roth IRA, you need to invest in the stocks, ETFs or Mutual Funds you choose. Until then your money earns you nothing! 

Here are the three steps to make your Roth work for you:

1. Decide an asset allocation

Target Date Funds have somewhat simplistic asset allocations, but the allocations change to reduce risk the closer you are to retirement, without any intervention on your part. If your retirement is say 30 years away in 2050, a target date fund might have an asset allocation something like this: 

60% Domestic Equity

30% International Equity

7% Bonds

3% Money Market Fund or Cash Fund

With just a few years to retirement, say in 5 years, your allocation could change to:

30% Domestic Equity

15% International Equity

50% Bonds

5% Money Market Funds or Cash Funds

The advantage is that your allocation is automatically maintained and closer to retirement, the allocation gets tilted away from risky assets like equity and towards less risky assets like Bonds to minimize a huge drawdown just when you need the funds.

2. Decide which funds

3. Rebalance at least annually or whenever allocation is off by a set percentage.

4. Consider an allocation to crypto-currencies.

The information provided here is my take on finding the best investment options for me and for general informational purposes only and is not intended to be a substitute for specific individualized tax, legal or investment planning advice. Where specific advice is necessary or appropriate, consult with a qualified tax advisor, CPA, financial planner or investment manager. 

Should I Invest In A Roth IRA?

 A Roth IRA offers income earners in the US another way to invest (apart from the Traditional 401K offered by your employer).

Should you take advantage of it? When does it make sense to invest in a Roth?

If you have any investments outside of your 401K (and I believe you should!), compounding and career growth will ultimately push you into a higher tax bracket. If that happens, a Roth makes a lot of sense. But if you have only 5 or 10 years to retirement, a Roth IRA might not be of much benefit.

More on the topic from Schwab.com

And here is a Roth IRA v/s 401K calculator from Bankrate.com

The information provided here is my take on finding the best investment options for me and for general informational purposes only and is not intended to be a substitute for specific individualized tax, legal or investment planning advice. Where specific advice is necessary or appropriate, consult with a qualified tax advisor, CPA, financial planner or investment manager. 

Investing Strategies

Practical Investment Strategies for the Busy Professional

This is what I will call the Carvalho Strategy after the person who started it all. I am not sure he started it, but I do know that it is the product of his fertile brain. Whether he internalised the strategy of someone else (ala Kavya of Harvard fame), I do not know!

The Carvalho Strategy is based on two basic facts:
1. Index stocks are likely to loose the least in a bear market.
2. Index stocks are on average likely to fluctuate in value by about 50% in a twelve month period.

Based on the above facts, the strategy involves investing in index stocks. Pick an index with at most 50 stocks so that the calculations necessary to re-balance do not get tedious. At the end of every quarter after initial investment, the stock holdings are rebalanced so that the investment in each stock is in the same proportion as the initial investment. The stocks may, of course, be held for a period long enough to avoid capital gains tax before the first re-balancing.

An example will clarify:

Let us say stocks A, B C and D make up the index. We decide to invest in these stocks in an equal proportion, that is 25% each. So if you have a 1000 dollars to invest, you would invest $250 in each stock.

At the end of 3 months, let us assume A has appreciated to 300, B has appreciated to 400, C has appreciated to 500, and D has depreciated to 200 so that the total holding is now worth $1400. Rebalancing at this point will mean the value of all of your holding in each stock should be 25% of $1400 (which is $350). Since stock A is worth $300, you would invest $50 in further shares of stock A, redeem 50$ from your holdings in stock B, redeem $150 from stock C, and invest $150 in stock D, so that your holding in each stock would now be $350.

This operation would have the effect of withdrawing money from the stocks which have appreciated more than the index and reinvest it in the stock which has appreciated less than the index. The effect of brokerage has not been considered in this example.

The 3 month period for rebalancing has come from Michel Edelson, from his book, 'Value Averaging'. This whole strategy is a kind of value averaging, except for the fact that instead of taking a fixed value for the appreciation desired, we here bring the divergence of the value of individual stocks to an average, so that we are always invested in each stock in the initial proportion. This has the effect of making you withdraw the appreciation from the stocks which are now overvalued and making you invest into the stocks which have underperformed.