Sunday, March 6, 2016

It's your Money

Karan and Arjun are childhood friends. They went to same school. They went to same college and now, they are working in same company. How lucky! Karan and Arjun had same academic background, same friends, same social influencers. But there was difference in their lifestyle and the way they handle money

With the excitement of earning a salary, Karan and Arjun began clubbing, parting and socializing.  Soon the frequency of partying increased from once in 2 week to twice a week. But, now they were planning to take important decision of their life.

On day, during evening break, at coffee table
Karan said - It nice to have good amount coming into bank account monthly. But, I know I have to invest for future
Arjun replied - Oh Karan, don't bother so much. Our salary will always keep on increasing. We should live in present moment & enjoy life to fullest

But, Karan was not convinced with Arjun's answer. He skipped couple of weekend parties that Arjun attended, enjoyed and celebrated. Instead, the discipline Karan studied few investment options and decided to park small portion of his salary, whereas Arjun, with his spendthrift attitude continued to ‘live in the present moment’.
Who do you think is right? Karan or Arjun?

Owning a car
During next 2 years, Karan and Arjun worked hard and they were able to showcase their outstanding academic performance at work and were able to outperform most of their colleagues. This earned them massive hike in salary year after year. With higher salary, Karan was planning to buy Maruti Swift whereas Arjun decided on Mercedes Benz A class.

Karan: Mercedes Benz is premium category car. From where you will arrange all the money to buy this car?
Arjun: Dealers of Mercedes Benz are friendly. They were happy to know that I have no liability and have arranged loan to finance full cost of car.
Karan: That's great. But I would not prefer to take such hefty loan for car

Financial planning rule of thumb says -
If you earn Rs. 10,000 per month. Your monthly transportation cost with self driven or chauffer driven car must not exceed Rs. 1,000.

If you decide to borrow car worth Rs. 100,000. It is important that you make pay 1/5th of the amount instantly and ensure that balance amount is repaid within next 4 years.
According to you, Who will be proved smarter in the longer run?

At this stage, Karan has decent savings in his account and lower loan amount of his small car. He was balancing his present and future lifestyle.

Owning a house
Another 3 years in job, with promotion and higher salary -- One day Karan and Arjun were discussing about buying their first house. Karan has repaid its car loan but Arjun had few installment outstanding.

One evening, both of them went to checkout premium housing colony. The layout of building was splendid, amenities offered were marvelous and proximity to schools and hospital was exemplary.

Arjun: This flat is awesome. I am going to buy it. My bank is offering me half the amount of flat. But, I don't know from where will I arrange for balance half of the flat value. Karan, How are you planning to pay for the house?
Karan: I have been regularly investing portion of salary in fixed deposit, mutual funds and equity. I plan to sell them and make partial payment for flat.

During the discussion with Karan, Arjun realized that by investing early by just 4 years, Karan was able to accumulate wealth almost twice the amount he had. Arjun's existing car loan liability, his poor savings and desire to maintain his existing luxurious life style, stopped him to taking higher loan

Arjun thought of postponing his decision of buying flat.
Karan: Don't postpone. If property prices would increase by next year. Then existing premises would become more costly.
Finally, Arjun settled for smaller house in same locality.

Financial Planning Rule of thumb says -
If you are earning Rs. 10 lacs annually as salary, then u can buy flat of value around Rs. 50 lacs - which is 5 times of your annual salary. Paying half of flat value as down payment, this will ensure that you have lower EMI.
By not investing early and smartly, Arjun faced challenges in meeting its financial goal.

Foreign Vacation
Further, few years Karan & Arjun were now promoted as head of departments. Because of his disciplined investing approach, Karan paid off considerable amount of loan, enjoyed foreign vacation with family & put his kids into the best of schools.

Arjun was still in his weekend party mood, paying his home loan amount and trying to set aside portion of his monthly salary to retirement corpus

Friends, Our life is the sum total of the decisions we make. There are 2 ways of becoming millionaire - start early, start small and stay disciplined or start with billion dollar in account, take some wrong decision and yet your are still millionaire.