The Investment Game Plan

^{A little insight into how you should invest.}

^{1. Figure out where you are}

^{The first thing to do is to prepare a personal balance sheet of sorts. Describe your assets - which is what you would call anything you own that is of real value. That means a house is an asset, money in the bank is an asset and stocks/mutual funds are assets. Your TV is not an asset. Your car should not be considered an asset (unless it's less than 3 years old, in which case consider the value declared to insurance).}

^{So add all the values up and you get a list of assets, like so:}

^Assets

^{Cash in bank: Rs. 50,000}

^{Fixed Deposits: Rs. 200,000}

^{Stocks: Rs. 150,000}

^{Mutual Funds: Rs. 70,000}

^{Gold: Rs. 20,000}

^{Current value of house: Rs. 25,00,000}

^{EPF: Rs. 8,500}

^{TOTAL: Rs. 29,98,500}

^{Under declare values of stocks, gold etc. by at least 25% since these are variable commodities.}

^{Now figure out your liabilities. Meaning, how much do you owe other people?}

^Liabilities

^{Outstanding housing loan: Rs. 20,00,000}

^{Personal Loan: Rs. 100,000}

^{TOTAL: Rs. 21,00,000}

^{Don't include things you intend to pay back immediately, like credit card bills, or phone bills etc.}

^{Subtract your LIABILITIES from your ASSETS to find out your NETWORTH: meaning, how much are you worth today. In the example above, NETWORTH = Rs. 8,98,500.}

^{2. What's your "cash flow"?}

^{Now find out how much you spend. Include all standard expenses (in fact, keep a record of this for about six months, and find out the real average) and also amortize your annual payments (like insurance) into the monthly amount.}

^{Add the total income you earn (minus taxes and any other deductions)}

^Expenditure:

^{Apartment Maintenance: Rs. 2,000}

^{Phone bills: Rs. 3,000}

^{Petrol: Rs. 2,500}

^{Credit Cards: Rs. 5,000}

^{Internet connection: Rs. 1,000}

^{Interest payment on housing loan: Rs. 11,000}

^{Insurance Amortised: Rs. 3,000}

^{House taxes etc. amortised: Rs. 1,000}

^{Cash expenses: Rs. 8,000}

^{Total: Rs. 36,500}

^Income:

^{Salary: Rs. 45,000}

^{Dividend: Rs. 2,500}

^{Total : Rs. 47,000}

^{Cash Flow: Rs. 10,500 per month.}

^{If your cash flow is not positive, i.e. Expenditure is greater than Income, STOP RIGHT HERE. Go back to the drawing table and figure out how to reduce your expenses or increase your income - there is no other way around. Investments are only for cash flow positive people!}

^{3. What and when do you need money? And How Much? Find out any longer term requirements to fund a large one time requirement.}

^{The way to do this is:}

^{Ongoing: Liabilities, Rs. 21,00,000}

^{After 5 years: School Donation for Child, Rs. 100,000}

^{After 10 years: House repairs and upgrades, Rs. 10,00,000}

^{After 15 years: College fees for Child, Rs. 10,00,000}

^{After 20 years: Marriage costs, Rs. 10,00,000}

^{After 25 years: Potential medical expenses, Rs. 10,00,000}

^{After 30 years: Retirement, Need to have corpus of Rs. 30,00,000}

^{Discount all these amounts by inflation of 6% a year.}

^{4. The Investment Plan Recipe}

^{Now's the time to act. You need to increase your network every single year to reach your goals. Your immediate goals for the next ten years are to build up a corpus for your child's education, and to clear out your loans. Always pay out your first house loan - that is the house you live in, so you must attempt to make that debt free. Further real estate can be financed by loans etc.}

^{To finance the above goals, you have a sum of Rs. 10,500 a month, of which you invest Rs. 3,000 per month (say) in the principal of your housing loan. The remaining Rs. 7,500 must be invested.}

^{What do you need? Here's an illustration:}

Mntly	Return	Yrs	Corpus	Grows to	Withdraw?	After Inflation	Remaining
7500	20%	5	900,000	3,189,560	2,000,000	2,676,451	513,109
15000	20%	10	513,109	2,909,698	1,000,000	1,790,848	1,118,851
25000	18%	15	1,118,851	5,138,964	1,000,000	2,396,558	2,742,406
30000	18%	20	2,742,406	9,586,741	1,000,000	3,207,135	6,379,605
35000	15%	25	6,379,605	16,543,093	1,000,000	4,291,871	12,251,222
40000	15%	30	12,251,222	29,358,528	3,000,000	17,230,474	12,128,054

^{The idea is that:}

^{1) You get 20% on the first 10 years of investment and you increase the quantum of investment per month every five years.}

^{2) After ten years you move money to less risky investments and get lesser return, and this goes on.}

^{3) Every five years you withdraw the amount of money needed to finance your needs.}

^{4) After thirty years you are left with about 3 crores, which will most likely be just enough for your current expenditure for a while.}

^{This is an investment goal. You can see where your goals like and try to achieve them. Update your networth statement once a month, and estimate your free cash flows every three months. That way you are aware of how close you are to your immediate goals and whether you are making it or not.}

Regards
Praveen Kumar
www.laymansfinance.blogspot.com

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