Most parents think that they do not need to teach their children how to manage money and the value of managing money in the right manner. They believe that this will be taught to the children as part of their curriculum in schools. The reality is very different. Personal finance is not taught in schools and by the time children reach college it may be too late to correct this mistake. Therefore, the onus falls on parents to teach their children this critical skill. As parents, we have to see ourselves as the primary source of financial education for our children. The earlier we start educating our children, the better the chance of ensuring that our children grow up to become financially literate and responsible people.

We are listing down some strategies that parents can use to share knowledge of money management:

Lessons should be unique if you want the message to sink in. To start with, parents need to sit down with their children at eye-level either at a table or in the child’s room. Keep the mobile phone and other distractions aside for some time and start by emphasizing the importance of the conversation. It needs to happen at their own level and in language that they understand. Irrespective of how young the child is, the effort of making this conversation happen is worth every rupee.

Money mistakes made by parents in the past can serve as a good guidance for teaching children about money. Past mistakes is not a disqualification for teaching but can in fact help to get your point across to children. Parents can explain how the mistakes could have been avoided and provide documentary proof as a support. Children will grasp the learning much faster if have actual figures to refer to; parents can explain how much money was lost because of the mistakes.

Reinforce your Teaching constantly: Make it a point to involve your kids in any transaction where you have any opportunity to save. Even if it is saving of only 5% - 7% on account of a cash back offer from your debit or credit card, it can go a long way in reinforcing the benefits of saving money.

Encourage children to save more money by opening a bank account for them. Even though the bank a/c may not earn much interest, it will go a long way in making your children appreciate the benefits of saving money for the future.

Budget pocket money or allowance: First of all, it is a good idea to give an allowance to your kids on a defined frequency. There can be various options to consider on how to pay an allowance to your child, namely:

1. "Earn money for tasks" allowance: The child is expected to complete certain house work or tasks on a regular basis and is paid for his efforts. The child will see a direct correlation between the effort and the money he or she receives. If for any reason, the task is not completed, then the child is not given spending money.
2. "Pay as needed" allowance: Children do not receive an allowance on a regular basis but request their parents for money as and when required. Here the child may or may not be helping the parents with household tasks. Secondly, as this money does not come on a regular basis, the child may not be able to save for future expenses.
3. Unconditional allowance: The parents give a fixed amount to the child on a weekly or monthly basis without any precondition of doing any tasks. This method allows the child to manage money on a regular basis similar to a salary payment. The downside of this method is there is no correlation between efforts and the payment made.
4. Hybrid allowance: Here this child is expected to do certain basic tasks for free as a contributing member of the family. The child will be paid for completing larger tasks like cleaning the fans, windows or cupboards. Whenever the child wants more money, he or she can take up a task or job and receive payment on completion of it. This method teaches the child that the harder he works, the more money they can earn. This is of course, very similar to our real world.

Whichever method you as a parent choose to pay an allowance to your child, encourage them to create a budget before they receive the money. For e.g., if the weekly allowance is R1000, you can suggest that R200 should be saved, R 200 can go for charity (a very important concept your child needs to learn from a young age) and the balance can spent as they like. This budgeting will help them plan for their future purchases and also help them manage their finances when they become full grown adults and earn their independent incomes.

Let us know put down some action plans for execution of the above strategies. As Steve Jobs once said, "To me, ideas are worth nothing unless executed. They are just a multiplier . Execution is worth millions."

Let’s start with shopping for your groceries at your nearest supermarket. Shopping with kids can be a nightmare; or a great way to teach them about budgeting, if you can spare some extra time:

Create a food plan followed by a shopping list: Get your children to help create a food plan for a week; then create the shopping list to fit your weekly grocery budget. This will teach your kids about budgeting, planning ahead and checking out any discounts being offered.

Getting the best price: Comparison shopping is a great way to teach kids about money and how to get the best value for your rupee. You can help improve your child’s math skills by challenging them to identify the best deal based on the product quantity or number or servings.

Making smart choices: Encourage your child to decide between several competing brands including the store brand. You may end up saving a lot of money provided you are comfortable with the product quality of the store brand, if you decide to buy it.

Matching discounts and sales with your shopping list: It may be worth your while to check out the discounts and sales offers the supermarket is offering. This will help your child to develop bargain – hunting skills.

Give your child a budget to spend on his treats and snacks. This will teach them to spend on their treats within their budget and not go overboard. Children love it when they are given the freedom to decide some part of their life. Now let’s move onto banking which is slowly and steadily moving the online route especially with younger generation.

Though a visit to the bank is still required if you want to deposit a cheque, fill a nomination form or meet the branch manager. It is a good idea to take your child along so they can better understand in person how a bank works.

Deposit savings: Children should be encouraged to deposit their piggy bank savings into their savings a/c on a regular basis. You can create savings milestones with your child which if reached within a particular time frame can be enjoyed with a small celebration or gift for the child.

Show your child the money: Children are fast learners by nature and very keen observers. Teach them how to deposit and withdraw money, how to fill up a deposit slip, how to operate the ATM etc. This will go a long way in making them understand the basics of money management.

Education literature: Check with your personal banker if they have any programs or literature for teaching children about basic banking. Banks may also provide you with educational coloring or story books which can used for learning and fun.

Finally, let’s talk about the large retail chains like Star Bazaar or Croma. These stores not only offer loads of electronic gadgetry but also plenty of stuff that your kids may wants like clothes, toys, games etc. A nightmare for all parents surely, but also a silver lining… opportunity to teach our children.

Economy and money: This is good place to teach your child about the working of the economy starting with why businesses are set up, how they grow and prosper, how the owners or shareholders are rewarded etc. Why does the store sell so many items, why is it organized the way it is?

Sales and discounts: Retail chains are famous for offering discounts and sales around festivals like Diwali, Holi etc. They also offer discounts on electronic items like TVs during the IPL season. Children can be taught how shopping smartly for electronics and other items during such events can help save a lot of money. On the other hand, just because a particular item is available at a huge discount is no reason to buy it.

Needs vs. Wants. Before buying any item, teach your child to check if the item(s) passes the following conditions:

1. Have they compared the prices with other retail shops and online shopping websites, especially for high priced items?
2. Is the item a need or want? Wants are discretionary.
3. Are there any discounts you can avail off (through your credit or debit card)?

If your are willing to teach your children about money, you can find a way irrespective of the choice of venue. Be creative in your approach and help your children understand why savings and budgeting techniques are critical real-life skills for them to learn. These skills will last them a lifetime and they will remember you for taking the time and efforts to impart them.

To conclude, can you rewind back to the times when you were young and your parents took the time to teach you about money management? If you are finding it difficult to remember, then this is the time to make up and put your children on the right path. The average Indian is struggling today as they have not saved sufficiently for critical goals like retirement and child’s education. There is a constant struggle to manage monthly expenses as the basics of budgeting were not learned in their young age. Please do not let your children commit the same mistakes when they become adults.

{s}
[[script type="text/javascript"]]
$(document).ready(function(){
new DiscussionBoard("divDiscussionBoard", "40", "http://www.njwebnest.in/esaathi/index.php/discussion").load();
});
[[/script]]
{/s}

Managing Portfolio In Retirement Years:

Retirement period is considered to be a new beginning for an individual. It is the time to unwind and pursue hobbies, which you were not able to pursue due to lack of time during your working life. Whether to plan vacation to unexplored locations or pursue the hobbies of gardening or photography, what is required to make your retired life a pleasurable experience is proper asset allocation of your retirement fund.

Your post retirement period on one hand is the most relaxing period of life after putting long years of working life and also on other hand it's a period when fresh income will stop and you will have to

Manage with whatever retirement corpus you have generated during your working life. With higher life expectancy, increasing cost of medical treatment and double digit inflation, life has become more challenging for a retired individual.

As we already now, the interest rates have been on a downward trend for few years now. The government would want to bring the interest rates in line with the market rates on government sponsored saving schemes like PPF, Postal Schemes etc, with some premium for retail investors. The post tax return from the traditional investment avenue of bank fixed deposits is also very low. Inflation, coupled with rising medical costs and lower interest rates leaves little option to retired individuals in terms of investment instruments, which can generate decent inflation beating, post-tax returns.

Consider Inflation Monster:

During working life, the inflation effect more or less get nullified as your income grows in line with the inflation rate but during retirement, inflation eats into your savings as you no longer have a growing income. So it becomes essential that your portfolio generates inflation beating return.

Lets consider that your monthly expense when you retire at the age of 60 is 25,000 per month. With inflation of 8% this will grow to 1.16 lakhs per month by the time you turn 80 years of age. So obviously your retirement kitty must earn return over and above 8% just to keep you floated and in today's environment there is perhaps no fixed income debt product, which can give you above 8% post tax return.

Add Equity Flavour to Your Portfolio:

We have always emphasized that long term equity is the only financial asset which can give you the most tax efficient inflation beating return. Although it comes with its own share of volatility but you can't escape from having equity flavour in your portfolio if you want your retirement kitty to provide for your post retirement years. It must be noted that the post retirement years can easily extend to 15-20 years.

We have also emphasized on the importance of having long term investment horizon when it comes to equity investment as duration increases, volatility comes down substantially. Thus the investment horizon is long enough for a bit of equity exposure. The quantum of equity exposure depends on the requirement and the amount of retirement kitty already available.

Importance of Asset Allocation:

There is no doubt that debt should be the major part of the your portfolio. The equity component should be only that kitty which you are unlikely to consume in the next 7-10 years. Normally, a component of 10-25% would suffice if you have a decent retirement kitty. Please note that the equity component must strictly be need driven.

The important thing to remember is to maintain proper asset allocation between equity, debt and physical assets (say real estate) during retirement years. Taking exposure to equity through diversified equity funds or balance funds are advisable rather than going for buying equity shares directly from the market. Having ideal allocation between these three asset classes can protect you from potential downside of equity and generate inflation beating return. Further, the asset allocation would slowly reduce on the equity component as you age and should ideally be nil by the time you reach say 70 years.

Use Transaction Options Effectively:

Mutual Funds offer two different kinds of options to investors. Systematic Withdrawal Plan (SWP) and Systematic Transfer Plan (STP). During early years of your retirement you can let money grow with your equity component and then gradually either start withdrawing profit component as annuity or start transferring to liquid funds to protect your portfolio from potential equity downside.

Doing STP/SIP in Retirement Years:

This may sound little strange on face of it but remember that on retirement an individual gets large

sum of money as retirement funds. This entire fund is not going to be used at one go. After keeping aside funds equivalent to meet the first 3 or 5 years of expenses and after investing pre decided component in debt, rest of the funds can be put in liquid/short term category of funds and STP can be done to diversified large cap funds. Remember that STP works on the same principles of SIP and generates similar benefit of rupee cost averaging to investors.

Conclusion:

The awareness on the need for retirement planning has increased in recent years. There are large number of individuals who want to retire early, even as early as late 40s. In such a case, the traditional age mark of 60 years no longer holds true for many of us. With sound planning, proper asset allocation and a bit of aggression can go a long way in making sure that your peaceful retirement years are sustained for long.

As families seek to improve their financial situation and develop plans for the future, a logical first step is to determine their present financial position. A common tool used to determine same is the net worth statement which is a personal balance sheet listing the assets and liabilities of the household, with total net worth being the difference between the two. However, there is a lot we can know about our portfolio than just this measure. We would encourage investors to do an annual assessment of their financial situation to understand the same and to also chalk out a plan for progress for the future. In this issue, we will talk about the wealth of information which can be gleaned from a personal financial statement than just the bottom line.

Usage:

Application of the ratio analysis technique to personal financial offers potential in expanding insight into specific strengths and weaknesses of a family's financial situation. The ratios are presented below with indications of how each ratio might be used to assess liquidity, solvency, or the general financial position of a particular investor/family. The information should provide more specific directions in assisting the client to develop financial goals. A ratio typically expresses a relationship between two or more data points /information /parts of the financial statement and provides a context in which to evaluate various aspects of the financial situation.

Key Ratios:

1. Emergency Funds - Liquid assets / monthly expenses: Liquid assets are those assets which can be easily sold/liquidated and quickly converted to cash without any loss of value. This ratio provides insight into the adequacy of liquid asset holdings to cover monthly expenses if the family experiences a sudden loss of income due to loss of income for any reason. This ratio may be modified to include financial assets which are not in ready liquid form but could be easily redeemed and converted in cash.

   Financial experts typically suggest at least 3 to 6 months of coverage depending on the situation, assets covered, income stability, the number of dependents, and so on. The higher the ratio, the better it is for families.

2. Debt Exposure - Assets /total debt: This ratio examines the relationship between assets and the total debt obligation of the family. Please note that which assets to be included here is of primary concern. If you only include liquid assets, the ratio will indicate how easily you could close off and repay all your debt. However, you could also include all your redeemable financial assets in addition to liquid assets. In such a case, it would show a different picture of your debt ratio. Together these ratios help in determining whether the family has overextended itself or has maintained a debt level within reasonable limits given the family's level of assets.

   Experts suggest that a ratio of say at least 10% (assets as % of the debt) and above should be comfortable when only liquid assets are considered. When total financial assets are considered, then 30% may be considered a minimum level to indicate a healthy financial situation. If you are only considering long-term asset creating debt like home loans, then again the ratio of 10% should be acceptable.

3. Net Debt Position - Total debt/ Net worth: Normally the debt position of a family is not evaluated unless the situation is extreme. This ratio expands our understanding in assessing the debt position of the family by relating total liabilities to total net worth value. Experts recommend that families should keep this measure below 1.0 or 100% meaning that that total debt should never be more than your total net worth. However, if a family has recently purchased a long-term debt, like home loan, this ratio may go a bit higher in initial years. During such times, you could exclude that home loan debt and other such asset-creating long term debt and look at the ratio again. Experts suggest that in such a case, your debt should not be more than 40% of your net worth.

4. Debt servicing ratio - Monthly debt liabilities / Net income: The debt servicing ratio measures how easily you can service your debt. In other words, it is the ratio of your EMI to the net income. You must never let the total debt obligation cross 40% of your net income. The less it is the better. The idea is that the rest of the 60% has to be adequately saved for consumption and savings. However, this ratio for most individuals living in urban areas may touch dangerous levels of even over 80%. Increase in EMIs compromises your lifestyle and your ability to secure a better future through savings. One should aim to move from a situation of high debt and low savings to a situation of no debt and high savings as your age/income increases.

5. Liquidity of Portfolio: Liquid Assets/Net Worth: This measures the proportion of total net worth held in liquid form. This type of net worth component ratio should be evaluated after considering the family's financial goals rather than as an objective standard. If the majority of the goals are of short term or near to maturity, then the proportion of liquid assets should be higher. However, if you are having long term goals not anywhere near to maturity, your assets should be held largely in non-liquid assets like say equities. The reason being that such assets will provide better returns than liquid assets. Thus, it is up to the financial advisor /family to ascertain the right/optimum portion of liquid assets in your net worth.

   One can further modify this ratio to also include all financial assets in addition to liquid assets as part of the total net worth. This ratio would indicate if you are investing too much in non-liquid and financial assets like gold, property, etc. One may think of ensuring a good balance between financial and non-financial assets with more bias to the former.

6. Savings Ratio - Savings / Net income: This ratio is used to show you how much money you are saving over a specified period. It is strongly advised to have a savings rate of at least 10% to 20% of your net income. The higher the number, the better it should be. In times when you do not have any debt EMIs or other expenses, one should be shrewd enough to let this ratio grow as much at possible. The equation should be calculated as income (-) savings = expenses whenever you are planning your monthly budget. Making the most of your available cash-flow and directing it towards savings is very essential as times may change in future when savings may not be that easy.

Conclusion: While there may be many more ratios for understanding personal finance, the above ratios are the key ones that help you understand your portfolio construction, your security and your savings behaviour better. Do not just stop at looking at net worth or the current value of your investments. Go beyond, take some time out, at least a couple of hours every month to calculate and track the trend of your personal finance ratio. Believe us, it will do wonders to your knowledge and your financial situation.