The IDEA of Personal Finance - The good habits of personal finance

This presentation describes a system of managing personal finance with a simple IDEA.

1. The IDEA of Personal Finance
The good habits of Personal Finance

2. The IDEA is all
WRONG
Income
Assets
Expenses
Debt

3. But what is the IDEA?

4. What is the IDEA?
●I - Income
●D - Debt
●E - Expense
●A - Asset
Income
Income
Debt
Expense
Mend this Link

5. Traditional Interaction of IDEA components
A = I - D - E
ASSETS =

6. Interaction of IDEA components
Ideal:
E = I - D - A where D -> 0
PAY YOURSELF
FIRST

7. How do we pay
ourselves first?

8. Budgeting
The Upside Down Tree budget
Income
Assets Expenses
Debt
20%
50%
30%

9. Tree Budget - The Income Tree
Income
Job
PassiveBusiness

10. Tree Budget - The expense tree
Expense
Food &
Groceries
Utilities
Lifestyle
20%
20%
60%

11. Tree Budget - The debt tree
Debt
Rent/Mortgage
Car Loan
Education
Loan
30%
30%
40%

12. Tree Budget - The assets tree
Assets
Short
Term
Medium
Term
Long
Term
20%
20%
60%

13. Budgeting - An example construction
-Take home Income = $5000/- per month
-Salary from Job = $4000/-
-Rental Income = $500/-
-Dividend, Interest = $500/-
-Divide into 3 groups
-$1000/- into assets
-$2500/- for expenses
-$1500/- for debt payment
-Assets
-$500/- emergency fund
-$200/- Invest
-$300/- savings for short term goals (insurance premium, taxes, vacation)

14. Budgeting - An example construction
-Expenses
-$500/- Food, groceries, dining out
-$500/- Electricity Bill, Car Fuel, Internet, Phone
-$1500/- Lifestyle
-Debt
-$1000/- Rent/Mortgage
-$500/- Car loans, Credit card debt
The numbers will change according to your personal situation and income.
Seek professional help in planning and optimizing your budget.

15. Budgeting - Tools for budgeting and tracking
-Plain paper and pen
-Microsoft Excel spreadsheet
-Envelope system
-Online Tools
-Mint
-Y.N.A.B
-Every Dollar

16. Challenges of budgeting
●Tracking and data entry
○Automation is the key here - seek financial coaching to set this habit correctly
●Leaks - actual vs. budgeted spending
○Dining out
○Clothing
○Entertainment
○Online subscriptions
○Service taxes and fees
●How to adjust if you overspent
○We talk about cash flow management and generating surplus
○The previous months’ surplus can be used to cover for overspending this month
○However this needs to be controlled to avoid going into debt.

17. So how do we solve the
challenges of budgeting?

18. Cash Flow Management
-Smooth flow of cash from Income to Assets
-Controlled flow of cash from Income to Debt
-Predictable flow of cash from Income to Expense
-Slice the Income into pre-defined buckets
-The game is to generate some surplus
-Adjust the Investments to absorb the surplus
-Generate surplus again
-Repeat month after month
Pre-Tax
Investments
Post Tax
Investments
Debt Payments
Expenses
Surplus
Build
Assets
Reduc
e
Control

19. Cash Flow Management
Take
Home
Pre Tax
Investment
Retirement and Tax
savings Accounts

I - A
Pay Yourself First
Taxable Investments
and Asset building

Disposable
Income
Debt Payment
Rent/Mortgage, EMIs,
Credit Card Payments

Surplus
Expenses
Food, Utilities,
Miscellaneous

20. Financial Automation
Pre-Tax
Investments
Post Tax
Investments
Debt Payments
Expenses
Surplus
Build
Assets
Reduce
Control
Payroll deduction
Auto
Transfer
Auto Debit
Credit Card
Savings
Interest

21. So how do we set goals
and automate finances?

22. Financial Goal setting and planning

23. Financial Goal Setting - Retirement
S - I want to provide for my retirement expenses for 25 years. Specific.
M - With $60000 per annum expenses, I will need 25 * 60k = $1.5M. Measurable.
A - I have about 20 years before retirement. Certainly attainable.
R - Relevant to my future and survival.
T - I wish to retire by 60 years of age, time bound.

24. Financial Goal Setting - Children’s Education
S - I want to provide for child’s education in 10 years. Specific.
M - Projected expenses = $100k. Measurable.
A - Certainly attainable in 10 years with monthly investment.
R - Relevant to my child’s career and future.
T - 10 years before college, time bound.

25. Financial Goal Setting - Vacation every year
S - I want to go on a vacation every summer. Specific.
M - Projected expenses = $10k. Measurable.
A - Attainable through disciplined savings in cash, money market.
R - Relevant for the experience and relaxation.
T - Time bound - 1 year.

26. Financial Goal Setting - Budgeting for Annual Taxes and Insurance
S - Specific. Budget and pay for year end taxes and premium.
M - Measurable. Projected - Taxes - $3000 + Insurance - $1000
A - Attainable through disciplined savings (monthly $400).
R - Relevant to be up-to-date and not go into default.
T - Time bound - 1 year for every year.

27. Financial Automation - Goal execution
Pre-Tax
Investments
Post Tax
Investments
Debt Payments
Expenses
Surplus
Payroll deduction
DCA
Short Term
savings

28. Financial Automation - Setting up the accounts
Pre-Tax
Investments
Post Tax
Investments
Debt Payments
Expenses
Surplus
Payroll deduction
DCA
401k, Roth, HSA
Mutual Funds
Mutual Funds
One account
per goal
Primary Savings or Checking Account
Brokerage, Mutual Fund or savings accounts
Monthly
transfers
A U TO MA T I O N

29. Okay. So how do I
become financially free?

30. Financial Independence
●Financial Independence is a mandatory goal
●Estimate your no. of years in retirement (Y)
●Estimate your projected monthly income (M)
●FI = M * 12 * Y
●So if your monthly income is $5000 and you expect 25 years in Retirement (90-65),
then:
●FI = $5000 * 12 * 25 = $1.5 M
●You need to accumulate a corpus of $1.5 million to be able to sustain yourself
through retirement.
●This may take a long time to achieve and some people do extreme savings to reach
F.I.R.E - Financial Independence and Retire Early.

31. Financial Freedom should be the first goal
Financial Freedom is easier to achieve than Financial
Independence.
Financial Freedom means you will continue working but let your assets
grow.
●At some point, you are not tied to the particular job
●You have enough liquidity to change/leave your job for two years
●You can try your dreams (a business) in that time
●You can pursue higher education for 1-2 years
●You can get back to the industry with a new skill and position
This is easily attainable if we plan our finances in the right way.

32. Mapping the milestones towards Financial Freedom
1.An emergency fund of 3-6 months worth of expenses
2.A Freedom fund of 2 years worth of expenses
3.An Obligation fund for goals within next 5 years
4.A Long Term Retirement fund (> 10+ years)

33. Steps to build the Emergency Fund
Move some funds to an Emergency Fund
NEVER LIQUIDATE THIS
UNTIL AN EMERGENCY
RETURNS DO NOT MATTER HERE
ONLY SAFETY AND LIQUIDITY

34. Steps to build the Freedom Fund
Pre-Tax
Investments
Post Tax
Investments
Debt Payments
Expenses
Surplus
DCAMutual Funds
Primary Savings or Checking Account
A U TO MA T I O N
LUMPSUM
LESS RISK, CHOOSE BASED ON WHEN YOU
WANT THE FREEDOM

35. Steps to build the Obligation Fund
Pre-Tax
Investments
Post Tax
Investments
Debt Payments
Expenses
Surplus
DCA
Mutual Funds
One account
per goal
Primary Savings or Checking
Account
Brokerage, Mutual Fund or RD
accounts
Monthly
transfers
A U TO MA T I O N
CHOOSE RISK DEPENDING ON TIME
HORIZON

36. Steps to build the retirement fund
Pre-Tax
Investments
Post Tax
Investments
Debt Payments
Expenses
Surplus
Payroll deduction
DCA
Mutual Funds
A U TO MA T I O N
LONG HORIZON

37. Building a portfolio - Part 1
1.Money market funds
2.Cash in savings account
3.Short duration debt funds
4.Hard cash in wallet
EMERGENCY FUND
Example:
6 months * $5000 = $30000
Stash away as soon as
possible

38. Building a portfolio - Part 2
1.Find your time horizon
2.5-10 years - Use Balanced Funds
3.> 10 years - Use Equity Index Funds
4.< 5 years - Use Debt Funds or Cash
FREEDOM FUND
Example:
2 years of expenses = 24 * $5000 = $120000
Business startup = $10000
Total = $130000
Build over next 5 years with monthly savings of $2000.

39. Building a portfolio - Part 3
1.Ideally maintain separate investment for each
2.Find time horizon of each goal
3.5-10 years - Use Balanced Funds
4.> 10 years - Use Equity Index Funds
5.< 5 years - Use Debt Funds or Cash savings
OBLIGATION FUND
Example:
Vacation $10,000 after 2 years: save $500/month
Education $100k after 10 years: Save $1000/mo
House $50k down payment after 5 years: Save $1000/mo

40. Building a portfolio - Part 4
1.Typically you have 15-20 years
2.Use simple index funds
3.Invest regularly via DCA
4.Put away any extra money in this fund
RETIREMENT FUND
Example:
Required = $1.5 M
Monthly SIP for 20 years = $1000/mo @ 8%
growth rate

41. You need a lot of investment, isn’t it?
Emergency Fund = $30,000
Freedom Fund = $130000 next 5 years
Obligation Funds = $100000 for next 2-10 years
Retirement Fund = $1000 per month for next 20 years
Solution - You do not have to do it all at once. Take one step at a time, according to
your situation. Seek professional financial coaching to adjust your goals.

42. The new form of asset allocation

43. How should I invest?

44. Investing is for the brave?
RISK
REWARD

45. Let’s look at the trees again
The 3 asset classes
Portfolio
StocksBonds
Real
Estate
MORE RISK, HIGHER POTENTIAL REWARDS

46. Let’s look at the trees again
Stocks
Domestic
Internationa
l (developed
markets)
International
(Emerging
Markets)
MORE RISK, HIGHER DIVERSIFICATION
STOCKS

47. Let’s look at the trees again
Bonds
Short Term
Medium
Term
Long Term
HIGHER INTEREST RATE RISK, HIGHER YIELDS
BONDS

48. Let’s look at the trees again
Bonds
Government
Bonds
State and
Municipal
Corporate
HIGHER DEFAULT/CREDIT RISK, HIGHER YIELDS
BONDS

49. Let’s look at the trees again
Real
Estate
Home
Real Estate
Investment
Trusts
Rental
Property
HIGHER RISK, HIGHER RETURNS
REAL ESTATE

50. The role of mutual funds in wealth building
The right product for stocks and bonds
1.Diversification - No need of individual stocks/bonds
2.Convenience - Invest at the click of a mouse
3.Asset Allocation- In-built asset allocation (balanced funds)
4.Deduction - Tax deduction using ELSS
Most people however treat them as stocks - jump in/out of mutual funds or trade
them on NFO and like stocks.
MUTUAL FUNDS ARE FOR PLANNED INVESTMENTS ONLY.

51. The role of real estate in wealth building
Finally the right IDEA !!!
1.Income - Rental Income
2.Deduction - Tax deduction of the interest
3.Equity - Build Equity as the loan gets paid off
4.Appreciation - The icing on the cake, if it happens
Most people however only rely on the appreciation, which is the mostly market/
economy driven.
DO IT FOR THE INCOME. APPRECIATION IS A BONUS ONLY.

52. Asset Allocation done the easy way
❖Create an asset allocation using stock and bond mutual funds
❖Keep direct real estate to minimum
❖Do not bother about alternatives
➢Gold
➢Art
➢Commodities
➢Futures and Derivatives
❖Do not invest in direct stocks
❖Rebalance to maintain your asset allocation

53. Keeping calm - the secret sauce is rebalancing
SAME IS TRUE FOR YOUR PORTFOLIO

54. The golden rules of investing
●Draw an asset allocation for your situation
○Goal based
○Asset based
●Invest in the SIP way - gradually
●Rebalance to maintain your asset allocation once a year
○Sell appreciated asset class and buy depressed ones
○Invest more in the lower end asset and bring it upto the desired allocation
●Maintain calm and do not change anything during market storms or euphoria
●Be wary of Mutual Fund Fees and Taxes
○Entry load, Exit load, Expense ratio - Use direct funds for lower expense ratio
○Taxes - Be aware of short term, long term capital gain taxes for sell decisions

55. Okay, is that all? Not
really.

56. Insurance - Protecting the future
●Term Life Insurance
●Health Insurance
●Disability Insurance
●Home Insurance
●Car Insurance
Consult an Insurance
Professional but DO
NOT fall for Insurance
as Investment.

57. Taxation - The only certain thing apart from death
●Tax efficient investments - NPS, PPF, EPF, ELSS
●Hold equity investments for long term
●Home Loan interest is tax deductible
●Health Insurance Premium for self and parents
●Donations to recognized charities
Consult a
Qualified Tax
Professional for
advice.

58. Record Management
●Emails, documents, papers related to investments, policies, tax returns.
●Gmail or Gdrive
○Use labels or folders as follows:
■Banking
■Investments
■Loans
■Taxation
■Insurance
●Tax returns
○2019
■From me to CPA
■From CPA to me
■Final returns
■Notices

59. Great. How do I get help
in getting started?

60. The Tortoise Financial Coaching Service

61. Resources for choosing investments
●Hire a financial advisor who works as a fiduciary (on a fixed fee basis)
○Do not take advice from banks or insurance agents - they will only push for higher commission
products
●Read, Read and Read - there is no alternative to financial education
Find book links at:
www.thetortoisefinanceblog.com/books
Find my blog at:
www.thetortoisefinanceblog.com

62. Q & A