The decision of India’s Employees’ Provident Fund Organization (EPFO) board to split its payout for 2019-20 into two parts—8.15% from its bond investments right now and 0.35% from its equity investments later this year—was unprecedented alright. But it was no big surprise, given the poor performance of its stock portfolio. Provident fund (PF) subscribers should not fret too much. Even if they must content themselves with just the main tranche, a rate of 8.15% is superior to anything a bank deposit could have offered in these times of low interest rates. In fact, some economists have argued that PF account holders are rewarded far too handsomely, distorting credit markets by getting in the way of efforts by the central bank to cheapen loans. It is an argument that holds some weight, and so the state-run manager of our retirement kitty has been generous. Fund management is not about generosity, however, and its deferral of the equity slice of its annual payout is yet another sign that it is woefully out of step with the times.
Money with Monika
The Corona Conversations
Season 4 Episode 23: 6 ratios for your financial life
The Covid-19 pandemic has forced people to ask some tough questions about their money life. How much should one be spending and saving? How much should one spend on EMIs? How much life insurance should one have? In this episode of the special series of Money with Monika, personal finance expert Monika Halan talks about 6 Money Ratios which give a broad direction in which one should move. Watch the full video for more. Monika Halan is consulting editor, Mint, and author of the book, Let’s Talk Money. Note: These are rough ratios. Please speak to your financial planner for a bespoke plan.
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Striking a balance between not doing enough and doing too much is tough for money, as it is with relationships. Do too little and a guilt nags at you each time you have a moment. Do too much and you sacrifice your today for limited future gains and life becomes about not living. I’ll leave the relationship bit for you to sort, but let’s at least put the money issue in perspective. While each situation is different and each family needs its own unique financial plan, it is good to at least have some basic rules of the road to know if you are at least going in the right direction. Remember these ratios are just very rough rules that point you in a direction rather than a detailed Google map. For that, find a planner, pay his fees and get your bespoke plan made.
I could not believe my credit card bill when I clicked it open a few days ago. The card that pays for petrol was zero. Zero. The other one was down to 20% of earlier spends. And I consider myself frugal—spending on what I need and not what I greed—and yet the difference a lockdown made to my own spends left me quite amazed. My age cohort and I grew up in an India of very limited means, choices and options. Basics like milk, water and electricity were in short supply. Less than five homes in 100 had a phone in most middle-class metro colonies and if you owned a car, you had either inherited it or were up to no good in that business of yours. But our generation was also on the ground floor when India opened up and was able to ride the wave of growth that lifted a lot of boats. Things began to change, but slowly. By the time the 1990s kids were born, small luxuries were becoming commonplace—eating out was not that budget breaking exercise that it used to be. The ’90s kids still remember a money-careful approach and some built money habits that usually last a lifetime. It is the parent and kids cohort of the 2000s and above that probably is really struggling with the new tight-money reality of the pandemic.
It is a little surreal to hear an economics Nobel laureate flag issues and provide solutions to some issues that personal finance writers across the world have been flagging for many years now. The occasion was the RH Patil Memorial Lecture to mark 25 years of the National Stock Exchange. Patil was the first chairman of the exchange that was set up in the aftermath of the 1992 stock market scam. Delivering the lecture was Robert C. Merton, Nobel Prize-winning economist and professor of finance at Massachusetts Institute of Technology.
Ask a 20-year-old who is old and she is likely to say anybody over 40. At 30 you are likely to shift that to maybe 50. At 40, 60 is old. Our perception of who is old keeps moving as we age. Not long ago, an 82-year-old very seriously spoke to me about “that young man of 50”. But it is true that the answer to “who is old” has changed from what it was a hundred years ago. That’s because, the “who is old” question needs to be seen in the context of life expectancy, or the age at which an average person dies. World Bank data puts this number at 52.5 for the world in 1960 and at 71.8 in 2015. The generation that will live to be a 100 may have possibly already been born.
The answer of “who is old” matters in ways that have nothing to do with vanity. It matters to each of us and it matters to a world that is living longer and longer.
A very irate 70-year-old spoke to me sometime back about his bugbear with the inflation stories he was reading in the papers. The inflation numbers had just been announced and the papers had stories about the rising real return on deposits. The stories celebrated the fall of inflation leading to positive real returns. This means that an inflation number of 4% and a deposit rate of 6% gives a ‘real’ return of 2%, as against an inflation number of 8% and deposit rates of 6% giving a negative real return of 2%. People don’t understand that they are better off, said the stories and comments, they just see the lower nominal return and feel poorer even when they are not. “It’s not as if the price of milk or vegetables has come down,” the septuagenarian grumbled. He’s right. The bite of inflation is such that even when inflation numbers go down, it just means that prices are still rising, but not as fast as before. What the commentators forget is that inflation too has a compounding effect. If compound interest on savings makes our money grow faster, the compounding of inflation makes our money buy less and less. For a retired person sitting on a fixed pot of savings and living off its interest, falling rates of inflation also mean falling deposit rates and that means insufficient funds to live on.
How much money we need to retire at age 60 can be answered in many ways. I wrote earlier (you can read it here: bit.ly/2ruHEtK) that you need eight times your annual income at age 60 to retire comfortably. Plenty of people wrote back to say that a more useful benchmark will be an expense multiplier rather than an income multiplier. An expense multiplier is, in fact, a better way to crack the same problem because at the same level of income, different families will have very different expense behaviour. I know families that don’t know where their money goes and others who have tiny expenses because of their chosen lifestyle. An expense multiplier assumes that you know how much you spend. Many families are clueless of their annual expense number—money comes in and money goes out. So get a hold on how much you spend in a year as a first step.
As a kid I remember getting irritated whenever the old people would get together. Now they’ll start talking about how expensive everything is, I used to mutter. Back in those days, kids couldn’t utter aloud all the insidious little comments that were swimming around in their heads when adults were around. “Arrey, on a salary of twenty rupees you could run the house and then have something left over? That shawl mamijee wears, no? That cost a full five rupees. Now toh, you can’t buy it for five thousand only.” Everybody shakes their heads. “Tch tch. Zamana hi kharab hai (these are bad times).” As a kid I remember buying sweets for 5 paise and bus tickets cost 25 paise (and I’m on my way to irritating the life out of kids in the family). My daughter has never seen coins below one rupee. Her daughter will probably say the same for fifty bucks. The fall in purchasing power is the reason that we worry about meeting our expenses when we retire.