Blog

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June 6, 2012

Types of Income – Income is money earned through employment, business, or investments. This income can be good income or bad income. For many of us, good income means a good salary or higher income and bad income means less salary or less income. So we divide income based on quantity and decide whether it is good or bad. What you may not know is the types of income and its division into good and bad income. So, let’s explore it.

Types of Income

3 Types of Income – Which One is Best?

There are three different types of income:

1) Earned income: Earned income is you working for money. It is the income that comes in the form of a paycheck (salary). It is also the type of income you ask for more of when you ask for a raise, bonus, overtime, commissions etc.

2) Portfolio income: Portfolio income is generally income from paper assets such as stocks, bonds, and mutual funds.

3) Passive income: Passive income is generally income from businesses or real estate. It can also be royalty income from patents (copyrights) or for use of your intellectual property such as songs, books, or other objects of intellectual value.

Out of these three types, passive incomes and portfolio incomes are good incomes while Earned income is average income.

Why Earned income is average income?

Earned income is worst due to the following reasons:-

1. It is the highest taxed income and it is the income with the fewest controls over how much you pay in taxes and when you pay your taxes.

2. You have to work for it and it takes up your valuable time.

3. There is very little leverage in earned income. The primary way most people increase their earned income is by working harder.

4. There is often no residual value for your work. In other words, you work, get paid, and then have to work again to be paid again.

5. You will always remain a slave.

Most people today dream about high-paying jobs with lots of earned income. Teaching people to spend their lives working for earned income is like teaching someone to be a high-paid slave for a lifetime. Earned income is the income that you work the hardest for and you are allowed to keep the least of.

The trouble with working for earned income is that you have to keep working hard for it. Eventually, a person working for portfolio and passive income will pass the earning potential of earned income because you can work less, earn more, and pay less and less in taxes when you work for portfolio and passive income.

Why Passive income is good income?

For Passive income, one has to work the least.
Passive income is tax least.
You can have better leverage over your income.
You can serve more and more number of people and earn more and more (Sky is limit)
You will be a master & can enjoy financial freedom.

A business owner has more control over taxes, the highest leverage potential, and the most legal tax advantages.

If you want to be rich you have to work for the right kind of income passive income (good income) but most of us join the rat race and work for Earned income (bad income).

70 % Money

This is what we call Earned income which you receive from a paycheck, “70 percent money.” The reason we called it 70 percent money is because no matter how much money you earned, the government always took at least 30 percent of it or more in one way or another by imposing income tax, professional tax, service tax, etc. As most people know, you are taxed when you earn, spend, save, and invest.

So, we wonder why people spend their lives in search of a higher-paying job or a pay raise. We can say, “When you get a raise, so does the government.” Spending your life working hard for 70 percent money was not the financially intelligent thing to do.

15 % Money

Many people today are working for 15 percent money, which is money from capital gains or appreciation of stocks and sometimes real estate.

Tax law for employees:-

If you work for job security, you will earn less and less the more and more you work. That is too high a price to pay for a little bit of security. Today, the best way to earn more and work less is via owning your own business. It continues to be the best loophole in the world. One reason to start your own business is the difference in when you pay your taxes.

Employees and business owners both earn money but the income of the employee is taxed first (TDS) and then he spends what is left, while the business owner, gets a chance to spend earned money first before paying tax.

The tax laws are really bad for the employee.

Working for Good money can make you rich:-

You can work for good money by simply starting a small home-based business, buying a franchise, or joining a network marketing company, you are moving into more tax-advantaged income. You can be rich if you build, buy, or create assets that create positive cash flow.

Try exploring the potential of your free time and you can be rich.

Many of the very rich became rich in their spare time. So, if you have a job because you have financial responsibilities, keep your job but make better use of your spare time. When your friends go to play golf go fishing or watch sports on TV, you can start your part-time business.

Comparison of the Three Income Types

When determining which type of income is best for you, consider the following factors:

Risk Tolerance: How comfortable are you with the level of risk associated with each type of income?

Time Commitment: How much time are you willing to invest in generating and managing your income?

Financial Goals: What are your short-term and long-term financial goals, and which income type aligns best with them?

Skills and Expertise: What skills and expertise do you possess that can be leveraged to maximize your income potential?

Diversification: How important is diversification to your overall financial strategy?

Which income is the Best Income?

There’s no one-size-fits-all answer to this question. The best type of income for you depends on your individual circumstances, goals, and preferences. Some people may prefer the stability of earned income, while others may seek the potential for passive income or portfolio growth.

LIC Jeevan Vaibhav Review – Think Twice

Life Insurance

Shitanshu Kapadia

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May 27, 2012

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Country’s largest insurer Life Insurance Corporation of India (LIC) has launched a non unit-linked single premium product Jeevan Vaibhav with minimum premium of about 95,000 Rs/-.

LIC’s Jeevan Vaibhav is a close-ended single premium endowment assurance plan which offers guaranteed benefits on death and maturity along with Loyalty Addition, if any, payable on maturity or on death in the last policy year. The plan would be available for a limited period only up to a maximum of 120 days.

Benefits of Jeevan Vaibhav Plan:-

a) Death Benefit:

On death during the policy term, excluding last policy year: Sum Assured shall be payable.

On death during last policy year: Sum Assured along with loyalty addition, if any shall be payable.

b) Maturity Benefit:

On maturity, Sum Assured along with Loyalty Addition, if any, shall be payable.

c) Loyalty Addition:

This policy will be eligible for Loyalty Addition on date of maturity, rates and other terms will be declared by the Corporation.

d) High Sum assurance rebate:

Sum Assured	Rebate (Rs.)	Amount (Rs.)
Up to 3, 90,000	Nil	Nil
4, 00,000 to 5, 90,000	2.00 %o S.A.	8000 Rs/- to 11800 Rs/-
6, 00,000 and above	3.00 %o S.A.	18000 Rs/-

e) Loan facility:

Loan facility will be available under this plan, after completion of one policy year.

Eligibility:-

The minimum age at entry for the plan is 8 years while the maximum is 65 years. The minimum premium under the policy is Rs 95,210 with no upper limit. Policy term will be 10 years and Maturity amount will be approximately double than premium paying amount.

Review Returns:-

Annualized return and premium amount including service tax is as under

So, overall this policy also gives same type of return 6-7.5 % like most of endowment plan. If you think from return prospective it is not advisable to purchase this policy, Mutual funds or even FD for 10 year can give even more return compare to Jeevan Vaibhav plan.

Risk cover:-

Risk cover by Jeevan Vaibhav policy is just two times of premium paid which may not be sufficient considering your income. It is not advisable to purchase this policy for risk cover Term plan is more suitable option for risk cover.

Tax prospective:-

If you look at this policy from tax prospective, it lacks the current Budget modifications. As per current provision to avail deduction under section 80C your premium should 10% of SA. This policy does not fit in this if you opt for Rs.1000000 SA then your premium should be within Rs.100000 which is not possible from this policy.

So if you are planning to purchase this policy from tax saving don’t purchase this plan.

Catch points:-

(1) This plan is giving you returns between the range 6-7.5 % No Tax benefit under sec 80C.

(2) Currently when Bank tax saving FDs are giving 9.5-9.75% tax free returns and 80C rebate is also available, I don’t feel LIC Jeevan Vaibhav is a good plan.

(3) The term for this plan is also fixed for 10 years. If you buy this policy for risk cover you have to again buy another insurance plan after 10 years to cover yourself, at that time it will cost you a fortune.

(4) With current inflation index this product may not beat inflation.

(5) As you will be investing all money at single go for 10 years you may lose opportunity to invest in some better financial product may come during this time period.

Over all this policy don’t provide you enough risk cover, return and tax benefit. Think twice before purchasing this policy.

I hope I have empowered you with enough calculations, reasons to invest or reject LIC Jeevan Vaibhav. Now better take informed decision and that too for the betterment of your finances.

If you have any questions related to LIC Jeevan Vaibhav or any other life insurance policy – feel free to add it in comment section.

How to Become Wealthy? – Robert Kiyosaki Cashflow Quadrant

Money & Wealth

Shitanshu Kapadia

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May 12, 2012

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When it comes to wealth, people often struggle & spend their entire lives to become wealthy. Some of them can change the wheel of fortune and become wealthy while others don’t. In this post, we will suggest a proven way to become wealthy.

Many people believe that “Being rich is being wealthy” This is not true; being Rich is about how much money you possess at a specific moment in time.

Being Wealthy is about . . .

How much money do you keep?
How hard it work for you?
How much is left for future generations?

Being Wealthy is about exploding your Passive Income. (How long you can survive without ever having to go to work?).

A million-dollar question arises as to why only a few people are wealthy.
What do others have to do to become wealthy?

Let’s check out the views of the famous writer “Robert Kiyosaki “on this.

How to Become Wealthy? – Robert Kiyosaki Cashflow Quadrant

What The Wealthy Teach Their Kids About Money That The Poor And Middle Class Don’t.

We are a free country, not necessarily a fair country. We are all free to fail. We’re being taught to be “Good Employees.” Process flow from the beginning of our childhood is:-

Go to school –> Get good grades/results –> Get a good “JOB” –> Work hard –> Maintain good credit

So we can consume lots of stuff. “JOB” for most means “Just Over Broke.”

This is a way to become “Wealthy? – NO

It is not your boss’ / employer’s job to make you wealthy or secure. Their job is to give you a paycheck. . . for work you have done & nothing more. You have to decide what you want to do with this money to become wealthy. The first thing you must learn is how to drive this money.

The biggest problem today is money drives most of us and we obey money.

Employers/Bosses
Landlords
Friends /Family

Probably it is because we are unable to drive money or maybe we are not smarter than our money?

If you want to be wealthy you have to be smarter than your money. You have to decide:-

Do you want to work for money? or do You want your money to work for you?

When money works for you, every rupee is your employee & you can decide how to take work from it. You have to manage the rupee so that every rupee works to bring you even more rupees while you’re asleep.

Yes, we are talking about the power of passive income. Passive income is income by Interest, dividends, real estate, rent, royalties, stock market, and annuities.

So it is not important that “What do you do?” but important is “What do you own?”

The key to becoming wealthy:-

Make investments that will bring passive income.
Know the difference between an ASSET and a LIABILITY, and only buy assets.
A True Asset will bring positive cash flow every month.
Live below your means, while constantly increasing your means. (Try to increase your active income)
Make your PASSIVE INCOME cover your Lifestyle Expenses forever.
Buy assets first, luxuries last.
If today you are unable to buy something ask yourself “How can I afford it?” This stimulates your creativity.

Sadly, most of us have been taught to read words and books, but not numbers and financial statements. Two key personal and business financial statements we all must be able to read.

The Income Statement shows the amount of money coming in and going out.
The Balance Sheet shows the balance of what you own and what you owe.

Let’s study the Income statements and balance sheets of the poor, middle-class, and wealthy people. Poor have small incomes and small expenses. Assets are zero and liabilities are zero.

The middle class has a stable income but they buy expenses and liabilities by thinking that they are buying assets. Expenses and liabilities are more and assets are less.

Now let’s take a look at how wealthy live. They usually take the income of the poor and middle class and buy assets that produce more income. Their assets produce passive income by which they again invest in assets to become wealthier. So to become wealthy you must invest in assets that are true assets and that will produce income for you.

As per the Cash Flow Quadrant In the world, we have four types of people. Employees, Self-Employed, Developers, and Investor look at the following diagram.

Understanding the Cashflow Quadrant is essential for individuals seeking financial success. It provides clarity on the various paths to wealth and helps individuals identify where they currently stand and where they aspire to be.

The E Quadrant: Employee

Characteristics of the E Quadrant

The E Quadrant comprises individuals who work for others and earn a fixed salary or wage. Employees typically exchange their time and labor for monetary compensation, often with limited control over their income and schedule.

Advantages and Limitations of Being an Employee

While being an Employee offers stability and certain benefits such as health insurance and retirement plans, it also comes with limitations. Employees have less autonomy and are subject to layoffs, salary caps, and the whims of employers.

The S Quadrant: Self-Employed

Characteristics of the S Quadrant

The S Quadrant consists of self-employed individuals who own their businesses or work as freelancers or independent contractors. They have greater control over their work and income compared to employees but often shoulder more responsibilities.

Pros and Cons of Being Self-Employed

Self-employed individuals enjoy autonomy and the potential for higher income, but they also face challenges such as irregular income, long hours, and the need to handle all aspects of their business.

The B Quadrant: Business Owner

Characteristics of the B Quadrant

The B Quadrant is inhabited by business owners who create systems and leverage the efforts of others to generate income. They focus on building scalable businesses that can operate independently of their direct involvement.

Benefits and Challenges of Being a Business Owner

Business owners enjoy the potential for unlimited income and the ability to create wealth through asset accumulation. However, they must navigate risks, manage employees, and adapt to market changes to succeed.

The I Quadrant: Investor

Overview of the I Quadrant

The I Quadrant represents investors who make money by putting their capital to work in various asset classes such as stocks, real estate, and businesses. Investors seek to generate passive income and grow their wealth over time.

Strategies for Becoming a Successful Investor

Successful investors employ strategies such as diversification, risk management, and long-term planning to achieve their financial goals. They continuously educate themselves and make informed decisions based on market trends and opportunities.

Transitioning Between Quadrants

Moving from the E or S Quadrants to the B or I Quadrants

Transitioning between quadrants requires a shift in mindset and approach to income generation. It often involves acquiring new skills, building networks, and taking calculated risks to pursue entrepreneurial ventures or investment opportunities.

Steps to Transition Effectively

Effective transition requires careful planning and execution. Individuals should assess their strengths, interests, and financial goals, and then develop a strategic roadmap to move toward the B or I Quadrants.

Building Wealth Through the Cashflow Quadrant

To build wealth using the Cashflow Quadrant, individuals must focus on leveraging assets and creating passive income streams. This involves investing in income-producing assets such as stocks, bonds, rental properties, and businesses that generate recurring revenue.

Conclusion

In conclusion, becoming wealthy is attainable for those willing to learn, adapt, and take action. By understanding and leveraging the principles of the Cashflow Quadrant, individuals can create multiple income streams, build assets, and achieve financial freedom.

FAQs

Is it possible to become wealthy without taking risks?

- While risk-taking is often associated with wealth creation, there are ways to build wealth through conservative strategies such as disciplined saving and long-term investing.

Do I need a high income to become wealthy?

- High income can accelerate wealth accumulation, but it’s not the sole determinant. Consistent saving, smart investing, and prudent financial management are equally important factors.

How long does it take to become wealthy?

- The timeline for wealth accumulation varies depending on individual circumstances, goals, and strategies. However, achieving significant wealth typically requires time, patience, and diligent effort.

Can anyone become wealthy, or is it reserved for a select few?

- Wealth is attainable for anyone willing to educate themselves, take calculated risks, and stay disciplined in their financial habits. It’s not reserved for a select few but rather accessible to those who are committed to their goals.

What role does financial education play in wealth creation?

- Financial education is critical for making informed decisions about saving, investing, and managing money effectively. By improving financial literacy, individuals can navigate the complexities of wealth creation with confidence and competence.

Retirement Planning – Download Free Retirement Planner

Shitanshu Kapadia

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April 29, 2012

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Retirement planning is a crucial aspect of financial management that often gets overlooked until later in life. Life is full of uncertainty but few things are certain and retirement is one of them. Once you are tired, you leave your employment/business, we call this retirement.

retirement planning

Retirement Planning – Download Free Retirement Planner

Retirement is the time to sit back and enjoy your life! You have a lot of time to do what you want when you want and how you want to, so we can say life begins at retirement.

To enjoy this life you require a lot of money, you might be thinking that retirement is quite far away why we should think about this money requirement today, We have to because:-

“Our future tomorrow depends on the choices we make today.”

Today, you are having a comfortable lifestyle. There is regular income and your day-to-day expenses are taken care of. However, the future will not be the same. Rising inflation will affect everything. A packet of bread that costs Rs.60 today could cost around Rs.300 twenty years later. This means on retirement your expenses will skyrocket. Unless you have sufficient income after retirement, it may be very difficult to manage your expenses.

Therefore we need to plan for retirement today itself. It’s something like “Working for not to work.”

Download Free Retirement Planner

This workout is very important because your retirement income –

needs to last a long time. (Up to your life expectancy.)
needs to cover all your living expenses:

the necessities,
the things you want to do, and
any future health care costs.

will come from multiple income sources that will start and end at different times, possibly leaving gaps.

Retirement Planning involves making financial decisions now to ensure a comfortable and secure retirement in the future. Retirement planning in India requires a deep understanding of various factors. Retirement planning should account for potential future needs including rising cost of living, inflation rates, changing lifestyle preferences, and access to home health care service. This ensures that retirees can receive personalized care in the comfort of their own homes, which can be essential for maintaining quality of life and independence as they age. Additionally, knowing the retirement age in India is essential for planning purposes, as it affects the duration of savings and investments.

Retirement Planning Quiz

So, let’s take a small quiz to find out if you are ready for retirement or not.

Have you planned your retirement?

1. How much of your income is predictable?

a. 100% b. Up to 80% c. Up to 50% d. Less than 50%

2. What are the sources of your retirement income?

a. Pension b. Returns from investments c. Bank Deposits d. All of these

3. How long will your retirement corpus last?

a. Lifetime b. Five years after retirement c. 10 years after retirement d. I don’t know

Key to quiz: –

If you answered a. or b. to question 1, d. to question 2, and a. to the last question, you have planned your retirement well. If you have answered differently, then you must plan for your retirement.

So, if you are not ready for your retirement we will help you to figure out how much you will need in your sunset years.

Retirement corpus calculation is one of the most complex economic calculations. Most of the clients when thinking of retirement corpus have simple calculations in mind that they spend X amount every year & in the future they need some X retirement corpus assuming a rate of 8% but they ignore many things including tax & inflation once they reach to retirement they don’t have any choice but to adjust their lifestyle.
To avoid this type of situation we are here with a step guide to plan your retirement.

Retirement Planning Steps

To avoid this type of situation we are here with a five-step guide to plan your retirement.

Step- 1 – Find out your Monthly Expense

To estimate your expenses post-retirement you must know your current expense. Based on your current monthly expense you can drive your total annual expense, just multiply it by 12.

Step -2 – Future Annual Expense

To calculate future annual expenses you must decide the assumption on the Inflation rate the number of years left for your retirement & Your life expectancy. Based on the above input we will calculate Future Value

FV (Inflation Interest, Number of Years left for retirement, Present Expense) FV is a Microsoft Excel function

Step-3 – Retirement Corpus

To calculate retirement corpus apart from the above we have to assume the inflation rate during retirement years. Based on these inputs we will calculate Net Returns and corpus required.

PV(Net Returns, Retirement Years, Expense First year of retirement, Payment due =1) PV is a Microsoft Excel function

Step-4 – Utilization of Current Assets

In this step, you have to make a list of your current assets and their values (like equity, mutual funds, PPF, or others). Based on this value we will come to know the deficit (actual amount) for which investment is required (Corpus required – Current Assets).

Step-5 – Monthly Investment required

Once you know the actual amount for which you need to invest your task will be quite easy. Based on investment options available in the market you can select the the best suitable option for your needs, if required you can get advice from a financial planner.

Download Free Retirement Planner

Please note: –

This retirement corpus calculator is made by using the inbuilt functionality of Excel FV= Future Value & PV = Present Value we have tested it repeatedly for the accuracy of the result. Like every tool it provides an estimated retirement corpus and monthly investment required.
For simplicity, the inflation rates before and after retirement are taken to be the same 7%. This inflation rate is an assumption only it may fluctuate from time to time.
The rate of return is taken constant it may change based on investment options.

Conclusion

In conclusion, preparing for retirement in India requires careful planning and proactive decision-making. By understanding the intricacies of retirement planning, leveraging free resources, and adopting a holistic approach that encompasses finances, healthcare, and lifestyle considerations, individuals can embark on their retirement journey with confidence and security.

FAQs

What is the ideal age to start retirement planning?

It’s never too early to start retirement planning, but ideally, individuals should begin in their 20s or 30s to maximize the benefits of compounding interest.

How much should I save for retirement?

The amount varies depending on individual goals, lifestyle preferences, and anticipated expenses in retirement. It’s advisable to aim for saving at least 10-15% of income towards retirement savings.

Are there any government schemes for retirement planning in India?

Yes, the government offers various schemes such as the Employee Provident Fund (EPF), Public Provident Fund (PPF), and National Pension System (NPS) to facilitate retirement planning.

Is it possible to retire early in India?

Early retirement is possible with careful planning, disciplined saving, and strategic investments. However, it requires meticulous financial management and realistic goal setting.

How can I ensure my retirement savings last throughout my lifetime?

To ensure longevity of retirement savings, consider factors such as inflation, investment returns, healthcare costs, and potential lifestyle adjustments. Regularly review and adjust your retirement plan as needed to stay on track.