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144: Time to Quadruple

In the article “The Number 72“, we learnt how to guesstimate the time required for an amount of money to double if invested at a defined rate of annual interest. Click here to access the article.

Then, we learnt about the number 114 in the article “Triple Your Money“, where we learnt about the time required for an amount of money to triple at a specified rate of interest. Click here to access the article.

144

Picture Credit: commons.wikimedia.org

Now, in the last article in this series, we shall become aware of another power number – the number 144. And as the article suggests, it shall help guesstimate the time required for an amount to quadruple i.e., become 4 times its original value for a given rate of interest. And if you have followed the previous articles, you already know the formula:

(Number of years to quadruple) x (Rate of Interest p.a.) = 144

So, if you have a 1000 INR note, you know that it would become INR 4000 at 12% rate of interest in?

Yes, 12 years. Simple, isn’t it?

Hope you find this trick useful.

Note: This is an estimate to be used to make your life easier and does not give an answer accurate to the number of days. Also, the higher the expected rate of interest, the less accurate does the formula become but still you can use it safely!

If you like this trick, like and share this article. Comment if you know more such tricks.

Triple Your Money

In the post titled “The Number 72“, we learnt an useful formula – how to calculate the number of years required for a given amount of money to double at a specified rate of interest. Now suppose double is not cool enough for you. You want to know in how many years your money would triple!

Here, comes another number to help you estimate: 114.

114.png

Picture Credit: pt.wikipedia.org

You guessed it right, the formula is:

(Number of years to triple) x (Rate of Interest p.a.) = 114

So, now following the example in the previous article (click here to access it), if someone promises you a rate of return of 9%, know that your money would be doubled in approximately 12.67 years, i.e., 12 years and 8 months.

Do the math!

Note: This is an estimate to be used to make your life easier and does not give an answer accurate to the number of days. Also, the higher the expected rate of interest, the less accurate does the formula become but still you can use it safely!

If you like this trick, like and share this article. Comment if you know more such tricks.

Getting Insured [Part II]

In the last article, we saw how Aadeshna calculated the returns on her mother’s “Cash Value” insurance policies. (Click here to access the article.)  And she was shocked to find that not one of the multiple policies her mother had subscribed to gave returns in excess of 6% which meant that the money invested would only double in 12 years (calculated using the “Rule of 72“).

getting-insured-part-ii

Now, what are “Cash Value Plans”?

The Cash Value Plans are those insurance policies which typically have two parts:

  1. Risk Cover
  2. Savings Component

The risk cover part provides you with the death benefit. Say, a policy holder has an insurance coverage of INR 1 crore. That means that the risk coverage is of 1 crore implying that in the event of death, the nominee of the policy holder – typically a family member – would get INR 1 crore.

And the savings component ensures that you receive a a lump-sum at the end of the policy coverage period or get an annual survival benefit every year. Sounds great, right?

But it is not.

This brings us to lesson number 2 (Click here for lesson 1):

Keep It Simple, Stupid! – the KISS principle designed by the US Navy in 1960

Insurance companies, like any other company, exist to make profit. They are not into charity. That you would receive a lump-sum or an annual survival benefit does not mean that the insurance companies are paying you out of their own pockets. They are making you pay for it. How?

Through your premiums!

This is why premiums of cash value plans are on the higher side as compared to the premiums of the useful “Term Insurance” plans which just do one thing: provide risk coverage. Typically, the premiums of cash value plans are 2 to 3 times the premiums of term insurance plans.

And it is the difference in the premium amounts which is used to provide you with the cash-back at the end of the coverage period.

To know more about the differences between cash-value plans and term insurance plans, wait for the next post!

P.S.: The motive of the post is not to show that getting insured is not necessary. That is absolutely not true. Getting insured is imperative. But there is a better way to get insured which shall be discussed in the subsequent posts of this series on Insurance.

Like the post? Help us know how we can help you better.

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Picture Credit: www.telegraph.co.uk

Getting Insured [Part I]

One Sunday afternoon, Aadeshna’s mother brought up the topic of the investments she had made in her lifetime. Her mother had retired last year from the Indian Post Office. Most of the investments were in the form of life insurance policies  which were going to mature within the next 3 to 5 years time-frame along with some recurring deposits and fixed deposits. Her mother wanted Aadeshna to calculate the returns on the insurance policies. Aadeshna had recently graduated from one of the best B-schools in the country. Although not an actuarial professional, she had a clear understanding about Internal Rate of Return (IRR), Modified Internal Rate of Return (MIRR) among other concepts all finance professionals are privy to.And  Aadeshna was curious to try them out!

Insurance-dice-copy.jpg

Picture Credit: http://orixinsurance.com/

She did the math. Not one of the half dozen policies returned more than 6%. 6%! What is 6%? Doubling the money in 12 long years? (Click here to know how she calculated that in a jiffy!)

She explained to her mother how she could have enjoyed a better return, more liquidity and bigger life coverage if only her mother would have known that:

Insurance is not an investment. It is an expense. A necessary one, but an expense nevertheless. 

That is lesson number 1, people. And while we understand it when we pay the insurance premiums for our cars and motor-bikes, somehow the cash value plans are able to fool us into believing that they add more value to our lives, when in reality there are better options available.

What are Cash Value Plans, you ask?

Click here.

Clue: Aadeshna’s mother had opted for Cash Value Plans.

P.S.: The motive of the post is not to show that getting insured is not necessary. That is absolutely not true. Getting insured is imperative. But there is a better way to get insured which shall be discussed in the subsequent posts of this series on Insurance.

Like the post? Help us know how we can help you better.

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Retirement Plan: Just PPF!

ppf

PPF or the Public Provident Fund is a no-fuss investment opportunity provided by the Government of India (GoI) under the Public Provident Fund (PPF) Scheme, 1968. Requiring as low as INR 100 to open the account, it not only helps you save taxes under section 80 (C) of the Income Tax Act, 1961 but also provides healthy returns.

For the fiscal year 2016-17, 8.1% is being offered. That means, your money parked would double in less than 9 years. Remember the number 72? Click here to review.

But given the high rate of interest and tax-free interest earned, one can only invest INR 1.5 lacs every fiscal year. With a deposit period of 15 years, it is one of the best retirement plans for investors of any age. More so, for the youth!

In fact, investors should first aim at fulfilling the PPF quota of INR 1.5 lacs before investing in riskier options like Mutual Funds and the stock market.

Hurry and open the account today!

The Number 72

72

Often we see investment advertisements which promise to double our money in (say) 9 years. Sounds good, doesn’t it?

Or don’t you wonder sometime, in how many years your money would double, if a Mutual Fund has been historically providing a return of 12%? Or, if you have INR 50 lacs, given the inflation rate of 8% (say), in how years would its value reduce by half in present terms?

(Answer to the three questions above are given at the end of the article.) 

The answer can be found out easily with a simple trick:

(Number of years to double) x (Rate of Interest p.a.) = 72

So, if someone promises you a rate of return of 9%, know that your money would be doubled in 8 years. If inflation is somewhere near 6%, know that your current kitty would be diminished by half in 12 years if not invested elsewhere.

Do the math!

If you like this trick, like and share this article. Comment if you know more such tricks.

Happy learning!

Answers: 8%; 6 years; 9 years. 

Picture Courtesy: https://in.pinterest.com/pin/53902526760366711/

Note: This is an estimate to be used to make your life easier and does not give an answer accurate to the number of days. Also, the higher the expected rate of interest, the less accurate does the formula become but still you can use it safely!

Tax: The Hindu Undivided Family

Familial ties can  be strong in India. Joint families abound with members sharing the same kitchen as well as the income generating assets. The concept of Hindu Undivided Family (HUF) thus exists in India where a separate bank account and Permanent Account Number (PAN) can be generated for the HUF.

This can help save taxes. How?

Suppose you are working for an IT firms – say, TCS – and are already in the 30% tax bracket. You inherit land from your father which generates rental income. This income would be taxed at 30%. But if the income is shown under a HUF, then no taxes might have to be paid. Thus, you can save yourself and your family a lot of money.

But if that is so easy, why do not most people go for it?

A HUF is easy to form. But first, only Hindus, Sikhs, Buddhists and Jains can form a HUF. Secondly, a HUF cannot be created by a single person. Thirdly, there is the concept called “coparcener” in HUF. A coparcener is someone who has an equal right to a property as the other coparceners. All members of a HUF are coparceners. So, starting a HUF is a lot like opening Pandora’s box. Fourthly, although easy to open, a HUF is not easy to dissolve as all the coparceners must agree to the dissolution of a HUF. Fifthly, a HUF property can be sold or transferred only if all the coparceners agree. And lastly, every new-born child becomes a part of the HUF. Thus, although in the present, it might seem manageable, things might go out of your hand as the family grows making you spend the amount you save in taxes on a Chartered Accountant.

So, what do you think? Is a HUF worth all the trouble?

Share your thoughts in the comment section below.