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Recap:Swayam was now king of the world. All the hours of studying in school, college had paid off, he had the job and he would spend  money  living life king size. But then he was pulled in different directions-taxes, savings, insurance,  investments,  stocks, mutual funds, . He realized he was educated but had no financial education and started on money awareness journey. He brushed up his school maths  such as percentages, compound interest. Today he will learn about it’s not only what one earns that makes one’s money or financial position.

 “Swayam, salary or income is just one corner stone of one’s financial position”, said the voice.  Swayam was shocked. “What do you mean? I thought earning well is what one’s money position all about?”. Voice said, “First of all what you get in hand is different from the figure quoted by companies in campus or offer letter. Your take home salary is much less than the Cost to Company or Net Salary.”  Swayam replied, “Yes I was shocked on getting my first salary, it was much less than mentioned in offer letter. I had divided CTC by twelve to arrive at my take home salary. Only when I read about  Salary, Net Salary, Gross Salary, Cost to Company: What is the difference did I realize my mistake. But a person who gets 20-25 lakh in salary, what problem can he have? ”  Voice said, “Sorry to disappoint you. More the money, more the problems. Take the case of  M.D”.

He bought a house in Navi Mumbai for about Rs. 80 Lakhs, – of this about Rs. 55 lakhs was funded by a loan from the State Bank of India. Over the last 4 years he had paid a lot of interest, but the principal outstanding was still Rs. 52 lakhs. He was also doing some SIPs which had seen an amount of Rs. 33 lakhs, but now in this market was worth Rs. 30 lakhs e does not have any debt investments except his LIC endowment policies – and all the policies are together worth Rs. 30 lakhs. So far fine. He just lost his job. What is at stake- Household expenses (including children’s school fees) -Rs. 100,000, EMI    Rs. 52,000 Assuming he gets a job in 6 months, he will need Rs. 1.5L X 6 = 9 Lakhs”. To know more about this can read strategy not Investment Strategy 

“Unfortunate for MD but that is just one of case”, said Swayam. “OK tell me who is better off among following?”, asked voice.

  • Shanker, 24, earns a monthly salary of Rs 20,000 from his job. His average monthly spending on livelihood and looking good is about Rs 18000. He currently has no investments and has an amount of Rs 10,000 overdue on his credit card.
  • Ramu, 30-earns Rs 4000 a month as a bank clerk. He spends a maximum of Rs 2000 in a month. He has Rs 4800 in his savings account but has not made any significant investment yet. He has to pay an EMI of Rs 800 towards his home loan.
  • Shikha, 26- is a housewife who gets Rs 10,000 from her husband every month towards household expenses. She make it a point to put Rs 1000 in her savings account as soon as she gets her ‘allowance’. She has managed to build a reserve of Rs 8,000 so far.
  • David, 19-a third year commerce student has built an investment portfolio of Rs 5000 in mutual funds. He started investing a part of his allowance, cash prize and gifts on his 19th birthday, 6 months back.

Asked the voice, “Who is better off?” Swayam replied, “If income were the only indicator if your financial situation, then Asif’s situation can be considered the strongest. ” Voice interrupted.”But does he seems to be doing well with his money? Is his financial position rally strong? Can he take care of financial emergency like a job loss or drop in income? Thankfully unlike M.D he does not have kids and Home loan to worry about and also he has age on his side”

Nodding his head, Swayam said “Infact looking at the overall picture, Asif even with his fat paycheck, is in the worst financial situation at present. His expenses are almost as much as his income. And his credit card debt has got him into a financial mess. ” Voice answered,”Considering his meager monthly balance and high interest rate on credit card debt, Asif would need more than 6 months to payback the debt, if nothing else changes. And I would like point out to you that even in developed countries like US people are Financially fragile” Swayam was worried, “What does this mean? ”  Voice replied, ” It means in an emergency situation they couldn’t come up with $2,000 unexpectedly in the next month, or would have to resort to desperate measures to come up with the money. A surprising number of middle class families – including 25 percent of those earning between $75,000 and $100,000 — are also fragile.

According to the National Bureau of Economic Research, nearly half of all Americans are considered “financially fragile.”  These were the findings of

a 2011 paper published by the National Bureau of Economic Research and The Brookings Institution, “Financially Fragile Households: Evidence and Implications” (PDF), used data from the 2009 TNS Global Economic Crisis survey to examine households’ capacity to come up with $2,000 in 30 days”

“I am speechless,” said Swayam. “But surely in India we would be better of ?” Voice answered, “Indian households are earning more as economic growth accelerates and putting aside savings, but they continue to remain financially at risk.  They would not be able to cope on their current savings for more than a year.  54% Indians suffer from nothing-will-happen-to-me syndrome.  These are some of the findings of a study done by the National Council of Applied Economic Research (NCAER) India and sponsored by Max New York Life, a private player in the life insurance space in the year 2007.  For report How India earns, spends and saves: Unmasking the real India Click here (pdf)

With global crisis of 2008 behind us and US and Europe crisis facing us things have worsened.” Swayam asked ” Then What makes up one’s money or financial position?” Voice replied “It’s Income, Expenses, Assets and Liabilities“.

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