How to Build Your Emergency Fund

Experts say's one should having three to six months’ worth of expenses available for emergencies. That’s a pretty wide range; knowing which end of the range to target depends on several factors. 

Saving three to four months’ worth of expenses might be enough if:

• You’re relatively healthy
• You don’t have much debt
• You live in a low cost-of-living area
• You rent and your car (if you have one) is reliable
• You could easily find a job if you lose your current one
• You don’t have kids or dependents (including furry ones) relying on your income
• Your job is very stable
• You have a partner or other family you can rely on for financial assistance

Saving closer to six months’ worth of expenses is recommended if:

• You live in a high cost-of-living area
• It’d be hard for you to find a job if you lose your current one
• You own your own home (especially if you have an older home)
• Your job isn’t very stable (you’re a seasonal worker, gig worker, or an artist)
• You have children, a stay-at-home spouse, pets, and/or other dependents you support
• You have a medical condition, or do high-risk activities (like rock climbing or BASE jumping)
• You lack a financial support network

 Saving a year’s worth of living expenses is ideal if:

• You have a high income
• You have a niche position or specialized job that might require relocation or take extra time to replace
• You are the sole provider to multiple dependents
• You are retired or are nearing retirement

A lot of people will be a blend of these. But if you see more potential for risks in your life, consider saving more versus less.

How to Build Your Emergency Fund

Calculate how much your emergency fund should have and take steps to fund it.

1. Set a savings goal: Determine how many months of expenses to save, between three and six months, based on your personal circumstances and risk factors. 
2. Calculate one month’s worth of expenses: When calculating expenses, only tally up things you’d still pay for in an emergency, like rent, groceries, and bills. Leave out optional expenditures like travel and dinners out.
3. Calculate the amount of your savings goal: Multiply your monthly expenses by the number of months you want to save. For example, if you want to save four months’ expenses and one month’s expenses are 20000 your target is an 80000 emergency fund (20000 x 4). 
4. Automate your savings: If you automate your savings, you’re more likely to succeed. Decide how much you can afford to save each month, then set up automatic deposits into your savings account from your checking account after you get paid.
5. Capitalize on savings opportunities: If you come across other money, such as a tax refund, side hustle income deposit it in your emergency fund to reach your goal sooner.

Don’t get flustered if your goal seems difficult to reach. Just remember that you don’t need it all immediately, or even next year. It’s better to think of your emergency savings fund as an ongoing process, like your retirement savings account. Then, once you do reach it, you’ll have extra money each month to put toward other goals.

 

Disclaimer:

The views are for personal use and for educational propose only. Ritesh Sheth & Family or Tejas Consultancy does not guarantee the accuracy, adequacy or completeness of any information in this emailer and is not responsible for any errors or omissions or for results obtained from the use of such information.

This BLOG is addressed to and intended for the investors of Ritesh Sheth & Tejas Consultancy only. You are advised to contact Ritesh Sheth & Tejas Consultancy to clarify any issue that you may have with regards to any information contained in this blog. Ritesh Sheth & Family or Tejas Consultancy does not have any liability to any person on account of the use of information provided herein and the said information is provided on a best effort basis. In case of investments in any of our schemes, please read the offer documents carefully before investing. 

What is the best step to deal with debt?

 GET RID OF IT.

Start by taking inventory of all debt. Credit card debt, personal loans, education loans, vehicle loans, home improvement loans. What you can keep away from this list is a home loan since the tenure could span over a decade. In an excel sheet, stack them in order of interest rate, and size (amount of outstanding).

• Debt Avalanche Strategy: Pay off your debts in order from the highest interest rate to the lowest, regardless of balance.

Say you have a credit card outstanding bill of Rs 40,000 at 24% per annum interest rate. But your personal loan is 18% per annum. This strategy would need you to pay off your credit card bill with priority as it has a higher cost. Once you clear that, you move on to the next most expensive outstanding.
But it does not imply paying off one loan to the exclusion of another. Make the minimum payment on each loan, while the extra money you have managed to save should be channelized into the one with the highest interest rate.

• Debt Snowball Strategy: This time, the size of the debt becomes the focal point, not the cost of it.

Make the minimum payment on each loan, while the extra money you have managed to save should be channelized towards clearing the smallest debt. Once that is paid off, you move to the next one, and the next, until you are debt-free. If you have many loans, this is a good way to clear the clutter.

Which is the right one?

Pay-the-smallest-debt-first is a straightforward strategy that can provide you with the much-needed motivation you need to get started. The small win can help you stay on track. But it also means that getting rid of the smallest debt entails holding onto the debt with the highest interest rate longer. This translates into paying more in interest.

The math favors this Avalanche Strategy, but if the Snowball Strategy helps you actually achieve the goal of being debt-free, there's value in that, too. The Snowball Strategy helps you take the first small steps and is kind of a behavioral trick, the idea being that taking small steps can lead to a sense of motivation and empowerment. It gives you a sense of control and achievement.

Or, you can try a combination. You can work at eliminating the smallest loan first to keep you motivated. After getting one or two out of the way, you can switch to tackling the most expensive debt. A word of caution here: Have a written plan that you adhere to. Or else you will be switching between the two constantly and not make much progress.

THE BEST STEP TO DEALING WITH DEBT IS TO GET RID OF IT.

 

Disclaimer:

The views are for personal use and for educational propose only. Ritesh Sheth & Family or Tejas Consultancy does not guarantee the accuracy, adequacy or completeness of any information in this emailer and is not responsible for any errors or omissions or for results obtained from the use of such information.

This BLOG is addressed to and intended for the investors of Ritesh Sheth & Tejas Consultancy only. You are advised to contact Ritesh Sheth & Tejas Consultancy to clarify any issue that you may have with regards to any information contained in this blog. Ritesh Sheth & Family or Tejas Consultancy does not have any liability to any person on account of the use of information provided herein and the said information is provided on a best effort basis. In case of investments in any of our schemes, please read the offer documents carefully before investing. 

What is the surest path to financial independence?

 There are only 3 aspects you need to focus on.

1. Income
2. Dependents
3. Investing

Let's tackle all these three one by one.

Income:

Your income can be from a job, or your own business, or from your assets that are generating income, this income should be able to take care of the shelter, food, and clothing.

Obviously, you should spend less than your income, and the rest need to be invested into assets.

Dependents:

At least In India, We end up taking on the financial responsibility of family finance and sibling financial needs, and even housewife.

Some people are lucky, some parents don't depend on their kids, some people marry a working partner (I think it's a smart move). You will need to find ways to solve this dependent problem (If you have dependents).

It will be hard, but If I can do it, then you can also do it.

Investing:

Obviously, your income can stop due to multiple reasons, you could lose your job, your business can fail or your investments can underperform for a couple of years.

You need back up and that is nothing but more investments.

Until your income is flowing, your investments need to happen side by side, the more you invest, the more you are financially independent you become.

My investment generates almost 2K per day (Somedays even more), But my spending might be at 500 per day, rest 1,500 is always re-invested. Eventually, it will grow into a huge pile of cash and ensuring more financial freedom.

One More: Your Attitude

Your attitude towards money, towards your financial freedom is a very critical part, You can let money and society control you or you can take control of your money and your lifestyle - It's your choice.

As for me…

I live in a small home (Not Villa),

I don't have a SuperBike 

I don't have a luxury car (I do have a nice car)

I eat and drink well at home (Maybe once or twice a month I eat out)

I keep my expense in check and invest most of the money.

I work where I want and I don't really care about getting big offices.

So basically, I am Financially Independent for Many Years to come :)

I hope this helps!

 

Disclaimer:

The views are for personal use and for educational propose only. Ritesh Sheth & Family or Tejas Consultancy does not guarantee the accuracy, adequacy or completeness of any information in this emailer and is not responsible for any errors or omissions or for results obtained from the use of such information.

This BLOG is addressed to and intended for the investors of Ritesh Sheth & Tejas Consultancy only. You are advised to contact Ritesh Sheth & Tejas Consultancy to clarify any issue that you may have with regards to any information contained in this blog. Ritesh Sheth & Family or Tejas Consultancy does not have any liability to any person on account of the use of information provided herein and the said information is provided on a best effort basis. In case of investments in any of our schemes, please read the offer documents carefully before investing. 

Why ELSS is a better tax-saving option than traditional instruments?

Equity-linked saving schemes (ELSS) qualify for a deduction under Section 80C. You can claim a deduction of up to ₹1.5 lakh against investments made in ELSS during the financial year. Some experts also believe ELSS is a better option than traditional instruments such as public provident fund and National Savings Certificate as they have a potential to deliver better returns.

However, returns are not guaranteed and are market-linked but they have the ability to deliver inflation beating returns if one stays put for a long term. “Since we already have EPF deductions, it adds a good balance. And more importantly it teaches us how to be good equity investors, stay for long term," said Shweta Jain, chief executive officer and founder, Investment.

ELSS returns are, however, not guaranteed and are market-linked but they have the ability to deliver inflation beating returns if one stays put for a long term.

Apart from these, there are other reasons which make ELSS a better choice for tax savings.

Shortest lock-in: ELSS has the shortest lock-in of 3 years when compared to other tax saving instruments. This gives comfort to people that they may have the option to withdraw the money in case of an emergency. However, it is advisable that one satys invested in ELSS for long-term. “ELSS can deliver better returns but one should stay invested for more than just 3 years, need to stay invested for longer and definitely see better returns, also these are good habit forming decisions, so definitely one should opt," said Jain.

SIP option available: ELSS helps in building the discipline of investing in equities as one can invest systematically through SIP plus the lock-in ensures that the person stays put for long-term and doesn’t withdraw due to market movements.

As the financial year is coming to an end, many of you may be looking for investing in tax-saving options. However, it is always advisable to invest in equities in a staggered manner to get the benefit of rupee-cost averaging. So, may be you can start with your investments in ELSS now and continue it for next year in a staggered manner.

 

Disclaimer:

The views are for personal use and for educational propose only. Ritesh Sheth & Family or Tejas Consultancy does not guarantee the accuracy, adequacy or completeness of any information in this emailer and is not responsible for any errors or omissions or for results obtained from the use of such information.

This BLOG is addressed to and intended for the investors of Ritesh Sheth & Tejas Consultancy only. You are advised to contact Ritesh Sheth & Tejas Consultancy to clarify any issue that you may have with regards to any information contained in this blog. Ritesh Sheth & Family or Tejas Consultancy does not have any liability to any person on account of the use of information provided herein and the said information is provided on a best effort basis. In case of investments in any of our schemes, please read the offer documents carefully before investing. 

IS IT A GOOD TIME TO INVEST IN EQUITY?

The question is a loaded one, and legitimate too. But given the stock market’s erratic behavior, there is no right answer. And if you wait for one, you will end up sitting out the market.

• Is there ever a good time to invest in the market?

Of course. When it hits rock bottom. Invest huge amounts and then wait for the market to rise. This is timing the market in its purest form, something that is extremely difficult to do. Let me tell you why.

You need to be convinced that the market has touched rock bottom. No one can successfully call out the bottom or peak in advance.

You need immense conviction and confidence to invest when scene is dismal.

You must have tremendous patience to ride it out. The wait could sometimes be years. Then again, those who invested in March 2020 found that the wait could be a few months. Unpredictable.

• Stocks: Is there a right time to invest?

In 2020, infotech and pharma stocks had a massive bull market, while banking and finance stocks had a bear market. So, was it the right time to buy? The answer is, depends on what you want to buy.

You wouldn’t buy a car without knowing its value. You would not buy a house without knowing what it is worth in terms of location and area and other factors. Why would you buy shares in a company without knowing its Fair Value Estimate (FVE)?

The FVE helps you determine whether the market price of a stock is high or low compared with its fundamental value. Calculating the FVE involves looking at a company’s financial statements and annual reports, its business and competitive advantage, predicting future cash flows, assessing the management structure and corporate governance. Based on that research, a value is calculated that estimates the value of the company and what one share of stock should sell for if no emotions or headlines or hype from talking heads were involved.

So you need to look at the stocks you want to buy and see where they stand with respect to the current stock market price. That will help you determine whether or not you should buy. Don’t just blindly look at the Nifty or Sensex and wonder if it is time to buy.

• Equity Funds: Is there a right time to invest?

The best way to invest in a diversified equity fund over the long term is via an SIP.

1. The need for convenience. It is very practical. You may not have huge amounts to invest, but you can invest at least Rs 5,000 every month. And once you select the fund and the amount, it is a hands-off approach. You could do an SIP every fortnight or every month or every quarter. The money from your bank account will automatically be debited to buy units of the fund. You decide the amount, the fund, and the periodicity of the investment.

2. The need for consistency. To be a consistent investor, you must do away with constant human intervention. Or else, during market downturns, you may be tempted not to invest at all. Or, when the market scales new highs, you could get carried away by the euphoria. The hands-off approach is convenient and prevents you from over thinking.

3. The need to exploit market upheavals. It capitalizes the erratic movements of the market. The stock market never moves in a linear fashion. This capitalizes on the market’s erratic movements; you get to buy more units when the market falls. And you are always invested, not sitting on the sidelines.

However, this is only in the case of diversified equity funds. When it comes to sector funds, you need to time your entry and exit.

 

Disclaimer:

The views are for personal use and for educational propose only. Ritesh Sheth & Family or Tejas Consultancy does not guarantee the accuracy, adequacy or completeness of any information in this emailer and is not responsible for any errors or omissions or for results obtained from the use of such information.

This BLOG is addressed to and intended for the investors of Ritesh Sheth & Tejas Consultancy only. You are advised to contact Ritesh Sheth & Tejas Consultancy to clarify any issue that you may have with regards to any information contained in this blog. Ritesh Sheth & Family or Tejas Consultancy does not have any liability to any person on account of the use of information provided herein and the said information is provided on a best effort basis. In case of investments in any of our schemes, please read the offer documents carefully before investing. 

Accounting Procedure for Valuation of Goodwill (4 Methods)

The valuation of goodwill depends upon assumptions made by the valuer. Methods to be adopted in valuation of goodwill would depend on circumstances of each case and is often based on the customs of the trade.

The various methods that can be adopted for valuation of goodwill are follows:

1. Average Profit Method

2. Super Profit Method

3. Capitalization Method

4. Annuity Method.

Average Profit Method: 

Goodwill = Future maintainable profit after tax x No. of years purchase

The first step under this method is the calculation of average profit based on past few years’ profit. Past profit are adjusted in respect of any abnormal items of profit or loss which may affect future profit. Average profit may be based on simple average or weighted average.

If profits are constant, equal weight-age may be given in calculating the average profits i.e., simple average may be calculated. However, if the trend shows increasing or decreasing profit, it is necessary to give more weight-age to the profits of recent years.

Number of year’s purchase:

After calculating future maintainable average profits, the next step is to determine the number of years’ purchase. The number of years of purchase is determined with reference to the probability of new business to catch up with an existing business. It will differ from industry to industry and from firm to firm. Normally the number of years ranges between 3 to 5.

Steps Involved under Average Profits Method: 

(i) Calculate past profits before tax.

(ii) Calculate future-maintainable profit before tax after making past adjustments.

(iii) Calculate Average Past adjusted Profits (taking simple average or weighted average as applicable).

(iv) Multiply Future Maintainable Profits by number of years’ purchase.   Value of Goodwill = Future Maintainable Profits x No. of years’ purchase.

Illustration 1:

X Ltd. agreed to purchase business of a sole trader. For that purpose, goodwill is to be valued at 3 years’ purchase of average profits of last 5 years.

Illustration 2:

Y Ltd. proposed to purchase business carried on by Mr. A. Goodwill for this purpose is agreed to be valued at 3 year’s purchase of the weighted average profits of the past four years.

The profit for these years and respective weights to be assigned are as follows:

On a scrutiny of the accounts, the following matters are revealed:

(a) On 1st September, 2012 a major repair was made in respect of plant incurring Rs. 6,000 which was charged to revenue, the said sum is agreed to be capitalized for goodwill calculation subject to adjustment of depreciation of 10% p.a. on reducing balance method.

(b) The closing stock for the year 2011 was over valued by Rs. 2,400; and

(c) To cover management cost an annual charge of Rs. 4,000 should be made for the purpose of goodwill valuation.

Required:

Compute the value of goodwill of the firm.

Solution:

Before calculating goodwill, it is necessary to compute adjusted profit on the basis of information given.

2. Super Profit Method:

Super profit is the excess of estimated future maintainable profits over normal profits. An enterprise may possess some advantages which enable it to earn extra profits over and above the normal profit that would be earned if the capital of the business was invested in some other business with similar risks. The goodwill under this method is ascertained by multiplying the super profits by certain number of year’s purchase.

Steps Involved in Calculating Goodwill under Super Profit Method:

Step 1: Calculate capital employed (it is the aggregate of Shareholders’ equity and long term debt or fixed assets and net current assets).

Step 2: Calculate Normal Profits by multiplying capital employed with normal rate of return.

Step 3: Calculate average maintainable profit.

Step 4: Calculate Super Profit as follows:

Super Profit = Average maintainable profits – Normal Profits.

Step 5: Calculate goodwill by multiplying super profit by number of year’s purchase.

Illustration 3:

From the following information calculate the value of goodwill on the basis of 3 years purchase of super profits of the business calculated on the average profit of the last four years (simple average and weighted average):

(i) Capital employed – Rs. 50,000

(ii) Trading profit (after tax):

2010 Rs. 12,200;

2011 Rs. 15,000;

2012 Rs. 2,000 (loss); and

2013 Rs. 21,000

(iii) Rate of interest expected from capital having regard to the risk involved is 10%.

(iv) Remuneration from alternative employment of the proprietor (if not engaged in business) Rs. 3,600 p.a.

3. Capitalization Method:

Goodwill under this method can be calculated by capitalizing average normal profit or capitalizing super profits.

(i) Capitalisation of Average Profit Method:

Under this method goodwill is ascertained by deducting Actual Capital Employed (i.e., Net Assets as on the valuation date) from the capitalised value of the average profits on the basis of normal rate of Return (also known as value of the firm or capitalised value of business)

Goodwill = Capitalised Value – Net Assets of Business

Steps involved in calculating goodwill as per capitalisation of Average Profits Method:

Step 1: Calculate Average future maintainable profits

Step 2: Calculate Capitalised value of business on the basis of Average Profits

Step 3: Calculate the value of Net Assets on the valuation date

Net Assets = All Assets (other than goodwill, fictitious assets and non-trade investments) at their current values – Outsider’s Liabilities

Step 4: Calculate Goodwill

Goodwill = Capitalised Value – Net assets of business.

Illustration 5:

From the following calculate the value of goodwill according to capitalisation of Average Profits Method:

(ii) Capitalisation of Super Profit Method:

The goodwill under this method is ascertained by capitalizing the super profits on the basis of normal rate of return. This method assesses the capital needed for earning the super profit.

The value of goodwill is computed as follows:

Illustration 6:

Balance Sheet of X Ltd. on 31st March, 2013 was as under:

4. Annuity Method:

Under this method, goodwill is calculated by taking average super profit as the value of an annuity over a certain number of years. The present value of this annuity is computed by discounting at the given rate of interest (normal rate of return). This discounted present value of the annuity is the value of goodwill. The value of annuity for Rupee 1 can be known by reference to the annuity tables.

If the value of annuity is not given, it can be calculated with the help of following formula:

Illustration 7:

The net profit of a company after providing for taxation for the past five years is:

The net tangible assets in the business are Rs. 4, 00,000 on which the normal rate of return is expected to be 10%. It is also expected that the company will be able to maintain its super profits for next five years. Calculate the value of goodwill of the business on the basis of an annuity of super profits, taking present value of an annuity of Rs. 1 for five years at 10% interest is Rs. 3.78.