Last Updated on August 30, 2021 at 8:55 am
Each December, I conduct a personal financial audit. I take stock of my financial goals and other aspects of personal finance relevant to me. For the last couple of years I have been sharing the gist of such audits at freefincal:
This may help interested readers to conduct one themselves: how to conduct a personal financial audit
Why do this? I think the DIY investor community should share their thought process in the hope that it would be mutually beneficial (I have made course corrections based on reader comments). My intention is not to brag or show off returns or my money management strategy. I would urge you to share your own strategy either here as a comment or at the DIY Investor’s forum
Some background:
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For those who are new to freefincal, I am an investment junkie. I push myself to invest more and more each year – typically 10% more. For the last couple of years, it has become extremely tough to keep up with my investment schedule. I track the schedule and investment made with this monthly tracker.
My wife and I live a reasonably frugal lifestyle without depriving ourselves of any pleasures. This enables us to invest more than our monthly expenses.
In general, I use this as a second benchmark to evaluate financial health. A family without any liabilities should manage to invest as much as they spend each month. If this does not occur, the reasons must be evaluated and corrective action taken (if possible).
The first benchmark is the well known, but trivial, “spend less than you earn”. Trivial because, having something to invest is important, but more important is how much we manage to invest and if that is sufficient.
This is where personal financial audits are crucial. Goal-based investing is not a one-exercise. The inputs used in goal-planning calculators must be evaluated once a year.
A few years ago, I used to look forward to the audits in December. Unfortunately, I have completely killed the romance of such an exercise. I have been doing this for the past 8 years and have slowly automated the process. Today I just use the monthly financial planner to keep track of investments (been doing this for 8Y) and the automated mutual fund and financial goal tracker to keep track of goal corpuses, CAGR, asset allocation etc. (since last Dec.). While the process has become convenient, it has come at a price. Few years back I used to be so excited to do the audit in Dec. Today I can do it anytime I want by opening a file and clicking a few buttons – not quite as exciting but actually a good thing!
“There is something in people; you might even call it a little bit of a gambling instinct… I tell people investing should be dull. It shouldn’t be exciting. Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.”
— Paul Samuelson, “The Ultimate Guide to Indexing,” Bloomberg Personal Finance, 1999
I do not time the markets and believe in systematic investing. I do not chase star ratings and my holdings (please do not ask what they are) are not at all impressive. So now over to the audit.
Retirement
Base asset allocation: 60% Equity, 40% Fixed income
Current asset allocation: ~ 55%+ equity.
Instruments used: Equity mutual funds, NPS (mandatory) and small exposure to PPF.
Current net Equity XIRR: 15.40%
Current NPS XIRR: ~ 10%
PPF ~ 8% (net)
Status: Notional retirement or financial freedom is 7 years away*, if equity returns are close to current XIRR. Seventh pay commission would also help!
Current invest must is a touch above required investment. Will not sustain without the 7th PC.
(*) want to bet on a 2008-like situation within next 7 years?!
Related Post:
- Review Your Retirement Portfolio in Seven Easy Steps
- Why you should invest as much as you spend for retirement
- Find out when YOU can retire with this tool.
Calculators used to compute this information
- How much should I save for retirement?
- When can I be financially free?
- Returns estimator for financial goals (used only for retirement)
Son’s education
Base asset allocation: ~60% Equity, 40% Fixed income
Current asset allocation: ~ 75%+ equity. Rebalanced once last year. Will take a call a bit later.
Instruments used: Equity mutual funds, PPF
Current net Equity XIRR: 13.9%
PPF ~ 8% (net)
Status: On track, both corpus-wise and investment amount-wise.
At 10% inflation, 10% net portfolio, return, current cost 50 Lakhs, goal ~12 years away, future corpus expected, 1.5 Cr.
Son’s Marriage
Base asset allocation: 100% Equity
Current asset allocation: Same as above!
Instruments used: Equity mutual funds
Current net Equity XIRR: 11%
Status: Have not invested for more than 1 year now, due to unexpected recurring expenses. Will try to resume after 7th PC.
Related posts
- Should I invest for my child’s marriage?
- How to plan for your child’s education and marriage
- Long Term Goal-Based Investing – Part II
Life insurance and Health insurance
These are in auto-pilot mode. So not much to do here.
Offline term cover from LIC (6+ years old)
Individual mediclaim for family from United India (9+ years old). Cover enhanced as much as possible each year.
Last year, my net worth exceed my term insurance policy. This means slowly (hopefully surely) our dependence on an expensive LIC term plan is decreasing. Hopefully, after a few years, we can get rid of this policy. The next milestones for the equity net worth and fixed income net worth to individually exceed the term cover.
Related post:
Tax-planning
- Section 80 C is taken care by NPS via 80CCD(1)
- Section 80CCD(2) by NPS (employer contribution)
- Some excess under 80CCD(1) may be assigned to 80CCD(1B) if possible – the new 50K rule. Note that these contributions are not voluntary.
- 80D by mediclaim
NPS is obviously tagged to retirement.
Monthly Budgeting
Just ensure we invest enough and spend the rest any which way necessary and/or desired. Do not believe in tracking spending habits. Tracking investments is more beneficial.
Emergency Fund
Have some about in SB account, and some in online FDs. Don’t know exactly how much in terms of monthly expenses.
That is about it. Hope 2016 is a dull and boring money management year. Wish you all a happy new year!
Previous Audits
The 2014 personal financial audit
The 2013 Personal Financial Audit
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Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
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