Are you game for an early retirement?

Gone are the days on which people want to work till sixty for maintaining their earnings, promotions and stuff. Nowadays, may be due to high pressure jobs and stressful lives, people want to retire from their career and lead a peaceful life as early as possible.

This article from Economic Times would make some of you think of retiring early and plan your strategies accordingly. Now, what could be the first step for early retirement?

According to the article,

We spoke to financial experts, and also a few smart people who actually managed to retire early from their active careers, and asked them for tips on how to retire early. Everyone was unanimous about the first step - make sure retirement stays at the top of your priority list.

Well, which I feel is not incorrect; but how many of us have retirement planning as our top priority?

Outsourcing of transaction tax compliance

Over the years companies have found outsourcing of important business processes such as recruitment, payroll, finance, training, HR etc. as a strategic and effective alternative that saves time, money and resources. Outsourcing of taxation related processes in companies to third party vendors is the next big thing happening in the outsourcing arena.

Transaction tax compliance is a burdensome process for companies. To give you an example, in the United States alone, there are more than 13,000 tax jurisdictions and each year the tax laws change more than 1,000 times. This makes it extremely difficult for companies to track tax rates and manage tax payments to the government for various transactions done at various jursidictions having different tax laws. Thus, while making sales in a particular geography, a company (that is operating over multiple geographies) should know about the prevailing sales tax, use tax and tax laws of that geography so as to account it in the tax amount to be paid to the government.

Failing this (or variations happening in tax payments due to not accurately tracking sales tax and use tax rates), companies have to face penalties, audits and other legalities from the tax authorities. This shows how important it is to ensure transaction tax compliance by a company, eventhough the process is unwieldy. That's where taxation compliance outsourcing becomes important.

A good example of a firm that do outsourced transaction tax compliance is Sabrix, with it's Managed Tax Service (MTS) that offers tax compliance solutions to small business and mid-market companies (they also have a demo of the application at http://www.sabrix.com/smb/demo/).

Outsourcing tax compliance to firms like Sabrix has lot of advantages. It would eliminate the hassles (tracking tax rates of various geographies etc.) associated with tax compliance. The payments to tax authorities will be accurate and timely due to the expertise of the firm as it is dealing only with such things (core competency). Above all, there is a cost advantage to it. As a result companies can concentrate more on its core business. Few more reasons to outsource transaction tax compliance can be found here.

Increase in debt waiver for farmers

The government has hiked debt waiver for farmers to Rs. 71,680 Crore (1 Crore = 10 million).

As reported by rediff,

Under the modified scheme, all farmers, including big ones, in 237 identified districts will get a debt relief of 25 per cent of the outstanding amount or Rs 20,000, whichever is higher, Finance Minister P Chidambaram told reporters after a meeting of the Cabinet, which approved the guidelines.

In a time when farmer suicides are rampant, this move from the government would be a great relief for farmers who are in debt and whose hopes have come to an end.

Elderly Travel Insurance

Travel insurance is used to cover medical expenses, financial and other losses (due to theft, delayed departure etc.) incurred while one is traveling. Travel insurance is available for students, businessmen, tourists, adventurers and for that matter, even ordinary domestic and international travelers. While it is widely used in developed countries such as USA, UK etc., it’s becoming increasingly popular in countries like India.

Like any other insurance products, travel insurance products also are unfriendly to the senior citizens as most of the policies would either have strict age limits or higher premiums for the elderly. This comes as an irony when we have retirement plans, low cost airlines and holiday packages that enable more and more people to save and travel during old age.

Recently, I came across a site called Covermytravels that offers travel insurance for senior citizens at a very lower cost compared to other insurers. Elderly Travel Insurance gives travel insurance quotes with in seconds (which is completely online) and is very user friendly. They have single trip per year and multi trip per year policies and also have some optional benefits such as ‘Winter Sports Cover’ that could be added to the travel insurance. They also give assistance to customers over telephone who want clarifications before deciding on the travel insurance they require.

Overall, an outstanding option senior traveler could bang on and I hope sites like this would be a great relief for elder travelers.

Sub-prime woes haunting the US

While the US bleeds of sub-prime wounds, most of the mortgages taken through sub-prime borrowing are now facing foreclosure. People who have taken such loans to build/buy houses are vacating it subsequent to court verdicts.

The gravity of the situation comes out clearly in this news reported by the New York Times. Quoting them,

The problem of vacant homes is all the more striking when considered against predictions by economists that a couple of million more homes will enter foreclosure in the next two years, said Cheryl Lang, president of Integrated Mortgage Solutions, a company based in Houston that contracts with Mr. McCallister and Mr. Law on behalf of mortgage companies.

With the consequent economic decline leading to more and more layoffs/job cuts, I guess the situation in the US is going to spiral out in the days to come. Feel like the sub-prime crisis had much more in its store than expected!

Money no longer gets locked in IPOs

When investors apply for Initial Public Offering (IPO), they have to pay money upfront to the registrar/banker with whom the money gets locked for a few weeks, until the IPO price is decided and the shares are allocated. If the number of shares allocated is lesser than applied, the balance money is refunded to the investor. Since the money is locked for a few weeks, the investor loses interest amount he could earn otherwise on that money.

On the other side, bankers get floating interest on investor's money, for those few weeks. Well, to say the least, when money runs into Crores, however small the interest percentage is, the interest amount will be huge.

According to a SEBI statement, the money will now remain in the investor’s bank account till the allotment price and quantity is finalized. This would eliminate the refund process. This would also save money collecting and refunding time and thus will reduce the burden on registrars.
More news here.

At a macro level, the locking of money denies the markets to have the much needed liquidity (money in the hands of people that can be used for trading in stock markets), particularly when they are falling and need money to push it up. Thus, money locked in IPOs has a serious impact on stock markets.

An example is something that happened in January 2008, when investor money was locked in Reliance Power and Future IPOs. These IPOs were huge and have raked in most of the liquidity from stock markets. When markets fell during that time due to US recession fears and other reasons, investors didn’t have money with them to buy shares (when markets fall, share prices also fall due to which investors buy shares which in turn will pull the market up) and stop the market from falling further. Reason; their money was locked with Reliance and Future IPOs!

The move by the regulator may not solve the liquidity problem during IPO as SEBI is planning to have some arrangements with which money would be locked in the investor's bank account so that there won't be any lack of funds in the investor's account when the IPO allotment comes. But this will atleast give the investors interest income on their money.

Credit card and effective interest rate

Suppose you own a credit card that charges an interest rate of 3.1% per month for revolving credit. What would be the yearly interest rate you end up paying the bank that have issued you the credit card? Is it 3.1 x 12 = 37.2%? Well, no!

Let’s see why.
Consider that you have made a purchase of Rs. 50,000 in your credit card having 3.1% monthly interest and have paid only 20,000 on the due date. The bank will take forward the remaining amount (30,000) to the next month's bill with an interest charge of Rs. 930 (3.1% of 30,000), making the total amount due to be Rs. 30,930.

Now suppose once again you couldn’t pay the entire amount and you paid only 20,000 out of the total due amount of 30,930. The bank will charge an interest of 3.1% on the remaining 10,930 (not 10,000). Thus the bank charges interest on the previous interest amount also or simply, the interest charged is compounded! Due to compounding, the effective annual interest rate will be higher than 3.1% x 12.

The effective annual interest rate, when monthly interest rate is quoted can be found out using the following method.

Effective annual rate = (1 + i/m)^m – 1
where i is the nominal yearly interest rate (3.1% x 12 = 37.2%) and m is the total number of compounding periods in a year (12, since monthly).

Effective annual rate = (1 + 0.372/12)^12 – 1 and that comes out to be 44.25% instead of 37.2%!

Think about a lender who charges 44.25% for the money that you borrow from him. That’s exactly the reason why we should keep our credit card spending to the minimum with absolutely no revolving credit.

Base year and number of commodities used for inflation calculation in India

By this year end, the government will adopt a revised Wholesale Price Index (WPI), besides considering actual prices from next month.

Instead of the current 435 commodities, the revised WPI will have 980 commodities included in it, which will be rationalized by incorporating new items, removing unimportant items and amalgamating similar items.

The base year will also be revised to 2004-05 from the current base year of 1993-94. Thus the new WPI would give a more accurate figure for inflation. More news here.

So finally, the government is doing something on various debates happened over inflation calculation in India.

Related Articles
- How is WPI inflation rate calculated in India?
- Commodities and their weight-ages in WPI calculation of India
- Inflation rates of India (2009)
- Inflation rates of India (2008)
- The magic of Inflation

Poll Result: Will India attain double digit growth rate?

Will India attain double digit growth rate?

From rags to riches

A crorepati who lives in a hut!

The awe-inspiring story of a first generation entrepreneur! Sarath opens up his mind about the hardships he faced while making his company a success. I particularly liked the following statement he makes.

Quoting Sarath,
We talk about India shining and India growing, but we should ensure that people do not die of hunger. We can be a developed country but we should not leave the poor people behind. I am worried for them because I know what hunger is... Thoughts that are quite in line with the article by Pankaj Mishra about which I wrote in this post.

Sarath is a classmate of mine from IIMA's MBA programs. I hope that his story will be an inspiration for each and every one of us to start something similar and take India to one of the topmost countries in the world.