Retirement Withdrawal Management

Retirement finance has an accumulation stage and a decumulation stage. Accumulation gestates, hatches, and cooks your retirement nest egg; decumulation allows you to eat it. Accumulation commands the lion’s share of attention in popular finance, but decumulation, or distribution, is equally important. Understanding how to disburse wealth is just as important as understanding how to build it.

The Basic Problem

On retirement day, you possess a store of wealth built up throughout your working life. Stretched out before you is the rest of your life, of uncertain duration. You want to withdraw a sufficient quantity of wealth to finance a comfortable lifestyle, but not so much that you run out of money before you run out of life.

In order to make your problem manageable, you will probably choose to withdraw and consume a specified fraction of your wealth. If your chosen fraction doesn’t work well – either because you don’t have enough money to live on or because you are using up your wealth too rapidly – you may either choose a bigger fraction or a smaller one. You won’t, or shouldn’t, simply withdraw a random amount whenever the spirit moves you. That would leave you with almost no control over how fast your money is used up.

Your basic problem is choosing that fractional withdrawal, which is called the withdrawal rate and is expressed as a percentage. The optimal rate depends on subjective factors – your tastes and preferences, your need for security, and your tolerance for risk – as well as objective ones. Copious research has been devoted to identifying it. The most widely-cited studies focus on the question of how much can be safely withdrawn, and over what time period, without depleting the principal.

The Right Withdrawal Rate

Financial advisors can and should tailor their estimation of the right withdrawal rate to the particular circumstances, needs, and proclivities of each client. When asked to suggest a “rate of thumb,” however, they usually fall back on a conservative standard – a rate that will not deplete principal over a long retirement – or an even-more-conservative standard – a rate that will keep principal from declining.

The most widely-cited studies of this issue were conducted around the turn of the twenty-first century. They suggested that a withdrawal rate of 4-6% would probably not deplete principal, although the risk of doing so seemed to rise steeply once the rate reached 5%. (Another factor affecting the withdrawal rate is the rate of return earned in retirement, which depends on the allocation of retirement assets. The larger the equity allocation, the higher is the permissible withdrawal rate.) Today, 10 years later, financial advisors have lowered their sights markedly, picking 3-3.5% as the rate of thumb. What accounts for this change?

Over that 10-year interval, stocks have turned in their worst performance ever, with a negative rate of return. That has reduced the historical rate of return to equity, which in turn has driven down the highest permissible rates. The recent financial crisis has almost certainly exerted a downward psychological pull, leading planners to pull in their horns in case the recession stretches out over the next decade.

Other Important Parameters

Other parameters also affect the right withdrawal rate. Life expectancy at age 65 has increased dramatically over the last half of the twentieth century. All other things equal, a longer withdrawal period lowers the withdrawal rate consistent with non-depletion of principal.

Interest rates are a key determinant of the right withdrawal rate. Higher interest rates produce lower bond prices, reducing the value of a bond portfolio. This is a difficult parameter to gauge, however, since the higher rate will also increase the interest yield on both fixed-income and liquid assets.

Expenses in retirement can vary widely for different households. In particular, debt can eat up income otherwise available for consumption. The more debt (or other expenses), the lower is the permissible withdrawal rate.

How Do Annuities Fit Into This Picture?

After reading the foregoing, how much would you pay to simply forget about all potential complications and settle for a guaranteed income for life? That is the concept underlying most annuities. Its attractions obviously depend on the size of the guaranteed payment, as well as the solidity of its guarantee. Since the rate of return on an annuity varies directly with the length of the annuitant’s life, the trend toward increased life expectancy certainly favors the annuity.

Perhaps the biggest plus for annuities – especially equity indexed annuities – is the elimination of the need to guess about future stock prices, interest rates, and longevity. The world’s greatest experts cannot forecast these parameters with much precision. It is very likely that, in hindsight, there will be a particular allocation of stocks, bonds, and real assets that will outperform the annuity. The problem is that we cannot know this allocation in advance, so we cannot guarantee that it will find its way into our portfolio.

If we compare the annuity payout with an optimal withdrawal rate and asset allocation chosen after the fact, the annuity will likely come out second best. That is hardly a decisive argument against annuities, however, since there is no particular reason to believe that the choices we actually make will be the optimal ones. Annuities give us a reasonable outcome, guaranteed, compared to the prospect, but not the promise, of a better outcome if we make the right choices.

Annuities: The Dark Horse Choice

It is ironic that, given all the lip service paid to the concept of security, the only asset able to provide lifetime security of income is not even-better understood and utilized. The reasons for the dark-horse status of annuities are many and complex, but the fact remains that a life annuity is probably the best, most secure way to provide guaranteed income for life. The quickest way to realize this is to sit down and try to compute the right withdrawal rate on your retirement savings. Afterward, check out the best deal on a life annuity. Ask yourself if the incremental gain in income is worth sacrificing the security of the life annuity.

Interview with Mark from Options for Rookies

I requested Mark from Options for Rookies for an interview while I am away, and he very gracefully accepted. In this interview Mark explains how options can be used as insurance for your portfolio. If you have any questions, please leave a comment here, or at Mark’s blog. As far as I can tell, Mark responds to each and every comment, and your answer will very likely get answered.

1. You have often said that options are a good way of insuring a portfolio. In your opinion – is buying Put options or selling Futures a good way to do this for a rookie? Is there a better way?

Conservative option strategies allow for earning substantial market profits – with reduce risk.  As a trader becomes more conservative  – and increases portfolio protection (insurance), stricter limits are placed on potential profits.  The ideal situation is a good balance between minimizing losses and earning profits.

The problem with buying insurance – as a stand alone strategy – is that there is always the negative side.

1) Buying put options is just too expensive.  It does it’s job very well and protects the investor from all disasters.  As with any insurance policy, the individual can choose his/her own deductible.  For example, when a stock is $52, you can buy a put option that gives you the right to sell shares at 50 (The most you can lose is $200 plus the cost of the puts); 45 ($700 max loss, plus put cost) etc.

Put options cost so much, that there is usually little chance to profit when the market continues to rally.  Expect to pay at least 15 to 20% of the stock price – per year – for this type of insurance.  I do not recommend it.  Too expensive.

2) Selling futures does provide a good hedge.  If that’s not bad enough, there is a big correlation risk.  If an investor’s portfolio under performs the futures contact, then significant money can be lost on rallies.  That is not the purpose of owning insurance.  It’s best to avoid correlation risk by owning insurance on the specific investment that you already own.  Do not sell futures as a stock market hedge.

3) The method I prefer costs very little (sometimes you can be paid for owning this insurance) cash, but there is an opportunity cost.  This strategy is the collar, in which you do buy the put option per #1 above – but you also collect cash for selling a call option.

This is the mixed blessing.  Selling the call often provides sufficient cash to pay for the put option – with cash left over.  But, your upside potential is limited.  When you sell the call option, you sell someone else the right to buy your shares – if those shares are priced above the call strike price when option expiration day arrives.  Thus, profits are limited.

I’m willing to trade the ‘potential’ upside for the ‘guaranteed’ protection.  Many investors are not willing to make this trade.  Being afraid to miss a rally, they prefer to take the risk of getting hurt in a down market as long as they have the possibility of earning unlimited upside profits.  Who is to say that’s wrong?  It’s far too risky for me, but each trader makes his/her own decisions.

2. How does one go about evaluating the cost for such insurance?  At what time do I need to say I will just sell my stocks instead of buying (or selling) these options or future positions to protect my portfolio?

To evaluate the cost, take a look at option prices.  If you plan to buy puts, pick the strike price, look at a 3-month put and see the cost.  Then multiply by 4 to give you a reasonable estimate of what it will cost to insure this position for one year.  Most of the time you will discover that the price is just too high and the stock would have to undergo a huge rally for you to earn any money.  Although some people recommend buying puts for protection, I am adamantly opposed to that idea.

Selling your holdings represents the perfect insurance policy.  There is no cost and there is no risk of loss.  But there is an opportunity cost.  You fail to prosper if the market rallies.  When to sell stocks is a major discussion all my itself.  A reasonable hedge is to sell a portion of your holdings when you deem it to be appropriate.

In general, most investors only know how to buy stocks and if they would learn to sell part of the time, they would do much better.  I’m not suggesting timing the market.  No.  Just taking some profits when prices rise ‘enough.’  And add to holdings when prices decline sufficiently.  But traders are subject to emotions and the majority cannot sell when prices are rising.  That’s a major problem for investors.

Collars are easier to analyze.  In most cases, the cash outlay is minimal.  Thus, ask yourself:

Am I willing to cap my profits if my stock reaches the strike price of the call option?  Or must I earn more than that?

Is the protection (the most I can lose on a decline) acceptable?

Am I willing to guarantee a maximum loss – at an acceptable level – in exchange for the possibility (note: that’s all it is – a possibility) of extra profits?

If ‘Yes,’ the collar is for you.

If ‘NO,’ you and collars are not well-suited for each other.

3.  As far as put options are concerned, do you have any preference on – out of money or – in the money put options to hedge positions? Does it make any difference because of the time decay or any other factor?

a) The purpose of these options is to buy insurance.  It is NOT to earn a profit.  Thus, there is a very big difference in approach.

b) The options should be out of the money.  That’s enough protection.

c) If you want to buy in-the-money put options as insurance, then you should sell stock instead.  There is no need to pay such a high premium for a stock that you are afraid will decline in price.  Insurance is protection against ‘being wrong.’  You do not want to own stock you suspect will decline in price.  And if you do not expect it to decline, there is no reason to buy in the money options.

Bottom line: Insurance is not for everyone.  In my opinion it is far better than depending on proper asset allocation and diversification to protect your assets.  In a very globalized economy, there is a good possibility that all asset classes can move in tandem.  If that happens in a debacle, you can be severely hurt.  I’d rather trust in owning collars (with a guarantee) than depending on out-of-date investing guidelines.

Silly ways to use credit cards

Mr Credit Card has previously wrote about tips to use credit cards wisely. Today, he will be focusing on some silly ways to use credit cards. Mr Credit Card’s favorite credit card company is American Express.

Credit cards, in the right hands are a great tool for consumers. If you use your credit cards responsibly, you can earn great rewards with them. But if you let your credit card control instead, then you are headed for trouble. Here are some mistakes folks make with their credit cards.

Ignorance – I have heard countless times that “my friend said it is OK to buy this on the card as long as I just pay the minimum balance – so I thought it is OK”!!%^&%. There were simply too many times where I heard comments like that and I simply felt like strangling that person. But when I calm down, I realize this is simply ignorance and is very prevalent (especially when it comes to credit cards). Getting a credit card before you even understand the consequences of carrying a balance and simply paying the minimum balance or what an APR is is simply asking for trouble. The only solution to this is to get educated about basic finances and credit cards before you even apply for one.

Carrying a balance for no good reason – I always advocate never to carry a balance. But I do understand where there are emergencies when you have to simply make use of your line of credit that is available on your credit card. But simply carrying a balance as a way of life is not the way to go. You end up paying too much interest over time and that is money wasted. It also fosters bad habits. If you find yourself in this camp, then I suggest getting rid of credit card debt as soon as possible.

Not Disciplined in paying on time – Paying your bills on time is such an important component of your financial life and discipline. While not paying your credit card bills may not be immediately disastrous (since credit card companies only report to the credit bureaus if you are late for 30 or 60 days), credit card companies are watching you and you are unlikely to be treated favorably in matters such as credit limit increases.

Not checking your credit card bills – I am a big advocate of enrolling in autopay feature. But even then, I do check my credit card bills every month to make sure there are no unauthorized payments on my statements. Whether you use autopay or not, or whether you can use paper or online statements, make sure you go through your bills every month diligently.

Playing the balance transfer game – I know folks who carry balances, and keep playing the balance transfer game to keep ahead without making any effort of headway to paying down their credit card debt. This is another silly mistake that simply keeps you trapped in the credit card debt game. If you have credit card debt and are looking to eliminate it, it is perfectly alright to use 0% balance transfer offers to pay down your debt faster. But to simply go from one card to another is sheer madness.

Running a balance to take advantage of 0% offers – More often than not, you will get credit card junk mails offering you 0% APR for purchases for up to a certain introductory period. It is very tempting to buy something you cannot afford on your card if it only charges 0%. Avoid that. You should never buy anything you cannot pay off in full. Many furniture stores offer the same thing, 0% financing for 12 months or even 24 months. Don’t fall for it. Using your credit card this way is the surest way to fall into debt.

Using your credit card as an ATM – Please, please, please – do not use your credit card at the ATM. The money you get will be considered cash advance and you will be charged an interest rate. Use you ATM instead and simply get cash from your bank account!

Reliance Liquid Exchange Traded Fund NFO

The Reliance Liquid ETF will be the second liquid ETF to be launched on the NSE. The Liquid BeES being the first one.

This is an ETF that will invest in a portfolio of short term government securities, money market instruments, and other debt securities of short and medium term maturities.

The minimum application amount during the initial offer will be Rs.5000. After it lists, you can buy it from the stock exchange, and there is really no minimum limit outside of what your broker imposes for a particular trade.

The fund plans to charge expenses to the tune of 2.25% of weekly average net assets, which seems a bit high to me, especially because this fund is going to invest in short term securities which generally have smaller returns, and this fee can eat into those returns quite easily. Compared to this, Liquid BeES has an expense ratio of 0.60%, which is significantly cheaper.

Personally, this kind of thing makes me want to wait and watch, and see how the fund develops over the years. There is not enough information right now to tell you that the extra money you pay in fee will result in superior returns, so why pay more right now?

You also don’t know whether a market will develop for the Reliance Liquid ETF, and whether there will be active buying and selling in the secondary market for this ETF. If an active market is not formed, then that could mean not getting good quotes for your investments, and that’s not good at all.

I really can’t think of any good reasons for getting into this NFO, but if you have one, — do leave a comment.

Disclaimer: This is just my personal opinion, and not investing advice of a professional money manager that you could follow.

10 tips for using credit cards wisely

Mr Credit Card is writing a series of post for me while I’m away. Here is his first post about tips on using credit cards wisely. For full disclosure, Mr Credit Card carries the Amex Platinum Card and the Chase Freedom as his main Visa.

Here are some quick tips on how to use your credit card wisely. Though it sounds simple, most people do not fully follow them. So here’s my list of tips.

1. Always pay your bills in full – To be honest, I feel real stupid writing about this one. But paying your bills in full every month is the best tip I can think of in terms of credit card use. By paying your bills in full every month, it frees you from “credit card debt”. If you pay your bills in full every month, it does not matter if credit cards increase their rates. One of my cards raised their rates by a few percentage points citing “economic circumstances”. Since I paid in full, it did not bother me one bit. But though I feel kind of foolish mentioning this point (since it is so basic), I realize that outside of the credit card world, many people and nations are in “debt”. In fact, every OECD country has debt to their eyeballs. If only they had taken this advice of pay their bills in full and not borrowing to pay their bills!

2. Use AutoPay Feature and Pay Your Bills On Time – Paying your bills on time is the quickest surefire way to improve your credit score. And you should always pay on time. The best way I have found to do so is to use the autopay feature where you set up your bank account to pay your credit card automatically each month. Some people prefer to check their statements manually before writing a check. I would say that is fine as long as you do not forget!

3. Make sure your credit card pays you rewards – Assuming you follow rule 1 and 2, then it is imperative that you use a credit card that pays you rewards either in the form of cash rebates or frequent flier miles. A good friend of mine used to have only one credit card. But he paid his bills in full every month and he had never carried a balance. But he had a Visa from one of his local banks and they charged an annual fee, but the card had no rewards. There is absolutely nothing wrong with paying an annual fee if the card has got great benefits. But his situation was ridiculous.

The lesson is always get a card with rewards. It could be a cash rewards credit card or an airline credit card (whatever suits your needs). But make sure you earn something for using your credit card.

4. Use Your Rewards Quickly – Since the financial crisis, credit card issuers have gotten very strict with cardholders. Having a late payment on another account, and you may find your account closed, interest rate raised or credit limit slashed. If your account is ever closed by a credit card issuer, you could lose all your rewards that you have earned for the period. Some credit cards pay you rewards annually and you could lose them all if you card is closed on the 11th month just before your card anniversary date! In some respects, airline credit cards are better because once you have earned your miles, they are transferred about every month into your frequent flier account.

5. Do not take co-signing a credit card lightly – While there are cases where co-signing makes sense (like when you are co-signing a card for your college student), it can also come back to haunt you if you the person you co-signed for is late on their payment or defaults. Your credit score can take a huge hit as a result. Be very careful.

6. Use your auto collision insurance – Most credit cards have auto collision insurance. Hence, when you rent a car and pay with your credit card, you do not actually have to buy the auto collision insurance from the car rental company. In fact, they’ll probably be surprised if you turned them down! Just make sure you check your terms and conditions with your credit card issuer before you rent your next car.

7. Make use of your extended warranty feature – Many of the better credit cards also have the extended warranty feature. In most cases, this extends the warranty of the product by one year (over the manufacturers’ warranty). Many stores try to upsell you on product insurance. Truth is this is mostly a waste of money and if you have a good credit card, just remember that your warranty is already extended when you pay with the card.

8. Make use of accidental damage coverage – Some of the better credit cards have this feature where if a product you bought with your credit card gets stolen or breaks during a certain period from your purchase date, you can get a refund from your credit card. Remember it and make use of it should something like that ever happen to you.

9. Make use of your credit card’s shopping portal – Some credit card companies have set up shopping portals whereby you can shop online at well known retail stores through your credit card account. If you do so, you can earn quite a lot of cash rebates. Many people do not fully make use of this. Best thing to do is to log into your account and explore these features.

10. Combine credit cards – To get the full benefits of credit card rewards, you should use a couple of credit cards to get the most benefits. For example, using a cash back credit card together with a gas credit card will often earn you more rebates than using a standalone card.

I can think of more tips, but I think I’ll stop here. Hopefully, you will find these helpful.

5 Factors that cause impulse buying

I engaged in a bit of impulse buying recently, and bought a Sony Blu Ray Player, that I totally didn’t need. I don’t regret it because I have been eyeing one for a long time, but I was thinking about what leads to impulse buying. I did a little research and found several interesting articles that discussed reasons that lead to impulse buying.

Here’s what I found:

1. Navigating through categories lead to impulse buying: I found this paper on e-Commerce that had a very interesting study on impulse buying and what causes it. The paper studied habits of consumers shopping online, and found that people browsing through products by clicking categories were more likely to buy something on impulse than people searching for stuff online. The rationale is that people navigating through categories get exposed to a much greater breadth of products than people looking for products through search.

2. Power Distance Belief (PDB): I found this research paper that discusses the concept of Power Distance Belief (PDB) and its impact on impulse buying. I am not sure if I fully agree with it, or even understand it, — but it’s a really interesting and novel take on the subject. Power –distance belief — is the degree of power disparity that the people of a culture expect and accept. Higher the PDB, the more a person expects and accepts disparity in power. Eastern cultures like China and India have a high PDB and western cultures like America have a low PDB. A low PDB results in greater impulse buying, and a high PDB results in lower impulse buying. The reason for that people is eastern cultures who expect more power disparity, are also brought up to practice self restraint much more than people in western cultures who don’t expect so much power disparity.

It is easier to digest the fact that people who have more self restraint are much more likely to avoid impulse buying than people who don’t have that level of self restraint. To stretch that concept to cultures and expect power disparity and such, — well that is something I am not too sure of, and will leave it to you.

3. Prosperity: I really don’t need research to tell me that prosperity leads to impulse buying. During the peak of the recession – impulse buying was not even something I thought about, let alone engage in. Now, that the situation has markedly improved, — a lot of people are engaging in it, including myself.

4. Shiny stuff causes impulse buys: According to this piece, things that are sparkly, noisy, jiggly, furry, fuzzy, or have any other feature that makes them draw attention will sell well on impulse. This makes sense too, because the more attention something draws, the more likely it is that you will think about it and end up buying it.

5. Price: This factor is the most talked about when it comes to impulse buying. A lot of people say that they indulged in impulse buying just because something was on a discount.  I am sure deals and discounts contribute to impulse buying, and when we see something priced much lower than what we are used, — that triggers a desire to get that thing and save money.

A large part of all purchases are attributed to impulse buying, this is undoubtedly good for retailers, but it’s not as good for consumers. I say that because a lot of my own impulse buys don’t end up getting used at all, and I regret spending any money on them.

Principal Precious Metal Fund NFO

Principal Precious metal fund is a fund of funds scheme, which means this fund will hold units of other mutual funds and ETFs. In the case of this fund, it will hold only other ETFs.

As the name suggests this is focused on metals such as gold and silver. This fund will primarily invest in Indian and foreign Gold ETFs and silver ETFs. I do not know of any Indian silver ETFs, so I think at least the silver ETF part would be composed entirely of foreign silver ETFs.

Exit load and Minimum subscription amount of Principal Precious Metal Fund

If you redeem your units within one year of subscription, then you will be charged a 1% exit load. The minimum subscription amount for the fund during the NFO is Rs.5000.

There will be a dividend and growth option, and the default option will be the growth option. So, if you don’t indicate which scheme you wanted to subscribe to, — you will get the growth option by default.

This fund will also be available for setting up a Systematic Investment Plan (SIP).

Asset allocation of Principal Precious Metal Fund

The indicative asset allocation is as follows:

Type of instrument

Minimum Allocation

Maximum Allocation

Gold ETFs – Indian and / or foreign



Silver ETFs -  Indian and / or foreign



Debt or money market securities and schemes of mutual funds that invest in these



As you can see, the main focus of the fund will be to invest in gold ETFs, and the next biggest allocation is for silver ETFs.

Some Risks

In addition to the regular risks facing funds, this one faces exchange rate risk too because it plans to buy securities in the overseas markets.

So far, all ETFs that track gold in India actually hold physical gold as their underlying assets. However, some Gold ETFs abroad don’t hold actual gold, but create derivative contracts that are supposed to track the price of gold. Indian investors should keep in mind that even though they are buying a precious metal fund, they face an extra risk because some of these funds may not hold real gold, and be composed of derivatives contracts that track gold or silver.

The total annual recurring expenses of this fund are expected to be 0.75% of weekly average net assets. Since this is a fund of funds, this expense is charged to you over and above the expenses of the underlying funds.

With gold and silver rallying the way they are, it is not surprising to see new funds throwing their hat in the precious metal ring. I’d personally, much rather buy gold ETFs and silver coins directly if I was interested in this kind of thing, (instead of paying fee for a fund of funds) but that’s just me.

Disclaimer: This is just a summary of this fund, and my personal preference, not investing advice tailored to your specific situation.

How to enable internet on iPhone in India with Airtel

One of the things I wanted to do during my vacation here was to enable internet on my iPhone. I got a lot of conflicting information about this, and that delayed the process, but otherwise, it was a pretty simple thing to get done.

Before I describe how I did it, let me state that I do not know if this is the best or cheapest way of doing it, but it is just something that has worked for me.

Here is what I did:

1. Get an Airtel prepaid connection. This was the first thing of course. I got a prepaid connection. I didn’t ask about any data plan or anything else; just got a simple connection and activated it.

2. Activate GPRS: After getting the connection I activated GPRS by dialling this number: *567*2# — and following the instructions. The instructions were mainly about which plan you want to chose etc. The whole process takes about 5 minutes for you to go through, and I think Airtel activated GPRS in about an hour or so.

3. Reset Network Settings: After activating GPRS, — I waited a night before doing anything else. I was told by someone who used the service earlier – that Airtel sends you setting details – that are needed before you can go online. While this might be true a few years earlier or perhaps on some other phone models, — this is not necessary on the iPhone 3G.

But, you do have to reset your network settings on the iPhone before it can access the internet, and I got that tip from the comments on this post.

Here is how to do that:

  1. Go to Settings à General à Reset à Reset Network Settings

The system will prompt you with an ugly red button which says “Reset Network Settings”, and on top it says “This will delete all network settings, returning them to factory defaults”

This concerned me a little bit because frankly I do not know what this actually does. All I know is that I hit the button and the iPhone restarted.

When it loaded up the next time, a little “E” appeared next to “Airtel” on the top left on the screen, and internet started working for me!

I have used it for about a day and so far everything looks fine. At the end of it all, the process was fairly simple and straightforward, and the speed is quite decent too. The apps work fine, and I had to just turn on “Location Services” in Settings  General à Location Services to work with the maps app. Everything else worked on its own, and I hope it works for you too!

Quick post on debit card usage

After spending what seemed like an eternity in airplanes, and getting a taste of the Delhi fog, I am finally home for my vacation, and having a great time here.

I thought I’d write about a couple of things in a quick post, as I found a free hour or so today.

First the fog: I can’t describe how much fog there was last week. You had to see it to believe it. Our flight managed to land somehow, but the pilots weren’t able to see very much so they didn’t taxi the airport to get to the gates. Instead, buses came to the plane and whisked away the passengers, and that took forever. I am just glad we were able to land and that didn’t get delayed, well not by much anyway.

Next; some fun I am having with my debit card: This time I have to do a fair bit of shopping, and since all my Indian credit cards have expired, I am heavily dependent on my debit card.

It has become harder to use debit cards because of some new RBI regulations to prevent fraud, and I am facing a bit of trouble in using my debit card for slightly bigger amounts.

I thought I’d do a post on what I have learned over the past few days.

1. Maximum limit of Rs.25,000 per day: I was told that there is a maximum limit of Rs25,000 per day on transactions on your debit card. You can’t make a transaction of more than Rs.25,000 for a day on a debit card. I know this is only partially true because my ICICI debit card was only allowed Rs. 25,000 for a transaction, whereas my uncle used his SBI debit card, and the transaction went through for Rs. 50,000. So, there is definitely a limit, and for a lot of people it is going to be Rs.25000, I am just not sure whether it is Rs.25,000 for everyone.

2. Maximum withdrawal limit of Rs.10,000 per swipe on the ATM: There seems to be some rule that says you can’t withdraw more than Rs.10,000 by swiping your card once at the ATM. The maximum limit is Rs.25,000 in a day, and if you want to withdraw that much, — you have to make three transactions at the ATM. Again, at least a couple of friends told me that the limit is Rs.15,000, but I saw Rs. 10,000 when I went to my ICICI bank ATM.

Now, the fun part is that you can transact thrice and withdraw 25k, but they won’t let you do that at one go.  There must be some good in this, but I can’t think how this helps anyone right now.

3. The two limits above don’t come in each other’s way: You can withdraw 25,000 from the ATM and make a transaction worth that much in the same day. It seems that you can first withdraw 25k, and then go to the store and swipe for another 25k. That works just fine.

If you are planning to buy stuff worth more than Rs. 25,000 with your debit card, then you might face some of these troubles too. The best way to overcome this is to use a credit card on which the only limit is your own spending limit.

Since I don’t have that luxury right now, I am forced to withdraw cash and use the debit card, use a combination of debit and credit cards for the bigger purchases, and in one instance, I was able to pay by check also.

I don’t have any other ideas to deal with this situation, and welcome your suggestions on this. These rules caught a lot of my family by surprise too so I thought that even a post that details the issues without the solutions might be of assistance to a few.

Why the banks are not lending

The following is a guest post by The Weakonomist from

Back in 2007, banks were starting to realize that the loans they were making and selling were possibly going to become a problem. As borrowers started to default into the beginning of 2008, banks began to evaluate their portfolios and project losses. Things didn’t look good. In short, all the banks were going to run out of money unless the government bailed them out. We all know that towards then; end of 2008, the government did just that.

Even though the government loaned the finance industry almost $1 trillion, this was only enough to keep them afloat. Imagine being given just enough medicine to keep you alive, but you’re still bedridden. This is what the banks were dealing with over the course of the year.

Congress gave the banks all of this money, and were shocked to learn the banks were not lending it out to you and me. They asked the banks why they weren’t lending it out. They’re response: “you won’t let us.” Congress told the banks to be more careful with their lending. Because of layoffs and people already borrowing too much, there’s no one out there worth the risk to loan money to.

So the banks do have a little bit of money to loan, but they can’t loan it to us because we’re too risky. What are they doing with all that money? Well they’re loaning it to someone. Businesses? Nope. Investors to buy securities? Nope.

They’re loaning it to the government. Well why does the government need to borrow money? They need to borrow billions of dollars to bail out the banks, thus giving them enough money to loan to us. The problem is, when Congress decided to give the banks this money, they didn’t require that they do anything with it.

The banks are investing in treasury securities. These are sold by the government to raise money. So the government is raising money, by borrowing from banks, to bail out banks. A mess is an understatement.

Congress still doesn’t quite understand that even this is going on. They are still grilling bank executives for not loaning out money, but blaming the recession on them for loaning too much.

If you were looking to invest some money in a safe place to ride out a recession, the government is the place to do it. Generally speaking, the rates at which the government issues their debt are referred to as “risk free” due to the low risk of the government defaulting on their debt.

It’s very tempting to blame the banks for not loaning you money. But look at it from their perspective. They’d love to loan you money, but if they don’t think they’ll make a profit off of you, they aren’t going to loan you the money. So they look for safer investments where they do know they will get paid back. And since the government is loaning the banks money at a cheaper rate than the banks are loaning it back to them, the banks are making a profit.

Don’t blame the banks for doing exactly what they are allowed to do with the money. Blame your Congress who passed the laws allowing the government to loan the banks money, but not passing laws requiring them to loan it to you and me. Government issues their debt are referred to as “risk free” due to the low risk of the government defaulting on their debt.

It’s very tempting to blame the banks for not loaning you money. But look at it from their perspective. They’d love to loan you money, but if they don’t think they’ll make a profit off of you, they aren’t going to loan you the money. So they look for safer investments where they do know they will get paid back. And since the government is loaning the banks money at a cheaper rate than the banks are loaning it back to them, the banks are making a profit.

Don’t blame the banks for doing exactly what they are allowed to do with the money. Blame your Congress who passed the laws allowing the government to loan the banks money, but not passing laws requiring them to loan it to you and me.