## Case Study – When investing for 10 years pays more than investing for 30 years

I started earning when I was 23. Pretty late I guess. Nevertheless, not everything is under our control.

But benefits of starting early cannot be matched easily by other reasonable approaches (like even investing more in later years). And I did some calculations that once again prove that as far as saving and investing are concerned, best advice is to START EARLY.

Next piece of advice? Don’t doubt the two words of the advice above. 🙂

The calculations that follow are based on certain assumptions, which you might question. I have tried to address the concerns later in the post. But I suggest that you focus on the crux of the story here, which is – to start investing early.

Scenario 1:

Suppose a person who starts earning at 23, is able to save Rs 1.5 lacs every year for next 10 years. He then stops (at 33) and doesn’t invest anything till his retirement.

What will his corpus be at the age of 60 (i.e. retirement)?

I will bypass the discussion on expected returns and how resorting to better asset allocation strategy can increase expected returns. Instead, lets use a reasonable and constant return assumption of 8% per annum.

Calculations show that at 60, his corpus would be about Rs 2.02 crores.

Now remember that this person has contributed a total of Rs 15 lacs from age 23 to 32. And not a rupee more after that.

Scenario 2:

Lets take the case of another person who realizes the power of compounding a little late and starts at 31. He continues investing Rs 1.5 lac every year till his retirement.

In total, this person would have contributed Rs 45 lacs in 30 years.

And he will end up with a corpus of Rs 1.83 crores.

See the difference?

First person invests Rs 15 lacs in 10 years and gets Rs 2.02 crore.

Second person invests Rs 45 lacs in 30 years and gets Rs 1.83 crore.

Now we all know that its not possible to invest a very large amount at the start of our careers. The annual investments gradually increase with increase in income. And in reality, investments neither stop at 32 (like first scenario) nor they remain constant between ages 30 to 60 (like second scenario).

So this is indeed a theoretical exercise. But it serves the purpose of highlighting the importance of starting early.

Scenario 3:

Now lets take another scenario:

Suppose your parents decide to invest Rs 1.5 lacs for 2 years after you were born. Then from the age 2 to 60, neither you nor your parents contribute anything. Unreasonable assumption but lets stick to it.

Result?

Corpus of Rs 3.15 crore at the age of 60.

The reason for this astonishing outcome is that Rs 3 lac invested immediately after your birth had many decades to compound.

And by the time you turned 23 and were ready to earn your first rupee, your corpus was already in excess of Rs 18 lacs. That’s a good amount to start with. Isn’t it? A big snowball to start rolling for someone who is yet to earn anything. 🙂

Again the assumption of Rs 3 lacs can be questioned. An amount of Rs 3 lacs was huge 23 years ago. But again, this is a theoretical exercise. It only proves that starting early works. It just does.

But don’t get disheartened if you are unable to invest in line with either of the first two scenarios or if your parents did not do anything like the third one. 😉

When it comes to compounding, there is no amount too small to start investing.

And remember that in initial years, you will not notice the impact of compounding. Its only after years that compounding starts to show its magic.
Compounding is like the god. Your prayers will only be answered after years.

## Getting Your Personal Finances in Order

There are people who struggle through their entire lives – just paying bills, loan EMIs and continuously doing things (or job) they don’t like. Lets aim not to be like those people.
There are people who have no idea how they manage to live paycheck to paycheck. Somehow, they are still able to save some money here and there. But that’s mostly because of luck and not their skills. Lets aim not to allow luck to play such a big role in our lives.
Then there are people who live under this constant fear of not having enough money for their short- and long-term goals. This is inspite having decently stable and regular incomes. Obviously, these people are doing something wrong. Lets aim not to be in the same category as these people.
Lets rather aim to become a person – who broadly knows how money works and he uses that knowledge to make it work for himself. This will make him prepared, confident and happy with his financial situation.
But the journey to become such a person will not be easy.
It will be tough at first.
Tiring in the middle.
But eventually, it will be worth the effort.
Now its my personal feeling that aperson who doesn’t appreciate the importance of personal finance, is unlikely to save or invest a lot of money. He will instead end up spending whatever he can. This might seem like the right thing to do now. But remember, that as you edge towards retirement and your regular income is about to be extinguished, you will have nothing left. Your kids might not be of much help too.
On the opposite end can be a person, who is quite frugal (doesn’t spend a lot) – but still does not understand the real meaning of personal finance. While he might have money stashed up in bank, his money might not be getting utilized to its fullest extent.
So understanding personal finance is absolutely necessary. And luckily for us, its not rocket science. But most people still get it wrong.
Get your + family’s life and health insured, save some money for emergencies, invest for long-term goals, spend wisely and more importantly, less than what you earn.
Its pretty simple.
As far as my own personal finances are concerned, I have a system that works for me. Its not perfect. But given my current circumstances and priorities, it works for me.
But the same system might not work for others.
This is the key point to understand here.
Here, there is no one size fits all.
You need to think for your own self.
Don’t worry if your financial life is still not where you wanted it to be.
But also, don’t keep waiting for the perfect personal financial strategy to find you. It really takes time to see what works and what doesn’t with money. Empower yourself with knowledge – read books, Stable Investor ;-), reliable online resources and take action.
Don’t just copy others or keep waiting as both can be financially harmful.
If your aim is early retirement, then ask yourself – Am I doing something to retire early?

Am I saving (or investing) more than regular people (who are scheduled to retire at 60)?
If you want to save money for travelling around the world, are you actually doing something for that? Remember, that just waiting (and ofcourse saving money) to travel when you grow old, doesn’t work. You travel a lot betterwhen you are young to middle-aged. Old age makes travel a not-such-an-exciting option for most people.
I specifically took up the points of early retirement and travelling because these are close to my heart. 🙂 Now talking of things close to my heart, let me confess something:

I don’t save and invest as much as I possibly can.
Why?
Because, I don’t want to keep saving without spending.
Sounds odd?
I spend a lot of money on travelling. Continuously earning, hoarding and not spending is something that I don’t aim to achieve in life. Ofcourse, getting rich is fine with me. But being the richest man in graveyard is not my thing.

Don’t get me wrong here.
I am not saying that I don’t save or invest.
I am also not saying that spend everything you earn.
All I am saying is that there should be a balance between the two.
You shouldn’t compromise the present by not spending at all. But you also shouldn’t compromise the future by not saving at all.
Warren Buffett once said:
Who is to say whether it is better to defer a dollar of expenditure on your family – on a trip to Disneyland or something that they’ll get enormous enjoyment out of – so that when you are 75, you can have a 30-feet boat instead of a 20-feet boat. There are advantages to spending money on your family when it is young – giving them various forms of enjoyment, education, or whatever it may be. But it’s crazy to be spending 105% of your income.
That’s so damn right! Isn’t it?
So unless you worship the act of hoarding money, having a balance between saving and spending is the key. I remember reading the below words somewhere:
Save enough money so that you’ll have enough for the future and for emergencies. But spend enough now to avoid looking back with regret.
A new financial year has started. And I think that it’s the right time for you to think about your personal finances.
Your personal finances might be in a mess. Accept the hard truth. And make a conscious decision to do something about it.
Its also possible that you might already be doing great. But there are always things you could have done better.
So take out some time to assess your networth, goal readiness, risk coverage, investment plans, etc. If someone is trying to stop you from doing it, do this to them. 😉
Strive to make your money decisions smarter, wiser and more efficient. Becoming wise is a slow game. But it is necessary if you have a long way to go. And I am sure you have.

Have a very happy financial year!! 🙂

## What I told a Frustrated Guy in Job. At 37, He Retired few Months Back – Part 3

This post was long due after I did Part 1 and 2 in April this year. Though the story of this guy was covered in first two parts, I wanted to do a follow up post highlighting some of the important points raised in comments of the post.

Readers like Krish, Bharat and many others made some noteworthy points, which I feel need to be shared with a larger audience and hence this post.

You can either read the complete story in detail in Parts 1and 2;Or just go through the broad outlines below:

This person had a big home loan, was earning decently, but just sufficient to make ends meet (after paying his monthly loan EMIs), had very little savings and investments and more importantly, was frustrated with his job and financial situation.

Luckily, he inherited a plot of land which till a few months back, he did not know what to do with.

What he does afterwards, is what changes his life:

Step 1: Sold off the land plot for Rs 9 Crores (post tax).

Step 2: Closed his home loan of Rs 70 Lacs.

Step 3: Created an Emergency Fund of Rs 30 Lacs (which covered his family’s expenses for next 2 years).

Step 4: Put Rs 4 Crores in Fixed Deposits, which provide approximately Rs 1.75 Lacs every month in interests (post tax).

Step 5: Bought 7 flats for Rs 3 Crores

Step 6: Bought a small warehouse (godown) for Rs 1.1 Crore

Step 7: Put 5 (now 6) of these flats on rent for a total of Rs 1 Lac a month.

Step 8: Put Godown on rent of Rs 60,000 a month.

Step 9: Quit his day job

Note – Actually he quit his job before the godown went on rent.

To summarize, he used proceeds of selling his inheritance to create a monthly income stream of more than Rs 3 Lacs. His average monthly expenses are between Rs 50K to 60K.

Now this is the current situation. And we do not know what might happen in future.

Point 1: Cashflow is great in terms of interests, rents etc., but over the years expenses also rise. Not only because of inflation, but also because of altogether new expenses like kid’s education, medical bills, renovations, etc.

Point 2: If investment in properties (flats) is made for capital appreciation, then one should understand that it is not that easy to sell off properties. Banks are generally skeptical about lending to buyers for older properties.

Point 3: Once again if investment in property is made for capital appreciation, it makes sense to buy in relatively undeveloped areas. Then wait for 3-5 years and sell them off. In this way, one can cash out on overall upgradation (read: development) of that area, and the increase in desirability quotient of that area. If one waits for more than 5-7 years, there’ll always be a problem of “Old Flat” perception.

Point 4: In rental properties, each time a tenant vacates, it requires big expenses in form of painting, cleaning, plumbing, unsolicited breakdown of utilities, etc to get the flat ready for next occupant. This eventually reduces the actual rental income coming from the property.

Point 5: Dependency on rental income often proves to be fickle and it does not even beat inflation. Since chances of real estate markets being in bubble currently are high, expectations of very high capital appreciation would be wrong.

Point 6: There is an increase in people seeking help / donations / loans when they realize that you are flush with funds and living off without working for anybody else.

Point 7: With so much money coming in every month, life style changes and expenses on luxuries like foreign trips, electronic gadgets tend to increase. These eventually reduce the surplus every month.

Point 8: Could have chosen not to close the home loan and continue getting tax benefits. The money could have been used to earn hefty interest.

Point 9: Plan of taking another loan (>2 Crores) and use the monthly surplus to pay EMIs can be a big risk as it greatly reduces the free cash available every month.

Point 10: Plan of starting a money lending business is a big no-no if one gives any weightage to peace of mind.

Point 11: All the proceeds from sale of property could have been put in debt funds (50% Growth, 50% Quarterly payout). After decent quarterly payout accumulation, the money could have been invested in Equity Mutual Funds and Residential plots in small towns as in long term, only MFs, Direct stocks and Land are game changing wealth creators.

Point 12: This person should not have quit his day job until his planned business had kick started. Any business started after inheritance is more of a time-pass and chances of it succeeding are pretty low.

These are few of the major points which came out of the discussion which took place in comments of the post. I personally do not subscribe to quite a few like not paying off loan (I love being debt free). But I also think that few of points like expenses related to properties are quite valid.

Overall, I think the approach taken has been quite prudent, driven by common sense and most importantly focused on generating cashflows. But finally, only time will tell whether its correct or not.

## What I told a frustrated guy in job. At 37, he retired last month – Part 2

Before I continue from where I left in part 1, I will briefly summarize what happened earlier for benefit of new readers…

A few years back, I met a guy who was frustrated with his job and life. He had a big home loan, was earning decently, but just sufficient to make his ends meet every month. Surprisingly, he had a plot of land worth several crores which he till that date, had failed to utilize productively.

In part 1 of this post, I suggested following 5-point action plan to him:

1. Sell the land & use the money as described in steps 2 to 5.
2. Pay off the home loan
3. Create an emergency fund
4. Set aside money in fixed deposit which would provide monthly interest income equivalent to his monthly salary.
5. Buy flats and rent them out to create additional streams of income.

Now let’s continue with what happened next…

This guy gave me a call last Sunday and told that he had actually thought a lot about what I told him two years back. He then discussed the approach with his parents and other family members before taking a final call 6 months back.

What he did then is summarized below:

1. Six months back, he sold off the plot of land for Rs 9 Crores (post tax).
2. Almost instantly, he paid off and closed his home loan of Rs 70 Lacs.
3. Parallely, he created an emergency fund of 30 Lacs to cover his family’s expenses for next 24 months.
4. Five months back, he parked Rs 4 Crores in Fixed deposits, which now provides him with a post tax monthly interest income of more than Rs 1.75 Lacs (Much more than what he drew as his last salary).
5. In next two months, he bought 7 flats worth Rs 3 Crores and managed to put 5 of them up for rent. Rental income from these 5 flats is more than Rs 80,000 per month. He is still waiting to put remaining two flats on rent.
6. Just two months back, he bought a small warehouse (godown) for Rs 1.1 Crore. As of now, he is pretty close to cracking a deal with a logistics provider for renting out the property. Probable rental income from this property is expected to be around Rs 75,000 every month.
7. With home loan paid off, and earning in excess of Rs 3.2 Lacs a month without going to office for somebody else, this person quit his job (read retired) after celebrating his 37th birthday last month.

 A brilliant example of how to use your inheritance

Astonishing…isn’t it? How life can change with one simple decision.

A reader commented in part 1 of this post that this guy was simply lucky to have inherited such a plot of land.

I am not sure whether its right to give all credit for this guy’s success to luck. Agreed that you need to be lucky to inherit something like that. But I assure you, mentally and emotionally, it’s not an easy decision to sell inherited properties. It’s a tough call to make. It may seem simple up front. But it is quite a difficult decision to sleep with. Anyways, we are not trying to judge anyone or anyone’s luck here.

The fact is that this guy does not need to work again for anybody else.

And for emphasis, I repeat.

This guy does not need to work again for anybody else.

And just to give you all an idea of how a person’s decision making changes when passive income starts flowing in….this person told me something, which will further astonish you.

He is currently earning Rs 3.3 Lacs from his investments. With renting of two additional flats, he might start earning close to Rs 3.7 Lacs. He told me that frankly speaking, he did not need more than Rs 50,000 every month for his normal expenditures. This left him with Rs 3.2 Lacs surplus every month. He himself suggested that he was thinking of choosing between the following 3 options to park his surplus funds:

1. Take property loans (approx Rs 2.5 Crores) which would use up this Rs 3.2 Lacs in EMI. The property in turn could again be rented out to generate more cash.
2. Put money in stock markets using SIPs in good mutual funds and direct equity investments.
3. Start a small money lending business.

For the time being, it’s irrelevant what I suggested him and what he eventually chooses to do. But this tells how a person starts thinking of ways of making money once he is out of the mad rat race of getting salary every month. The decision making and thought process changes completely.

We talk about value unlocking in properties held by companies. And here we have an exceptional example of how normal people like you and me can unlock value from existing properties. Once unlocked, the money needs to be managed as prudently as possible. And with systematic approach like the one taken by this person, its now money which is creating more money.

By the way, he is not frustrated any more. 🙂

What are your thoughts on this?

______

## What I told a frustrated guy in job. At 37, he retired last month – Part 1

Isn’t this like a dream come true for all of us? Atleast for those of who are not working for themselves but for somebody else?

This post is about a person, with whom I had a casual chat over lunch some two years back. At that time, I (in my wildest dreams) could not have imagined that this talk would have such a big effect on his life.

But as it has been rightly said in Alchemist,

“When you want something, all the universe conspires in helping you to achieve it”

…in hindsight, it now seems that our little chat was the catalyst for something big which was about to happen in that person’s life.

He called up last Sunday to thank me for the little chat I had with him two years back.

At first, I did not realize what he was thanking me about. But when he told me everything, it was like a jaw dropping moment for me.

And the first part of the story goes like this…

While doing my MBA internship in an organization, I came across a guy who looked quite old for his age and was a quite frustrated with his life. One day while having lunch together, he became aware of my interest in stocks and wealth creation in general.

And this got him started. He then told me quite a lot about his personal and financial life.

He had been working in that organization for last 15 years. He was frustrated because though he was earning well, he was still barely breaking even every month end. He stayed in a decent 2BHK flat in New Delhi, which he had purchased 2 years back using home loan. The loan still had almost Rs 70 Lacs of unpaid amount. And this is what ate up almost 60% of his salary. Apart from the house, he had almost nothing to show for savings. To be exact, he just had a couple of lacs in PF, and less than a lac in fixed deposits.

But he had something else which could be a game changer.

Sometime back, he had inherited a plot of land.

And this plot of land was worth almost Rs 7 Crores at that time!! Yes. You read it right. It was worth more than 7 Crores! And as of then, that plot of land was lying vacant and was not suitable for cultivation.

I was surprised when I came to know of this. I was surprised that even after being a big Crorepati (many times over), he was still working for someone else, and was unhappy with his finances!

What I then told him was simple common sense and none of the usual financial gibberish you get to read on this site 😉

I told him that if he was ready to take a decision based on simple common sense, his life would change for the good. But for that he would have to part with something which he had inherited. And that in itself would require a lot of emotional will power.

He seemed quite eager to know what I planned to tell him. And what I told him is listed in 5 steps given below:

1. Sell that plot of land and use the money as described in step 2, 3, 4 and 5.
2. Pay off the home loan of Rs 70 Lacs
3. Create an emergency fund
4. Set aside money in fixed deposit which would provide monthly interest equivalent to his monthly salary.
5. Buy flats and rent them out to create additional streams of income.

This is what I suggested him two years back. And last Sunday, I received a call from him.

But I will share rest of the details about why he wanted to thank me in part 2 of this Post.

## In 2 Minutes, I Can Tell You When You Will Retire!!

Read the title of this post again.This post will not help you to retire in 2 minutes. But in less than 2 minutes, it will tell you how long will it take for you to retire. And that too without having to make any big and complex calculations.

And you can do it yourself!

But for you to do it, you need to be familiar with TheRule of 72

## What is Rule of 72?

Rule of 72 is nothing but a financial shortcut to calculate the number of years required to double your money.

 Rule of 72 | Calculate Time Required To Double Your Money

For example, if you want to know how long will it take to double your money at 12% interest, divide 72 by 12. The result is 6. And this 6 is the number of years required to double your money. It is as simple as that.

Lets take another example: At 8% interest, which is the average rate offered by banks for keeping your money in recurring deposits and fixed deposits, your money would double in 9 years. (How:  72 / 8 = 9 Years)

Note – This rule is applicable only for compound interests and not simple interests. Also it works better for smaller numbers.

Lets go further..

## How to Use This Rule of 72 for Retirement-Years Calculation?

Please note that this post does not tell you about the amount required for your retirement. But this neat little number trick will tell you the (approximate) number of years required to reach that amount.

Let us suppose that you need Rs 2 crore as your retirement corpus. And as on date, you have a saving of Rs 6.25 lacs.

Note – I have chosen this strange figure of 6.25 to make further calculations easy.

The assumption here is that you are a rational human being, who doesn’t want to take too many risks with his retirement kitty. And neither do you want to earn comparatively lower returns offered by bank deposits.

So you decide to take a middle path of 10%.

This is higher than 8% offered by National Savings Certificates and bank deposits and and lower than 12% plus offered by inherently risky stock markets.

Now lets back calculate…i.e., starting from the final retirement requirement of Rs 2 Crore.

Mathematically, 72 divided by 10 is 7.20

Now if we get 10% per year for our investments, it will take 7.2 years to double our money. (Using Rule of 72, we know that 72 divided by 10 equals 7.2 years)

Now to double your money from an amount X to Rs 2 Crore, it will require the amount X to be 1 Crore. And using the Rule of 72, we have that Rs 1 Cr doubles to Rs 2 Cr in 7.2 years, i.e

1 Cr to 2 Cr = 7.2 years

Similarly,

50 Lacs to 1 Cr = 7.2 years (Total: 14.4 years)

And so on..

And the calculation continues as follows:

This simply means that starting from Rs 6.25 Lacs, it will take you 36 years to convert it into Rs 2 Cr, which is the target amount.

But wait…

I know you must be thinking that 36 years is too long for anyone to keep saving. But here is the magic. Did you notice that you started from Rs 6.25 Lacs? And you ended being a Crorepati, twice over.

But you did not put in any new money in these 36 years!!

Yes. You need to understand that it takes 36 years to convert Rs 6.25 Lacs to Rs 2 Crore without any additional investment and without doing anything in stock markets. 🙂

That is the power of starting early, when it comes to investing.

The above example is a very simple and basic usage of this Rule of 72.

So in case you decide to make additional investments every year, you can reach the target of Rs 2 Cr much earlier than 36 years.

For example, if you additionally invest Rs 1 Lac every year, then you can reach the goal by 27th Year.

And if you somehow manage to save Rs 2 Lac every year, then you can reach your goal in less than 23 years!!

Try doing 3 Lacs an year and you will retire in less than 20 years. Doing 3 lacs an year means doing 25,000 every month. And if you earn decently, then saving this amount every month towards your retirement should not be very tough.

Warning: This exercise to calculate these numbers for your own retirement can be a scary one. But it clearly illustrates that if you decide that instead of going for one time investment, you are ready to contribute regularly to your retirement fund, then you can drastically reduce the time required to reach your retirement target amount.

So how much are you targeting to save for your retirement? And how much time will it take?