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Financial Planning & Investment Advisory

  • ‘The Secret’ – How to Accelerate your Financial Freedom?

    How to accelerate Financial Freedom

    Everybody wants to become financially independent. But very few actually get there.

    Why?

    There can be various reasons but I think that achieving something like Financial Freedom doesn’t just happen. It requires one to have a serious plan and more importantly, then commit to that plan. And that’s easier said than done.

    Personally, I aim to achieve early financial independence.

    If you were to ask me why then I will quote Charlie Munger – I did not intend to get rich. I just wanted to get independent.

    And that for me is a goal worth having. But let’s not discuss my thoughts. I have already written about it in detail at F.I.R.E.

    Let’s rather talk about you.

    If you are beginning to get comfortable with the whole idea of financial independence or early retirement, then I am sure you would be wondering How much money do I need to Retire Early In India? Or how much is enough for Financial Independence & Retire Early (FIRE) in India?

    It would be best to have a perfect formula for financial independence.

    But there isn’t any.

    Getting the right amount for regular retirement is a tough nut to crack in itself. And here, we are talking about early retirement. 🙂

    But there are thumb rules that can get you going.

    A popular one is – having a corpus equal to atleast 25 times your annual expenses.

    This may be enough for some people but may not be for many others. For some 30X or 40X may be a more appropriate size. It depends on a variety of factors like current age, age of early retirement, life expectancy assumption, inflation % assumption before and after retirement, return estimates before and after early retirement and several other more serious factors like the sequence of returns risk, etc.

    But as I said, if you are just beginning your journey – then the exact accuracy doesn’t matter and you can have atleast some target in front of you – which I think is a good one provided by the 25X, where X is your annual expenses.

    You will, in any case, require several years to reach that first. 🙂 So relax about the accuracy a bit.

    But as you get closer to your goal and/or the portfolio size grows, you need to run numbers more carefully and have additional buffers to make your early retirement plan more robust. And if it sadly means delaying it by a few years or saving more, then so be it. Better be safe than sorry when you are older.

    So 25X is a good aim to have.

    But what about the ‘secret’ that I mentioned in the title of this post?

    Here it is…

    If the X (i.e. Annual Expense) is small, you can save more and, in turn, reach the target of 25X faster.

    Read that again.

    And again if you are still unable to understand its importance.

    Let’s take a small hypothetical example to make this idea crystal clear:

    Suppose your annual income is Rs 12 lac. And your annual expenses (i.e. X) are Rs 8 lac.

    So if we were to use the 25X thumb rule, then you would need 25 times Rs 8 lac – which is Rs 2 Cr as Early Retirement Corpus. And to achieve it, you will have Rs 4 lac every year (Rs 12 lac income minus Rs 8 lac expenses) to save for the goal.

    Note – I have ignored inflation, etc. for simplicity here.

    Now remember what I said earlier – If the X (i.e. Annual Expense) is smallER, you can save more and in turn, reach the target of 25X faster.

    So let’s make the X a little smallER.

    Your annual income is Rs 12 lac. And your smallER annual expenses (i.e. X) are Rs 6 lac (reduced from Rs 8 lac earlier).

    Now if we use the 25X thumb rule, then you would need 25 times Rs 6 lac – which is Rs 1.5 Cr as Early Retirement Corpus. And more importantly, to reach it you will have a higher Rs 6 lac every year (Rs 12 lac income minus Rs 6 lac expenses) to save for the goal.

    So the target has reduced from Rs 2 Cr to Rs 1.5 Cr. And you also have a higher amount of Rs 6 lac per year (instead of Rs 4 lac) to save for the goal.

    So it’s a double benefit of having a reduced target and higher savings capability.

    Decreasing your expenses (I know its tough) increases the potential to increase the savings – this fact alongwith lower target requirement can potentially accelerate your plan to reach the final corpus earlier.

    Think of it like this – If your expenses are low, you will need a smaller corpus to support it for years to come. And a smaller corpus means that you will require a lesser number of years to achieve it. But if your expenses are high, then not only will your required corpus would be high, but it will also require more time and probably a higher saving rate.

    And this is the real secret!

    Remember – this 25X figure is just a thumb rule.

    And you also need to understand the risks that such thumb rules or any early retirement plan is exposed to – like sequence of return risk, unexpected and unplanned expenses, living longer than you estimated(!), extremely high inflation in retirement years, high medical expenses inflation that isn’t covered by your health cover, etc.

    The actual number will be different for different people and circumstances.

    The idea here was to show that higher your saving rate, the sooner you can potentially retire.

    If you save just 10% of your income, then you can forget about early retirement. You need to save a lot more – like 30, 40 or even more than 50%. I am able to do more than 50% as I aim to achieve financial freedom by 40. Fingers crossed. 🙂

    So that was about the simple thumb rule for computing how much money do I require for financial independence and early retirement (FIRE).

    I like to talk about financial independence on Stable Investor quite regularly. It is one of the big financial goals I have. But I must also warn you – the maths of FI is such that you can speed up the theoretical goal achievement if you reduce expenses by a lot. But then, that would mean you are sacrificing your present for the future, which is good to an extent but not beyond it.

    We always know how much money we have but we never know how much time we have. So we cannot entirely sacrifice the present.

    Financial independence is a difficult goal which most people won’t achieve.

    But even if you were to achieve it partially, even then it would provide you with a lot of control over your financial life. A solid early retirement corpus with reasonable return expectations will cover basic living expenses for longer than your life expectancy. That’s a good achievement no matter when you achieve it.

    I still feel that aiming for some degree of financial independence (and not early retirement) via a high saving rate is a fantastic goal for most people. More so for those who see real threats to their jobs in near future. You never know when you might be forced to retire early & involuntarily.

    At the same time, I recognize that not everyone is eager to achieve early retirement. And there are also people who like their luxuries. And that is fine as it gives them happiness.

    The bottom line is that your goals are unique and you need to do what is necessary to achieve your financial goals. If financial independence is not one of them, then you can ignore it. But if it is and it’s more than a passing wish, then you need to do something about it. The independence that a big corpus provides is amazing. It even gives you that magical ability to say F*** Y** to anyone without thinking too much about the consequences. 🙂

    Imagine that kind of freedom!

    So if you are planning early retirement in India, then sit up and take action. Just wishing and asking questions like how much money I need to retire early in India will not be enough.

  • Do you even have the ‘Right Mutual Funds’ in your portfolio?

     

    Best Mutual Fund Portfolio

    You have been investing in mutual funds for some time now.

    But in last few months, 3 big changes took place. And all those changes can and will impact all mutual fund investors in big ways.

    You remember the 3 changes…don’t you?

    • Introduction of Long-Term Capital Gains Tax on equity
    • Changes in existing Mutual Funds attributes due to SEBI’s categorization and rationalization push
    • Shift to TRI for performance benchmarking, which will reduce the so-called over-performance of the funds

    I repeat. These are big changes.

    Why?

    I have already explained it in detail in the post titled MF Investors and 3 Big Changes that will Impact their Portfolio and Returns and here and here. So won’t repeat it here. But if you haven’t read these posts, please do so for your own good.

    I am writing this post to bring in front some questions that need to be asked by all mutual fund investors NOW!

    This ofcourse is not a comprehensive list.

    But it will help you get started in the right direction. So here it is:

    • All future profits from the sale of mutual funds will attract LTCG tax. This means that you need to be careful so as to reduce the impact of this tax and allow more money to remain invested for longer (for compounding). This also means that you should be investing in funds, in which you can ‘ideally’ remain invested for long without much need of selling. So do you have such funds in your portfolio?
    • Have you been investing in flavor-of-the-season funds (or last year’s top equity fund) till now which required you to enter and exit every 1-2 years? If yes, then do you realize that this strategy may not work very well in future due to the impact of LTCG tax on each reshuffling of funds?
    • Do you understand that due to the two above-mentioned points, your portfolio should now be curated strategically to have funds that need comparatively less maintenance and can survive various market scenarios?
    • Do you know how to find such funds that fit into the above criteria (which have become more relevant now than ever before)?
    • After SEBI’s recent categorization & rationalization exercise, several funds have changed their mandates, categories, etc. This means that these funds will not be doing what they were doing till now (atleast to an extent). This also means that the returns delivered by these funds till now may not be possible in future. Do you know if these are the very funds that are still part of your portfolio?
    • Do you understand that not all funds have changed their mandates and categories in the SEBI-pushed rejig? So even though some funds may have to be kicked out of your portfolio, it is possible that many are still good enough to remain invested in. Do you know which funds?
    • Do you understand that some of the funds that you are holding may not remain in line with the asset allocation that you had initially bought them for? For example: Suppose you bought a fund that earlier was a multi-cap fund. But after the re-categorization, it has become a mid-cap fund. So going forward, about 60% of your money would be invested in mid-caps. This is not exactly what you bought the fund for. Isn’t it? Remember you bought it for its multi-cap(ness). So there will be a need to change the funds. Do you know which all of your existing funds have changed so much that they should be exited from?
    • Some of the funds, despite changing name and attributes and categories, may still be inherently doing what they were doing earlier. Therefore, no point exiting such funds. This is all the more important as exiting also means paying exit loads and additional taxes. So do you know which funds you hold are still the same even after getting their new clothes?
    • Do you know that after the change in benchmarking for mutual funds, it will be more difficult for the funds to beat their benchmarks like earlier? Fund managers will now have to work extra hard to deliver benchmark-beating returns. This will be difficult for them to manage on a consistent basis. So do you have funds that have been able to beat new TRI-based benchmarks in past? Do you even understand what I am talking about??
    • Do you understand that the two changes in combination, namely i) using TRI for benchmarking and, ii) limited universe of stocks available for fund managers to invest as per SEBI’s new guidelines, hints to the fact that more and more large-cap funds will find it difficult to beat their benchmarks? This also means that there is a case for investing in index funds for a subset of investors now. Do you realize why this might make sense for you too?

    Thought provoking… Isn’t it?

    Even I have reviewed my personal mutual fund portfolio in last few months and made changes where necessary.

    It goes without saying that proper review of your existing mutual fund portfolio is now more necessary than ever before.

    Chances are high that you may want (or have) to weed out unwanted schemes from your mutual fund portfolio as soon as possible.

    I understand that you might be worried about exit loads and taxes. But these are short-term pains and frictional costs that must be borne for long-term course correction.

    In fact, take it as a forced blessing-in-disguise. You are being forced to think properly about how to build a robust, all-weather mutual fund portfolio that is worth remaining invested in for several years.

    So go on… identify funds that should be exited from your portfolio. Find out funds that are worth bringing in to your portfolio based on proper fund selection and above discussed questions.

    Also ensure that your final fund portfolio (after all the changes) – maintains proper asset allocation, is reasonably diversified among various caps and fund houses, has funds that can be held for several years, doesn’t have adventurous funds which may cause regret in future, and most importantly is built on common-sense.

    This is an opportune time for you to build a mutual fund portfolio wisely and safely and that is well-positioned to create wealth and achieve your financial goals.

  • FIRE = Financial Independence and Retiring Early

     

    Financial Independence Retiring EarlyNow that’s a new FIRE to burn inside you.

    And wouldn’t you want to be FIREd like that? 😉

    If words like Financial Independence, Financial Freedom and Early Retirement fascinate you, then you would be interested in reading further.

    These words can mean different things to different people:

    1. Having enough money to not work ever again
    2. Having enough money to not work for several more years
    3. Having achieved a reliable combination of financial assets + passive income + part time income, to not worry about money ever again.

    Technically, points #2 and #3 cannot be referred to as ‘real’ financial independence. Its more like semi-financial freedom. But still a commendable achievement no doubt.

    ‘Enough money’ by itself demands explanation here.

    Atleast for me, it means being able to continue living my current life style and meeting all future financial goals.

    All that is fine.

    But you might now ask…

    Why Financial Freedom?

    I have written about this earlier too (Financial Independence Day) and reiterate here that financial independence has intrigued me for years.

    But its mostly because the freedom it provides and not because I can spend more money without having to think about it.

    Charlie Munger once said something that is very relevant here:

    Like Warren, I had a considerable passion to get rich, not because I wanted Ferraris – I wanted the independence. I desperately wanted it.

    So essentially, financial independence is about not being trapped in the game that we are so accustomed to play –

    Earn, Spend, Repeat.

    It is rather about being in that (money) game and yet remain detached.

    What About Me?

    I am still years away from my F.I.R.E.

    I am 31 now. So its not very late considering that I have been working towards it for last few years.

    But many people (including close ones) ask me about why do I even want to ‘Do Nothing’ after few years?

    I have to then explain them that Financial Independence is about having the ‘option’ of not working (or working part time on things you like). It doesn’t mean that I won’t work. Though being in a state of FI means that I am not forced to earn an active income in order to fulfill my financial responsibilities.

    There is difference between retiring and achieving financial independence, which most people fail to understand.

    Technically, financial independence (FI) is not exactly the same as early retirement. You can be in a state of FI and still continue with your job or business for as long as you want.

    A famous early retiree Money Mustache explained it like this:

    “This is the whole point. [During retirement,] you’re not going to sit around doing nothing unless that’s your true personality type… Retirement to me just means you’re free to do what you really want to do…”

    I know what you are thinking. All this is easy to write about and difficult to put in practice. And I agree with you.

    But that is how it is meant to be.

    It is not easy to become financially free. It should not be easy to become financially free. Had it been, most people would have already achieved it. Isn’t it?

    Infact early retirement can be achieved only by those, who really deserve it. It might sound a little cliché and bookish… but that is how it is.

    How ONE statement by My Wife jolted me?

    I have never made a secret of my desire to become financially independent as early as possible (even my x-employers knew about it). 😉

    But working towards this goal requires sacrifices. You need to defer gratification, curtail unnecessary expenditures, save and invest more from a young age.

    So obviously, you might have to make certain trade offs.

    But once I was trying to talk to her about the rationale of early retirement and she said something that hit me like a bullet.

    She told me that in order to achieve my destination quickly, I should not screw up the journey.

    Read that again.

    It is remarkably true. And if you have understood the quote, you will know how important it is.

    Few months before my wife said this to me, I was increasingly becoming addicted to the idea of investing (and saving) more and more money to prepone my financial independence. This meant that I was quite reluctant in spending money even on things that were worth spending on.

    And this was wrong on my part.

    Goal achievement (atleast this one) should not be at the cost of killing the joy of multi-years long journey.

    There is no point being rich when you can’t use those riches. You can continue to lead a really frugal life and hoard tons of money when you are 45 or 50 or whatever.

    But, will you be able to use that money in ways that would have been possible when you were young?

    No.

    You don’t want to be richest person in the graveyard. Isn’t it?

    richest man graveyard

    And this reminds me of a quote by George Lorimer:

    It’s good to have money and the things that money can buy, but it’s good, too, to check up once in a while and make sure that you haven’t lost the things that money can’t buy.

    Profound.

    But coming back to reality – there is absolutely no doubt that aiming for financial independence at a young age requires sacrifices.

    And naturally, not everyone is interested in making those sacrifices.

    Many prefer to live their lives to the fullest today itself.

    And I don’t think we can call them wrong. Its just about having different choices.

    But what if You really don’t want to be Financially Free before 60?

    That’s a relevant question.

    There are many who are just fine working till 60 or even more. So why should they be asked to make ‘even small’ sacrifices today for something that is decades away in future?

    This logic might sound reasonable but here is what I think.

    Aiming for FI means that you will be saving atleast a little more than what is normally required. This also means that in a few years time, you will have an extra financial cushion in form of larger savings. So in future, you decide that you have had enough (F*** the job) or you want to do something of your own (start a business), you will have the option to do it because you are financially stronger (with that extra savings you have). You can be much bolder in your decision making if you have little extra money. So it actually makes sense to target FI, atleast to an extent.

    For me, financial independence is the biggest financial goal as of now.

    But having said that, will I strangulate myself (and not spend money more freely) if I don’t achieve it as planned?

    Not at all.

    I have already made a course correction after being hit by that ‘bullet’ from my wife. 🙂

    I now balance the goal of financial freedom with that of spending today on experiences / things that I want.

    So basically, I am not saving as much as I actually can. But that is fine with me even if it means that my so-called ‘early’ retirement will be delayed by few years. 🙂

    Now comes the next question.

    How much is enough to retire early?

    The answer is different for different people. And don’t believe the blogs/websites that write about other developed nations like US. There numbers wont work for Indians.

    But the mathematical figure depends on factors like your cost of living (lifestyle & expenses), life expectancy, returns expectations today (& after retirement), inflation, other financial goals and your unique circumstances.

    Some say that having funds worth 25 to 35 years worth of expenses (as per current lifestyle) is enough. This is a reasonable estimate to start with.

    But one should do some calculations to really understand the requirements here. If you want to do it, you can try out early retirement calculators available online. But beware – those are not perfect as you might not even know which inputs are reasonable and which are unreasonable.

    A decently reasonable option is to take help of investment advisors like me 😉 if you don’t know how to ‘actually’ do it.

    Will ‘any’ Early Retirement Strategy work?

    Many readers have mailed me that how can one be sure that their strategy for achieving financial independence earlier than 60 will actually work?

    financial freedom works
    Source: Internet

    Frankly, I just wish that I had some really smart answer for this.

    But mathematics is something that we should believe in (not blindly though).

    To increase the probability of success in achieving FI or RE, no doubt you have to save and invest more than others. You have to be conservative in your return expectations and also overestimate the impact of inflation (and maybe taxes too).

    But still there are no guarantees here. You need to believe that a reasonably calculated strategy based on sound and sensible financial principles is what works. And as Steve Jobs said:

    You can’t connect the dots looking forward; you can only connect them looking backwards. So you have to trust that the dots will somehow connect in your future. You have to trust in something – your gut, destiny, life, karma, whatever.

    So you need to have faith.

    Also, what about other financial goals (like children’s education, marriage, real estate, etc.)?

    Ofcourse those need to be taken care off too. You cannot be considered financially free if you don’t have enough funds to achieve those goals too. Isn’t it? So you need to save for those too – no questions about that.

    How to achieve Early Retirement?

    Easy option is to get lucky. But we all know how luck behaves. So lets ignore that option. 😉

    Other option is obviously to work towards it the hard way – earn more, spend really less, invest correctly in right products and hope for the best.

    It is not easy.

    But think of it. You are trying to achieve something at 40 (or 45, 50 or whatever you choose), which others will be achieving at 60 or 65.

    So you will definitely have to save and invest a lot. This means you will have much less to spend on your needs and wants. And there is no other way around it. Naturally for those who cannot control their urge to spend, financial independence or early retirement is out of reach without major lifestyle sacrifices.

    But for many it is possible.

    Many of you already know that you want it.

    And your desire to quit the mad rat race lies dormant in you.

    But unfortunately, you don’t know how to go about it.

    Seth Godin once said,

    People are not afraid of failure, they are afraid of blame.

    Likewise, I am sure many of you want to do something about it. But are afraid about the consequences if you get it wrong.

    Unfortunately, there are no easy answers here.

    The choice between regular and early retirement is a question of tradeoffs and your life will change completely. Decision is tough and once you have decided to go after it, it is even tougher.

    But I am not trying to scare you.

    I am just asking you to think about it at a deeper level (and not just at mathematical level).

    So take your time and think about it. Think of time when you will have no bosses to report to and other such scenarios. Maybe its really worth it. 😉

    I don’t have the exact secret sauce that will fix everything. But I can help. If you have any questions about achieving financial independence, do mail me at stableinvestor@gmail.com or dev@stableinvestor.com.

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