In his wonderful fable ‘The Richest Man in Babylon’, George S Clason hammers home financial discipline and its rewards. Written way back in 1926, the lessons are as powerful today as they were in that era pre-depression. Actually, they are more so, because one of the tenets of the book — saving atleast 10% of whatever is earned — has become mighty difficult for people of today, in spite of a vastly improved economy and circumstances.
We may have a thousand more avenues for investment and financial reward today as compared to the time that book was first written. But as Arkad tells his students in the fable, very few people actually manage to work out the discipline and balance to get money working for them rather than the other way around. We were talking of this on Twitter recently, and a friend made an observation that we are not able to save as much as our parents’ generation did (in terms of % of income etc).
I mentioned that I’ve been fortunate that way as I’ve done better than them — thanks to practical advice received from books and some wonderful mentors. Several friends asked that I write this down in case it helps someone else, and this post is an endeavour to do so. Firstly, I’m not a financial planner. Ideally, one should take professional advice when it comes to planning and long term investments. Secondly, I never aspired to be rich. Just wanted to retire early with an ongoing income from investments and be able to sustain my current lifestyle while being able to provide for kids growing up and any sudden major expenses. Lastly, since financial planning is never a one-size-fits-all approach, it has to be done personally, considering all circumstances. So don’t consider this as advice. Lets go.
HSBC had put up an ATM in my city many many years ago. As part of my first job, we were given zero-balance accounts, and they came with ATM cards. And those machines had a cash deposit option also — put money in an envelope that the machine gives us, and load it back in. It gave me great joy, and I would deposit 100, 200, whatever I could spare. Then, my banker told me one day about mutual funds, and I sat with a planner back then, wondering at all the options, while drinking free coffee they served in that beautiful office. My salary then was ₹4000! And like in most such stories, I built a little corpus, and then withdrew it all for some purpose, thinking I’ll put it back in later, which never happened. Then I got some credit cards, and the rest is history. Taking out loans to pay off the cards, buying more stuff than I could afford, lifestyle expenses, taking bigger loans, asking parents for help! And quitting job to start something, failing at it, finding something else to do, more loans, more credit cards, paying 40% interest rates, overdue fees, scraping by with minimal balance payments since there wasn’t a steady monthly income…. Thinking that the stock market will give us a way out, putting money there, losing it all.. Going for stock market classes, option and F&O trading, putting whatever the business gave us into the market wanting to make it 100x, losing it all again…. There’s nothing new here. Many people reading this may have done it, many more will continue to do it. That’s how it goes. Just because we tell people not to, doesn’t mean they will stay away. We all consider ourselves more intelligent than the rest of the world — till the world proves to us that we are not 😉
Lets get to specifics. Whatever we do in life, the very first thing is to pay off cards and loans. That’s obvious. Scrimp, save,, take a low-interest loan on property, do whatever but first pay those off! And then set aside 12 months of living expenses in a deposit. I learnt the importance of that since I did not have a steady monthly income (being an entrepreneur). That gives us confidence, and that confidence does wonders. It’ll be tough. Very tough. But till that’s done, nothing else will get accomplished. This first rule is the same whether we’re earning ten thousand or ten lakhs a month. Take an average monthly expense, add 50% to it, and then put aside 12 months of that amount. One thing I learned from my father was to write down every rupee spent. He had a diary and I have an app. Last 8 years expenses I have on my phone. Every rupee earned and spent, and it gives me great insights into where my money is going. Do it. Please.
These 12 months living expenses should be in a fixed deposit that you WILL NOT touch, unless you lose your job or something untoward happens. It may take you 1 year, or 5. But do that first. No shortcuts here. Once that’s done, do an analysis to understand how much insurance you need. We ALWAYS under-estimate the sum assured, since we’re thinking in today’s terms. That money should be thought of in terms of 20 years or 30 years later, and it’ll be worth 1/3rd or 1/4th of what it is today then! Take a term policy of that amount, and keep paying for it till you actually have gotten wealthy enough so as to not need it (meaning you have 3–4x of that sum assured in your bank). And then, irrespective of your company’s health policy, take a health insurance policy for your family. Get in early so the premium is locked. If you can’t afford that, get a yearly policy and keep paying for it — some 10000 or 15000 per year it’ll cost; again, till you have atleast 3–4x of probable medical expenses in your bank. There are great top-up plans also available today, which cost a fraction of normal health policies and will only kick in after the first 3 or 5 lakhs bill. Those will take care of the expense from 5 lakhs to 1 crore — in case something major happens. Read up on them. One more thing I did was to take child policies when our kids were born. Policies are issued when kids are 3 months old, and for both our kids we took out childrens policies when they got to 90 days. These policies pay out an assured amount when the kids reach 18–22, and each company has separate riders available. These policies don’t pay out much ROI, but for me, I wanted a predictable amount I knew was coming on their 18th birthday since we had almost zero savings when the kids were born. This isn’t advice for everyone having kids; just something I did, which gave me confidence. Remember — insurance is not an investment. Don’t club them together. Insurance is separate. It comes first.
So we have 12 months of living expenses, are free of high-interest debt, and have decent coverage for term and health insurance. For many people, getting here itself is mighty difficult. And understandably so, considering how expensive it is in many cities just to get by. But most people will be able to get here in a few years — irrespective of how much they earn. The numbers may be different, but the principle is doable for all. Getting here will let us sleep peacefully at night, and walk on the street with head held high. Financial squeeze is terrible. It doesn’t let people think of anything else. It’ll sap all energy out and affect all judgment. It affects our relationships and destroys all positive energy. Having a year’s savings plus insurance will remedy that and give us great confidence on ourselves. I’ve been there personally, and I can’t stress this strongly-enough. Even if we manage to do nothing else but this, the quality of our lives will get much much better. As living expenses increase, keep adding into that 12 month fund. Revise it annually.
Now that the basics are taken care of, we can get to investing. Depending on your risk appetite, pick a basket of products you like. There are several risk appetite tools available for free online. Spend a bit of time on one of them and find out what kind of an investor you are. Traditional instruments like PPF, NPS, FD are all quite ok too. Not everyone has to get into real estate and stocks! If you’re happy with ~8–9% returns, great! It’ll beat inflation, give you secured returns, and some also give tax benefits. Either way, I prefer to have 25–30% of my investment in the secured basket, and with age we increase allotment here. Personally, I find it easy to work in %s. As income increases, we should be able to put aside more each month since basic costs will remain more or less constant. I realised that I could put aside 30-40% of monthly income without affecting lifestyle. Some months, even more than that since I live in a smaller city and have no loans. Coming up with a number based on your expenses is very important and you’ll keep tweaking it as you get better at finances. The next investment I would recommend is a ULIP which allows you to switch between equity and debt. New ULIP policies often have no loading charges, and you shouldn’t listen to your bank’s advisor on this — they will just promote products they’re paid to, and don’t know much about the competition. Do your research online. My personal recommendations are HDFC Click2Wealth and ICICI Pru Signature. Similar products are available from Tata AIA, Aditya Birla, and others also. They’re both extremely low fees products and come with great flexibility, and you can go for them online too — like with direct mutual funds. You can choose to pay for 5 years or 50 — depending on your age and investment horizon, can choose to close the policy after 5 years or keep it till you’re 99, withdraw partial or full, and also enjoy tax benefits. Plus, they’ll allow you unlimited switches between multiple mutual funds of the fund house as and when you think the market is down or up. Or if you don’t want that hassle, just put it in a mix of balanced and blue chip funds and forget it. You can always top up if you have extra money or the market falls significantly. This is one of my favourite products today because it has the benefits of 3–4 different products in one. All while giving us 10x annual premium as life cover for the entire term. Like we spoke earlier, insurance and investment are separate. This is purely an investment product, and think of the insurance cover as a free add-on. Also, these ULIPs allow us to move the corpus at the end of term into an SWP, we’ll talk more about that in a minute. Of the amount you think you have free each month to invest, put half in such a product with a 5 year pay-in term, extendable later. The other half you can have an SIP into a balanced fund or an ELSS based on your tax situation. Keep your SIP low and if you have extra money at the end of a year, you can always add more as lumpsum when the market falls. These products should ideally give about 12–15% post tax over a period of time. Again, the funds you choose will depend on your risk appetite and your age. Don’t choose too many funds. Just 2–3 funds — ELSS is anyway full equity, one balanced fund, and maximum one more as per your choice. Keep them going.
In this post, I won’t talk about a home loan since that’s a whole separate discussion. And anyway the home we live in isn’t an investment. Real estate, I’ll say this though — I prefer buying a farm in my village than a plot on the outskirts of a large city (unless that plot is for you to build a house to live in — then it isn’t an investment). Only buy land you’re sure you can safeguard / develop in a place you have known people. And never buy real estate for investment on loan / instalment. When we buy, we are told the market is very expensive, and when we want to sell, we’re always told the markets are down 😬. Same with stocks directly. I have some stocks exposure directly also, but thats more for fun. And that amount is less than 5% of my corpus. Anyway mutual and index funds have direct stock exposure, and I’m happy with that since my plan works on a 12% annual yield. For that, we don’t need to go directly to stocks IMO. It may be different for you.
So if we’ve gotten so far, we have an FD with 12 months of current expenses. Then we have a term insurance policy of a sum that’ll sound ok 20 years later, plus a kids policy for each child maturing when they’re ready to go to college. We also have health insurance for the family or atleast a top-up policy. Then we have PPF / NPS which allows investments up to 1.5 lakhs or something each year. We’ve maxed out on ELSS of 1.5 lakhs per year, locked in for 3 years. Whatever else extra we have available, we’ve put it into the market in moderate risk funds / ULIPs, which will take care of retirement. In truth, most people won’t get this far. Our busy lives and burgeoning expenses won’t allow us. If you do manage to get here, you’re the minority and have actually put your money to work for you, beating inflation and giving you an opportunity to think of a happy retirement. What is also the truth is through financial prudence, most people can build a nest-egg if we’re wise and disciplined enough to write down all expenses, understand risk appetite, build clarity on what we need for the future, and plan a career accordingly.
One of the most important points Arkad makes in The Richest Man in Babylon is that of an ongoing income. Making money work for you is essential. In Telugu, we have a saying ‘కూర్చుని తింటే కొండలు కూడా కరిగిపోతాయి’, meaning even a mountain of wealth will erode if you just sit and eat. To prepare for retirement (at any age), today’s financial instruments allow for us to consolidate funds into a Systematic Withdrawal Plan (SWP). Read more about SWPs, there are ample illustrations by excellent financial planners available online. If you withdraw 1% of your fund each month, with a 12% growth estimate, you’ll live out your life and also leave a healthy amount behind so the kids can buy sandalwood for our pyre 😉 So if you have a corpus of 2 crores (which is quite doable) and withdraw 2 lakhs each month, it’ll keep growing unless something drastic happens! Compounding is magical. We won’t realise the power of money compounded till we see it in action. Life has a way of throwing spanners into the works. It’ll happen to each of us. We’ll lose our way several times over in this journey, but staying put and veering back onto course will also happen. While it is best to start early, there is no deadline and this isn’t a race. Being financial free is amazing, and the confidence it gives us is indescribable! I know this has been a long post — longer that I usually write, but you also would’ve realised that at several places I had to cut back because it would go on even longer otherwise! There is no rocket science here. Like with most things, financial planning also is simple, but not easy since it requires us to be disciplined for a long period of time. You can replace the instruments I quoted in this post with any other as per your choice, and the result will still be financial freedom. These are my 2 cents based on what I’ve learnt so far, and again like Arkad said, if atleast one person is positively impacted through this, wonderful 🙏🏼
