Last Updated on December 29, 2021 at 5:03 pm
SEBI registered fee-only investment advisor, S R Srinivasan (SRS) discusses his journey to financial freedom for the benefit of freefincal readers. This is the second part of his guest post. In the first part published yesterday, he talked about his approach and investment choices. If you have not read it, please head over there first and then come back here: How I achieved financial freedom and became an Investment Advisor!
In this article, he lists the factors that helped him achieve financial freedom, things he should have done differently and some references. SRS believes in numbers based insights and naturally, I find this appealing. He has rigorously stress-tested his retirement corpus with various tools. You can approach him for your financial needs via srinivesh.in. Kindly note that he has written this detailed two-part series upon my request.
You may recall that he recently wrote about the List of Mutual fund categories that you can avoid! Older readers may also recall a Sep 2016 presentation shared by SRS: Growing Wealth: An engineering approach
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A list of factors that helped me achieve financial freedom
This part may be a lot of philosophy! I am giving a list of things that I believe helped my journey. Except for the first, all of these may not apply to everybody. Please use your own mileage.
- An understanding spouse– I can’t emphasise this enough. Your spouse should be aligned with the FIRE goal and the steps needed to achieve that. Even if your family has a high income, achieving FIRE requires some level of expense optimisation – at least in a comparative sense. For example, you may not live as a flashy lifestyle as your colleagues or neighbours. It takes a lot to continue the planning and investment over many years. And the actual decision too is off-routine and would be surprising at least to some people in your circle. Your spouse’s active support is crucial in this. (If you have children, you can mould them to some extent – this is part of your parental duty of value education anyway.)
- A clear vision of FF – I deliberately use the word vision here. Before you get to N year and xxx corpus goal, you should know why you want to achieve FF. Hopefully you have an idea of what difference FF would make in your life – e.g. pursue a passion that is not financially rewarding, pursue a hobby, try a second career, just chill out, etc. etc. (Vinod Khosla, the co-founder of Sun, is supposed to have during his college days said that his goal in life is to become a millionaire by 30 and spend the rest of the years in beaches.) Having a vision may help with point 1 also.
- Decent income – I had mentioned that I work in a software MNC. The salary is decent. But my company is not in the top league of paymasters. But as is well known to people who want to achieve FF, saving a larger part of your income is key to the plans, and saving a larger part of decent income is helpful.
- Getting started, with some goals – I mentioned that I was not happy with the analysis that I received. However, we got started with our ‘Retirement’ goal early enough. This goal changed drastically during the years, and the required corpus became much larger. But the early start helped tremendously. Goals related to children were formalised around 2006 after my first child started school.
- Investing in debt products– In my case, this was particularly EPF. Even a decade ago, the total PF contribution was in lacs a year, and the interest was slightly more than that. For 2017-18, the interest was almost 2x the yearly contribution! PF (and PPF) are the best examples of compounding. Everybody needs debt instruments, and you can’t do better than these two – they provide high, tax-free interest. They score lower on liquidity but allow partial early withdrawals too. I can meet all my children education goals and a few years of living expenses just from my EPF corpus. In other words, the EPF amount would take me until 2030. I really can’t describe the level of comfort that this provides.
- Having a clear approach-I described my approach earlier. I have also repeated it at the end of this part. Since I used to present my approach to others, I had a very clear understanding of the approach, and it became almost second nature. This really, really helped me (and us) stay the course. And yes, there are many years where I could have done better. The approach helped in getting back on track. If you use a good advisor, he/she can also keep you on track. However, you should invest the time to internalise the approach.
- The right attitude for equity –In my early years, I was a bit lucky with equity. I would credit the 2008 market for giving me the right attitude. It is all fine in theory to talk about lumpy returns from equity, using equity for the long term etc. etc. But you have to experience it and show the right behaviour before you can be confident in your approach. Of course, I don’t wish a bear market on new investors. Let me put it this way. You should not be scared of equity; you should not be too confident also.
- It is a wild horse – you can manage it, but never really tame it.
- Being low on debt – We bought two homes on debt. I was fortunate that my company had a decent car lease program, and I could buy two cars back-to-back at practically zero interest. When we purchased the second home in 2006, the first home was already paid for. We never bought anything else on credit. We never used loans for any expenses – ever. I used to say this in a half-serious way: When equity did well, I sold some and took foreign trips or expensive domestic trips. When it did not, we used to drive down to an inexpensive location! I still have the second home loan active, but I can tune it the way I want and use it to store my emergency surplus, cash reserve, etc.
- Using term insurance – While I wish I could say that I only had term insurance ever, it is not entirely so. I did buy some ‘LIC policies’ but got out of them soon enough. Having only term insurance frees up money for high-growth and flexible investments. I have seen too many Indians losing out on opportunity cost due to endowment and ULIP policies.
- freefincal tools– I can generalise and call ‘Robust set of tools’ – Rules of thumb can take you only thus far. To make progress, you need robust tools to help you keep track of all these:
- Selection of product types/asset classes
- Selection of good products among them
- Actually investing in them
- Tracking performance (this does not mean doing some changes – you ought to know what your portfolio is doing)
- Reviewing performance; rebalancing, etc
- Optimising taxes
- and more
- Appropriate lifestyle– I don’t want to suggest a minimalist lifestyle, though our lifestyle would be frugal compared to the peer group. I believe that the right approach and the right tools would help you live a lifestyle that you want, before and after FIRE. My spouse has been a great support in the lifestyle. We took our time to inculcate the lifestyle with our children too. We have pampered them, but only to an extent. They have heard enough No’s for their demands. This, of course, is very personalised – you have to figure out the lines that you draw.
- Single Portfolio– This can be debatable, but the way I see it, early FF needs a single portfolio approach or something close to that. All, if not most, major expenses would occur during FF years. The typical approach of having a balanced portfolio until three years before, and shifting everything to debt, etc. would be sub-optimal. Having a single portfolio approach also means having a large enough debt corpus to take care of long bear/sideways equity markets.
- Bucket Strategy –In this, I differ from many of the usual discussions in FIRE groups. A lot of people advocate using a ‘Safe Withdrawal Rate’ (SWR) method. I believe that the SWR method needs two conditions – Steady stream of expenses, and reasonably low inflation. If you look for early FF in India, with kids, then both conditions are not present. I firmly believe that the bucket strategy, with a decent estimation of cash flows through the years, is better to assess readiness for FF. By the way, both bucket and SWR have many similarities – you have both equity and debt during the withdrawal phase, you expect your corpus actually to grow, etc., Of course, SWR is more elegant to present.
- Rightsizing the goals – It helps to have the right estimates for the goals. This seems obvious, but there are many ways to tune the estimates. For living expenses, it helps to track the sub-heads and see the inflation for each. On education, my children helped by ruling out medicine. So I plan for the next expensive option of engineering. I keep checking the current fee levels and tuning my estimates.
- By the way, my estimates at current prices – First year of engineering – 12 lacs, subsequent years – 7 lacs each; first year of postgrad – 17 lacs, second year – 11 lac. So what happens if my kids want to do MS in the US – part-funding from loans/TAship, etc., and part-funding from the foreign corpus.
- These days when I attend weddings in my community, I make it a point to ask about the expenses. I use that to calibrate my estimates. If you have a goal for children’s marriage, definitely get an estimate of the costs – for your community/group. There is no point in having an estimate from a group that is not comparable.
- Handling the final years before FF- (You can, of course, handle this when you come to it and not worry about it now.) It is essential to finish your active income years on a high. If you are set to leave work at year x, then you want to be as engaged, if not more engaged, in the 2-3 years before x. Your colleagues should wonder why you quit rather than wishing that you quit!
- Handling the transition – (This is another thing that you can plan later.) It is useful to plan the immediate months after you achieve FF, particularly if you plan to leave active work.
- Post-FF: For many people, this may not be required as they would plan to continue their current career/profession. For me, being open about what I could do really helped. I was not expecting to leave my job as such. In the last few years, I have been amazed by two non-finance people making a huge difference in personal finance: One is the author of this site! The other is Ashal Jauhari who runs the facebook group Asan Ideas For Wealth. My post-FF career choice is influenced by them.
Things that I should have done differently
To balance the somewhat self-congratulatory tone of the previous parts. Here is a list of significant misses during my journey.
- Not having an asset allocation – Or I can call this ‘Having too much real estate’. Looking back, I can definitely see that the big purchase we made in 2006 made us overweight on real estate. We have almost paid off that house – which means that a big part of our current portfolio is still in real estate. It also starved to some extent, the money available for equity. I am not saying that real estate should not be in your portfolio. If it is there, make sure that it does not skew the asset allocation – both when you make a downpayment and after you have paid off the loan.
- Not being systematic about investments – There are many years where I did not add much to the portfolio. There seemed to be good reasons at that time, but in the long run, they seem more like excuses than reasons. I suggest that you have a precise estimate of cash inflow and outflow every year, and ensure that the investments happen regularly.
- Not starting DIY soon enough – It could be my luck that I didn’t find the right kind of planners/advisors to work with. I could have made an earlier start to develop my tools. Though I was not (and still am not) very strong with spreadsheets, I had access to great Excel geeks; but I didn’t use their expertise.
- Being inconsistent with expense management – Overall, our lifestyle is more on the frugal side, and this helped the FF plans. (Socially we are conservative, and this trims expenses of partying, entertainment,etc.) I could have done more to be systematic about which costs I would control and which I would indulge in. To others, I would suggest this: Use your current expenses to guide your corpus target after that focus on making the investments and don’t go overboard on trimming costs. As for estimation, it helps to break down your expenses into major buckets and estimate the inflation – the simple matter is that there is a huge variance in inflation in different heads.
References
Advisor – This is a touchy topic. The number of fiducial advisors is still small in India. Fee-based or commission-based advice is still predominant. I have not found many advisors who can deal with typical FIRE situations. In particular, the fee-based advisors are more template driven and less willing to make modifications to the tools that they use. I would recommend using the fee-only planner list, which is always in the top bar. A larger list of fee-only planners is here: Fee-Only India (Disclaimer: I am also a fee-only planner; I became one after being inspired by people in the list.)
Portfolio review – This is a crucial activity. Typically, rebalancing is also done after the review. There are no easy tools that do the job well. This freefincal post talks about reviewing mutual funds in your portfolio: Pattabiraman’s posts on yearly audits give a great amount of information on how you can set up a review system.
Tools – freefincal has this excellent collection of tools. Some of the links are older, but traversing the articles gives you the most recent calculator. The thing that I love about freefincal is that there is a calculator for almost any financial questions that you could have. For tracking, I am personally comfortable with Perfios – I have used it for many years now, and I have not had a security issue – so far. I choose to keep the credentials on my computer only. I can still view the data on other devices, but need to use one computer to get updates.
- Unified Portfolio – I am of the firm view that early FF and unified portfolio go hand-in-hand. Almost every ‘advisor’ in India would suggest having a separate portfolio for each goal and doing asset allocation for each portfolio. Since early FF people tend to have a number of large expenses, this can become unwieldy. A freefincal article discusses the unified portfolio approach and advises abundant caution. A later article discusses using the same mutual funds for multiple goals
- FIRE calculator – I used this FIRE Calculator. I realised that the ‘bucket-as-you-go’ approach could have some errors when the corpus is small and have made that as the alternate version. The main version uses the more traditional approach of building the corpus till retirement and then deploying it in the right buckets.
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Part 1 is here: How I achieved financial freedom and became an Investment Advisor! Please join me in thanking Srinivasan for sharing his journey. You can approach him for your financial needs via srinivesh.in.
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