Last Updated on June 11, 2018 at 11:49 am
If you had to choose between making more money and spending less, what would you choose? “Wait a minute, why should I choose?”, you ask? Good question! Let us find out if you have to make that choice (or do both) ! Now, I hate thumb rules because most of the popular ones are flawed (eg. rule of 72), but here is a thumb rule that is pretty effective but most people either ignorer or cannot follow.
If you wish to plan for financial independence or (normal) retirement then, invest for retirement as much as you spend for essentials. If your monthly expenses towards essential day-to-day expenses are about 40K, then invest at least that much for retirement (including your mandatory EPF/NPS contributions).
So now let us first find out if you need to make a choice between earning more money and spending less. For those interested in earning more money anyways here is a compilation of ideas from members of Asans Ideas for Wealth: How to Make More Money In India: Forty real examples
Please note that the following illustration is made with less than 40-year-olds in mind. Older money managers may find it difficult to reduce expenses and/or earn more income. Of course, it is certainly possible.
Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! 🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥
Let us take the case of Anita. She just turned 29 and is taking home Rs. 1L a month (this includes EPF contribution but is after tax). Let us call this take-home-pay for this example. Let us assume her salary increases at 8% a year (including increments, promotions etc).
She spends about 40% of the salary each month towards essential expenses. So this means her expenses increase at 8% a year (because her salary increases at that rate). Essential expenses are those that will persist until she is alive.
Projecting future essential expenses based on current essential expenses is severely flawed as we will need more money for at least medicines as we age, but let us fly with it and see what we get.
She needs 20% of her take-home-pay for her wants (leisure, luxury, etc.) each month. This means: 40% goes to essential expenses, 20% goes for wants (non-essentials that are assumed to be absent after retirement). So she can invest the remaining 40% each month for her retirement. Let us assume she does not have any other financial goal to worry about.
Let us assume she will retire at age 55 (even that is too late seeing how healthy we are today!) and live up to age 85. She will need about 13 Crores at 55 to generate an inflation-protected income with that lump sum.
Does this seem too much?! I guess what you really mean is, “can she accumulate that much?”. Yes, she can. If she manages to invest like a robot 40% of her take-home-salary (this includes EPF contribution) for the next 26 years.
There is a catch though (there always is!). Her portfolio will have to generate a post-tax return of about 11% after 26 years to achieve this. Is this possible? yes. Is this probable? yes. Is this practical? I am not sure. An 11% after-tax return would mean a portfolio of at least 60% in stocks – not just now, but for all those 26 years.
So if you have noticed, Anita invests for retirement as much as her essential spends and even that has its weaknesses. Wait a minute. What about her accommodation? If she has her own home, fine. But what if she is renting? She will want a house of her own before retirement and that will not count rent as an expense that will persist in retirement.
If she is renting, then the above calculation is still correct if we assume the take-home-pay is after rent! But we have excluded rent after retirement. This means sometime within the next 26 years, Anita will have to buy a house. Meaning she will have to take a home loan. Where will the EMI come from? With luck a reasonable EMI = 40% of take-home-pay (as defined here).
Then what happens to her investments? Even if she gets rid of the 20% non-essential spending, her investment will by half. Meaning she will have a house she can call her own but not have enough corpus to retire “well”.
This is perhaps only one reason why many people need to stop and think: Should I be making more money or spending less? Well, it should be Should I be making more money AND spending less?
If we put our minds to it, we can spend a little less, but not enough to hit the necessary investment mark. So the grim reality for most money managers is that they need to earn more.
So the point of this post is, please do this calculation with the freefincal robo advisory software template and check if you can invest enough for retirement with your current earning and spending levels. Try to decrease spending if possible and invest more.
As regards earning more, the standard ways are getting a better paying job perhaps with higher qualifications. If you have hit saturation in this aspect then here are two questions:
1 Can you spare at least one hour a day (during weekdays) and more during weekends?
2 Do you have a skill or an interest that can be used for earning extra income?
If you want inspiration, check these out: How to Make More Money In India: Forty real examples
Please note that my intention is not to scare you into paralysis and an “all is lost” mode. My intention is to scare you into action. If you put your minds to it, you can still earn more and invest enough for retirement.
I will write more about making extra money preferably with some real-life examples.
🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 5000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! ⇐ More than 1000 investors and advisors use this!
New Tool! => Track your mutual funds and stocks investments with this Google Sheet!
- Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
- Have a question? Subscribe to our newsletter with the form below.
- Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.
Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!
Explore the site! Search among our 2000+ articles for information and insight!
About The Author
Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter or Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter what the market condition is!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course! Increase your income by getting people to pay for your skills! ⇐ More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts you and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!
Our new book for kids: “Chinchu gets a superpower!” is now available!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or you buy the new Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low volatility stock screeners.
About freefincal & it's content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
- Twitter @freefincal
- Subscribe to our Youtube Videos
- Posts feed via Feedburner.
Our publications
You Can Be Rich Too with Goal-Based Investing
Published by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
This book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.Your Ultimate Guide to Travel
This is an in-depth dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)