In Jue 2013, when freefincal had just completed one, I had written an account of how I came to be interested in money management and finance and my money mistakes. This is a mildly updated version for new readers, especially young earners who think they have “started late”. Trust me, when you look at my life, you will feel better about yours. Be it money or education or general living, fear has been a great stimulant for me. Specifically the fear of making the same mistakes again, the fear of being in the same situation again. As I write this, I am recovering from a nasty nightmare where this very fear is the central theme. Freud would have had a field day with me!
This summer (2013) I am spending quite a bit of time with my 16-year-old nephew. He is a philosopher, writer, artist and entrepreneur! He makes money by doing chores for his parents. He makes money by doing drawing assignments and other odd jobs for his friends! When I asked him where this money goes he said, “my mom (a banker) puts it in FDs and RDs". I asked him to start a SIP in an equity MF but he seemed uninterested. Update1: He is now in college studying BA literature, writing stories, poems and acting in plays. Update2: His elder brother who is a PhD in cancer research from Austria, (now in the US) is so good with his money management and is on his way to decent corpus already! He is proof that a busy work-life does not mean one cannot manage money well and on their own.
So the next time he came along I watched ‘one idiot’ with him. He found it interesting in parts but politely sat through the movie for my sake. Having seen it many times, my mind wandered while the movie played on. I started thinking about my financial life.
My current financial situation is pretty good. I am the classic retail investor: I have no access to any kind of lump sum amounts. I have a stress-free, well-paying, permanent job with retirement at 65 and oodles of freedom and time. My financial life is pretty uncomplicated. As of now I only have annual short-term goals and three long-term goals and no debt. Thanks to my prudent wife we lead a reasonably frugal life. As a result, I (try to) invest close to 60% of my take-home pay towards my long-term goals. My emergency fund is in place. Health and life insurance requirements reasonably covered. Update 1: overall similar but as pointed out in my personal financial audit 2017 reasonably comfortable (also see below) Update 2: After about 8+ years of investing I now have a corpus that would qualify for financial independence. It is not as robust as I wish it to be and I hope to strengthen it in the next few years. The only reason I keep bringing it up is to point out that simple systematic investing is enough to achieve our goals: The rise and fall of my retirement corpus and The 2016 Personal Finance Audit: Returns do not matter!
Excuse the bragging. I know many people will take for my financial state without hesitation if they had a choice. My point here is that my financial life is in order but has one important aspect missing: financial freedom. I need to work to ensure it is in order. I can’t say, “I don’t feel like working anymore" and just put my feet up. My family will then be plunged into chaos. Under such circumstances, thanks to the life insurance, I am worth more dead than alive!
Financial freedom is a state when my passive income (interest from a large corpus, rent from real estate etc.) is more than or at least equal to all my expenses year after year for the rest of my life. Then my active income (my salary) is no longer needed and I can simply quit my job. Financial freedom is something that every investor should aspire for. We should be clear about how much we need for attaining freedom and when we can achieve it. This financial freedom calculator would help in this regard. Knowing when you will achieve financial freedom and doing everything you can towards this gives you an incredible sense of purpose and control of your financial life. My financial freedom is a good 10-12 years away (not bad, considering official retirement from salary is 26 years away). Update: For all those who think goals are too unattainable, look at how things have changed in 5 years. A target that was 10-12Y away suddenly came down to zero. That is why we should put our head down and keep investing without expected instant results. Patience is the key!
While ‘one-idiot’ was playing, I started to think about past financial opportunities life presented me with. Presenting a few of my mistakes in the hope that someone young(er) reading it would …
- I got my first salary three years after I left school. When I started my M. Sc I was given a monthly stipend of Rs. 500 and my tuition fee was waived off. I got the stipend every 6 months or so and promptly purchased expensive coffee table books on cinema with it.
- My father retired two months after I started my PhD so my stipend (Rs. 500) was doing its bit to run the household. I was still clueless about money.
- In the 4th year of my PhD, I got a scholarship to spend 3 months in the Swiss city of Lausanne. It was a paradise. I was paid a scholarship of 2700 Swiss Francs. A handsome amount, much higher than what even young scientists were making that time. Students who had got this fellowship before I did had managed to save Rs. 1-1.5 lakhs by being prudent.
- Prudence was still not my thing. I blew every single Franc. I was too lazy to get a ‘student’ bus pass for transport and spent 10 Francs every day. Many regular co-passengers were appalled and told me to get the much, much cheaper pass. I just didn’t listen.
- I ate junk food three times a day in Lausanne. Dinner each day was in a Mcdonald’s. My face became so familiar to the employees there that many would often give me ‘extra’ French fries. One guy would lift the nearby garbage can and asked me if I wanted French fries in a pack that big! I was leaking money steadily. My marriage and graduation were around the corner. I just didn’t care.
- After my PhD, I had a short stint in Berlin as a ‘visiting scientist’. No sign of money gyan yet as I blew a good portion of my decent salary on rent. A single guy living in a large, expensive two bedroom flat.
- Back home I started work as a ‘K S Krishnan research fellow’ at IGCAR Kalpakkam. Though I was given decent accommodation at Kalpakkam, I travelled from Chennai each day. A journey of more than 150 Kms both ways. I lost my health and blew my entire pay in travel expenses for about 1.5 years!
- Soon my job at Kalpakkam became permanent. Exactly 5 days after I received my first ‘proper’ salary my life changed forever. My father was diagnosed with cancer and soon the treatment cost started spiralling up. Thankfully my brother-in-law gave me an interest-free loan of Rs. 3 lakhs.
- I was terribly depressed. I hated debt and wanted to get out of it. Thankfully my pay shot up by about 45% and I got a pretty huge lump sum (for my standards!) as arrears from the govt (sixth pay commission). I paid off my brother-in-law.
- The day I was debt free I felt great. It was a cathartic experience. I felt free and in control. I told myself that I am going to do everything I can to feel this way, at least wrt my finances, each and every day. So started the journey out of the hole. This was about 5 years ago. The journey continues …. The fear of messing up again: a powerful force
What is Past is Prologue
It is stupid of me to even think what my net worth would be had I started investing the day I received my first pay (a good 16 years ago!). My past is my prologue. My past can also be your prologue especially if you are younger.
The arrow of time refers to the direction of time. It flows only one way, forward. You cannot reverse it. The financial arrow of time simply means the same with respect to finances. Every moment wasted, not being in control of your cash flow, not investing enough, not taking action, is lost forever. The past is prologue!
I am not sure if my nephew had learnt something from one idiot. Preaching does not work. All one can do is present experiences and that is what I have done here.
Now imagine someone in their early 20s who understands the importance of
- leading a frugal life,
- power of compounding
- power of passive income
- and financial freedom
Imagine such a person working actively towards financial freedom even before he/she starts a full-fledged career. When I imagine this I am filled with a delectable gentle joy. Doing it right the first time around has a charm about it (to those who didn’t!).
Update: After nearly 6 years of freefincal, I have interacted with at least 30-40 people in the 18-35 age group who are true DIY investors actively striving for financial independence. I have also had the pleasure of learning from about 10 people who are 45+ and financially free. Whether you have a history of mistakes or wish to do it right the first time, it is never too late or never too early to start. Get going today! If you want some help, you can consult these free e-books