The Financial Arrow of Time

This summer 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.

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 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.

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).

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. 5000) 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 me 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 everyday. 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 day in Lausanne. Dinner each day (for 90 days) 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 was 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 spiraling 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 …

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.

Source: quotehd.com

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 for ever. The magic of compounding diminishes slowly and relentlessly. 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!).

Does it sound too good to be true? Not really. Ladies and Gentleman I present to you:

Mr. Mihir Naik

Entrepreneur, blogger, investor, CA student and seeker of financial freedom. Born in the year of the lord, 1992. One of my sources of inspiration when I get depressed.

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22 thoughts on “The Financial Arrow of Time

  1. bemoneyaware

    Very honest, I came to know so much about you…I am damn impressed by you and Mihir. Mihir what makes you the way you are? Would love to know that.
    Most of us have similar scripted story Why do we splurge when we start earning money. I did it because till we are not earning we have to listen to our parents and lots of our wishes just get lost. So when we start earning we think we are kings of the world and just splurge before life catches us and it’s back to worrying about money.

    Reply
  2. sunder

    chief, that was a gr8 write up. i am forwarding it to all my younger friends and relatives as well as friends and relatives of my age and above. the latter also needs. earlier the better. but, its also never too late in personal finance. in fact, i had been badgering my eldest brother, who is 63 [7 yrs elder to me] to ensure that his daughter starts investing in equity. he is an economist -- economic adviser to the chairman of j.k. grp. all this while, he just refused to listen to me. but last sunday, there was a breakthrough -- he declared that he himself is going to invest a small amount in equity himself through sip. tnx to all of you i have learnt the need to invest in equity and i am making an effort to share it with my kith and kin. pattu, tnx again.. .

    Reply
  3. Rakesh

    Pattu,

    Thanks for sharing your personal experience, seldom people do that. Got to know more about you.
    What a turn around in just 5 years.
    Must read for one and all.

    Reply
  4. Manish

    It was great reading your personal life journey, sums up what you did and how you become a financial wizard 🙂 .

    Every one should read your story , it has lots of things to teach !

    Manish

    Reply
    1. pattu

      Many thanks Manish. In fact your post on 'six steps to plan your retirement' is one of the many triggers for me to start making calculators.

      Reply
  5. avadhut2013

    Hello Pattu,

    Thank you for writing this. Thankfully, my mindset has been frugal since childhood ( due to my strict upbringing). It helped me maintain my sanity in bad and good times.

    Thanks for writing your mistakes, I learnt a lot from them. Please keep writing, it's an inspiration to me to read and implement your lessons.

    Regards,
    Avadhut

    Reply
    1. pattu

      Thank you for your kind words of support, Avadhut. Yes a frugal upbringing helps a lot. I full agree.

      Reply
  6. Aparna

    Dear Pattu,
    Felt both good and bad reading this. You have had bad times, didn't feel good reading about it, but nevertheless it is a good lesson to all the readers how one should get out of difficulties. Felt good reading about the nice things happened to you. It is ok not to be frugal for sometime- I repeat, just for sometime- in life, especially if we have been frugal since childhood and suddenly get a lot of cash. So I don't consider it as your mistake to blow all the money.
    Regards
    Aparna

    Reply
    1. pattu

      Thanks Aparna. I agree with you that should let ourselves some luxuries and splurge a bit. My problem was I did it 24X7 and was clueless about it.

      Reply
  7. Madhu

    When I read story like this, I feel very blessed to be young(23 yrs) and more importantly, be guided by people like you to achieve financial freedom.

    Thank you for sharing your story sir , your experience can teach a lot to those of us who are young.

    Reply
  8. Madhu

    I have a question to ask Sir- if you don't mind answering - considering that as a couple you are able to save a good % of income. Forgot to ask in the previous comment.

    What is the qualities to look for when choosing a spouse who respects saving more than spending from your experience?

    I have a genuine fear of finding a good spouse striving for financial freedom(or at least respect the mentality of money working for us instead of the way round) in this Indian market more than the fear of wealth creation(since I have started early and motivated and has a thirst to learn, at least that will help in this to an extent I believe). Comparatively, finding a temporary girlfriend is easier these days as long term commitment is deferred for some time.

    Also, as J.L.Fisker says in Early Retirement Extreme(ERE), it has indeed become uneconomical to stay alone or remain unmarried considering the economies of scale and useful utilization of resources of goods and services consumed. Charlie Munger also speaks of preventing a bad marriage(Two of my first cousins marriage have gone sour but has nothing to do with above question - one an arranged ; another a 'love' marriage in last two years who recently married in last 3 years) as of the best things. T. Stanley in Millionaire Next Door also mentions of having a more conservative wife than husband when it came to millionaire household.

    Add to that people of my age are ready to blow money like crazy for useless stuff that hardly use or use for a few weeks that then throw away(definitely I splurged on books and books that I reference from time to time but gradually trying to control it after learning the importance of saving and learning from ERE).

    It's scary when I think of all this.

    Reply
    1. freefincal

      Financial compatibility is difficult to ascertain whether we marry by arrangement or love. That is only one aspect of the marriage. you can only decide on a case to case basis and take a risk! Dont worry too much about this.

      Reply
  9. Bhadrasheel

    Pattu Sir, it is highly valuable article, you can pin this on ur facebook blog(asan ideas for wealth).It is highly impactful to feel and act on the need of savings and investment thru such a personal real story than reading a 200 pages of book on the same !!
    Thanks a lot and God bless you.
    You are an awesome teacher of Personal Finance or life, not even the financial experts write like this. 🙂

    Reply

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