Last Updated on July 19, 2016
A little more than seven years ago, my expenses dropped to ‘normal’ levels after my father passed away (post a prolonged battle with cancer). I had been in a regular position for less than two years then and was taking stock of my cash flow and investible surplus (money net of all expenses).
Immature me, I remember asking my mom a dumb question: “Why did you and appa not invest more when you were younger?”
She answered without batting an eyelid: “We (both worked) never earned enough”.
That felt like a slap to my face. I must have insulted her deeply.
I now realize that I was asking the wrong question.
The financial health of a family depends on its investible surplus at any point in time.
When the breadwinners work for a living, a good part of the surplus ought to be invested and not spent frivolously.
After retirement, the surplus could be invested or used in full to enjoy the finer pleasures of life.
Investible surplus is defined as
Surplus = Income – Expenses.
Interpreting this simple equation is a tricky and often a touchy subject.
You get a surplus if
1) you earn much more than you spend
or if
2) you spend much less than you earn
Unfortunately, there is a problem. The ugly truth is that these two conditions are not independent in practice.
You can spend much less than you earn only if you earn much more than you spend!
Distribution in income levels causes inequalities in society. However, all is not lost for those who earn less.
Consider a family (couple + 2 kids) whose sole breadwinner is in the 10% slab (or lower) and is likely to be in the same slab for the rest of
his/her life.
Can the couple expect to be financially independent after retirement?
Yes, if they expect to maintain their current lifestyle in retirement (and not dream of anything above that).
Yes, if they invest as much as they spend until the breadwinner retires.
But how practical is that?
The couple has two kids to parent. There is more to parenting than just taking care of the basic necessities of children. A parent will have to
indulge the children at least once in a while. They will have to support the kids dreams.
What if they decide to buy a small house? What if want to take a holiday? What if they want to spend a little extra during festivals?
Do we tell them that such things are luxuries and a strict no – no for them, because they are not earning enough?
Do we tell that the pleasures that rich and the affluent enjoy are beyond them even if they wish for it sporadically?
Financial advisory has to be clinical but who would have the heart to say such things to the family?
I don’t have an answer. However, I think there is one thing that MUST be said to such families:
Invest what you can, but invest it right, and as early as possible in productive assets. Never touch your investment unless absolutely necessary.
I write this post in the light of recent reactions to the post detailing the real-life experiences of two people who are financially independent:
I am miffed at comments which suggest that their financial independence is only because of their high income levels. Miffed because they could have been spendthrifts, locked their money in fixed deposits and still be chained to the desk.
The primary reason they are financially independent today is because of their disciplined investing in aggressive assets.
Had they earned less, they could not have retired early. No question about that. That, however is not the point.
A disciplined person, who understands the value of investing in aggressive assets to the best of their ability is more than likely to be financiallyindependent when they stop working. That is what counts.
That is all that we can expect a breadwinner and his family to do, irrespective of their income level.
During the recently concluded IFA Galaxy meet, I was delighted to spend most the day with Subra. He narrated how the peon in his office has a corpus of a few lakhs (thanks to Subra’s counsel). When the peon learnt about the value of his corpus, he could not believe it.
Disciplined investing matters. Investing right matters. Financial independence is not an impossible dream. It is a dream that is far away.
Yes, the investible surplus determines the distance to the dream. Why harp on that?
We can only control the controllables, but control them we must, to the best of our ability.
That is the mistake my parents made. They never invested in a productive asset like equity to the best of their ability. The comfort with which they met ends during their earning years gradually withered away, thanks to inflation.
Aiming for eventual financial independence backed with meaningful effort is something that we all should strive for. Regardless of ourincome levels.
Not all of us can achieve early financial independence.
Not all of us can enjoy the same level of financial independence. Subra’s office peon cannot go on a vacation abroad.
That goes against the nature of our existence. Every aspect of our lives follows a distribution – a spread. ‘True’ equality is defined but its absence!
All this reminds me of this quote.
The worst form of inequality is to try to make unequal things equal – Aristotle.
Use our Robo-advisory Excel Template for a start-to-finish financial plan! Now with a new demo video! ⇐ More than 700 investors and advisors use this!
Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 2600 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 600 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!
My 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 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 (will work with any index!), or you buy the new Tactical Buy/Sell timing tool!
We publish mutual fund screeners and momentum, low volatility stock screeners .every month.
About the Author
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. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored three print books, You can be rich too with goal-based investing (CNBC TV18), Gamechanger, Chinchu Gets a Superpower! and seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation to promote unbiased, commission-free investment advice. He conducts free money management sessions for corporates and associations based on money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association, IIST Alumni Association. For speaking engagements, write to pattu [at] freefincal [dot] comAbout freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on developments in mutual funds, stocks, investing, retirement and personal finance. 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 from credible and knowledgeable sources before publication. Freefincal does not publish any paid articles, promotions, PR, satire or opinions without data. All opinions presented will only 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, seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now. It is also available in Kindle format.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, 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 199 (instant download)Free android apps
- All calculators from our book, “You can be Rich Too” are now available on Google Play!
- Install the Financial Freedom App! (Google Play Store)
- Install Freefincal Retirement Planner App! (Google Play Store)
- Find out if you have enough to say "goodbye" to your employer (Google Play Store)