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.
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Pattu sir,
What a hard hitting article..
Regards
Guru
Hi Pattu,
This is a simple truth well told. I personally don't think that the amount you earn is relevant (unless it's at the very low subsistence level of earnings not relevant to this audience). The key is to strike a balance between current and future needs and define your needs according to your ability to pay for them.
Sanjiv
Thank you. Yes balance is the key.
All our parents ,with their limited financial literacy. invested their surplus only in low risk and low return investment only. That is how wealth was created in this country. As per RBI data on household saving only 3% of Indian households preferred to invest in high risk investments.
Your parents had concern for your growth and security in this society. They are right so is the majority of parents. Ultimately my children welfare is more important than the success (not sure) in earning speculative return on high risk investment.
Your parent and also my parent belong to 95% of RBI households.
Many of them did not know what risk means. Their investing was mostly forced. There are many instances in the 80s and 90s where people lost huge money in chit funds, resorts, teak plantations, more recently emu farms. They just were not able to gauge how risky the investment is compared to what returns are promised.
The economic reforms of1991 heralded the era of equities and after a couple of major scams major reforms happened in SEBI giving it statuotory powers.My parents and for most in my generation were close to retirement.The only savings they had was PF mandated by govt.Unfortunately even today no school curriculum contains courses on personal finance .It takes blogs like these and few other similar sites to spread and enlighten people on these crucial aspect.Recently i was reading a book by John Bogle father of Index Funds and founder of Vanguard MF which pioneered the concept of low cost investing.It has explained with such simplicity the art of investment and the profound impact that the simple but correct choices have on our financial health.
Very true. Thank you.
Sir.
A nice article indeed. It props certain questions about financial discipline.
Thanks a lot.
With regards.
Sourav Chandra
Thank you.
Do I see a slight displeasure about your parents attitude to savings.?If yes, as an old man I request you not to have such thoughts.Times were totally different.I am sure if your father was here to day he would have been proud of raising such a son who is offerring so many free valuable lessons to so many who have been lucky to find and follow him.
Not a displeasure sir. Just a regret. If my father has invested the money he used for smoking he would have either not got the cancer or we would have had enough for performing an expensive surgery. Thank you for your generous words of praise.
Oh My God-I did not know your father was a smoker. My father was also a heavy smoker. He too paid a deep price for the vice.So I know how you feel.
Thank you.
The problem with our previous generation(s) was that they could not trust the high risk equity. Because of their less income their risk 'appetite' (or should I say the digestion capacity) was very less - perhaps even less than the risk they could withstand in actual. My parents still say Equity is a bet - a bet to lose money. 🙂
Yes very true. Coming out of that upbringing will take some doing.
Control your wants. Live life within your needs.
True that. Thank you.
Interesting article.
Dear Sir,
A meaningful article ! My take on investing for the milddle class people :
Live simply and save as much as you can. Lets see where we end up when we retire. No point in losing sleep today thinking i need to buildup a corpus of 6 crores to retire comfortably and how am i going to achieve it.
True financial independance is to live within your means on any day.
Absolutely. Very well said. Thanks.
Thank you.
Thanks for the article Pattu sir.. I think, one of the paragraph in "Richest Man in Babylon" is correctly matches here. Quote "Hard work without consideration for what you do with your earnings is as futile as laziness. You have to be clever about what you do with what you earn—regardless of how much that is. Otherwise you will come to realise, that you have been working ‘year after year living slavish lives. Working, working, working! Getting nowhere…’
Superb Article!!
Thanks Prashant. Sorry. Saw this only one.
Thanks Prashant. Sorry. Saw this only one.
Thanks Prashant. Sorry. Saw this only one.