In 2008, my expenses dropped to ‘normal’ levels after my father passed away (post a prolonged battle with cancer). By then, I had been in a regular position for less than two years, 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.
A family’s financial health depends on its investible surplus at any point in time. When the breadwinners work for a living, a good part of the surplus should be invested and not spent frivolously. After retirement, the surplus could be invested or used to enjoy life’s finer pleasures.
Investible surplus is defined as
Surplus = Income – Expenses.
Interpreting this simple equation is a tricky and often touchy subject. You get a surplus if you earn more than you spend or 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! The “much” is for those seeking financial independence early.
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All is not lost for those who earn less. Consider a family (couple + 2 kids) whose sole breadwinner is in the lowest tax slab and who will likely be in the same slab for the rest of his/her life. Can the couple expect to be financially independent after normal retirement?
Yes, if they expect to maintain their current lifestyle in retirement (and not dream of anything above that before and after retirement). 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 children’s basic necessities. A parent will have to
indulge the children at least once in a while. They will have to support the kid’s dreams.
What if they decide to buy a small house? What if they 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 say that the pleasures the rich and the affluent enjoy are beyond them, even if they wish for it sporadically?
Financial advisory must be clinical, but who would have the heart to say such things to the family? I don’t have an answer. Finding a balance is hard. 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.
Many assume that financial independence (FI) is only possible by high-earners. Yes, those who earn more can achieve FI early and comfortably, provided they invest right and do not splurge.
From personal experience and our readers’ stories, I can tell you that FI is achievable by those with medium income levels. The standout criterion is disciplined investing in aggressive assets as early as possible.
PV Subramanyam once told me 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. But why harp on that? We can only control the controllable, 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 our income 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. This is ‘true equality’!
“The worst form of inequality is to try to make unequal things equal” – Aristotle.
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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(X), 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 3,000 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 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.
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