Sourav SinhaAre you enjoying your freedom?

15August

Are you enjoying your freedom?

Today is 15th August 2021 and we celebrate our 75th Independence Day.

India has come a long way from 1947 when Pandit Jawaharlal Nehru hoisted the tricolour on the intervening midnight of 14th and 15th August.

India has improved leaps and bounds over the years and with time our economic conditions have improved too. Today we are the 5th largest economy in the world and boast of having the youngest average population in the world.

We got political freedom from the colonial rule in 1947 but how many of us have gained financial freedom? To be fair we are far away from it.

India today has a thriving middle-class population but a big question that raises on my head is – are we financially free?

What is Freedom?

You are free only when you can decide what to do when to do and with whom to do it. Freedom also means you are the master of your time. Confused?

Let me explain.

But before that, let me ask you a few questions.

Can you get up from the bed at any time you wish?
Can you take afternoon naps on weekdays?
Can you say no to all business proposals that come your way?
Can you check your calendar and see if you have recurring meetings every alternate week?

If the answers are no to the above then you are not free. Yes, you are politically free, you live in a democratic nation, you have freedom of speech (I guess we have) but you are not financially free. And till the time you are financially free, you will have to keep saying yes to a lot of things that your heart doesn’t agree to.

It’s all about choices. It’s all about decisions taken or the choices made that have put us in such a situation. I have been an equal culprit of such a situation in my life. So you are not alone, you have a partner.

If you want to truly enjoy freedom, then what you should yearn for, is freedom of time and that’s only possible by making the right choices today. It won’t come easy. India’s freedom struggle was a long drawn affair but believe me, this freedom struggle won’t take that long.

Rich Vs Wealthy

There is a difference between being rich and being wealthy. Rich can be seen but wealth is not visible. Wealth is like an iceberg it’s 90% invisible! You can seem to be rich without being wealthy. One can have a big car, a big house, go on yearly vacations but if most of his major lifestyle expenses are serviced through debts then that’s not a wealthy lifestyle – it’s a rich lifestyle!

So try to garner wealth. Don’t try to show, being rich. We are living in constant need of self-gratification and we are under pressure to prove ourselves to others! But this doesn’t get you happiness! It gets eyeballs and nothing else.

Living within your means is the order of the day! Our needs and wants are controllable and that’s what is the first step towards getting wealthy. Restraining your “needs” and controlling your “wants” is what differentiates between living life under stress or gaining freedom!

50-30-20

In one of my earlier posts, I wrote about the 80-20 rule. Here I break this up further! It’s the 50-30-20 rule.

50% Needs: you need to take care of your basic needs within 50% of your net income.
30% Wants: all your wants (desires) should be taken care of within 30% of your net income!
20% Savings: 20% of your net income should be saved.

How we control our wants is what defines if we will gain freedom or not. Imagine a day when you get up and you can decide what to do, not what you “have” to do. You have a job you may love it too but does that give you a purpose and pleasure! If yes, great, if no, you need to gain freedom. But to gain your freedom you will need to sacrifice something. And that something is to control your wants. You can’t decide to purchase items that can be postponed.

Ideally, if you plan to buy something don’t buy it immediately. Wait for a month and see if your desire is still strong on that. Most of the time “wants” are changing and hence once you postpone after a few weeks, you won’t have the desire to buy. In that case, your money is saved. Even after a prolonged wait if your desire is still strong then go and buy it only if it’s within the above formula.

Insurance

Insurance is not an investment tool or product. Two have completely separate reasons for existence. Insurance is bought to protect our future needs or for future unknown eventualities.

If you have a child below 5 years, protect his future by buying a child education endowment plan. But how do you know what’s the amount that’s needed? Head to Funds India calculator. They have a marvelous calculator which can give you an idea of what amount you need to save for particular goals.

Insurance premiums are expenses that fall under the category of “needs”.

If endowment policies don’t cover within the 50% rule then opt for a term policy, only. 10-12 times of your net annual income should be covered under your term policy. This basically means you will have to relook at this every 5 years. Because every 5 years your expenses will increase due to rising inflation and you need to ensure that you are properly protected.

Discuss with your spouse about all your insurance policies. People tend not to talk about “insurance” with their spouses because no one likes to talk about deaths but it’s a truth that all have to admit. There is no guarantee of how many years one may live so even if that happens it’s your duty to ensure that your family doesn’t struggle for basic needs after you are no longer there.

Health insurance is a must due to rising medical expenses. Minimum policy coverage of Rs. 10 lakhs is required for a family of 4. Have a top-up policy every year in case you can’t afford the premium of Rs. 10 lakhs right now. So you may buy a basic floater policy of Rs. 5 lakhs and every year purchase a top-up which should be double the basic amount. The advantage is that a top-up policy can be purchased at 25% of your existing premium. This way you can keep yourself properly insured.

Debt

Our earlier generation used to buy cars and houses when they had enough money to cover that expense. Today we purchase cars and houses based on the down payment affordability and by EMI affordability. For a flat worth Rs. 40 lakhs most don’t have that money in their bank so they opt for loans based on the fact that they can give down payment of Rs. 10 lakhs and finance the balance Rs. 30 lakhs. Two things happen. One, your savings of Rs. 10 lakhs goes towards down payment (you lose your compounding power) and you end up paying EMI of more than Rs. 20k per month.

Now imagine if you are earning Rs. 40k per month. You end up paying more than 50% of your income in servicing the debt. This would eventually mean, “no savings”. You are young and free to think that your salary raise will take care of your future savings with time. But that’s a “big if”. “If” because our desires are always aspirational. Today you will buy a 2BHK house which will feel small after 5 years and you will then yearn for a bigger house.

Some get lucky and things fall into place but what’s the guarantee you are one of those lucky ones? Having a life of no debt is the first thumb rule for freedom. You gain freedom when you are not answerable to anyone.

But if you are living under a pile of debt then you have not gained freedom.

You might have a big car, you might have a big house but if they are financed by banks then these assets don’t belong to you. And till you pay them up, you are not mentally and financially free.

You might be in a job that pays well but has a toxic environment! Can you change your job at the drop of the hat if you have debts? You can’t. And you end up living a life which you are not happy about. Then what’s the use of having a house and a car if you are not happy?

These are hard questions, you need to ask yourself. If you need freedom, if you need total control of your time, first thing first, get rid of all your debts.

If you are already under debt then it’s time to stop and have a look at your finances and see where can you reduce your expenses so that the extra cash can be given to your existing loan.

If that means you will have to stop some investments – do it but first get rid of your debts.

Another thing to keep in your mind is that your term policy should be enough to finance that loan just in case something bad happens to you. I don’t mean to frighten you but you are responsible for your family. If something happens to you, God forbid, can your family pay up the pending loan via the insurance? If you have not done that, then do that today.

Emergency Fund

6-12 months of your needs should be available in liquid form at any point in time. So, for example, if you can take care of your needs within Rs. 15,000 per month then ideally Rs. 1.8 lakhs should be in your savings account or some liquid funds. If it’s not there then you are not close to gaining freedom.

If you are in a job which makes you unhappy, can you change it immediately? Most of the time, the answer is no. It takes time to get a proper job that will match your needs. But if you are not happy can you leave it immediately? You can take that decision, only if you are debt-free and when you have a 12-month emergency fund available with you.

Emergency funds are not supposed to be used in your “wants”. They are only kept for extreme emergencies. If you don’t have one, create today. I have a separate savings account altogether where I put some portion of my money every month to finance my emergencies. It’s a habit that I started in 2013. In between, I have had medical emergencies and those were taken care of only due to the availability of that fund. Even today that’s the first activity I do on payday. By default, 5% of my net income goes into that fund every month. And frankly, I don’t look into that account other than once a year when I have to submit my IT returns. If you don’t have one – start today.

We want freedom, but you will only get freedom when you plan properly. You can’t expect to be free if you have debts and if you don’t have an emergency fund.

Savings Rate

People feel that they will get wealthy when they get better pay. But the fact is that you don’t get wealthy with that mindset. You may get rich but not wealthy. Because wealth is created over time. You become wealthy when money works for you, not the other way round.

With your pay raise, if you push the goalpost of lifestyle expenses then you can’t get wealthy. Your goalpost should be firm. Your lifestyle expenses should not increase with your pay raise. That’s the only way to get wealthy. Because once you do that, what will happen is that your extra cash will be put under the savings/ investments bracket.

The only way to increase your wealth is to let your money grow over time. And keep increasing that investment amount every year with your pay raise.

Top-up SIPs are a great way to begin that journey.

If you have EMIs to pay, then pay some portion of your extra EMI with your new pay raise. Debt reduction is equally important to gain freedom.

But if your pay raise is used to finance a new vacation or a new electronic gadget, then you are pushing your date of freedom.

Finally, it’s a choice. And the choice is yours. Do you sacrifice a bit today to have freedom for yourself and your family or do you want to have instant gratification! I leave it to you to decide.

Goals

Having goals is very important in life. So it’s vital to ask yourself what are the goals you have in life that you need to fulfill or wish to fulfill. You will need money to finance your goals and it’s best you do not be dependent on anyone other than yourself for those goals.

You can break up these goals into buckets (I put them in an excel sheet with each tab having one goal).

What could be your goals?

It’s absolutely personal but generally speaking, people have goals like Children’s education, a dream house, a foreign or domestic vacation every 6 months, etc. Now that you have defined your goals, give a deadline (time) against each goal. If your child is 5 years old then you would need to finance his or her education in another 12-13 years. So you have a time of 10-11 years to build that corpus.

How do you know how much is needed? Well, head to Funds India and they have some good calculators which can project the costs of your future goals. Once you know the amount that you need you to get into planning mode.

For child education do you have a child education endowment plan?
Are you invested with any child gift funds?

If yes, add these up and see what’s the expected amount after 10 years. You can calculate that too with the Funds India calculators.

Now, check if adding them is taking you to your goals or not. If not then you will need to arrange more funds which if not possible today, wait for your next raise and invest it in a mutual fund of your choice.

Investments

As I stated above, insurance products are not investments. You are investing for your freedom. If you are new to investments then you can start with Mutual Funds. But remember you have better choices in case you have a window of 12 years or more. Even with mutual funds make a plan to have a proper balance of funds.

Invest 25% on large-cap funds
Invest 25% on Midcap funds
Invest 25% on Balanced Funds
Invest 25% on Small cap funds.

This is not at all something which I am advising you. It’s a suggestion. Finally, it’s your choice.

If you ask me, I will suggest that you invest only 50% of your kitty in Mutual Funds. 30% in stocks. And 20% in cryptos.

I am not keeping Gold and Real Estate in this discussion but I do believe SGB is a good option in building assets in the medium term.

Century SIPs provided by a few mutual fund houses are a good option too. This is a product that can connect your investments with insurance. You get insured 100 times your SIP amount. This is good because you are forced not to stop or withdraw your investments for a fixed amount of time. Discipline is very important to get wealthy and this product forces you to remain displined.

For direct equities, once again you will need to do a lot of research on what to buy and when to sell. Most people don’t have so much time but that doesn’t mean you should pay these Mutual Fund companies the various expense charges that they keep charging you. You can get rid of these expenses by investing directly in equities via Smallcase and Zerodha. This allows you to have full control of your funds – you become your own fund manager.

Open an account in Smallcase.com which is directly integrated with your Demat account. Zerodha is very easy to use and is very user-friendly and you will have fewer charges to pay if you invest through Zerodha. Smallcase allows you to invest directly in equities in portfolio formats and you can buy it in SIP way too. The advantage is that you are the owner of the stocks and you will have full control of your investments. And if you are a man like me who loves to enjoy dividends then because you are investing directly in stocks you enjoy the dividends too not like in MFs where you do not get any dividends.

Over the past few months I have been reading and talking with people related to cryptocurrencies and I think 15-20 years down the line this will become the new normal on how people deal with money. It’s a big disruption in the money market and I think if you invest today, you can get multi-fold returns a couple of decades down the line. But do not invest too much yet, be very sure about your risk appetite because you can lose a lot of money in the short term. It’s highly volatile but the returns can be quite unimaginable in the long run.

I maintain a retirement fund. I used Funds India Calculator to understand the corpus I need to create for me to retire (Retirement means financial freedom – not retirement from work). These are the places where I have invested for my retirement goal.

Reliance Retirement Mutual Fund
Franklin Pension Fund
PPF (Public Provident Fund)
NPS (National Pension Scheme)
Stock investment in ITC and Reliance.

Now, this is something I won’t advise you to copy. Because your way of thinking could be completely different from mine but I just wanted to give you an example of how I have diversified my retirement corpus. Every year, I update my excel sheet to understand how far away I am from my goal.

I am definitely not there yet but I am surely getting there.

If I can do it, I am very sure you will be able to do it too. I would really love all my friends to enjoy freedom. It’s important to live a life filled with happiness and that’s only possible when you do not have any burden. I advise you to plan your freedom today.

Happy Independence Day everyone and I hope to see you financially free too.

PS. If you are young and you are yet to get going, I will advise reading a few time-tested books to further crystalise your thought process.

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