Earning money through value – A personal perspective

What with one thing or the other, I have been totally irregular with my blog this year and have been almost absent for the last two months or so. Part of it is due to my busy schedule in a variety of things and the rest is linked to my life situation. There are however, several ideas I have which can be converted into significant and meaningful blog posts and let me try and do it more often from now on.

In the last post I had written about how money actually comes to you or anyone from other people and you need to provide value in order to earn money. That blog post had a very good readership and several readers commented on it. Let me try and expand this more on the current post. I will take my own example and this should help readers get into my thought process. Some of this was not evident to me as I went through life but experience leads to knowledge and wisdom, so I have a very clear perspective on how things transpired for me in life as I went along.

For people who know about me I an from a middle class family based out of Durgapur in West Bengal. My father worked in SAIL and we had a fairly comfortable existence with a family of 5 , though not a luxurious one. Education was always a priority and I was a good student completing my schooling from St. Xavier’s school, going on to get a BE degree in Computer Science & Engineering from Jadavpur university, ending up with an MBA from IIM Calcutta. Like most people, I was creating some intrinsic value through all this education in the hope that there will be companies who will give me jobs based on their needs of such value. I did have 7 such jobs when I graduated from my Engineering but decided not to take up any as I had got admission into IIMC. On my graduation from IIMC I received 2 job offers from HCL and Wipro, deciding to join the former.

Over the next two decades, life was a roller coaster ride on both the personal and the professional front and I lived through it enjoying it immensely. On the personal front getting married to my wife Lipi, births of my two children and their growing up, moving from Delhi to Chennai and now Hyderabad, travel and vacations all made life enriching. On the professional front progress was hectic as I was part of management in just 4 years and progressed swiftly to top management cadre in another 4 years time. My first CEO role was in 12 years time and I worked for another 15 years in similar Executive positions. The knowledge, skills and expertise I was able to gain through my initial education and later on through my experience and performance in the various job roles helped me in securing these positions and earn a certain amount of money.

After 27 years of corporate life, I realized that doing what I did for 15 years at CXO level was taking its toll on me. I was still pretty good at what I did but I did not enjoy it any more. I also wanted to add value to more people rather than restricting myself to just one company as the CEO etc. I also wanted more time to myself for pursuing the many interests that I had. While I had always been able to maintain a very decent work-life balance, when one gets to 50 there is a clear feeling of time passing by rather quickly. I therefore quit the regular corporate grind and started a Management Consultancy practice where I worked with SME companies in the IT/ITES areas to help them formulate and implement growth strategies. Here again my corporate experience as CXO provided the value that such companies were looking at and they were prepared to pay for it. This mode also gave me enough time to follow my interests and passions.

Over the years I had been very interested in personal finance, stock markets and investments in general. This helped me in organizing my finances in such a manner that I was truly financially independent. In real terms it means I do not really need an active income to maintain my lifestyle but can fund it from whatever assets I currently have. As I wanted to share my experiences and knowledge with others, I started this blog in 2015 and it has been a pretty successful one. A lot of people saw value in it and reached out to me for helping them with their financial planning. Though I do not do this professionally I am happy to do it for people who approach me.

Training on a variety of topics including high end management area has been a long standing interest of mine. I developed a framework on Strategy planning and Execution courtesy my being CXO of so many companies and currently offer workshops in these to companies for bringing about change in the way their management people think and act. There has also been an abiding interest in Education over the years, B school education being at the center stage of it. I have been mentoring people for B school admissions informally for the last 5 years and have started to do it formally this year. Food, travel, sports and performing arts are the other interests i have.

So if I am looking to earn money out of all my knowledge, skills, expertise and interests how can I do it in tangible terms? Look out for the next post as this one has got rather long. I promise the wait this time will be a much shorter one.

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The transience of life

When I was in class X at St Xavier’s School, Durgapur we were taught the Shakespearean play Julius Caesar as part of our ICSE curriculum. I consider it the best work of the Bard and it is full of memorable quotes that had made an indelible impression in my formative mind. The part I best liked was the one where Caesar’s wife, Calphurnia, is beseeching Caesar to avoid venturing out that day, citing the several omens that had occurred. Caesar’s response to it is an all time classic :-

Of all the wonders that I yet have heard, 

It seems to me most strange that men should fear,

Seeing that death, a necessary end,

Will come when it will come.

I do not wish to be morbid but it is a given that all of us will die, some earlier than others and some later. Given that this is an essential truth, it will seem logical that all of us should try to add value to our own lives and that of others while we do live. However, it is really not so for most people. Many of us are obsessed with some facets of life and hold ourselves back from enjoying life fully. Once common fallacy is that we need to be focused on financial responsibility and therefore cannot indulge in some of the things that will greatly add value to our lives. The sad part is that life, as you know it, may well be over tomorrow morning. Let me give you some examples, which brought home this truth to me powerfully over the last one year :-

  • In a get together of our school friends, I was shocked to learn that many of their parents, who I knew very well while in school, have passed away. I felt rather fortunate that my parents are still there and in reasonably good health.
  • When I shifted from Delhi to Chennai a Recruitment consultant had helped me find the job in Sify. Got to know last November that he had passed away, he was only 55.
  • In our school we were a batch of 70 and this has already seen 4 deaths.
  • Look around yourself and you will see examples of people passing away suddenly and unexpectedly.

Death and taxes, it is said, are the only certainties in life and in the Indian context the former is the unique certainty. Therefore, it makes a lot of sense to do worthwhile things in life in an early part, give yourself time and money in the end and finally find time for things you genuinely enjoy. I have tried to do this to a large extent in my own life, though I do not claim to have all the answers. A suggested blue print could be this :-

  • Focus on building your knowledge and skills through education in the early part of your life. However, if you enjoy sports or any other hobbies and are reasonably good at it then you must take it up. Find time for it, can always be done.
  • While making a living is important, do not get into believing that work is your life as that will be a very sad way to view it. Strike a balance – you work to earn money so that you are able to do things you genuinely enjoy doing. It could be reading books, watching plays, acting in group theater or traveling.
  • Children do need to focus on education but do not make them one track people, there is a lot more to life than school marks and college grades. Spend time with them to understand  their potential and try to develop the same. As parents our responsibilities should be to enjoy our time with the children when they are young, they do grow up very fast and will go away long before you want them to.
  • Unless you have a venture of your own or are really passionate about a profession, try to organize your finances in such a manner that you are financially independent by 45 or 50. This will give you enough time to do the things you love and enjoy while you are still physically fit. If you do a job till you are 60 then you will have very little energy to do other things in the rest of your life.
  • While it is impossible to get a general blueprint for everyone, for most in modern India who want to get professional qualifications and work thereafter, follow this :-
    • Focus on Education, sports and hobbies till you are 22 or 24 depending on what qualifications you go for. This is the time to build skills and value to yourself.
    • Focus on your career for at least 4-6 years before you think of marriage.
    • Between 28 and 48-52 focus on your career and your family life simultaneously, making sure you have a rich life as a professional and as a person.
    • If you do things right then by this time your children will be in college and you will be financially independent. Once this happens, you can figure out how you want to spend your next few years.
    • At this time arrange your finances in such a manner that you can live comfortably without having to depend on any active income.

Living life well is important as it is the only one we have. Making it useful for others will make it worthwhile, but we first need to take care of ourselves and our families before we can think of others. As such the earlier we can get to financial independence the more chances we will have of being of use to others.

You may want to read several other posts in this blog to understand how you can achieve the above.

 

Financial Independence at 41 – A reader query

India is truly a land of great contrasts. On one hand we keep hearing about difficulty in getting jobs and job losses in a variety of sectors. On the other hand we see people just coming out of colleges getting salaries that their parents did not get even when they retired. The vast majority are forced to work till very late in their lives, yet we have some who plan to retire at a relatively early age. In this post I wanted to share about a reader who wanted to check with me as to whether he could retire at 41.

This person, let us call him Ravi, is atypical in many ways. He is currently employed and is 27 years old. Even at this young age he is clear that he would like to pursue his passion seriously when he is 41. So much so, that he is unwilling to get married and start a family, which he feels will hinder him from achieving his goals. His parents are also self sufficient and have even contributed to his NPS till he got started in his job. The objective of giving this background is simple – I want readers to understand that not all of us can look at this plan, most of us have families and will need a whole lot more to run our lives as well as to retire.

With that proviso, let us look at Ravi’s current situation :-

  • His current NPS balance is 9 lacs. We will assume he keeps it at this and lets it grow at a rate of 10 % every year. He will have 34 lacs in 14 years time.
  • His monthly surplus is 60000 Rs today. We will assume it stays at this level for 6 years and then goes up to 90000 for the rest of the period.
  • We will assume that his Equity to Debt allocation is 60:40. So for first 6 years he will invest 40000 per month. This will lead to 1.7 crores in 14 years at 12 % return annually.
  • For next 8 years he will invest 58000 in equity every month. The extra 18000 for 8 years will add up to 29 lacs at 12 % rate of return.
  • For the debt allocation, these figures will be 62 lacs and 16 lacs at 8 % annual return.
  • Ravi’s total corpus when he is 41 years will therefore be 3.12 crores.

Let us now look at how much Ravi will be needing :-

  • As he lives in a smaller town his current expenses are only 25000 Rs per month or 3 lacs annually.
  • At 41 we can assume this to be in the region of 7 lacs annually.
  • Let us assume Ravi will live for another 45 years from 41. At a conservative level his corpus should be 45 x 7 lacs or 3.15 crores.
  • How should he deploy his money so as to get a passive income of 7 lacs annually? In this case as he has enough money, so keeping it in any instrument which matches inflation will suffice. However, as a good financial practice he should deploy his money as suggested in some of my blog posts earlier.

So, Ravi can retire at 41 which is great for him. What works for him is lesser responsibilities and ability to invest a lot at an early age. His parents have also contributed to his NPS which adds up. People with wife and children will find it really hard to retire at 41. However, something like 50 is still quite possible.

I will be happy to receive and answer any queries that the blog readers may have.

 

FIRE considerations – parents and children

What are the most important considerations for you when you are planning to FIRE? For sure, your lifestyle and expected longevity are two most important considerations but there are a few others which are paramount. These relate to your parents and children. Let us address both of these in the current post.

If you are thinking of FIRE today or in the next 2-3 years, you are probably 50 plus now. It is quite possible that your parents are around still and that is a great thing. Fortunately my parents are both living but I know many of my friends who have lost either one or both parents. Given what our parents mean to us, we would all want them to live as long as possible. In several cases, they will be living on their own. Now the issue is this – when they retired 20-30 years back, the corpus they had would have been sufficient to generate enough income but it is woefully inadequate today. My father retired in 1990 and at that time he only had about 10 lacs as a corpus. It seems impossible today, but it was true then. Now those were the days of 12 % interest rates, so 10 lacs would give you an amount of 10000 per month. In 1990 it was still possible to live reasonably well with that amount if you had your own house. However, it was soon to become difficult.

Fortunately, I passed out of IIMC in 1988 and started working so I could contribute to the family finances. Over a period of time, the inflation increased the expenses considerably and the interest rates generally went down. If you look at the situation today, the costs are at a level of 4 lacs annually, even though they live in a fairly simple fashion. Their original 10 lacs is only fetching 75000 Rs today. Thankfully my sister, who is a Doctor in UK and I are able bridge the gap. How did it affect my FIRE considerations?

Well, for my parents the situation was simple. I know that I need to contribute some amount regularly over a long period of time. I therefore just add this amount to my own monthly expenses and look at the total amount. So, If I am contributing 2 lacs and my own expenses are 10 lacs in a year, then I need to plan for 12 lacs.

As far as children go the issues are a little different. If you are doing FIRE at 50, it is possible that your children are still in college. I am saying this as most people will marry around 30 years and have their first child around 32 years or so. Therefore when you FIRE at 50, your child will probably be just starting college. In my case when I FIREd in 2015 start, my daughter was in her third year of Engineering and my son was only in his first year of his 5 year dual degree course. The overall expenses annually for them were in the range of 6 lacs and it was increasing at the rate of 15 %.

I had the following strategies to deal with the situation:-

  • I needed to fund the Graduation expenses of my children and had told them that if they wanted to do an MBA then it would have to be through an Education loan.
  • For the immediate next year, I put some money in FD in their accounts so that they would mature in time for their semester fees.
  • I also started my Consultancy services which resulted in some active income. To the extent possible, I used the money to create new FD’s with the same strategy as before. This meant, I always had enough money kept away for paying the fees for the next 2 semesters.
  • In 2016 when Rinki passed out of BITS and joined XLRI, we decided to take a loan of 12 lacs whereas the 2 year fees were in the range of 23 lacs.
  • Over the next 2 years we actually used only 6 lacs of that loan as I was able to fund the rest of the money through my Active income.
  • Now she has completed XLRI and will be joining her job in June.
  • My son has now completed 4 years and I will have to pay 2 more semesters, each to the tune of 2 lacs or so. As before, this money is arranged for.

So what is the bottom line? When we talk of FIRE, it has to take into account the situation of your parents and children. In all likelihood, you will have to contribute financially to your parents, assuming they are not staying with you. Build this into your monthly expense estimates and deploy your corpus in a manner so that you are getting this amount in a regular manner. For your children, their regular expenses can be catered through your monthly expenses. However, Education expenses in college are a different story altogether and you need to handle it differently.

Take care of both of these and you are ready to FIRE.

A TOI article on FIRE

As most of the readers will know, the acronym FIRE is for Financial Independence Retire Early. This is a very commonplace jargon in the US and is becoming popular here too. I was recently approached by a journalist from TOI who wanted to discuss my journey in this as she was writing an article on this.

For those who have not read it, click on this link to read the article. I found the article to be interesting though the writer has not addressed some important issues. In fact the How to part of the article is directly taken from our conversation.

If you go through the comments you will see that many of them are overly negative. That is really unwarranted as it is possible to achieve FIRE without compromising on things such as your old parents and well being of your children.

I will address this in the next post.

Financial independence is central to living life in your terms

Over the course of the past 3 years or so when I have been writing my blog, several people have asked me as to why I focus so much on financial independence ( FI ) as a goal when most people automatically keep working till they cannot do so. In some posts I have explained as to why FI is an imperative, even if you want to continue in your present job or profession and retire normally. However, the most important idea of being in an FI state is that it gives you the ability and confidence to live life in your terms.

What do I mean by living life in your terms? It simply means that you are able to do the things you want to do without having to worry about the financial impact of them on your future well being. There are only two conditions where this is possible. Firstly, you can inherit a lot of money and secondly, you work towards and attain an FI state on your own steam. Remember, in your life the terms are set by you, so it is not necessary that they will align with other people. For one person it may be the ability to stay in a huge mansion with all amenities, for another it can be the flexibility to travel as and when he wants and for a third it may be playing the stock market with some capital without the fear of losing it. Let me give you some more examples of what you may be able to do in the FI state – these are real life happenings with people who I know.

  • A couple in their 40’s take 2 vacations outside India every year because there is just too much to see and they have the cushion of FI.
  • A man who is a car enthusiast has bought a luxury car recently surprising many of his friends and family. He said that he wanted to buy it for about 2 decades but was able to do it when he understood that he was in an FI state.
  • A batch mate of mine who is a Banker, left his job and started to do workshops on personal finance as it has been his passion for a very long time.
  • A lady who has been a lawyer for 3 decades was able to switch to taking cases free for the poor when she realised she was well over the FI line.

I can go on with more examples but I think the point is made. Whatever your terms are, you need to be in an FI state to live life with those. Most of us work because we need to earn certain amount of money, for now and for the future. While we are doing that, we are unable to live life in terms of what we want – it can be a money issue or a time issue or both. Once you are in the FI state you will be able to reorganise your life in a way so as to do these things in a manner that fulfils your aspirations. To me, that is the essence of living – yes, there are times when you live for responsibilities and need to compromise on your personal aspirations but that is surely not a desirable state.

Coming to my personal example, what does being in the FI state mean for me? Also, to respond to the curiosity of many people, what do I do now and what do I plan to do in the future? Let me try and address it here :-

  • I do some Consultancy work if it is of interest to me. As I do not depend on the money from it to fund my lifestyle, the flexibility of choice is great.
  • As many of you know, I write this blog and am advising several people who seek me out. I have also made Holistic life and Financial plans for a few people who have reached out to me. Note that this is not my profession in any manner.
  • I have been involved very closely with the education of my children and that is coming to an end now. Interaction with many IIM and B school aspirants through public sites is something I am passionate about. I am also part of the admission panel for IIM Calcutta.
  • Conducting high end Consulting workshops for corporate organisations is something I love to do and will expand it significantly this year.
  • Travel has been a passion for me since long and I am able to do it much more now. In the last year and quarter we have been to Kumarokom, Araku valley, Italy, Goa ( twice ), Konkan beaches, Durgapur, Ayodhya hills, Khajuraho and are now planning a short trip to Bali.
  • Sports is another passion I have and I am really happy to be able to watch almost anything I want to nowadays. Looking forward to the FIFA world cup.
  • I am toying with the idea of writing a book. Something may or may not come out of it but I will make a fairly serious attempt this year.
  • I am also keen to explore the idea of forming a venture. The ideas for it are crystallised now and I will be looking for some founder partners soon.

When I measure all of the above against what I could have done as a CEO in a regular corporate job, I must say that I find this infinitely more preferable. The bottom line however is that I am able to do this only because of my FI state.

What is your ideal existence in life? If you are already having it in your current job or profession, great !! If it is very different from what you are currently doing then you need to think seriously about being in the FI state so that you can live in your terms.

After all you have only one life to live !!

Road to financial freedom for a fresh MBA

April is a month when the B school fever is at a peak, both for new admissions as well as for people who have just passed out and are about to embark on their first job. This year I got to meet quite a few of both varieties, courtesy my daughter’s convocation at XLRI and my being a panel member for the IIMC admissions. In one such interaction, I was asked a question – “how long will it take me to be financially independent, if my starting salary is 22 lacs a year and a good life today costs about 1 lac per month for a family?”.

I could not give a straight answer on the spot so I promised to get back to this person. If you look at it logically, we will need to make some assumptions in order to reach a conclusion on this. Let us go by the following :-

  • Rajat is 24 now and has an Educational loan of 20 lacs. He wants to pay it off in 10 years.
  • He is in a growth sector company and can at least expect a salary hike of 10 % each year. 
  • His initial costs per month will be 50000 Rs including 10000 Rs he sends to his parents.

Let us also assume that Rajat will live till 85 and will be financially free at age X. Based on what we had covered in the earlier posts, Rajat will need an income for (85-X) years. If he is assuming a cost per month of 1 lac in today’s prices, then it is reasonable to assume that at 6 % inflation, these costs will double in 12 years and triple in 20 years. Based on this Rajat will need 36(85-X) Rs as his corpus for zero real rate of return.

Putting some numbers in place now, let us see if Rajat can retire at 45 years:-

  • He will need to have 14.4 crores to fund himself till 85 years.
  • If he is investing in equity with SIP for 20 years, he will need to invest 1.45 lacs per month at a 12 % IRR. This is clearly not possible.
  • Viewing from another angle, how much can he invest today? Well, if he pays EMI of 25000 and has expenses of 50000 then he may be able to do SIP of 50000 at most.
  • In 20 years this will grow to nearly 5 crores @ 12 % returns.
  • With his increase in salary, Rajat will be able to do more SIP at a later date. Let us assume he will be able to do at least another SIP of 50000 Rs per month every 5 years. The new SIP’s will therefore be of 15,10 and 5 years respectively.
  • The new SIP’s will contribute the following to the corpus :-
    • 50000 for 15 years will grow to 2.5 crores @ 12 % returns
    • 100000 for 10 years will grow to 2.3 crores @ 12 % returns
    • 150000 for 5 years will grow to 1.22 crores @ 12 % returns
  • So from the MF route, Rajat will have about 11 crores.

Now apart from these he will also have substantial PF and some other Debt investments. Bottom line is he will easily be financially independent in 21 years time, if he is able to invest in a disciplined manner. As you have seen in the earlier posts, even with a corpus of about 12 crores or so, it will be quite easy to get this done.

I think the above will become the norm for the future very soon. We will have people working in regular corporate career for time periods of 20 to 25 years and then doing things which they are fond of. Of course, some may get off the train earlier so that they can follow something they are passionate about. 

Think of it – 45 and no worries financially any more that you have to earn money !! That is the stuff I always dreamed of but it took me another 5 years to get there.