(This appears in some editions of Deccan Chronicle, today. Make sure you pass the message to your children. And if you have very young children, leave them a good inheritance without much risk)
Money & Life
There is a wonderful and thought-provoking article in New York Times that every young person should read. Here is a link to that
Financial planning may help you to understand some numbers based on a whole lot of assumptions. However, the bigger thing here is lifestyle planning. The author talks about saving more by spending less. Most good planners would also tell you the same thing.
I feel it would be nice if we have a breed of ‘LIFE COACH” that can help us with our emotional aspects related to finances also. Savings and investment are a function of attitude. It is good to pause once in while and take stock of our life goals and not just the money part of it.
Lifestyle is a personal choice. However, often, we are thrust headlong in to a lifestyle, without pausing to think. We are driven by media, advertising and what we see around us. It is a rat race where we want to have one better than what the neighbor has. I do not want to sound judgmental. What I want to point out is that financial planning should also include “lifestyle” options. What each lifestyle can do to our finances and our retirement plans. I will illustrate that with a simple example:
- Save 10,000 p.a. for 40 years. End of 40th year Amount is Rs.28.00 lakh appr
- Save 10,000 p.a from 11th t0 40 yrs End of 40th year Amount is Rs.12.25 lakh appr
- Save 10,000 p.a from 1-10 and forget End of 40th year Amount is Rs.14 lakh appr.
- To get 14 lakh at end of 40th year, you should save almost 90,000 p.a if you start after the first 30 years have gone by.
I have used a very modest sum of 10,000 per year.
How many of us sit down to think? We are more worried about the next iphone to buy or the down payment on the new car we want to get. I am not against this consumption. I think we owe it to ourselves to live well. I am pointing out the advantages of saving early in life, before our propensity to save is reduced with life’s responsibilities.
The numbers above assume a compounded annual return of EIGHT percent (8% p.a.). If it is ten percent, the 28 lakh would become Rs.48 lakh!!. The difference of 2% compounded over the 40 years magnifies the final amount almost by 100%.
The early years are wonderful years to put a foundation in place. If you have to give a gift of financial freedom to your child (debatable whether it is a good thing) put in a 10,000 monthly SIP in any ETF for the first ten years of his life. Pass it on to him only when he is 50. Probably he could retire. At 10% p.a. this will result in a little over three crore rupees on the ‘child’s’ 50th birthday.
The earlier you start your savings, the sooner you can hang up your boots. Of course, you may love what you are doing and want to be at it for as long as you want. That is a matter of choice. If you do not start in time to build your pool of savings, you may not be left with a choice to work or not.
You will also find that the later you start your savings plan, you will start worrying more and more about risk. Investing in bank deposits may be safe, but it is not tax efficient and consequently it will not beat inflation. Equities capture this in their growth. And equities need time to grow. If I start my savings and investment plan at fifty, with nothing to fall back on, I will be afraid to look at stocks. I will be more worried about preserving my money because I know that my future earning period is limited. On the other hand, if I buy shares when I am twenty-five, I can afford to be wrong.
The trouble with us is we do not know when to say ‘enough’. Lifestyle choices and ambitions are often in conflict with financial freedom. If you understand the magic of compounding, your choices will be easy to make.
I can write a million articles. You can read a million books. You can talk to hundred advisors. Nothing matters. YOU have to take the first step. The first step that you take towards a planned savings and investment regimen will reduce your worries dramatically. While you are working, put your money to work. So many things in life get easier. Happy Investing.