Whether we are accepting or not
Money plays a key role in our life.
Many say that money
cannot buy happiness
Doesn't matter if it can buy happiness or not
but it can definitely buy
our daily needs
We are all working hard to earn this money.
Some love to work hard. But many hate it,
but still work hard for money
What if our hard earned money works
for us and earns more money to meet our monthly expenses?
If we have achieved that,
We have successfully removed the dependency
on money on our life.
That is called "Achieving FinancialIndependence"
Called "Nithi Suthandhiram" in Tamil
Today, In this episode we will
review the step by step direction
to achieve "Financial Freedom"
Step #1: Track your expenses
"Tracking your expenses" is the most important step
In financial planning.
Regardless of whether we have a monthly budget or not
it is very important to track the expenses.
There could be little ups and downs between monthly expenses
But we can find out on average, how much
we are spending and on what we are spending
through tracking expenses. If only we know
our expense average, we can predict our future needs.
This is what Aandi Senthil meant, when he said
"Information is Wealth" (Boys movie)
US residents can use websites like mint.com
that aggregates credit card expenses.
What "mint" does is, it aggregates the spending data,
categorizes them
and generates a neat report
Not sure what kind of service like
mint.com is in India.
Even if there is no such service, using our credit card
statement, we should be able to track our expenses
By categorizing our expenses,
We can do analysis like, where we are spending more
and if we can avoid or minimize that expense.
Even if you are not able to categorize your expenses,
at least track the total expenses.
This is my last year's expense chart.
If you can track your expenses like this,
you can see the details of where you are spending more
and where you can save.
I have included a sample
expenses sheet in the description.
You can copy it to your google account and can
modify it to your needs.
Step #2: Track your Savings Rate.
If you have started tracking your expenses in step #1
you can automatically start
tracking your savings rate.
Savings = Income - Expenses
The percentage of savings to your income
is your savings rate.
i.e (Savings/income)*100
To calculate how much money we need
for retirement, this savings rate is a key parameter.
The return rate of investments from those savings is
another parameter.
If you have not watched my asset allocation video yet
please watch that first to understand what return can be
expected from which asset. You are now looking
at the retirement calculator in networthify.com
I have included its like in the description.
Lets take a look at the input parameters in this calculator
If our savings rate is 25%
and if our average investment return is 10%
Lets assume that we are
withdrawing 4% from our assets after retirement.
Then by 22.5 yrs
we would have been ready for retirement.
What if our savings rate is 50%?
We would be ready for retirement in 13 yrs.
The reason we are using 4% withdrawal rate here is,
because when our assets is giving
10% return on average and if we are only withdrawing
4%, our invested amount will always be growing.
As it is going to last beyond our life time,
this 4% withdrawal rule fits perfectly
for retirement calculation.
Also, because we are calculating this conservatively,
this also reduces the risk
from inflation.
Use these numbers as guidance.
Because, in reality we have more expenses.
like kids education expense
and kids wedding expense.
Step #3: Pay off all your debts.
After started tracking our savings rate,
the next thing to do is to pay off all
our debts except mortgage.
If you ask me, I would say even the mortgage
debt with interest rate more than 4% should not be there.
But thats a topic for another day.
By paying interest to credit card companies,
we are gifting the "monstrous" growth
we saw in "power of compounding" video
to credit card companies.
That is why before investing any money,
we should be paying off all our debts.
After paying off all our debts, the next step to do is
saving for emergency fund. By this step,
we know how much we need on average
for monthly expenses. So save
3 to 6 months of monthly
expenses as emergency fund.
During an economy downturn,
if we happen to loose our job,
we could manage our life comfortably
using this emergency fund.
If you have saved 3 to 6 months of your monthly expenses
for your emergency fund, then you are officially
ready for investing. Congratulations!!
Any money that you are saving from now on
can be invested in any assets depending on your risk profile.
After starting investing, start tracking your networth.
Are you wondering what "networth" means?
In simple terms, networth defines our
financial worthiness as of Today.
In pure accounting terms,
Networth = Assets - Liability
i,e. All our assets value -
All our debt.
That is our networth.
An asset is anything that earns income for us
or anything that appreciates in value.
House, Land, Stocks
Bonds, Gold - all are assets.
Our car, TV, bike are all not assets.
Because neither they appreciate
nor they bring in any income. But the loans
on them are liabilities. In other words,
having a car does not increase our networth.
But the loan on the car will
decrease our networth.
Its easy to calculate the value of liquid assets.
But for immovable assets like
house and land, estimate the value
and use it in networth calculation.
If the house is 50 Lakhs, include 50L in assets
part of the calculation. If there is a mortgage of 40 Lakhs
on this house, include 40 Lakhs in liabilities.
So the house has contributed
50 - 40 = 10 Lakhs
towards your networth.
If you like to learn more on this assets vs liabilities
read Rich Dad Poor Dad book. If you don't have the time to read,
there are many Youtube videos that summarizes the content. At least watch that.
Set a target for Year over Year networth growth.
And work towards that target.
Growing our networth to be greater than 25 times our annual expense
is the last step in achieving financial freedom.
Why is that 25 times? Where is that coming from?
As we previously saw, it is coming from
4% withdrawal rule.
For example, if we need
10 Lakhs for our yearly expenses,
the money we need to save as networth is
25 x 10L = 2.5 Crores.
4% of this 2.5% is our annual expense need
of 10L. If this 2.5 Cr is growing every year
by 10%, we are withdrawing
only 4%
So our nestegg would keep growing by 6%.
It lasts for ever is the idea.
That is why saving a networth of
25 times our annual expenses is making us
ready for retirement.
So finally, how much we need for retirement is not
dependent on how much money we make
But on how much we spend.
All this is OK... but is it possible to
save 25 times our annual expenses?
That depends on our life style.
Lets take a look at few examples.
First - Simple Singaram, earning 5 Lakhs / year.
and saving 50%
i.e. he is spending only
2.5L per year.
The money he needed for his retirement is 25x2.5L=62.5L
If we assume that his
investment growth is 10%, he would achieve that 62.5L in
12 years. At that point, he
has achieved his financial freedom.
He doesn't have to work after that for money.
But he has the power to choose a work that he loves to do rather than for money.
Next, lets take a look at "Middle class" Madhavan.
He is earning 10L/yr and saving 20%.
i.e. he is spending 8L / yr
The money he need for his retirement is
25*8L=2Cr.
If we assume his investment growth is same 10%
He will achieve that
2Cr in 24 yrs.
Lets take a look at "Bandha" (lavish) Parasivam next. He is making 20L/yr.
But his lavish lifestyle
is not helping him to save any money.
The retirement money he need is
25x20L=5Cr.
Because he is not saving anything,
he has to work till death to maintain his lifestyle.
Cannot retire at all.
Of all these three, which lifestyle you choose
is your choice.
If you have not subscribed to this channel yet, please subscribe.
We will meet again soon in next video. Thank You. Vanakkam.