Our last video was about investing in our 20's. Many people asked for a video about investing in our 30's and 40's.
Let's cover that too. That is the topic of this episode.
Hi. My name is Vijay Mohan, and you are watching Investment Insights.
The biggest advantage we have in investing in our 20's is time. We give our money the maximum time to grow.
If we don't invest in our 20's, then is that the end?
There is a Chinese saying that says, "The best time to plant a tree was 20 years ago. But the next best time is now."
So instead of feeling sad that we missed investing in our 20's, feel happy that we are at least learning about it now.
If time is an advantage in our 20's, there is a different advantage in our 30's and 40's - more income.
We would have grown in our career and gotten around 3 to 4 times (or more!) as much salary as we were getting in our 20's.
However, with a family to look after and other expenses associated, there will also be a high amount of expenses compared to our 20's.
But at least we will also have a high income. That means even if we only save 20%, that will be higher than the 50% we would have saved in our 20's.
So we have to try to save as much as possible for investing.
How do we do that? What do we normally do? After expenses, we try to save the rest. Instead, we should try to save and then have the rest for spending.
Let's say that we have a monthly salary of 1 lakh. If we spend and then keep the rest for saving, what will happen?
After expenses like going to the mall, eating biryani, going to the cinema, etc., there will only be around 10,000 or 15,000 rupees left.
Instead of that, if we automatically put 30,000 into our investment account, then we will only see 70,000 coming into our bank account.
We will think of that as our income (70,000 rupees) and we will spend accordingly.
For those of you in the US, you can use this strategy for your 401K. Increase your contribution percentage so that yearly, you contribute 20K.
We wont even realize that money is being saved for our retirement. But every year, seeing it grow to 50K, 75K, 100K, etc, is a happiness all by itself.
In 15 years, the balance will come to around a million dollars.
Next, we need to know the money we need for retirement. We need 25 times our annual expenses for a comfortable retirement life.
To achieve that 25 times, we should have a target for every decade, and we should save and invest accordingly.
As an example, let's look at a possible target. At 40 years old, we want 7X. At 50 years, we want 15X. And at 60 years, we want 30X.
Like that, we want to set a target and invest and save to meet it.
Keep your plan as rough guidance. A plan almost always doesn't go according to plan.
Life will throw many surprises at us. That's ok. But if we have a plan, we can see how much we are deviating from it.
Looking at the deviation, we can change our strategy to get us back on track.
You might say, "You are expecting us to have 7X at 40 years old! But I am only just starting!"
Let's look at a sample calculation. Our current age is 35. Our yearly salary is 5 lakhs. Until today, we haven't saved even a single rupee.
But from now on, we will be saving 30% of our income and investing it.
Our investment return is 10% per year. We get a 6% salary hike per year as well.
You could ask, "Who would give a salary hike of 6% per year?" You can put what you expect in your own calculation.
Next, inflation. Can anyone forget about that? We will keep it as 6% here.
At the end of the first year, our net worth, or the amount we have with all our assets minus debt, is 165,000 rupees.
Networth as expense multiple: we are looking at our net worth as a multiple of our annual expenses. At the end of the first year, that is 0.47.
In the next year, our expenses and income both increase by 6%. At the end of the second year, our net worth multiple is around 1.
If everything grows at these same rate (income, expenses, savings, etc.) then at age 60, we will have 20X.
Not bad. But what if we want 25X? What can we do? Well, we can increase our savings rate to 35%. That results in 25X at age 60.
Now we have a target for getting 25X. But if you say, "No, I cannot save 35%," then another option is earning more money.
Let's increase our salary hike for each year to 7%. Now, we would have attained 27X at age 60.
Getting a 7% hike each year is no easy task. We have to constantly grow our knowledge and skill set to achieve that.
Next, investment return. If we invest in an equity index fund, in the long term, a 10% return is very probable.
It can even be higher. But for our calculation purposes, let's conservatively keep it at 10%.
Even though we are starting late, don't get too aggressive with your investments in the name of catching up to people who invested in their 20's.
For each risk that we take to beat the index, we increase the probability to do worse than the index.
But I'm not saying that you shouldn't higher risk. For higher risks that you want to take, you should do it in a small percentage of your portfolio- 5% to 10%.
But anything more than that, in my opinion, is a needless risk. It is not necessary to do it at all.
On the other hand, it isn't necessary to put 100% into equity. Per our comfort level, we can invest in other assets as well.
According to that, we should also lower our return expectations.
If you put 100% in equity, you can keep it that way until 50 years old. In the next ten years, depending on the market situation, it is best to slowly lower that allocation.
When we retire at 60, it is best to keep around 50% or lower in equity, and so we should adjust our portfolio accordingly.
This is all just a suggestion. You can use the percentage that is at your comfort.
Next is inflation. The 6% here is for managing your current lifestyle.
Let's say our friend buys a new car. We are also earning well, so let's buy one too. Our manager has bought a new iPhone. We are no less. Let's buy one too.
Like that, if we keep buying things to upgrade our life style because of peer pressure, that is called lifestyle inflation.
This will change our savings rate for the worse, as we will have more expenses. Let's change it to 20% to accommodate for the change. Then at 60, we will only have 12X.
I'm not telling you to not upgrade your lifestyle, but to make sure you understand how it impacts your savings rate. After calculating this, then you can make a decision.
Next is debt. We have already looked at good debts and bad debts on this channel. We should avoid bad debts as much as possible.
Today, everyone is trying to put us into debt. "0% interest, sir. You can buy it now. You can pay it off later nice and slow." they tempt us to buy needless upgrades.
You might try to avoid this by only shopping online, but now there is "Buy now, pay later" option.
They badly want us to get into debt. We have to watch out for that.
The link to this spreadsheet is in the description. You can't edit it in this copy, but click "file" and make a copy that you can edit.
You can put the numbers that fit your situation. This sheet's purpose is not to accurately predict what our future needs, but to act as a rough guideline.
This is also to show how savings rate, lifestyle inflation, investment return, and income impact our financial growth. It will be useful for each financial decision we make.
If you think, "This is really complicated. I don't have time to focus on this," then you can out source that. There are many fee only financial advisors out there.
You can interview different advisors and choose the best one for you. A good financial advisor has only your financial growth in mind.
If a financial advisor wants to buy useless products in the market with your money and earn a commission, then it is best to leave them behind immediately.
There are other things that we have to do in our 30's-40's. If there are family members relying on you financially, then you have to buy life insurance, especially term insurance.
There is a whole other episode explaining that. If you haven't seen it yet, then you should watch. Don't think of life insurance as an option - it's a must.
Next, health. In our 30's, we will be eating lots of unhealthy foods, like biriyani, porotta, etc. Our body is like an engine. As long as we take care of it, it will run for a very long time.
But if we overload the engine, then it will look like it is fine for now, but its reliability will fall in the long term. That will lead to giving up all these at the age of 40 because of cholesterol, sugar, etc.
But I'm not telling you to give up on biriyani- just have a limit. Then you can enjoy it for a long time. If you want to enjoy everything now, then you will have to forgo them in your 40's.
So, regardless fo whether we are exercising everyday or not, make sure you watch what you eat.
Next, spend time with your kids. Make sure you spend as much time with them as possible, because in a blink of an eye, they will grow up.
Then, even if we want to spend time with them, they won't be able to. They will become busy and have stuff to do in their own lives.
Other than this, what else do we have to do in our 30's and 40's? Tell me in the comments.
Before I finish, I would like to tell you something. There are a lot of new subscribers to our channel. Looking at a lot of the comments, most of them have already been answered in a separate episode.
So whenever you have time browse the episodes in different playlists. Building Wealth, Early Retirement, Personal Finance, Stock Market- there are many different playlists.
I'm sure there are many episodes that will interest you. Check it out. I will see you in the next episode. Thank you.