What Rs 325 could do for you: Cost-benefit analysis

The Price of anything is the amount of life you exchange for it.

                                                                               Henry David Thoreau

The last two episodes on fun maths for our personal finances have been very well received by the readers. I have been a proponent of living a well-balanced life and for which financial well-being and independence is a sine-qua-non. However, while we must endeavour to live well and meet our legitimate aspirations that money can buy, we should never become a slave to money. Money by itself means nothing and is merely a token for barter – for everything but happiness. Money like fame, will only accentuate what you intrinsically are? If you are good, the money will make you better; if you are bad the money will make you worse; if you are happy the money will make you ecstatic and if you are unhappy the money will make you miserable. Money by itself is inert, neither good nor bad, it is our craving and avarice for money, which gives it a bad name.

One thing is sure – that money can’t be earned without effort or rather it can’t be earned and retained without efforts. We have heard cases of people who inherited great fortunes or won big lotteries but soon were back to being what they originally were – poor and miserable. So, managing your money is extremely crucial and germane to our overall well-being. The consciousness that we earn money only by spending our life-energy is extremely important as that will ensure that we spend our money, read life-energy prudently. Obtaining the best bang for the buck, you may say.

I am here to offer you a much better and enduring transaction for your Rs 325 and that is to ignite in you a want to be financially wise, secure and independent.

Life is all about transactions and as human beings we endeavour to make the best of each transaction be it of our efforts, time, relationships or money. Let’s take the example of a Pizza. A Personal or Pan BBQ Chicken Pizza at Pizza Hut costs around Rs 325. It has nearly 800 calories. It takes around 20 mins to be prepared, 20 mins to be consumed and it exits your system in about eight hours, give or take a few. All this Rs 325 transaction does is to give you gastronomic pleasure for about 20 mins and 800 empty calories which will require you to be on the treadmill for nearly 90 minutes to be shed.

I am here to offer you a much better and enduring transaction for your Rs 325 and that is to ignite in you a want to be financially wise, secure and independent. A want which will last you a lifetime and make you happier and richer in the long run. But you might ask, how am I competent to make this tall claim? After all, the topic of personal finance is not my core competence. Before answering that question, let me talk about a few famous personalities and their achievements.

They are the famous Wright brothers – the pioneers in aviation. Incidentally, neither had a pilot’s license or an aeronautical engineer’s degree and yet they invented, built and flew the world’s first aeroplane.

Alfred Hitchcock– Hollywood’s master of suspense and thrill. Was he a trained director? No sir. He was in fact a trained Marine Engineer.

Our own Chetan Bhagat, a graduate of the IIT and IIM, but best known for his bestselling books and movies like 3-Idiots.

And since we are talking of financial education here, we talk of William Bernstein, author of ten personal finance bestselling books including the iconic, “Four Pillars of Investing”- go ahead and read this book, it’s brilliant. He was incidentally a neurosurgeon by profession.

Let me very humbly put forth my credentials in the field of personal finance. My first book, “Musings of a Financially Illiterate Father” which got published in July 2018 is an Amazon Bestseller rising to global rank # 5 by Nov 2019. The book has been consistently in global top-20 in its genre over the last two and a half years.

You have to make money your slave- it should work to make more money while you have fun, relax and enjoy life.

But, why should we bother about being financially wise? Because if you are not financially wise, no amount of wealth is sufficient for you. Michael Jackson, the king of pop, sold over 750 million albums, he was the winner of 13 Grammy awards. But when he died in 2009, he reportedly owed more than 500 million dollars to his creditors and his estate went bankrupt.

Bhagwan Dada, the superstar of 1950s, with hits like “Shola jo bhadke, dil mera dhadke” to his credit. He had multiple properties and a fleet of seven cars, a different car for every day of the week. He died a pauper. The film industry had to pool money for his funeral.

Mike Tyson made an income of more than 500 million dollars during his boxing career spanning over 20 years. He owned bathtubs which were worth millions of dollars. He had 110 luxury cars and yet he was bankrupt before his 39^th birthday in 2003.

The lesson is straightforward and stark – it is not important how much money you make but how much of it you intelligently save and invest. You have to make money your slave- it should work to make more money while you have fun, relax and enjoy life.

Let me ask a few basic though uncomfortable questions of you. Do you really understand the power of inflation and compounding? How do you harness this great power which Albert Einstein called, “The Eighth Wonder of the World”?  Do you know that a late start in investing or getting just 1-2% lesser returns over time can make you poorer by crores of rupees? Let’s understand with a simple example of a person with an investing time span of 32 years.

• A time span of 32 years of investing @ Rs 20000 per month with Rate of Return (ROR) 12% CAGR = Corpus of Rs 7.8 crore.
• A time span of 32 years of investing @ Rs 20000 per month which increases by 6% each year to cater for inflation with Rate of Return (ROR) 12% CAGR = Corpus of Rs 13.25 crore.
• A time span of 30 years of investing (because you wanted to have fun for the first two years after you started to earn) @ Rs 20000 per month with Rate of Return (ROR) 10% CAGR (because you didn’t understand the fundamentals of investing) = Corpus of Rs 4.1 crore.

Your lack of financial acumen – not increasing the investment amount to cater for inflation, not starting to invest from your first paycheck and not optimising the returns has made you poorer by Rs 9 crore at the time of your retirement. There go your dreams of a villa by the beach, a cottage on top of a hill, annual foreign vacations, giving gifts to your family and philanthropy to contribute to the society, up in smoke.

And do you know the concept of “Pay Yourself First”? The lynchpin to harness the power of compounding. You pay to the government, taxman, lending agencies, your landlord, grocery store, petrol pump etc. before you get your salary, never to yourself to build up a financially secure future. And, if you are indeed paying yourself first, how much is that percentage of pay that is adequate to give you a comfortable corpus for your sunset years as also fulfil all your wants and needs. And in fact, do you know what are your needs and wants and how do you differentiate between the two?

Do you know the difference between assets and liabilities? What are the investible assets for a common investor like you and me and in which proportion should they be invested into based on your financial goals? This is incidentally called Asset Allocation – the alchemy of wealth creation and retention. Just to give an example – Real Estate has grown 30 times in the last 50 years which amounts to a ROR of 7%, whereas Sensex has given a ROR of 16.5% in the last 40 years. So, over long periods, equities have given better returns than real estate. But this is with the wisdom of hindsight. The real question is how do you invest for your future?

Do you really think that a professional like you has the time to invest in the stock market directly? There are nearly 5500 listed stocks on the Bombay Stock Exchange (BSE) and around 2000 on National Stock Exchange (NSE). The prices of these stocks fluctuate 100s of times in a day thus generating more than 7 lakh data points in a day. Can you follow them? So, what do you do? Take help of financial magazines and news channels who peddle financial entertainment enticing you to buy and sell frequently which makes them richer not you. In any case, if they get to know of a stock which is going to rise 100 times over next month, why will they tell you about it?

So, you want to take the route of mutual funds. Do you know that there are 36 categories of mutual funds with nearly 900 variants available out there? How do you select the best?

Do you know the tenets of taking on debts or loans? Nowadays, lending agencies are more than willing to give you loans, much more than you can afford. How much debt can you incur without adversely affecting your future?

And finally, have you given a thought about your children’s’ education? A BTech in India costs around Rs 20 lakhs today, an MBBS Rs 65 lakh, an MBA Rs 25 lakh. Education inflation is around 10% today meaning that these costs will double every seven years. So, if you have a child who is four years old and she wants to be a doctor, be ready to shell out Rs 2.5 crore after 14 years. Are you saving for that in the right investing instrument or a combination of instruments?

Going abroad for education is in fashion today. Do you know that a Graduation in Canada costs around 300,000 Canadian Dollars over four years- nearly 1.6 crore- today? If the child is four or five today, the cost will be Rs 6.5 crores at 18 years of age. Add rupee-dollar depreciation to this figure, which has been around 2.5% per annum, and the cost may well be Rs 7.5 crores. It is a seriously large amount. And don’t even think of Education loan – it is a millstone around your child’s neck for 8-10 years after she gets a job, or you have to dip into your retirement fund to clear it. Should you do it? Remember, there is an Education loan out there but no retirement loan.

So, let me end by giving you a better transaction for your Rs 325 – my book, “The Millionaire Mechanic”. It is a new genre in writing- a financial travelogue which will not only provide you answers to all the questions that I have discussed but also give you the thrill of a road trip to Kutch. So, please go to Amazon, Flipkart or Kindle and read the book and share it with your family and friends.

The choice is yours ladies and gentlemen – after all the life is yours.

Read more from Anand here:

My Reception in the Regiment: A Tale of Missing Belongings and a Charming Lady Doctor

A Different Way to Find Meaning in Life Part 1- The five blue zones Ikigai