Rabbit and hare – why I am repeating the story

Financial Independence
Photo by Pixabay on Pexels.com

As kids all of us were told the story of the rabbit and the hare. While I don’t intend to tell the story here, the implication of the story are more important to investing than all the “gyaan” and financial numbo jumbo needed for becoming wealthier.

The basic premise of the story is that consistency even if you take very small steps is more critical than large irregular bursts.

Photo by Pixabay on Pexels.com

The hare takes short bursts and then stops to rest while the rabbit keeps nudging small steps on a continuous basis.

For compounding to work, it is the consistency which is critical. That is why a systematic investment on a regular – weekly/monthly basis is more critical than investing a large sum at irregular intervals. Over here I am assuming that you are not a person who already has a large amount of money. (If you already had a large amount of money you would not be reading my blog anyway.)

There are 2 psychological issues which you need to keep in mind.

When small amounts of money keep getting deducted from your account on a monthly basis, it does not hurt and your spending patterns adjust with the little less money that you have in your account. But because compounding has less to do with the amount and more to do with the tenure and rate of interest, it works perfectly – like the rabbit – in building your wealth.

However I often hear people tell me that they would invest the money that they get in their annual bonus or sales incentive. While its a very good idea to invest the money that you get as a bonus(and not spend it), generally humans discount the bonus that is expected. So by the time the bonus actually arrives, there is a new microwave to be bought or their is a holiday to be taken or there is a relative’s wedding for which new dresses have to be purchased or there is a medical emergency for which the amount needs to be spent and then you never end up doing the investment.

I was part of this story for most of my life till 2013. I always intended to put the next major increment or bonus for buying my own house or making investments. But it never happened. Life just passes by and some new emergency, urgent expense etc. kept propping up and I did not have any major assets.

By starting very small investments on a regular basis from 2013 I was able to build consistency in my investment plan. The ups and downs of the market don’t bother me because I am getting to do averaging of my costs of the investments. Due to this I am able to build a core to help me work on ticking out items from my bucket list.

Whether you do any other new year resolution in 2020, take one step to carve out 3% of your monthly income and make automatic deductions for some investments. Slowly as you grow used to having 3% less income, raise the amount to 5% of your income and then to 10%. Check out your bank if they have any mechanisms to make this kind of deduction for investments. Today is just the 8th day of 2020….take action for a better, wealthier life.

Carpe Diem!!!

Investments as confidence builder

Financial Independence, Uncategorized

I have been writing about how investments can help in getting financial freedom. Have written extensively on how even a few percentage points of differences can make substantial differences in your earnings in the long term. Have also shared about how having different buckets of investments can also help you plan your vacations or other activities, which can make you happy.

Yesterday I was reading a book by Dean Graziosi – Millionaire success habits. While this book is not about investing styles and strategies, I would highly recommend you reading this book for the overall enhancement in the quality of your life. It helped me identify a few blindspots which I didn’t know I had.

In one of the chapter’s. he talks about stacking some money from whatever you earn to increase confidence. This was a new take on a topic dear to me.

I have also written earlier about how even very small amounts invested over long periods of time can make you wealthy, because the amount is never the issue…. it is the duration and the interest rates which determines how wealthy you can become.

Dean’s logic is that when you stack even small amounts, it gives your brain the satisfaction that there’s money for a rainy day and therefore you feel better, more confident and your decision making improves.

I would think confidence is a precursor to multiple things other than just pacifying your hyper active brain and taking decisions. When you are confident, you are buy definition not fearful. As per a study human beings have 70-80 thousand thoughts in a day out of which more than 70% are negative thoughts. Since our brain still has “fight” or “flight” response to most things these negative thoughts spiral into some of the other kind of fear.

Fear can be from you losing your job to your health to speaking to an unknown person or speaking in public. Most of the fears however boil down to either not having money (food) or health which are the most primal fears going back to the time when we lived in forests and hunted for food.

By stacking money and investing it you can give your brain positive inputs so it does not go into the fight or flight mode.

In addition the compounding equation starts playing. An ideal way to do this would be putting regular amounts into SIPs from mutual funds or into SIPs of ETFs. You can start SIPs in India from as low as Rs500/- (USD 7/-) per month.

Most people, like Tony Robbins says so often, over estimate what they can do in one year but under estimate what they can do in a lifetime. This Rs6000 (Rs500*12months) will become close to Rs100,000/- (USD 1500/- ) if invested for 20 years at an interest rate of 15%. If every year they were to invest a similar amount, then after the 20th year, EVERY YEAR, even if they don’t invest anymore they will definately have Rs100000/- coming without effort and securing their future.

Now if you know that even the small amounts of money that you are stacking will ensure your future, you would be able to take on your “present” with more confidence. And if you make your “present” better, your future will automatically turn out to be better because your future is based on the foundation of your “present”

Habits

Financial Independence, Uncategorized

I just finished reading the book The Power of Habits by Charles Duhigg.  I had bought this book long back but it was lying on my Kindle… forgotten.

It has been my habit, that whenever I saw a new recommendation, I ended up buying the book.  Especially so when it was available on Kindle because then there was the instantaneous gratification of having the book in my possession.  This was not a good habit because I always had a huge backlog of books to be read.  Now I have taken a sabbatical from buying any more new books, till I finish the complete set lying on my bookshelf as well on my Kindle.   I haven’t bought a book in 3 months and I have a feeling that I may not need to buy for another 6 months because of the backlog.

This book is a very interesting read and Charles shows with very interesting examples of how it’s very difficult to break a Habit He talks about the loop – “Cue – Habit – Reward”.  If you are not cognisant of this loop you cannot change behaviour.

Recently on ETNow there was a news item which mentioned that the amount of SIP flows had not changed dramatically even-though the stock market had been faltering over the last 12-18 months.  {If you have been following my posts then you would know that a SIP is a Systematic Investment Plan where money is directly debited from your bank account every month automatically}

This news item came as I was finishing this book and it got me thinking – is it that the flows have not reduced because of a habit as Charles Duhigg says or because of inertia or because the investing population in India has become so mature that they realise that in equity investment the short term rise and fall of markets have little significance.

Only one of my friends asked me, if she should change the scheme in which she had the SIP to another scheme for the SIP.  She did not mention about stopping her SIP.

I doubt if the population investing in Mutual Funds has become more mature.  This could be pure conjecture but the SIP culture in India is not more than 5 years old.  So a population maturing in 5 years becomes doubtful.

What could play is that people have inertia. So they do not go to the mutual fund agent or to the mutual fund site to stop the SIP.  My wife I think is from this constituency and the fact that I keep telling her that equity is for long term.

After reading the book I realised that there could be a third play here.  The media and the association of mutual funds has made SIP investing more like a movement. Now as Charles points out, once something becomes a movement then it creates leaders from individuals at the community level and the movement keeps going from strength-to-strength.

He gives a clear example of Rosa Park and Martin Luther King and how that one incidence in the bus and the links that Rosa Park had propelled the civil rights movement in  the USA.

I have a feeling something similar is happening here with the SIP movement.  Since people in offices and homes are now all talking about SIPs there will be a lot of peer pressure on a person if she thinks of shutting – off their SIPs.

Another thing which I think could be happening is that since the individuals have got into the Habit of living on a smaller amount in the bank, they do not feel a pinch if the amount they have out into a SIP does not appreciate for a few months.

Due to the amount of SIPs continuing the amount of money coming into the stock market has not fallen dramatically.  Due to this the market has not fallen because when the foreign institutional investors take money out the domestic institutional investors keep buying.

the AMFI and channels like ETNow need to be congratulated on creating this movement with their sustained initiatives in India.

Do you know of any such movements for creating a better financial future in your country…I would like to hear.

Till next time….

Pay taxes, still go for your dreams

Financial Independence

Death and Taxes are the only things which are certain in life.

There is nothing much which I can suggest on the first item – though if you are interested, it will be worth your while to look at Dr. Peter Diamandis and others on what they are doing for enhancing the quality and longevity of human beings.  If you subscribe to his Abundance newsletter it will give you insights into the kind of amazing work that’s going on in the areas of robotics, DNA research etc.

However coming back to taxes….this is the time of the year (April – July) in most countries when taxes have to be filed.

For service class people the biggest challenge is that the government takes away its “pound of flesh” even before we get the salary in our hands.  Depending on the tax brackets, generally the income tax rates are around 25-35% in most countries.  So for every $100  that you earn, the government has a right on $35 before you.  Which means the harder you work, the more your try to earn, the more you end up paying to the government.

Unlike a business person who is allowed a lot of expenses as tax deductible.  The employer has to deduct tax at source before paying the employee.  That’s kind of unfair for the employee.  Being an employee myself I completely sympathise with all my salaried brethren.

Having said that, we also have to take cognisance of the fact, that all the roads, hospitals, defence services that the government provides.  If we have to ensure prosperity and safety for all the people of the country then paying taxes is mandatory.  One of the big challenges for countries like India through history have been poor compliance to paying taxes.  That has resulted in us still being a poor country.

So we should ALWAYS ensure we pay taxes which are due.

For the employed the government in India does give avenues to do a tax deduction to plan for long term capital appreciation.  One of the things in this is the NPS( National Pension Scheme) in India. ( In the US I believe there are 401K plans) . Not only can you contribute about 10% of your basic income and get tax exemption, you can in addition contribute another Rs50000/-.  The biggest advantage of this scheme is that there is a very low management charge and you can decide to also invest a certain percentage in equity because of which you get the benefits of tax exemption as well as capital appreciation in the long term.

There is another avenue which you should look at exploiting and do good as well. The government wants you to help organisations which are doing good for the society.  When you showcase that you have contributed to a good cause you can also get a tax exemption.  Now that’s such a good idea….you do a good cause and the government supports you in doing good by giving you tax exemption.

There are many such things which the governments in India, US etc. give to help the salaried class reduce the tax liability.  I would sincerely suggest that you’ll take professional advice from a CA or CFA on how to bring down your tax liability as per what is legal.  But do not shy from giving taxes.

Now when you get the tax deduction, the money saved should be put into a bucket to help you achieve your dreams.  Over the long term these amounts aggregate to a very large  corpus to help you get closer to your dreams without breaking the bank.

Last time I had spoken of how I had gone about trying to achieve things from my bucket list.  You too can, by utilising the avenues given by the government, reduce your tax liability and then let that money compound.

Every person should have a bucket list to look forward to in life.  That’s what makes life interesting.  Let finances not stop you from living your life.  Plan things, use compounding to your advantage and take benefits given by the government to have life.

Till next time.

Carpe Diem!!!