Tag: compounding

How a 15 year old can aspire to be a billionaire

How a 15 year old can aspire to be a billionaire

Last weekend I was at one of my relatives place.  She has two young kids.  One of them is around 19 years and the younger one might be around 14-15 years of age

I was very glad to notice that they had an interest in making investments at such a young age.  I also loved the idea that their father was actually instilling in them a habit of trying to evaluate different avenues in investing.  This means that in India the efforts of channels like ETNow and  CNBC TV18 & the efforts of the mutual fund industry and stock exchanges like NSE are starting to bear fruit.  If kids and parents start discussing financial products then the future is definitely bright for the Indian middle class.

When they came to know that I write a blog on achieving financial freedom, they thought of asking me for some recommendations on stocks and other investments, which I denied. I prefer not to give advice on any specific type of instruments or stocks, because a) I am not qualified and b) because everyone has a different risk appetite.

Since I like to look at just the basics and compounding and the rule of 72 are simple things that anyone can do at the back of an napkin, I just spent time with them on that.

Using the above I just explained to them without any use of even a calculator how wealthy he could grow.

If the younger son invests today Rs10000/- at the age of 15.  India’s long term growth rate has been about 15% average.  Even the indices therefore will grow at a long term average of 15%.

Therefore if he was to put this 10000/- in a Nifty ETF, it would also grow at an average of 15%.  By the rule of 72 if he divides the number 72 by 15% then he will double the money in about 4.5 years.  For simplicity let’s assume 5 years.  which means every ten years it will grow 4 times. So his investment table, if he keeps invested with this 10000/- would look like below.  Just staying invested without doing any hard work (incidentally staying invested could be the hardest thing) he can convert his Rs10000/- into Rs10million or (Rs 1 crore)

Age Amount@15% Amount@25%
25 40000 100000
35 160000 1000000
45 640000 10000000
55 2560000 100000000
65 10200000 1000000000

The second column is if he looks out for investments which can lead him to compound at close to 25%.  then you see the magic.  The amount converts to Rs1 billion (100 crores).  Look at what happens between the ages of 45 and 65.  At 45 he would have Rs 10 million and at 65 Rs 1 Billion.  Even Warren Buffet’s wealth if you Google at age 65 and now at age 85, he is one of the richest men on earth just because of this phenomenon.

Obviously getting 25% on a consistent basis is not going to be easy, over a long period of time.  But the key is going to be about staying invested.  I hope the young guy can.

If you have any young guy you know, just show him this table of what his 10000 today can do for him over  30-40 years.

Till next time….

Carpe Diem!!!

 

 

Investments and Bitcoins

Investments and Bitcoins

I was recently listening to the Berkshire Hathaway annual conference addressed by Warren Buffet and Charlie Munger.  This was being beamed live via Yahoo.

In this Yahoo presentation before the conference began they had some of their correspondents check out the people who had cone and then one of the correspondents also did a small interview with Warren Buffet.  One of the questions he asked was – what Warren thought about Bitcoins and cryptocurrencies.  This question kind of has stayed with me because this was something which I myself was not clear for a long time and then a lot of people have asked me.

As is usual of Warren Buffet he gave a very simple explanation for what is an investment and what is trading.  This is something which I found very useful and I thought of sharing.

For him cryptocurrency is not a investment because the cryptocurrency has value only in the eyes of the next person who wants to buy it so it’s a commodity for trading and if someone is willing to pay higher price you gamble on that.

Unlike trading an investment is an instrument of some kind which earns on its own even if there is no one to come and buy it from you… so if you buy farmland in your village and even if the next person is not willing to buy it from you at a higher price, at the farm you can still grow crops and have cattle etc. …. Same would be the case in terms of investment in equity…or for that matter even buying a cow can be an investment and the milk can be sold

So if you are wanting to do an investment keep this fundamental concept in mind …..will this item earn for you  irrespective of somebody wanting that item or not.….if you buy foodgrains with the thought that somebody will buy it from you at a higher price then that is trading. On its own foodgrains will not grow more foodgrains for you

So your house for your own living is not an investment – which is something I had written earlier also is a bad idea, but a house which you buy to rent out to generate passive income is an investment and therefore a good investment

Equity purchase of a company which manufacturers or makes something is an investment because the company will continue to produce its goods irrespective of whether someone else comes and buys that equity from us or not

People become financially free when they make investments. These investments earn for them and compounding grows the earnings multiple times over. The longer the runway –  as Mohnish Pabrai puts it – for compounding to play its part the more wealth you create.

Till next time….when you are in a dilema…think very simply ….will it earn for me irrespective whether the other person wants it or not.

Carpe Diem!!!

 

 

 

 

Living carefree forever

Living carefree forever

Last week I saw this movie “102 Not Out”.

It stars 2 of the best actors in Indian cinema Mr Amitabh Bachchan and Mr Rishi Kapoor. It’s a very sweet story about a 102 year old father and his 75 year old son.
The son has lost his interest in doing anything in his life while the father is still active over the age of 100. It is an extremely sweet movie which I would recommend everyone to watch.

The movie got me thinking on how this person would have lived his life from retirement, which in India is typically at age 58, for another 40 + years.

For sure he must have had enough Investments that could last him for 40 years of zero regular income.

The average age that an Indian is approaching 70, what that means is for every 38 years of working life the average Indian will now have to survive without the facility of a regular income help him through those next 10-15 years

Given that medical expenses and medical inflation are at such high levels you really need to think how will you survive without asking for any assistance from your children

There are very few things which are inflation proof and especially for an economy which is growing so rapidly and looks to become the third largest economy in the next 15 to 20 years, inflation pressures will always be very high.

So you need to think in terms of what are your investments and what kind of returns will they give you for you to survive for those years when you don’t have a regular stream of income and still have the will to enjoy like Amitabh Bachchan in 102 not out.  You need to celebrate life not live a life of drudgery.

Tell next time
Carpe diem!!

There is nothing sexy in achieving financial freedom – part 2

There is nothing sexy in achieving financial freedom – part 2

Yesterday I wrote about how most of these Ultra rich people – Warren Buffet, Tony Robbins, Richard Koch, Robert Kiyosaki – actually followed a system rigorously even when there were roadblocks around the way

The systems required that they had to do some amount of sacrifices. Maybe they did not go out for a date when they were young because they had to ensure that they were closing something as part of their system.

I also realised when I started a bank mandate initially with just a 1000 rupees. Initially it did matter that even before I could utilise the money, the money went out from the bank. But slowly I got used to it and I went on increasing my commitments to the money getting directly debited from the bank into some Investments.

In 3 years I did not realise what a difference that had made to my financial stability. Based on the possibilities that my investments could do, I actually sat down to figure out a date by which if my assets reached a given value I could leave my job and start doing what I want.

While God has been kind in a lot of these endeavours it is also a matter of the systems working and the investments compounding in the background.

For all those young guys if they read this, just a very small portion of their income if they can directly give a bank mandate, for money to be deducted to go into an investment, without they realising, they can all become millionaires.

If you leave it to your discretion that every month you will invest based on what you save…. You will never be able to invest.

The human brain was designed to ensure that it survived and immediate gratification was more important than long term safety. Hence the brain does not allow you to take a chance with your safety of money and wants you to have it till the last moment. But when you have a system to automatically reduce the money from your bank for an investment the brain gets used to the lesser amount of money and you are able to live a similar Lifestyle even with that less money.

Today there are possibilities of various kinds depending on your appetite and the goals that you have to invest in mutual funds in SAP or in a recurring deposit whichever way you want.

Whatever you do and whatever your risk appetite, put a system in place so that it works in the background and gets you to your goal

If you can resonate with my content, a follow on my Facebook Page will be highly appreciated!

Thanks in advance! 🙂

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Why you should not buy a house to live

Why you should not buy a house to live

For most Indians having a house is the first investment that they ever make.  Even the government gives subsidies for taking your first house.  The first house is an emotional issue for most middle class Indians.

After getting a job an Indian male is expected to work for the next 2 to 3 years and then get married. After marriage husband and wife want that they have a house of their own as their first investment where they can live on their own.

So after the person has started working and for 3 years has saved something he gets married spends his savings immediately for expenditures after marriage. Then he starts saving for a house and takes a loan to buy his first house.

Now the company giving the loan is more than happy to give him a longer duration loan because they also realise that compounding helps them make more money.

While paying for the instalments the husband and wife end up completely blocking their liquidity for the next few years.

As time passes you have the family growing and the investments never happen.
Suddenly at the age of 45-50 the couple realise that they will retire in the next 10-15 years. Life has just passed them by.

I did the same thing incidentally, so I know what this couple goes through.

The house I bought by investing Rs 200000 and taking a loan for the remaining 1900000, costed me over the next 15 years a total of rupees 3700000/- and the hardships that we had to undergo because of not having spare cash.

If I take out the benefit of tax that the government of India gives, I ended up paying a total of rupees 3300000/-. Today the value of the house is about Rs6000000/- so net gain of Rs2700000/-.

If I had invested the same monthly instalments in equity over the next 15 years (less the rent I was paying and less the tax benefit I got) I would still have invested every year about Rs150000/-.

The 200000 plus the 150000/- every year for the next 15 years in the conservative NIFTY index would have resulted in me getting approximately Rs100,00,000/-. At this point I could have bought the same house on cash and still have 4000000/- to spare or I could have bought a much bigger flat.

Now there is always this issue about staying in a rented house versus buying your own house… If you can manage to stay up in a rented house for a longer time and if the rent is controlled then you can hold back the fixed cash flow that you will have to shell out when you take a loan for your house. The rent also gets the income tax benefit.

Some of you may come back to me saying – the house also appreciates…. That’s true but the appreciation of any property even in a place like Bombay has not been more than 10 to 12% compounded over the last 35-40 years…. An investment at 15% will beat the appreciation of the property anyway… The second and more important point is, if the house is where you are going to stay then its appreciation has no significance because you will not sell the house in which you are staying and live somewhere else.

Now my intention of the headline is not to stop people from buying a house in which they should live… but the appreciation of the house and the interest rate that the loan company charges actually kill the capability of the couple to ever create wealth.
You should buy the house where you take a loan such that the interest payments get both the husband and wife a tax benefit and therefore the cash outflow is low. You should first invest and create a corpus which appreciates more than the value of property and from that corpus take out enough money and do a down payment so that the interest outflow is just enough for qualifying for a tax rebate.

Till next time….

Retire at 36 ….part 2

When we are young and you ask me to save 60% then what are we earning for….if we cant enjoy when we are young, when do we enjoy.

Instant gratification is a the bane of becoming wealthy.  If you read The SNOWBALL-the biography of Warren Buffet, among the richest men in the world, you will realise the benefits of delaying gratification.

There are 3 other ways of looking at the same discussion which I put out in part 1.

Suppose you were to target a corpus of Rs3crore (30 million) at the age of 36 and today you are at 21.

An alternate to the 60% of Rs500000/- could be that you take your initial job at Rs10,00,000 and invest Rs400000/- in the first year and increase the investments every year by 5%  for the next 15 years.

Or you could take a job at Rs500000/-, in the first year save only 40% but in the subsequent years increase the investments every year by 20% instead of 10%.

The last option is to not take up a job at all. Become an entrepreneur. An entrepreneur has the potential to grow earnings geometrically.  The reinvestment in your own business can grow more powerfully than investing anywhere else.

At the end of the day the idea is to do what you love and love what you do….for that invest early so your nest egg can grow faster and then you can enjoy life forever.

Till next time…Placeholder Image

Retire by age 36…

Retire by age 36…

After my last post some people mentioned why I don’t lay emphasis on asset allocation.  I am not a financial planner so I wont be able to comment on that.

This blog was started so that people, who are my son’s age, learn the basics of money and how to make money work for them.  Unfortunately our education system doesn’t teach this.

The idea of financial freedom is the ability to choose what you want to do in life, rather than money dictating what you “have” to do.

With that in mind there is no doubt that equity has been the biggest compounder over the last 30 years in India.  Even if you just invested in the BSE Sensex alone you would have compounded about 15% over the last 30 years.  If you remember the maths from my earlier blog…that would mean that 6 periods of 5 years.  By the rule of 72, every 5 years the money doubles.  So in 30 years 10000 invested becomes 640000/-

My advice to my son and others his age (in the early 20s) is very simple.  If you can invest about 60% of your income, only in equity over the next 10 years…you can be financially free to do what you want after the age of 36..  The type of equity that you choose can vary.

Assume you are 21 years of age and earn Rs 500000/- per annum and every year get an increment of 10%….you invest 60% of your income – i.e Rs300000/- per annum.  If you invest and get 15% return then every 5 years this amount doubles…by the age of 36 this amount will become 24,00,000/-.

For the next year you could save 330000/- by the age of 36 this amount will be close to Rs23,30,0000/- . The next year’s number will be Rs22,00,000/-.  At the end of the 15 years, you will have more than Rs 30000000/-.  (Rs30 million!!) as your asset base.

This does not mean you won’t work after the age of 36….but when you have this kind of an asset base, you will do the work that you love.

Asset allocation for these young people can be thought of later.  The India growth story has along runway in my opinion.  At this young age I would not like them to play defensive because even small interest rate differences, can make a huge difference in their wealth.

If you are interested there are blogs by J L Collins and Money Moustache which I have found very interesting.  While they talk with respect to the US market the underlying concepts remain the same.

You can retire by age 36 and do what you love.

Carpe Diem!!!