207. (Building Financial Intuition) Your life may not improve by default
“It isn’t that they cannot find the solution. It is that they cannot see the problem.” — G.K Chesterton
Last week I met a couple in their mid-40s to help them in sorting their personal finances. Here are my observations from that meeting. I think they earn well enough but I don’t think they are able to save anything meaningful. Although they have set aside some money in fixed income instruments, I don’t think they are really investing. I don’t think of allocating capital to fixed income products as investing — it is only saving. Although they bought a fancy apartment a few years ago, they are in the process of selling it now because they are not able to afford its EMI (mortgage payment). They roll over credit card balances every once in a while. I do not think they live a particularly disciplined life — surely on the financial front but likely on other fronts too — like health, career etc. But in their minds, they are disciplined.
Why is this case significant? Because I don’t think they are an exception. In fact, I think they represent the rule. They probably represent the plight of most middle class of not just India but of all countries orientated along capitalism.
Quick excel calculations revealed that for them to retire in ten years, they will have to invest Rs 2.6 Lakhs (~ $3,000/-) every month until they retire. This calculation assumes certain rates for inflation and investment returns, which may turn out correct or not. So, this monthly number is not to be taken as cardinal but as indicative.
As things stand today, they are not be able to invest even one tenth of this monthly figure. So, what do they do? There can be many generic approaches to address this situation but most will not work because every family’s situation is unique and any workable solution will have to be specific to this family. Having said this, can’t we think of any “good” practices that will help address such situations. I think we can and here are what worked for me.
Recognize the problem and own the solution
“Your life begins to change the day you take responsibility for it.” — Steve Maraboli
If you want your problems to be fixed, first recognize that there is a problem and own the solution — no one else will fix it for you. Others can help but you will have to do the actual solving. It is very hard to change our habits and to resist the temptation of instant gratification. This makes investing for retirement very hard to sustain. I think honest recognition of the problem followed by attaching a strong, meaningful purpose is necessary for succeeding.
Creating savings
“The habit of saving is itself an education; it fosters every virtue, teaches self-denial, cultivates the sense of order, trains to forethought, and so broadens the mind.” — T.T. Munger
If you are not able to save anything today, how can you suddenly start saving a large amount? There are two levers here. One is earnings. Try to maximize earnings sustainably. You become more valuable to your employer. Stop wanting to maintain work life balance every day. There will be days (or weeks or months) where you may need to put in more work and there will be times when you will be relatively free for taking care of your personal priorities. World is not obliged to increase your income every year. The obligation is on you to ensure that world does not have a choice but to increase your income.
The second lever is your expenses. Stop worrying about the Jones’s. You spend on things you value. If you can’t afford something, you don’t spend even if you value it. No matter what, you ensure that you live within your means.
By increasing income and controlling expenses, over a period of time you will be able to save and invest amounts that are commensurate with your personal condition (your income and your needs).
Financial Hygiene
Maintain basic financial hygiene. Ensure that you have the right amount of coverage in terms of life and health insurance. Ensure that you have a suitable amount of emergency fund.
Health is wealth
“To get rich never risk your health. For it is the truth that health is the wealth of wealth.” — Richard Baker
Health implicitly affects wealth. Bad health will affect both your earnings and your expenses. Double whammy! Non-financially speaking, what is point of living with bad health no matter how wealthy you are.
Food: Ensure that you eat 3–5 vegetables in a week. Ensure that you additionally consume leafy vegetables 3–5 times a week. Ensure that you eat enough protein (I am a vegetarian — so, we consume pulses and curd in over 75% of our meals). Eat suitable amount of carbs. Eat 3–5 fruits a week. I don’t know if this is scientific but I know that it is actionable and is equivalent to “many steps” in the right direction.
Sleep: Experts say eight to nine hours of sleep a day is ideal and I aim for at least seven hours.
Exercise: Walk briskly thirty to forty minutes at least five days a week.
Stress: Seek stress that propels you into action and avoid stress which makes you anxious. Spend time with people that matter in your lives. You must spend time with yourself too.
All this is rather simple but certainly not easy. I keep falling behind on these practices all the time. Sometimes, I fail in nutrition and other times, I fail in exercising. Sleep almost always is an issue.
Faithfully following such practices as the ones mentioned above, does not guarantee financial emancipation. There are no guarantees in life. Our endeavour is to significantly increase our chances of success.
Bottomline
“One thing is sure. We have to do something. We have to do the best we know how at the moment… If it doesn’t turn out right, we can modify it as we go along.” — Franklin D. Roosevelt
Creating financial prosperity is one of the simplest but hardest problems that most people face. It is simple because its solution is simple — recognize the problem, maximize earnings (sustainably), incur only meaningful expenses, invest the savings in suitably calibrated risk instruments and maintain good health and relationships (including with yourself). Hard because it requires one to go against one’s default tendencies like instant gratification and social approval. To sustain on the path of prosperity, one has to own the solution by attaching a strongly felt purpose to it.
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