Generally, people talk about FIRE – Financial Independence to Retire Early. I just crossed fifty a few years ago and retirement is far from my mind. Even if I had continued in employment and retired at 60 odd, I am sure that I would have kept myself busy by assisting people to achieve financial independence. Since I achieved financial independence early, I am now able to put my dreams into action. I could have done the same with a wealth management firm. But I realised that the shareholders would put pressure to generate revenues and that would make you sell products that are good for the firm and not for the client. But this post is not about the wealth management business but how I got to FIFE. I will share some of the things that I did to ensure that I reached FIFE a little earlier than I had imagined.
The foremost principle to FIFE is a high income whether it is salary or business income. The importance of a good education that will give you a good start cannot be emphasised more. I have been explaining the same to my children. Make sure that you get into a good institution not only for your studies but also for your first employment/assignment. Many factors were at play when I got an offer from Arthur Andersen & Co where I started by CA. I could have taken the easy way out and chosen to work for a smaller firm where life is easy but I deliberately chose the hard route. This meant working in office for ten hours a day under constant pressure to deliver high quality work and the additional stress of studying and clearing the CA exams. So choosing the tougher road works out in the end.
After clearing CA, I chose to join the Aditya Birla Group in the Chairman’s office. Though the group was not a well known employer then, the role appealed to me and I took a leap of faith. I spent the next thirteen years of my career at the Group and did four different roles. It is here that I made an entry into Financial Services where I have worked for twenty four years and which has given me enough to reach FIFE.
Choosing the right industry and the right organisation plays an important role in maximising your income. Of course, you need to work hard, keep acquiring the necessary skills, be flexible, etc. I was fortunate enough to do different roles in different organisations as I realised that I am not the person who can do one role and work in one company for many decades. FIFE now allows me to become an entrepreneur which is something that I wanted to do which led me to take up commerce after my tenth.
Though I had a good income, I was always conservative in my spending habits. I recall that I always purchased cars through my employers. This allowed me to save and invest my funds. Further, I would opt for a version which met my needs rather than splurging a couple of lakhs more on a higher model for features that I did not need. Till date, I have never made a full payment for a car at the time of purchase, as the same has been adjusted in my salary over a 4-5 year period. The added benefit being that insurance and maintenance costs were also borne by the company.
The same is true for mobile phones too. Always took a phone from my employer, used it till it stopped working. Never made it a status symbol.
We would also take many vacations as a family and we would try to be economical in our spends. On a recent vacation, I noticed a number of young couples with kids at an expensive resort and I was wondering whether their income would allow them to reach FIRE or FIFE quickly.
The three most important determinants of FIFE is your income, your savings and where you invest the savings. The higher the income and savings, the higher is the chance of becoming independent soon but the most important decision is where you invest those savings. The one mistake that I have made is not committing to equity whenever I could. I should have started the SIP early on and stuck to it. I was a bit conservative at some times. This is an issue when you work in financial services and you understand concepts such as valuation multiples and other sundry parameters. I have been waiting for a correction since the Sensex was at 52,000. After that covid happened and the Sensex went down to 30,000 odd and I should have had the guts to increase my equity allocation and as always you worry about whether the market will go down even further. As I write this, the Sensex has crossed 80,000, That’s a 60% increase from 52,000 levels and a 160% increase from the 30,000 levels. At many times, my exposure to equity was less than 60%. I should have committed more to equity and not worried about market levels or whether markets would fall further. The indices have shown almost a one way street to reach 80,000 levels. Even at these levels, the markets are over- valued but if you have a five plus years perspective, it still may be the best asset class to be invested. Here is an analysis that may help you understand the relationship between income growth, savings and investment income. I have assumed that a thirty year old is earning twenty five lakhs per annum, is paying tax of 25% and investing 30% of the balance. Investment incomes have been assumed at 10%, 12% and 15%. In order to achieve FIFE, one’s wealth should be at least 10-15 times annual expenses. Look at the below table:
| Scenario | Income growth | Savings | Investment income | Wealth multiple at age 60 |
|---|---|---|---|---|
| 1 | 15% | 30% | 10% | 7.37 |
| 2 | 15% | 30% | 12.5% | 9.74 |
| 3 | 15% | 30% | 15% | 13.29 |
The only variable above is the investment income number and the same will depend on the proportion that you invest in equity and debt. If you invest 100% in equity, your entire savings may earn 15%. If you invest 60:40 in equity and debt and you assume that equity will earn 15% and debt will earn 8%, then the portfolio will earn 12.2%. And a 30:70 portfolio will earn 10.1%. The wealth multiple at 13.29 means that at age 60, the wealth accumulated is 13.29 times the annual expenditure at age 60. Assuming that you change your asset allocation and earn a lower return, it would mean that your annual investment income should be more than your annual expenditure thus giving you the freedom to do what you want. Of course, the whole idea is to get the freedom at the earliest and this is where the income growth multiple as well as the savings rate needs to be increased to reach that number quickly.
The above numbers can change over a period of time. For example, at higher income, the savings rate will also increase and hence the wealth multiple will be much higher than what is stated above. These calculations should be done at individual levels and should be updated every 3-5 years to validate the assumptions.
Clearly, the following adages still hold true:
- Maximise your income, savings and investments.
- Invest as early as possible. Start your SIP from your first income and keep topping it up every year by 12-15%;
- Stay invested for a long time. Resist the temptation to sell your investments and spend the same. Rent instead of buy or take a loan at a lower rate;
- Maximise your equity allocation. Plan your asset allocation properly but maximise your equity allocation.
Plan your finances. Determine what is most important to you, plan for it and invest accordingly.
