Financial independence for us is the amazing thing which allows you to go with the flow of life. We are far from calling ourselves remotely FI but in resent months I have loved the freedom of not fretting about money or other issues around it while we concentrate on maximizing our careers. Last few months have been far too busy on the work front for us to be able to look closely into our investments or sit down and write a post. There are a few unfinished posts in different files scattered around on my system but it is high time we talk.
Last few months have been a real roller coaster for us particularly in terms of added responsibility at work, amazing vacation and us taking more steps towards a better lifestyle. The lifestyle we are aiming at is one which allows us to be forgetful about monitoring our investments. It does not mean we did not save, in fact last three months saw a good chunk of our income being saved as we try to reign in our expenses.
We had started this financial year with a goal to keep our monthly spending within 14k not including rent, home loan EMI or parental support. Below is our total monthly spending since June since we are almost at the end of September I am counting the total till 27th.
June- 19,391/- (includes 2,200 for bike tire replacement and 1,918 for Mr. S’ clothes.)
July- 15,049/- (no out of turn expense except paying ~600 to get 300/- vouchers for a retail brand through loyalty points)
August- 11,893/- (this is way too much for a month where we were vacationing for almost 10 days. Though it does include some gardening supplies)
September- 13,774/- ( We still have four days till the end of the month and I am hoping to keep it around 15k. This includes 499/- for Amazon Prime(affiliate), 255 for a headphone and 625 for a trimmer.)
We also bought a replacement for Mr. S’ phone which died in June using the offers in past one week. Amazon Prime was also a result of that well thought shopping spree. We believe at 499 a year it is a decent deal right now as it allows us to buy smaller products for no shipping and gives access to some content.
While we are on the topic of phone I would like to expand a bit on it. Mr S’ phone gave up charging in June and after sinking in some money into it we shifted to a hand me down from parents. It was over 2.5 years old and we both feel like it went out too early. My current phone was bought for 10k and is around 1.75 years old. With all the new models and technologies flooding the market right now I wonder at what rate people change their phones. When did you last buy a cell phone and what is your usual update schedule?
Apart from shopping around a bit and repairing other items we also purged a decent amount of stuff from our house. We made some 80/- bucks out of it and my tiny apartment thanks me for it. We also sold our couch to a friend leading to a decent amount of space which gives me a lot of peace.
We have been working on cooking more at home and I have been trying to process some fresh produce for us to consume along the year. I am thankful that cooking makes me as happy as it does otherwise it would suck to cook every day. Past weekend I made some cucumber relish and apple jam which turned out amazing and some nankatai which burned since our oven is apparently hotter than the recipe guy’s. We have thankfully managed to keep our grocery bill in check and have barely had to throw away any food.
We have a lot of family time planned and in next few weeks and we plan to sleep in during Diwali holidays. We are also reigning in on our travels for the remaining months as we almost touched out yearly budget with previous vacations in the year.
In terms of our savings the market saw considerable highs last few months and is running on a downhill slope for past few days. I am hoping it will last long enough for us to capitalize on it with salary coming in soon. However we are still way ahead from where we started last year and I hope the next time I update that ticker on the right I can say we crushed the 10% mark.
That’s a lot of English about us, we would like to hear a lot more about you as well. We have been sloppy in responding but are so happy to read new comments coming in every few days.
Let us know how you have been doing past few months.
Healthcare is something that has been on my mind for some time now. Today when we are young and earn a decent sum we can probably afford to get sick and pay for some damn expensive treatments. We are also insured through our job, which means till we need over 6L in expenses we will probably be fine. The insurances cover pregnancy and child delivery should we need it.
Both sets of parents are well insured and their insurances have come to our aid in past few years. There has been a hospital admission, with both cashless (mostly), and reimbursement after paying. Our families have managed to get out largely unscathed from each one of these. However if the amount had gone way above what the insurance covered we could have easily managed the difference. Would we be able to do that if we were facing a debilitating illness? Nope. Would we be able to manage the same hospitalization post FIRE? We don’t know because we really don’t know where we will be and how much healthcare will cost at the hospital we are admitted to.
Let’s deal with the second question first. We have thought a lot about how we would manage finances if we face a long drawn severe disease. Today it would mean a drain on our savings, insurance and loss of pay. It will in almost all cases mean one of us or both of us will have to work longer. The ability to earn more will dwindle as soon as we distance ourselves from work and the gap in experience increases. Add to that the emotional stress that accompanies such a disease we might not be able to come out unscathed at all.
However we are also not sure if we should be worrying about it a lot either. But it seems to be a major concern for many and is definitely not unfounded. In past one year we have had a surprising (to us) number of people, reach out through comments and healthcare has been a major concern for most if not all.
As I said before we are currently covered by a decent cover and even though I would wish universal healthcare becomes a reality, I am not holding my breath for it. If it happens good for us, otherwise we intend to take a high deductible plan with a good cover and something that would cover major number of illnesses. Since wait period for most pre-existing conditions is 3 years 6-7 years from now would be a good time for us to buy it.
Insurance for 37 year old couple with 50L cover (excluding critical illnesses) today run for around 38,695/year , assuming a 10% hike every year they should be around 75,405/year when we are 37. This is neither high deductible nor requires co-pay. These usually reduce premiums in absence of claims, or in this particular example increases your cover to 70L if you don’t claim for 5 years. In the above cases of hospitalization of family the bill never exceeded the claim limit of 2 & 5 lac. Both the hospitals are considered reputable in their city; it included surgery in one and intensive care in both cases.
We realize that we need to have a robust strategy on how to deal with any health related expenses after we retire. In a lot of ER forums many suggest working part time for a job you like to maintain health cover. That might be another option.
Critical illness cover is more important than a considerable health cover. Cancer treatment costs run upto 10-20L today and even though research is on to reduce the price of drugs treatments are definitely going to get pricey. Those treatments that would require lifelong treatment are indeed a big drain on both emotional as well as financial energy of the family. This is one of the reason why critical illness cover is something which I have been looking into.
Term insurance is another such ‘what if’ cover that we have been researching of late. For barely 2-2.5k per month it sounds logical to be insured for 20 times your current income. Term insurance plans are of vital importance during the accumulation phase of any FI dream. Any life cover might be good to have but it kind of defeats the purpose if you have already accumulated enough wealth to live for the rest of your life.
Things other than healthcare
As I have said previously we are not sure what we will do when we retire and a small part of me worries if we would be happy being home all the time. Then again maybe we’ll be a celebrity through this blog in next 9 years and never have time! Like I said there are a lot of things we are ironing out. In past few months I feel like we have a better handle on expense side of things even with a lot of eating out. I hope to add the next part on the Saving Money series and probably start a monthly expense tracker on the site (like this one here though not as fancy).
On a side note it is next to impossible to get decent stock images for healthcare with US ACA issue splashing all over my screen. We request you to avoid having the same discussion here as well.
As you know the biggest reason for us starting this blog was to share and get feedback of our plans. We are really grateful for all the comments and suggestions we have received and would love to know, what your contingency plan for healthcare is.
First salary of FY 2017-18 is in and invested. It sure isn’t very interesting when you do one transaction and all of your investments are done for the month. There is no real thrill of researching and reinventing as you go along once you narrow down on a strategy to Financial Independence.
We started last year on shaky legs still learning to walk the financial planning bit of our lives. We were clueless about direct investing in mutual funds, zero brokerage trading(affiliate link) and more importantly the real long term game.
As we put first of our saved money, into various mutual funds we learnt we might want to change our approach to what we thought would suit us better. As the year went on we realized these early years are the best time for us to experiment with the investment strategy.
Below is an account of how we decided to save our money and how it went for us.
Most investors in Indian markets would advise to put your money in something which has high growth potential and it is still possible to beat the market. Why? Because we are still growing as an economy and a lot of measures are being taken to take us from a developing to developed nation.
With the urge to beat the market there is the need to know what will let you achieve the beating. We have no clue (like most around us) and we know we are in it for the long term. We know that the market will go up in the long run however the share or sector we bet upon may completely vanish the other day. You can easily ask those who lost money of kingfisher airlines or on businesses which are redundant today.
It was surprising for me to know that SENSEX and NIFTY change every day in how they weigh the stocks in the index and which company should be a part of the index.
With the uncertainty which accompanies making specific choice and our need to keep the money alive for as long as we can, index funds become the best choice.
Lower expense ratios are just added bonus and with the (late) discovery of direct funds we are paying as less as 0.3% for majority of our funds in expenses. This might not be a valid point for many but we don’t believe in sharing the returns of our money unless we have to.
We have thought of adding a few sector specific funds to the portfolio going forward but have not been able to justify the purchase. We own a few other funds some from before we decided to take charge of our finances and others as an experiment.
I am sure you can see where we believe our money is best invested.
The Dividend Gamble
In last November we started another experiment to see how dividend stocks would work for us. We started small and we have been keeping our holdings within 10% of our net worth. The reason for this is twofold one it keeps more of our money in other long term safer holdings and secondly we accept we are no stock picking experts.
We are still at the experiment and did pump a decent sum around March. However we are probably not buying a lot more individual stocks in near future and definitely not making individual stocks a majority sector in the portfolio. Since we bought the stocks in last few months on the FY it is not fair to judge how much dividend we got out of them. That analysis I would hold back for the next FY.
The Real Estate Factor
It would be stupid to not talk about real estate as a major contributor to our net worth. We do get a monthly rent but we do not include value of the house when we talk about our net worth because we don’t own it outright and because that value is never absolute.
Currently we are landlords for the only flat we own and additional money sure doesn’t hurt. We have gone back and forth about whether we want to add more properties to our portfolio. Over multiple discussions we have gone back and forth about our decisions to buy but the answer for now is – no. This stems not just from our desire to keep our lives simpler but also because we don’t really have spare money to put into a non liquid asset.
The Home loan
As said above and in multiple posts here and here we own a flat. We also own a home loan to go along with it and it is more than what the rent covers. Last year in April we equated our home loan, using the overdraft facility offered by our loan provider. That meant we would not be paying any interest at all and our loan would eventually end earlier. At that time it felt like the best use of our money and a guaranteed way of ensuring we do not default on our loan.
Around June we had started challenging our financial beliefs with something known as maths, which told us this was not the best approach. We ran multiple scenarios which helped us determine the best ratio between offsetting the loan and investing in other heads. We have since reduced the amount we maintain in the OD account and have invested remaining.
The OD account is our emergency fund account which allows us to travel (replenished by us) dole out money when needed for family emergencies or invest in bulk. Currently we divert rent collected to this account which allows us to take money out without making a huge permanent dent in the account.
We had been following NPS for sometime but it wasn’t till late February that we seriously looked into what this instrument can do for us. We found that it is a good way to both save today as well as let our money grow without any interference from us for a good time. We have opted into the aggressive plan which invests 75% of our money into stock market using funds and remainingn is split in debt instruments. This is in line with what we intend to do with our money anyways.
Before we invested in NPS we were aiming to max our contribution for PPF. PPF in its own right is a great instrument to let your money grow but being an interest based option it does not provide the benefits that NPS does. We are currently aiming to put 50K each in NPS to get the extra tax saving we can and keep on contributing 1Lac to our PPF.
In our tax bracket we are able to reduce our tax liability 20K while investing which makes it a double benefit deal.
We are blessed with a profession which allows us to earn some on the side without flouting company policies. Even though with increased workload we have not been able to grow the revenues we have however been able to support a big chunk of our travels through it. That has allowed us to build our stash and not feel trapped into the grind completely.
As we work towards re-balancing our lives and learning how to say no to unfair requests at work we both hope to achieve better quality of life and time to increase our side gig earnings.
The Life Changes
Apart from what financial changes we made including reining in our expenses last year led us to multiple personal changes as well. We are now much more conscious of both spending and consumption. We have always known how much we spent past month but how that relates to our overall goals was never clear. This was perhaps because we had no goals we were aiming for except for finishing our mortgage.
Our life has much more clarity now and we have far more discussion about where we plan on being in next decade and decades after that. There is a certain amount of satisfaction in inching our way to the goal.
Before this we were usually looking at our expenses and the amount left from income as potential expenses. Now every penny we make is a way for us to get out of mandated working and allows us freedom to choose how we wish to spend our lives. I feel much more at rest mentally about our way forward and running multiple scenarios has led us to for the first time settle into our current job. As we said here we firmly believe saving is more of a mind game than a money game.
We are always open to better opportunities but knowing even in current job with its job security we are on our way to ensuring a far better and relaxed life than many around us. We get frustrated every now and then but know we are not in deep trouble with where we stand today.
The desire to be able to work on our own terms has reduced our desire to own more stuff. We have been actively purging our belongings and have reduced a lot of clothes, plastic ware and small knickknacks which have been gathering dust in various storage locations.
This is also the first time in years that we have a household which we run completely and it has taken us over a year to realize we can finally grow some roots. We can choose to retire from this city if we want or swap to another once we have the chance. Like I said above we know even while living in this expensive city we can get our numbers to work. Even if you are not looking to actively save or retire and would rather spend every last penny you earn, take the time to think and decide where you want to be in five or ten years from now. If you are worried about what you can afford or how much you can save in your current situation running a few numbers can help you reach answers quicker.
How do your investment breakups look? What category of investments do you believe are best for you?
In most of the big cities around the globe people live around 20-30 Km away from where they work. There are many reasons for this decision but one of the most important one is rents are higher closer to work than 20Km away. When we shifted to the new expensive city we also had to make the same decision.
We considered our options at length and came to a few conclusions:
None of us wanted to spend over 3 hours every day in traffic burning our money. We value our time and both of us get cranky when we have to spend extended hours in sun and rain doing nothing more than getting from one point to another. In a city known for its traffic jams you would have to really love sitting in a car to be able to justify 3 hours a day.
We wanted the flexibility of leaving work early to get something done at the house or not taking entire day off because something had to be fixed. In past one year since we have moved we have had multiple handymen come in at odd times, a lot of things delivered and for most of the things it has been possible for one of us to take a quick ride to home and take care of things. This is also quite handy when family is visiting.
We don’t own a car and moving 20KM+ away would require us to trade our trusty motorbike for a car. This would mean a lot more money than we would like to dish out on commute. This regular expense would be in addition to shelling out monies to get a four wheeler.
Meeting future needs. Currently there are just two of us but if we do extend our family we would need to be able to run the triangle of home work and day care. Increasing the distance simply did not make any sense. To be fair we have not raised a kid before but none of us were interested in keeping the child on road for long traffic logged hours.
Above are some of the reasons we decided to live within 10 minutes driving distance from our house. That being said we have spent over 20 minutes covering the 2.5km ride because of traffic, congestion, broken vehicle rains or marches. Now imagine how much would these factors affect longer commutes where your time increases at every single red light you have to stop at.
But there are some other factors which might have affected our decision
Even though we can easily afford our current rent, which is over 10K higher than the cheaper suburbs, it does make us question our renting choice multiple times. For many however 10K might be the difference between taking up the job or not. Commuting longer to ensure that you can actually work is a great option provided you cannot find a new job closer to where you live and you cannot find an alternate living arrangement like hostels or paying guest/roommate setting.
We are also blessed to be a dual income household (which does affect our affordability) where both partners work around the same location. This has allowed us to share commute costs as well as ensures none of us have to face longer commute. Most people work at different location than their spouse. So it might be a conscious choice to live closer to one of the spouse’s work in case the spouse is responsible for household errands, managing kids or has any other constraint where being closer to the house is better for them.
We value our time a lot but we also value our living conditions. We are usually not interested in swanky apartments (unless someone else is paying for it), but we need decent clean surroundings and good construction. Our definition of that though might be very different from someone say with kids for whom a park nearby is a requirement. Same people or those taking care of elderly parents might feel a safer environment to be a gated township/society. We are sure we will require these at some point of time, today however we are perfectly content with where we live.
We have parents and guests who live with us every once in a while. We are happy however renting a 1bhk instead of a more common choice of 2bhk or 3bhk to provide for visiting family. We are happy to let our parents use our bedroom and lay a mattress in living for a few weeks in a year that they are here. There are many who rent bigger simply because they need to have space for people to come and visit. If that is a need you would probably be better moving out to suburbs so that you can afford a bigger dwelling.
A few of above factors are the reason why we rent far cheaper than a lot of our colleagues living within the similar distance from office. Others who live over 30Km away spend hours travelling back and forth though a few of them do get the benefit of office provided transport.
Two of the houses we liked last year were 1 bhk and 2bhk for 23K and 30k respectively. Though we deeply debated the pros and cons with the later coming ahead on locality and building services our current location won in terms of price, proximity to office and being the amount of house we could maintain.
Currently our housing expenses make for over 50% of our household budget and we intend to increase the number by reducing our monthly expenses. With current 10% increase in rent we would have spent almost 4 years in the house before the rent would catch up to the other house’s starting rent.
What have been the factors you considered before you decided how far from work you live? For those who own their house this might have a lot more factors but I am sure we all have theory of what is the best option.
Last month I did a post about buying a house and in the comments we discussed whether we were crying over nothing. We also started looking into real-estate as a potential income source. So we decided to do a bit of follow up on that.
When we bought our property in 2013 we took out a 10 year loan which we equated in April last year. Since then we have run the numbers and invested a part of the money we were parking in max gain. This has allowed us to achieve a balance between higher returns and interest paid.
We are currently finishing 4 years of paying the loan and our remaining loan if we take our all the remaining amount right away or at the end of the year. Should we wait another 18 months the time frame will be reduced by another 3 months. We therefore stand to finish off our only debt by the end of 2020 before either one of us is 35. That is definitely a nice thought and we do have some money we can throw at the loan, over and above our current investments and EMI after the yearly raise we just received.
Our calculation of current return vs investment old us that we would have fared better had we invested the money in 2013 instead of buying a house. Let us take this a few steps further to see how owning this piece of real-estate will fare for us:
Rent earned from property (80% occupancy, 10% hike, tax at 20%): 13,00,000*
Expected Property value: 58,00,000
Money paid (Loan EMI+ Out of pocket): 31,00,000
Total addition to net-worth: 71,00,000
Net gain from property if it sells for peak price at the time: 40,00,000
Increase in net-worth in case the money was invested: 67,04,570
This means we will end up ahead in 9 years with the property (rental coming in) than we would have by simply investing it. This rosy scenario depends on multiple things.
We are able to sell the house when we want to and are able to get a fair value for it. The value above is dependent on an average of the appreciation in last 4 years.
We actually earn the rent we believe we will. 80% occupancy and tax on rental income brings this into quite realistic rental gain.
Once we retire we would probably be living in the flat ourselves unless we end up buying another property. If we do buy another property then one of them will be a rental which will provide us with recurring income.
To add or not
Most people include real-estate equity in their net worth. In our current calculations we consider rent as an income but we don’t include the home equity in our net worth. The reasons for those are multiple and not being able to sell the house as quickly as we want is definitely one of them. Other reasons are the unpredictability of housing market and various reasons the price of the house depends on. We might be a great landlord but if the resident associations is a PIA or suck at maintenance our house might lose value.
We are doing and redoing multiple calculations for scenarios where we do invest further in real estate and in ones where we don’t. Real estate has a huge potential of recurring investment post retirement and an increased income during our net-worth creation phase. If we do add the value of our real estate holdings in our net worth as well then the figures start looking great. I would rather err on the side of caution and not include it.
Do you include your real estate equity in your net worth?
We will keep you updated as we go along and improve our finances and take measures to build a nest egg which can take care of us for a considerable amount of time. In past few months we have done many changes to how we invest along with a few experiments to gauge how we can benefit from various investment strategies like dividend investing and others. We really appreciate the feedback we get from our readers which is the major reason for us starting the blog.
It is common knowledge that we own a flat back in our old city and we have made considerable progress in paying off the mortgage. However every now and then I am forced to rethink if we made the right choice. There are a lot of things we did right (and wrong) but was that the best thing we could have done with our money. Was Buying a house worth our hard earned money? This is the question we want to talk about today.
This post contains a lot of numbers and follows my twisted mathematical pattern. If you are averse to so many numbers you might want to jump to the end.
Without factoring in the ongoing interest, it cost us 25,34,641 for a two bedroom flat in a new township with a resident’s association. This also includes 1 year of maintenance paid upfront to the builder.
This was at a time when most of the people around us were investing money into houses which started at twice the price. When we were deciding if a two bedroom house is a good deal for us we were driven by what we can afford today instead of what we will need down the line. Some might call us really short-sighted and maybe we were but with a job which moves us every few years it just made sense to us.
Buying a house: What IF??
We know if we go back to living in the city as a joint family we will need to either rent a bigger apartment or another apartment next to ours. That time is clearly not coming in next 5-6 years and none of us know what we will want at that time. Had we chosen to go for a bigger house almost 4 years ago when we booked the flat we would have put money in something which we would not need for another 10 years. It would have resulted in more loan which means more interest, longer loan term and reduced liquidity.
When we booked the flat the income(gross) to price ratio was a comfortable 1:2. Though we were driven by our desire to spend less then, this ratio in hindsight is something we are quite proud of.By the time construction was complete and we got the keys the ratio had gone down to 1:1.5.
Buying a House: The Math of it all
If we were to sell the house today the average market price would yield us 29,60,000; an approximate 16% gain total in over 4 years since we first put a dime in. for the sake of simplicity let’s calculate how things stand today.
Home ownership cost= direct costs till date- tax rebates
Direct costs till date= Amount paid by us+ Loan EMI
Home ownership cost= 18,11,366 – 90,411 = 17,20,955
Loan remaining= 10,65,000
If we were to sell today our loan would be taken over by the buyer, therefore the amount we will be entitled to on selling is.
Amount earned= 29,60,000-10,65,000=18,95,000
Profit= 18,95,000-17,20,955= 1,74,045
% return= 10.1%
We currently rent out our flat and that has therefore resulted in both costs as well as returns. Let’s take a look at that.
Land lording costs include furniture and fittings for the flat along with rent agreement costs and other fee. For us this came out to be – 35,315.
Rent earned till date:52,500
Net return= 17,185
Tax on profit from property= 3540.11
Actual profit= 13,644.89
Total profit including rent= 1,87,612
% return= 10.9%
Buying a house: Flip side of the money
When we started in 2013 nifty was at 6,000* and today it stands at 8,400. For the sake of easy calculations I have taken 1st April as the bench mark for every year. Currently we maximize our PPF account but that has sadly not been the case for any FY before this one.
Assuming the same distribution of money i.e. maxing our PPF and investing rest into NIFTY index funds would bring us to 23,45,267
If we were to invest everything into nifty index funds we would stand at 21,79,484.
We are not considering FD route because that is something we have never believed in.
Extra tax we would have paid: 70,411
Scenario1: 23,45,267- 70,411= 22,74,856
Scenario2: 21,79,484 – 70,411=21,09,073
Scenario1: 22,54,856-17,20,955 = 5,33,901= 31%
Scenario2: 20,89,073-17,20,955 = 3,68,118= 21.4%
These numbers are quite sobering and definitely make us want to kick ourselves. It would not be wrong to say we lost a lot of money and tied ourselves to the bank for quite some time. In this calculation I have not included the money we put in the OD account to equate our loan. This money earns us no interest but we don’t pay interest on principle amount equal to the money we put in the OD.
We have always lived on rent because we are posted in a different city than the city we own the flat in.
Talking rationally buying a house was not a good monetary decision and would have put us far ahead in our FI calculations. If we assume that we would have earned an average return of 7% and all the money we have either put in OD and house as well as what we will put in next few years would have resulted in 67,04,570 in 2026. That is over 20% of our FI amount.
We have in last few months discussed investing in real estate but the numbers as we stand today don’t really look good. Not just that the prices have definitely climbed quite up since we last put money in the market. However we do believe that the equation will look quite different in a few years’ time when we are done with the loan. In case we still have a tenant and the housing market continues to go up we can expect the house to maybe close the gap with the invested money.
There is however a fact which we cannot overlook which is how difficult it is to get the money out from this investment. We fully expect to not be able to sell the house at a fair price should we need to in an emergency. This is one of the major factors why I am skeptical if we will ever buy another property. That being said we can definitely not afford to buy a house right now.
I know of a few financial bloggers who have made their riches in the real estate world. Unfortunately I have not been able to find someone like Financial Samurai in the same market as us. We however need to understand the sector and actual return from it before we can think of putting our hard earned money into it.
For those wondering if the figures above are actual, well they are pretty close if not accurate. However it doesn’t matter much since the rate of return remains the same no matter how much we put in.
If you know of any bloggers in India who have been writing about real estate strategies we would love to know of them.
How has buying a house been for you? Do you believe that it was a great decision?
Why are Updates necessary? You ask. When we work towards a long term goal it can be very easy to get distracted. Are you looking at retiring in 10 years by saving aggressively? You are lucky if you can retain the gusto every month and every day. This is what makes it important to set smaller goals and keep reminding ourselves that there are smaller and seemingly needless decisions which will make that goal possible.
In our line of work it is very important that a concept be agreed upon and a vision for the finished product be clearly understood. However the stages of development are equally as important. Every small decision made and detail worked out will result in the final reality you want.
As this year closes we have seen a huge change in how we operate both as a family and as individuals. Our understanding of what our future could look like has improved while our capacity to take a messy house has reduced. When we started on the financial independence ‘journey’ early this year, it was to serve a completely different purpose. Also we were making some 50% less than what we make today. A year before that we were spending 50% more every month on our daily expenses every month.
Let’s talk a bit more about what happened in past year 10 months to be exact.
We started 2016 thinking that we were a few bad expenses away from eating into our meager savings. The reason, in February we had to move to a new and very expensive city for our jobs . In this city a tiny flat rents 3X more than what we were dishing out for a two bedroom apartment, back in the old city.
Even if we could swallow a 300% hike in our rent even day to day necessities cost far-far more especially eating out. This meant we had to find a way to increase our income. Our first step was to ask our current company for some more money as relocation compensation. We did get some but that was definitely not enough to save a huge chunk.
Though this cash crunch was the reason we started on our frugal journey we kept on looking for a job and Mr.S found one overseas where he could make the more than what we were making here together. That was the first time we realized how easy putting in the papers can be and how most companies try to retain you.
We ended up staying with quite a considerable bump in the take home monies. December gave us another bump with the regular raise cycle of the organisation. So we can happily report we are earning quite a bit more than we were doing last year same time.
Another income stream opened up for us with rent from our property we have been paying EMIs for last few years. The flat was empty for a year before our agent found a tenant. We put in some of our own money to furnish the flat once we had a tenant and have been using the rent to make up for it till December.
In 2017 that money will go to equate our home loan once again.
We started tracking our expenses around March and are finally able to come to an expense trend which spans for a considerable part of the year. Past year had quite a few ups and down and we realized our expense tracking method is probably not the best one.
We managed to reign in our expenses except for last 4 months of the year. Even with these high expenditure months we overall spent far less than what we were doing in the previous city. Below is the total spent under various heads. Rent: 2,30,000 Household expenses: 2,14,969 Parental Support: 2,10,000 EMI paid (includes interest payment): 2,51,000 Gifts and other expenses: 20,000 (we did not track this but I am assuming a high sum) Total Expenses tracked: 9,05,969 Total expenses:9,25,969
This is an average expense of around 90K every month which is a huge sum for sure and it hasn’t been long since we started seeing this amount in our accounts. Every time I see how much we are spending I am shocked. However once I look into the various heads it starts making better sense. Rent: Our rent is a lot and it has gone higher as the lease period ended. We did consider shifting but this high rent is still the lowest in the area we live unless we shift over 30-40Km from office and resign ourselves to 4 hours of daily commute. The only solace I have is that this is still less than the other houses we saw a year ago, new construction and ample space for the two of us. Household expenses: We are trying to get our expenses down to 10K a month and Frugalwoods’s UFM challenge has been a good starting point for us. The expenses you see includes our one time setup costs like bed and mattress, a cabinet and a few other knick knacks required to get the kitchen more efficient.
This year we resolved to not buy replacements till we could repair the appliance. We can say for sure that it saved us over 5K in food processor after we got the jars repaired instead of creating more trash. (How do people in India trash their appliances? I have not had to do it even once; do you sell it off to the kabadi waala or repair shops?) EMI: we have talked about our home loan earlier and how we decided to use part of the equated money to put into our investments. Around 80% of our EMI went into principle and with the rent now coming in from the property we plan on equating the balance again by the end of the year. This equated amount is the emergency fund we have for anything form a sudden medical emergency or a great opportunity.
This March will complete four years of our loan term and we are happy to report that we should finish our loan way before the full 10 year tenure and should not be paying any interest as we start equating the loan principle with the rent. Gifts and other expenses:
This is something none of us are happy about not because we spent it, because we did not track it. We are sure what I have assumed here is too much but there is no way to confirm how much we actually spent. This category includes gifts we bought for our family, clothes shoes and other personal items. This year onward we will keep a better track of it all and hopefully this year we will have a single head with every expenditure tracked.
As I said in the start it is easy to lose sight of your goals; we are clearly defining our goals for the coming year which should be coming out sometime soon.
If I had to be true I am a bit disappointed in us. We have not been able to rein in our spending for past 4 months. We definitely have a very real reason for most of the over budget amount but that still means we have not achieved the well-oiled machine we hope to run. This year we are working harder to make more efficient budget a norm for us.
That being said there are still times when we look at our spending habits and are surprised at how far we have managed to come within a year. Did you manage to save and invest better past year?
It’s a time for update. Diwali was just a few days ago and the few days of holidays we had have again reinforced our desire to retire and that too as early as we can. October was probably the busiest month in terms on our jobs and we have barely had time to think about anything except meeting the deadline. This has resulted in silence on this blog and a lot of delayed decisions personally. But that was not the only thing that happened this month; we also managed to finally fly off to a week long vacation. How we fund our recurrent trips is something we will discuss in another post, hopefully soon.
September ended on a high note for us as we prepared for our vacation and managed to keep our expenses within reason. None of us forgot about the blog but as life goes we were pulled into some highly demanding (though rewarding) work and deadlines (definitely demanding). In fact I have a lot of updates written and a few posts I need to sit down and work on.
When you are not dependent on your blog for money you can afford to let life run its course. Especially if you have an audience which realizes that people looking for FI are probably not interested in being bound to their blog. Thanks to all of you who believed us lazy souls will be back soon.
As October rolled in we were packing our bags and the excitement was high with this vacation coming at the heels of a lot of change and upheaval in our lives. Before we move to the FI bit let me say- if you have a chance to spend some time in Indonesia take it. It was perhaps one of the most comfortable trips we have taken in last few years.
November is almost halfway across as well and it has been a fun ride though a bit different from our usual months. We have house guests for a better period of the month so the expenditure is proportionate to a 4 people household than just the 2 of us.
Now back to the FI stuff- a lot has changed.
The month that was
October started with a vacation but for most people this is not really a productive month especially in India. The off days started with Dusshera and were sprinkled throughout till Diwali. It definitely did not hurt that most holidays allowed us to think of a long weekend. Usually Diwali is an expensive occasion but being the frugal people we are we rarely spend big bucks on anything. Diwali also comes with a lot of offers and discounts both online and in stores.
This allowed us to buy some essential items for our house like a bed and a good mattress. We had been researching for months and finally decided buying second hand wasn’t going to get us any major profit. Also none of us were comfortable about a second hand mattress because not many people here use mattress protector. And before this one neither did we. We also invested in a book shelf during past few months which is the only storage in our living room. For Diwali we bought following
Pack of 6 scented candles – 299
Pack of small wax diya(lamps)- 69
6 earthen diya(lamps)- 20
Pooja samagri- 100 (this is an approximation)
250 gm laddu- 50
Most of these are quite reusable and we ended up using just one of the scented candles. Still if I include all of this we spent a grand total of 538/- for the festival. It definitely saved us quite a bit more on the bed and mattress only. As people above 30 we believe we have had our share of fireworks and neither one of us was interested in lighting any so we didn’t buy them. What I am not including in this total is the cost of fruits since we buy fruit anyways as against sweets which none of us enjoys much.
Our office gifted us with gift cards and a small pack of sweets which we were more than happy to eat and share. These gift cards will help us buy some things we need.
Why are we buying things?
It might sound a bit weird that the person, who claims that freedom of not buying is awesome, is talking about buying things. Well there are multiple aspects to this.
We have purged probably a quarter of our belongings in terms of clothes, utensils and stuff which we no longer use. This started with family as we gave them and option to pick first then to a few colleagues and finally we handed a big box full of stuff to the staff at our building. They were free to take it for themselves or sell it off. This might seem stupid to some but none of these were things we could have sold ourselves or our friends and family were interested in. This made sure that we essentially emptied out one of the corners of our living room.
We never really bought stuff except for essentials like a bed and mattress (we sold our old bed when we had to move a few years back- earned money and saved transportation costs.) and a working kitchen. We were gifted the said bed by my family as a wedding gift and the lone couch we own was a gift from a friend. We did spend on buying a new to us four seater dining table and two recliners which everyone loves. We are looking to sell the couch to free up more space and also to reduce the stuff we own.
You’d remember our drive to eat better which we started a few months back. A major part of the drive is slowly phasing out our utensils both cooking and eating to healthier options. Non sticks and aluminium are moving out and being replaced by steel and cast iron. Both the replacements are quite expensive so we are using up any free money we have spare to get us some better stuff.
All of that being said we are quite conscious of the small apartment we call home as well as our preference for relatively empty and open spaces instead of those filled with things.
Big changes same investment
Apart from the changes that we are making or striving for there were two major changes which affected our investments one was the US election and the other was discontinuation of currency. Both these allowed us to buy on quite cheap prices on 9th November. Though the markets have recovered since then we are happy we bought in to the volatility.
Some would call it timing the market, well you would be correct but does it make sense to not buy at really low prices simply to be able to say I have never timed the market? Of course it doesn’t.
We also forayed into dividend stocks this quarter and we are slowly building our stock while investing in index funds alongside. In a market like India where volatility is quite high we concluded it was a good move to try alternates and create a kitty which we can leverage as required once we retire.
Our current portfolio follows the principles laid out here and we believe we will be able to tell you how this decision fared out by next financial year.
Apart from introducing dividend stocks we are continuing with our previous philosophy of investing every single penny we can since we do not need to have additional emergency fund. We are working hard to maximize our PPF accounts and anything over and above that goes into our index funds and dividend stocks.
If you are wondering why we are so intent on PPF that is because a guaranteed rate of 8% return compounded annually is way better than what the best of us can claim consistently from the market. Apart from that any returns are tax free which makes it a great instrument for fixed income.
As an experiment I have stopped tracking detailed expenses every day. We are still keeping tabs on how much we spend every day. It has been going on pretty fine and we have not spent a whole ton on things we don’t need but I miss being able to exactly tell how much we spent on groceries and how much on eating out.
Looking at things differently
As you might have realized we have made a lot of changes around here and a few big ones came from outside our circle of control. We have been looking at a lot of aspects of our lives differently and a big part of that is to make us more efficient. These changes are in various stages and we have been waiting for these results to show up consistently before we share them with you.
This blog is our way of sharing our frugal investment and retirement journey with you. We would love to hear if there is anything in particular that you would like to read about.
Early retirement is a dream but it is a scary thought as well. We have read through a lot of stuff about how much you need to retire. Most of the work done is not in Indian context but we believe a lot of concepts are actually same.
We have used a few blogs and articles for our research both Indian as well as those applicable to other parts of the world. This is probably going to end up being a series since there are a lot of concepts which have contributed to our final figure.
This post talks about how we have come to the number that we have. There are a lot of detailed description of our thought process which I agree might not be required all the time.
Most of our assumptions are just that, assumptions a few like groceries, and utilities are based on our actual expenses these past few months. Needless to say as the assumptions change so will the calculations.
We assume an inflation rate of 6% in all our current calculations. Many recommend 9% inflation rate but seriously I don’t believe that is required. You can run these numbers for various inflation figures if you would like.
This calculator at Big Decisions allows you to see how various components of your monthly spending will increase. It tells us that our current expense categories will inflate at about 3.33%. We know that we currently do not have a lot of expenses that come with having a child like day care, schooling and healthcare. To cater to those expenses we are currently calculating at 6%.
We currently rent in the city we live but also own a flat in another city. After we retire we will definitely be returning to the flat unless we decide to settle down in a much cheaper place or end up buying another property. So in our assumptions the rent after retirement is considered 0. Though we have included maintenance charges and also assume a property tax of 30,000 per year.
Our electricity bill has been a bit skewed with induction eating away a substantial part of it (we assume), since we now have gas connection in place we hope to go back to our earlier energy consumption level. We don’t own a AC which helps us keep our low along with the fact that we are in office the entire day and usually use the same room during evenings and night resulting in less power consumption.
Internet is our requirement so that will remain as a fixed utility. Our apartment complex allows for water to be included in the maintenance charges so that is not a part of calculations. A cooking gas cylinder of 14.4kg lasts us around 5-6 months and costs ~ 1000/- our current cylinder is 17.4Kg and cost us 1200/- we assume it will last us 6 months so the cost is prorated. We do not use gas to heat water for bathing or any other purpose except for cooking.
We are trying to increasingly cook our food at home. But we have accepted that we can’t always manage packing lunch. So we are currently ordering packed lunch from a lady who delivers home cooked food. When we retire this would go away and we would be cooking on our own. Currently I am trying to move to more organic way of life and from June’16 we are trying to buy more and more organic produce.
I hope to grow some of my vegetables especially the greens but since I cannot be sure of it I am still going to assume the same grocery bill as we usually have.
Child care and education
We might have a child in future and that would in pure financial terms mean extra expenses. Though we assume that we will be very frugal and teach our child the same values, we know we will be spending more. That is the reason why there is a child care cost column in the expenses.
We might in future decide to home school our child which would take away most of the costs.
We currently have very few if any healthcare expenses. They range from a cough syrup in a month to no expenses at all. Both of us are currently free of any life threatening or lifelong diseases. This is why we are hopeful we will not end up spending a huge amount on healthcare expenses. Still we have included the amount the tax-men allow us to deduct from our taxable income.
So what do our expenses come down to?
Electricity, Internet, Gas
Based on our recent months we are working on reducing it
Apparently education is very expensive and so are day cares!!
This may reduce if they decide to come live with us. Or may remain the same
Miscellaneous/ Other expenses
No clue where these come up from but they do every few month in different roles.
This is the tax deductible amount that we have.
Total monthly expenses after retirement in today’s rupee
Taking money out
When we do retire at 40 we can expect a non-inflation affected expense of 46,500/- with some projections and an inflation rate of 6% this comes out to be 83,274.42/-. This puts our annual withdrawal at around 10 lac.
Now let us play with our projected expenses and also assume that we will not reduce any of these. Following calculations use an approximation of our expenses to show various scenarios. Let’s start with a case scenario where we have managed to accumulate 2Cr. by the time we plan to retire which is around 2026.
Let us assume that we will earn this income from our investments and return from our investments is an average of 8%.
This is how the table looks
We should be free of child care sometime between 50-55 years, depending on how brilliant she turns out. If we are blessed with a highly intelligent child who gets scholarship for everything guess what, expenses would probably be far lower.
The trend post 60 is what anyone would be worried about- we are eating from our reserves instead of eating from our returns. A few factors can get us back into good graces, like a lower inflation rate and a higher return on our investments. Since we are all pessimists here we are not going to change these return values. We will allow our expenses to increase by 6% every year and we will let our return make no more than an average of 8% per annum.
How about we increase the corpus we have saved. Now I believe I am going to grace this earth with my presence for a long-long time, still being the humble being that I am let’s keep a cap of 99 years for the time I will need this money. Increasing the corpus required to 3.5crores we can easily live off our savings.
So even for a pessimistic outlook where the inflation keeps on increasing by 6% my returns don’t make more than 8% CAGR, none of us make any money apart from the returns and we don’t reduce our expenses ever we need 3.5crores to achieve a very reliable financial independence.
If we assume that any gain on our money will be nullified by inflation then 3.5 Cr will last me 35 years with the same amount of expenses. That means even if we retire at 40 with this amount we can live till 75 easily and then use the provident fund we have been continuously contributing to.
We are currently assuming that we will be living in the flat we already own so as to not pay rent. Our property has seen an increase of 30% over last 3 years but we don’t expect this gain to go on for a long time. We assume an average gain of 5% for the property price so our initial per sft rate of 2275 should go to 3705 psft by 2026.
If we do end up selling the house and investing the assets to rent somewhere cheaper in the same city we should have additional rental spending of 2.4 lac. Since in our super pessimistic view returns equal inflation, we should be able to easily live for over 16 years. This gets very close to the PF withdrawal timeline.
Another thing we accept is the fact that none of us can actually survive without doing one thing or another. If we end up gardening our grocery expenses should reduce and if we start teaching kids Maths and English we would be getting some income as well. If we actually go for a guest lecture in one college or another that would add to our incomes as well. Still we don’t know what we will be doing or maybe we will do nothing at all and enjoy our lazy lifestyle.
Add to this the common Indian expectation if our kid would support us in old age we just have to make do till she is around 30-35 years old. That brings us to the time when we are 70 years old and are going strong enough. We also do not expect any inheritance or windfall to happen to us in the course of our lives.
Time to summarize
Early Retirement Corpus required to sustain us and our expenses from 40 to 99:
3,50,00,000 for a scenario where average returns are 8% and inflation keeps on climbing at 6%. We also assume that our current expenses are going to remain the same.
Early Retirement Corpus required to sustain us and our expenses from 40 to 99:
2,50,00,000 for a scenario where average returns are 10% and inflation keeps on climbing at 6%. We also assume that our current expenses are going to remain the same.
4% or 3%
We might come across as people who have a bit more courage than the rest but we are still scared ones. 4% rule makes a lot of sense on paper especially since a lot of trends and calculators show us that what we spend money on does not show the alarming rate of inflation that a lot of other items show. Also we usually buy in bulk and they tend to be a whole lot cheaper than walking around the aisles for every item you need.
We on the other hand think that a 3% withdrawal will make more sense and will provide us additional cushion in case times go rough. For our current expenses without considering a kid that comes out to be ~1.44Cr which we will require if we were to retire today. With an adjusted 10K kid expense that shoots upto 1.8Cr.
If we want to get to 2% withdrawal rate we will require between 2.4Cr. to 3Cr.
Now let’s get to the tricky question of Taxation after retirement. Even though I am including it here for consideration we are still working out the winding lanes of tax laws.
Before we get on to how much we expect GOI will take away from us let’s talk about what we have till now discovered, as a way to save taxes starting now. We currently pay a small amount of taxes as pour loan principal and interest result in a substantial rebate. Also we don’t earn insane amounts like either. Our earnings would be considered a lower step in most corporate ladders. Our benefits stem from the fact that both of us make roughly the same amount and pay way less taxes if only one of us was making the sum both of us do together.
We are currently looking into forming a HUF (very karta oriented which I don’t like) and forming a LLP/regular partnership. We are yet to decide which way we would like to go and what our plans are for future including the time after FI. HUF seems to be the way to go for now as it would reduce our tax liabilities majorly. For following calculations we will assume that we are still being taxed as individuals and are equally dividing the income between us.
Source of income: Dividend+ PPF returns + selling some MF units or shares
Almost all of these are tax exempt as per current regulations except if we make more than 10 lac in dividends in a year. Since we will be paying taxes individually and the dividends earned would be equally divided we should be tax exempt till we get 20 lac in total dividends.
Our current holdings are mostly growth based mutual funds ( we hate paying DDT) and we will be holding each of these for well over 12 months so we do not expect to pay long term capital gains at least as per current laws. We have all the time in the world to switch to a better option in case the laws change on this.
PPF investments are EEE and looking at recent backlash that rate cuts received we can hope that it will remain the only instrument to be so. That will give us access to around 28-30L of completely tax free money when we are learning the ropes of Early Retirement
Does that mean we will have no taxes to pay?
To be honest we don’t know because tax laws keep in changing every single year and sometimes in the middle of it as well. What we do expect however is that the deductible income will keep on rising from current 2.5l per annum to 5l per annum. Even then let’s calculate how much tax we would pay if we each take out 5l per annum and all of it is taxable.
This means we will have a tax liability of around 1,716 per person per month. This will definitely not put a wrench in our daily expenses but let us assume we need at least 10 l to make do. Another quick calculation shows us that we can achieve that by withdrawing around 5,35,000/- from our corpus per person.
We will certainly have a completely different equation depending on whether we go HUF way or not. To be true, chances are we will be free of taxes since most of our income falls into tax free status. Additionally we should be eligible for tuition fee rebate for our kid and a few health insurances.
Overall the taxes may play a big role but currently it is safe to say that we should be withdrawing tax free income after retiring early.
Working after early retirement
We both have varying views on it and we change our personal views every other day as well. My decisions have varied from not doing a single thing and relaxing at home to working part time or guest lecturing somewhere. In between all that has been realizing my dream of travelling the world. Depending on our family and financial situations and the global travel scenario we would probably take up the last one.
Mr. S on the other hand has toyed with the idea of working beyond financial independence, though at a job which is something he enjoys. If he keeps on bringing the money he brings in now we would be happily set for life. The problem would then be how we travel more. So let it be said that we have no clue about what we are going to do once we cross the bridge.
Thankfully we have over 3500 days and 500 weeks to come to a common strategy on how we deal with time after we/I retire. This is why I have assumed a grand total of 0 as assured income post retirement.
Another factor which needs to be considered is our freelancing income which has been more than enough to cover our travels in past few years and we hope to put it to same use over next years. We are not sure if we will simply stop freelancing or we will continue beyond 2026.
We are sure we have missed a few calculations and someone will point them out especially in terms of taxes. We also know and expect that all of this including what we earn will not match our calculation or any of the figures here. Since 10 years is still a long way to go (who knows we might win a lottery) we would be surprised if everything turns out exactly as per our calculations.
Right now we believe we can and should achieve financial independence by Feb 2026 with a minimum of 1.8Cr if we have a kid. A much more comfortable figure for us is 2.5-3Cr and we hope to also achieve it before we hit 40. Will we retire at 40 or when we reach the figures is something where your guess is as good as ours.
Right now the figure to breach is 2,50,00,000 and to achieve it you would require a regular investment of over 12-15 lac depending on the returns you get.
Is this actually right? I already have 2Cr…
Well if you do then you are a really lucky person and rich as well we on the other hand are starting from a big old 0. The question still remains whether it will be a figure that will tide us over till our old age. And the truthful answer is we are not sure but we believe that it should. I have read and reread posts like this, this and this. Most of these talk about a much higher rate of inflation and a much lower rate of returns.
It might be a case of adding factors of safety or it might be a case of us not understanding what the real market condition is.
For us, the actual expenditure to run a household has gone down in last 5 years. Most of it is by learning how much we actually need and reducing wastage. To say we live frugally will be stretching it a bit. On the other hand, a lot of our friends have grown/inflated their lifestyles exponentially yet we know of many who live in the same expensive city with half of our expenses and supporting a family.
We might update this figure in either direction as time goes on and to say we can or will retire after achieving a figure is a bit premature. What we can assure is that we will be keeping a close eye on both our expenses and investments. Right now our major focus is reducing our expenses and we know there is a lot of margin in our expenses to cut them down. I would be very happy with a recurring expense of 12k per month which will actually mean we will be spending only half of what we were when we just got married.
No Early Retirement Calculators!!!
Nope, the online calculators actually make me a bit weary and scare the shit out of me. The reason why I prefer using likes of big decision is because it does the inflation calculation. Even better is running our own excel sheet with our researched figures.
Most of the calculators and excel sheets come with their own set of assumptions formulas and guidelines. Though these are helpful it is very unnerving for me if someone recommends using 9% inflation when I strongly believe that 6% should be fine. Right now what we need is a figure we believe in however bit it is (2.5Cr. gulp!) and then formulate our strategy to achieve it. We have to believe that we can achieve financial independence first and then iron out the kinks. There is nobody stopping us from working another 5 years and still retiring at a comparatively young age of 45.
If you are in our boat this is what I would recommend you do to calculate what you need for early retirement:
Know what you spend right now and on what
Strike off the expenses which will not exist when you achieve early retirement.
Assume rate of inflation and project the sum required when you retire.
Depending on what method makes sense to you see how long the money will last you.
Keep track of all your assumptions and make changes as required in you spreadsheet.
If you have a figure which you believe makes a lot of sense in your early retirement scenario put it down below.