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In the last blogs we saw how debt inflates our needs for bigger purchases and traps us into situations that are undesirable like tolerating bad work culture, poor working conditions etc. Next step in achieving resilience is to avoid the marketing traps especially the ones that call your money “Disposable”.

A lot of people get into buying properties on loan because they would spend the money on luxuries when they see a big withdraw-able balance and it is growing month on month. People prefer being locked into long hefty repayments to prevent the temptation to dispose off the money, so they will end up with a housing loan with hefty repayments. The reason for this mindset is, any money left over after taxes and essentials (rent, medical, food, utilities, child care etc) is called disposable. Forcing us to prime it such a way to spend.

If we ask someone what will they do if they have million dollars, a vast majority of people will give ideas on how to spend a million dollars like buying an exotic car, expensive jewelleries etc which may bring joy momentarily but also drag the wealth down by many notches. While we need to spend on joy to remain sane, how much of it is required is the question we need to answer. By default we humans are hedonistic, we will keep wanting more and more of the same thing or something bigger than what we want. So we will end up disposing what we have in hand without thinking twice.

Unless we think about the cash in hand as a capital than disposable money, we would not have the mindset to invest large sums of money across different asset classes which makes us resilient. Replace the term ‘disposable income’ with ‘discretionary income’ that is waiting for its business owner to be invested. You will realise ways to budget spends for joy and standard of living, yet set money aside for investments. Best piece of advise I got from a friend was to create two other bank accounts apart from the salary account. One is to keep 3-4 months of expenditures for emergency usage and another one to fund SIPs, equities and loans. The moment salary arrives, the account is left only with budgeted money for essentials, living standards and joy and the rest goes to investments. In other words, the disposable income becomes limited. This helps in not succumbing to temptation to spend until zero or buy a huge property with hefty repayments so that we will not spend it away.

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My grandfather never borrowed for anything. His guiding lines for me were – Using borrowed money is like fuelling the fire using hay, it burns fast and gets consumed quickly but when we want to repay we will be paying in firewood for the same volume of hay which could have served us much more. Another mentor quoted a text when I wanted to buy a flashy car much in my early career – We buy things we don’t need, with money we don’t have, to impress people we don’t like.

Both those texts are my guiding lines for debt management now, but adopted it much later when I learnt it the hard way. Two of the biggest purchases in one’s life, a house and a car, often don’t stop at needs but end up as a status symbol. People love to show that they have arrived and achieved. In reality no house or car is big or luxurious enough over time. So people go all out and buy things that are not affordable. Loans were initially meant to lent out to people seeking business capital. Those were risky so banks turned to milk the retail borrowers – ‘us’. Affordable loans are oxymorons, if you are going for a loan to buy something then you cannot afford it.

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Negotiating for big purchases with cash in hand vs taking loans has a big difference. We are hard on our future selves but care for who we are today so the cash in hand looks heavier and hard earned while the loan repayments broken down over the months in the future looks small and affordable; inflating the overall demand and reducing the willingness to negotiate.

When we buy larger than our needs, we commit to a monthly outflow which we cannot afford to skip because it will bite back with more penalties. This is the single biggest factor which contributes to workplace stress; people put up with toxic work cultures, long working hours and bad bosses in the fear of losing the lifestyle they signed into.

On the contrary, if we save up for paying the big purchases we will negotiate hard with the money in hand, we will not be a victim to the need of hefty monthly payments, which gives the clarity of thoughts to take crucial career decisions. You can buy a dream house by SIP route within 7-8 years of saving the same money that we will be paying for 20 years for a home loan. Once I was in a car showroom where I observed a guy talking to the salesman for the model he wanted.

Salesman: Please let me know what is your monthly salary, I will let you know which car you will be sanctioned?

Buyer: I wanted the top end model, in that specific color and rims.

Salesman: In order to proceed I need to know your ability to pay month on month, I can work out the interest rates and tenure:

Buyer: Gives a cheque and says – Fill it with the price that you are offering that will make me sign and drive the car out.

The salesman was stumped and the buyer negotiated almost 10% off the vehicle.

Debts are for businesses to quickly turnaround profits and not for building assets over 20 year loans. Try the no debt strategy, this means you will have money in your account you don’t know what to do with. This is the first step in being financially resilient, there is no pressure to pay huge bills month on month. The next thing is to resist the urge to spend and build up moveable assets. More on subsequent posts.

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Early 2000s in India had a lot of Public Sector Undertakings (PSU) float a voluntary retirement scheme popularly known as VRS. If you choose to live in a Chennai suburb in your late 40s or early 50s with no loans and a house to your name, then the monthly recurring expense of 5,000 rupees with some set aside for additional expenses like repairs, medical etc annually amount to about a 1,00,000 rupees. The VRS plans gave a mouth watering deal of 15-20 years of annual expense. A lot of people who opted for this were in the middle management who were bored of waking up to go to office everyday. Most of them had a thought of becoming freelancers or do simple jobs to keep up the cash flow and not disturb the nest egg.

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The reality was harsh, I have first hand information from near & dear ones and neighbours. The problems I observed were that

  1. Skill was not up to date in their field as a lot of them were middle management.
  2. Lacked the marketing and networking skills needed for a freelancer, unable to advertise and convince businesses to give them work.
  3. Did not understand uneven cash flow, inflation, investment diversification etc as they always had ever increasing salaries paid monthly, their entire corpus was bank deposits.
  4. Continued with their pre-retirement high income lifestyle.
  5. Did not cover themselves with medical insurance, one critical illness away from bankruptcy.

A majority of them ran out of their retirement benefits within 6-7 years when they were hit by inflation – medical, food and education went faster than retail inflation where the interest rates were lagging behind. From being their own boss they had to take their kid’s help to live peacefully in just a short span of a few years. They were not able to find jobs as a free lancer; even if they did, they didn’t manage to break even. They also felt too shy to cut down their status symbol items in front of their near and dear ones.

Unless we have a passive source of income like a rental income or income from an established business/equity that can grow with inflation and cover monthly/annual expenses comfortably, it is very hard to achieve financial independence through a retirement corpus alone. A lot of FI/RE (Financially independent, retire early) blogs explain that we need to have a minimum of 300 times our monthly expense or 25 years of annual expenses in the corpus to achieve that. These have been inspired from low inflation economies not for India, I had observed that what looks good for 20 years in India usually runs out within 6-7 years.

Financial independence for a regular salaried citizen is extremely hard, especially for the people I observe who are on the consumption based economy, are encouraged to take loans for their purchases. What we need to plan for is financial resilience. More about it in subsequent posts.