Lessons on investment & money skills

Of late my daughter has been very curious about my current interest in writing blogs. She has always been the first one to read the draft version of all my previous three blogs. After the third blog “Finding the Yogi in me,” I was wondering what I would write next. And there my sweetheart promptly suggested “Papa, you should write next something on investment.” This has more or less to do with the fact that she has seen me following some financial influencers in YouTube and tracking the business news, and buying equities of some popular companies since the mid-2022. Though I quickly agreed to her suggestion, I later found myself scratching my head on the content of the blog. I thought over it for a few days and finally began gathering some ideas and based on my personal experiences and learning. A famous American investor Peter Lynch has been quoted as saying: 

Everyone has the brainpower to follow the stock market. If you made it through 5th grade math, you can do it.

It sounds easy. But, investment is a technical subject and personal finance can only be learnt with some effort.

My parents’ struggles

I am the elder son of a middle-class family. Both of my parents used to work as teachers. I have seen my parents’ daily struggles. They had always tried to provide us better education, hep us prepare for the competitive exams, fulfill all our needs and build a home. My father used to wear only two pairs of trousers and shirts, which he still does. He used to cycle almost 15 km every day for his daily commute to the school till his retirement. My mother used to put all her efforts to save every pie that she could. I have seen her spending hours sorting the rice and wheat grain by grain, so that we got to eat a clean plate of rice and roti every day. 

Cracking an exam for a government job

I am one among many other who study a professional degree only to work in the bureaucracy for which a plain degree in any humanities or science subject is enough. Since I wasn't sure regarding my career path, I did my graduation in fisheries science (2002) so that I could easily land in the government (Fisheries Extension Officer). Thereafter, I chose to prepare for the civil services exam. It so happened that I was still preparing even after more than 5 years of completion of my undergrad. I also did my masters in social work (2007-09) as a Plan-B. Finally, I cleared the State PCS exam and joined in the government during my late twenties (2010).

Lacking the money skills

From the very beginning, I never had fancy for money. All I wanted was a job with decent amount of compensation. I was sort of dull and not enterprising. This reflected in my attitude, not giving a damn to money. I seriously tuned to the mode of maximum spending and minimum saving. I began my investment journey only on the advice of one of my friends. He had suggested me to open a Public Provident Fund (PPF) account and buy a Postal Life Insurance (PLI) policy. PPF and PLI remained my only investments during the initial 5 years of my job, which I am still doing due to their long maturity/ lock in periods. Subsequently, I also purchased some mutual fund units on monthly basis through SIP (systematic investment plan) route. I didn’t know much about different categories of mutual fund schemes, i.e. regular vs. direct schemes, equity, debt, hybrid, liquid, etc. Later, I found out that I was investing in 2 regular hybrid schemes and 1 regular large-cap equity scheme. I had never tried to understand the market and business news. I was financially ignorant and lacked the money skills.

Developing the finance mind-set

My brush with finance beings as a public servant working in the area of public financial management at the sub-national level since 2017. My boss in the office Dr. S. P. Rath is an expert in public finance and he is a master in crunching big numbers. He is a very kind guy and has helped me to learn the public financial management and some macroeconomic concepts. I got to learn the basics of public finances only by working. Lately, I have come across this interesting concept called macro-investing in which one can make investment decisions based on prevailing macroeconomic policies and scenarios. Government, DIIs (domestic institutional investors) and FIIs (foreign institutional investors) are the main players in the market. The Central Banks across the world through quantitative easing (QE) and quantitative tightening (QT) policies try to keep inflation under check. One has to do some homework on business (industry) analysis, fundamental analysis and technical analysis before building a portfolio of equities. Those of us working in government are required to refrain from trading since it is a speculative game and is also against the service conduct rules. With some effort, one can sensibly build a portfolio of 15-20 stocks across 5 different sectors. That's all.

My take on investment

For me investing is a set of activities by which we put our limited resources to some productive use. It is always a long-term game. It is like planting a seed, watering it, seeing it germinate, taking care of the sapling, and finally observing it grow in to a full-size tree and bearing flowers and fruits. It is not meant for people, who are impatient and can’t see beyond a point. One has to inculcate the long-term thinking and mind-set. TIME and MONEY are two important factors of investment. We have to exercise due diligence while investing our time and money in our professional and personal spaces. Money once lost can be earned back, but time once gone is gone forever.

As I have grown old, I have come to realize the importance of owning time, i.e. being time-rich. Since my job requires me to work for almost 8 hours a day on working days, I don’t own my time. I don’t have a choice to take leave from my job at will. I am time-poor, a slave of one kind. Now for me being time rich is more important than being money rich. I toil hard to only earn money and I need to invest right to have some free time. Wealth creation at this stage is contingent on how I spend what I earn and leverage time and money to build some passive and parallel streams of income. Our financial planning during working age can either render us poor or rich during the later periods of life. The point I want to convey here is that we need to spend our time and money with due diligence. Bad investment decisions hurt really badly.

Now I am at a stage the things that matter most to me are – (i) my health (physical, mental and emotional), (ii) my family, and (iii) my job (active source of income). These are non-negotiable priorities. We as a family, the first that that we do everyday, is some kind of physical activities, be it outdoor games, sports, morning walk, yoga routine, or some sort of exercise. My daughter has developed interest in playing basketball. She has picked up the game really well within 1 year of training. Family teaches us to be responsible and not to be selfish. One has to do some tasks on daily basis without feeling monotony for organic development of the child and well-being of all family members.

My government job is the only source of income. I have learnt to derive some degree of satisfaction in delivering my duty day in and day out. The skillsets I have learnt working in the government system is of no relevance in the market. That’s why I see many retired government employees taking up re-engagement in the same office even after 30 years of monotonous work. This is only due to the fact that the public servant as a species are unfit for employment outside the government system. Though I hear a lot about parallel sources of income, I am clueless as to how I would generate one. I lack the required amount of time and motivation to pursue another stream of income. Rental income though is an option, I lack the resources to buy assets (particularly commercial real estate) that can yield monthly rents.

Knack for keeping track of my income and savings

From the very beginning of my working life, I have been maintaining an excel file on my incomes and savings which always came in handy for calculating my tax liabilities. I had opted for some compulsory saving instruments only to avail deductions under section 80(C) of Income Tax Act. Later, I also began maintaining separate sheets for all my investments (mutual fund schemes) and loans (including the non-productive consumer durable ones). I now have a data on my 13 years of salary income, taxes paid, investments made and loans availed. While maintaining the data sheet, I never knew that one day I would check back all those readily available information for a blog on personal finance.

I plotted all those information in an area chart only to discover an interesting trend in how I have been spending and saving. The chart below shows the composition of my expenditure over the years (2011-12 to 2022-23).

As is evident from the chart, my expenditure on consumption, rents, kid’s education, material acquisition, etc. constitutes the bulk of the cash outgo and I am happy to note that it has gone down substantially from 76% of my income to around 40% very recently. In contrast, my savings rate has remained flattish over the years in the range between 25% and 30% of my income. Debt servicing expenditure has increased steadily from 2015-16 which now stands at 22%, barring abnormal level of 48% during 2018-19. In fact I had taken a personal loan and a consumer durable loan during 2018. I squared up the personal loan during the same year by redeeming some mutual fund units. That’s why the chart shows a sudden jump in debt servicing and it has distorted the chart. The income tax liability has steadily gone up from 4% to current level of 12%.

Analysing the trend for a course correction

Then, I plotted 3 indicators of personal finance, i.e., tax payment, debt repayment and savings, to decide on the course correction so that I would be able to create a nest and generate some passive source of income to further accelerate the rate of my investments.

One can’t do much about tax liabilities. Tax optimization in the new tax regime is no more an option when Government wants all of us to spend. My income tax payment has increased from 4% during 2011-12 to current level of 12% and I am pretty sure it is going to rise and breach 20% mark in a few years’ time. What remains under my control is the choice (i) to optimize my spending habits and set aside a substantial amount of cash for savings and investments, and (ii) to not resort to unnecessary and unproductive high cost loans (personal and consumer durable ones). The first principle is to own assets, not liabilities. This strategy is crucial in using the surplus cash to build a safety net for emergencies (usually six months of salary as a back-up) and a nest for generating some passive income.

Forecast for next five years

I have tried to plot a forecast for next five years assuming that I continue to serve in the government and earn my regular salary income till I retire. In the medium-term, I would try to keep the debt level below 20% and take it further down below 15% in next 5 years. At the same time, I would also curtail my discretionary spending and increase the corpus for my annual rate of savings and investments to 38% in next five years. In the long-term I plan to achieve annual savings rate of 50% of my income. My kitty of investment would include a mix of equities, bonds and real estate (land and commercial properties). Since crypto-currencies are not my cup of tea, I am not considering it as an asset class for my investment. Though things may change after introduction of CBDC (Central Bank Digital Currency).

Invest to overcome the cost of living crisis

As a salaried worker I earn enough to afford a decent lifestyle. But, the double digit price rise of consumables has outpaced the single digit annual increment in salary. This gap between the inflation and actual pay hikes is going to eat up our savings for sure. After meeting all the commitments, one is hardly left with any surplus to save or invest. This is called the cost of living crisis, which makes the salaried class to think twice before taking any spending or saving decision. On top of it, pension is gone for all those who have joined government services after 2005 and I am one among them. We are covered under the contributory pension system, which has not yet stabilized. As per an estimate, the corpus in our pension fund would only provide around one fourth of our monthly salary as pension post retirement. Imagine how difficult it would get once we retire, if we don’t plan our finances well ahead. Thus, learning to invest has become even more crucial to protect our savings from being eroded by inflation, i.e. to grow our savings at a rate (α) more than the inflation consistently. India is developing fast and inflation is going to remain at 6% for the next decade or so. Keeping this in mind, we have to develop a system of investment which would help us to generate an alpha (α) over the inflation.

In order to create an investment portfolio, I have been doing compulsory savings (by Standing Instructions/ Systematic Investment Plans) from my monthly salary [i.e. Income (I) - Compulsory Savings (S) = Discretionary expenditure (E)]. This habit has worked well in my case. The other way round (I-E=S) is a bad idea. I must confess that I have been able to resort to compulsory savings only due to the support of my woman. Her money manners and knack for physical assets are next level.

Hows of investment

Investment is both entertaining and adventurous. The amount of happiness we get while checking our portfolio grow is priceless. But, the market never goes in a upward linear fashion. It moves up, falls down and dances in a way which no one can predict. It passes through Bull (upward), Bear (downward) or Bunny (sideways) run. The volatility in market brings in the adventure angle to the investment system.

Investment is a lifelong process and it has different phases:

1. Education and acquiring skills: As young ones, our focus should always to identify our strengths and work on it. The goal should be to attend a good university for our higher education. At the same time, we should always focus on acquiring skills relevant to our profession.
2. Sharing the investment goals with partner: After finding a partner, it is even more important to discuss and share the investment goals. We should take financial decisions together. There may arise instances of disagreement which should be sorted with building mutual consensus.
3. Building a safety net to meet emergency situations: Emergencies arrive without any notice. The first thing one should consider after getting a job is to consider buying a term insurance policy. We should also set aside some cash regularly to build a safety net of at least 3-6 months of salary. Health inflation is currently one of the highest. This also requires that one should also buy a health insurance to meet the health emergencies.
4. Learning to take risks: For more return in our portfolio of investment, one has to take more units of risks. This is called the risk-reward equation. Building a business from scratch involves putting many things at stake. Risk taking is a crucial aspect of entrepreneurship. I, being risk averse, chose a regular salary paying job in the government. The minimal risk in my job has also put a limitation on my personal net worth.
5. Diversifying investments in different asset classes: When we build a portfolio of different assets, we have to follow some hedging strategy. We should always prepare ourselves for doomsday scenario. That means we should be able to gather ourselves in case we lose our active source of income.Buying land, commercial real estates, bullion and bonds are the best available assets to hedge against the risk in investment in equities. Equities are highly volatile. However, some equities are less volatile. Thus, equity investment should include core portfolio of stable businesses (80%) and non-core portfolio of opportunistic stocks (20%). Profit booking and capital rotation are important aspects of equity investment.
6. Owning time: Owning time is a luxury for salaried employees. We are time-poor until we retire and when we retire we are clueless how to put available free time to some productive use. However, in this busy schedule we should always take out time for giving our child the care and attention that she deserves, gathering experiences, and self-development.

Takeaways

Personal finance is unique to every individual, since it is personal in its scope. There is no 'one size fits all' approach in this domain. What has worked or not worked in my case can't be generalized. My parents were from rural-agrarian communities and the first generation of migrant workers. In their generation, life used to be much simpler and owning land and building a home was not that difficult. But, now things have changed and are becoming even more complex with each passing day. Buying a piece of land and building a home now appears pretty much a herculean task and an impossible dream. Prevailing high inflation environment has further worsen life of the middle-class people. We pay the highest proportion of tax (in comparison to our net worth) and end up living a miserably at certain point in life when we are met with a crisis or when we retire from our active employment. To cut the long story short, we have to learn to take some amount of risk and invest our money in different asset classes. We can't take excuse and remain ignorant. We should also invest time in improving ourselves so that we don't find time for negativity. We should be in a situation where we have money not needing to spend, rather than having no money and needing to spend. I hope this blog tells a story and conveys the central message with some clarity.

Thank you for your time and patience in reading this blog. Feedback of readers would be deeply appreciated.

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