Originally published in Desicritics web site.
Many men dream of being financially free. Many dream of quitting their jobs to travel around the world, spend time with friends and family and start new ventures and do what they would love to do. Most people have read the book Rich Dad, Poor Dad by Robert Kiyosaki. Some young men in 20s declare, “I want to take a retirement or break from work when I turn 35. Maybe, I will set up a company at that time.” I was one such guy. Sometime in 1999, I declared that I want to be financially free in a couple of years, when I had almost no literacy in personal finance or financial instruments.
So, how does one go about creating financial freedom and personal wealth? Being a miser is not the right way.
The process starts with introspection and getting in touch with reality. One has to start with a clear idea about one’s expenses in a month called cash outflow. Cash outflow can include the house rent, the bills, the travel expenses, cost of food and household items, medical expenses, children school fees, donations to charities etc. Most people meet these expenses by working in a full time job. A man is considered financially free, if he is capable of earning his monthly expenses (cash outflow) via his passive income. Passive income is the money a person makes without working, say by investments or being a non-working partner in a business etc.
In some families both spouses work, however we keep those situations aside for the sake of simplicity and focus only on an unmarried working men or a married men with wife playing the role of home maker.
Having good passive income and having financial freedom is inspiring to men. However, most do not know how to reach there. Many assume it is a function of their salary in the current job and start working harder to get a promotion, a bigger salary hike or an opportunity to work in US or Europe. They get stuck. Some go aggressively into stock markets and buy stocks recommended by friends without doing research on their own. They end up with bad experiences.
The first key to increasing passive income is to be financially literate. That is, one must get educated with financial instruments and learn the long term trends and patterns of real estate or stock markets etc. This literacy is a must before one gets into action. One can also start experimenting with small amounts of money in order to learn.
Financial freedom depends on a person’s net worth. If a person has a high net worth compared to his monthly income and also expenses, then his chance of being financially free is high. So, the first step towards financial freedom is to increase one’s net worth by shifting one’s attitudes towards life, expenses, money and investments.
If you had invested Rs.100,000/- in a simple index mutual fund in year 2003, instead of taking a honeymoon trip to Mauritius, you would have 6 lacs more net worth today. Just ten such decisions would have made your family sit on top of 60 lacs today, earning passive income of about Rs.60,000/- per month for your family.
I did not buy a car in 2003.
The moods, feelings and emotional highs and lows are the biggest enemies of financial freedom. Unless you are ready to take it as a game without high degree of detachment, you can forget about financial freedom. Well, good things in life come with some discomforts and sacrifices. So, have patience and enjoy.
Recently, many young guys are asking me, “Should I buy an apartment? I am getting married after 6 months and my parents are pestering me to settle down and buy a house. My friend bought a house costing 40 lacs rupees. Well, I also see that I can save Rs.50,000/- tax on interest that I pay for my home loan.”
Now, these guys save hardly 2 or 3 lacs in a year from their salary and they are getting ready for a house loan of Rs.30 lacs apart from completely emptying their bank accounts for paying rupees 10 lacs to the bank as down payment. The loan EMI itself is more than 3 lac rupees in a year.
It’s most often a bad decision. To pay the 3 lacs EMI, these guys literally starve themselves. They live on curd rice, when they go onsite (to US or Europe) for an assignment so that they can clear off this loan as early as possible. Buying a house to stay is the first mistake and the next big mistake is to attempt to pay up the entire loan early by putting more hours at work sacrificing other important things in life.
A house gives about 5% returns on investment in India. A house is not an asset, it is a liability. Buying a house costing Rs.40 lacs is as good as staying in a house worth about Rs.40,000/ per month, while great apartments, better than that dream house, are available for rent for as low as Rs.18,000/- and one also get tax breaks on the rent that one pays.
A man can dump his dreams of financial freedom to dustbin, if he buys a house. A house can wait till one is financially free. It’s all about being strong against wishes of parents and peer pressure and tell them straight, “You will not take away choices in my life; I work hard for my well being”. The other way to get them off your back is to ask them to contribute half of the cost of the house for a joint registration. Most parents will back off with this counter offer. Forget about the tax breaks you get from interest on loan. That’s a trap set up by government to push you into lifelong slavery and insecurity.
However, one can always invest in real estate as an individual or together with friends. Here, the male bonding really helps. Buying real estate involves research, legal verifications and price negotiations. This works when it is done as a team.
However, here is a ground rule regarding buying real estate as an investment. Never buy real estate (say land/sites/plots) thinking that it will appreciate in future. Buy real estate, if you find it cheap and if you are fine even if it does not appreciate. In India, people who bought real estate taking small loans in 2002-2005 did make good money out of it. This pattern has now shifted to tier II and tier III cities. Real estate can make one boost one’s net worth. If you had purchased a site worth rupees 10 lacs in Bangalore in 2003 by taking a loan of rupees 7 lacs, then today you may have increased your net worth by about 40 lacs.
If one lives in US, it makes great sense to buy a house at USD 300,000 during recession rather than succumbing to pressure from wife and ending up buying a house at USD 600,000 during a boom. In 2009, the prices of houses in many places in US have dropped to almost 50% of their peak price in 2007. However, this situation and trend has not yet come to house prices in India.
I have seen Multi-Level Marketing (MLM) guys speaking about passive income. However, MLMs seem dirty and tiring, when Indians are involved.
If you have patents or have written books which generate royalties, those also add to your passive income.
Once a person has high net worth compared to his monthly expenses, all he has to do to create passive income, is to shift a portion of that wealth to create some rental income (say commercial rentals) or get returns from investments into businesses and stock markets. If you have a net worth of Rupees one crore (about quarter million USD), then one can have an annual passive income of rupees 8 to 10 lacs easily.
Having financial freedom can help one get into a fast track towards capitalising on one’s ideas and opportunities. If you still work, then you will do it as a choice and not as a compulsion. You can switch to careers, which may not be high paying, but more fulfilling. You can take breaks from work to go on a long holiday with family or take on studying for another degree in a different field. All this will add years to your happy life and will create prosperity and happiness for your family.
It requires an internal paradigm shift to achieve financial freedom. The keys to financial freedom do not exist in outside world, for example one’s salary. The keys lie in one’s internal belief system and the way a person is hardwired to his relationship with money. When a person shifts this paradigm of thinking and attitudes, he slowly starts journey towards financial freedom. Robert Kiyosaki has a game called cashflow101, which makes ones overcome some of these internal barriers and decision making habits that stop us from being financially free.
For many people, investment in markets or real estate is risky business. Well, not taking risks in life is the most risky way to live life.
So, the keys to financial freedom are:
- Declare your intentions about your future net worth, when you are financially free. Be clear about the time frame. For example, declare, if 1 crore (USD quarter million) created in next 5 years makes you financially free.
- Stick to your intention even if it appears impossible. Declarations are powerful and they open new possibilities and opportunities.
- Reduce wasteful expenditure. Do not listen to moods, feelings and emotions.
- Do not buy a house to stay.
- Invest in stock markets and/or real estate for long term after sound research.
- Play Cashflow game (board or software) by Robert Kiyosaki with friends or family.(link)
- Spend some time learning fundamental and technical analysis, if you are investing in stock markets.
- Develop contrarian skills and be independent in thinking.
Do not get into buying futures or options looking for quick bucks, if you are a beginner. You will get enough time to experiment with all these beautiful instruments as you grow up. Have patience.
Do not listen to your broker or investment banker. Most of them are incompetent losers, with bad finances of their own. Dictate terms to them and avoid being nice and considerate to their persistent requests.
Realise that Market news channels like CNBC and NDTV profit are basically a kind of entertainment channels even if they get best fund managers to give opinions. I often do opposite of what these news channels recommend. My investment banker and stock brokers hate me