Thursday, 16 June 2011

Getting out of the Rat Race - an interesting perspective!

Let this note find you in the best of financial & physical well being. 

I have been continuously intrigued by how people’s energy and enthusiasm level keeps varying: What triggers the fall & how they recover. We call it being in star mode or planet mode. One remarkable thing I discovered during this search (especially looking at my own life experience) was: How you handle your finances makes a big difference. It is not a question of the monthly inflows. I have met people with limited salary, but managing their finances really well. I have also met people with lots of money, life style & yet they have messed up their finances. I noticed that when I was in a financial mess, my energy levels dropped more frequently.

I started talking to some people who manage their finances well. Also I came across a book: “The Richest Man in Babylon: by George S. Clason”. Babylon became the wealthiest city of the ancient world, despite limited natural resources. This book is still very relevant in current times. The king of Babylon once found that the economy is in doldrums. He was informed that no one has any money despite so much city development & construction work funded by the treasury. All the money has finally been channeled to very few people who are now very rich. The wise king, instead of taxing the rich people, called the richest man ARKAD. He asked him whether the art of making money can be taught. Arkad proposed to the king that he be given 100 people. He will teach them this art and they can then teach the entire city. That was how the city then turned into the richest city. This book contains many simple practical insights that are still applicable in our times:
-  How to come out from loan trap
-  How to manage finances well
-  How to be consistent in investing
-  How to honour your money instead of lending it out of obligations and pity
Please do read the book if you can.

We continued our search on how to quantify financial strength, independent of salary level. We finally crafted a factor we call: Financial Freedom Factor (FFF). It is defined as 
FFF = (monthly income without working / unsubsidized monthly expenses ) x 100

Monthly income without working:
  • This completely excludes salary or any bonus or other benefit. This includes interest income, rental income, dividend, income from business (which runs without monitoring), etc. Remember to keep out anything that you got from inheritance: self generated financial freedom has its own joy.
  • If you have any annual inflows, then divide by 12
  • For any bank balance or investment portfolio, for simplicity you can take 1% of the balance as monthly income. (This presumes 12% post tax return, which can also be possible if one invests prudently)
  • Notional gain from house property is to be excluded.
We found that this is close to zero for many people, despite significant work experience & salaries.

Monthly unsubsidized expenses:
  •  If you stay with parents or in company provided apartment, for similar lifestyle, what will be your expenses: rent, utilities, food etc?
  •  Add all the outflows: EMIs, education, food, entertainment, travelling, even insurance premium etc.
  •  We have enclosed an XL sheet that may remind you of many possible expenses
The attached XL sheet will help you calculate your FFF. Notice in this factor, when it crosses 100%, we reach a magical state: we can live our life without working. This also means we stop working for money and thus we start following our heart. We may still continue working as we all want to add meaning and value to this world. But there is a different shine and quality. That can be one quantifiable definition of coming out of the RAT RACE!!!

This factor is also independent of the level of income someone has.

Some recommendations:
1.   Keep first focus on consistently improving the FFF. Even if it is currently zero, instead of losing heart, START!! And very soon you will surprise yourself! Instead of spending to match up with peers or advertised lifestyles, we can choose to focus on creating a stream of income without working. And that makes all the difference. While making any substantial financial decision, calculate the ratio before and after and ensure that you improve the FFF as a result of your decision.

2.   First pay yourself. It means at least 10% of the take home is meant for YOU TO KEEP but NOT for YOUR USE. This means you keep investing that portion of your take home, never ever plan to liquidate that portfolio. You will be surprised that, as that portfolio grows:
-   your beingness will shift,
-   your ability to deliver improves
-   you command better price,
-   you get paid better,
But you keep that investment safe & growing!!

3.   Ensure that loan EMIs are max 20% of the take home. Watch out for temptations to take a higher EMI loan even if the bank allows it. If your EMI is already higher than 20% of take home, work at bringing it down. If you have zero EMI, invest 30% of your take home. Every year this 30% investment can increase your FFF by at least 5%!!

4.   Manage your lifestyle within 70% of the take home. In case this ratio is higher, find immediate ways to sort it out. Many people who we talked with, hoped that one day their salary will increase or they will get a better paying job. But surprisingly, when it did happen, there were expenses & EMIs already waiting to match up with the increased salary. So the mess continued. In a recent workshop we were told that many young people, especially those 3-5 years in their career, or just married / become a parent, have destabilized their FFF. Under huge EMI pressure, they switch jobs for higher salary, ignoring the mismatch between their passion and the job.

5.   Short term pleasure v/s lifetime of abundance: We also came across some people who were recently married. They took an expensive holiday, spent extravagantly on the marriage. They borrowed at the pretext that such things come only once in life time. After few months, the debt pressure takes a toll.

6.   Guard against lending out of obligation, pity, relationships: ONLY lend for growth, to progressive, positive people. We came across many spoilt relationships and friendships: people find it very difficult to ask relatives and friends to return money lent to them. This actually sends a signal to the creation that they do not value the wealth they created. So the wealth becomes shy of coming to them. Also the people who borrowed, became dependent and stopped taking total accountability of their lives: this “help” blocked their internal capacity from surfacing.

7.   Investing v/s spending: is it an asset or a liability? A new non-accounting definition:
  • Asset: what brings regular money inflow in your pockets. So a stock investment with regular dividend would be an asset. A house getting regular rent is an asset.
  • Liability: What takes away money from your pocket regularly. So a car bought for self use, would actually count as a liability unless you give it for hire!!
Invest in assets instead of liabilities.

We came across amazing people, some real smart people, where this ratio was already more than 100. Here is one case. This person is around 45 years old. He cleared CA Inter and finally left it in between. He is now a tax advisor. He & his 3 brothers had a land in the village going waste for many years. He convinced them and they built a building with 16 apartments. Each brother owns 4 flats and earns a rent of Rs. 10000 without working. Our friend also invested Rs. 2 lacs in a gym with a friend. After 2-3 years, the gym has started doing well. He gets Rs. 15000 per month from the gym as his profit share. He had few more such income streams.

Here’s to your total financial self expression!

Warm regards,

Rohan Singal