Let’s Talk Money -Book Summary
Whatever may be the amount of cash in the wallet or in the home cash box, it gets spent. Large chunks of unused money cry out to be used, and get borrowed away or spent on an impulse that later you wonder why you gave into.
You need to have an Invest-it Account. Get a grip on how much you spend each month by watching how much you move to your Spend-it Account at the beginning of the month. I’d leave a bit extra in the Income Account in the first three months to see how much I need in my Spend-it Account. If it runs dry, move more from Income to Spend. Moving money from Invest-it to Spend-it is not allowed in Let’s Talk Money.
When we label the account Invest-It Account, we will be loath to touch it for our current spending needs. We’re tricking our brain into doing the right thing.
Let’s Talk Money author says that you are doing OK if …
- You have a three-account system that separates your income, spending and savings.
- Your spending on living costs is no more than 45–50 per cent of your take-home income.
- Your savings are at least 15–20 per cent of your take-home income.
- You have six months’ living costs in an emergency fund.
- You are a double-income family with no dependent parents and have three months’ living expenses.
- You are a single-income home with dependent parents and have a year’s living costs in an emergency fund.
The day you realize that it is in your best interest to separate your investment and insurance products is the day you move solidly towards building your financial security. Else you are building wealth for the seller and the insurance companies.
Show me the money
“I’m not rich enough to start investing.”
Not beginning the process of investing because you don’t have a large corpus in the first place is like waiting to get fit before you join a diet and fitness routine.
We don’t need a lot of money first to start investing. We need a lot of little money streams to keep gathering to make a large corpus.
The important thing to do is to start saving rather than wait for that golden moment when you have a big amount to hit the market with.
Financial seat belt reduces the need to keep most of your money ready at hand. Keeping money ready to use for an emergency is one of the key reasons that people don’t invest for the long term. But not just emergencies, we shy away from long-term investing for one more reason: What if I don’t have the money to make the annual investment commitment? What if I change my mind? What if I find a better investment?
Remember that each financial product you buy must solve a problem you have. It must have a purpose. Simply buying something because it is being hard-sold is just bad money-box behaviour.
Let’s De-Jargon Investing
There is a purpose for each product you buy, and each product needs to fight with others to grab that place in your box. There are three asset classes that we need to understand. Debt, equity and real assets.
Debt is just an umbrella term for all financial products that are based on borrowing. Equity is ownership of a business and the risk that it brings, either directly (through stocks) or indirectly (through mutual funds). Real assets are those that can be physically seen. Debt and equity are called ‘financial assets’, while real estate and gold are called ‘real assets’.
Not more than 5–10 per cent of your total portfolio goes into gold. You do not buy jewellery as investment.
Real estate is a horrible, clunky, chunky investment that has lots of costs, which people forget to add to the profit maths. It is illiquid – you can’t sell in a hurry. You can’t sell one room to raise some funds – you need to sell the whole darn property. It needs periodic investments for maintenance. For society flats, there is the added cost of high charges. But we remain wedded to real estate.
Rules of equity investing
Equity investing has its own rules and unless you follow them, you will lose. One, when investing in the stock market, give it the same patience you give real estate – a good equity portfolio needs five years of patience, ten years to see consistent returns, but actually will slow-cook over fifteen to twenty years.
Investors need to remember that if they gave the same respect to equity that they give to real estate, it would be a smoother ride with fewer costs.
You don’t just buy a product because it is sold to you. Each product in your money box needs to justify its space. It has to fight with other products available to claim its place in your money box. The time has come to now begin filling the money box with products.
Keep about 5–10 per cent at the most of your net worth in gold if you want to. The exact asset allocation between debt and equity will vary from person to person.
The thumb rule for equity is 100 minus your age. If you are thirty years old, you should have 70 per cent of your money in equity. If you are sixty years old, you should have 40 per cent of your money in equity. Yes, you need equity even when you retire.
My Retirement
I know lots of people who plan to keep working till they die. This is all very good, but two things can go wrong. One, health; two, supply of work. When we’re young we underestimate the damage that an ageing body causes to work. Lifestyle diseases, bad backs, knees, neck and lower immunity cause us to reduce the work we do.
What we know and can do need upgrades over time, and as we age we find it difficult to rework what we are and gather new skills. How do we know that when we hit sixty-five or seventy or eighty, there will be a skill that can throw off an income? We need to create a retirement corpus so that by age sixty we are financially free.
You are financially free when you don’t need to work to pay your bills. You have enough assets that generate enough income today and for the rest of your life.
Financial freedom is what some people also call it Go to Hell money. This is the money that you need in your money box before you can say the three words you may have been wanting to say for a long time to your boss.
Freedom to choose the work you want to do, when you want to do it, and how much you want to do. I’m not talking of the super wealthy who can hire jets or zip off to watch a match abroad at a moment’s notice. But regular folk like you and me. We have lifestyle expenses, but our basic middle-class background keeps a lid of most of these.
The idea of financial freedom is to be free of any strings. I use two rules of thumb to get to a rough estimate of how much is enough.
The first one uses your current income which I call ‘Save Your Age’. The second one – ‘Multiply Your Spend’ – uses your current expenditure to forecast what you will need in the future and how much you need to have.
Inflation is relentless, and even when the rate of inflation falls it does not mean that prices go down. They just rise more slowly. Getting the right amount for retirement is a tough nut to crack.
Save your age
At age twenty-five save 25 per cent of your post-tax income, at age thirty save 30 per cent of your post-tax income. At age forty save 40 per cent. This formula works if you don’t have money saved towards your retirement, till you are forty.
Notice how the saving ratio reduces with age – the younger you are the less you need to save.
But you’re asking: What happens after age forty? If our goal is to retire at age sixty, the time left for savings to do their work gets reduced and you have to pull harder at the savings rate. By age fifty, if you really have no money saved, you must salt away 80 per cent of your post-tax income.
It is almost too late at fifty to save for retirement if you have nothing in the retirement kitty at all.
Multiply your spend
A better way to target a retirement number is to look at your current expenditure each month and each year. An expense multiplier is, in fact, a better way to crack the same problem, because at the same level of income, different families will have very different spending behaviour.
An expense multiplier assumes that you know how much you spend, but many families are clueless of their annual expense number – money comes in and money goes out.
Your expenses will drop in the first year post retirement.
This is because costs related to travel to and from work, wardrobe, entertainment, food and other such expenses reduce once you stop going to work. But your monthly expenditure does not stay at fixed amount, it begins to creep up again due to inflation.
Use the Rule of 72 again to do the maths. This time you divide 72 by the inflation you are projecting into the future. For example, if we think inflation will be 6 per cent in the future, divide 72 by 6. This means you will spend twice of today’s expenditure in twelve years.
Divide 72 with your inflation number to get the number of years it will take to double your current expenses.
How much will you need at retirement? At age sixty, you need between eighteen to thirty-five times your annual expenses at retirement to retire with the lifestyle you are used to.
The future is out there and there are too many things that can change along the way. At a macro level inflation rates could drop, growth could take off even more, resulting not only in better than expected increments but also better than expected equity returns.
Let’s Talk Money author says that:
At age forty, you should have three times your annual income as your retirement corpus already.
At fifty, you should have six times your annual income.
At age sixty, or at retirement, you should have eight times your annual salary.
This is the big goal for the future. The earlier you begin the better it is. Small amounts can grow to big amounts if put in the right fund. Think about funding at least twenty-five to thirty years of increasing living and medical costs after age sixty.
Let’s Talk Money: You’ve Worked Hard for it, Now Make It Work for You by Monika Halan. It was published by Harper Business (July 5, 2018) The book has 204 pages.
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