Debt - A good or bad idea

This is another one of those very contentious topics that gets a lot of extreme opinions.  So is debt a good or a bad idea?  And like many other subjects in personal finance; it depends!

Debt comes in many forms.  The most simple kind of debt could be a small amount borrowed from a friend or a family member. Another type and probably the more common type is credit card debt. And then the larger debt like a loan to buy a car or a mortgage to buy a house. So which of these could possibly be good debt?  Well, it depends. My personal preference is to separate debt into 2 kinds; debt that is used merely for consumption and that used to purchase a depreciating asset and on the other hand debt used for a productive purpose or to purchase an appreciating asset.

First of all, all debt needs to be repaid at some point and comes with a cost. So the first and probably the most important consideration is whether you can afford it.  Very often, the start of a serious financial crisis starts with a loan that one can't afford to pay back.  And hence it is important that you have confirmed that you can afford to pay back the loan including the interest. Very often there are variable components to the loan, eg the interest rate.  As time passes the interest rates may increase thus increasing your monthly payments. Moreover, you need to assess the risk to your income that helps you to pay back the loan.  Is there a reasonable risk that you will not be able to pay back the monthly instalments in the future? 

Click here

An important consideration is the financial impact of the asset that you are buying. Are you taking on debt to pay for a holiday? Or to buy a depreciating asset like a car.  Remember it may feel exciting to go on a holiday using borrowed money but as soon as the holiday is over in a few days, you will be left with the burden of paying off the loan over a period of time. Pleasure for a few days and financial burden for a few years. Will this be worthwhile? Also understand that the value of car will depreciate the moment it leaves the showroom.  And it will continue to lose value over time while you continue to bear the burden of the debt for many years. In other words, these are examples of non productive debt and I advice people to refrain from taking on such debt.

On the other hand there is productive debt.  Debt that allows you to produce more or create an asset in the future. A good example is a mortgage.  A mortgage allows you to build an asset over time, something that appreciates in value over time. Although a mortgage is as risky as any other debt in terms of risk of affordability, if used wisely, it can help you to build a asset over time and hence I call it good debt as long as you use it wisely. Make sure that the monthly exposure that you have in terms of monthly repayment is set in such a way that you can still afford to pay the EMI even if the rate of interest changes over time. Have enough buffer to account for unforeseen increases in the interest rates.  Then again, should you buy a house or rent it?  Read my post here to know more.

The worst kind of debt is credit card debt which should be avoided at all costs. The interest costs associated with credit card debt are exorbitant and the cost can spiral up very quickly if not managed carefully.

In summary, debt can be good or bad depending on how you use it. Any questions? Post your query in the comments section below.

Trust the capitalists

Remember the doomsday feeling of 2008? Or the panic of March 2020? And in between there have been several instances of the market dropping by 10% or more over a short period.  And each time everyone has felt panic.  That feeling of absolute nervousness.  As if the end is near. 

And in every one of those cases, the markets recovered to make new highs!.  Remember this. The next time the market drops quickly and by a large value, trust the capitalists.  They will continue to build value in the market.  And every one of those drops will be followed by a recovery and a new high.

If you look back into history, you will see this happen over and over again.  A quick glance at the 20 year trend of the Nifty 50 will only confirm this.  That markets have dropped sharply in the past, always to recover and go on to make new highs. Remember October 2005?  The Nifty took a sharp drop from 2644 in early Oct to go down to 2316 by  the end of the month. But the recovery took less than 30 days.  The Nifty 50 moved from a low of 2316 on 28th Oct to trace back to 2664 on 25th Nov 2005. Take a look at Myy 2006. After hovering around the 3754 mark  in early May, the market dropped quickly to 2632 by the middle of June, almost 30% lower.  Then again, the market went on to recover to 3769 by the end of Oct, taking a little while longer. Trust the capitalists!

While the above examples may not be in many people's memories, I am sure the events of 2008 and 2020 will be.  Even the investors who have begun the journey recently will remember the big one of 2020. The panic of COVID-19 was jsut setting in. The sense of an upcoming global pandemic was being felt by the market. I remember watching the news closely as businesses started shutting operations. And then the Nifty 50 took a sharp nosedive. From 12,201 in the middle of February 2020, the market collapsed quickly to reach a low of 7610 within a month on 23rd March.  That amounts a sharp nosedive of about 38%!! Several people were predicting the end of the markets.  Emotions were running high as some even pointed to a very long period of pain. At that point and in the following days, many distraught investors fled the marekt. Some making huge losses as the chaos continued for a few weeks.

 And as I have said several times in this blog, trust the capitalists. Despite the doom and gloom of the pandemic, the market recovered back to the 12,200 mark by early November of 2020. It is not just the recovery that begs attention. It is the strength of the recovery and the momentum thereafter!

It is importatnt that I mention an important consideration. The market will always rise. That does not mean every company will. The markets and investors are vicious.  They celebrate the performers and severely punish the laggards.  And hence every few years, some companies will die, while some others will zoom to the top.  What matters is that you have a broad portfolio that is balanced.  Invest into broad and diversified funds. Have some allocation to broad index funds. It is difficult to pin point which company will be a winner. But not too difficult to point to the fact that the broader markets will continue to rise after every fall. You only got to make sure that you stay the course. 

So as we reflect upon the slight nervousness in the market over the recent moves of the Nifty 50, remember this.  Trust the capitalists.  

The importance of discipline in investing

 Almost everybody I know has alll the information regarding the importance of a healthy diet. But almost all find it difficicult to follow it. The same with investing. And just like the a good healthy diet, one can experience the benefits of investing only if one maintains the strategy for the long term. Markets will rise and markets will fall. And often markets will move sideways for a long time. The key to a successful investing outcome depends on how one reacts to the markets over time.  The secret to success?  Do nothing. 

It is important that ones first sets out the goal and the path to it.  This would involve calculating the end goal of an investment process over time. This should consider the current cost of living, inflation, changes in lifestyle etc. And aside from the final goal, one needs to consider and sign off on the path.  How do you want to go about your investment process? There are several approaches and all could be useful depending on your own style and risk appetite. You can explore the various options in other parts of this blog.If you have a long investment timescale and can afford to sustain some ups and downs, you can probably take a significant amount of risk. If you need the money in 5-10 years and don’t have any other assets, a more cautious approach is required. Read about asset allocation here

Once you have set up the process, stick to it. Many times short term market fluctuations can lead you to doubt your decisions.  Don't let emotions interfere in your investment process. A sharp fall in the market can be stressful, and many investors may sell in panic. But a dip is usually followed by a recovery, and this can happen very quickly. Taking money out means missing out on this recovery. But more importantly, long-term returns are not based on a straight line. The drop and subsequent recovery are not a short-term anomaly that we need to allow to pass – they are a key feature of how the market functions. Remember that every drop in the market in the past has been followed by a recovery.

Click here

Holding a balanced portfolio over a long period of time and adjusting the allocation over time as your risk profile changes is key to a successful investment process. Discipline matters!

The value of 1%

I am often surprised at the casual approach of many people to a small difference in return on investments. How do people react to say a return of 11% per annum compared to a return of 12% per annum.

Most people will not see a large difference and some may respond with a shrug of the shoulders. This is because in absolute terms, it is difficult to comprehend the impact of the 1% difference in return. This is because we are not able to visualize or see the impact over time very easily.

To understand the real impact of the 1%, let us use a simple illustration. Let us assume that an investor has a capital of INR 10,000 to invest. Let us make another important assumption. The investment lifetime of any young person is about 35 years. What will be the final result of this 10,000 invested at 11% over the period of 35 years. Compounded annually at 11%, this small amount of 10,000 will grow to an interesting 3,85,748 over the period of 35 years. While this looks impressive, what will be the final outcome me if the rate of return was just 1% at 12%?

10,000 invested at a rate of return of 12% over a 35 years period will grow to a whopping 5,27,996!!

That is a large difference of 1,42,000 or 37% more money at the end of 35 years. Now that you can see the difference between the final result of investing at 11% or 12%, would you look at the 1% difference the same way?

Interesting right?

Have you been a victim of such thinking in the past? Let me know in the comments below.

Don't be stupid

Don't be stupid, you know I love you

Don't be ridiculous, you know I need you

Don't be absurd, you know I want you

Don't be impossible

The famous lyrics from Shania Twain's hit song are also relevant to the world of investing. Don't be stupid.

It I said that doing badly in the investing process can be as equally difficult as doing very well; as long as one sticks to the basic principles and one does not do anything stupid. Often, managing risk is key to getting the job done. Lack of success in the world of investing has less to do with taking great decisions and more to do with just avoiding stupid stuff. Avoid too much risk and success will follow.

So what are the stupid things that one needs to avoid?

For starters, temper your expectations. Although this is not a decision itself, how one sets expectations has a strong impact on the decisions one will take. If your expectations are within limits, you will tend to take less of stupid decisions that are driven by over expectation and hence disappointments related to the actual performance of your investments. Don't get swayed by what you read on social media. 25% CAGR is not really necessary to succeed. As long as one is achieving 5% to 6% over average inflation, you are already on the path to success. Hence keep your expectations within reasonable limits. 

Maintain a balanced portfolio. Having assets across multiple asset classes will ensure that you ride the cyclical waves of each asset class. There is no need to take unnecessary risk and allocate a disproportionate share to any one asset class based on recent performance. Remember, everything reverts to the mean eventually.

Save and invest aggressively. There is no substitute for this. Consistent investing and holding the investments over a long period of time is a critical element to success. There is no quick magic. And if you read about how other  people are getting rich quickly, run away from such stuff. Stay consistent.

Anything else that you suggest? Mention your suggestion in the comments below

CAGR v/s IRR

Of course!  The most important measure of success as an invester is the rate of return. But what exactly does this mean? And how is it calculated?

There is no greater pleasure than to flaunt your rate of return. Assuming that it is something to be proud of. But more impoertatly, it is important that one is aware of the rate of return so that one can judge the success of the investment process. So how does one measure the rate of return of an investment? Often, many people use absolute return as a measure. Nothing can be as risky as using absolute returns of an investment. Absolute returns refer to the increase in the value of an investment without considering for how long the money has remained investment. So what is the right way to measure the rate of return?

CAGR and IRR are commonly used methods to measure the rate of return.

As the acronym suggests, the compounded annual growth rate (CAGR) indicates the compounded rate of return of an investment on an annual basis, considering the value of the investment at the start and the end of the period. CAGR is commonly used as a measure across several areas of business including to show the growth of a business or sales.  However, the validity of CAGR is limited to calculating the growth rate of an investment between a fixed start and end date. It is not a good indicator when investments are made at multiple points of time. This is where IRR comes in very useful. 

The calculation of CAGR is relatively straight forward. It can 3 inputs; the start value of an investment, the end value of an investment and the period for which the money remained invested.  While the CAGR calculation is an excellent indicator of returns, it becomes limited in use when the investments are made at multiple time periods eg. investments made via an SIP on a monthly basis. IRR is more flexible as it considers multiple cash flows and time periods. 

That begs the question. Which one is a better measure to understand the performance of an investment. Neither is categorically better. IRR is a better measure when investments are made at multiple points over time while CAGR is better suited while measuring the performacne of a lumpsum amount over a period of time.

The Retirement Gamble

 My retirement plan?  Well I plan to pray.  That may be the only way out.

Often folks in their 50s and 60s hope they hit the jackpot. Else retirement could be a a very stressful period. Will you have enough income to retire comfortably? 

I wish it was a simple question with a simple answer. As they approach retirement a lot of folks begin to play the game of roulette at the casino hoping for that one big break. Does the retirement planning process really need to depend on the roll of the dice? Based on my chats at social gatherings, most people in their 50s regret the way they planned for their retirement.  Almost all feel that they could have done a much better job in building a better corpus. But often the challenge also lies in the asset allocation and the inability to generate periodic income without the need for active management.

The first thing of course is to have an adequate size of a corpus to form the base for your retirement funding. While the active income during your earning years is an important element, the one thing that many fail to do is to start the planning process early. The magic of compounding is almost often elusive to the human mind. The impact of time in the process is often misunderstood or not understood enough. One of the moment important factor in the final result is time. Start early and let the investment grow over time. The magic begins to unfold from year 15 onward and truly feels like magic in year 25 of the process. Given the average retirement age of 60 years, being fully involved and committed to the process by the age of 30 is critical. Starting at the age of 25 gives a strong multiplier impact. 

Buy of Rent

The mix of assets as you draw closer to retirement is extremely important. The asset allocation process becomes even more important as one draws closer to retirement.  This is for 2 reasons.  Risk management and the need to generate income without active management.  

As the rule of thumb suggests, the share of lower risk assets should increase as one draws closer to retirement. As a person nearing retirement or as someone who has recently retirement, it is undesirable to be heavy in higher risk assets like equity.  It is important that one carefully realigns the asset allocation as one draws closer to retirement. Move more into lower risk assets.

The other factor and probably the less obvious is the ability to generate income without active management. Retirement is a well deserved period and one does not want to spend it in actively managing the assets.  As an example, while rent from an investment property is a good way to generate periodic income, do you really want to spend retirement in managing properties? Add to that the potential of litigation and maintenance. One needs to try and move assets across to classes that can generate income without having to actively management the income.

Do you have a good retirement plan in place?  Or are you banking hopes on God?

Check out this video about the magic of compounding

Do Less

 Have you encountered these very animated and loud conversations about investing around the coffee machine? Often you will come across some colleagues who rattle off the many investment decisions that they have taken and how they are making big money?

 

My experience suggests that investment success is inversely proportional to the number of investment decisions that one takes over a period of time. The more transactions or decisions, the less the success. The more decisions taken also means a higher likelihood of bad decisions. This behaviour is often driven by the news of the day or the need to be constantly on top of the latest fad. This constant action does not lead to better success albeit it more often leads to poor success. Try to take a few good decisions based on your conviction and then let your investments work their way up. The magic of compounding is real.  It works.

 

Taking a few good decisions and then waiting for the magic of compounding to unfold will almost always give a better return on your investments compared to constant buying and selling.

Don't do too much

I have often met folks who seem to believe that the investment process is and has to necessarily be complex and heavily managed.  They get a sense of unease if they are not taking some sort of action.  They feel they are not doing enough if they are not constantly re-allocating the portfolio or if they are not constantly buying or selling based on the news of the day. 

Investing doesn't need to be a process of constant and continuous action. In fact the best results are achieved when one doesn't do too much. The planning process itself needs to be thought through well based on your circumstances; your age, risk profile, ongoing financial obligations etc. But once you have signed off the plan try not to 'act' too frequently with your investment process. The less you do the better will be your result.  We often get swayed by the constant and unnecessary barrage of new information and noise. Social media has made this event more complex with so many financial advisers dishing out all sorts of advice.  Shut yourself out from this unnecessary noise. 

Click here

Once you have set in motion your asset allocation and signed off a plan, stick to it come what may. This is of course based on the fact that that you have spent adequate time and effort in putting the plan together. If you don't the conviction in your plan, you will always have self doubt and be constantly steered into various directions.

                                

Think of the investment process like a buffet.  Before you begin, scan the buffet table. Understand what is on offer.  Understand what is good for you and importantly what is bad for you. There is a limit to how much you can eat. You also don't want to rush back to the buffet too often. Quite often the buffet table is laden with a huge arrays of foods, most of which are bad for you anyway. Your financial process should be similar to how you pick food at the buffet. Find out whats healthy and avoid food that may be bad for you.  Decide how much you want to serve yourself. And once you have served your food, relax and enjoy the experience.  Don't rush back to the buffet table too often. This will only make you take some poor decisions including some terrible food on your plate.

Read about the most important habit for financial security here

Click here

Should you prepay your mortgage?

Should you over pay your mortgage? Or maybe just go ahead and invest that extra money elsewhere?

The decision between investing extra cash or prepaying your mortgage is one of the most debated topics in personal finance. You've received a raise, optimized your budget, or come into a lump sum—like 8,00,000 from an inheritance—and now face a choice: put that money toward reducing your home loan balance, or invest it elsewhere for potential growth? Both sides have passionate advocates, and the "right" answer depends heavily on your personal circumstances, risk tolerance, financial goals, and current economic conditions.

This isn't a one-size-fits-all decision. It can be approached rationally through numbers and assumptions, but emotions play a big role too—especially how you feel about carrying debt. Some people sleep better knowing their home is closer to being fully owned, while others prioritize building wealth through compounding returns. In personal finance, there's rarely a perfect path, only the one that aligns best with your life. Let's explore the key factors to help you decide thoughtfully.

At its core, the choice boils down to opportunity cost. Prepaying your mortgage is like earning a guaranteed "return" equal to your home loan interest rate (since you avoid paying that interest going forward). Investing elsewhere offers the potential for higher returns but with risk and no guarantees. Add to that the worry about the debt you carry.

Let us assume you have an mortgage with an outstanding tenure of 17 years. If you prepay 8,00,000 now against your mortgage that costs you 8% pa (as an example), you reduce the principal immediately. This shortens the loan tenure or lowers future EMIs (depending on how your lender applies it), saving a significant portion of future interest—especially powerful early in the tenure when interest forms a larger part of each EMI.

Alternatively, if you invest that 8,00,000 and earn a compounded annual growth rate (CAGR) of 12% over the remaining 17 years, it could grow substantially—potentially to several times the original amount (far outpacing the interest saved on the loan in many scenarios). Meanwhile, you continue paying the original EMI, but the investment grows independently.

On paper, if your expected investment return exceeds your mortgage rate, investing often wins mathematically. Historically, equity mutual funds have delivered long-term returns in the 12-15% range for diversified portfolios, though past performance isn't a guarantee. Debt funds or fixed deposits might offer lower, steadier returns closer to or below current home loan rates.

Several variables tip the scales: Your mortgage interest rate — The lower it is the stronger the case for investing. The key factor being the spread between your mortgage rate and the expected return from your investments.  Remember that here our decision will be based on the estimated return and the actual return may be higher or lower. Investing carries market risks. The return that you achieve over the years could be lower thus nullifying the assumed benefits. The other factor is the remaining loan tenure. Longer tenures amplify compounding benefits of investing. Prepayment saves more interest early on due to amortization (interest-heavy payments initially).

But one needs to keep in mind the psychological impacts also.   Debt aversion is real! One may prefer being debt-free sooner for mental freedom.  What if you lost your job?  Or your circumstances changed in the future thus impacting your ability to repay? Reducing debt even at the risk of reduced returns or wealth creation is a good place to be in if it means less stress about the future.  Remember, circumstance can change midway. What if your circumstances change for the worse like redundancy or reduced earnings? Often, the near term risks can overshadow the long term gains. Peace of mind is often not given enough importance while we are busy driving our careers and ambitions. It is something we don’t appreciate until we don’t have it. 

So that big question again?  Should one repay the mortgage with the extra cash or should one invest that amount instead? Many experts recommend a middle path: allocate part of the surplus to prepayment (for peace of mind and interest savings) and part to investments (for growth). For example, prepay enough to reduce your EMI or shorten the tenure modestly, then invest the rest in a systematic way. Or maintain an emergency fund first, then split extra cash.

What would you do if you had a mortgage and came across some extra cash at the end of the month?  Or if you received a hefty bonus at work? What would you do? 

  

Financial Independence for women

Traditionally financial planning has been left to the men. This is something that comes naturally for men in our society.  Will it be beneficial if more women got involved in financial planing and their own financial independence? This is not just beneficial but necessary. 

Financial planning has traditionally been a male domain. This is probably due to their traditional roles as the main or sometimes the only breadwinner in the family. The success of a man has been measured by his financial success and how much money he makes and this has shaped our thinking. But today as more and more women venture out into the work place, a good understanding of financial planning has become important. In fact financial planning has become even more important for a home maker.  It is high time women change their relationship with money and get to know how to manage money with confidence. 

Whether you're single woman, married, or in a relationship, knowing how to handle money is vital. Women should be financially independent because relationships should be equal. A woman should be able to handle money independently. Education in financial planning is critical for a woman in the modern context.

Change your mindset and relationship with money. Start to be involved in decisions related to money. I know many men who would love their partners to be involved in the money decisions to be taken. But this needs to begin with you; the woman. Discuss the family's financial status. Understand where the money is getting invested. 

Improve your financial literacy. Find out all you can about money terms, investing, saving, and anything that you feel you need to understand. Click on the various topics shown on the right of this blogpost and read the various posts. YouTube is a great resource for improving financial literacy.

Set up an independent financial goal. A goal doesn't need to be grand. It could be a small achievable goal to save and invest a small amount each month. Be consistent. Keep increasing the monthly saving each year. The magic of compounding is a very powerful concept. Often the small investments in the early years feel trivial but as you keep building your investments, the compounding effect accelerates the growth of your money. 

Start an SIP.   The SIP approach is a very simple automated process to building huge wealth over the years. It takes away the indiscipline that we are often victims of.  Schedule your SIP a day after your salary gets credited into your bank account. This way your investment get priority over all other expenses. 

Become financially independent. The ultimate goal is to be independent financially. And the most critical part of this process is to start your plan as early as possible. In the modern world, it is very important for a woman to be financially independent. Build your own corpus. 

Being financially educated and working towards your financial independence will make you a confident person. It will have many other positive impacts in your life. 

Try it. 

Financial freedom is not early retirement

 

Work towards financial freedom. But don't equate financial freedom with the idea of retirement

Many of us will have had a thought at some point in our life about hitting the jackpot and then retiring comfortably.  This is often something people dream of.  We dream of being finally free from financial stress and constantly worried about our future income. But does financial freedom necessarily need to end in retirement? 

Click here

One of the big mistakes we make in out thought process is to see retirement as the end goal of financial independence. Without doubt, financial independence allows you to retire from the day job. But importantly, the end goal of financial freedom is to gain time. The time to do stuff that one dreams of. Financial freedom allows us to choose what to do and when without the stress of working towards an earned income. We no longer need to exchange our time for a salary.  Our time can be spent doing things we love. And that could well include our current job that we love to do. 

Retirement on the other hand can be a very risky decision if taken at the wrong time. Retirement reduces our physical activity. Retirement reduces our mental activity. And often retirement reduces our social activity. These changes can lead to deterioration of our physical and mental health.  I have seen many people go downhill after retirement and this is often due to take of regular activity to keep the mind and body stimulated. Hence retirement is an important decision to take at the right time.

Hence achieving financial independence early and equating that with retirement can be a risky situation.  Work actively towards financial freedom. That doesn't need to end in retirement

 

F U Money

A few years ago, I was fired.  Not because I was a poor performer. It was just that my boss and I had our differences over certain business policies that he had implemented. I knew instantly that these policies were detrimental to the business and I stood my ground. In the end, the company decided to let me go. But that itself is not the point.

It is in moments like these that FU Money becomes important. You may have guessed what the F and U in the term FU Money stood for. And it means exactly that. I had not heard of the term when I was fired from the job but got to know of it much later. I remember reading about the term FU Money in a blog written by the legendary JL Collins. FU Money gives you the space to take a break if required. It lets you do what you want and work when you want to. Often we are prisoners of our work places. We are literally chained at our ankles and we cannot leave. Many would be financially challenged if they lost their job. We are prisoners at work. Only until we find our FU Money. 

By the time I had lost my job, I had already set aside my FU Money. Adequate money to keep me afloat for a few years. Enough to stop me from being over anxious about my financial needs. FU Money gives you the confidence to do what you want. It takes away the chains around your ankles. Do you have your FU Money today? 

    

Size does matter!!

Sit back and look at how you spend your money. Often almost 40% of the money that we spend can be saved. Just writing down our expenses each month is a good place start. It makes you aware of where your money goes. And more importantly it makes you aware of the money that can be set aside to build your FU Money. Each month work aggressively to build your FU Money. Put that money to work. Invest it wisely. And let the returns from your investment get reinvested. And the cycle goes on. Very soon you will begin to breath better. You will realise that you have FU Money set aside that can tide over any eventuality or even give you the chance to do other things. Once you have your FU Money you will feel the shackles fall off your ankles.  It will set you free. 

FU Money should not be confused with financial freedom. That will be a long distance ahead. FU Money just cushions you from a fall. It gives you the confidence to literally say just that.  F U.