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.

Investment Myths

 One needs to be stock picker

One needs to be a stock picker

Often we hear of investors who are constantly beating the crowds. A cut above the others. The investors who beat the index by far.  The super investors. This constant barrage of information of other investors beating the market by cleverly selecting the winners leads us to believe that we all need to be super investors too.

And here in lies the biggest risk that most investors expose themselves to. The feeling that the only way to win in the investment process is by picking the winning stocks. And very often these winning stocks happen to be recommendations from random acquaintances. Can everyone really pick the winning stocks? The process of selecting multibaggers can be daunting.  The path can be full of landmines. Not everyone can be a Warren Buffet. And yet almost everyone wants to be one and many even believe that they need to be one.

A safer path for most investors is to diversify the risk by buying the entire market or a broad index. In the words of the legendary Jack Bogle, buy the haystack. In other words, don't try to pick stocks. Instead buy the index or the broad market. A safer and yet a rewarding approach is to buy the entire market. Ride the wave of the entire market. Often referred to as Index investing, the key principle is that instead of taking on the risk of choosing the winning stocks, it is better to buy the entire index. 

The concept of index funds was made famous by Jack C Bogle, an american legend. He argued that a safer for the retail investors was to buy an index fund which represents a group of stocks that represent a broad set of industries and sectors. By investing in index funds, one takes away the risk associated with specific stocks and only aims to replicate the returns of the market.

Watch my video about The Principles of Investing by Jack Bogle

In summary, successful investing does not require you to be stock picker. Not everyone needs to be a Warren Buffet or Vijai Khedia. You can achieve tremendous success in investing by not being a stock picker and exposing yourself to a huge risk. Take the less risky path. Buy the index and sit back and relax

Read this other very interesting blog post, Buy The Hay Stack

Saving is key

 Success is not about taking that bold step in the future, it is about taking the small steps now.

Saving is probably one of the most important habits in life. This is the first step towards your long term financial security and ultimately your financial independence. There is no substitute for saving. And hence the moot question. How much of what you earn gets saved?

I often hear people say that they cannot manage to save by the time the month ends. And this may be true in some cases. But in my experience, most of us can save a part of our earnings. While the size of our savings has a huge impact in the long term, the first step is to be aware of and having that intent to save.  Getting into the habit of saving and a mindset of saving is a very important first step. 

The early years need to be focused on building an initial corpus. One needs to build a sizable base as quickly as possible as this is important for the magic of compounding to kick in. Read about the importance of size in my previous post Size Matters. Hence developing a saving habit is very important. Just like your health, your financial health is dependent on the daily decisions that you make everyday. 

Here are a few ideas that will get you started on your journey towards financial security.

1. Set a budget: Setting up a budget is the most important start. Setting up a budget does not necessarily mean being stingy or depriving yourself. The process of budgeting makes you aware of the various things you spend your money on. It allows you to prioritize the important stuff and may be leave out the not so important stuff. How much do you plan to spend on rent? How much of your earning is allocated to groceries? And that most important question. How much of your earning do you intend to save at the end of the month?  Set up your goal for saving. Don't stretch yourself too much as setting unrealistic objectives will get you off the rails before you have even started. Setting up a fair and realistic goal is extremely important for a sustainable budget. Getting into a saving habit is much easier than you think and setting up a budget is a great way to get started.

Click here

2. Spend less : Spending less does not need to be a negative thing. You need to decide which expenses are important and which are not. You can still go ahead and buy something that makes you feel good. But among the many things that you buy everyday, you will find opportunities to eliminate many items from your shopping list. You will be surprised about how many items you will be able to eliminate from your monthly list once you get into the mindset of saving. Shopping around is also a great way to cut down on your spending. While you may have set a reasonable budget for your groceries, check for prices and value across the supermarkets and brands. You will discover new stores and brands that provide a better value and cost significantly less. 

3. Separate your savings: Often we find that moving the targeted savings amount out of the current account is a great way to build the discipline. Right upfront, move your targeted savings amount to a new bank account. As soon as the salary gets credited to your account, transfer your planned savings to a separate account. Once it moves out of your salary account it is likely to remain safe and out of reach.

4. Avoid debt: We all fancy the luxuries of life. If you can't afford to buy them with cash, you can't afford them. Never ever take a loan for depreciating assets. Like a car or the new TV. A loan is a sure way to disrupt your savings process. Aside from this, debt have several others risks associated with it. It is prudent to avoid all debt in the early years.

5. Set up an SIP: An SIP ( systematic investment plan) is an automated process of investing your savings on a periodic basis. I personally love the concept of an SIP and have used it extensively. you can set up a process of automatically investing a fixed amount into any mutual fund of your choice.  Watch my video about the process of SIP here

Click here

The risk of over ambition

 " A genius is the man who can do the average thing when everyone else around him is losing his mind"

                                                                                    - Napoleon

How often have you experienced anxiety which stems from an exaggerated target return? For most people, the slow and steady approach to investing is a much safer bet versus the over ambitious route. Many times we get influenced by exaggerated claims of success that we see on social media or even within our friends circle. 

I guess this issue has become even bigger in this social media driven world as we get bombarded with all sorts of news and information. Even more dangerous are the so called social media influencers supposedly living fancy lives after huge investing success (are they?)

Having fair and reasonable expectations from your investments is a key factor that can make or break your long term success. How we behave and react to the constants noise is a very critical factor. In the investment process, a high IQ is not very important but a strong EQ is. Doing well with money doesn't require a lot of intelligence but it definitely requires a calm and composed mind. 

It is a vicious circle. The more you get stimulated by outside noise, the more you tend to up your own ambition. And more you keep pushing yourself harder, the more likely you are to make stupid investment decisions. 

Click here

Focusing on average returns can be very rewarding. It eliminates the risk of anxiety and stress of overachieving. It eliminates the poor decisions usually associated with over activity. Very few among us will be as successful as Warren Buffet. Staying focused on average returns is far more important in the long run.

"The line between 'inspiringly bold' and 'foolishly reckless' can be a millimeter thick and only visible in hindsight" 

- The Psychology of Money

Index Funds

 Investing in index funds has long been considered one of the smartest investment moves you can make. Index funds are affordable, enable diversification, and tend to generate attractive returns over a longer period of time. 

The biggest benefit of an index fund is the elimination of personal bias. It takes away the complexity of selecting specific companies to invest in and rides the general growth of all business within the index. In other words, the fund invests your money into all the companies in that index based on the weightage that each company holds in the index. It is assumed that fund managers who manage active mutual funds are smart enough to know which companies to invest in and which ones to avoid. However historical data suggests that over a long period of 10 years or more, there is little to choose. Very few active funds will have beaten the index. While some active funds will beat the index, the question is which ones? 

Time is your friend Click here

Another important reason to invest in an Index fund is the diversification it provides across various industries, companies and business cycles. Remember that an index itself is a self-correcting one. Over the period, poorly performing companies will be eliminated from the index while well performing companies get added. This provides a vast diversification of the fund. 

The most important advantage of an index fund is the low cost. Investing in an actively managed mutual may entail an annual cost of 1% to 2% which is taken from your investment fund. In other words, the fund house will deduct that amount each year from your fund. This is referred to as the Total Expense Ratio (TER). Now imagine the impact of this on your investment compared to the TER of an index fund which may vary from 0.15% to 0.3%. This has a huge impact on the total outcome say at the end of 15 or 20 years. Read about the value of 1% here.

In summary, index funds are an excellent route to building wealth over the long term. Could other active funds beat the index funds? Sure. A few will. Alas if only we have that crystal ball to know which ones! 

Need to talk about Index Funds? Leave a comment below.

Click here

How not to invest

 A lot is said about how to invest. We spend a lot of time trying to become the next Warren Buffett, trying to identify the next multi bagger. I know of a lot of folks who brag about their investment ideas. But to become a good investor, the first gate one needs to cross to know how not to invest. 

In a game of cricket, the real stuff happens on the pitch. And in the dressing rooms. What really matters is the strategy the team has in mind, the batting line up, the bowling statistics etc. And yet the focus often remains on the cheerleaders. They are nice to look at. The draw a lot of attention. At the end of each over, they dominate the screens. And yet they have no impact on the final outcome. Investing is a lot like that. 

Imagine there is a hardware shop in the village that has been operating for a few years and is now on sale. Would you buy the shop only based on the village gossip? And if you did decide to go ahead with the purchase, how much would you pay? Would you want to know how many customers it serves? Would you not want to know how much profit it makes? Or may be it is running losses? 

Would you go ahead merely based on the fact that he has a good looking daughter?  That is what is referred to as hype. Often people depend on the hype while taking investment decisions. With little reference to business fundamentals. Just like a game of cricket, the cheerleaders don't matter. They have no impact on the final result of the match. Remain focused on the game.

Before you invest ask questions about the business. In a sense buying a share of a company is like buying a small part of the hardware shop. Find out if the company is making profits. How consistently has it made profits over the last few years. What does the future hold? Is the company's future protected? How efficiently is it run? How good are the returns on the capital it has deployed? What is the company's position in the industry it operates in? Is there any risk to the company's business in the future?

Click Here

This post is not about what to do. It is about what not to do. Don't make decisions based on a random comment or hype. Do research. Understand the company, Understand the industry. Look for signals about the company's future profits.

In the end the cheerleaders don't have any impact on the final outcome of the match