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Tuesday, 30 June 2015

This Issue of Financial Security

Money has such a pivotal role. Almost no one can be indifferent to it. However, very few, a miniscule minority really understand it and can take balanced decisions about it. While it is a rational subject, emotions drive decision making.

A person in his forties, earning Rs. 5mn pa, but is absolutely unhappy with his job, is asked, “How much more money do you want to earn, before you feel secure enough to retire?” He says, “I would like to quit, but I can’t arrive at a figure, the more, the better.”

Now, this can be interpreted in two ways. One, that his cribs about his jobs are nothing more than an engaggement in self-pity. He needs someone to agree with him that he’s going through troubles and that factors outside are responsible for his misery. The second interpretation is that he truly wants to free himself out of his misery, but is not feeling financially secure to quit his job. Which of the interpretations is correct can be easily gauged by asking simple questions like, “If you do a thorough examination of your finances and you realise that you have more than enough for all your financial needs, will you quit immediately?” Or one may say, “I know of someone, who is very good at answering this question of financial security. He has done it for himself and has also helped many more feel secure. We can meet him tomorrow. Should I fix a time?” It is then easy to ascertain which of the interpretation is correct.

During the last few months, I’d been unsure about our financial security. I know that this is a rational subject and the logical answer can be found by simply arithmatic calculations. The financial objectives are as under

  • There is no need to build a networth to be inherited by children.
  • All needs including those beyond physical sustenence, should be considered for fulfillment. On cross examination, if it is found that for fulfilling a particular need, the time and effort required to earn the requisite money is not worthwhile, the need may be dropped.
The question to be answered was whether I had enough to achieve my financial objectives. Since there is no need to leave inheritance, it is alright to deplete principal amount. The results of my calculations revealed that if I have a networth of Rs. 10 mn, I manage this money to generate returns of 12% pa, I withdraw 30k per month for the first year and then increase the monthly withdrawal by 10% every year (to account for inflation), then, I will be able to satisfy my financial requirements till 2060 and still have assets worth Rs. 15mn. 30k is a little more than what we currently spend on an average per month. In 2060, I will be over 80 years, probably dead. It should also be considered that during the coming years and decades, I will make efforts to earn.

Does that make me feel financially secure? Yes, it does. But I’m not sure if this kind of understanding will help other people. There are many I know, who have so much that they will not be able to spend in this lifetime, but are still unsecure. There’s something else that helps in getting that sense of security.

Anyone wanting to explore their own financial standing, welcome to drop me a line.