Tuesday, 18 October 2016

Just As Much (JAM)

"If you stop earning - absolutely, how many years can you carry on with whatever you own?”, I asked a few people. The neighbouring small farmer said three months. The bigger farmer said five years. My ex-subordinate, who earns about a million and half p.a. also said five years. My ex-colleague earning about ₹ 5 million said 20 years. The manual labourer who works in our farm said I won’t be able to repay what I borrowed to live during the last 3 months.

To earn for livelihood is a compulsion for few, not so for few others. Wouldn’t it be fantastic to know how much is enough to suffice till old age, say 90? If I knew that, and let’s say a buffer for another 10 years, I can live like a child – provided for – not a worry about finances – at least one aspect of life completely sorted out! Then, there is no point in earning more. I can work for other reasons.

The concept of JIT became quite famous in the context of production management a few decades back. Before that, ‘earlier the better’ was the norm. With regard to money, ‘more the better’ is the norm today. Let us explore the concept of Just As Much (JAM).  Why? For the same reasons that JIT was popular! If I continue to spend time and effort to earn money, which I won’t need, is it not a waste of time and effort?

Is it a difficult calculation? Does it require one to be a financial wizard to calculate? All that is needed is basic arithmetic. In fact, an excel sheet can obviate the need for that too. However, it can only be done by people who no longer aspire for a more expensive lifestyle. I use the word expensive and not better. Here we will confine ourselves to the domain of money.
Let us understand how. If I have ₹ 1 Cr and I am 40 years old, is that sufficient if I live till 90? More information required? My monthly expenses are ₹ 75k p.m. and I don’t aspire for a more expensive lifestyle. It should be quite easy to calculate. We need to check for inflation, returns on investment and plug in the figures in a sheet.

Calculations suggest that if my investments are able to generate a 12% pa return and the inflation is 10% pa, I will be able to manage till 2028 i.e. till the age of 52. I’ve also factored in a 2% pa increase in expenses due to lifecycle – kids growing up, medicines, etc. A ₹ 2 Cr networth can carry me on till 2050 (age 74 years). In calculation of networth, there is no need to exclude anything – not even the house you’re living in.

Now, that should sound encouraging to a lot of my friends. How will it get operational is the next question. But that’s a much easier one. This first level needs much deeper understanding and acceptance.

Is there a catch? Yes, there is if you’d like to call it so. Financial planners across the world make you believe that you got to slog it out till you retire, so that you’re able to survive post retirement. They plan to build a corpus or capital so huge that its earnings are able to meet your expenses till you die. The assumption is that the capital cannot be spent. I think this thinking became obsolete a couple of decades back. Look around – so many people who retired 10 - 15 years back have built sizable capital (networth), be it in real estate, equity, debt or gold. They’re all set to pass it on to their children as inheritance. But it is hardly required! The children are well off by their own selves. There is no reason to believe that I will have to leave any inheritance for my children. Correction: There is no reason to believe that I will have to leave any financial inheritance for my children. If this does not provide comfort to the reader that using up capital is okay, the discussion can end for him/her.

Let’s get back to the calculation. A ₹ 75k p.m. lifestyle in a city like Mumbai is not a lavish one, but neither is it very modest. We’re not considering investments here - 75k of expenses. So, if one is paying an EMI of say 40k, we consider only the rental value, which may be around 20-25k, or less.

The next calculation can be done for how expenses can be reduced, without impacting the quality of life adversely at all. How does that impact the sufficiency of capital? A 10k drop in expenses gives me a 5 year increase – takes me to 79.

I’ve moved out of Mumbai to live on a farm. Our monthly expenses for a family of 4 average out to less than 20k per month. Factor in the lumpsum expenses of travel, capital expenses and the figure will average 35k per month. Our standard of living has definitely gone up. Our expenses should come down, because we’ll grow more food in future; currently we buy everything.

Sounds interesting? Let me know.


  1. Apart from calculation, it's actually about reflection and truly seeing what is essential. There is a beautiful book about this: "Your money or your life".. I do want to see how to be financially free. To cut expenses. Increase income. I often feel being laid back in many ways and extravagant in some ways I have delayed my financial freedom. The whole relationship with money is such a profound question.. net worth and self worth have a deep connection also.

  2. Hi Shantanu, Interesting post. My target is 1 crore before leaving my Job :-). Thanks,Avinash