What makes us human? I feel that the key differentiating factor between us and the rest of the animal kingdom is our understanding of the concept of time. Specifically, we can project our thoughts to the future and relate to the future version of ourselves. Animals, however, are programmed to live in the present. The concept of the future does not exist for them, at least not in the sense we are able to connect our future selves to our present.

How does this behaviour play into the field of personal finance? It’s through a simple concept of delayed gratification, and has been the subject of a very interesting study by professors at Stanford university.

The setup is as follows: Four year old children are led into a room one by one and given a small reward, in this case a marshmallow. They are then offered two choices: They can eat the marshmallow right then, or if they decide to wait for 15 minutes, they will be rewarded an additional marshmallow. Roughly two out of three children would eat the marshmallow and forego the additional marshmallow. One of the three children managed to last the whole 15 minutes and were rewarded for their wait with the second marshmallow. The children that lasted through the wait did so by distracting themselves (singing songs, falling asleep, licking the marshmallow, playing with their clothing, etc.). In follow-up studies of the same population of children, it was found that the children that were able to delay gratification had better SAT scores, lived healthier lives and were more successful than the children that could not.

Subsequent studies have analysed variants and concluded that the children’s response also depended on their upbringing at home – The poor children tended not to wait because were not sure the promise of two marshmallows will be honoured based on their experiences at home. Inadvertently, this may explain why people in financial crises may not be able to think beyond the immediate future and keep taking decisions that act against their own self interest and keep them poor.

Thus, the ability to exert self-control is key to success. Mapping this to the field of finance, the ability to forego instant gratification and wait out for the delayed (and bigger) reward is a determinant for a secure financial future. If you can resist the urge to buy the latest iPhone the day it comes out and invest the amount into assets that appreciate in value, you will be able to reward your future self with a present that travelled through time. This is all the more important in today’s age of a YOLO (You Only Live Once) philosophy, egged by the constant temptation of advertisements and marketing all around you, and enabled by credit solutions of Zero-interest EMIs and one-click buy solutions that encourage you to spend money you have not earned yet.

PS: There are plenty of entertaining videos of the experiment online, I’m linking a few below:

Joachim de Posada: Don’t eat the marshmellow

Link 2

Link 3

This post may align with those that generally count themselves as middle class. Your family values inculcated the focus on education and a drive to find employment in a good stable job till retirement.

We begin two generations ago. Your grandmother took care of the house, while your grandfather worked for the government in some capacity or the other. His pay was adjusted to inflation over the course of his working life, and when he retired, the government paid an inflation-adjusted pension till the end of his life, and took care of your grandmother till the end of hers. Your grandfather worked one job for forty years, bought the house he resided in with years/decades of savings, and lived a frugal retirement from 60 to 80. The government funded pensions with a defined benefit retirement scheme that guaranteed a level of cash payout every month long after your grandfather stopped working. Your grandfather took out a low-interest loan from the government, for the singular purpose of owning the house he will retire in.

Fast forward a generation, and the private sector has outpaced the government in providing jobs to the Indian employee. Your parents worked in five to ten companies through their lifetime. There is no pension that their employer provides them, but your parents had a portion of their paycheck flowing into defined contribution retirement plans. They also invested into real estate during the course of their working years, and your parents are able to manage a good standard of living thanks to regular income coming in from their provident fund investments, and monthly income from houses rented out by your parents. Your parents focused on paying down their home loans, funding your education and were generally successful in saving more than they spent over their working career. This gives them a cushion for a comfortable retirement post 60.

And now cut to the 2000s. You may expect to change not just jobs, but the pace of change is likely to make your current job redundant within a decade and to continue to have a paycheck, you will need to change your career multiple times through your working life. You are bombarded by thousands of advertisements every day to spend money you have not earned yet. There are promises of easy credit, zero interest EMIs and credit cards, and you find there’s not much left in your account at the end of the month. However, you tell yourself you don’t need to worry as your retirement is forty years away and that everything will sort itself out in the end. The sky-high property prices remove any thought of real estate investing from your mind. Meanwhile, the latest iPhone has just released, and its screen is one inch wider than the previous iteration of the iPhone (which you own). It would be humiliating if your phone is a generation older than that of everyone else in your friends circle. Your Facebook feed is full of photos of your friends enjoying vacations in cool foreign locales. This reminds you it’s time to plan your annual vacation.

The 4% rule of thumb is a handy tool to guide many aspects of financial planning. We will discuss a few of them below:

Size of your target corpus:

Once you have an idea of most of your current annual expenses (recurring as well as one-time), multiply by 25 to determine a target investment corpus. What can be measured can be improved, so the biggest advantage of the 4% rule is that you are able to focus on growing this corpus and accelerating your path to independence.

Date of financial independence:

You can compute an amount you can systematically invest on a monthly basis once you have an idea of your monthly cash flows (salary/ business income inflows and expense outflows). You may assume a conservative growth rate for your investments, and the date the size of your investment corpus exceeds the size of your target corpus is your estimated date of financial independence.

Spend or Invest decisions:

For every significant expense, you can pause before you pull the trigger and make the purchase. If you plan to retire in ten years, the 4 lakh every year that you spend on vacations till then can instead be invested in the market (returning, say, 10%) to allow you to withdraw INR 21,000 every month after ten years for the rest of your life. While that INR 21,000 ten years from now may be worth only 11,865 in today’s rupees considering a 6% inflation, you can make a judgement call whether you would value a ten ten-day holidays higher than a 20,000+ monthly cash flow for the rest of your life.

Fast-tracking your target date:

Having a clear goal enables you to optimize your path. By reducing your significant and/or recurring spends over time, you can advance your target date. If you invest the amount of money you forego spending on, you can estimate how sooner you can be independent. In parallel, if you crimp your spending to a lower amount by targeting your significant and/or recurring spends, the required investment corpus is automatically lower, again bringing forward your retirement date. Once this becomes a habit, you may identify many extraneous spends that were in effect, keeping you in the hamster wheel for longer than you should have been.

Shift from Net income to monthly investment:

We tend to evaluate the size of a purchase by the number of days we would need to work to earn the amount being spent, after tax. But once we shift our focus to the investments we make on a monthly basis, the time horizon gets magnified, providing a truer picture of the cost of the purchase. For the travel example above, if we earn 1 lakh a month after tax and save 30% on a monthly basis, four lakh represents four months of income, but over a year’s worth of foregone investments and consequently the true cost of what you are paying is clearer.

In summary, the 4% rule brings in clarity and a simple long term goal to focus on while you count down your days to financial independence.

“How much is enough?” How much should you have invested to live through your retirement?

The answer? “4%”.

If your annual expenses are less than 4% of your investment in capital markets, you may live off the investment corpus through decades without exhausting your nest egg. If you have saved 25 years’ worth of expenses in stocks and bonds, you are financially free.

This is the result of an academic analysis popularly known as the Trinity Study. The study evaluated the impact of various withdrawal rates to different portfolio mix of stocks and bonds and considered US market data from 1926 to 1995. A portfolio mix of 75% stocks and 25% high quality corporate bonds, subject to a constant annual withdrawal rate of 4% of the initial portfolio value at the start of the year, can outlast a thirty year period 100% of the time. The tables of portfolio mix, length of retirement and withdrawal rates are summarized in the original study

The key conclusions are:

1. To beat inflation, a minimum 50% allocation to stocks is essential
2. Basis history, withdrawal rates of 3% or 4% are extremely unlikely to exhaust any portfolio of stocks and bonds during any of the payout periods considered in the study
3. You are likely to end up with a terminal portfolio value higher than what you started off with, so you may continue to withdraw infinitely at the safe withdrawal rate without exhausting it.

What’s interesting is that a portfolio of 100% stocks is less likely to outlast a portfolio of 75% stocks and 25% bonds. The bonds seem to function as a ballast, a low volatility asset to withdraw from in the years where your stock portfolio has crashed and you want to avoid selling stocks when they are low.

This is a Thumb Rule, a general case that may not be applicable in every situation. This is not factoring inflation, mutual fund fees, taxation, assumes a uniform withdrawal rate, and is based on US market 70-year historic returns, etc. To account for this, you may apply factors of conservatism to build in a cushion of certainty. You may consider a lower withdrawal rate to adhere to, say 3.5%, before you consider yourself financially free.

The study also assumes zero money inflow during your retirement. However, when financially free, you may choose to still monetize your time. So even during your retirement, you may have cash inflows to meet a portion of your expenses, and may even be adding to your investment portfolio. This allows you to retire earlier – You may retire when you can withdraw 4% a year to meet the difference between your expenses and your reduced future income.

The study has since been updated and enhanced by many to factor in variations. An example is this analysis by “The Poor Swiss” which incorporates a longer retirement period, stepped up withdrawals, a bigger time window and inflation adjustments. Early Retirement Now has also analysed multiple variants and these findings are generally in the same ballpark as the original trinity study. As a conservative viewpoint, Wade Pfau has determined that in the times of the current Coronavirus pandemic and low interest rate scenario, a lower 3% (or 33 years expenses) is a more appropriate safe withdrawal rate.

There you have it, a simple number to focus on. You are financial independent once you have invested 25 years’ expenses in stock-focused mutual funds. Start now!

The traditional way of looking at your financial cashflow, if you are an employee, is:

1. Earn money from your salary, to see a deposit in your Bank account
2. Spend money out of this Bank account, while trying to spend less than you earn
3. Save whatever remains in safe instruments (Fixed deposits, Postal certificates, etc.)

In this mode of finance, Savings = Earnings – Expenditure

In other words, “You are saving what is left after spending”

You budget a certain amount for expenses on a monthly basis with the intent to save as possible by end of the month. As month rolls by, there often is some unexpected expense that may derail our plan. You had forgotten that your kid’s school fees were due. Your car had to be serviced or repaired. Your mother was ill and hospitalized for a couple of days. You had to purchase gifts for visiting relatives. Your insurance payments fell due this month. The reason varies every month. Of course, none of these were discretionary expenses, so you did not have the choice of not spending the amount. The end result is, more often than not, that the residue in your account at the end of the month a little smaller than expected.

Now let’s flip this equation. Let’s suppose you adopt the following approach:

1. Earn money from your salary, to see a deposit in your Bank account
2. Invest money out of this Bank account systematically in wealth-creating instruments
3. Spend what remains while tracking, categorizing and accounting for non-monthly expenses

In short, Spending = Earnings – Investments

Or in other words, “You are spending what is left after investing”

What can be measured, can be improved. This activity of flipping your perspective ensures:

1. You are paying for the security of your future self first
2. You track and forecast expenses, thus being ready with funds for when the payment falls due
3. You can identify key expenses (monthly or otherwise) and can evaluate the necessity of each spend.

This perspective is crucial to ensure you remain focused on maximizing your investments. If you have wondered why you can never make ends meet, you can isolate the cause and focus on generating the right solutions:

1. Are you not earning enough? If yes, what can you do to raise your income?
2. Are you not investing enough for tomorrow? If yes, how do you remove your emotions from the process to prevent you from sabotaging your goals?
3. Are you spending too much? If yes, what are you spending on and what can you cut down on?

Your specific financial situation may have a tailored response to each of the questions above, and so will the solutions. The overarching focus, however is to:

1. Maximize your earnings
2. Maximize your investments
3. Minimize your spending

The difference between your earnings and spending, and the instruments you invest in, will determine the years you will need to work to achieve financial independence.

Scott Adams, creator of Dilbert, set out to write a book on personal finance. He subsequently was able to fit most of the advise that works for almost every American in a few bullet points. These are:

• Make a will.
• Pay off your credit cards.
• Get term life insurance if you have a family to support.
• Fund your 401k to the maximum.
• Fund your IRA to the maximum.
• Buy a house if you want to live in a house and can afford it.
• Put six months worth of expenses in a money-market account.
• Take whatever money is left over and invest 70% in a stock index fund and 30% in a bond fund through any discount broker and never touch it until retirement.

These concepts are universal, and hold up well even in the Indian context. We may need to tweak this a bit to reflect India-specific investment options, and that could be a good framework to plan for your own financial freedom:

• Make a will.
• Pay off your credit cards in full, every month.
• Get term life insurance if you have a family to support.
• Fund your NPS Tier I account to the maximum.
• Fund your MERA to the maximum.
• Buy a house if you want to live in a house and can afford it.
• Put six months worth of expenses in Fixed Deposits.
• Take whatever money is left over and invest in a stock index fund through the direct route and never touch it until retirement.

I intend to expand on most of the points above, so we can optimize our financial situation with patience, over time.

Notes on the deviations:

1. The Indian consumer does not have as bad a problem with Credit cards as the American does:
   1. 65.6% of Americans have at least one credit card, whereas only 3% of Indians do
   2. 92% of Indians pay a greater amount than their minimum due, compared to 89% of Americans
   3. However, the average American carries over USD 6,000 of credit card debt at an APR of 16%.
   4. More importantly, 78% of Indians ‘usually pay off their full balance, whereas 55% of American card holders do not pay off their balance each month.
   5. At 3% penetration, Indians shy off credit card usage altogether. This, however, is suboptimal, as Credit Cards are useful to build your credit history.
2. The National Pension Scheme (NPS) is modelled along the lines of the 401k scheme of the US, as a market-linked investment vehicle with penalties for early withdrawal. These investments are EEE (Tax exempt at Investment, Accrual and Withdrawal) when used as intended.
3. I borrow the concept of MERA (My empowered retirement account) from Capitalmind. This is a very good suggestion and I hope those in power can come up with something similar to enable Indian retirement planning.
4. If you are employed, you are already investing in debt through your Employer’s Provident Fund (EPF) account. You would not, typically, need to invest in debt funds over and above your PF investment.

A few disclaimers:

• This blog is for information and entertainment. I am not a financial advisor. Do your own research or consult your financial advisor for actionable steps.
• Material on this site is provided “as-is”. I make no warranties or make any representations on results you could expect by operationalizing what’s in here.
• I am not responsible for trading decisions, damages or other losses resulting from, or related to, the information, data analysis or opinions here.
• Past performance is not a guarantee of future results.
• All investments are subject to financial and non-financial risks.
• I may revise content to address errors, or factor in changed scenarios, or for any other reason. I do not warrant that anything in here is accurate, complete or current. I also do not make any commitment to update material to ensure ongoing validity.
• I am not responsible for content of any links provided in this site. I do not imply endorsement of any views in the sites.
• I may have financial relationships with merchants and may be compensated for driving traffic to the site through affiliate links. I may also have invested in investment vehicles detailed on this site.
• I may revise terms of use for the website any time without notice.

There’s a few interpretations I’ve tried to incorporate into the name of the blog, and I’ll detail them here.

1. My name is borrowed from that of the Sudarshan Chakra, a discus weapon of Vishnu, the “Preserver” in the Hindu Trimurthi. Hence my views could be ‘Chakra view’
2. The Hindu sacred epic of the Mahabharata, which details a fratricidal war of the Kuru dynasty. On the thirteenth day, Kaurava commander Dhronacharya set up a massive defensive military formation, known as the Chakravyuha. Abhimanyu, son of Arjuna, knew how to enter the maze, but not how to exit. He ventures into the formation and is trapped alone behind enemy lines. Try as he may, he could not escape the multi-pronged attack and is eventually overwhelmed, overcome by physical and mental exhaustion. Half knowledge of the concepts of the game he was forced to play proved fatal. Some could draw a parallel to the game of finance that everyone alive is mandated to play. To our benefit though, unlike the Chakravyuha, concepts of Personal Finance are easy to grasp.
3. Most of us are running in a hamster wheel, conditioned to believe that true happiness and freedom is a turn of the wheel away. Experts in human behaviour try their hardest to distract us with short term gratification options benefiting themselves at our peril. It takes effort to break this default conditioning and see things for what they truly are. In this journey, our learned habits are our worst enemy, and an understanding of how they can be tweaked to benefit us is the target to achieve.

Focus, knowledge and time are tools to figuratively break this cycle and achieve our objectives. This is the blog’s focus, and hence the name. It would be my effort to get to a point where I have the option to choose how I spend my day. I believe I can get there after reading up on the thoughts and strategies of those who have tread this path before us. It is my hope to have your inputs on this journey, and your company as well, to make this ride smoother.

I’ll blog as regularly and systematically as possible. I intend to follow a basic skeleton to structure content, and build that up through iterations.

Five letters represent a liquid, transferable store of value used as a medium of exchange for goods and services availed by all of us. MONEY is a tool for us to get what we want.

And yet, some regard money as the root of all evil – that those who have more of it are in sin. For some, this theme is uncomfortable and they would rather not talk about it. These mental roadblocks have very real consequences. These beliefs may impede our ability to live comfortably, and the realization may have come in too late for us to do anything about it. History is also littered with examples of those swimming in wealth ending up poor. Inability to handle this tool may destroy much of what we hold dear. When we handle the tool right, we can set up ourselves and everyone around us to comfort. If only we are willing to listen.

Many of us fall prey to the belief that if only our paycheck was a little bigger, all our problems would be solved. America is the world’s richest nation, with 57% of all stock market wealth. And yet, 6 out of 10 Americans cannot afford a USD 1,000 emergency without going into debt. The average American earns far more than an average Indian does. So, your financial situation is more a function of your mindset than the amount flowing in on a monthly basis.

I’m Sudarshan. An Engineer (Mechanical, IIT Madras), MBA (Finance, IIM Lucknow), millennial from India with over a dozen years of Financial Sector Consulting experience. I’ve been lucky to be born in a family with a significant interest in Finance and my father has enabled my assets to grow wonderfully over time for which I am eternally grateful. Increasingly, I’ve been reading up (and listening on) the topic of personal finance. I notice simple principles guided by our tendencies and habits could secure our individual futures. I endeavour to document them here, and hopefully this would benefit others as much as crystallizing my thoughts benefits me. I could look at monetizing this blog but that’s into the future. I’ll try to stick to ~ 500 word posts to keep focus.

Personal Finance concepts and studies have largely originated in the USA, but the key takeaways are universal. I consider India a few years behind, so this enables us to follow the results of experiments in the US and to learn from them. I’ve focused on efficiencies in my professional career, and one of the key tricks is to not reinvent the wheel. An understanding of these universal concepts that many before us have formulated can enable us not only to fast track our own experiences, but also avoid the pitfalls and gain the benefits of hindsight that those who have trod the path before us have encountered.

This is going to be a sandbox, my experiments and thoughts in a quest for Financial Freedom. Hop along, let’s get started! We’ll figure our path along the way. It’s going to be fun.