Let's Talk About Money

How I am able to save money through automations

Hey everyone,

Let's talk about money. In fact, I am planning to write about money at least once a week for this newsletter.

Why?

Because like Arjun said in Zindagi Na Milegi Dobara, "Mujhe bohot jald ye samajh me aa gaya tha ki ye duniya sirf aur sirf paison se chalti hai." (That I realized, early in my life that money is the only thing that matters in this world)

I know, I know. That's not true.

But, and it's a big Kardashian 'butttt'

Money plays an essential role in our mental well-being. Because it gives you a sense of control, a sense of power, and a euphoria like anything else. If you want to experience it, just remember the moment your salary/pocket money is credited to your bank account.

You can buy things that you are in dire need of, a shirt or a dress you had always wanted, a gift for your partner or parents. You can party. You can travel. Or you can spend just for the sake of spending.

Money gives you a sense of power and control. But if not used wisely, it can make your life miserable.

That's why you have to be disciplined with the power you have.

It’s like a nuclear chain reaction which if you don't control, can lead to catastrophe.

Here, the control comes with "Financial discipline". You have to be disciplined with your money because of the fear of catastrophe.

I'll share one of those fears to make you realize how important discipline is.

A Simple Retirement Calculation

Let's calculate, how much money I would need post-retirement to lead a stable life till I die. (I am considering retirement as the age when I won't be able to work physically or I would like to relax and chill. I know, we feel that retirement planning is uncle’s but it’s a misconception.)

Let’s assume that age is 60.

After 60, I need some money every month to pay for all my expenses. That money will come from the corpus I have saved over the past 30-40 years.

At present, my monthly expenses are around 50k and I would like to keep it like that post-retirement. I am assuming my life expectancy to be around 85 years.

Considering all these factors, and taking inflation into account, if I calculate the corpus I would need just before retirement that would last for 25 years, it would be

~13,00,00,000 (13 crores)

If I don’t save that much, I might run out of money at the age when I am physically incapable of earning myself.

(Yes, it's that high because we have to include inflation into the picture. Suppose, you can buy 10 pencils for Rs 100. After a year, for the same 10 pencils, you might have to spend Rs 110. This means that your Rs 110 are now worth only Rs 100. The Rs10 difference is due to inflation. The same is with your retirement calculation. The 13 crore corpus is a lot in today's scenario but after 30 years, the value to 13 crores would be very less because of inflation.)

How can I generate this humongous amount of money?

It's simple.

Save as much as you can and then invest it in a product that beats inflation. (Inflation is roughly around 6-8%, so your investments should generate a return of at least more than that otherwise your money will simply lose value.)

The question is, how much do I have to save and invest every month just for my retirement

~23,000 (23k/month)

You can calculate it using any of the retirement plan calculators online.

Every time I look at this number, I stop for a second, close my eyes and say "I am fucked"

Because, from the 75k of my salary, I spend around 50k even if I try to live frugally. In the last few months, I am able to invest around 20k per month which includes everything from my emergency fund, tax-saving, retirement, and other short-term funds. Even that money is not covering my monthly retirement needs.

That is the real fear. The fear of not having enough savings to live freely without worrying about the future.

You might be someone who is voluntarily trying to turn a blind eye to the issue. Or you might be someone who wants to and trying but is still unable to save enough. I was also like that. But after seeing those numbers, I felt even more miserable than I used to when I was not earning.

My iPhone Story

The simplest, no-fuss strategy that I follow is "forced savings through automation". (Its just SIP or systematic investment planning but I am trying to sound fancy)

My first experience of forced saving was two years back when I was preparing for my pre-pg exams. I was into audiobooks and audible was giving free subscriptions to ICICI customers. So, I opened a bank account in ICICI and also started putting 2k per month in a recurring deposit. I had no knowledge of investing and returns and was still not earning. I did it for a year and it ended around August 2020. During that same time, Apple had big discounts on the iPhone 11 which I wanted to but hesitant to spend 2/3rds of my salary in. One day, out of nowhere, my account was credited with 27k which I was saving since last year using recurring deposits. It was a godsend. It was like God, indirectly trying to convince me to buy that iPhone. So I did.

But, it was not God's work. It was my forced savings of a year that eventually helped me buy that iPhone.

Earning, Spend, Save. Is It?

A simple rule of money is that Earnings - Savings = Expenses.

We usually follow the Earnings - Expenses = Savings model, which is extremely hard because it needs a lot of willpower. You have to be a monk to cut down your desires.

I follow the first formula now in which savings are "automated"

How Do I Invest?

I invest through SIPs (systematic investment planning) where, every month, a certain amount is automatically debited from my account into various funds.

My salary gets credited on the 1st and I have intentionally kept the debit date to be the 3rd of every month. This makes sure I am not spending my salary before the debit date. Because the process is automated through the bank, I cannot control the debit cycle at my will.

(My girlfriend has more control over her spending so her debit dates are later in the month. But, I am very careless so I have created this simple system for me.)

I started with 5k, extended to 10k, 15k, 20k, and finally 25k. My salary is still the same (in fact I am getting a little less than I used to) but still, I am able to save, just because I am doing it forcefully through automation.

The only thing that I need to worry about is that I have enough balance in my account for the SIPs on the 3rd of every month which till now is manageable.

I am writing about all this because many of you don't realize, how important it is to save money as early as possible. Having control over one’s finances gives you a sense of stability which is very important early in your career. Money should be the last thing you should worry about at this stage when you have study and learn when you can.

We will discuss Compounding next, which is another big reason to start saving early.

Till then, stay safe and be cautious with the cash in hand.

Ciao!