Opinion: Financial freedom is never a taboo for savers

To those who wonder if and when it is possible to earn their financial freedom, there are two questions to be asked – can you control your expenses and how much you save toward this goal? Rest you can see for yourself.

I made few assumptions for the model. One is 35 years old. Has an income of Rs.50,000 a month. His regular expenses are at 50% of income. Other expenses like paying towards insurance premiums etc. are at another 25%. Hence he can save 25% of income towards retirement kitty. It is also assumed that income grows at 5% every year and expenses too go up accordingly. If he puts the 25% savings into deposits or bonds and manages to earn 10% on the savings, he can retire comfortably at the age 50. And he can live off rest of the life from the income his accumulated savings earn.

Accelerator mode: If one can save incremental 2% savings a year to accelerate this scheme and boost the returns by diversifying savings into index funds and ETF’s, he can retire by 45.

How one can save this additional 2% a year? Fixing the finances would be one of the ways. Refinancing higher cost loans with lower rates, paying off credit card bills and treating it as a buffer would help too. When the income grows on yearly basis, spending should not be increased at the same pace. One can go for bargain buys for the necessities, avoid impulse spending by procrastination and extend the life of goods by maintaining them well etc. Basically avoid spending to impress others and look to get the value out of all your spends.

Aggressive mode:  For an aggressive saver and an informed investor, who saves 40% of his income and manages to earn 18% on his savings with a balanced portfolio of deposits, bonds, ETFs, mutual funds and good quality index stocks, retirement or financial freedom is just 6 years away.

Though 40% would look a higher number, it is not impossible to achieve. Count the contributions towards Provident fund, gratuity earnings, investments made to save tax into your savings. They would be already 15-20% of your income for salaried people. You need to make additional conscious efforts to boost it to earn your financial freedom.

Life does not follow any model. Many unplanned expenses come in the way that would delay reaching the goal but yet one can earn financial freedom if one can manage his/her spending, saves regularly and earn consistent returns.

(Inspired by the article on MarketWatch: How to retire early — 35 years early Link: http://www.marketwatch.com/story/how-to-retire-early-35-years-early-2014-01-17)

Opinion: India wakes up to Ebola

Source: Unicef

India or Indians were/are always busy with our own lives and tend to ignore the developments around the world. But there is evidence that it is changing. In our past mindset, we would have ignored Ebola as African pandemic and would not have taken notice unless it had spread and claimed lives in India too. But not anymore, we too are proactive.

Before arriving at Bangalore airport from international travel last week, we passengers were handed over a form to fill-in by the cabin crew and it was about Ebola. The form needed declarations of the traveler and had identified the affected countries, symptoms of the disease, measures to prevent spreading etc. and whola, it also gave a toll-free number to call for help during emergency. At Airport too, all passengers were made to line up to hand over the forms as the first thing to do and also seek clarifications or advice on the disease or to undergo check-up if needed. Kudos to those who made it possible as airports are the first place and easy passages to import this disease. 

If it arrives, it would be really difficult to stop as it spreads quickly and would have a dangerous impact on countries like India which have dense population. Better to stop it at the borders and the effort has begun.

Economic news round-up

Brent falls below $60

What seemed unlikely is no more impossible. While many are speculating further downslide, charts suggest otherwise. For those oil exporting countries, their revenue is halved, their economy will be hurt badly. But fundamentals of oil pricing would come back kicking in quickly. Further low crude price would not leave any profits on the table for oil producers, many would get out of this business, reducing supply glut and prices may hold on or come back to $80/barrel.

But this sharp fall in oil price has put pressure on those who made a living out of that surplus money in the oil pricing. Those organizations funded by oil money appear to be starved now and the attack on humanity in the neighboring country of India would be a side-effect. Though this is gross speculation, if it has any truth in it, we would see more violence before those organizations disappear or become smaller in size.

Value of Russian Rubble takes big hit

Putin might be wondering in private that there is no power left in his MIG’s, missiles and aircraft carriers in the new world of economic wars. He could annex Crimea but the economic war with the west took away all his pride. Former KGB agent might be feeling his training is insufficient when raising the interest rates to 17% could not stop Rubble from falling further.

Couple of months ago, you needed 2 Indian Rupees to buy a Russian Rubble but now you would need less than Rupee. It is time to increase oil& gas import from Russia. Tourists take note and plan your trip to Russia!

Source: Investing.com

Opinion: Bravo Rajan!

Two recent news reports from Raghuram Rajan, Governor of RBI offer wisdom and shows what he stands for. Here they are:

One: RBI Governor Raghuram Rajan's word of caution on 'Make in India' campaign (Link: http://zeenews.india.com/business/news/economy/rbi-governor-raghuram-rajans-word-of-caution-on-make-in-india-campaign_114054.html )

Two: Raghuram Rajan Says It's Not The Regulator's Job to Boost Sensex (Link: http://profit.ndtv.com/news/economy/article-raghuram-rajan-says-its-not-the-regulators-job-to-boost-sensex-712041 )

In the first news item, what Rajan says is ABC of economics. Do what you are good at and outsource the rest to flourish. Instead if every country follows the approach of make it all themselves, there would not be much international trade. And the prices of goods won’t be any less leading to opportunity loss. Manufacturing has worked for China but it does not mean our primary focus should also be the same. Manufacturing creates more jobs and has a lot deeper trickle-down effect than service industry. But what the Prime Minister’s office fails to see is manufacturing is not just labor, it is skilled labor and it also demands uninterrupted power, huge water supply and a robust transportation network to enable moving around things quickly and at low cost. Without the supporting infrastructure, it is not possible to produce at low cost. It takes lot more time to build infra than building factories. When we have so many power plants producing a lot lower power than name plate capacity due to coal & gas shortage, who will power the new factories coming online? And what about the water, chemical supplies? Hopefully you now see, why many goods from plastic goods to solar cells would be lot more cheaper to import than make them here in India. Until we fix infra woes, which may take a couple of years to a decade, focusing on manufacturing may not yield the desired results. So Rajan’s caution is all about economical wisdom but who knows whether the powerful person of India is willing to lend an ear or will he ask Rajan to leave at some time? It would be unfortunate if Rajan’s caution is not taken in right sense.

The second news item is about the priorities of a central banker. Inflation and Rupee valuation come first for RBI before the wish list of finance minister and businessmen. The former Governors of RBI too had this as priority but they were pressured successfully by politicians and businessmen. But Rajan is giving them a miss. He raised rates during UPA-2 governance and now he is able to withstand pressure from NDA Government by not reducing it. It may cost his job, but the rock star Governor made it clear what are his priorities. So I say, “Bravo, Rajan!”

Both inflation and Rupee valuation were hit hard in the past few years. Inflation was stubborn above 8% for many years and Rupee had a good fall from 45 to 60 against dollar. But now, in the last few months, inflation is reversing and Rupee did not give up much when rest of the emerging market currencies were sliding quickly. While RBI can be credited for arresting the Rupee fall but not for bringing down the inflation which is due to softening of crude oil and other commodities.

Since the liquidity is high, bringing down rates by a 100 bps may not increase the inflation, but could help in bringing down the interest costs and help boost economy like it is happening in US. Rajan said he is noticing this, but he will act only on confirmation and that may come very soon. What he says is best is best for us, the common men. Of course his priorities are priorities for the common man too.

PwC Report: India to be $10 trillion economy in 20 years; Too rosy picture?

Cover page of PwC report: Source: PwC site

A report published by PwC says India has the potential to achieve 9% growth rate and become a $10 trillion economy by 2034 (i.e., 5 times of $1.9 trillion in 2014) on the back of concerted efforts by the corporate sector and a constructive role played by the government. (http://www.pwc.in/en_in/in/assets/pdfs/future-of-india/future-of-india-the-winning-leap.pdf)

Here are the major expectations of the report:

• Average life expectancy to increase to 80 years (from 66 years)
• Manufacturing to be 25% of GDP (from 12%)
• Agricultural output to rise to 7.4 tons/hectare (from 4 tons/hectare)

Overall, the report paints an optimistic picture though it considers several scenarios. It took a gap of few years for these optimistic reports to make come back. It is a feel good factor for all Indians and we can cheer at this renewed faith.




But one must not ignore the roadblocks and consider following factors to keep expectations more realistic.

• In the next 20 years, there will be at least 3 elections. If the ruling party does not come back to power, replacing political party/parties have the habit of undoing some of the works done by the previous Govt. So forecasting the policies which will come into force in next two decades is grossly inaccurate task.
• As the economy base increases, growth rates reduce. Many econometric models have shown this and one can look at the data of developed countries for the sake of proof. This would mean 9% growth would be achievable when India is a $2 trillion economy. By the time India becomes $5 trillion economy or so, growth rates will slow and even a 6-7% growth would look fantastic.
•  In a period of 20 years, there would be couple of down years due to economic cycle taking a turn. Nobody has perfected the art or science of forecasting the downturns, the timing or impact of it. Central banks all over the world are still struggling to erase the impact 2008 financial crisis.
• India has tough neighbors and had fought with two of them since independence. As growth kicks in, competition for natural resources and trade will intensify.
• India is a low wage country at present. If wages rise quicker than broader economic growth, it would hurt exports and some of the competitive advantages. Though higher wages boost domestic consumption in the beginning, inflation will also go up limiting further growth in consumption.
• Most of the investments are going into infrastructure space now but the productivity benefits derived out of better public infra is high in the beginning and tapers out over time. Further investments in infra after a decade or so may not produce the same financial returns like those earlier projects. So the investment opportunities in Infra will likely reduce over time as it is happening in Japan and Europe. Also think of ghost towns of China which has also built roads to nowhere.

Considering these speed-breakers in place, one can expect Indian economy to reach $7-8 trillion in next 20 years, if not $10 trillion and an average growth rate of around 7% (instead of 9%). Even if this is achieved, millions of people would move above the poverty line and India would be a front-runner in many fields.