How much $$$ do I need to Retire ?

A lot of people go through their lives doing what they are supposed to do. Get education, get a job, get married, make kids, retire and finally the inevitable. Most forget to live their lives amongst all these. What if someone told you that you didn’t have to do all these, or at least…some of these.

Recently, I asked a colleague what was the age that he wished to retire. His surprise was genuine when he said he had not given any thoughts to the matter since it was decades into the future.

On yet another occasion, I asked another colleague how much did he think was needed to retire peacefully. He scoffed and said ‘Probably in the millions’.

The two scenarios above kept making loops in my mind.

  1. Most people do not know that Retiring early is an Option.
  2. Most do not know how much they would need to retire.

For this article, let us concentrate on the second point. How much does one need to retire? Many financial geniuses, much smarter than I am, have answered this question with logical explanations and immaculate research.

Calculate the following

  1. Average Returns from Investments (usually stocks) per year.
  2. Average Inflation In your country of residence per year.

When One’s annual expenses are covered by the difference between 1 and 2 above, one can retire peacefully knowing that the funds will outlast one’s lifespan.

For example, in the USA

  1. Average Stock Market Returns for long term investment = 7%
  2. Average Inflation = 3%

So, if one’s annual expense <= 4% (1 minus 2) of their total investment, then they can retire comfortably knowing that their assets would outlast their lifespan.

hypothetically, if Tom spends 25,000$ on all his yearly expenses then he would need 25000$ to be the 4% interest that is generated every year. i.e he would need (25,000 *100)/4 to be the invested amount. Tom would need 625,000$ to retire.

What if there is a stock market crash? every crash has a corresponding rise. Historically, the stocks have always risen. 7% is the average gain in stock market in the long term. This involves not day trading and being in it for the long haul.

Add all the buffers you need but at the end of the day, all you really need is your annual income times 25 invested wisely in stocks. Happy Retirement Planning!

Practical Lesson: New vs Used Car

A year ago, after months of new vs used research, we ended up with a 5-year loan on a brand-new over-budget Toyota Rav4. It was my first ever car (new\used). We plan to keep the vehicle for a few years (more than 5).  As apprehensive as we were while buying a new vehicle, the joy of a shiny new toy convinced us that it was a good decision. The 0% interest on the loan helped too.

Warning lights for following got thrown out of the window.

  1. We owed more on the car than our net-worth.
  2. Rate of depreciation was faster than rate of loan repayment.
  3. For a family of 2 that uses a local train for commute, SUV wasn’t really a necessary vehicle of choice.
  4. Our Rate of savings would take a huge dip thanks to an exorbitant monthly payment.

Today somebody backed into our car. The damage was more than what one would expect as it was a simple parking lot accident with neither party hurt\scratched. Air Bags were not diffused. Their insurance is paying for the damages.

As a result:

  1. Our 1 year old newly purchased vehicle has an accident history.
  2. We now owe more on the vehicle than it is worth.

We wish we had come across Mr.MM and the FI Community earlier. We could have avoided this mistake and ended up with more savings. The only saving grace is that we will be hanging on to the vehicle as many years as we possibly can. This was a Lesson learnt the hard way.

Power of compounding using Curry Leaves

Most of the inspirational blogs I read nowadays tie to some childhood memory that I seem to be hanging on to. I came across the online Financial Independence community recently and most of them talk about the powers of saving and compounding. This reminded me of a story my mom told me as a kid and here it goes

A man had 2 kids and when they were grown up and ready to make it on their own in the world, he gave them each a small curry leaf plant* and asked them to take care of it. Curry leaf is widely used in a variety of Indian dishes.

A few years later he decides to visit his sons. He makes his way to his first son’s house. After the initial conversations, he brings up the curry leaf plant that he had given him when he left the home. The son replies: ‘Oh, that plant? It was so tiny. I used the leaves within the first 2 weeks. I think it dried up after that’.

The man soon makes his way to the second son’s home. He realizes that the second son is far more prosperous than the first one. And as expected, after his initial conversation, he brings up the curry leaf plant. The second son replies: ‘Oh that plant? You should come out and see it. It has become a huge tree and has produced several other plants and the entire neighborhood now uses Curry leaves from my plants’

Regardless of what the details of the story is, when you think about it, it does boils down to common sense. Anybody can tell you that. Do not strip the plant of all its leaves. Let it have a chance to grow so that it can replenish the leaves. And once you do that, the plant can provide you with curry leaves for the rest of your life. If understanding a plant is so easy, why then do so many people have a tough time understanding their finances?

This story spoke to me as a kid. What i learnt is – Do not continuously withdraw from your savings\investments to a point where it cannot build up faster than you withdraw. Let it grow to a point from where withdrawing will not affect the year-on-year balance as the interest will keep replenishing whatever you take.

*Curry Leaf: It’s a common leaf native to India\Sri Lanka and is used a lot in Cooking. Not to be confused with Curry Powder. scientific Name: Murraya koenigii.

The Millionaire Next Door – Book Review

I do not know why but I am into Financial Blogs these Days. And one of the books I came across on multiple blogs is ‘The Millionaire Next Door’. This book was available on EBay for 2$ with free shipping so I got a copy for myself*.

Anybody who is $ conscious should read this book. It is about 2 researchers who study common habits of millionaires. Here the term Millionaire is someone who has 1 million in savings\investment\worth. Why should you read it? Because it answers the following questions

  1. Where is my money going?
  2. Can we live happily and save with 1 person’s salary in the USA.
  3. Kids are so expensive these days. It is impossible to save with kid(s) in USA?

Some of the most interesting things I learnt from the book

  1. People who drive Flashy and expensive Cars are not necessarily millionaires.
  2. You cannot point out millionaires by their attire\car or their house.
  3. Most Self-Made Millionaires’ households run on budget.
  4. Ivy League Education may guarantee a high paying job but not necessarily a high bank balance.
  5. Millionaires don’t necessarily eat fancy food or at fancy restaurants.
  6. There are more millionaires than we think of.

Maybe if those aren’t the things that you are looking for in a book, the following might be interesting. The authors have presented the book as a case study with detailed math charts. Most of the case studies are presented in a way that one could easily relate to. It is easy to find yourself as a character in the book. So, if not to gain a new perspective on the world of millionaires, read it to judge yourself on the scale set by average millionaire next door. The presentation and point of view of the authors is presented in a practical yet humorous way.

What the book does not do is give you recommendations on what you should do with your money. It just tells you what Millionaires so with their money. Even if it is just for fun, go read it!

 

*Most FI Blogs don’t recommend buying books. They recommend Library.

5 Must Do things before one dies!

You will never guess what the top 5 to-do things are before one dies. This list does not include scuba diving with sharks or bungee jumping in New Zealand. This is not an emotional or a traditional bucketlist that follows the path of enjoyment and must-have life experiences.

Unless you are all alone in this world, there will be someone whom you love. This bucketlist is focused on the practical aspects of death the way it affects the people we leave behind to grieve for us.  However out-of-whack my reasons may seem, know that these are useful and necessary things and could save someone a lot of grief someday when we are gone.

  1. Write a Will: I cannot stress the importance of this enough. Everyone should have a will. If you are over the age of 18 and have over 100$ in your bank account, then you need a will. Feel free to modify this as many times as you want in the future but make sure that there is one true will at any point in time.
  1. Have precise Documents: Make sure your near and dear ones know where all the deeds and documents to your possessions are. I have a friend who has a scheduled email with a master list of all his accounts\debts and passwords. Every month, he updates the email and pushes the scheduled date by a month. His argument is, if he dies then his loved one(s) will get the email in a month and they will know what to do.
  1. Death Ceremonies: Let your loved ones know how you wish to be bidden farewell to. Let them know your wishes for Organ Donation. Traditional Burial vs Cremation is the hot topic for debate these days. You can budget for funeral services (seeing as they run upwards of 10,000K these days) and have these funds ready so that you don’t become a burden to your loved ones in your death. Some countries have yearly funeral rites, and these usually have monetary values attached. My grandpa always said – ‘When I die, do not spend money on those who have enough in life. Instead, make sure that you sponsor one full meal at the local orphanage and that is one effective way to pay tribute to me’. And till date, that is what we do.
  1. Let your partner know that it is OK to love again(Or not, depending on the kind of person you are). I personally would like it if my partner would be able to say his goodbyes and move on with his life instead of pining for me. This guilt of falling in love after a better half has passed away can be a bit too much for most of the people.
  1. Always tell your loved ones that you love them. This can also be constituted as a life lesson. Your general happiness will always be better when everyone around you knows that you love them and when you know that you are loved. Repeat this everyday as often as you like. We never know what surprises are waiting for us around the corner.

There are a few other things that I am working on personally like a necessity for DNR but I guessed it would be too much for everyone to handle. So, am keeping the list short at 5 Must do things before one dies. So, regardless of your age, start working on the above 5.

 

4 Golden Rules to Save Money

How to save Money ?

I have always feared running out of money or not having some when I need it the most. A few silly experiences (like the ones below) in the past have gotten me this way.

1. As a student studying in a different town, there was this time when my bus ride home broke down in the middle of nowhere. I had wiped my purse clean to pay for the bus ticket. I had no possible means of getting a taxi or even calling my father to let him know where I was. (Pre credit card era, pre mobile phone era). This scared the S#@% out of me and I thank god that I reached home safe and sound.

2. After 6 months of a well-paying IT job, I had to move to another location. I had 0 in savings and had to borrow money from mom to pay the deposit at the working women’s hostel. Asking money from anyone embarrasses me (I can ask money only from my better half and even that takes some serious effort). That was the last time I asked anyone for money since I started earning.

I had never had problems saving money in my home country as my job was one of the better paying ones. Then I moved to the US of A for job and that is when crazy money habits sprang out of nowhere. I fell a victim to the bling and glitz of the marketing industry and soon I had a bunch of things that I did not really need (2 years ago, I retail bought a brand new quesadilla maker that till-date hasn’t seen light of the day). The only thing that saved me from going overboard was the fact that I have a thing against loans and credits. If left by myself, I shall always live within my means which results in never having a credit card debt.

At the end of year 01 in the USA, I had not met my yearly savings goal, which should not have been too difficult had I paid any attention to my finances. Instead I had a meager amount in my account. I justified the lack of funds by saying I had seen a lot of the country and I had a lot of one-time purchases for setting up my rented apartment. I had seen most of the east coast – all the way from Niagara Falls and New Hampshire to Universal Studios at Orlando, Florida. But a midway budget exercise through year 02 pointed out that I was headed out for a year like the first.

Since then, the following steps have put me on my path of attaining my savings goal. I expect the savings to provide me with some emergency cash should I ever be in need. Following rules helped me a lot and by end of this year.

1. For every new purchase that will go into your wardrobe, 1 piece must be discarded. This applies to dresses, t-shirts, pants, tops, socks, and even shoes etc. There shall be no exception to this rule.

2. For every purchase that costs over 100$, research the following. And once the product has been purchased, do not upgrade till it becomes non-usable. (My Samsung Note 2 lasted me 3.5 years and never needed an update till I tried something silly and broke it.)
 Do you really need it?
 Price Trends for the past year.
 Possible offers on any site.
 Quality of the product and an option of purchasing it used from Craigslist.

3. Food – If it comes in a packet and will be ready to eat in minutes, DO NOT BUY IT. Learn to cook from scratch. It is simple, easy and does not take a lot of time. If you live alone – You will be cooking for 1 which is easy. If you live with others, they can help with the Prep and clean part of cooking. Either way, a grocery bill for a family of 3 will never exceed 100$ per week (even if you purchase organic food). In other words, if there are 3 mouths to feed and you eat food 3 times a day, it will be 63 plates of food at 100$. This comes with 2 benefits,
 Your health will improve significantly.
 Your finances will improve significantly.

4. Pay off your credit card completely every month. This is the only way to live a debt free life. Regardless of your income, credit card interests are in the NOT AFFORDABLE territory.

In the end, the money is always spent on the following 4 categories – Food, Clothes, Shelter and Miscellaneous. I have learnt how to save on the Food, Clothes and Misc categories. However the part where savings come from ‘Shelter’ is a new concept to me and I am still researching Buy vs Rent.

Where is my Money??

Where is our money going?

Between my husband and I, we are spending over 3000$ a month. We don’t have any expensive hobbies or habits. We don’t eat out more than twice a week (the month is question is an exception). We pack our lunch every day. We do not buy packaged food and almost cook everything from scratch. So, what I found out on a recent budget experiment is freaking me out.

Row Labels Sum of Cost
Eat Out 527.96
Grocery 329.49
Household 21.7
Monthly Recurring Cost 1815.06
Yearly Recurring  Cost 378.94
One time Travel Expense 73.5
Grand Total 3146.65

For most of you reading this article, 3000$ a month might come across as a right amount to be spending. But keep in mind that we do not have any kids or pets. 3000$ a month adds up to a cool 36,000$ a year. and that is a salary of around 50,000$ pretax.  So how do a vast majority of Americans live on an income less than 50,000$ per family ?And the above does not include the commuter train pass and the health insurance premium that is deducted from paycheck every month. Nor does it include any purchases like clothes. It does however include a small trip to Charlotte but that should still not matter a lot in the grand scheme of things. We also did entertain a few friends at restaurants and maybe I should not be so hard on myself.

The realization that if only one of us were working, we wouldn’t be able to lead this lifestyle is getting on my nerves. Over the next few months, my aim is to get the Total Monthly expenditure to less than 2K a month. It will be some hard work but I am ready for a challenge and honestly believe that it can be done. Following is my Plan of action

  1. Reduce Eat Outs to 100$ or less per head so that the total jumps from 527 to 200. Saving us 300$ a month.
  2. My Monthly Recurring Charges are below. The Car is on a 0% Interest Loan and I am not sure paying it off at one go will solve my problems. I still have 4 years on that loan. The home is in a part of country from where we are trying to move. Changing the rent to mortage will not be helpful. 
    Row Labels Sum of Cost
    Car Loan Repayment and Phone 500
    Car Insurance Feb 100.34
    Netflix Feb 12.71
    Energy 23.4
    Internet Bill 42.66
    Rent + Utilities 1095.95
    Phone 30
    International Calling 10
    Grand Total 1815.06

    3. The monthly grocery bill usually does not add up to a number greater than 250$. So, an investigation is needed into what is making this jump high.

In the meantime, any suggestions are welcome on costs that could be avoided.

 

 

Should I save Money?

Honestly, I do not know but I do it anyway. Why? Because of the too many articles that I have been reading about what happens during retirement when health expenses rise exponentially and income is almost negligent. There are too many ‘what-ifs’ that are driving me to save money for my future. Following are 3 examples from people I know and their money saving model.

  1. Save, save, save:
    • Saves 70% of the paycheck
    • I don’t have binge shopping sprees. Almost all purchases are well planned.
    • I indulge myself with Lunch\dinners outside at least twice a week and Starbucks- maybe twice a month as so on.
    • For any purchase over 100$, I sit with the decision for a day before I buy it.
    • I am not cheap but I do not spend on unnecessary stuff.
    • Summary: I am on track for retirement. I wish to retire by the time I hit 35 or 40. I do not wish to work for all the good years of my life. I have a huge bucket list that I must get started on soon.
  2. Save first, spend later: Saves 40% of his paycheck
    • This is my husband’s style of saving. He puts away a part of his paycheck into savings as soon as he gets it.
    • He makes it a point to spend the rest of it even if it involves things that are marginally in the ‘I may want this’ list.
    • Thanks to this, we indulge in a lot of trips and travels.
    • Summary: He is on track for retirement as any other human being. He is happy today, he will be happy later. His wants are modest and he has no early retirement plans.
  3. Why save? Future shall take care of itself. Saves 0% of his paycheck.
    • This is a friend’s style of money management. Every time he had a salary hike, his lifestyle had a corresponding upgrade.
    • He always has the latest gadgets, fancy cars, expensive hobbies.
    • He also has the finest Steaks and lamb shanks for lunch\dinner every day.
    • He leads a credit based lifestyle.
    • Summary: He has no plans to start saving for future. He believes that no one knows what the future holds and he is happy to live in the present.

Each of us believes that our money management skills are better than the skills possessed by the other two. All of us are happy with our lifestyles and maybe at the end of the day, that is all that matters. Being content in our own money managing skills and not having to worry about the future.

USA: Save your Account from Online Thefts

Like many others, I too came to the USA with the great American dream. As in India, I share my Account Details with anyone who owes me money. 3 months later, I used an online site to transfer some money to India and all they wanted was my Acct Number, Name and the Routing Number (Which is unique to a bank). They did not ask for passwords or any other details. This lack of security seemed odd, so a colleague and I walked to the nearest Bank and spoke to their representative. We thought he would assure us that our accounts were safe. Instead, he told us the exact opposite.

He said that anyone with our Account Number, Name and Routing Number* can transfer money out of our accounts.

a. Every time you gave someone a check, you gave them your name, account number and routing number on a piece of paper.
b. Every time you signs up for auto pay using any site, your name, account number and routing number are being stored in a database with access to many.

The solution to this risk:
1.Maintain a Savings Account to hold most of your money.
Cons: No debit cards and a limit of 3 transactions per month.

2.Maintain 2 Checking Accounts.
Pros: Split your salary in such a way, that the account through which you do online transactions, gets at least 250$ a month through direct deposit from the employer and the rest goes to the new checking account.
Cons: Your employer should have the ‘split the salary’ option.

3.Always use the legitimate Bank Website to set up automatic Bill Payments.

If there have been unauthorized fund transfers from your account, please approach your bank and file a claim at the earliest.

* Routing Numbers are Unique to the Bank and hence very easy to find out.