It was a Tuesday afternoon when Mr. Joe (name changed) walked into my office. He was an extremely confident individual and was bubbling with optimism. Mr. Joe is 37 years old, is married and has one child (8 year old).
It was a Tuesday afternoon when Mr Joe (name changed) walked into my office. He was an extremely confident individual and was bubbling with optimism. Mr Joe is 37 years old, is married and has one child (8 year old). He currently has no liabilities and his total net worth as of today is Rs. 2 crores (excluding his self occupied property). The present was not as much as a surprise as the past. Joe hailed from a middle class family with not much of surplus money. The very fact that he could just about make ends meet was by itself an achievement.
One fine day about 20 years back Joe lost his parents, he was 17 years old then and the financial situation worsened. There were times where even buying basic food provisions for home was a very difficult task. He started working , doing odd jobs like delivering milk packets, newspapers or even working as a waiter in a hotel while completing his studies. If this was a situation 20 years back and today Joe is in a better financial situation than many 37 year old with fancier degrees ,what is the reason. What are the things he did right which probably many of us are not doing ?. I probed him further to find out and the secrets started unraveling slowly.
1) Income minus savings is expense:
Joe followed this golden mantra of financial planning joe throughout his life. More often than not savings is the balancing figure that we are left with after our expense. The problem today is that not just are our expenses on a higher side but also the modes of spending have increased. I remember when we were kids shopping meant buying a shirt or a trouser for a festival or birthday and that too from the shop across the street. Today we go to a mall. A mall is described as a beautiful place where you go empty handed and come out with 4 bags of which 3 of them you don’t know why you bought. Joe realized very early on that one cannot achieve financial success if one spends more and saves less.
2) Power of compounding:-
I am often reminded of a story where a priest asks a king for rice as reward for his services. However the grains of rice should be kept on a chess board and doubled with every square. Even before the king could reach the last square of the chess board he was a pauper and the priest was a rich man. We would have heard this story of power of compounding time and again but how many of us followed this. Joe maintained this discipline right from the start by doing systematic investments and he realized that the most crucial thing for money multiplication is not just the quantum of investments one does but also the time period till which he does that.
3) Ceiling on desires:-
We often do not draw a line between what is a need and a desire. Many times our desire overrules our need and the financial decisions in this regard are generally sporadic in nature. For e.g. I have seen people with high credit card outstanding and also taking further loans to either buy a home theatre or a luxurious car. Joe was very clear of these concepts right from the start and he involved his wife in his financial planning as well so he could succeed in terms of the support he receives from her. Most financial planning fails because in a family both husband and wife are clueless on what the other is doing regarding their investments. Once we are clear on this demarcation financial planning is a an easier exercise.
4) Portfolio allocation:-
To decide how much should we invest in different asset classes helps us build balanced portfolios as per our goals. The general tendencies to invest is looking at the fads. So if gold does well everyone jumps for it. Similarly the demand for equities will start surging once the market touches new highs. Joe took the help of a financial planner to help him allocate his money correctly in different asset classes as per his needs after considering his tenure and risk taking ability.
5) Risk and insurance planning:-
The hardships of life had taught Joe that the most predictable thing about life is its unpredictability. He knew that only a good and sufficient health and life insurance cover could protect him and his family during uncertain times. He always made sure that he assessed his insurance needs on a constant basis and increased them taking into consideration his responsibility and time value of money.
We salute Joe who is a commoner and a common face in the crowd but is miles apart from the common man in terms of his financial stability. Joe has set examples of how mere financial discipline could lead to financial independence. Finally when my meeting with joe came to an end he said “ I came to meet you sir so I could take my financial planning to a different level now I need a much early financial retirement, let’s work towards it”
This is the story of The Average Joe.... Nothing average about him.
Mukund Seshadri is a senior partner at MSVentures Financial Planners.