Financial Freedom

[avanishk]

Financial Freedom is what I have been after in last couple of years (~since 2008). Initially as a part of MLM industry (that helped me focus on my personal development), and later through investments (primarily in Real Estate).

I must say that I lost the focus in last couple of years, or would say that I did not put in right effort (building team, advisors, educating myself) to choose the right investment for creating passive income. I may be having decent networth, but they are not doing much. They are primarily Doodah in Rich Dad term. I was also kind of discouraged to see the ROI that is possible in Indian Economy through residential real estate, with property prices so much inflated that rental returns are not much. All due to black money stashed in it by politicians, bureaucrats and businessmen.

Coming across ERE community has provided me the needed energy to come out of my slumber, and start doing something drastic. For example, taking serious measure towards cutting down expenses. For ex: the more I earned, I saw my expenses going up along with it, with no increase in my savings rate. I am also working on developing the right expertise for investing in equity market with reduced risk. As Robert Kiyosaki says, it is not the investment that is risky, it is the investor that is risky.

My high level strategy at this time is as follows:
1. Increase savings rate to 50%+ by end of 2019 and keep increasing it from there on. It has been lurking in 20%-30% range lately.
2. Keep looking for opportunities to replace Doodah with Assets to increase passive income.
3. Develop expertise on Equity and Debt investment, local and global economy and allocate more money to this asset class. Large portion of my savings would start going to Equity and Debt, knowing that I am already overweight on Real Estate side.
4. Increase investment in commodities over a period of time (5-7 years) to 10% of my networth (as inflation hedge).
5. Continued focus on personal development and skill building in the areas I feel passionate about, and can see myself investing my time with after FI. Currently they are learning about Personal Finance and Personal Health/Fitness.

My Financial Freedom date is Jan 2027, which is a gift I want to give myself on my birthday.

I will be sharing more measurable targets and updates as I go along.

I am excited about being a part of this ERE community and looking forward for further help and guidance towards achieving this goal.

[fiby41]

See freefincalc.com for country specific financial information. He also has excel spreadsheets where you can input your Jan 2027 date, income and present savings and it'll tell you how much you need to save every month.

[avanishk]

See freefincalc.com for country specific financial information. He also has excel spreadsheets where you can input your Jan 2027 date, income and present savings and it'll tell you how much you need to save every month.

Thanks. I have downloaded the calculator and working with it.

[avanishk]

October 2019 review:

ERE numbers:
Savings rate (for 2019 so far) - 56%*
Safe Withdrawal Rate - 7%
Passive income - 6% of total income.

* I used after-tax calculations for savings rate. I.e. (Total expense - Income tax)/(Income after tax). My income tax is very high being a salaried employee, and not much in my control as far as my savings goal is concerned). Hope this approach of tracking is fine. Eventually I expect tax part to come down significantly as I start generating more passive income than active income.

I have engaged with a Financial Planner/Advisor from the month of October to prepare my financial plan and working on Fine tuning my Life and Health Insurance coverage. Once that is done, focus will move to investing the money being saved to equities.

My other key goals:
* Read 50 new books every year (1 book per week). I have read 16 books during 2019 so far and lagging behind the target quite a bit.
* Health: 50+ pushups in one minute. Currently tracking 46 pushups in 1 minute.
* Health: Reach weight of 65-68 kg range. Current weight: 60 kg.

[fiby41]

with property prices so much inflated that rental returns are not much.

income tax is very high being a salaried employee

You can write off losses from rental units from income from other sources including salary for tax deductions. If the loss from rental property cannot be subtracted from income from the same or other sources, it can be carried forward for up to 8 years. Losses upto 2 lakhs from the previous year's can be deducted from current year's income. If this loss is greater than 2 lakhs, the amount above 2 lakhs can be carried forward to the next year. But in the next year, this loss can be deducted from income generated from home rentals only.

[avanishk]

You can write off losses from rental units from income from other sources including salary for tax deductions.

This is the main motivator I had behind buying rental real estate and generating passive income from it. While I get tax deductions on the interest payment to the bank, I have started to see that this approach is putting me behind on my financial goal (or atleast has slowed things down significantly).

For ex:
* Home Loan repayment has reduced my savings rate significantly. Cost of loan is almost 6% (after considering full income tax deduction for interest portion), while my income from the property is at 4% or less. Even if I have funded 50% of the purchase cost, I don't get much passive income left behind after making loan repayments. And the more properties I buy, more behind I get on using my savings for other investments (equity market) that can generate higher returns.
* This is very different from other developed countries where you can get 30 yr fix rate loan at 2-3% APR, and rental yield is also significantly higher allowing for positive cash flow even with zero/minimal down payment.
* I have changed my focus now on increasing my savings rate (by reducing expenses and paying off some of my loans), and redirecting the savings to Equity investment. No more real estate purchase for the time being, while I re-balance my asset across different asset classes.

[avanishk]

Couple of days ago, I had made a chart of my yearly savings rate since 2006 (year when I started tracking my income and expenses).

I noticed that while my savings rate were in 25%-45% range during 2006-2015; it came down to 17% in 2016 and 0% in 2017. That was a significant drop, while salary had continued to go up.

A close review of my 2017 expenses brought following points

• Transportation ~ Rs 8.5 lacs of additional expense
  • Bought a new car for spouse and replaced my old car with a bigger car (although used one)
  • Additional Insurance, Gas and Maintenance expenses

• Education expense went up ~ Rs 3 Lacs of additional expense
  • One kid moved to a new school with higher fee (as part of move to a new home and locality). We also opted for their meals to be provided at school's cafeteria during school, adding to the cost.
  • Another kid joined primary school
  • Mindvalley training and membership fee

• Grocery expense went up ~ Rs 60,000 of additional expense

• Travel expense went up ~ Rs 1.5 lacs of additional expense

• Miscellaneous expense ~ Rs 1.5 lacs of additional expense
  • Primarily due to family moving to a new home, and family get together.

Learning and action items:

• Reduce ongoing transport related cost
  • Use public transport whenever possible. Have started that from Nov 14th for my commute to work.

• Minimize paying for unnecessary books and online courses.

• Expenses on kids education continues, except that we pack their snacks/meals for consumption at school from home. This is already implemented.

• Closely review grocery expenses and look for opportunity to reduce unwanted purchase or package food as much as possible.

• Significantly cut down on travel expenses. Replace air travel with train or cheaper modes whenever possible.

• Carefully review/guard all miscellaneous expenses and minimize/eliminate them.

[avanishk]

Nov 2019 review:

ERE numbers:
Savings rate (for Nov month) - 54%
Safe Withdrawal Rate - 5%
Passive income - 11% of total income.

Actions taken in Nov
* Purchased one more Life Insurance Term Plan to increase the cover equivalent to 10 years of yearly income.
* Changed my commute to work from car to public transport.
* Made prepayment on the home loan taken for one of my rental property. Plan is to fully payoff that loan by March 2020.
* Made prepayment for the home loan taken for the house we are living in (using extra cash I had available in savings). With this, I have reduced the monthly loan payment to the bank.
* Read Bogleheads Guide to Investing book.

Plan for Dec
* Complete reading of following books
- Ego is the Enemy
- Road to Ruin
* Get yearly health checkup for me and my wife.
* Consistently do 50+ pushups in one minute.
* Buy a Health Insurance plan (besides what I have through employer)
* Work with Financial Advisor on tax planning.

2019 goals:
* Read 50 new books every year (1 book per week). I have read 17 books during 2019 so far.
* Health: 50+ pushups in one minute. Currently tracking between 46-51 pushups in 1 minute.
* Health: Reach weight of 65-68 kg range. Current weight: 59 kg.

[avanishk]

Dear Friends/Fellow forum members,
Wishing you and your family a very happy, healthy and fulfilling year ahead.

Hanging out with you on this forum has been great in last couple of months and has created new found hope in me towards quicker realization of Financial Independence.

In this post, I will be sharing Dec 2019 review and my high level goals for 2020. They will be broken down into smaller and SMART goals for better tracking shortly.

Dec 2019 review:
ERE numbers:
Savings rate (for year 2019) - 55%
Safe Withdrawal Rate - 5%
Passive income - 7% of total income.

Actions taken in Dec
* Completed reading of books "Ego is the Enemy" and "Road to Ruin".
* Initiated a application for Health insurance policy for the family. This is besides employer provided policy, which would not be available once I stop working.
* Worked towards increasing my investment in Gold as inflation hedge and risk associated to global economic instability. Goal is to have 10% of my investment in Gold.
* Commute to work using public transport continues.

Year 2020 goals - Big 5
1. Read 52 books (one per week) during the year to propel my personal growth and develop skills aligned with my purpose and what brings personal fulfillment and serves others.
2. Get personal fitness and health on growth trajectory. Improve immunity and other health issues through optimal nutrition, right kind of exercise and rest.
3. Be a full time dad for my kids and spend the time necessary to make them an awesome human being.
4. Live Frugal lifestyle as promoted by Jacob Lund Fisker is his ERE book and blog. Save more than 60% of income, and learn to invest it wisely to achieve financial freedom by Jan 2027.
5. Develop love and kindness towards everyone and focus on giving and serving others. Heal my relationships with close family members. Make use of quiet time and meditation towards this goal.

[avanishk]

My SMART goals for financial life
1. Passive income - Generate Rs 1 Lac per month through RE rental, Interest and Dividends by end of year 2020.
2. Savings - Save more than 60% of income and invest it in MF (mainly index fund), and Stocks (using value investing approach for long term).
3. SWR - Reduce spending to bring SWR below 3% by end of year 2020.
4. Read following books related to personal finance in year 2020.
- Your Money or Your Life
- How I Found Freedom in an Unfree World
- Thinking, Fast and Slow
- The Black Swan: The Impact of the Highly Improbable
- The Intelligent Investor
- Warren Buffett Accounting Book: Reading Financial Statements for Value Investing

[avanishk]

Jan 2020 review:

ERE numbers:
* Savings rate (for Jan 2020) - 24%
* Safe Withdrawal Rate - 4%
* Passive income - 12% of total income.

Note: Savings rate went down due to one time/annual cost incurred on kids education fee and car maintenance. I expect to be back on track this month for achieving 60% savings rate by end of the year.

Actions taken/Learning summary from Jan:
* Completed reading of books "Trading for a living by Alexander Elder". Used the learning to make 13 day and 26 day EMA with MACD Histogram for the public listed company I work for. This would allow me to understand the short-mid term market trend and sell the company stocks I own at appropriate time.
* New health insurance policy for the family is approved and active now. This is besides employer provided policy, which would not be available once I stop working.
* Bought some Sovereign Gold bond in secondary market towards the goal of have 10% of my investment in Gold.
* Used https://www.portfoliovisualizer.com/backtest-portfolio to back test different portfolios for my Vanguard IRA account. Finally decided on 33% (VGSLX-REIT), 33% (VGHCX-HealthCare), and 34% (VEIRX-EquityIncome) allocation re-balanced annually.

[avanishk]

Feb 2020 review:

ERE numbers:
* Savings rate - 53%
* Safe Withdrawal Rate - 3%
* Passive income - 5%

Note: Large variation in earned income (due to year-end bonus) is causing passive income(%) to fluctuate widely. Absolute amount of passive income is little bit up as compared to Jan.

Actions taken/Learning summary from Feb:
* Currently reading book "Thinking, Fast and Slow". This has been slow read, as there is lots of information to digest before moving forward. Learning how heuristics and biases are formed and lead to error in judgement at times, and how we can prevent it by engaging our logical brain and looking at problem statistically.
* Getting completely out of Bond funds in my IRA seems like a good decision I made. The volatility that Bond funds have due to frequent interest rate change and other factors goes against the purpose I had them in my portfolio. I am glad that I did it, as I expect many rounds of government intervention with interest rate in coming years. I had rather live with volatility of equities.
* I was planning to close one of the home loan with proceeds from sale of company shares. However, that will have to wait couple of months looking at current market.
* Initiated Tax filing for previous year with my accountant.
* Tax planning for current year is in progress.

[avanishk]

March 2020 review:

ERE numbers:
* Savings rate - went -ve (This is due to extra tax liability of employee stock vesting. Taxes are applied at the time of vesting while I will realize the gain at the time of sale, which due to current economic condition is going to take a while)
* Safe Withdrawal Rate - 5%
* Passive income - 12% (went up due to quarterly interest payment from few investments)

Actions taken/Learning summary from March:
* "Thinking, Fast and Slow" book reading has been on a pause for the while. Have been doing binge reading of blog posts on http://www.psyfitec.com/.
* Vanguard REIT fund has taken a huge beating during coronavirus triggered downturn; much more that S&P Index and other equity diversified funds. Other equity diversified MFs have recovered quite a bit, but VGSLX continues to struggle. If the NAV goes very low, I intend to convert some of them from IRA to RothIRA.
* I was planning to close one of the home loan with proceeds from sale of company shares. This will have to wait till my company's stock recovers and comes closure to the price they were vested at.
* Made few small trades during the March 23rd market drop and practiced use of limit order on Vanguard ETF (VOO) and my company stock. I was expecting the index to fall a bit more, however US gov stimulus has done some trick temporarily. I intend to cash-out if market recovers a bit more and comes closer to start of the year level.

[avanishk]

April 2020 review:

ERE numbers:
* Savings rate - 58%
* Safe Withdrawal Rate - 4%
* Passive income - 8%

Actions taken/Learning summary from April:
* Completed binge reading of blog posts on http://www.psyfitec.com/. Many of the posts were really good read.
* Completed "The Crash Course" book on youtube channel by Chris Martenson. Intend to pick up his next book Prosper shortly.
* Teachings of Robert Kiyosaki (asset vs liablity), Jacob's ERE philosophy is all coming together well and helping in my journey towards resilient life style. This new book from Chris only seem to reinforce what I have already learnt from these mentors.
* I have started to get more convinced about importance of keeping 10% of investment in Gold. Though seems less likely at the moment, I feel concerned that this march towards negative interest rate and huge government stimulus and money printing by Fed may lead us to hyperinflation. Converted some of my investment in IRA to IAU.

[Seppia]

* Completed binge reading of blog posts on http://www.psyfitec.com/. Many of the posts were really good read.

Thanks for the recommendation, it was a great read for me.

* I have started to get more convinced about importance of keeping 10% of investment in Gold. Though seems less likely at the moment, I feel concerned that this march towards negative interest rate and huge government stimulus and money printing by Fed may lead us to hyperinflation. Converted some of my investment in IRA to IAU.

I find owning gold through an ETF to be somewhat of a contradiction.
This mainly because I think of it as the ultimate edge against black swans, and an otherwise uninteresting asset class.

[avanishk]

Thanks for the recommendation, it was a great read for me.

I am glad that you liked it. I came across this as recommendation from someone in these forums only.

I find owning gold through an ETF to be somewhat of a contradiction.
This mainly because I think of it as the ultimate edge against black swans, and an otherwise uninteresting asset class.

I understand. Gold ETF is still paper asset (backed by physical gold) and prone to manipulation as compared to having physical gold. No one really knows how much of real gold they are backed with. I will keep rest of my investment with S&P index fund. A well diversified stock portfolio should work as hedge against inflation as well.

[jacob]

No one really knows how much of real gold they are backed with.

On the contrary, it is in fact known in great detail. Otherwise the ETF system, specifically block creation and redemption, wouldn't work. You can look this up in the prospectus. For example, on 3/31/2020 GLD held exactly 31015661.3 ounces of gold in an allocated account. This means that each gold bar in that account was individually and specifically assigned to GLD down to the decimal point and individually stamped bar.

This level of meticulous tracking of who owns what is no different that the underlying machinery of an index fund. I don't think anyone would claim that "no one knows which or how many shares an index funds owns"? In reality, ownership of shares is tracked down to the individual CUSIP numbers (analogous to serial numbers on bank notes). Same thing happens in gold ETFs that are physically backed with gold. Those that are backed in the futures market would similarly track exactly which futures contracts they owned. This is foundational back-office stuff. It's the main contributor to why the financial industry generates such massive amounts of data.

[avanishk]

Pardon my ignorance in this matter jacob. That statement should have been more like "I don't know how much real gold IAU ETF is backed with". I will look up more on this.

My concern comes from difference in paper vs reality. For ex: while US government had made commitment to back US dollar with physical gold, over a period of time they continued to print large amount of dollars without increase in physical gold backing it and thus breaking Bretton Wood agreement during Nixon presidency. So there was a difference in agreement vs reality that broke trust of other countries in US Dollar.
What if the same thing is being done by ETF fund companies. How would we as investor know for sure if that much amount of Gold is actually being kept in their vault? What if they don't redeem my units during huge amount of redemption pressure when I really need it?

[jacob]

Okay, fair enough. Issuing shares (creation) w/o putting physical gold into the Trust account would be fraud. There's no guarantee of fraud prevention and I suppose in some way they could pull an Enron although that would be harder since the financial structure is simpler. (It would require the auditor to be in on it.) In terms of a "run" on the ETF, your risk as a retail investor that you can't demand redemption in physical gold. Only the authorized block traders can do that. IOW, most likely "bad outcome" is that the gold is there, but the ticker says it's worth way less than street value, because retail owners can't effectively access it. Unraveling that would require an corporate sized entity to gain (pay the fee) block rights, proceed to redeem the physical gold, and then arb your shares for the actual gold... probably charging a transfer fee.

[avanishk]

Thanks Jacob for your input. I checked IAU fact sheet https://www.ishares.com/us/literature/f ... -en-us.pdf, and see that $20 billion of asset is backed by 391 tonnes of physical gold, which closely matches Net Asset Value. I will go through their prospectus in detail before any further investment.