39 Become (and stay!) a millionaire

Here’s an extraordinary book which tells you how America’s millionaires came to be so. Stanley and Denko (both PhDs) in their book The Millionaire Next Door. The Surprising Secrets of America’s Wealthy, demolish many myths or notions about the wealthy. Almost every line has a nugget of information, based on studies and surveys, that show how most of them accumulated their wealth the hard way: by working hard and steadily, minimizing expenditure, and saving and investing assiduously. The majority are self-made millionaires in their own lifetime, not inheritors of fortunes. The secret is that they don’t live like millionaires: they live in ordinary neighborhoods, drive ordinary cars, they maximize their assets (investments, nest-egg, cumulative capital), not their consumption expenditure, they are “compulsive” savers and investors.

38 Enjoy saving and investment – as a hobby!

The principle of embarking on a course for some intrinsic values rather than just for a material goal, suggested in the previous post (37 To find a purpose), has an application even in something as arcane as the pursuit of assets and a nest egg for retirement!

Consider the goal of attaining the accumulated assets we require to maintain our living standards after retirement, which can loom like a formidable mountain in the early stages. Like real mountain-tops, the more we advance, the farther it seems to keep receding (local guides, who know too well the discouraging elusivity of these things, keep enticing you on by cheerful assuring you that’s it’s just a shouting distance away – in Hindi, “haak-bhar door hai, sahib!”). We saw the arithmetic of it in previous posts (36 Saving for retirement – the professional view, and 34 Retiring comfortably, or your life term savings plan); but as you can see, it can be dry and enervating to understand how it works exactly, especially as there are so many conflicting factors: incomes, expenses, inflation, taxes, compounding, discounting, erosion of value, liquidity versus security, and so on and on. Then there is the drudgery of dealing with the petty bureaucracy and exacting paperwork of bank accounts and provident funds and insurance policies and income taxes. There is a temptation to give up the whole thing and let momma (or the government) deal with it!

The one sure way to take the drudgery out and instill even as dry an undertaking as investment and taxes is to approach it with the mindset of a willing student. In fact, make it a hobby rather than a responsibility! If it’s income tax, designing your own spreadsheet and fitting in formulae to do the computations, designing reports (however rudimentary) and so on can be an interesting exercise and a challenge to your computer skills. Once the templates are drawn up,  the drudgery is taken care of and you only need to post up the year’s transactions. Similarly, keeping track of your savings and investments – the fixed deposits (FDs), PPF account, and other instruments – can become confusing and exhausting if you don’t devise a tracking system (I have described mine: keep entering the items serially in a diary with details, dates, values and source and destination), amount at investment and at maturity, and then review frequently). This also can provide some engaging moments.

Tracking tax deductions, roll-over of matured deposits, and so on is also something that will have to be done on a regular basis. Filing income tax returns also is easier if taken as a hobby project rather than as an imposition. The challenge is to understand the rules of the game, devise our own ways of doing it, and the reward is the satisfaction of having achieved something to “beat” the system (not really, nobody can beat the tax department, but it’s good to think of it as a competition!). The same with shares and the demat account you need to work them: the joy is in beating the market, not so much in any profit you may book. My neighborhood baker was a share trader in Mumbai for twelve years, and his conclusion is that it’s a mug’s game: he made 12,000 rupees net profit (or loss, he’s not sure!) after all that effort. Now he runs a bakery for the challenge of it – again, the competitive spirit!

Just as in music,1 you learn for the intrinsic worth of it and not to gain audience appreciation, so too in building a corpus: once you get engaged in the intellectual pursuit of the process, you will be hooked, and will not feel the act of saving and the mechanics of investment as a chore. Of course, one should not go to the other extreme of getting obsessive about saving, and trying to pinch pennies at the cost of one’s comfort and well-being. It’s a long term activity, and should be a source of pleasure and learning rather than a punishment!

¹and in blogging!

36 Saving for retirement – the professional view

In a previous post (34 Retiring comfortably, or your lifetime savings plan) I referred to a pretty nice book by one Paul Westbrook, JK Lasser Institute (Saving for Retirement, Wiley, 2003), which deals with these questions in a professional manner. I’ll run through his main conclusions and see how my own home-spun analysis stands up.

First, the main points about the arithmetic of saving.

34 Retiring comfortably, or your life term savings plan

We’ve been talking rather glibly about retiring and having a ball (see Post 29 Retirement as “The Freedom Years”, Post 28 Managing retirement). But this sort of assumes that we’ve managed our savings and investment strategies, during our working life, sensibly. How much do we have to save to achieve this?

32 Paying your income tax

Are taxes always a worrisome task in March every year? Perhaps you are not sure of the total income, you have not updated yourself with the current tax slabs and allowances, you do not have the record of deductions and savings … the list is endless. The way to avoid the end-point hassles is, of course, to start assessing yourself from the beginning. You can start by entering each month’s salary and deductions into a spreadsheet, and in my case this has stabilized as a complete tax calculation application with separate pages for salary, interest incomes, house property, capital gains (which is now empty because I have abandoned shares!), and a master worksheet bringing it all together. I save the newspaper of end-February which usually has the tax proposals, and the issue in end-March which has the finance bill as voted in Parliament (these are of course available on the website of the income-tax department nowadays, but having the paper version saves a little time). You can note down the changes in slabs and rates, deductions, and any other significant stuff (like concessions for senior citizens!), and start computing the tax likability from the start. By the third quarter, I start seriously paying up the anticipated cumulative tax dues in installments. This way, at the end of the year, there’s little calculation to do, and no standing in queues with other harried late stirrers!

Just a caution: make sure to check the calculations by hand (a manual check of the spreadsheet, if you are using one), as sometimes old data and formulas could be left behind and cause unexpected mistakes- like claiming too much deductions or using old slabs or rates of tax!

Why don’t most people do this in practice? One factor, I feel, is the general (and quite understandable) resistance to parting with any of our hard-earned moolah to the government. So the last three months’ salary is often entirely consumed by taxes, since the accounts department usually gets the provisional tax return from you in December. Actually there are also rules about how much of the anticipated tax you need to pay by each quarter (I think about half has to be paid up by the third quarter), called advance tax. If you haven’t kept up with these installments, the income tax authorities may even charge you interest on the quarter-to-quarter shortfalls (even after you’ve paid up the whole amount in March!).

I’m finding a strange problem nowadays because of all the interest income coming from the fixed deposits from the retirement payments. The problem is that the banks deduct some 10 to 13% as TDS (Tax Deducted at Source), but generally won’t give you the correct figures until after the end of the financial year (usually only by the end of June in the next financial year!). In the meantime, you have to pay up the balance 20% of the tax on your interest income, by 31^st March of this financial year. It’s difficult to get the correct figures of income since the banks are so busy toward the end of the year. In practical terms, what I do is to make an approximate estimate of interest accrued by multiplying the principal amounts into the interest rate for the appropriate number of months the deposit has been in force during the 12-month period, and I just pay it up before the year-end (I may have to encash a deposit or two to get the required funds). Incidentally, that’s another little ploy I have of keeping things flexible: I split my deposits into manageable amounts. I also have a system of making each deposit for a slightly different amount: say you want five deposit certificates, you make them for respectively 10000, 11000, 12000 and so on; this is a way of numbering them serially without assigning numbers. This avoids confusion about how many deposits are still there and how many have been closed, and also keeps the bank accountants from terminal despair!

Should you file income tax returns even if you are below the taxable limits? I personally feel you should, because it always helps to have your accounts audited and certified by the tax authorities every year (in case you need a tax dues certificate, for any reason). Secondly, it gives a good training ground for you to build up familiarity with the main rules, the process of preparing and filing the returns, and so on, when there are no high stakes involved. Then when you do start getting into the taxable range, you will not have a stressful learning curve. As the psychologists say, we feel the pain of loosing money more than the joy of getting an equal amount: that’s why if we learn later on that we have missed some exemption or other loophole in the rules, it makes us feel really bad. It’s wise to learn all this when we are not even in the tax net, so that we are prepared for better times when the taxman will come a-calling!

One last suggestion here: how do we find the money to pay our taxes? One sure thing is that if we postpone payments, they become more and more difficult. That’s why the income tax rules require the employer to deduct taxes at source. But as mentioned above, the TDS rates are usually only 10%, whereas you may land up in a higher tax slab toward the later part of the year, and then be forced to pay up your entire salary as taxes during the last two or three months. When I had multiple demands on my salary, I used a method that helped me budget my money without too much pain. I made columns for these different ‘heads’ of payment in my chequebook (there's usually a few ruled pages for entering transaction details stitched into each chequebook), such as school fees, loan repayments, household, savings, selfish pursuits, and of course taxes, and so on, and split up each month’s salary income  among these heads. Money withdrawals or cheques issued were also entered under the appropriate heads, and balance available also calculated head-wise. Of course sometimes one or the other head would go into the red (since sudden demands always arise), and then one has to make larger ‘appropriations’ for those heads in the next month’s salary. You will notice that this works for those getting regular salary; it beats me how business people manage their personal expenses, and increases my admiration for them!  

As a measure of abundant disclosure, let me say I have just paid up large sums as advance tax after closing a couple of my fixed deposits! 

28 Managing retirement

I’m getting back to this blog after a hiatus of two years, during which time I’ve retired and returned from Delhi to my home and family in Bangalore. So I guess the first thing is to share the retirement experience!

First of all, I absolutely do NOT miss the job at the ministry in Delhi, and all the meetings and hustle and bustle and dealing with irritable and irritating people! I do not know whether this is a special feature of government jobs, but very few persons in similar circumstances have expressed any regret or longing for he old days after retiring. This has been a very pleasant experience, because the feelings of regret or nostalgia for the past seemed to have been a common thing in my father’s generation (I may be mistaken!).

One difference in the situation of persons retiring now may be that there are just so many more things to do, thanks to modern technology and the communications and information revolutions. There are more channels to watch, more web sites to browse, and many of my colleagues and contemporaries have taken to Facebook and such things with gusto. My generation has probably been the luckiest in human history (born in the 1950’s, we would be just post- the baby boomers, I guess): this is the generation that grew up in many countries at the beginning of the brave new era of self-determination and democracy (some countries like South Africa had to weight a while longer), a faith in ideals and in the promise of technology, and many new institutions and initiatives to take part in. In India, the middle class soared, with limitless possibilities through new institutes for specialized higher education and development  of science and technology; the performing arts, commerce and so on. This generation went all over the world,  and laid the foundation of the diaspora in the technological frontiers of the world, like Silicon Valley. The social scientists and intellectuals had not yet cast gloom on the party by their predictions of doom and mayhem, the shadow of religious fundamentalism had not fallen, rationalism and the scientific approach still held out promise and had not been eroded by the doubts of relativism and post-modernism.

Coming back to the post-retirement phase, a friend had offered the view that you can do anything you wish after retirement:  you can relax, or travel anywhere at your sweet will and fancy, you can read, write, take up courses, engage in voluntary effort, join clubs and societies, and almost anything else. All this, of course, assuming that you have prepared yourself and the family for the decrease in income and the withdrawal of support from the office or company. 

One way of doing this is obviously to plan your savings strategy right from the start of the career; some people say that you need to save only 15% of your income during your working years, but I am not sure it is enough; better to save the very maximum you can spare, so that compound interest rapidly builds up the reserves and soon makes up through interest for the inevitable halving of the pension or other official retirement income. The human tendency is to discount the future (termed myopia or short-sightedness in anticipation of the future);  so extra effort is needed to pay attention to distant future needs.

The other issue is, of course, to do with what is called life cycle planning, since one is not sure how long one is going to be alive; if one has a general pessimism about the life span, saving for eternity may not have much appeal. The only sensible approach, I feel, is to assume that you’re going to have a pretty long life (an eternal life, in fact); there is no use regretting vainly in the sunset years that you’d put by more. The problem here is, of course, that you may have to carry the accumulated savings to your last day, since you need the regular interest to see you through without seriously troubling your descendants. The corollary is that you will have to leave the accumulated capital to them, which is good in many ways, as it reduces your own temptation to splurge wildly and spoil your health, and it makes the heirs a bit kindlier and indulgent if they can look forward to a reward for putting up with your terminal foibles and troubles.

Retirement gives an opportunity to do all those things you never had time for: so enough of the excuses, get up and get going. A friend gave a novel way of looking at it: he calculated the number of days required for each activity, say personal health and hygiene, entertainment, managing the finances, drawing up income tax returns, attending to family get-togethers and social events, hobbies, and so on, and came to the conclusion that here would be no time to sit and brood! Of course, one thing to avoid is getting too closely involved in household matters and the personal lives of your family, especially the next generation; best to keep a wary distance and proffer advice only when asked.

So that’s the thing to do after retirement, of course always keeping in view that there’s going to be a long way ahead. Retirement is a start of a new journey, not the end of everything. As far as the erstwhile job and all its glories, let us comfort ourselves with the gratitude for having had it as long as we did, rather than pine for its loss; what’s more, all those who came after us are also going to be retiring soon, and within a few years the people we knew in our working lives would all be in the same boat with us, so the pain of comparing our lot with others will diminish and disappear.

(As a token of abundant personal disclosure, I have to add that I am improving my initial retirement years  by taking up reading and writing, which I could not develop systematically during the busy years on the job. Going to an institute solves the problem of being all dressed up with nowhere to go; I anticipate the need to travel to a work spot outside the home will diminish over time).