Discussions about financial independence often revolve about numbers and I have thought through my first financial target. Why a target? A target for me is quantitative and measurable which would eventually lead me to my objective of being financially independent.
The target is to accumulate INR 10,000,000 (in current terms) in my investment account by March 2020.
How did I arrive at this number?
Frankly it’s psychological, having assets worth 8 digits means a lot to me, it is usually a dream for most of the Indian middle class. In dollar terms it’s approximately $150,000 and reaching this amount would make me a ‘Crorepati’ which is highly aspirational.
What is an investment account?
Well it’s an account with my bank that enables me to invest in shares, mutual funds, Etf’s, corporate deposits, bonds and commodities. As you can notice all of these are liquid assets, hence it would not represent my complete networth.
What’s my starting point?
I have done the hardest bit which is to get started off. I am already a quarter of the way through thanks to my investments over the past 2 years.
So what’s the challenge?
The challenge as always is not to get distracted. As investments grow, there is a tendency to siphon a part of it to increase spending on wants and readjust your current lifestyle which is also called as lifestyle inflation. That’s one reason I prefer to track this target through this blog to provide transparency.
What is my plan? How much do I need to invest per month?
Based on my previous experience, I am not good at picking individual stocks. Hence my choice is to invest a majority into actively managed mutual funds on a monthly basis.
To reach my first financial target, I would have to invest about INR 93000 per month and expect annual returns of 12% for the next 4 years with an increase of 10% in the monthly investments per year.
What is the source for the investment amount and are the returns realistic? The investment amount comes from my monthly paycheck. The annual salary raise could be anywhere between 8 to 12% and with a savings rate between 60 to 75% most of the surplus would be invested into this endeavor. At all times the effort would be to maintain my current lifestyle.
Below is the breakup of my current portfolio, as you can see it’s heavy on equities.
Debt and fixed income products at present provides 7 to 8% returns and it would slowly go down further. Equities on the other hand have been down this year and would be volatile going forward. But I am positive that the Indian markets would perform well in the future to provide >12% returns.
The backup plan is to increase the monthly investable amount by about 5 to 10%, but that would be a bit of a stretch.
What would be the enablers?
- Primary enabler would be if the market outperforms
- Higher than usual annual raise, bonuses or a change in job with a higher salary would enable higher contributions
- Alternate sources of income like freelance, consultancy or even online
What could be the inhibitors?
Anything that restricts my primary source of income say a job loss, ill-health etc. Read here on how ill-health can be detrimental to your finances.
Having set the stage, I would be providing regular updates on the progress through this blog. Once again I welcome you to join me in this journey.