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How much money can your savings buy?

Saving while managing all our debt (according to a recent report, millennial Indians owe the most in terms of unsecured debt), is a tall order for most. We all need some inspiration to do the hard things in life. Here’s something that should give you some practical motivation.

For individuals in the first ten years of their career in India, current realities dominate their thoughts. Will they progress in their careers? Will they make enough money today and much more in the years ahead? Will they be able to afford their wants and dreams? 

Ironically, mindfulness mediation which has become so popular amongst the urban young, talks about staying in the present. When it comes to money and finances, most individuals are definitely more about the present!

Saving while managing all our debt (according to a recent report, millennial Indians owe the most in terms of unsecured debt), is a tall order for most. We all need some inspiration to do the hard things in life. Here’s something that should give you some practical motivation.

Let’s talk about how much money can your money make.

What is your cashflow?

Your salary or earnings minus taxes are your cash inflows. Your expenses, including EMIs, and taxes, are outflows. The wider the positive gap between the two, the better your financial situation. Ideally, you should add your monthly savings and investments to your expenses list as well.

In business, cash flow is one of the metrics on which a company is judged. Basically, how much money (liquid) a company brings in and how much goes out. A net positive cash flow means that a company is doing well from a financial perspective, all things being equal.

Cash flow is generated through the daily activities of the firm in the market, supplying goods and services to people like you and I and at the same time buying goods and services from other individuals (for example, employees and suppliers). 

In your case, you earn your cashflows through your work.

From a purely practical perspective, one of the key things that truly matters in wealth creation is how much money can your money bring in.  This is also why corpus size makes a difference.

Getting your money to work

What if you could get your inflows but without having to work for it? Your investments are meant to do exactly that. But many investors look at returns on a short-term basis when considering the investments they have made, especially when new. Returns are important, but wealth creation can depend far more on how much you earn and invest rather than just returns.

From a purely practical perspective, one of the key things that truly matters in wealth creation is how much money can your money bring in.  This is also why corpus size makes a difference.

Let me illustrate with an example. If you make Rs 70,000 each month in take home income you receive about Rs 8.4 Lakhs a year in annual cash inflows. 

If you wanted to fetch this much money without working do you know how much you’d need? About Rs 1.4 Crores (as of 2019)!

The simple math

The lowest volatility and lowest risk investments in India, whether liquid funds or a reliable bank's FD, generate about 6%-7% per year. Rs. 1.4 Cr invested in such funds for a year would generate about Rs 8.4 Lakhs in returns or interest income (pre-tax). Of course, you would need some more for the corpus to beat inflation and not eventually run out.

Look at your savings and investments as of today and multiply them by 0.06 to get a rough estimate of how much cash inflows they can generate annually. Divide by 12 to get an estimate of your monthly run rate.

For example, if a person has accumulated Rs 10 Lakhs, that is capable of generating Rs 5000 a month (lesser if you don’t want to eventually run out). 

This is one of the key reasons we say that you need about 25x your annual expenses and a home of your own before you can consider yourself financially ready to retire from your day job.

The takeaway

We often wonder why we are saving and taking the pain to invest at all. It’s simple, we are saving and investing literally for the day when the money we have, can generate enough to literally live off of it each year.

That’s also called being “seriously rich”.

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