You might have read the story of the overconfident hare that challenged the tortoise for a running race. All the animals gathered around to watch the race knew with certainty that it would be a one-sided battle. Even the hare believed he would win, unopposed, unchallenged, and untroubled, but the final results were not in his favour.
The hare, who got a huge lead, was so far ahead in the race that he thought he would take a small break, a quick nap. This turned out to be a turning point, as the tortoise quickly caught up and surged past to emerge victorious.
The tortoise and the hare can be compared to expenses and investing in personal finance. When we begin our careers, the ability to invest can exceed the amount we can expend. Most of them would start an SIP, too.
But if we become overconfident like the hare and think we have invested abundantly and can take a break, the expenses will catch up and cause us to lose the battle.
When we begin our careers, we are pulling more than our weight. But when we are in our 40s or 50s, expenses will rise much faster than salary increases. We might need more money as the number of dependents goes up. We have school- or college-going kids, ageing parents, house and car loans, grocery bills, maintenance bills, medical bills, and recreational/leisure expenses. When you add inflation to all these, the final outcome is worse than expected—rising expenses and a stagnant career.
Many of us are victims of stopping an SIP plan midway through our careers. It would have been triggered due to a job change, marriage, starting a business, time out with ill parents, time out with a special needs kid, etc. Our break may not have been entirely due to arrogance, but rather to circumstances. This prevents you from winning the race, as your expenses will catch up with time anyway.
To stay in the fight and to win over your long-term expenses, I have put forward a simple plan. In the running race, if the hare, who was much ahead of the tortoise, could just slow down to the latter's pace, he could have stayed in the hunt. Whatever his lead was, it could be maintained as the hare is moving as fast as the tortoise, and there is no way the latter can catch up.
Similarly, in the investing race, all you need to do is trim your investing pace to match your expenses and maintain the lead. By following this advice, you ensure that long-term expenses will never exceed your investment corpus.
Let us look at an example so that we can understand it better.
If you had begun your career at age 25 with a salary of ₹50,000, your monthly investment would be about ₹10,000. Expenses may be around ₹25,000, including rentals, food, and groceries. The rest of the money could be spent on EMIs, leisure, and recreation.
In 20 years, expenses may grow 5 per cent per year due to inflation, while your investments could grow at about 12 per cent. Your expenses would then be around ₹66,000, but your investment corpus would have grown to around ₹1 crore. This ₹1 crore is more than enough to cover your expenses of ₹66,000 per month for the next 15 to 20 years, but if you had to take a break and were unable to continue the SIP, this target would never be met.
If you had to take a break between ages 35 and 40, let us look at how to get back on track to raise ₹1 crore by age 45. To do this complicated calculation, we need to split it into three sub-sections.
1. An investment of ₹10,000 per month from age 25 to 35 will generate a corpus of ₹23.23 lakh, which will grow to ₹72.15 lakh by age 45.
2. If you take a break from age 35 to age 40, it is best recommended to continue the SIP at ₹500 per month (1/20th). This will generate a corpus of ₹41,240 and will grow to ₹72,680 by age 40.
3. If you are able to rejoin work by age 40, you need to raise ₹27.12 lakh, which is easily achievable by topping up your SIP to ₹33,000 for the next 5 years.
See, there is not much damage. In the original case, the investor had an SIP of ₹10,000 for 20 continuous years. Whereas our “hare” investor was able to invest ₹10,000 for the first 10 years, ₹500 for the next 5 years, and ₹33,000 for the final 5 years.
The most important takeaway is that you did not entirely sleep off like the hare, but you kept persisting. Circumstances stopped you from going to work, but you still managed to continue the SIPs at 1/20th of its original value, and when you bounced back, you were able to afford a higher monthly plan. This detour still ensured that you are reaching the financial destination you had originally intended.
So, in the modern-day hare (Investing) vs tortoise (Expenses) race, make sure you do not give away your lead to the tortoise. If you cannot run, walk. But never stop or doze off.
The writer is a SEBI Registered Investment Adviser (INA000021757), SEBI Registered Research Analyst (INH000025045), and author of ‘How to join the top 1% options traders club’.
DISCLAIMER: Investments in the securities market are subject to market risks, including the potential loss of principal. Past performance does not guarantee future results. Information provided is for educational purposes only and should not be considered financial advice. Investors should read all related documents carefully and consult a certified advisor before investing. Registration granted by SEBI and Enlistment with RAASB/BSE and certification from NISM in no way guarantee the performance of the intermediary or provide any assurance of returns to investors. The investor is requested to take into consideration all the risk factors before actually trading in stocks or derivatives.
The opinions expressed in this article are those of the author and do not purport to reflect the opinions or views of THE WEEK.
