Lessons from a decade of wealth creation experiments

It was my second semester of college when my experimentation with wealth begun. To put things in perspective, this was the time when Facebook was very new, we were still on Orkut.  E-commerce was just starting to come up. I along with two of my friends started a web agency to help companies with their digital branding and web presence. It’s been more than a decade since I started making enough money to sustain myself and in these years, I have learned a thing or two about wealth. In this post, I will condense and list out those learnings.

1. Debt is evil

Debt is going to kill you in your journey to create wealth. There’s only one rule for debt – never take it. Let’s break down some common scenarios where we justify taking loans.

a. Education Loans

Education is free now, more than it has ever been. You pay college for a degree not for education. It’s important that we don’t conflate education with degrees/validation. College however teaches you a lot of other things which I believe is really important. Optimize for these experiences while learning the coursework online. If you can figure out a way to learn these skills in a more economical way, then do that instead. In my opinion, a great way to acquire these skills early on is to get a sales internship/job. From a job perspective, the new-age startups are becoming more and more friendly towards e-learning graduates, self-taughts, and dropouts. It’s only going to get more mainstream.

b. Home Loans

This is an emotional decision for a lot of us. Getting our own home is something we all dream of. If we keep the emotions aside, financially renting a home is always a better option than buying one on loan. The argument – “why pay the rent when you can pay the same amount as EMI and own the house” is deeply flawed. The current average yield rate (rent that a house could make vs the value of the house) of houses in India is about 2%. This means, if you are renting a house instead of owning it, you could pay the rent for 50 years before the sum of the rent you have paid becomes equal to the value of the house, assuming the same rate of appreciation in rent as well as value of the house. If you are in your 20s, technically by the time your sum of rent paid will be equivalent to the value of your house you have rented, you will be 70 something.  If you want to own a property, own a piece of land instead, again, only if it doesn’t involve taking on debt. 

c. Car loans

Another aspirational purchase we tend to do. Fortunately, it’s not a huge cost if we don’t want it to be. If you are thinking to buy a premium car and pay a huge sum of money for it, please rethink. Vehicles are depreciating assets. The value drops to almost 70% the moment you buy it. So the only reason you should buy a car is if it helps you in conveyance, not to post a picture on Instagram and announce that you have arrived. Expensive cars are also high maintenance and give poor mileage. Get a bike instead if you stay alone or a second-hand car if you need one. 

There are many other loans that we end up taking to finance our status in society. By doing that, in the process, we pay a huge opportunity cost. The money we make to pay the downpayment of loans or the interests could have been invested elsewhere to create wealth. Moreover, the monthly EMIs that one has to pay for these loans reduce the optionality of what one can explore. Say 5 years into your career, you want to start your own startup but can’t because of the EMIs of your home.

2. Security

I break down security into three important categories. The idea for security is to give you peace of mind. Security gives you the assurance that there is a safety net for rainy days when it comes. It also gives you room to invest. Always build your security first and investment after that. Investing without security will make you react to market fluctuations and prevent your wealth from compounding.  

a. Emergency fund

The earlier we plan for this, the better off we will be later. Define your emergency fund as per your needs. The general advice of having an emergency fund worth of 6-month expense is nonsense. It’s important to understand what makes you feel secure. If saving worth 2 years of your current expense is the answer then do that.

b. Life insurance

If you have dependents and family, it’s good that you care about them and want to think about their future in case something tragic happens to you. The right way to think about the sum you want to be insured is :

  1. How much money you think will be enough for your family to live in case something happens to you?
  2. How much time do you need to create a wealth corpus that amounts to the answer of #1?
  3. Get insurance for the number of years from answer #2 that insures a sum worth answer #1

If you care about your family and feel that you should get life insurance then do it. Don’t however take insurance plans that structure themselves as investment instruments by promising a return after specific periods. The premiums for such plans would be way too high which you could invest in better places to reap better returns. I was naive and made this mistake. I continue to pay for this mistake of mine. Don’t repeat the mistake I did. Life insurance is not an investment instrument, don’t treat it like one. Save those premiums and invest them into other assets to create wealth.

c. Medical insurances

If you are working, most likely you will be covered for medical insurance by your company. But in case you aren’t, it’s highly advised that you get one, especially if you have dependents and older parents. Make sure your dependents are also covered in the insurance. Medical emergencies come without notice and it can bankrupt you if you do not plan for them. About a year back, right at the time when I was starting my current startup Binks, my mom was diagnosed with an illness and required surgery immediately. If not for my medical insurance, I would have been left with next to nothing in my savings and would have to quit the idea of starting up. 

3. Investment

People often conflate trading with investment. While trading focuses on exploiting a short term opportunity or arbitrage, Investment is generally value-based and long-term (read decades). I have experimented with trading as well as investment and have understood the hard way that trading needs to be active – it’s a full-time job, Investment on the other hand is passive or semi-passive (if that’s a thing). Starting on an investment journey early in a career is fundamental to wealth creation. The sooner one starts investing the better opportunity compounding will get to do its job.

Below is what my portfolio looked like before I started working on Binks and I would advise in your 20s, given today’s landscape, it should least look this aggressive if not more. All the investments that I do are via a SIP or similar monthly instrument.

a. Direct equity-based mutual funds – Indian Market (20%)

I invest in 2 types of funds. One that tracks indexes (Nifty, Sensex). The reason to do so is that I trust the collective decision of the nation over that of an individual fund manager. This is where the majority of the 20% goes. The second is a select bunch of funds that have great fund managers and a good track record. 

b. Direct stocks via smallcase – Indian Market (30%)

I don’t have the time, skills, or knowledge to actively track stocks. So I rely on people who are much smarter than I am and who do this full time. There are investment firms that have created their own smallcases on www.smallcase.com and they charge a small fee for you to use their strategy. The fee is completely worth it. I don’t find most of the free smallcases listed on the website to be useful mainly because of a long rebalance period. I personally invest using momentum strategy with a rebalance period of not more than 1 month. 

c. US based stocks (30%)

Have a healthy mix of well-performing and upcoming stocks in the US market. Apps like IndMoney have made it super easy to invest in US market stocks for Indians.

d. Direct debt-based mutual funds – Indian Market (10%)

Debt funds are a great alternative to FDs especially in times like these when FD rates are very low (~4%-5%). They are less volatile than equity funds but also give lower returns than equity funds. The returns from debt funds generally range from 6%-8%

e. Cryptocurrency (10%)

This is a gamble. I consider this money as lost money or sunk cost but in case it works out it will return more than all other investments combined. That’s a gamble I am willing to take at my age. The Crypto market is very volatile and every penny you put in this should be considered gone. A good reason to invest in a crypto is that it’s not correlated with the fiat financial markets at a very fundamental level. The reason why it’s not correlated with the financial market is that it has no asset backing it and has not mainstream use, which also makes it a risky investment. It’s literally investing in lines of codes and the worth of crypto is decided largely by sentiments with no justification whatsoever.

If I had to simplify this entire post into 3 simple key takeaways, it will be

  1. Don’t take debt/loan until its life or death situation
  2. Get secure by getting on a good family medical insurance and life insurance if required
  3. Once you have put some money aside as “Emergency cash” start investing in above mentioned options.