A friend, say RMD, called me
today morning. He is 55 years of age. We have been serving him for over 20
years now (since 1997) and helping him mainly with his Income Tax compliance. I
talked to him about his query - which was how to deploy a lump sum amount which
he would be getting later on in the day today. As I sat down to write this
blog, my train of thoughts took me over the past 20 years with my interaction
with RMD and his family.
When we started working together,
RMD had his own views (probably from his family and other background) regarding investments, loans, etc but still used to take our advice occasionally on these
matters.
When we started serving him, RMD
was member of a typical low-income joint family, staying in a one room kitchen.
He was self-employed. His family owned another small business and RMD used to
help out in the family business too. He had 2 siblings elder to him, who were
in private employment, who moved out of the joint family in a couple of years.
He had to continue to manage the family business, devoting more time without
any corresponding financial benefits to him.
Today RMD owns a small apartment
in Mumbai (city proper and not suburbs) and a small commercial unit in the
suburbs, runs his business which he has been operating since past 25 years and
has also taken over the family business as a proprietor. His children are in the
verge of completing their education. The family has managed to provide higher
education for the children which RMD and his wife could not have even dreamt
earlier. He has a very marginal loan liability which compared to his net worth
is negligible. In this journey he has learnt some valuable financial lessons.
Getting back to RMD’s story, after
he got married, he continued staying in the same place with his parents. In a
couple of year, RMD’s family had grown to himself, his wife and a child. He had
not generated enough corpus / savings which he could use as a down payment to
move into a separate house.
It was at this stage in his life
that he consulted us again and started taking our advice more seriously.
His top priority was moving into
a separate house with his small family. And he was sure that with his
background, his earnings and net worth at that point of time and family
pressures he would not be able to do it. So, the first issue which we had to
tackle was to show him that it was possible. We knew he was frugal in his
spending, so building a small corpus should not be a problem for RMD. What he
lacked was conviction that he could do it. A simple back of the envelope
calculation gave him confidence that there is no harm in giving it a try.
With what he had already saved, RMD built up a small corpus in the next 2 years as a down payment for an apartment. His regular Income Tax Returns helped him get a home loan for the balance amount. RMD signed the agreement and moved into his new apartment with a pride which only a first-time home buyer can experience. No prizes for guessing that we were one of the first invitees for the traditional pooja in RMD’s new house! Sometimes RMD had to struggle to pay the EMIs, but somehow, he managed to do that without spoiling his credit history. Business was going on, nothing great to mention. The regular business income was now comfortably taking care of the EMIs over and above the routine house hold expenses. RMD had now learnt his first financial lesson (i) If you have a proper plan, and adhere to it in a disciplined manner, attaining your goals become easier in life.
At this stage we started
noticing that during his visits to our office he would invariably bring along
his wife, who would get involved in the discussions.
When the occasional topic of pre
paying part of the home loan cropped up, the family chose to earmark that for
the children’s education. The family apartment in which RMD was born and where
he spent a major part of his life was eventually sold and RMD got a share of
the proceeds. This helped him to pay off the home loan fully and he was left
with a small surplus.
So far, a substantial portion of
regular income was being used to service the loan. Now with the small surplus
from his share of sale of family property and the additional monthly income
which was hitherto being used to repay EMI, RMD suddenly had a sizeable surplus
which his family was experiencing for the first time. And with money you get
many relatives who approach you with their fantastic money multiplying ideas. A
relative convinced him to buy a commercial property and form a partnership business.
After 7 years in the partnership business RMD realised that this business has not provided him
the return which he was expecting. We showed him another simple calculation of
what he could have earned (conservatively) if he had given the property on rent.
He weighed the matter in his mind carefully and did not waste much time in
dissolving the partnership. He had learnt two more valuable financial lessons (ii) do not
dabble in things which you do not understand and (iii) Consult a financial
advisor before taking any major financial decision.
It seems he is taking these
lessons very seriously now! Having dissolved the partnership firm and having
decided to put up the property for rent, RMD has identified a tenant and fixed
the terms of tenancy. And the reason RMD had called today morning was to check
how to deploy the Deposit the tenant was to give him for taking the premises on
rent.
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