The Rise of the Indian Middle Class

Since the beginning of college, my mother used to urge me to save a certain amount of money from my monthly allowance, and put it away either in the bank or make a recurring deposit for it. Now since I was an average engineering student, I did not have much interest in learning about Fluid Mechanics or the Strength of Materials. Instead, I spent time on various portals applying for internships in the business domain, because the concept of money always fascinated me. Coming from a background where your father is an IITian, and your mother a science teacher, it’s hard to understand where your passion lies in school. Your top priority is always everything apart from studies, well at least in my case. I was too busy running around the school, bunking classes to play football. Naturally, I had to pick subjects that would land me a good engineering college, and at the time I didn’t pay heed to what I was passionate about. I assumed my parents' passion is my passion, which in a way turned out to be a great learning opportunity for me.

I worked a couple of internships during college to earn some extra pocket money, during that phase of my life, I understood the need for money quite well. But what I did not understand, is how to make money with money. More on this later.

We Indians have a strong penchant for saving money, the world perceives us as thrifty, and frugal with our money. Which is one of the strongest foundational principles that our parents have taught us about money, but what was lacking from this was a complete understanding of financial literacy. India is one of the highest-taxed economies in the world, the amount of various taxes we pay is beyond biblical in proportion to other developing nations. But I am not here to rant on the tax policies, instead, I am here to help you understand it better so that we can better manage our own money.

We are emotional spenders, if that is not the case, just take a look at your Amazon cart purchases in the last 6 months and ask yourself the following questions. Did I absolutely need this product in my life? Does this product have any intrinsic value, apart from the brand name? Could I have searched for an alternative that would cost lesser?
If these questions raise any red flags in your mind, then you probably could have done away with those purchases. But I am not here to nag you about how to spend your money, you have worked hard for it, why shouldn’t you spend it on things you like? The answer is really simple, we have a discipline for food, we have a discipline for health, we have a discipline for productivity, but we don’t have a discipline for money. It was never taught at school, no one tells you how to file your taxes, understand what investments are or what passive income means. These are the things you often learn when you’re on your own, and you dread the last few days of the month because your salary is exhausted, and then we take on debt to manage our daily expenses. Money discipline is exactly like any other discipline, you have a plan, you have a short term and long term goal, you measure your success at certain time intervals. This is why I like the 30–30–30–10 rule. 30% of your income goes into monthly expenses, 30% for liabilities such as home loans, personal loans etc, 30% investments and 10% for personal expenditure. Now, this is something that sounds great in theory, but the hardest thing to follow since we are such emotional spenders. This is where your discipline comes into action, from theory to reality. Even if you start with 10% in the initial stage and gradually increase the percentage, you would be able to create a discipline that would serve as a strong foundation for your future.

Now let’s talk about how to rightly invest this x% of income. The notoriously famous Fixed Deposit in India, might not be the best option, and here’s why. The current rate of inflation in India as of September 2021 is 6.16%, and if we talk about the return on FD’s, even the best banks are providing anything between 5–6%. Now, this is a huge red flag, if you intend to save and earn interest on it through, let’s say 1CR in the next 10–15 years, at the current rate of inflation that 1CR will be worth 40 lakhs of money. This is what most of us miss, and we can draw a clear parallel with what’s happening in the US right now. The US has always been an economic superpower since the beginning of the 17th century, and the rate of inflation over the last 15 years has constantly been capped under 2%, which is phenomenal! Things changed tremendously after the pandemic, no government was ready for such a catastrophic event that would change everything, and render the world an absolute halt. The finance market toppled, and people started panic selling all digital assets to keep money handy for difficult circumstances. In order to keep the economic engine running, the US took on a huge debt, similar to their strategy for the Housing Market collapse in 2008. Now, we keep saying the world is in debt, but who do we owe the money to, and who will pay it? Guess what, it is the citizens that end up bearing the brunt. Inflation meteorically rises, to put it in simple terms, if you could afford to buy 5 apples with Rs. 100 in 2019, the same in 2021 will only fetch you 4 apples, even though you end up paying the complete Rs.100. Scary, right? Now imagine a world where inflation keeps increasing, and more money is printed and fed into the system by the government, how do you think this would play out?

How do we counter this problem? It’s easier said than done because managing your money is one of the toughest disciplines to master, but each incremental step compounds magically. I will attach a video that helped me understand the fundamental application of compounding, one of the finest digital mentors I follow religiously, Mr Ankur Warikoo
https://www.youtube.com/watch?v=cosjtcWyWlI

The first step here is to identify what your personal expenditure is. This does not need to be a complicated excel sheet that might overwhelm you, but a basic input table based on two key metrics — Income, and Expenditure. Now Expenditure could be bifurcated into two sub-channels for clarity, Liabilities and Expenses. Liabilities are what you owe any third party, a bank, a lender, and debt that you are carrying. Expenses are things you routinely spend your money on, could be shopping, fuel for transport, eating out. Once this basic table is ready, you will understand the flow of your money better, Through this exercise, you would be able to single out the expenses that could be directly moved to the investment bucket, which is an addition to your asset column.

Now, identifying the right investment opportunities is something that requires studying and understanding the flow of money into the economy. You don’t need to be an economist to invest, but the more informed you are, the more you read and learn about it, the more opportunities you are likely to find to get the best possible ROI (Return on Investment). The easiest way is to invest in a passive mutual fund. Here, you are betting on the economy of the country, through an index fund. You are betting on the rise of the economy, and hence the growth of your money will directly be proportional to the growth of the economy. Two key metrics that you need to be mindful of while investing in mutual funds are Expense Ratio and Exit Load. These are the charges levied by the AMC (Asset Management Company) in order to grow your funds. With an index fund, these two expenses become relatively lower as compared to an actively managed mutual fund, which would have more data analysts involved, as they would try to beat the economy with the returns. In the long term perspective, if we have to compare the two funds, passively managed funds would be an easier bet to win, as you are bullish on the economy growing, rather than a set of companies managed by a portfolio manager. Attaching a reference video here for a more in-depth understanding of passively managed mutual funds by another great digital mentor I follow, Mr Akshat Shrivastava.
https://www.youtube.com/watch?v=CN8PwGi_Spw

It seems like a lot of work, it might seem a mountainous task at first, but trust me this will help you understand the fundamentals of your habits. I am currently reading Atomic Habits by James Clear, in his book he has beautifully explained how our brain is programmable, it all boils down to the cues we get in life, and how we choose to respond to them. Decision making is a life skill that will always serve you well, be it professionally or personally. It can help you navigate through your life with a defined purpose, and enjoy the routine that navigates you. More on that, in the next article. I hope I have been able to do justice to the time that you have taken out for me to read this piece, I would love to hear your feedback on it and progressively get better at writing, and also create a good habit out of this :)

Until the next time, please take care and stay safe.