How This IIT Professor Got Financially Free in His 40s?

Summary

In this insightful video, Pabi Raman, a physics professor and personal finance educator, shares his journey towards financial independence achieved in 2018. He candidly discusses the challenges he faced, including an early period of negative returns in his investment portfolio. Raman emphasizes the importance of patience in equity markets and the significance of investing consistently, like 'your assets are on fire'. He also touches on various financial topics such as retirement planning, the impact of inflation on lifestyle, the decision-making process around buying a house, and having children. His advice for aspiring financially independent individuals is to focus on time and amount invested rather than returns, highlighting the 'cost of delay' in retirement planning. Raman's story is a testament to the power of steady, methodical financial planning.

Takeaways

• 📈 The speaker emphasizes the importance of investing early and consistently for financial independence, highlighting that patience is key in the equity market.
• 🔢 The transcript details the creation of a retirement calculator to determine the target corpus and required monthly investment, considering current expenses and inflation.
• 🏠 The discussion suggests that buying a house should be an emotional yet calculated decision, recommending doing so in early 30s after establishing an investing habit.
• 👶 The topic of having children is addressed, with a recommendation that financial planning should be considered, especially when contemplating a second child.
• 💰 The interviewee shares his personal financial journey, including the challenges faced with health issues and the motivation behind starting his financial literacy website.
• 📉 The speaker admits to an initial lack of success in his investment portfolio, being in the red for the first five years, which underscores the necessity of staying invested through market fluctuations.
• 🏢 The interviewee, a physics professor, has contributed significantly to financial literacy in India, with his work being recognized even by the government.
• 🚫 A humorous moment is shared where the speaker asks to cut out a phrase that may not be proper, showing a lighter side to the discussion on personal finance.
• 💡 The importance of not scaling down lifestyle in retirement is mentioned, suggesting that the goal is to maintain the same level of spending before retirement.
• 📚 The speaker's educational background in physics and his passion for science are shared, providing context to his journey into personal finance and financial independence.
• 🤔 The transcript raises questions about the FIRE (Financial Independence, Retire Early) movement, suggesting that not everyone has a clear plan for what they will do after retiring early.

Q & A

What is the main topic discussed in the video script?

The main topic discussed in the video script is financial independence and the journey of achieving it, as well as the importance of personal finance management.

Who is the person sharing their financial independence journey in the script?

The person sharing their financial independence journey in the script is Pabi Raman, also known as Puu, a physics professor who teaches personal finance.

What was the initial driving factor behind Puu starting to educate others about personal finance?

The initial driving factor behind Puu starting to educate others about personal finance was an autoimmune condition called myia gravis, which left him unable to work for almost two years.

What personal experience led Puu to realize the importance of financial planning?

Puu's father fell sick with a rare form of blood cancer called multiple Myoma without insurance, leading to a significant medical bill that Puu had to manage, which made him realize the importance of financial planning.

What is the significance of the term 'SIP' in the context of Puu's financial journey?

SIP stands for Systematic Investment Plan, which is significant in Puu's financial journey as it represents his strategy of investing a fixed amount regularly in mutual funds to build wealth over time.

Why did Puu's portfolio initially show a loss according to the script?

Puu's portfolio initially showed a loss because for the first five years from June 2008 to late 2013, the returns were zero, indicating that the market was not favorable during that period.

What is the importance of patience in the equity market according to Puu's experience?

According to Puu's experience, patience is important in the equity market because there can be periods of poor performance, but staying invested can lead to significant gains when the market eventually rises.

What are the two main requirements of Puu's retirement calculator?

The two main requirements of Puu's retirement calculator are to determine the target corpus (the total amount needed for retirement) and the investment amount required to achieve that target corpus.

What is the recommended investment strategy for someone aiming for early retirement according to Puu?

According to Puu, someone aiming for early retirement should aim to invest two to three times their monthly expenses, emphasizing the importance of aggressive investing to achieve early financial independence.

What advice does Puu give regarding buying a house and its impact on retirement planning?

Puu advises that buying a house should be an emotional decision but also recommends doing it in early 30s after establishing an investing habit, ensuring that a significant portion of income still goes towards savings and investments.

What is Puu's perspective on having children and its relation to financial planning?

Puu believes that while the decision to have the first child doesn't need excessive financial worry, the decision to have a second child can involve financial considerations, ensuring that there is enough income to support all children equally.

How does Puu suggest managing lifestyle inflation when salary increases?

Puu suggests being conscious about managing lifestyle inflation, having a financially compatible partner, and maintaining a frugal mindset to ensure that increased expenses do not derail financial independence plans.

What are the primary investment instruments in Puu's portfolio?

The primary investment instruments in Puu's portfolio are NPS (National Pension System) and mutual funds, with some exposure to PPF (Public Provident Fund) and a small stock portfolio.

What is the key advice Puu gives to people aspiring to achieve financial independence?

Puu's key advice is to focus on the time and amount invested rather than just the returns, emphasizing the importance of starting early, investing consistently, and controlling expenses to build wealth in a 'boring' but effective way.

What is the 'cost of delay' in retirement planning and how does it impact financial planning?

The 'cost of delay' in retirement planning refers to the increased amount that needs to be invested each month if one delays their retirement plan. It grows at a rate higher than inflation, making it more expensive and emphasizing the importance of starting retirement planning early.

What mistake does Puu consider he made in his financial planning?

Puu does not mention any specific 'worst' mistake in his financial planning. Instead, he emphasizes making normal, moderate, and average decisions, focusing on consistent investing and managing expenses.

Outlines

00:00

📈 Journey to Financial Independence: Puu's Story

This paragraph introduces Puu, a physics professor at IIT Madras, who is also a personal finance educator. Puu shares his own experience of achieving financial independence by 2018. Initially, he had no knowledge of finance but was propelled into financial literacy after his father fell ill with multiple myoma, a rare form of blood cancer, and faced high medical bills without insurance. Puu's journey began with a mutual fund SIP (Systematic Investment Plan) of 1,500 rupees in June 2008, despite a negative portfolio for the first five years. However, by late 2013, the market upturn led to significant gains, teaching him the importance of patience in equity markets. Puu emphasizes the value of investing consistently and the power of staying invested through market fluctuations.

05:01

💡 The Importance of Financial Planning and FIRE Movement

In this paragraph, Puu discusses the FIRE (Financial Independence, Retire Early) movement and the importance of having a plan for life after retirement. He suggests aiming for financial independence and normal retirement rather than early retirement without a clear plan. Puu advises investing 75% of one's monthly expenses for those planning for normal retirement and two to three times the monthly expenses for those considering early retirement. He also touches on the emotional aspects of buying a house and the financial considerations that should be made, recommending that it should be done in early 30s after establishing an investing habit. Puu also shares his thoughts on having children and the financial planning that should go into such a decision.

10:02

🏡 Balancing Lifestyle and Financial Independence

Puu talks about the challenges of maintaining a balance between lifestyle inflation and financial planning for independence. He shares his experience with his wife, who also has a frugal mindset, and how they decided to invest rather than spend on unnecessary luxuries. Puu explains that every financial decision, such as buying a house or an expensive car, will have future implications, and it's important to manage money like a water-filled balloon, where pressure at one point will cause a bulge somewhere else. He advises managing expenses carefully and investing consistently, with a focus on mutual funds, NPS (National Pension System), and gradually building a stock portfolio.

15:03

🚫 Avoiding Financial Pitfalls and the Power of Consistency

Puu emphasizes that he has not made any spectacular investment decisions but has built wealth through consistent and moderate choices. He advises aspiring financial independence seekers to focus on the time and amount of their investments rather than just the returns, as the latter is not directly controllable. Puu introduces the concept of a 'cost of delay' calculator, which shows that delaying retirement planning significantly increases the required monthly investment. He concludes by stating that there is no need for extraordinary financial strategies and that wealth can be built through a boring and consistent approach to investing.

🌟 Inviting Financial Journeys for the Channel

The final paragraph is an invitation for viewers to share their financial journeys with the channel. It encourages those who have interesting stories of financial planning or independence to fill out a form provided in the pinned comment below, with the promise that the channel will get in touch for potential inclusion in their storytelling.

Keywords

💡Financial Independence

Financial Independence refers to a state where one has enough savings, investments, or passive income to cover their living expenses without the need for active employment. In the video, the theme revolves around achieving this state of financial autonomy. The concept is exemplified by the speaker's own journey and advice on how to plan for it, emphasizing the importance of investing and saving to reach a point where one is not financially reliant on a job.

💡Early Retirement

Early Retirement is the concept of leaving the workforce and ceasing active employment at an age earlier than the typical retirement age. The video discusses the growing popularity of early retirement, often associated with the FIRE (Financial Independence, Retire Early) movement. The speaker shares insights on the importance of having a plan post-retirement and not just focusing on the financial aspect of retiring early.

💡Portfolio

A portfolio in the context of personal finance refers to a collection of financial assets such as stocks, bonds, mutual funds, and other investments. The video mentions the speaker's experience with his investment portfolio, which initially faced losses but eventually saw significant gains, illustrating the importance of patience and staying invested in the market.

💡Investing

Investing involves allocating resources, such as money, with the expectation of generating an income or profit. The video emphasizes investing as a key component of achieving financial independence, with the speaker sharing his personal investment journey and the importance of consistent investing despite market fluctuations.

💡Inflation

Inflation is the rate at which the general level of prices for goods and services is rising, and subsequently, the purchasing power of currency is falling. In the video, the speaker discusses the importance of considering inflation when planning for retirement, as it affects the future value of money and the corpus required for financial independence.

💡SIP (Systematic Investment Plan)

A Systematic Investment Plan (SIP) is a financial tool that allows investors to invest in mutual funds periodically, rather than in a lump sum. The video mentions the speaker's SIP journey with mutual funds, which started with a small investment and grew over time, highlighting the power of regular investing.

💡Retirement Planning

Retirement Planning is the process of anticipating and preparing for all aspects of life after retirement, including financial planning, health, and lifestyle choices. The video's speaker discusses his approach to retirement planning, including calculating the target corpus and the investment amount required to achieve it.

💡Corpus

In the context of retirement planning, the corpus refers to the total amount of money one needs to have saved or invested to maintain a certain lifestyle after retirement. The video explains how to calculate the target corpus by considering current expenses, inflation, and desired lifestyle during retirement.

💡Financial Literacy

Financial Literacy is the knowledge and understanding of financial matters, including how to effectively manage personal wealth. The video mentions the speaker's significant contribution to financial literacy in India through his website, freefinal, which aims to educate investors and help them achieve their financial goals.

💡Compounding

Compounding refers to the process where interest or returns are earned not only on the initial investment but also on the accumulated earnings of previous periods. The video touches on the concept of compounding as a powerful tool for building wealth over time, especially when combined with consistent investing.

💡Cost of Delay

The Cost of Delay is the additional amount or effort required if one postpones taking action, such as investing or planning for retirement. The video discusses the concept through a retirement calculator, illustrating how delaying retirement planning can significantly increase the amount one needs to invest each month to achieve the same financial goals.

Highlights

The importance of financial literacy and planning for early retirement is emphasized.

Puu, a physics professor, shares his journey to financial independence in 2018.

The impact of an autoimmune condition on starting a financial blog and helping others.

The significance of understanding and planning for inflation in retirement planning.

The importance of staying invested during market downturns for long-term gains.

How to calculate the target corpus and investment amount required for retirement.

The role of essential expenses and lifestyle inflation in financial planning.

The advice on aiming for financial independence before considering early retirement.

The recommendation to invest a significant portion of monthly expenses for those planning for early retirement.

The emotional aspects of buying a house and the financial considerations involved.

The financial planning considerations before deciding to expand a family.

The impact of salary increases on lifestyle and the importance of controlling expenses.

The strategy of managing money as a water-filled balloon, emphasizing the interconnectedness of financial decisions.

The inclusion of NPS, mutual funds, and stocks in Puu's portfolio and the rationale behind it.

The advice for aspiring financial independence, emphasizing the power of consistent investing over time and amount.

The cost of delay in retirement planning and its impact on required monthly investments.

Puu's approach to financial decisions, advocating for a 'boring' method of wealth building through consistent investing.

Transcripts

today as you know fire has become a very

popular World many of them are actually

talking about early retirement because

they're unhappy with their jobs what is

the worst mistake youve ever made for

the first 5 years my portfolio was red

late 2013 early 2014 the market went up

from one day to the next the gain in the

portfolio was much more than the amount

I was investing each month I I usually

say invest like your asses on fire but

I'm not sure if it's proper you can cut

that out

[Music]

this is puu a physics Professor who

teaches personal finance his calculators

and blogs have helped thousands of

Indians achieve their financial goals

but today he tells us his own journey of

achieving Financial Independence in 2018

and how he planned for it so I'm known

today by most people as puu okay but my

full name is Pabi Raman I'm a faculty in

the physics department at IID Madras

okay I was born in Chennai and I have

spent most of my life in an area of

Chennai called my Laur all I ever wanted

to do as a child was to dream about uh

maybe writing or astronomy or things

about science and so on so that has been

my uh goal in life okay to some extent

I've achieved my dream I think sir uh

many of our viewers may or may not know

about this uh but then you have been a

very significant contributor to

financial literacy in India to the point

that even s has recognized your work it

will be really helpful if you can talk

about uh your website free final and why

did you decide to educate investors

through your learnings free final

started uh because of an autoimmune

condition called myia gravis okay I was

detected with it in uh September 2012

okay and uh I was not able to do any

work for almost 2 years I needed

something to know get me up and go

running slowly when I started writing

articles more and more DIY investor

started to like it and I realized that

there is an actual demand for such a

thing and one thing led to another and

uh that uh helped me forget my

conditions and I was able to you know

become a little more focused in at work

as well as in my hobby the first time

the actual phrase retirement planning

entered my head was I would say 2009 or

so I think I should give you a little

bit of a background about why I started

I was a head in the clouds academic I

knew nothing about finance and I knew

nothing about household management a few

days after I got my first 10y salary my

father fell sick and soon we recognized

that it was a rare form of blood cancer

called multiple Myoma okay and uh he was

hospitalized without insurance and

within a few days the bill went to a

lack okay and I had no money and uh so

thankfully my brother-in-law you know uh

came to my rescue and he said I'll give

you uh the money you don't have to give

me any interest or something pay be back

when you can and I had to go back to him

again and I had to go back to him one

more time so it totaled to about almost

three lakhs in a very very short span of

time that is when I started realizing

that that should never happen to me

again and then I started reading

articles on the internet and one of the

very early personal finance blogs that

did very well with Jago investor that

was where again and again that word

inflation came in and once I realized

that inflation is the key to beat I

started my sip Journey my mutual fund

sip Journey with 1,500 bucks

for the first 5 years from June 2008 to

late 2013 uh my portfolio was red it was

the returns were zero one part of me

said I was doing something very wrong

but the other part of me which kept know

me stay invested was that look I should

not be in the situation of debt again

late 2013 early 2014 the market went up

from one day to the next the gain in the

portfolio was much more than the amount

I was investing each

so that was happening for a few days and

a few months and it kept going it taught

me that if you want

to win in the equity Market you have to

be patient there will be a lot of poor

months lot of drought then suddenly it

will rain a lot but if you want to be

there in the right place at the right

time when it rains a lot you need to

stay through that stay invested through

the Dr uh so sir you mentioned about the

calculator so can you just explain to us

more in detail how you build that

calculator what were the components you

uh took into consideration while

building that calculator so as you know

U retirement calculator has got uh two

you know requirements that is the

outputs one you should tell us what is

the Target Corpus okay and two it should

tell us what is the investment amount

required for the Target car so to First

calculate the target carpus you should

know what your expenses are your current

expenses are right you don't have to

take into account the tution fees that

you pay for your children because by the

time you they're going to be you know

working on their own so and they're

independent they will be they don't they

not going to be depending on you only

the B essential expenses for example

groceries uh mobile charging cable

internet those are the essentials that

you're going to stay with you throughout

your life and that number should be

evaluated every year okay because one

year uh to another there will be

differences in your lifestyle positive

as well as negative correct suddenly

people buy cars suddenly people will

scale up their mobile phones you don't

want to scale down later on right the

goal of retirement planning is to

maintain that level before you make a

big spend just think okay a little bit

so first is to refine the expenses and

then is to Define an inflation amount

what is your current inflation many

people make the mistake of assuming that

the inflation is the same as reported by

the government okay right 4% 5% 6% but

if you actually look at your lifestyle

over the past 5 years or 10 years your

lifestyle inflation would be close to I

would say 8% to 10% and of course they

will slow down a little bit in the you

know after retirement but at least until

retirement the expenses will increase at

that uh at least at 7% I would say is a

reasonable uh you know input using those

assumptions you find out what is the

Corpus required okay and for that Corpus

required you assume some return and then

find out what is the monthly investment

required the moment you recognize the

right asset classes you have to start

investing and invest invest invest

I I usually say invest like your ass is

on fire but I'm not sure if it's proper

you can cut that out but you have to

invest like that apart from retirement

planning did you fix a time that Beyond

this I don't want to work and I want to

be financially independent I would say

I'm extremely lucky to be working where

I'm working okay so I have never thought

about early retirement or even

retirement but that's an interesting

question you ask and I would like to um

give you a take my opinion on that today

as you know fire has become a very

popular world yeah I would say many of

them are actually talking about early

retirement because they're unhappy with

their jobs they're frustrated with their

work life balance and they're working

too hard they're not able to enjoy life

or they're they know they're tired and

they want to get rid of that but do they

really have a plan of what they want to

do after they retire I would say not

many have I would recommend first uh aim

for financial Independence and normal

retirement okay that is enough and have

a balance between your spending and

investing because there are certain

things that you can do only when you're

young so as a Thum rule I would say that

somebody who is planning for normal

retirement normal retirement today is 55

okay or maybe even 50 so somebody aiming

for normal retirement should aim to

invest

75% of their monthly expenses but

somebody who wants early retirement

should aim for two times to three times

a month expense that's not always

possible we see lot of debates and lot

of uh people coming on YouTube and

saying that buying a house is not

necessary it's it's more like uh it

should not be done right what are your

thoughts about it so this is a very

subjective thing and it depends on a

person's experience I'm not as emotional

about buying a property as many other

people are many other people I know are

they've always lived in rent and they

faced terrible land loss who middle of

the night they'll come and say you have

to you know get out of the house as soon

as possible next week and so on they'll

keep moving from place to place so then

they become very emotional about having

their own roof absolutely fine you have

to be emotional about it I'm just saying

be also emotional about your retirement

and I would recommend people to do it in

their early 30s they want to buy a house

dude in their early 30s not in the uh

early 20s or late even late 20s that is

the time for you to get into the

investing habit once you get into the

investing habit then you can afford like

you rightly said 30 % of take home 35%

of take home is absolutely fine but make

sure that another 30% goes to investing

also savings and investing as well like

you rightly pointed out buying a home is

definitely one of the emotional decision

decisions we take in life right but then

similar to buying a house another

emotional decision which is there in

life is uh is is having a child right

what do you think that how much

financial planning should play a role

before a couple decides to you know

expand the family well this is a very

difficult question is also a dangerous

question to answer definitely you don't

need to worry too much about having the

first child and I think uh I've realized

that our elders were right our elders

used to say get the first child as early

as possible I've come to realize now

after making this mistake because my son

was born 8 years after marriage for me

should you have the second child or not

is a very D dangerous uh you know

subject to brooch but that's where

probably the finances will come into

play and I think you should have the

right level of income to you know

support the second child as well because

you can't say I I will only you know uh

fund my first child's uh postgraduate

and uh education and not the second

child's and so on that kind of decisions

can't be made one more thing which I

want to understand is a lot many times

you see when the salary increases people

also increase try and increase their

lifestyle or end up adding uh more

expenses do you personally take care of

it that such expenses do not not come

into play when you're planning your uh

Financial Independence how do you

control those expenses so I was quite

conscious about it in the early years

and uh having a partner who is

financially compatible with you and who

also thinks the same way also makes a

big difference so once uh I asked my

wife if I give you 10 lakhs what will

you do with it she thought for it for 10

minutes thought about it for 10 minutes

and he said I don't know I have no idea

I said can't can't you think of one

place where you will spend 10 lakhs I

said no and she said what will you do

and I also thought for a long time and

uh I also couldn't think of something

that I you know uh I would spend it on

okay so and said I'll just invest it so

that is the kind of we had a Frugal

mindset match right of course I'm not

saying everybody should be frugal

because frugality is not something that

you can teach people either you have it

or you don't what I like to say is that

okay if you want to live it up and uh

enjoy life then tell yourself uh how is

it going to impact your future okay uh

often I think of our manage our uh money

management as a water fi balloon so if

you take a water field balloon and press

it in one point it will bulge at some

other point right we are going to press

but the Bulge may be behind us we should

go around and see where the Bulge is so

the every uh you know decision we make

today whether it is to buy a house or an

expensive car or an expensive phone it

will have some impact down the line and

till date uh do you only explore uh

mutual fund and the the regular NPS

investment or have you also started

exploring other instruments for your

portfolio NPS and mutual funds are the

primary uh weights in the portfolio I

also have a little bit of ppf exposure

okay and uh in the last few years I've

also started building a small uh stock

uh portfolio sir there are a lot of

people who are aspiring to Achieve

Financial Independence and as early as

possible what is your advice to them

there are many people who believe that

Building Wealth you know the people talk

about magic of compounding and so on

many people believe that uh returns play

a big role in it yes of course naturally

a higher return will give you you know

better wealth but return is not

something that you can directly control

but what you can control is the time

over which you invest okay and what is

even more important is the actual amount

you invest so one thing I found out

early is that when I was making my

retirement calculators I made what is

known as a cost of delay calculator if

you delay your retirement by let's say

one year or two year or three year and

for every year of delay the amount that

you need to invest will grow at a rate

of 12% to 14% so the cost of delay is

increasing at a rate higher than

inflation so let's take an example of

this cost of delay calculator and let's

assume a person is 35 and wants to

retire at the age of 60 okay and uh

expects to live about uh 80 up to 80 so

let's assume that the current monthly

expenses average expenses is per month

is about 40,000 and if you assume the

inflation is 7% so the total Corpus

would be about 4.8 crores if they start

right away uh there's a very

manageable

36,700 so it's just below the uh annual

monthly expenses you expect you assume

40,000 and the investment required is

about 36,700 if you delay this by 5

years it will shoot up to uh 63,000 oh

so that's like 11.4% increase year on

year right so that's what I meant uh by

uh cost of delay is much more expensive

than inflation itself the inflation exp

increases your expenses right but the

cost of delay would increase your

monthly investment required at a much

much greater rate and therefore it's

much more deadly which why you have to

start planning right what is probably

the worst mistake you've ever made while

planning your finances in which you

would suggest everyone to take care of

I'm afraid I don't have an interesting

answer for that because I have not made

any spectacular investment decisions nor

have I made any worst or abysmal

investment decisions things have been

more or less know normal or moderate

average kind of decisions for me which

is what I like to emphasize to everybody

that it's absolutely possible to build

wealth in a boring way you don't need to

you know run around trading buy this and

that and just do normal things focus on

your income and keep your expenses low

and invest like a machine you're there

and consistently consistently thank you

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