I recently read the book “Make Epic Money” by Ankur Warikoo. It’s a great book if you’re getting started with finance books.
The book covers almost all the basics of personal finance but the book is focused more towards things and options related to India and the Indian market. Well, irrespective of that anyone can read the book till the time you get the intent of the author.
Chapter-1 (Why should I even care about money)
Ankur Warikoo starts by explaining how money came into existence by ending the barter system and what money can get us up to a certain extent given we use that money towards it wisely:
- Peace of mind
- Health
- Quality Food
- Safety
- Comfort
- Options
- Courage
- Experiences
- Freedom
Well, what he wants to tell you is that money is not the goal; it is the cheat code to freedom and living the life you want.
“The true purpose of money is NOT to help us buy things. The true purpose of money is to grant us freedom-over our time, our choices and the way we lead our lives.”
Chapter 2 (Now I really want to earn some money)
Ankur challenges the notion that one job is enough or that your salary can make you wealthy. He says that “your job can help you maintain your living standard and earn a living but can’t make you wealthy.”
Wealth can be generated when one pivots from active income to passive income or maintains passive income while earning active income.
Here are a few basic mistakes we make due to a lack of financial knowledge that keep us far from being wealthy:
- No safety net- Not keeping emergency funds or liquid money
- Spending more than we earn or spending the money that we haven’t even earned yet
- Drowning in loans- Interest rates would create a mountain of debts for you
- Playing too safe- Keeping your money in a savings bank account rather than investing.
- No future planning- Having no financial goal and trying to be wealthy is like wanting to win a race but not wanting to create a fitness routine.
- Getting Greedy- Investing in quick rich schemes or easy gain games majorly turns as we don’t want it to turn, which causes financial losses.
Further, in the book Make Epic Money, the author explains how passive incomes give you freedom and get you out of the barter system of giving your hours for money.
Passive income has multiple benefits:
- It may be difficult initially, but once it starts rolling, then it can give you the same results with minimum effort.
- You can earn money even when you’re sleeping and need not rely on anyone. It is a self-sustaining income stream.
Ankur mentioned earlier that he had the mindset that success is limited, like the water in the pool. If one has become successful, the chances of getting anyone else decrease.
But later in life, with experience, he realised it is an ocean, so success and wealth are not inversely proportional to the number of successful or wealthy people.
“Professional degrees help you earn a living. Financial literacy helps you build wealth.”
Chapter-3 (So that I can spend it Wisely)
The chapter starts with the author explaining the 50-30-20 rule. So, in case you’re not familiar with the rule. It says:
- Need- You spend 50% of your salary against your basic essential needs like rent, EMIs, food
- Wants- You spend 30% of your salary towards your wants, like the things you desire or your wants can be shopping or buying a new phone
- Savings- You spend 20% of your salary towards your savings
Senator Elizabeth Warren created this rule, but here’s an addition to this by the author:
- Whenever you get a raise or increment, instead of again dividing it by 50-30-20, go 20-30-50 (Need, Wants and Savings)
- This is because your needs are not going to increase by 50%. There would be inflation, but definitely, it won’t spike the needs by 50%; rather, the bigger chunk will go towards saving.
- Adopting this strategy would help you accumulate more savings and would be a great step towards your financial freedom.
Next, he explained that people usually think that buying a home is an asset, but it is actually a liability. He has attached a fantastic Excel sheet with the calculations.
I did the calculation, and it made sense to me that it is better to rent a house over a tenure of 20 years, where you invest the downpayment amount of the property. Renting would do two things:
- If you stay on a rented property in your 20s, you will have more freedom and flexibility when shifting to a new city or country.
- By the end of 20 years, you would have more money than when you purchased a real estate property.
“Tret your credit card like a cool debit card. Swipe it only when you’ve got the cash ready to go.
Or when you’re sure you’ll have it next month.”
Chapter 4 (But people tell me I should save)
Saving ain’t cool, obviously, in the early years of your career, no one wants to start saving because you have a lot of time for it.
Right now is the time to enjoy and spend money. Definitely, you should spend money but there’s no harm in planning and then spending it wisely.
Create your goals: Short, mid and long term goals because without goals you won’t have an aim and you won’t even know how much to save for each goal.
Pen down your goals for next year, 3years and 5years and allocate the money required for each one of them.
Here are bonus tips that might help you to further save more:
- Budget: Stick to 50-30-20 rule and save 20% every month
- Automate your savings: Opt for auto deductions like SIP or go with EPF deductions so that you don’t get an option to interrupt it.
- 30-day rule: If you really want to purchase something expensive, wait for 30 days. Chances are you won’t need it after 30 days and still if you want to then you may purchase it.
- Try a fortnightly money ‘fast’: Try to bring your expenses to 0 for 14 days, that would teach you how to look for better and cheaper alternatives when in need. On top of that it would save you a lot.
- Choose Debit Cards over Credit Cards: Banks have created this illusion in the world that even a credit card is your money, but no your money is the only money you’ve in your debit card/in your account.
- Rent over purchasing: Rent out things that are expensive and you rarely use. Like a professional camera if you need it just for clicking images on a trip so rent a camera rather than purchasing it.
- Create a list: Whenever you’re out to purchase something ensure you have a list because then you would stick around it.
- Buy bigger sizes: Choose bigger packets over small ones because bigger ones usually cost less making it an ideal deal for you.
- Pay off loans: Always try to pay an extra EMI/per year (in case of long-tenure loans) and increase the EMI by 10% each year this would help you save 60% on your interest.
“If you don’t build the habit of saving while your salary is small, you’ll never be able to save when you begin to earn more.”
Chapter-5 (And use the money to protect me)
This chapter revolves around how to get started with insurance and with basic things to remember at the time of purchase.
Ankur Warikoo suggests everyone to have:
- Health insurance
- Life insurance
- Emergency fund.
Health Insurance:
- The author suggests purchasing it at an early age because you would get higher coverage at a cheaper price.
- At a younger age, the chances of the insurance getting rejected are low.
- Insurance companies incentivize you if you don’t apply for a claim and the probability of you applying at a younger age would be less.
- Take coverage considering 10 days of hospitalization/year, assuming a 25k/day rate in a hospital (25k*10=2,50,000) and if considering for parents so consider 20-30 days of hospitalization/year (25k*30=7,50,000)
Life Insurance:
- The book suggests taking life insurance as well at an early age as the premium charged would be less.
- This will protect your family, especially if you’re the main bread earner.
- In India, the term/life insurance premium remains the same over time despite inflation, which makes it even cheaper over time.
- When you’re about to purchase get for at least 10 times and ideally 25 times your annual income. (10 lakh/annum comes to 1cr at least and 2.5cr as the ideal amount)
- A few add-ons to consider: Critical illness, disability, premium waiver on critical illness, premium waiver on disability.
Emergency Fund:
- If you’re starting your career in the early 20s you want it to be smooth rather than starting with debt for unexpected expenses.
- Expenses are never-ending and at times unavoidable as well moreover these are the expenses that none of your policies would cover.
- Note down your monthly expenses and then create emergency funds for a minimum of 6 months and create an extra cushion by creating for an year.
These emergency funds would give you the freedom in case you’re willing to switch your career path without panicking about the funds issue when you won’t be earning.
If you get any extra money or cash apart from your regular cash flow add it directly towards emergency funds until you have an year’s backup.
If possible pause your investments for a while or slow them down and create emergency funds.
Chapter 6 (But What I Really Want Is To Grow My Money)
Everyone needs to understand this thing that your job brings financial stability but it doesn’t make you financially independent.
You will become financially independent when your investments and business give you money to manage your needs and necessities rather you unwillingly working for a company in corporate.
“Saving is great, but it’s pointless without investing. The biggest risk is taking no risk.”
He urges everyone to start investing in the early 20s because the earlier you start the more time compounding will happen means the higher value you’ll get.
He explained that just investing 20k as a lump sum for 20 years can give you 14.6lakhs without doing anything assuming you’re getting 10% returns.
Moreover, if you have a low-risk profile diversify your investments, just in case one sector doesn’t perform the other one manages you so you don’t face big losses.
If you are in your early 20s or even late 20s you can go with high-risk investments but as the age passes you can shift from mid-risk to low-risk.
Let’s understand the options we have in each profile to invest:
Low Risk
FD– It is usually considered the safest option by Indians but if we see the stats of recent years it hardly beats the inflation and on top of that you pay taxes on your returns. Henceforth, it decreases the money you invested though it can be a good option for emergency funds but not for investing.
PF: It is further divided into EPF and PPF. Employee Provident Fund is available for the employed population on the other hand anyone can invest with PPF (Public Provident Fund) both let you learn 7.1 to 8% of tax-free interest but the downside is that the amount will be locked for 15 years. Not for NRIs
NPS: National Pension Scheme, matures at the age of 60 making your after-retirement years easy, it has further bifurcations that give you the power to choose how your money can be invested which is lacking in PF.
Gold: The author recommends going for SGB (Sovereign Gold Bonds) over physical gold as they give you interest and SGB is safe given they are backed by the government. On top of it, you can save tax on capital gains if you take money out at the time of maturity (after 8 years).
Medium Risk
Corporate Bonds- They are not volatile as they are not market-linked and you can earn regular payments on set dates. The downside of these bonds is that it can be difficult to track how a company is performing.
A company not performing well can effect you by not releasing your interest on time. Always go for AAA, AA, A and last BBB rating bonds because chances would be less of losing money.
Real Estate- Real estate can give you rental income which can become your passive income plus the value appreciation you would get. But real estate isn’t liquid, to have money you need to go through the process of selling the property.
REITs- A better option available Real Estate Investment Trusts lets you invest money in real estate like a share, you can buy a fraction of a property, which would solve the problem of liquidity.
Mutual Funds- If you don’t have knowledge of the share market but want to invest in it, the best and the safest way is mutual funds because for you a Fund Manager manages the fund and in exchange charges an expense ratio of ideally less than 1%.
High Risks
Stocks- Directly purchasing a part of the company and then selling. It requires good knowledge about the current market trends, knowledge about the company, and the latest news around it which becomes difficult for people who ain’t fully devoted to it. It is a high-risk trading game but one can expect high returns.
Crypto- Coins in crypto can be highly volatile, you might see drastic variations within a day. It is something that is challenging and has given better results than traditional investment options but it is highly volatile.
Chapter 7 (And manage my money well)
“Most people underestimate what they can do in a year, and they massively underestimate what they can accomplish in a decade or two. The fact is: you are not a manager of circumstances, you’re the architect of your life’s experience.”
The author starts the chapter by telling the difference between a rich mindset and a wealthy mindset.
When he got his first job he was earning well so he used to spend like so because of this he couldn’t accumulate the money he could.
On the other hand, if someone starts investing wisely at an early age while managing the finances as per the 50-30-20 rule then they can achieve their goal in way less time.
Ankur has described in detail that depending upon age and your income your approach towards investing and spending should change. I have attached images of a table that describes the approach.
Chapter 8 (I know I’ll make mistakes)
“Nothing in life is to be feared. It’s only to be understood.”
Let’s learn from the mistakes of others because you are not progressing until you make mistakes. Here are a few things one should keep in mind on their journey of finance:
Believing the “Zero-Risk” Lie: There is no circumstance that you would be in a zero-risk situation. Depending upon age you would have higher risk-taking capacity comparatively when you’re in your 30s or 40s or maybe later.
Low-risk investments mean low interest but high-risk investments don’t mean high interest every time.
Short-Term Thinking: People don’t usually think of the future and spend like there is no tomorrow. Live your life to the fullest but be responsible as well. As per the 50-30-20 rule make the fullest of your 30% but not beyond that.
Ignoring Inflation: We do not consider the hidden factor that eats up our money (Inflation) which is unavoidable, and inflation is inevitable.
So, always look for investment options that beat inflation because then even despite investing your money would decrease day by day.
Ignoring Taxes: It depends from country to country but in India you’re taxed on every step, starting from getting your salary to selling your stocks (on capital gains) you are taxed everywhere.
Living beyond your means: This is something that will always keep you hooked to loans and credit cards because spending more than you earn means you’ve to borrow to spend the unearned money. Hence, never spend the money you haven’t earned.
Ego: We don’t realise but we spend a lot on what others might think of us, take a minute and see the expenses you make. Do they bring you joy? And if the answer is “no” then it’s your ego.
Not understanding the dark side of compounding: Compounding sounds great only when we’re getting interest on our investments but not when we’ve to pay on loans. Interest on interest makes a vicious cycle.
Not understanding that most purchases have a hidden cost: While purchasing stuff we don’t realise the extra or hidden costs included with it. If you purchase a car, taxes and car maintenance as well get added to it.
Relying on One Job to Build Your Wealth: In the technology-evolving world, no one’s job is safe because AI might do what you’re doing in the future.
Moreover, even if it’s not the case, your salary can help you maintain a cash flow and maintain a standard of living but can’t help to upgrade it.
Just like investment options try to diversify your income options as well.
Not Creating a Margin of Safety: As mentioned earlier in the book, emergency funds are necessary because no insurance can cover such expenses and it is always good to have some liquid cash otherwise you’ll be forced to take debt.
Believing that if someone gets wealthy, only by taking from someone else: There’s no limit to the number of people who can become wealthy. So, it’s not like the opportunities of becoming rich would be reduced if someone else becomes successful.
Believing that investing is a quick race to riches: Investing is the path to becoming rich but it’ll only make you rich when compounding can show its magic which takes years and years. So, it’s not a quick scheme to riches but definitely the path to becoming wealthy.
Not realizing that the system is designed to keep you poor: The whole financial system and atmosphere of banks have been created in such a way that they show you that they gave freedom and are making your life easier (by flexi EMIs, pay minimum) but rather they keep you trapped in the vicious cycle of paying high interest, earning low interests on FD and RD.
Chapter 9 (As long as I know this)
It is just not our choices that impact the trajectory of our wealth and finances but also because of the bias we have in our brains for things.
Here are a few common biases everyone has in their mind.
Anchoring Bias: When you become dependent on the 1st info you get around something and set your benchmark around it.
If you are looking to purchase a property and right now you don’t have any idea about the property price in that area so you might end up buying the price around what the agent would tell you the 1st time.
Availability Bias: We tend to give value to every piece of information we get irrespective of the source, even where there are higher chances that it might be wrong and still we act with that bias.
Loss Aversion Bias: We just focus on the loss, by default our brain is inclined towards negative things and at times we have invested so much money and time that despite seeing it’s a sinking ship still we keep spending on it because we can not handle losses.
You might not enjoy on 1k profit as much sad you’ll be on a 1k loss.
Herding Bias: Doing something just because everyone is doing isn’t the right indicator to get started with something because everyone has different goals and life journeys.
Ostrich effect: Spending money like crazy and then expecting that you won’t get the bill, sounds unrealistic. Right? If you can’t see something doesn’t mean that it won’t exist.
Decision Fatigue: A human makes around 35000 decisions/day starting from what to have for breakfast, to planning for the next day before going to sleep.
As the day passes our mental capacity to make assertive and accurate decisions decreases with the no. of decisions we make. Therefore, always prioritize the crucial decisions and take them first in the morning.
Sunk Cost Fallacy: We live in denial that we cannot lose money due to which at times we keep on putting money in a sinking ship. It’s better to declare it as a loss rather than going double down on it and hoping it might get better.
Gambler’s fallacy: Believing that the future performance would mirror the past performance even if it is not linked in any manner.
Framing Effect: Our brain focuses towards how things are being presented rather than on the facts or knowledge. Even marketing people use such tricks to gain attention helping them to get more business.
Mental Accounting: Our brain’s mechanism that helps us find the right value of a particular thing though that’s biased.
Spending 10k on a meal in your city is too much but on a trip, you’ll be pretty much okay with it. The way we see it changes, the value we give to it changes but the impact it makes on our finances is the same.
Dunning-Kruger Effect: This effect states that the less you know, the more you think you do and the more you know, you think that it is easier for you and everyone else. The problem with people who think they know everything is that their learning stops because they think that they’re the smartest in not just their room but every room.
Social Comparison Bias: Doing a thing because you saw someone doing it. We always think that the grass is always greener on the other side which is not true but this comparison and the race of competing with their lives highlights drain and shakes your finances which gets you in a trap.
‘I’m not biased’ bias: We all have cognitive biases that we don’t realise, it is our brain’s default setting. Moreover, our surroundings, what we’ve been consuming as information, and what media shows all influence it.
My favourite bias is the “I’m not biased” bias: The brighter you are, the harder it can be to see your own limitations. Being good at thinking can make you worse at rethinking.
Chapter- 10 (Oh one last thing)
In the last chapter, Ankur tells his story and his relationship with money since his childhood and then writes 13 letters to his younger version so that he can make sound decisions in his life.
Below I have mentioned the message he wants to convey from each letter:
Letter 1
Right now you might not know your relationship with money and if the story hasn’t been shaped yet it will soon.
You might not realise but your one relationship with money would impact many things in your life from your career choices to your health and it will even have a say in your relationship with humans.
Letter 2
If you had not so good experience with money in your initial years of life, here are a few possible possibilities:
- You’ll spend your life chasing it
- You’ll try to escape from it
- You’ll spend your entire life going beyond it.
The sooner you realise the better the choice is yours deciding which way to go.
Letter 3
After running for money for so long you might feel that it’s a never-ending thing and an endless loop but remember you started chasing for money to get happiness.
The main goal is not money but happiness.
Letter 4
Money doesn’t change anyone but it will multiply and intensify who you truly are.
This means if you’re worried and anxious all the time, you will remain worried and anxious despite being rich, the reasons might change but you won’t.
Letter 5
Earning money isn’t the same as keeping money and, being rich doesn’t mean that you’ll be wealthy.
Keeping money is far more difficult than earning money.
And true wealth is what you have but people can’t see.
Letter 6
We think that there are a lot of things in life that require courage, and confidence that might be true but it also requires money.
There are a lot of things you can’t do if you don’t have money.
Letter 7
It’s a shiny and materialistic world where you can never win because someone will always have more than you.
Focus on yourself. On improving yourself, we think people look and think about us but the reality is that everyone is busy in their lives while focusing on themselves.
Letter 8
Money and career will make you feel that there’s nothing more important than them but actually, the most precious thing is your relationships.
Everything can wait but not relationships, especially where you’re irreplaceable.
Letter 9
Less doesn’t make you poor but always chasing and looking more makes you poor.
Letter 10
We judge people on the decisions they make in life but we shouldn’t because we only get to know that it’s a bad decision when it’s already taken. Always remember this when you’re judging yourself or anyone else.
Letter 11
Life is always hard, it’s on you which hard choice you make, either suffer the pain or take the pain and overcome the rough patch. Remember saving is hard but being broke is harder.
Letter 12
No matter how difficult situations are in your life, you might feel stuck and clueless but you’ll find a way out. Always look for corners to get out, and one day you’ll find yourself happy and out of the situation.
Letter 13
If you think that you’re the only one struggling or you’re the only one that has problems so, no you’re wrong.
Everyone is facing life, they might not confront but everyone struggles but also finds a way out of the problem.