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Economy Fiscally fit?

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  #1  
Old January 15th, 2011, 02:27 AM
Shringarey Shringarey is offline
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How much money do you need?

I was reading in one of the posts here that a Prof and his wife were earning 250,000 USD and he did not feel rich (unable to find the thread). A lot of people jumped on the guy. They called it a manifestation of US consumerism. That led me thinking. How much money does one need?

I believe that US$ 250k is NOT rich - not at all. You will be surprised by this. But I have done some pro-bono personal financial consultancy, and I am talking from experience.

What do you want really - a comfortable lifestyle - not a lavish one.

- A decent house, not a bungalow.
- 2 Kids, their education to be taken care of
- A retirement plan.
- 2 cars (one for man, one for wife) - both in the 25k range
- Freedom from financially having to depend on kids on retirement.
- A holiday once every 2 years at a reasonable rate
- Family medical bills to take care of.

All nice stuff, nothing fancy. Do your calculation. Let us say that 250k of PRETAX inciome translates into 170k of POSTTAX Income. Now do the calculation -

i) Mortgage
ii) Insurance (If yr Company takes care of it, add it to income and expense, both)
iii) Children's education
iv) Travel costs (incl. car EMI)
v) A small holiday expense (divide by two as it is once a year)

From this, calculate your savings. Accumulate yr savings at an approx rate. Find out the kitty when you are 65. See how long the kitty lasts.

One CAVEAT - Dont say income is 250k from age 25. Say it is from age 40. Upto age 40, take yr actual income.

You WILL GET A SHOCK.
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Old January 15th, 2011, 02:29 AM
Shringarey Shringarey is offline
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A biiger shock

Do the same exercize as above for India. Consider that you earn 2/3 in India - ie about 120000 x 45 Rs per year afte tax (a handome income in India). Now do the calc. It will shock you even more!!!
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Old January 15th, 2011, 02:34 AM
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Re: How much money do you need?

I'm weak in math, Shring... suppose you narrate your calculations...
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Old January 15th, 2011, 05:09 AM
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Re: How much money do you need?

no amount of money is sufficient for those who want more money.
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Old January 15th, 2011, 05:15 AM
Shringarey Shringarey is offline
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Re: How much money do you need?

You will kill me - but I am telling you that you may just about survive.

The catch is this - the money you earn should give you a return atleast equal to the rate of inflation. Otherwise you are poorer off keeping the money, and the rate of inflation will kill you when you rtire. This is especially true because of Quantitative Easing ie. really printing money.

Most people say that stocks give better returns, or real estate, etc. Not true. This is because you should not consider the rate of inflation which the govt publishes. That rate take an average "basket of goodd" and then finds out the price of last year against this year. That is how inflation is calculated. But, the average basket of goods is national average.

I would suggest that you conside a different basket of goods. This basket of goods woul be the consumption pattern of Average Middle Class Indians (lets call it AMCI) rather than the national average consumption. What does this basket consist of ?

Education (a big one) - includes college edu
Housing (150k - 500k bracket)
Trips to India (every 5 years)
Cars (20K - 35 K bracket)
Best Medical Expenses
Comfortable Holidays every 2 years (economy class travel, acco)

The other items are standard fare - gas, food, etc,

Some of the main items are rising far faster than average - Education (a first priority with the greatest weight) is increasing @ 20&+ per annum. Best medical costs are increasing at a fast rate.

AMCI Inflation Index is (as per my calculations) somewhere in the 18%-25% range. You should make atleast that to save your capital from inflation. That is the issue. That is why you need a far higher capital than you think you do.
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