How to achieve financial freedom? Feroze Azeez's roadmap for monetary nirvana

"People should sit back and look at their entire balance sheet and see which is the most inefficient part of their balance sheet. Quite a few people have a second home that has made 5% compounded return over the last eight years. We have been negative on real estate for the last eight years and made just 5%-6%. So, if he gets rid of that high ticket item, he gets to save his EMI and if he has got back his down payment," says Feroze Azeez, Deputy CEO, Anand Rathi Wealth.

What according to you is financial freedom?
Financial freedom has different connotations for each of us but there is one mathematical way of defining it; there is one which is very specific to each one of us. If you ask me, financial freedom is going to a restaurant, opening the menu and not seeing the right side of the menu to find out the price. You look at the left side of the menu and order.

But if you give a mathematical answer to it, if you have five goals, find out the present value of those five goals. Let us assume you have the conventional goals, marriage of children, education of children, retirement. You discount them and find out what the present value is. Let us assume the present value of those goals comes to Rs 2 crore. If you already have money greater than Rs 2 crore, then you have attained mathematical financial freedom.

Emotional freedom is a separate story but I think this is one of the most important ways to comprehend whether you have reached that stage where you can say you are financially free and don’t have to drag your feet to work. That does not happen then. You go to work because you love that job. You are so right and so practical that on a weekend you have relaxed and Monday is one of the toughest days to get to work and your passion will be high if you are not compelled to and that is something which you would love doing.

I think a lot of people misjudge it. In my opinion, financial freedom is not about not going to work. It is choosing what sort of remunerative activity or activity that you want to have on a regular basis. It can be sculpting or painting and you could sell those paintings theoretically. But it is not a lack of monetary means. You do not have to stop going to work.
Absolutely. I think that is misinterpreted completely because most people have not reached that stage. If most of our country had reached that stage, they would have empathised with what a financially free person does. Does he sit back home and do nothing? Not at all. For example, our chairman is 76 years old. He is so enthusiastic about work. I am sure he has attained financial freedom and especially in the post Covid world when I interact with several 50-60-70-year olds, I see they want to engage their mind and keep it fertile. I think financial freedom is to choose what you wish to do and do it with passion.

Then the question arises is this something that the average Indian can achieve? A lot of people starting out earn Rs 25,000-30,000-35,000. A lot of people starting out right now in their early 20s will be earning around that. Can the average Indian achieve financial independence?
I am sure an average Indian would be able to achieve that but the caveat there is with the current level of planning,when I meet people, the answer is no. It will require a plan, it will require discipline, it will require foundation, it will require enthusiasm to stick to the plan because investing is about 10, 20, 30 years and not getting bored.

Second, we don’t have a US kind of scenario where everybody is investing. In India it is not a practice. So, I think it is possible and how to do that is about three, four, five important variables.

Let us talk about those variables. What does an individual need to do?
To my mind, the first thing is to set a goal. Financial freedom has to be measurable, it cannot be subjective. Decide your expense and your income. What is your ratio, how much are you earning and how much are you ready to invest because the difference in income minus expense is what is your investible surplus is. So, ascertain and try to expand that.

The third thing is to create a monthly budget, most of us spend on the go. Have a monthly budget so that you can measure and see whether you are going to be spending a little more just because of an exciting offer on a commodity which you always envisaged you will own.

Choose the right asset and respect the asset which has stood the test of time. Equity has stood the test of time, real estate has stood the test of time, that is the fourth thing.

The fifth thing is preparing for contingencies. If you do not prepare for contingencies, rest assure, God has another plan as well. Some exigencies can put all your planning off track and that should not happen and then your entire financial freedom gets deferred by another 75 years maybe.

So please make sure that you plan for your contingencies, review and take corrective actions. What happens when the pilot starts flying a plane is he is going to check whether he is going on the path desired. Make sure that you have a great management information system, a report to tell you whether you are making any mistakes. We are all human and we are going to make mistakes but you have to correct them sooner before it creates more irreparable damages. If you are passionate about these six steps, it is quite likely that every one of us Indians can achieve financial freedom.

A lot of people throw up their hands and say I am earning Rs 30,000 a month and you want me to take 30%, 40% of that? How is this going to be possible? Is this something that you have to decide and say that as soon as my salary hits the account I will transfer say 35% into another account and use that only for investments? Does that approach work?
One-size-fits-all policy does not work. But it is a great idea because if you carve out some money, then the likelihood that you will be able to not spend that and invest is very high. If people believe that they have a Rs 30,000-35,000 salary and they cannot start investing, they are mistaken.

My first salary was Rs 9,400 in 2004. Even if you add inflation, that is the number which you are speaking about, Rs 30,000. The point is even if you earn Rs 30,000, please believe that you can invest Rs 1,000. Back then, Rs 1,000 was the minimum; today even Rs 500 is permitted. So it is a very affordable mutual fund platform where you get 50 stocks for just Rs 500.

So please believe that you can do it, start somewhere because this is not going to move the needle but it will create or imbibe a practice of saving and that is more important when your salary is Rs 30,000-35,000. If you imbibe that practice, when your salary is a lakh, that is going to carry on for ages as a legacy.

If you look at Rs 35,000, is it possible to save one-third of the money? To my mind yes. If you are able to save one-third of the money, that is Rs 10,000, in 30 years, you will get to Rs 3-3.25 crore even at a 10% growth rate or a 12% growth rate. But if you look at the practical side of how the corporate world or any structured employee works, there is a marginal increase in your salary every single year, especially in India, unlike in the emerged countries.

So if you step up your SIP just by 10% more than what you did last year, you will get to Rs 8 crore after 30 years. Of course 20 years is a long period, but Rs 8 crore is a lot of money as well.

If you manage to do 30% of 35000 like you said in four years, five years, seven years when your salary does hit that Rs 1 lakh mark, you are going to be able to save Rs 35,000 or thereabouts which is a humongous amount of money. and you have already gotten into the groove of saving 35% and then you think okay I have that much less, but there is no guilt at the end of it.,
So right, actually if you think of it you have to do net practice, a great batsman does not become a batsman just because he thought he plays well and he played in a simulator, you go into the net, you practice it, these are practice years that is very-very important that you practice to save and I think that is what I think is what you are saying and I cannot agree more.

There are people out there who are midway through their careers and they have mustered certain amount of money but we do not know that if they tweak things a little bit, they might be financially free. These are people that have a couple of houses sometimes on EMI and if they just got rid of one of those assets and one of those EMIs, they might be in a position to be financially free. Do you come across people like that?
Several. I think people should sit back and look at their entire balance sheet and see which is the most inefficient part of their balance sheet. A balance sheet is nothing but every asset you own. Anything which you do not use, the only purpose of that portion of the balance sheet is to grow and provide you financial freedom.

Quite a few people have a second home that has made 5% compounded return over the last eight years. We have been negative on real estate for the last eight years and made just 5%-6%. So, if he gets rid of that high ticket item, he gets to save his EMI and if he has got back his down payment, then he puts it into equity, he can compound that money at 12-14%. Some degree of recalibration of your portfolio from time to time is very critical.

The second part is we live in fortunate times. India has seen a tax rates of 50, 60, 70%. In India today, a 15 lakh CTC if you use the new method of taxation, just has a Rs 2 lakh taxation which is 15%. You look at the top four economies in the world. The tax rates are obscene. so you just see this as 30% tax. So many employees don;t have to pay any tax in India. Why should you not save Rs 10,000 and use that money for investments? What if the tax slab was at zero and not at Rs 5 lakh? One has to try and have self imposed disciplines and not wait for regulators or the tax authorities to create that practice of not spending all your salary.

If someone is paying an EMI on a second house and if that house is in Mumbai, anywhere upwards of Rs 1 crore could be freed by getting rid of it. But you do not know when you are going to get a buyer for your house but you could start the process. What are the other factors that you can bear in mind if you are in a situation where you can make changes to not be saddled with an asset allocation strategy that is a little wonky?
When you are trying to sell real estate, it is going to take its time. It is not just a click of a button just like a mutual fund is a click of a button. Quite a few people are so emotionally attached to real estate that they do not want to let go of a few lakhs, if it is a Rs 1-crore house. If you get an offer at 95 lakh and people keep haggling to get that Rs 1 crore, it might take a year to get it and they feel happy that they got that money. But if you took that Rs 95 lakh and put it to great use. you may have Rs 1.10 crore after a year which is Rs 10 lakh more than having waited.

So point one is to be as mathematical as possible. At Anand Rathi, our property selling division calculates the compounded return of that property and you will be surprised if you see that the last 100 properties that we have helped HNIs sell have given a compounded return of 4% to 8% and have resulted in huge opportunities. So be surgical when you wish to extract an inefficient part of your portfolio. Not all real estate is bad, but not all is good either.

I remember in a past conversation you pointed out the difference where you said that had these HNIs invested 10 years back in a mutual fund, the kind of returns that they would have gotten would have been far far higher. Do you want to elucidate that? I cannot remember the time frame that you had spoken about. Is it 10 or 15 years?
So I have a precise example. It was Barmer, Pune. Somebody bought a property at Rs 55 lakh and sold it at a crore. That looks like a great return of Rs 45 lakh when you compounded from 2014 till now the return was close to about 6.5% pre-tax. Of course, the guy would have got some rental income of a percent or two; so that was 8%.

If the person instead had invested in a simple longest lasting flexicap fund which is HDFC Flexicap and Prashant Jain, he would have been with Rs 2 crore instead of a crore of rupees on Rs 55 lakh. That person lost an opportunity to make a crore.

Does this happen with 80% of the properties that we exit today? The answer is yes. Residential, real estate in metro or tier one cities or tier two cities has not performed for 10 years and we still keep it because it gives us comfort and sleep full nights.

People who have gone through the financial crisis will know markets can crash very dramatically in a very short period of time. Assuming that you have achieved financial freedom and you are kicking back and are not worried about the funds, what if you see a massive drop in your corpus overnight – a 40% drop in equities? How do you deal with something like that?
So you come back below the threshold where you believe you achieved financial freedom. I am again going back to how we recommend our portfolio. We back test and see if during the global financial crisis, if I did the same portfolio, where would I be? If you get an answer that you are following 40% equal to the market, then you have something wrong with your portfolio design. Make it such that you do not go down more than 10-15% on a two-year rolling basis or a three-year rolling basis. If you are able to create shock absorbers in your portfolio to the extent of a smooth car ride, then you are okay.

If you have achieved financial freedom and have a large amount of money, how do you deal with it?
I have met several thousand HNI families in the last 18 years and I still cannot remember one person who has achieved financial freedom. I do not know one person who sits back home and just goes for walks. So the people who have not achieved financial freedom assume that they will be free and not work and the people who have achieved it – I cannot even recollect one – say that I do nothing. So point one is when you achieve that financial freedom you have to think of objective two, objective three.

If you have achieved objective one which is to achieve financial freedom, grow your money at good quality inflation beating returns. The second objective is important to make sure that you start training the successor. All of us have a finite life. When we live, we will have to designate somebody else to take the legacy forward. I am the Deputy CEO. My CEO designated me saying that if something were to happen to him, then somebody else has to take the business forward. Similarly, you have to take the legacy forward amd so train the other person.

It will take you 5-10 years to train him or make a will to ensure that all the loose ends are tied/ Management is about tying all the loose ends and I think that is where you move ahead from the first objective to second, third, fourth. Now the fourth one could also be philanthropic in nature. So many HNIs today say no money is enough if you wish to give in a country like ours.