Can employees get rich?

Reality:

Everyone wants to be rich. The very next person you would meet also would tell you their life goal is to get rich. Some wants to travel the world, some wants to build large mansion, some wants to buy great cars, some wants to buy grand jewellery. Whatever some wants, all wants to be rich definitely. All are not born into large business families, and many don't have any support from previous generations too from a fortune inheritance perspective. And most of us don't win lotteries too. 

Employment in India:

Over 50% of the India's workforce is self-employed which would include new startups, local grocers to your tailor. The employee workforce is around 22% of Indians. Official unemployment in 2024 is around 3.2% and remaining are all casual labourers and unpaid workers. As per key studies,70-80% of self-employed workforce in India earns lesser than salaried employees. Over 85% of the self-employed business never grow or hire employees. About 15-20% of the self-employed each enough to be equated with the middle-class income in India. Less than 5% self-employed business become successful with sustainable income and profit. Exceptionally successful self-employed business percentage in India is 1%. These numbers it really makes it easy to decide what you want to do. It is statistically less likely that you start a business, and it becomes successful. However, everyone we know had confirmed to us that the only way to richness is not by selling time as employees but building brand, product or service as an entrepreneur. 

Self-Employed:

Recently I had an engaging conversation with one of my childhood friends who started a restaurant in Bangalore and had to shut down due to various challenges. At the same time another friend inherited a restaurant from his parents and now had scaled it to unimaginable heights. Now suddenly my statistics looks different for food business, it is showing me a 50% success in my personal journal. This led me to do a detailed understanding of the industry and find some worrying numbers. It showed that approximately 60% of new restaurants started in Bangalore would shut down in 3-5Years period and 5-10% becomes successful. Extrapolating the population that I was looking at, let's assume 1 in 10 friends that I have has a chance to own and run a successful restaurant in Bangalore. But in most cases, we don't care about numbers because we think passion is the only thing that drives business. Every business owner you need, would tell you how passionate and different they are and why their business is unique, ask them 5years later in the business it would be all about surviving the year. Another trick that people share after encountering their share of bad luck and failure is that it is all about timing and how much leverage you have to keep the cash flow. In general, people mistake the top line growth as the final success and forget about the bottom line assuming initial years we are not expected to make profits. Interestingly most people like to invest big in the business with borrowings and without real plan about the cash flow and timely fund raising. The Duning-Kruger effect is rampant in the business world. 

Employees of India:

As per data, out of the 22% employees in India, 5-10% become successful, 1-2% become rich and 0.5% becomes very rich. The risk of failure for an employee to get rich is quite low compared to a business owner. But the outlier is that the few businessmen who succeed has a chance to be super rich in comparison with an employee but at the cost of time, sleep, food and eventually health due to the challenges and lifestyle while relentlessly working on a dream and a project. As great scientists had told, without capitalist a country can't go forward and we really need more people to start business, thinking original, challenge status quo and build new products and tools. We also mistake saving money in a bank account is equal to investment. It is an investment when money/asset grows without any next step from you and as they say when money starts working for you and generating returns, that is an investment. There are chances of investments going wrong and not generating returns too but we do have chances to course correct as we progress in life.

Keeping philosophy of everyone with a kind heart and good social service is rich aside, from a financial perspective it is very easy for an employee to get rich due to the higher chance of predictable income. The key challenges an employee face is unpredictable expenses, not having financial acumen, not planning for unforeseen circumstances, and lack of discipline in some cases. There are innumerous frameworks and strategies available out there for an employee to get rich but as someone said the perfect example of an employee is that he would buy a Titan watch when it is sold on 50% discount on Myntra even if it is his 10th watch, the same person would not buy Titan stock when at 50% discount thinking it is now going down and forgetting its potential. This is where all the employees really have some work to do. Every time I talk to a new employee in India, I get a feeling that they had made up their mind that investment means they need to have large sums and small portion of a meagre salary can never qualify as an investment. Demystifying this takes a while but once someone understands, they get the point that even Rs.1000 is a good start for them. It is important to use the tools available to assess the risk and understand the products people get into before putting their money. But unfortunately, the investment employees in India do is driven by that distant relative or neighbour uncle who ties you up as soon as you get a job into some endowment policies of xyz companies and you mistake that as the investment you have done or parents who guide you to take loans to buy a property to build a house. Initial 10Years worth investments are usually locked which yields around 6% annualized returns for xyz endowments and 9% annualized returns for property in good locations in Bangalore. 

Getting Started:

First baby step is to analyze the risk profile that each one of us have using available tools to understand where we put ourselves in the risk meter. The clarity it gives us is critical for our next steps. Once we understand our risk profile, it opens up the plethora of investment options. Starting your investment journey sooner than later is the most important attribute of your journey. Based on your risk profile, once you identify how much money needs to be put in debt and equity instruments respectively, then we can plan what are the next steps. An investment can start with as low as Rs.500 which you would throw on a food order anytime any day otherwise. There are tools and apps available to guide you on this journey for free and also investment advisors who are qualified to give you inputs based on your life goals. I would like to once again emphasize on the early start. If you can start investment once you have the first salary, it gives you that must edge post 20Years. 

I kept using the word journey to make you understand that nothing happens overnight in investments unlike advertised. It is really a journey where you need to understand patience is one of the biggest allies you can find. I don't want to bore you with retirement philosophy but do keep that also in mind. Think about various life events that would come your way, the time you have to face those events and also your retirement. Write down all the events that you could identify, and we are sure there will be lot of unplanned events for sure too and let's put that in a miscellaneous event bucket too. Once you have various events bucket which is in-line with your life goals, add a money value to it however big or small it is, better to quantify them.

First investments:

Now that you know how much you could allocate to debt, equity and how much is your need for each of the life event. It is time to plan the instruments that can lead you to that. There is very less luck factor in asset growth, if we understand it clearly. The ability to react to the investment when not growing and when we have enough data showing why it can't grow is critical. 

The understanding of the below tables would be a key input to visualize and demystify the stories you hear about various instruments. This is not to project any particular instrument as better. We also need to understand that within the decade there will be great pockets for every instrument which will get you multifold benefit suppose you enter it during the lowest phase and capitalize that. Thinking that we can time the investments perfectly during the downside is a challenging task and not for all.

Gold

Nifty50

Property in Bangalore

After analyzing all the products around us that fits each of your risk profile, you need to shortlist the asset class that you would want to invest in. Normally real estate is considered for later stages of life because we would need to generate good amount for initial investments. Always avoid taking loans for investments as no investment guarantees any return and subject to world's economic condition not just your country's economy. 

As an employee, starting with good mutual funds, gold, silver etc., would be a good start. Also ensure you have adequately invested in your Employee Provident Fund monthly and National Pension Scheme to have good debt exposure. Fill the remaining equity portion with mutual funds to begin with until you reach a situation where you have enough knowledge to start picking your own stocks. The remaining portion of your portfolio can be gold/silver based on availability and accessibility. There is no hard and fast rule to keep the ratio same across your life, remember to reassess your risk based on new factors in your life and readjust your approach and ratios across asset classes. 

Consistency

Discipline is key for the success of your investments. Whatever be the condition in the market and asset classes you chose, continue the investments with discipline without fail during your tough times and assets downsides too. Having the conviction in your selections is key for the product to excel in returns in long run. Also evaluate periodically how the products/assets are doing across the asset class or certain benchmark from returns perspective to decide whether you need to continue investments or switch to better instruments. Remember when chips are down, it is your time to aggregate and get better value for your holdings when the product is right. Find opportunities to add more into your monthly investments as your salary grows and preferably as much as possible from your additional income would be best for future.

Swapping

Another technique that investors employ is swapping the asset classes based on the corpus created. There would be good real estate opportunities once you have a corpus to get into the real estate market. Remember again that there is no fool proof investment and every investment comes with a risk equated to the instrument. You could also do vice-versa when real estate had received a good bull run in your area and markets are beaten up, time to buy the market and exit real estate. This is something most people don't venture out much due to lack of liquidity in the real estate market and often buyers have an edge when you are in need of money. 

Staying Long

Most investments grow when given time, hence having the patience to stay put for long period is very important if you really want to get benefits from your investments. I am not an expert or even qualified to explain but in my judgement a minimum of 15Years is required to really assess the performance of your investment. This is assuming you have weeded out the low performers earlier and replaced with good performing instruments be it debt/equity/real estate/metals. If you are someone who had invested in decent products and has time by your side with lesser chance of panic during the crashes, you have a higher chance to grow your money. 

Exit Strategies

We all know to invest by now and also had tried our luck in various investment strategies and products but what we actually don't know is when to exit what instrument and which ones to hold for long. One obvious time to exit is when something consistently underperforms against its peers and benchmarks. Another one would be once your investment goals for which you had invested had been met and now you want to encash it to fulfill your dreams for which you set out for the investment journey. If you don't have a particular goal towards which you are investing, then we can assume it is for your retirement and then best is not to sell and encash. Find ways to periodically encash whatever you would need for your post-retirement goals and of course survival without depending on others. If you are invested in a mutual fund product, there are Systematic Withdrawal Plans similar to SIP where money comes to your back Monthly based on what you set out for. This will also enable the remaining units to grow as per the market movements while you get your SWP. There are also tools available to calculate what should be the corpus that you need to generate to have the monthly income from it at the level of your living expenses.

Points to Ponder

1. Mistaking insurance as an investment and mixing it. Keep term insurance and health insurance separate to your investment.

2. Selling too early due to herd behaviour listening to media and friends. Make your own judgement based on your needs.

3. Keeping too much cash in account and waiting for a future right moment to invest. If you are in for long term, the moment is now and not in future.

4. Investing in income generating instruments without calculating the yield percentage and the loan interest percentage and EMI required to generate the income.

5. Not taking care of fitness and personal physical/mental health thinking generating more income and larger investments can take care of future. First thing required to reap benefits of your investment is staying fit and strong and having limited concerns during old age.

6. Investing post all expenses. Best practice is to plan and invest before your expenses and make only money available to spend post investments. 

7. Investing all your money in one kind of instrument and lacking diversification.

8. Taking huge loans without understanding the principles of leverage and technical aspects of money management.

9. Not having a monthly budget written down and sticking to it.

10. Living beyond means and expecting things to work out in future.

11. Keeping on check on the lifestyle and continuing at an optimum level without agreeing to go beyond that can sustain your wealth.

We know that employees can get rich now and the only way to get rich is linked to your behaviour when you have money with you. Having a long term plan, sticking to it whatever happens and believing in the importance of time and power of compounding is all that matters.

If you are too scared to try it but expect miracles will happen to make you rich, then God alone can save you! Take ownership, take control and result will follow!

It is not the man who has too little, but the man who craves more, that is poor.

— Seneca

Risk Profile Calculator - Risk Profile Calculator - CAGRfunds

Books to read: The Psychology of Money - Morgan Housel