- Your current salary post-tax and expected growth rate of salary.
- Your absolute living expenses, inflation, and contingency fund.
- The savings you have for trading capital.
- How much of your savings can you risk if it’s not working out?
- Will you be borrowing capital and if yes what is the cost. (What consequences if you lose the capital?)
- Do you have any other investments for an emergency/contingency fund?
- -> 10%
- -> 20%
- -> 30%
- -> 40%
- -> 50%
- -> 60% ……………………. ( Stop !! Please manage my money and let me raise money for you and let me retire !! )
Annual Income – 12 lakhs post-tax.
Living Expense – 8 lakhs
How much capital do you need to make 12 lakhs p.a?
|Expected Annual Income||Expected Annual Return||Capital Required|
|12 lakhs||10||1.2 cr|
|12 lakhs||20||60 lakhs|
|12 lakhs||30||40 lakhs|
|12 lakhs||40||30 lakhs|
|12 lakhs||50||24 lakhs|
(Skipping Appraisal and Salary Growth for Now.)
Step 4) If 5% Earnings Growth?
Earnings % Return Capital
- 12 lakhs 30 40 lakhs
- 12.6 lakhs 30 42 lakhs
- 13.2 lakhs 30 44.1 lakhs
- 13.9 lakhs 30 46.3 lakhs
- 14.6 lakhs 30 48.6 lakhs
Step 5) The Reality
A 15-30% drawdown is normal in most trading strategies.
Do you have a contingency fund for living expenses at such times?
Even if you can make 20-40% post taxes. The minimum requirement is 3-5 times your expected earnings.
One can think of 7-10 times your expected earnings as a good number.
Step 6) Some questions.
- If you want to make 12 lakhs per annum do you have 1 crore capital.
- Even if you have a strategy which can make 20-30% return over a long 3-5-10 year cycle. Do you have the risk appetite?
- Will you be able to sleep after losing 30% capital?
Dream – Trade with a laptop anywhere in the world.
Reality – ???
- If I am Full Time I would definitely find a way to make money.
(Just because you do good office politics why not shift to politics and you could be a Prime Minister, Chief Minister or a successful Politician)
- I get scared because I have a small capital base. If I had a few crores I would make a killing.