The mantra for staying rich or becoming rich is simple: Save > Invest > Repeat. I think I have given a golden advise for free here. If you look at the records, there have been hundreds of cases where people became overnight millionaires and lost all the money in next few years. You must have heard stories of lottery winners, actors or athletes who gain lot of wealth and become poor all over again. What could be the primary reason for that?
The answer is simple, lack of financial knowledge. They do not: Save, Invest, Repeat. They think money is only to spend. You can’t expect someone to gain financial literacy overnight or after they have gained a lot of wealth. Had they approached a financial adviser, they’d have been rich throughout their life. But ignorance and fixed mindset is another characteristic of typical middle-class and poor. Practically speaking, not everyone can win lotteries. Majority of rich start from scratch. Statistically speaking, more than 90% of millionaires in the world living today are self-made.
Because many middle-class people think investing is risky; that’s not true. Lack of financial knowledge is risky.
The only reason to save money is because you are going to invest into an asset for your future. I seriously hope you’re not trying to become rich by investing in a Fixed Deposit account at 7.50% interest. Are you? Is the answer “yes“, then let me remind you that inflation in India is rising at about 7.7% per annum.
If you’re good at math this should be enough. If you’re keeping your money in savings account at 4-6% interest, then you’re technically losing money. You don’t realize the impact because the effect is felt in long-run, not in short-term. Read impact of inflation here, also read impact of fixed mindset and ignorance here. These are must read if you want to live a healthy financial life.
Wealth is not what you spend but what you accumulate. And how hard it grows. Do you want to work forever?
We Indians have tendency to invest in Gold. However, even Gold happens to provide an average return of below 7%. If you’re one of these people then you’re just wasting an important resource that could make you more money. Lack of knowledge or lack of interest in this subject can cost you a lot.
An interesting example
I remember asking one of my co-workers an interesting question. “What would he do if he wins a lottery of Rs.50 crore?”
His reply: “I would buy a Lamborghini for Rs.13 crore, buy a big house, travel around the world.”
At first, I thought he was joking but to my surprise, the answer he gave was a serious one.
But this is not what shocked me. What surprised me is that when I asked few others, they had similar answers and their justification was that, it’s his money and he has all the rights to spend it wherever he wants. I somewhere agree to this point completely. However, my response is something like this:
“He is definitely going to have a lot of fun in that world tour. No doubt! However, just imagine this, your productivity is same, income is same as before. Once that tour ends and so his lottery money, how is he going to maintain that big house and Lamborghini with his salary?
There is a common myth throughout the world that people consider their own house to be an asset. However, ask any finance expert, your own house is never an asset. (We’ll discuss my answer of where I’d spend Rs.5 crore below, however let’s first understand what an asset is).
An asset has these 2 simple features:-
1. Increase in value over time which can later be sold for a profit
2. Puts money in your pocket monthly/annually. (The total amount you accumulate in your pocket is more than the amount you invested originally).
Do you sell your own house later on for profit?
If your answer to this question is “no” then your house is not an asset. Buying a big house only increases the cost of maintenance. Which simply means you have to spend extra bucks from your pocket to ensure it stays in good condition? This is a definition of a liability. The more you earn and think of buying a bigger house to increase your standard of living, the more you need to spend in purchase and maintenance and you’ll stay in the rat race forever.
On the other hand, if your answer to that question is “yes” then it can be a wise decision. However, no one ever sells their house and shifts to a smaller house unless they are forced due to financial reasons.
Before buying a house for profit, it’s important to do some calculations and investigation to understand whether that property actually appreciates more in comparison to other investment class.
Buying a second home is an asset as it pays you rent and you can also sell that house whenever you want as per the new market price. Buying a stock is an asset which pays dividend income and you can later sell the stock at higher price.
What’s my strategy to spend Rs.50 crore?
I’ll try and keep the cost of living same as before, no hype or buying unnecessary stuffs. I’d take out a small portion (5%) from this fund, buy gold and hide it somewhere safe (that’s my emergency fund). Then the remaining would be split into five equal portions of 20%. The first 20% would go to my savings account immediately.
Second portion of 20% will be invested in real estate (flats, plots and lands). This would give me rent that I can consume as my salary or income and it’ll ensure that my source of income is not stopped. I’ll also ensure my consumption is not increased more than the monthly income. At least 33% of my overall income would be invested back in shares based on my own research. Typical : Save > Invest > Repeat, you see.
Third portion of 20% would be invested in mutual funds and index funds and that too through a systematic investment policy (SIP) route for long term (7-10+) years. This is because timing the market is a zero sum game. Buying through SIP will give me advantage of rupee cost averaging. Also investing will become automated.
Forth portion of 20% will be used to invest in businesses over a period of time that I really believe in which can give me multiple returns should those businesses become successful. (You can see shark tank – a reality show for better idea on this).
Final portion of 20% would be used for my own education, self-development and health. Yes, I’m going to invest heavily on myself and my education.
Last but not the least, I know what you’re thinking. What am I going to give to the poor and needy people, right? I’m not only going to give them fish, but I’m also going to teach them how to catch a fish. Hence a lot of my time will be invested in providing education and self-help to people in need who can become self-dependent as that’s the true wealth – “knowledge” that we posses.
“The real tragedy of the poor is the poverty of their aspirations”Someone
Let’s come back to reality
If you’re not buying assets then you are not playing the game of becoming wealthy. You are inside of someone else’s game and you can conclude that you are going to keep the same standard of living forever. Or even a lower standard of living due to increased prices – that is inflation. Even if you win a lottery, you are going to lose the money soon because of lack of experience and exposure to managing money.
Hence it’s important to invest your hard earned money to ensure it works for you instead of just loses its own value. When you invest in good asset class, you can get good returns and enjoy the power of compounding. Click here to understand the power of compounding in true sense. Also create a habit of Save > Invest > Repeat.
“Try to save something while your salary is small; it’s impossible to save after you begin to earn more.”Jack Benny
India is still the land of opportunity and the opportunities available now are more than ever. There has never been a time like this in history of mankind where you could just make money sitting at home. Earn in dollars while sitting in a remote location in India.
As Thomas J. Stanley quoted: “Over the past thirty years I have consistently found that 80 to 85 percent of millionaires are self-made. There is great pride, joy and satisfaction to be derived from building one’s own fortune. Countless millionaires have told me that the journey to wealth is much more satisfying than the destination. When they look back over their history of building wealth, they recall constantly setting economic goals and the great happiness gained from achieving them. Yes, in the context of economic achievement, it is the trip, the journey to financial independence about which the millionaires next door most often boast.”
If you follow these principals, gradually, you’ll build wealth allowing you a life free from financial stress. Wake up whenever you want, do what you want entire day and live wherever you want. Your money is going to work for you and that’s what I call real financial freedom. Save, Invest, Repeat is by far the most guaranteed way of becoming rich, many people save, but they don’t invest it in proper places and don’t repeat it often.
If done correctly and these lessons thought to your children then they can also have the same lifestyle changing your entire family name.
Finally I end this fantastic series with this quote:
When you learn, teach. When you get, give.Maya Angelou