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Recipe – How to be wealthy ?

If you blow up all the money you earn every month, you will always struggle financially

We all need money to survive in this world. The reason why you and I wake up every morning and doesn’t matter how dreadful is our job, we go to work religiously to work every morning. We go to work to pay our monthly bills, have a roof on head, have food on table for you and your immediate family, pay for the commute etc. These are all known as basic needs. Almost all of us earn enough to take care of our basic needs.

How to be rich

We all want bigger home, nicer car, to dine out in better restaurant, more and more nice and trendy apparels for our wardrobe, latest smart phones, latest gadgets and the list never ends. The reality is that a majority of working class spend their entire salary what they earn every month. By month end they have to wait for the next salary to come in to take care of their basic needs & never ending list of wants. This cycle repeats every month and the same way every year.

If the above description portrays what you are, indeed you are in deep trouble. Unless you hit a lottery, you can never be rich in your life. You will always be struggling with your finances. If you wish to avoid this financial struggle, you have to take control of the situation. You have to save money. Not just one month, every month and keep investing money such that it gives you returns.

 The key ingredients in the recipe here is

  • You have to spend less than what you earn.
  • Keep working towards increasing the gap between your income and your expenses.
  • This gap, you need to invest such that your money works harder for you to generate more money.
  • Repeat above steps month on month – year on year for as many years you can
  • One of the most important tip – Do not fall in DEBT trap

This is what is required to be wealthy. There is no magic to become wealthy. You have to change your mindset; the money you earn is not for spending in entirety. Once you master this, you are on right track. If you have control on your spending, you have control on your money and on your future finances.

There is only one magical formula “You have to spend less than you earn”

One you achieve this, you need to focus on investing the amount you save each month. It’s not just about investing – its about investing wisely to maximize your returns. Keep on repeating this for donkey years; – you will end up as a rich guy/girl.

Only thing you should focus is consistency in investing money. Yes, I repeat consistency in your approach of investing. Just like you earn a monthly salary – pay your investment kitty also a monthly salary. This amount you invest every month will keep on increasing your net worth.

“Money is not everything in this world, BUT money gives you a cushion which is a mean to survive in this world. ”

Money instill a kind of confidence in your life to take on life’s challenges.

Consumer Debt & personal finance

Malls are filled with loads of white goods showrooms. Not only they have latest models of TV (LED, 3d, HD ), refrigerators,  kitchenware, washers, dryers, food processors, microwave ovens, cutlery, music systems but also they buyers lined up to buy them. Hardly anyone buys all cash. Most of them lined up to buy stuff are through consumer credit.

 

consumer debt & wealth

 

One of the greatest hurdles in creating a positive net worth is consumer debt. With easy credit availability, everything in the market is available at easy EMI (equated monthly installments – monthly payments). This is luring consumers to buy anything and everything they want.

  • Our neighbor has bought a new 85 inches LED, so we must also get something similar, if not bigger.
  • I must have a new car to show off my status; after all I am working so hard.
  • I must go to Malaysia / Singapore trip this winter holidays as my neighbor had done this last season and they boast it a lot.
  • That Tissot watch is so tempting; I must have it alongside my Seiko to go well with my casual dressing.

The list is ENDLESS

Above are the lame excuses we make to ourselves to get into consumer debt. Since today’s generation is earning well, and coupled with easy credit availability, everything seems to be within reach. EMIs make us think that we can afford anything, but in reality, by increasing EMI burden, we are harming our savings and investments in the long run. What if a bad economy patch hits us, times are not always going to be on your side. Suppose you are out of job for few months due to a sudden slowdown in economy, how you are going to manage so called EMIs?

Consumer debt is like a black hole. Once we get sucked in it, it is impossible to get out of it. We get more and more tempted by LOW EMIs or low monthly payments. We are then not bothered about the percentage of our take home that is going out in terms of monthly payments towards these loans. Once we add up the processing fees, interest charged on the loan, the final costs escalates and this makes our purchase financially not feasible by the time the loan term ends.

We see TV’s , print media, online media all tempting us to buy something or other. We tend to flow with the marketing pitches and buy the items which are in WANT category. Sometime we ignore our basic NEED category and give preference to WANTS. These WANTS will not serve any good to you in the long run as they are negating your savings and investment potential. Remember in later years, these things are not going to support you. You need funds in terms of retirement savings to take care of you.

Avoid consumer debt like plague; invest money smartly for your retirement years. Ultimately you are the decision maker of your life and you have to make sure that these little EMIs do not end up denting your retirement savings.

There are some good credits and some bad credits. You need to wisely distinguish between them. Good credits increases your net worth in terms of appreciation of the item purchased and also they give you tax breaks. Home loan or mortgage is an example of good credit.

Consumer loans come under bad credit. You buy the stuff which loses its value considerably the moment it comes out of the showroom. Also, you pay interest, processing fees and you do not get any tax break on this purchase. It’s your choice now, what kind of loan you should pick for your financial independence.

Have you bought anything recently on easy credit?

What is an emergency fund? And why you should have one?

In personal finance and money management, emergency fund is the first line of defense against the unexpected problems in life. Financial emergencies can happen anytime, and most of the time they occur without warning.

  • What if your car needs immediate repair?
  • What if you are out of job for a couple of months?
  • What if you broke your leg while playing gully cricket?
  • What if a sudden voltage surge damaged your TV/Fridge/AC and all devices?
  • How you are going to tackle this?

Times are good, you can draw money on your credit card, or you can swipe your card to get new TV/New AC etc. You can take personal loans to pay for the home expenses if you are not in job for a couple of months. But all these options come at a cost. Cost is 18%-24% rate of interest per year.

So, you must have an emergency fund, which is money stashed away in an account which is reachable at a short notice of about 1 working day. Now the question is How Much? There is no thumb rule to it. 3 months of living expenses should be sufficient so that in worst case you do not have to rush out and get money on credit.

You can use a high interest sweep in account of any bank or a liquid / cash mutual fund. Mutual fund option is better as it saves you from the high tax if you are in higher tax bracket. Any liquid mutual funds can be cashed in 1 working day. You do not have to plan to earn huge interest on your emergency fund, but let it sit in some avenue which gives some returns and which is easily accessible.

Power of Compounding

The Magical power of compounding

Albert Einstein is purported to have once remarked that the most powerful force in the universe is compound interest.

In simple terms, compounding is the financial equivalent of a snowball, rolling down the hill and gathering momentum as well as weight. More the ball rolls down, more weight it gathers in terms of the snow that get attached to it and more its momentum increases. By the time it reaches down the hill, it can well translate into a small avalanche. More the distance of travel, more is the impact of snowball.

Almost all personal finance websites/blogs and all financial magazines emphasize on power of compounding. If you start early, use compounding effectively, the end result could be a huge avalanche of money. The key is to start early and remain into the game.

I am not going to give chart of person A starting early and person B starting at later stage in life and the potential gain for person A over person B. But if you start early in life, it makes a HUGE difference.

Same is applicable to the money that you spend on material gains or for momentary gains. If you put the figures in any of the online compound interest calculator available for the money you spend in leisurely sipping cups of tea / enjoying junk food day by day, month on month, you will be astonished to know the amount of money you stand to lose over the years. The loss is two ways, one in terms of actual money you spend and other is the health you stand to lose by gulping junk food.

So gear up and use compounding as an efficient tool to maximize your gains in investments.

A penny saved is more than a penny earned

“A penny saved is a penny earned”

Most of us would have heard this popular saying. In reality, it is different. Is goes like this

“A penny saved is more than a penny earned”. Yes it is more, much more than you think. There are different angles to it.

If you see from taxation point of view, the penny saved is after tax deduction. That means you have already paid the tax on the saved penny. When you earn a penny, you have to pay tax. And for the highest tax bracket, its 33% tax, so when you earn one penny, you end up having only 0.67 penny at your disposal.

If you see from Work angle, you have already put in effort to earn the saved penny. You had worked x amount of time and put in your energy and earned the saved penny. To earn a penny again you have to put x amount of time, energy and resources in terms of fuel etc for commuting.

Hence you are much better off when you save a penny. Save it and invest it so that you can multiply it for your future needs.

Framework to bring finances under control

Taking control of your financial life is not very complicated, nothing like rocket science. The basic principals are simple, easy to practice if you can co-relate them with your day to day life and the expenses you incur.

  • Get a good education, work towards building your career
  • Spend less than you earn – This is the most important part
  • Track & budget your expenses – Any given point of time, you should know where you are financially
  • Invest diligently rather religiously every month towards your goals
  • Plan for taxes; take informed decisions on your regular taxes and taxes on your investments. Optimize them so that you do not end up paying a lot to the government
  • Keep enhancing knowledge to manage investments, budget and taxes. Remember, it’s your money and none else will help you in planning for your goals unless they have vested interests

The above 6 points sums up the key to financial success. And remember, there is no place for debt which can spoil any good retirement plan. Especially the debt meant for buying lifestyle goods. You need to beat inflation as well as lifestyle inflation to beat the financial blues

Your money is your money!

As title says, “your money is your money“. None other than you would be able to manage it better. Others, who claim they can manage better, have their conflict of interest since they would be doing it for their livelihood. When they earn commissions for suggesting you the investment tools, they can never be honest with you. Here I am talking about the insurance agents, investment advisers and host of bank officials who always push you with some “REAL GOOD” plans

I am not pointing fingers at the financial planners, but at times, they cannot be believed due to conflict of interest clause. Their “BEST PLAN” might be the “BEST PLAN” for themselves but may not suit your needs.

A common man, who is working his way up in his career, is an educated person. He has basic knowledge of this world, how to live, survive, commute, plan things. Why not take charge of the finances instead of outsourcing it to someone who is unlikely to give you honest advice. We as employee help our companies to grow by managing their balance sheets, why not help ourselves by managing our own balance sheet of household finances & investments?

So remember, your money is your money. If you outsource your money management to someone, he will be more interested in sucking the commissions out of you by suggesting funds/avenues which gives him better commissions instead of suggesting you honestly where to invest. So take charge, control your finances. And believe me, with little knowledge you can be easily at the driver seat.

You alone will be the best person to guide your investments which is ultimately going to lead you to a financially stable retired life.

Why Money is Important?

A popular advert for a leading credit card company says “There are some things money can’t buy, for others there is MXXXXXCard”

Philosophically it can be said that money is not the most important thing in this world, but the fact is that without money, none can survive. We need money to buy food, buy a roof at our head, buy services to sustain our life/lifestyle and above all it gives us a kind of security.

  • When you are a student, you need money to fund education
  • When you start working, you need money to buy basic necessities
  • When you are married, and have family, you need money to build wealth and buy comforts
  • When you are sick, you need money for the healthcare
  • When you retire from work, you need money to sustain your lifestyle and fund expenses
  • When you are dead, you need money for your last rites

 

Money is required for every single stage of your life. We live in a world that thrives on Money. We don’t see this trend passing / changing anytime soon. The best thing is to use money as a tool, a mere tool so attain happiness. Not in terms of buying all luxuries available out there but to make wise decisions to have happiness and spread happiness in life of people who are connected with us.

Money is important but it’s also JUST money. Of course we should study hard, work hard to earn money but at the same time we must not lose our sleep over money. We should strive for a balanced life where you stop and smell the roses at will.
Wealthsamurai is about living life being lively, not about running around scouring for money all the time. We must focus on living a quality life instead of measuring our life by quantity of stuff we buy

Money & Life stages

From one’s point of view, there can be different stages in life with respect to money. Remember, this is only perspective – in general for a common man.

As one goes through different stages in life, the financial condition & goals are likely to change. They cannot stay constant over the entire life span. What holds good for you at early employment stage may not hold true when you are at the peak of your career. What is good for you at the peak, will likely change when you retire. If you manage your money well, you can strike a balance in all these years and can have a good plan for the years to come.

Stage 1:
Initial career years
From an Indian context, most of the parents pay for the kid’s education till University stage. So the first stage I am taking is early career years. The immediate goals for this stage may include buying a vehicle (a car or a two wheeler), planning for home, home furnishing, building a good credit history. However this might change soon as kids have started moving out on own soon and since education has become quite expensive, education loan is gradually become a trend now.
There is lot of energy and dreams at this stage. This stage decides how you will shape up your life, hence decisions taken are important and have long term impact on your life.

 

Stage 2:
Starting a family and career building
One may switch jobs for earning higher compensation to increase financial kitty, growing savings, buying home, start to plan for retirement funds, start a family, begin saving for kids education, buying adequate insurance etc Income typically rises in these years.
The right investment decisions taken at this stage leaves a long lasting impact on your life. Also since these are initial years, money accumulated and invested wisely comes handy at a later date.

 

Stage 3:
Pre-Retirement years
Your expenses more or less stabilize now due to high income. Kid’s higher education, their marriage , prepayment of home loan, any other long term loan prepayment, putting away more funds for retirement, taking professional help for financial planning/ retirement planning. At this stage you become more organized for retirement planning.

 

Stage 4:
Early retirement years
You are officially retired, but you may want to work for sometime more as you are in good health. This is just to support the lifestyle, travel. You now work towards consolidating the retirement savings into a regular monthly income, managing taxes, and do everything in making your savings last till you breathe last. Preparing will also come during these years.

 

Stage 5:
Twilight years
You may become less mobile due to age and health issues. The goals include planning for assisted living (trend is picking up in India now), tax optimization, efforts to make your money / savings outlive you. Prepare yourself for this stage well in advance when you are at stage 3 & stage 4. You can consult people who are undergoing stage 5 and plan well in advance.

To sum up, your goals will change with each stage and if you are well prepared mentally for each stage, you can plan well. A well planned, goal oriented life will put you in less stress financially and ultimately make you sail through your retirement years.

The ultimate retirement goal for anyone it to outlive his/her retirement fund.
If you plan well at different stages of your life, this goal is quite achievable.

~ WS

9 Ways you can ruin your wealth creation plan

 

In spite of being well educated, well traveled across – still we are prone to making mistakes in life. Some mistakes can be corrected easily but some have long term impact on your life. In financial journey too, there are some mistakes which have long term negative impact and after a point it’s impossible to come back from red zone into the green zone.

Worst money mistakes one can make

The journey to wealth requires a series of correct steps at right times pertaining to your finances. However there are a set of mistakes that exist which can ruin the hard work & self control of years.

I am listing them down below, they are not in sequence, but randomly placed. Anyone of these can ruin your financial plans and rock your retirement years

  1. Over spending: Overspending means spending more than you earn. This will keep increasing gap between your income and expenditure and ultimately the black hole will such all your resources.
  2. Not working to grow & maximize your career: Basic education is required and it is a must to embark on journey to wealth creation. Education helps you in understating things better, take rational approach, take timely decisions, plan strategies etc. Aim should be to maximize your career through education so that you have steady income for expenses and investments.
  3. Waiting to invest till right time comes: There is a Chinese proverb, “The best time to plant a tree was 20 years ago. The second best time is now.” The same goes for investing. Albert Einstein was amazed by the power of compounding and called it the eighth wonder of the world. The key is to start as soon as possible and to stay in the race as long as possible. You cannot time the markets hence the right time is now to start investing.
  1. Not saving enough: Unfortunately there is no magic figure or magic formula that if you save X% of your income you will become wealthy. The perspective of X% differs for a fresh graduate starting job and someone who has spent 30 years in corporate world. Most of the people make mistake in assuming “Things will work out eventually” They absolutely ignore inflation and rising costs of housing, costs of healthcare, education. These costs can make a big dent in your savings.
  1. Marrying the wrong person: Creating wealth is a team effort involving family members. Once you start working, gradually you tend to settle in life by marrying, planning for home, kids etc. It is very important to choose life partner carefully. A careful selection can make or break your plan of becoming wealthy. Both the spouses should be on same page as far as road to financial freedom is concerned.
  1. Not having enough insurance (life as well as health): People usually tend to ignore insurance. They take insurance to save tax and mix insurance with investments. This leaves them neither here nor there. Result is they are neither covered adequately nor their investment cum insurance policy sold to them by their trusted advisor is yielding any positive returns post inflation deduction. By doing this they are leaving their wealth creation plan in limbo.
  1. Investing heavily into real estate: Real estate investments are usually advisable once you are done with all other investments with proper asset allocation. House/flat for self consumption is not counted here. Reason why because real estate investments are big ticket purchase. Also the returns are usually good in long term. The process of buying ad selling could take up to 6-12 months. This makes them illiquid to certain extent. If you tilt your asset allocation towards real estate, you may run a risk. What if real estate pricing falls? One should take holistic approach towards real estate. Also since ticket size is big and you cannot sell part of the asset if you need money unlike stocks/mutual funds/bank deposits.
  1. Not having a will: No matter what’s your age, you must have a will. Creating a will is not grandpa / grandmas job. Whatever you have earned, whatever wealth you have accumulated so far should be passed on to your successors in case of something going wrong with you. Will also prevents strife in families at a later date. Even you should have nomination forms properly filled with banks and financial institutions where you have deposits. This makes life easy for family members in case of something going wrong with you.
  1. Buried deep in debt: Easy consumer loans lure you to fall into temptations of buying what your neighbors buy. This keeping with Joneses syndrome can be a big debt trap. Buy 80 inches 3D LED TV when you deserve, not on EMIs. Buy when you are ready financially. If EMIs are taking ac hunk out of your monthly income, you are not going to succeed in wealth creation. Have a practice of buying with cash.

 Avoiding above mistakes is not a rocket science, but takes a balanced well planned approach. As I said earlier, any one of the above is capable to derail your train to wealth creation.