Browse Tag: rich

Financial problems with an average family

Financial problems with an average family 

Most of us falls under an average family category. Average family usually comprise of husband & wife with one or two kids. In some cases husband and wife both are working and in some only husband is working hard to run the family and wife takes care of the kids and home.

 

average family

 

Everyone strive to be rich and wealthy whether it’s poor class or middle class. We all would like to enjoy the luxuries of life and we keep working to achieve the goal of becoming wealthy. But have we ever thought what keeps the poor class and middle class struggling to become rich? If everyone is working hard why an average middle class family remains a middle class family ? Why don’t they become rich say after 5 years of slogging ?

Let’s take a look at the financial problems with an average family which keeps it pulling back from realizing its dream of becoming wealthy.
average family

 

  • No financial planning: The single biggest problem for most people is that they just do not plan their finances. It just keeps coming and going. Even if they are not happy about the results they got so far, they do not change the way things are they do in their life.
  • Overspending: Many people with not very high incomes have very high ambitions. This is likely to get them to grief. In the stores too, gadgets and appliances are priced as EMI to lure people. It looks cool to have latest gadget and appliances hence people tend to stretch themselves and overspend. We have seen earlier how supermarkets are big traps?  
  • Not talking finance at home: Children are kept away from the finance topics at the dining table. Finance is perhaps the second most taboo topic at home! So many children grow up without knowing how much of sacrifice their parents have gone through to educate them. This makes children ignorant about finances and they repeat financial mistakes their parents made in the past.
  • Parents spending on education and marriage: There are just too many kids out there who believe that they need to worry about savings, investment and life insurance only when they cross 40 years. This means your father, father in-law or a bank loan has funded your education and marriage. Kids should take on financial responsibility at a much younger age than what is happening currently. Or rather parents should take lead and make their kids financially responsible.
  • Marriage between financially incompatible people: Most marriages under stress are actually under financial stress. Either the husband or the wife is from a rich background and the other partner cannot understand or cope with the spending pattern. Or the spending habits of partners are different. One is frugal and one is spendthrift causing severe financial imbalance in the family.
  • Delaying saving for retirement: “I am only 27 years old why should I think of retirement “ seems to be a very valid refrain for many working professionals! Every year that you delay in investing the greater the amount that you will have to save later in your life. Till the age of 35 it might be feasible for you to catch up, but after some time the amount that you need to save for retirement just flies away. We have seen earlier that delaying investments can cost you dearly. 
  • Inadequate life and medical insurance: With all the risks of lifestyles, travel, etc. illness and premature death are common. We buy vehicle insurance because it is forced upon us, but we ignore life insurance! Imagine insuring a INR10 lakh car, but not insuring (or under insuring) the person who is using the car — and paying for it, that is, you! We have seen earlier that Why we need insurance?  
  • Not prepared for medical emergencies: Normally big emergencies — financially speaking are medical emergencies. Being unprepared for them — by not having an emergency fund is quite common. Emergency fund has now come to mean the credit card.This is good news for the bank, not for the borrower. We have seen earlier that what is an emergency fund and why we need it?  
  • Lack of asset allocation: Risk is not a new concept. However, it is a difficult concept to understand. For example when the Sensex was 10k there was much less risk in the equity markets than there is today. However at 10k index people were afraid of the market. Now everybody and his aunt wants to be in the equity market — and there are enough advisors who keep saying, “Equity returns are superior to debt returns.” This is true with a rider — in the long run. It is convenient for the relationship manager to forget the rider. So there could be a much larger allocation to equity at higher prices — to make for the time missed out earlier. We have seen earlier that goal based investing is a good approach to have proper asset allocation. 
  • Falling prey to financial pitches: The quality of pitches has improved! Aggressive young kids are recruited by brokerage houses, banks, mutual funds, life insurance companies, etc. and all these kids are selling mutual funds, life insurance, portfolio management schemes, structured products, et al. Selling to their kith and kin helps these kids keep their jobs, and there is happiness all around! These kids, themselves prey to financial pitches, have now made it an art when they are selling to their own natural “circle of friends and relatives.”
  • Buying financial products from obligated persons. This is perhaps one of the worst things you can do in your financial life. A friend, relative, neighbor, colleague who has been doing something else suddenly becomes a financial guru because they have become an agent! Charity begins at home, not financial planning.
  • Financial illiteracy: Most people do not wish to know or learn about financial products. They simply ask, ”Where do I have to sign” — so buying a mutual fund is easier than buying life insurance! Selecting products based on the ease and simplicity of buying is a shocking but true real life experience in the financial behaviour of the rational human being!
  • Ignoring small numbers for too long: What difference will it make if I save INR5,000 a month? Well over a long period it could make you a millionaire! So start early and invest wisely. It will make you rich. That is the power of compounding. We have seen earlier the magical power of compounding
  • Urgent vs important: Most expenses, which look urgent, are perhaps not so important — the shirt or shoe at a sale. That luxury item which was being offered at 30 per cent discount is such an example. These small leakages are all reducing the amount of money you will have for the bigger things like education or retirement. We have seen earlier that how to tackle money leaks.

 

financial problems

The list can be long but the points mentioned above can well be attributed as hindrances that are responsible for middle class not becoming rich. So if you want to become wealthy, tackle these issues in your life one by one. I am sure you will be able to cross the fence sooner after tackling the above mentioned issues.

 

Happy investing !!!

 

Wealth Mantra: Buy assets and avoid liabilities

Wealth Mantra: Buy assets and avoid liabilities

 

Is there any formula which can make me or someone like me wealthy?

Keep on accumulating assets and keep on avoiding liabilities – This is a fool proof mantra to become wealthy.

 

Asset and liability

OK, but can you elaborate as I can not understand this? The terms liabilities and assets are too technical for me.

Don’t go into too much technical details about ASSETS and LIABILITIES. To keep things simple and easy to understand let’s consider asset as something that generates a positive cash flow regularly. This is something that was explained by Robert Kiyoski in his famous book Rich Dad & Poor Dad. Also, we will consider anything that takes money out of your pocket as liability.

The above assumptions are quite simple as you have a very clear demarcation between assets and liabilities. Let’s scan through some of the common items and check if they add up as your ASSET or qualify as LIABILITY to you.

HOUSE:
I am sure like everyone you also must be having a strong belief that your house is your biggest asset.

Yes, I have a big house with a big monthly payment going out against the home loan/ mortgage I took out to purchase it. It is indeed the biggest asset I have till date.

Keep our initial definition of ASSET and LIABILITY in mind. Let’s go through the expenses associated with a house.

  • You take out home loan/mortgage to buy a house. You pay processing fees, lawyers fee and several other charges while purchasing
  • You pay monthly maintenance charges to Association/Society for the upkeep of the common area and housekeeping charges for the common area
  • You pay sinking fund
  • You pay annual property taxes
  • You dole out money to keep the house in proper shape – maintaining cleanliness inside the house, make sure all taps, fittings, fixtures etc are in proper working condition.
  • You pay money for the repainting job every couple of years


The list can be pretty long. If you see, every single head mentioned above results in money going out of your pocket. Now if we go back to our original definition – it says anything that gives you regular return or puts money back into your pocket qualifies as an ASSET.

Now here we have our house which is not fitting in the definition of ASSET.

Sure, you can say that house price will appreciate in due course. But the appreciation can not match the kind of money that goes out of your pocket month on month to maintain the house.

So the house is a kind of liability. To counter the liability factor, one must buy the house which is of right size. The house which fits your need in terms of space and pricing. The moment you buy a bigger house than you need, money starts going into drain. Here I would like to add that if you have a rental property, then it is your ASSET not LIABILITY.

Oh, I was under the impression that I have a big house and it’s a big asset for me. Your arguments seems to be logical.

Let’s take CAR now:

It is said that the moment a car comes out of a showroom, it loses about 15% of its value.

On top of this, your car consumes money in

  • Fuel
  • Regular maintenance, oil changes, servicing etc.
  • Car depreciate with the passage of time
  • Wear and tear of tyres, other parts
  • Annual insurance premiums
  • Road tax

Here again we see that the car is consuming your money regularly. Hence your Car is also your LIABILITY. The takeaway here is unless you are super rich, don’t buy a bigger, expensive car. Remember a car is a mere tool to take you from point A to point B. So here again buy what you need, not what your neighbor drives. More details can be found here – Your car is not your asset

 

Hmmm sounds right. What about the items I owe like my belongings etc?

Now list down all your belongings. They are your LIABILITIES as they lose value over time. Be it your furniture, appliances, gadgets, books, DVDs, gaming devices etc. All depreciate. We have seen it earlier too here 

liability is bad

You have listed down almost all my possessions under LIABILITY column. I am now curious to know what qualifies as ASSET?

  • Your assets include your investments (FD/RD/ULIPs/Mutual funds, shares, ETF, Bonds)
  • Any commodity (Gold/ ornaments)
  • Collectible items
  • Art (paintings etc)
  • Rental properties
  • Cash you are holding

All the line items listed above generate income over a period of time. They put money into your pocket regularly so they all classify as your ASSET

The key here in accumulating assets is to make financial goals, stay focused and never crib about your income but keep investing regularly.

Now, let’s see something interesting based on the classification of ASSET and LIABILITIES. Let’s see what poor, middle class and wealthy people do.

Poor: They mostly own liabilities and keep spending on feeding their liabilities.

Middle class: They have some assets but they keep on buying liabilities and spend their chunk of income in feeding their liabilities. They avoid investments and usually spend money to buy and maintain things they don’t need.

Wealthy:They generate a lot of income from investments and keep reinvesting. They accumulate good amount of wealth which can be passed to their next generation.

Now financially independent class: This particular class has plenty of good assets and income from investments is enough to take care of all their expenses. They constantly look for investment opportunities and never averse of buying good assets.

Bottom-line is one must keep buying good income generating ASSETS and avoid LIABILITIES like plague. If you stick to this, none can stop you from becoming WEALTHY. As you go on accumulating good assets, you get more freedom to take calculated risk in order to go for higher gains.

 

Happy investing !!!