Can You Call Yourself Rich?

Can You Call Yourself Rich?

 

The happiest person is the richest person, and why wouldn’t we be happy if we had Richie Rich’s mansion, safes and robot maid?

‘Being rich’ is a relative term, however, two common factors which determine the richness of a person are the amount of savings and investments. But, a 10-year delay can destroy your ‘get-rich’ plan.

So, can you call yourself rich?

Let’s look at these two factors in greater detail. And soon you’ll know how to get rich today!

Savings:

The first factor which determines how rich you are is your income vis-à-vis your expenses. Logically, the lesser you spend the higher your savings in hand will be and the richer you will be.

Savings are basically comprised of two components: Income and Expenses.

While it may not be very easy to increase your income levels, it is relatively easier to reduce the expenses. Again, reducing discretionary expenses may be easy. But cutting back on non discretionary expenses is extremely difficult, if not impossible. Budgeting can transform your financial life.

For example, house rent, cost of groceries and vegetables, school fees for your children or medical expenses can’t be compromised on. But, one thing to remember is that most of these non discretionary expenses are largely determined by the cost of living in your city.

Let’s take the case of Vishal, who lives in Noida and has a monthly income of Rs. 1.2 lakh. His average monthly expenses are as below:

• His monthly expenses on grocery and utility bills come up to Rs. 15,000.
• He pays a rent of Rs. 25,000 for his 2 bedroom apartment.
• He has two children studying in an international school which charges a monthly fee of Rs. 30,000.
• In addition to this, Vishal takes his family out to weekly dinners and watches a movie every week.
• The monthly entertainment expenses in addition to fuel costs come up to Rs. 20,000 in a month.

Depending on his lifestyle expenses, this amount could go down or up in any month.

So, on an average Vishal saves Rs. 30,000 in a month.

Now, let’s compare this to what Vishal’s cash flow statement would look like if he stayed in a smaller city, like Coimbatore.

His income would be marginally lower at Rs. 1 lakh per month. His expenses would be much lower too.

• His 2 bedroom apartment’s rent costs him Rs. 10,000. Grocery and utility bills come up to Rs. 12,000.
• His children are not in an international school, but get good education at a monthly fee of Rs. 10,000.
• The entertainment options in Coimbatore are numbered compared to Delhi. But, Vishal continues to take his family out on weekends.
• Restaurant bills are lower and distances are shorter, and fuel costs are lower as well. Entertainment expenses and fuel costs come up to Rs. 13,000 a month.

As a result Vishal saves Rs. 55,000 on an average every month.

This shows that even with Rs.1.2 lakhs per month, Vishal is not rich, as he saves only Rs.30,000 a month.

But with a lower income in a small city, he is richer than this.

Bottom line: Your income is not the scale to measure how rich you are.

Investments:

Another factor which determines if you are rich is the extent and nature of the investments you’ve made. While making investments is inherently a good thing and can boost your financial strength, the type of investments and the investment strategy plays an important role in determining if you really are rich.

Take the example of Ram and Shyam, both of whom had a corpus of Rs. 1 crore to invest on retirement. Ram invested the amount in land as he thought that it was a good opportunity.

Shyam invested the amount partly in fixed deposits and partly in equity mutual funds. While both Ram and Shyam own investments and have wealth, who is the richer one?

Ram or Shyam?

Ram has invested the amount in an illiquid asset and as a result, the money is blocked. He does not get a regular income from his investment. Also, it may not always be easy to sell land in case he needs funds. The land value will appreciate over time. However, the level of appreciation depends on a variety of factors including the locations potential.

Shyam’s investment in fixed deposits and mutual funds is highly liquid compared to Ram’s investment in land. Fixed deposits and mutual funds can be sold at short notice and without much of a hassle. If the investment in fixed deposit is made with an option of monthly or quarterly payout of interest, there is a regular flow of income from the investment.

Similarly, if the investment in mutual funds is made with a dividend payout option, this also yields a regular income. There is a capital appreciation as well on equity mutual funds, although the extent of appreciation depends on market conditions.

Then who is richer?

A comparative analysis of the investments indicate that Shyam can call himself richer as his investments are liquid and also yield a regular income. Land and property are, of course, considered ideal and must-have investments for the average Indian. However, investing in liquid assets which give you returns is much more suitable for an individual from all points of view.

Conclusion: You can’t really become rich simply by earning a higher income or by investing mindlessly. It is more important to cut back on lifestyle expenses and invest in the right nature of investments. These can actually make you Richie Rich.

 

Happy Investing