Free Press Journal

The difference between being rich and being wealthy


Wealth is not about how much money you make, but how much you keep. The problem with money is that if it is not managed intelligently, it can go as quickly as it comes. No matter how much money you make, without financial intelligence it can land you in financial mess, writes A L I Chougule

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There is a mistaken belief about money that it solves all financial problems. On the contrary, according to financial experts, it can create more problems or aggravate existing problems. There are several examples of people – actors, models and professional sportspersons like athletes, boxers, cricketers, tennis players etc – who made millions in their heydays and ended up broke a few years down the line. Mike Tyson, Burt Reynolds, Vince McMohan, Francis Ford Coppola, Adam Hollioake, Bjorn Borg, Marion Jones, Evander Holyfield and Kenny Anderson are just a few popular names who squandered their wealth.

“Most people fail to realise that in life, it’s not how much money you make,” writes Robert Kiyosaki in Rich Dad Poor Dad, a personal finance classic. “It is how much money you keep.” But often the problem with money is that it can go as quickly as it comes.

That’s because when the inflow jumps suddenly, people have the tendency to lose control on their spending behaviour which, in some cases, becomes a chronic habit of overspending.  “Money often makes obvious our tragic human flaws, putting a spotlight on what we don’t know,” explains Kiyosaki. “That is why, all too often, a person who comes into a sudden windfall of cash — let’s say an inheritance, a pay raise, or lottery winnings — soon returns to the same financial mess, if not worse, than the mess they were in before.”

In simple words, what it means is that the money you have or the big fat salary one gets does not necessarily compare to wealth. It is just a number and if the real wealth behind that number is not managed properly, it can fall to pieces in no time. After all, no matter how rich you are or how many zeroes are there in your salary slip, if you don’t know how to manage money, it’s quite likely that at the end of the day you may not have enough left in your kitty. “Money without intelligence is money soon gone,” warns Kiyosaki.

What’s money intelligence then? According to author Susan Wahhab, money intelligence is the ability to make the money, manage what you earn or make, spend it responsibly and invest it wisely.

“It’s about making the right choices with money and life,” she says. It has nothing to do with your intellectual or emotional quotient, nor your qualification. You need not be an expert in financial planning, or an MBA in finance, to manage your money. All you need is money discipline and financial intelligence. Even financial experts can’t do without it in their personal life.

While human beings have the innate desire to save for the rainy day, whether one admits it or not, the truth is all of us are guilty of financial mismanagement at some point or the other.

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For instance, splurging money on things you don’t need or even use is not uncommon. Often the unconscious mind is tempted by clever advertising and marketing to think irrationally which, many a time, breeds impractical consumer behaviour.  Irrationality is bane of financial intelligence as it violates financial discipline needed to manage money.

In modern monetised times money is a necessity no one can do without. It is a must-have for all seasons for all kinds of spending necessities. While the pursuit to earn continues till the end of one’s working age, the pursuit to save is as much necessary.

But how much should you save? Ideally, according to financial experts, one should save at least about 20 per cent of your earnings; the saving percentage could be higher if you fall in higher income bracket. Of the remaining 80 per cent, 50 per cent should go towards necessities and 30 per cent towards discretionary spending. This 50-30-20 is a popular thumb rule recommended by financial planners. But it can be tweaked in individual cases, depending on earning potential and financial obligations.

Like it or not, money is often the root cause of all your financial problems. There is no financial indiscipline or irrational consumer behaviour when you have little money.

Problem begins with increase in money supply in any form. That’s when financial indiscipline kicks in as the thumb rule of saving is ignored and financial intelligence goes for a toss. Most often, the additional money supply gets eaten up by additional spending arising out of need, discretion or plain impulse. Impulsive spending often results in regret or guilt as it violates the basic rules of financial planning. Not learning from mistakes can be even more costly.

For most average Indians, wealth creation through systematic saving plan can be a complex thing. As you earn more, your expectations and aspirations also move up. A decent pay hike would mean not only higher taxes but higher personal consumption as well as higher discretionary spending like a better house or car.

There is no end to expectations and aspirations as you move higher and higher in income bracket. But you can be in the same financial mess as before if you fail to plan your expenses and curb discretionary spending. Absence of filtering mechanism to control expenses and conspicuous consumption can be too costly as the money that comes in is likely to go out, leaving little or nothing in the kitty.

Ideally, the single most important feature to recognise for healthy wealth creation is the ability to produce a surplus, or saving in common language. Remember the popular old wisdom, money saved is money earned? The more you save today, the more you will have tomorrow. Unless you focus on bettering your savings and ensure that more money is coming in than going out, it is quite unlikely that you will save enough by the time you reach the end of your working age.

Hence putting a systematic saving plan in place quite early is a must.  But saving a fixed sum each month alone is not enough; you have to make it grow. It is also not wise to park all your savings in one single investment instrument like, for instance, fixed deposit in bank. You need to work out a systematic investment plan to diversify your savings in multiple investment instruments like insurance, bonds, mutual funds and even equities, if you have the risk appetite, to ensure optimal returns on investment.

There are two kinds of people – wealth creators and wealth destroyers.  People, who look for opportunities, have career goals, work hard to realise their dreams and accumulate wealth/assets are called wealth creators. Wealth destroyers are those who do not create enough for their survival but live on inherited wealth. People who accumulate wealth create assets. Those who do not create enough live in debt and hence create liabilities for themselves. Understanding the difference between an asset and a liability, which distinguishes between wealth and debt, is a primary distinction to recognise if you want to accumulate wealth by bettering your savings.

Earn enough, save enough should be a lifetime goal. That’s money intelligence in simple words. Investing your money diligently is financial intelligence. And asset creation is wealth wisdom. Earning, spending wisely, saving and investing intelligently are the building blocks of personal finance.