Skip to main content

What important financial rule do most people break?

Lets start with a character.
Rohit recently completed his engineering. He is placed in an IT firm with an annual package of Rs. 7.2 lakh ($ 10,000). His take home after tax income is Rs 50,000 ($ 700).
Rohit said, “Hey Sahil! I have got a new car.
I said, “Congratulations! That’s cool. Which car did you buy?
Rohit,“ I always dreamt about Honda City since my engineering days. Hence I got my dream car.
Image source: google
I said, “But you recently started your job. How did you manage to get the money to finance the car?”
Rohit, “I got it on EMI with 90% loan. The EMI comes out Rs. 20,109 ($ 282) for 6 years.”
I said, “But that’s a lot of money. How much do you save monthly?”.
Rohit, “Saving? Bro, I am just 24 years old. I have my entire life to save. Moreover, I want to enjoy my life for the next 5-6 years. It is too early to think about savings.”
Fast forward 6 years when I met Rohit in one of our common friend’s wedding.
I said, “Hey Rohit! Congratulations! I heard you got married. How is life?
Rohit said, “Thanks, Bro! Everything is good but there is only one problem.”
I asked, “What?”
Rohit-“It’s been 6 years since I started earning. My package is now Rs 15 lakh ($ 21,200). But the problem is that I have not saved anything yet. Now when I plan to save, I find that even 1 lakh ($ 1413) a month after tax is less for my expenses. I am not sure how to manage my expenses. I don’t know even after earning so much, I do not have any wealth. I am paying EMI’s and living paycheck to paycheck.”
This is a common problem across the world!
The common financial rule that most people break is not to develop “habit of saving”. It sounds cheap! It sounds UNCOOL!
  • Most of the people live paycheck to paycheck with most of their salary spent in their expenses.
  • The biggest problem is that they don’t have any control over their expenses. They just spent money on credit card and keep paying the credit card bills.
They don’t understand that:
  • It is not about being cheap but it is about developing a habit of saving and investing.
  • It is about investing in assets and not in liabilities.
  • It is about spending in limits!
I am not saying that one should not get a car or one should not go on vacation. However, it is about knowing the limits.
The entire idea of spending today and saving tomorrow never works. The reason is that these young people never develop the habit of savings. Their lifestyle is such that they always run out of cash.
If they get an increment and hike, they spent it on fancy dinners and vacations. Then they wonder, where is the money going!
On top of that, they lose out on the 8th wonder of the world (according to Albert Einstein) - Power of Compounding.
Just to explain the power of compounding-
If Rohit had started investing Rs 10,000 ($ 140) a month when he started earning from the age of 24 and invested for 10 years till the age of 33. He would have made Rs 12 crore ( $ 1,700k) by the age of 60 at the rate of 15% annual return with a total investment of Rs 12 lakh ($ 17k).
Whereas, if Rohit would start investing by 33 till the age of 60, he would make only Rs 4.5 crore ($ 636k) with a total investment of Rs 33.6 lakh ($ 47.5 k) for 28 years.
Do you want to make 12 crores ($ 1,700 k) with a habit to save Rs 10,000 ($ 140) per month for 10 years or do you want to make Rs 4.5 crore ($ 636 k) by investing Rs 33.6 lakh ( $ 47.5 k) for 28 years?

Comments

Popular posts from this blog

How to Read the Right Way: A Complete Guide

The nature of books has evolved. Society and technology have changed. Forcibly, our approach to reading has taken on new forms to accommodate a different way of life. The question is: For better or worse? Although books give us new ideas, spark discussions, and explore topics in detail, the same information can be delivered in a variety of formats. When it comes to exactly  how  we should absorbing books, the debate rages on. Let’s take a look. The Effectiveness of Speed Reading Since the 1950s, speed reading has been touted as an effective way to get through reading material quickly. Scientists, psychologists, and teachers have come up with methods to increase reading speed, whether through manual tools or visual movements. At the World Championship Speed Reading Competition, top contestants can reach 1,000 to 2,000 words per minute. Six-time champion Anne Jones reached 4,200 words per minute at one point. Those rates seem phenomenal compared to the  ...

I'm 25 years old and I want to become a millionaire by 35. How do I do this?

A bit of simple advice that works for any age. Copy what millionaires do. I’ve studied over 40 millionaires and finally found out their secret to wealth. It took me a long time to piece together the puzzle, but I’ve finally figured it out. Here’s the golden question: What do Elon Musk, Warren Buffet, Bill Gates, Mark Zuckerberg, Mark Cuban, and Tonny Robbins have in common? Besides the mulah...they all  read . Yep - reading. Don’t believe me? Let one of the most successful and admired entrepreneurs tell you... Musk built four multibillion-dollar companies by his mid-40s -- in four separate fields (energy, software, transportation and aerospace). How is that possible?  Because he reads. SpaceX co-founder, Jim Cantrell, mentions Elon Musk’s passion for reading, He'd been borrowing all my college textbooks on rocketry and propulsion. You know, whenever anybody asks Elon how he learned to build rockets, he says, 'I read books.' Well, it's true. [...

There Are Two Ways to Read — One Is Useless

Reading is telepathy, and a book is the most powerful technology invented. Homer, Shakespeare, Voltaire, Flaubert, Tolstoy, Woolf, Hemingway — these are names without a living body. We can’t talk to them, nor touch them, but their thoughts are immortalized through the written word. Aristotle’s logic, Kepler’s astronomy, Newton’s physics, Darwin’s biology, Wittgenstein's philosophy — these are memes without living originators. They no longer champion their ideas, and yet, we still talk about them. Without books, humans would never have escaped the boundaries of space and time. Each new generation would have had to learn the realities of life for themselves rather having the luxury to build on the past; knowledge accumulation would have quickly dimmed towards an asymptote. Everything that we value in the modern world has its root in invention of writing. Everything that we have accomplished has come from reading. Even on an individual level, one of the most effective way...