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Sunday, September 21, 2014

Open your mind : Increasing your income is not the only way to get wealthy.

This blog post is a part of the article already published in Complete Well Being magazine. 

When people think about getting wealthy, what they usually focus on, is increasing their income. Well, increasing your income is definitely one of the ways to get wealthy, but is definitely not the only way.  Let us look at some other avenues.

More often than not, people ignore the holistic picture. It is like assuming that the only way to make any nation self sufficient in power is to generate more power. What a tragic mistake. If you learn from countries like Japan, they have an equal focus on two other factors - how they can reduce electricity wastage and how they can make their devices more energy efficient. Of course, more electricity generation will also help to a good extent, but we must harness the power of all 3 modes - more generation, reducing wastage and innovating to make devices more energy efficient.

It goes the same way with handling money in our lives. While increasing income will surely help, but it is definitely not the only way to get wealthy. And it is certainly not worth it - if it makes you busier and takes away your family time, peace and happiness

Increasing the income has the potential to increase your savings by the same proportion. If you increase your income by 30% in a year, you can potentially save and invest a large portion of that increase.
However, quite conversely, the facts show something else. It has been observed that an increase in income generally leads to a proportionate increase in expenses, rather than increase in savings or investments. While a higher income is desirable, there are two other smarter and efficient modes to get wealthier, and these are often overlooked for lack of our own appreciation of the impact these factors can have on our financial portfolio. 

(1) Reducing your expenses
Do not ever underestimate the power of managing and tracking your expenses. A penny saved is a dollar earned. Sounds old generation, but this wealth management principle is time tested and proven. You typically save only 20% of what you earn. So, if you can save Rs. 1000 extra in the next month, that is equivalent to an increase in Rs. 5000 income. Get your mindset right with savings.

(2) Increasing your returns on investments
This is all about getting innovative. As your wealth grows bigger, even a small % increase in your return on investments can have a much more significant impact on your wealth than a substantial increase in your income. 
Let us see this with a small example.
If you earn Rs.80,000 per month and have built a corpus of Rs. 2 Crores over the years, then a 2% increase in your return on investments on your corpus would mean an increase of returns by Rs. 4 Lacs per annum or approx Rs. 35,000 pm. If you compare this increase with your monthly income, this is almost equivalent to a 40%-50% jump in monthly income. 
Now, I tell you this. If you focus on increasing your income by 50%, it might take you 4-5 years, assuming you are one of the best performers and all other 'uncontrollable' factors fall in place. And I can tell you by my own experience that if you focus even a little bit on your asset allocation in the portfolio, learn a few fundamentals and making an attempt in implementing them - then you can increase your returns by 2% in less than one year. Is it worth the effort? You decide. Another important fact here is that in this case, you are letting money work for you, rather than you working for money - a time tested principle for financial freedom

So, open up your mind - spend adequate time in tracking and controlling your expenses and also on getting better returns on your portfolio.

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