Sunday, March 01, 2015

Four levers that create wealth for you

Most of us feel that increasing our income will make us wealthy, and that is why we focus most of our energy on getting a higher salary or getting more profitability of our organisation. We forget that increasing our income is just one of the levers to wealth creation, and NOT a very significant one. Ignore the other three levers at your own peril...read on...
It was 9 AM right now. Vinay was anxiously waiting for the phone call. His supervisor was supposed to call him up at 11 AM. Today. He made sure that he reached office an hour earlier, out of sheer excitement and curiosity of the upcoming promotion declaration. After 2 hours, he would be the Vice-President of the company - a dream he had cherished over the last few years. His mind started venturing to the kind of hard work that he has been doing over the last 12 months for this promotion. Out station trips to get new contracts, sitting late in office and at client sites to make sure that nothing can go against the deal, working  over weekends to stay ahead of his competition, spending time and effort on building a great relationship with his supervisor - in and outside the office. And then, once the promotion goes through, he can spend some time with his family and on his fitness, and all the other important things that he neglected over the last few years. Everything was going as per the plan, he thought.

His train of thoughts were interrupted by the telephone ring. He picked it up with childish excitement. It was his supervisor on the other side. Vinay listened on, as his face played all possible emotions from exuberance to maturity to anger to depression. He kept the phone down after 3 minutes, and kept looking at the telephone instrument for a long time.

Sneha, his colleague in office, had just arrived at her desk. She saw an unusually depressed Vinay and asked him to join her for tea. Vinay obliged. Over tea, Vinay shared the entire event with Sneha, and how depressed he feels right now, after 20 years of hard work with this company.

Sneha consoled him, and said
“Vinay, that is the problem with most of us who are in this race to earn more money and strive for better positions. We think this is the only way to get wealthy.”

“What do you mean? I mean how else can you get wealthy if you don't get promoted and earn more money?”

“I had exactly the same mindset till 6 months back. Then, I met an author in one of the workshops I attended and he explained me something that changed my entire outlook towards wealth building. Let me help you with some of that.”

“Please do that Sneha. I would be so thankful if you can give me some alternatives.”

“Sure, here we go. There are four (4) levers that catapult our wealth in the long run, and increasing our income is just the first of them. Also, this lever, does not have the biggest impact on our wealth.”

“Are you saying that, while staying in a job, I have other ways to increase my wealth than to just focus on increasing my income?”

“Yes Vinay, you are absolutely correct, and those levers are equally powerful, if not more, vis-a-vis just increasing your income. Hold on and let me explain you all the levers”

Vinay was back this childish excitement, as he listened on to Priya.

Lever 1 (Increase your income)
This is where most of us are focussed on. Probably, this is the only lever most of us are aware of. While this is a good lever to increase your wealth, the impact of this lever on your overall wealth is just ‘Medium’. So, while we must pay attention to this lever, but only to its fair share. We should not be burning all our energies on this lever.

Lever 2 (Increase your net income)
Most of us struggle for a 5-10% increment every year and we conveniently forget or ignore the fact that we pay close to 30% of our income to the government via taxes. The money that we take home is far less than what the company gives us. On the top of that, most of us feel that we do whatever we can do about taxes, but the fact is that a vast majority of us do not spend enough time to understand the nuances of smart investing which can save us good amount of our taxes. If we invest some of our time in getting smarter about taxes and how to reduce some of those, it is very easy to contribute the same amount of money to our corpus, as we get in our annual increment. This lever also has a medium impact on our wealth, but needs much lesser effort than Lever 1. It is worth spending a fair portion of our time on this lever.

Lever 3 (Reduce your expenses)
Do not get me wrong here. No where, I am saying that you must lead a saintly life and stop spending money. What I am only saying here is that we should eliminate the unwanted expenses and get wiser about spending. One of the techniques that has worked for me here is tracking my expenses on a daily basis. Did you know that just getting into this habit of spending 2 minutes every evening and tracking your family expenses can reduce your expenses by as much as 15-18%? Yes, this is scientifically proven. And do not underestimate the power of this 15-18%, remember that one rupee saved is equivalent to five rupees earned because typically you save only 20% of your earnings. The contribution of reduced expenses to your wealth corpus can be humongous in the long run, much much more than your increased income. What we need is to inculcate good habits and discipline of tracking our family expenses every day.

Lever 4 (Get your money to work hard for you)
This is where most of us get it wrong. And this lever has the biggest impact on your wealth. Let me explain you. Over the last 20 years, you must have earned and saved a lot of money. Do you know how your saved or invested money has been performing year on year? Don't only consider the real estate that you invested 5 years back and got decent returns on. I am talking about your entire portfolio comprising FDs, RDs, Mutual Funds, Equity Stocks, PPF, EPF, Gold, Real Estate, Insurance and every other investment that you have done until now. Do you have a documented list of how much money is invested where? What is the performance of each of your investment? What are your returns from each of your investments and your overall portfolio last year, and a year before that? If you do not know the answers to all these questions, you are missing out on the biggest lever in your hand. Look at it this way. You are the CEO of your life, and each invested asset is your employee. You got to monitor the performance of each of your employees, and make them work hard for you. If some of them are not giving great results, you must replace them with more productive assets  - employees that can get you better returns. All this will happen if you invest some time on this lever, and start tracking the performance. A 2% increase in your portfolio returns by getting smarter about your portfolio can far exceed the impact of 20% increase in annual income.

“So, what do you say Vinay?”

“To be frank Sneha, I had never ever looked beyond Lever 1 in my life. I think you are right. Can you help me get started?”

“Of course I can Vinay. Getting aware of these 4 levers, and getting smarter about using these 4 levers in my life has, in fact, helped me earn back time in my life, while increasing my overall wealth. I have more time now to spend on my relationships and myself. I spend more time with my kids. I know what they study in school. I am also able to spend time on my fitness and health. I also have some time to help you. Lets get on to this today itself.”

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Cheers

Manoj Arora
Freedom can buy you.... what money cannot !!

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