Why you'll never become Rich so long as you don't follow these simple steps

Ramalingam K (Founder & Director - Holistic Investment Planners (P) Limited)   (21077 Points)

04 February 2014  

It’s a fact of life that, if you don’t follow this simple and very obvious money management code, you will never ever become rich. Don’t let the negligence to follow this, keep you from becoming rich.


To become profitable and stay profitable, the bigger organizations always look at cost cutting methods. They cut a part from the salaries, reduce expenses on travel, in serious situations, go to an extend of laying off some employees. They do this to increase the net worth of the company year after year.


Likewise, to become rich and stay as rich, you need to increase your personal net worth year after year. Cutting on your unnecessary spending is the most important aspect of increasing your personal net worth and saving for a rainy day and keeping away from the fire.


How come a cut on spending save you from disasters? How can one determine what to buy or what not to spend on? What happens when we buy more? Read on.


The biggest threat to your savings:


I have a credit card, just scratch it whenever I want to buy something and pay it off every month, where is the problem here when I don’t pay any extra cash?


Keeping a credit limit and paying off every month doesn’t help at all in the long run. Have you ever returned empty handed when you go for window shopping at the malls? Need it or not, considering the monthly limit one has set, they tend to buy more unwanted things. If you buy things you do not needsoon you have to sell things you need.


Your credit card limit need not be your monthly expenses limit. Your monthly expenses should be based on the monthly budget you have prepared. Remember Warren Buffet’s quote here. "Do not save what is left after spending, but spend what is left after saving".


Do you track your expenses periodically?


We all make budgets periodically, but how many of you are tracking the expenses? Tracking your expenses will help you to identify the areas where you need to implement the cost cutting measures. Do not think about spending all the money on vacation while getting a bonus. Add a percentage from the bonus on the amount you have kept for vacation. Keep the rest for other necessary expenses or add it on your investment. It is important to remember the ancient story of learning from ants saving for rainy days.


How to transform your savings into wealth?


Robert Kiyosaki: "It's not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for."


The biggest challenge to transform your savings into wealth is inflation. Inflation reduces the purchasing power of your savings. How can you beat inflation?


Imagine an escalator which is coming down. If you have to use that escalator to go up, what you need to do? You need to climb up the escalator at much faster speed than the speed at which it is coming down.


So as to beat the inflation, you need to invest in avenues which can generate more rate of return than the inflation rate. It is your hard earned money. Now you make it work hard for you and generate more returns for you by investing in prudent investment avenues.


Why should one aim at having a passive income?


With the fluctuating job market, have you made any plans for the unexpected expenses if you sit without a salary for few months? How long you can survive just with the money from your savings? Think about it. Having an additional income will help in need. When you have an additional income, you can run your family without any worries and use the money from savings only for emergencies.


The speaker and the finance expert, Dave Ramsey quotes beautifully here. "Financial peace isn't the acquisition of stuff. It's learning to live on less than you make, so you can give money back and have money to invest. You can't win until you do this."


How can we retrieve a passive income? Your investments can generate a passive income. Stop unnecessary spending and start saving and investing for your rainy days. Creating a corpus of investments to the extent the passive income generated from those investments should take care of your living. Once you reach that point then you can stop going to work and start thinking of retiring.


- What do you want to achieve?

- Add more things at home and compress your savings?

- How do you want to spend your time after retirement? Relaxing or running around in a new job?

- Do you want to save some for the generations to come?


Answer these questions and start cutting on your unnecessary spending right now.


The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Founder and Director of Holistic Investment Planners (https://holisticinvestment.in/) a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam @ holisticinvestment.in.