Wealth Quadrants

The below picture clearly shows in which quadrants we should be in order to create wealth. Most people who are millionaires have become so by staying in the quadrant where they are invested in stocks and real estate. Gold and Silver are usually seen as an instrument to keep one above inflation and hence its a preserver of wealth.

One has to further identify in one's spending habits those expenditures that are taking money away.

The concept has been adopted from Mr. Sanjay Mathai's book where he explains that income will stop one day, but wealth creation goes on, provided one is consciously working on the above quadrants. The earlier you get in, into quadrant one and two with green signals, the larger will the wealth be, that you create.

DEBT

DEBT - the state of owing money

Debt: - What is it!

An action, state of mind, or object one has an obligation to perform for another, adopt toward another, or give to another.

The state or condition of owing something to another.

I am in your debt.

Money that one person or entity owes or is required to pay to another, generally as a result of a loan or other financial transaction.

(source – iwise.com)

DEBT and how to stay out of it

1.       Have many sources of income.

2.       Have healthy spending habits.

3.       Spend less then you earn.

4.       Save

5.       Invest

6.       Have a written budget

7.       Create an Emergency Fund (6 times your monthly salary/income).

8.       Stay away from Credit Cards

If one has to get into DEBTS then only two kinds qualify as being worthwhile.

One a debt that helps you create an asset. For example you buy a house and pay Installments for it. The value of property is expected to go up over time and hence it is considered an asset.

Second Knowledge is also an asset.  Since a good education, acquired skills and knowledge acquired at work or by reading helps in enhancing ones mental horizons and giving new skills which in turn can be used for making money (asset), we can consider getting into debt for acquiring knowledge as also a pardonable offence.

So Where Debt is okay:

For creating an asset – Like buying a house

For enhancing your Knowledge – Taking an education loan for enhancing your skills.         

So an Asset is – Anything that brings money to you.

A Liability is – Anything that takes money away from you.

A few Quotes

“Rather go to bed without dinner than to rise in Debt”

– Benjamin Franklin

“Some debts are fun when you are acquiring them, but none are fun when you set about retiring them.”
-Ogden Nash

“What can be added to the happiness of a man who is in health, out of debt, and has a clear conscience?”
-Adam Smith

“It is the debtor that is ruined by hard times.”
-Rutherford B. Hayes

“We all think we’re going to get out of debt.”
-Louie Anderson

“Interest on debts grow without rain.”
-Yiddish Proverb

“The only man who sticks closer to you in adversity than a friend is a creditor.”
-Unknown

“The borrower is servant to the lender.”
-The Bible

“When you get in debt you become a slave.”
-Andrew Jackson

“Never spend your money before you have it.”
-Thomas Jefferson

“If you think nobody cares if you’re alive, try missing a couple of car payments.”
-Earl Wilson

“A man in debt is so far a slave.”
-Ralph Waldo Emerson

“There are but two ways of paying debt: Increase of industry in raising income, increase of thrift in laying out.”
-Thomas Carlyle

“Debt is the worst poverty.”
-Thomas Fuller

At a spiritual Level meaning of DEBT

In the Hindu way of life there are five types of debts prescribed in the scriptures along with ways how to repay them.

Dharma (Righteous Living, Dharma also means righteousness, or living morally and ethically at all times.) says it is our duty to pay the five debts. Hindus believe that they are born in debt to the gods and various humans, and they must repay those karmic debts during their lifetime. The debts are:

1.    Debt to the gods for their blessings; paid by rituals and offerings.

2.    Debt to parents and teachers; paid by supporting them, having children of one's own and passing along knowledge.

3.    Debt to guests; repaid by treating them as if they were gods visiting one's home.

4.    Debt to other human beings; repaid by treating them with respect.

5.    Debt to all other living beings; repaid by offering good will, food or any other help that is appropriate.

In the Mahabharata Yaksha asks Yudhishthira several questions one of them pertaining to happiness as below. The answer is worth considering.

Question: the Yaksha asked: Who is truly happy? What is the greatest wonder? What is the path? And what is the news?

Yudhishthira: He who has no debts is truly happy. Day after day countless people die. Yet the living wish to live forever. O Lord, what can be a greater wonder? Argument leads to no certain conclusion, the Srutis are different from one another; there is not even one Rishi whose opinion can be accepted by all; the truth about Dharma and duty is hid in caves of our heart: therefore, that alone is the path along which the great have trod. This world full of ignorance is like a pan. The sun is fire, the days and nights are fuel. The months and the seasons constitute the wooden ladle. Time is the cook that is cooking all creatures in that pan (with such aids); this is the news

Meaning of the Word Yaksha: (Sanskrit: यक्ष yakṣa) is the name of a broad class of nature-spirits, usually benevolent, who are caretakers of the natural treasures hidden in the earth and tree roots. 

 Chanakya believed:

Nothing should be allowed to remain of debts, enemies and disease.

According to Chanakya The debt that cannot be paid back….

A guru who shows his disciple the path of righteousness leaves a huge debt. It cannot be paid back as none of the physical objects is so precious.

The purpose of the above information is only to draw attention to the fact that being in debt or engaging in activities that would bring one in debt or enhance it, is considered extremely dishonorable in the Hindu way of life and the biggest burden one can carry. Credit cards, consumption loans or any other such types of loans will only bring misery in the end. Since in the Hindu way we see life as continuity into the next, we carry the skills and burdens of this life into the next. In short there is no escape from debt in this birth or the next. Spend what you earn and a little less. 

Saving - Role of Saving in the Financial Planning Process

SAVING

In India there is a saying:

“To save Money for a Saint is a sin AND, to not save Money for a family Man is a sin”

If one is completely out of debt saving is not an issue and one must save regularly. However if one is in debt then one must make provision for both. Pay the debt, as well as save a little. Staying out of debt is the first step in building a healthy corpus.

Your Creative Energy is at the highest from the age of 15 to 40. These 25 years are what make your future.  Since time is a very important factor in saving so one can always start late only to retire later.

Why Save?

To provision for uncertainty.  You must have kept aside for 3 months of your expenses. That is the usual wisdom. However I recommend to have savings of atleast 6 months. In case you lose a job it takes usually 3 to 4 months these days to get a job. You should provision for yourself and your family for minimum 6 months.

To create a healthy habit.

To build a Corpus to retire peacefully.

How much to save?

Either save a fixed amount or save a fixed percentage of your income regularly, say monthly.

Ask yourself how much is it possible for you to save in terms of Fixed Amount of Rupees, Rs. 500, Rs, 1000, Rs. 5000 etc or take a percentage of the money you earn each month.  Say you earn Rs. 20,000 a month. You could start saving Rs. 500 monthly which is 2.5% of your monthly income.  As your income grows you can save more by increasing the percentage to 5% of what you earn.

How to start saving?

Best option is to start with RD’s (Recurring Deposits).  Most banks do not issue Rs. 500 RD’s and in such case you open an RD account at the local post office which encourage small savings.

An important principle in saving is that you buy less.

Always ask yourself before buying something if you really need it? So, rich people are rich not because they have more money, but because they spend less. How much ever you earn, remember your expenses will always outpace your income.

Another principle to increase your savings is not to borrow.

In simple words stay out of debt.

If you keep healthy spending habits you won’t have to take a credit card or any other such instrument which eventually will get you into trouble.  There will be periods in life where your cash flow will get disturbed and then your loans will mess up your savings completely.

Yet another principle in saving is to start as early as possible

The earlier you start the more you are able to save over time. How does time and compounding help will be explained in another article. The Time factor is crucial to savings.

Now you might say, how I spend less if I want to buy a car or a TV or some expensive item which is something you cannot pay in one payment.  First always ask yourself if you really need it or a cheaper version will do? Can you buy a second hand version for the time being? Secondly if you are applying to the bank for a loan, make sure you have provision made for a year and a half of payments for what you buy. For example you want to buy a car and your monthly installment is Rs. 10,000. Make sure you have Rs. 180,000 in your bank account before you buy the car. This is to save you the embarrassment of the bank calling you to pay for the installment in case you lose your job or some other big expense crops up. Once you default, your credit history is spoilt and you will find it more difficult to take a loan in future.

This is where RD’s (Recurring Deposits) again come in handy. Say you want to buy a TV that is costing Rs. 60,000. You can open up an RD of Rs. 5000 for one year and buy the TV once money is accumulated.

Financial Wisdom: Take a loan only for creating an asset.

Asset: Anything that brings you money

Liability: Anything that takes money away from you

Why Financial Planning - Pillars of Financial Planning.

A plan might not necessarily get fulfilled but it gives you focus and direction. You are more likely to achieve your goals if you have them written in front of you rather then not having well thought out goals. Goals give direction. In addition your energy is not scattered any more.

Requirements or desires will always be more then your income. So prioritizing them helps and correct allocation, or near correct allocation of your income takes place.

Since energy is always highest from your teens onwards to around the age of 50 so financial planning and saving should also start early.

Pillars of Financial Planning

• Start as Early as you can
• Pay yourself First
• Start saving
• Reduce Debt

1. Income & Expenditure: A plan helps you to do correct allocation of your income and also helps in monitoring your expenditures. 
2. Financial Literacy: One gets more financially literate about different products and how they have performed over time. 
3. Builds Assets - Reduces Liabilities: Over time you can see how to allocate more to assets and reduce your liabilities. An Asset is anything that gives you money. A Liability is anything that takes money away from you.
4. Cash Flow: Helps in establishing a smoother cash flow.
5. Investment: A proper financial plan considers your personal circumstances, objectives and risk tolerance. It acts as a guide in helping choose the right types of investments to fit your needs, personality, and goals.
6. Protection:  A plan should be robust and ongoing. It helps in protecting you and your family from mishappenings. It helps in reducing loans and liabilities from high paying interest ones to low paying interest. It helps plan from retirement, children's education, children's marriage, vacations, Insurance, Purchases etc. 

Let us help you in having a customized financial plan to get you on track to meet your financial goals.