You may have a decent salary and aspire to build a corpus to a secure future, but you eventually fail in doing so every-time. Everywhere whether it’s your colleagues, social media, or your email are flooded with suggestions of investing in securities but meagre of them focus on the basics of wealth creation i.e. The Four Levers. Understanding these four levers will help you manage your wealth prudently. All four levers are important but the fourth lever is the most important of all and gives you the most leverage to wealth creation.
Lever 1: Increase your income
“The millionaire mentality watches cost and tries to reduce them and also strives to increase the production and sales and thus the overall profits.”
Always take your financial freedom goals seriously and diligently to earn more, cut costs, save more and invest better. I will try to explain the first lever with simple story. Once there was a person who use to look for money on a daily basis. He would actually ride his bicycle while looking down and surprisingly he would find money lying on the ground. Don’t replicate this story but my point clearly says that you will get what you are looking for.
When you start to look for ways to increase your income, you will find out opportunities all around you which were overlooked by you before.
If you save 20% of your monthly income and earn an additional income just 10% of total income, then you do not speed up your financial freedom by that additional 10%, but by 50%. That’s true and believable.
Savings and not your income contribute to your financial freedom, which will be simplified with an example.
Let’s say you earn INR 100000 per month and save 20% of your income (i.e. INR 20000). You also have an additional income just 10% of total income (i.e. INR 10000). This entire income can be saved since your expenses are covered by your regular income. So now you save INR 20000 (savings from regular income) + INR 10000 (additional income) = INR 30000 per month.
A 10% increase in extra income leads to almost 50% jump in corpus savings. This is powerful and incredible, but no one cares for it because it is too good and too simple.
Opportunities to earn that additional income and increase your savings by 50% are all around you. You just have to look for them in pursuit to achieve financial freedom.
Lever 2: Reduce your expenses
With increase in income, it becomes important to cut our expenses not all but which will go as waste. We are psychologically conditioned to consume and spend more than that we want. Marketers and salesman are studying your spending patterns and targeting you so that you spend more and more. In-fact the target is more focussed on the people who fail to understand financial planning, saving and concept of financial freedom.
The millionaire mentality says “the amount of money saved is at-least equal to the amount of extra money that you would have earned”. If you saved INR 200 on a pair of shoes, you just earned INR 200 extra. That sounds lucrative. Ultimately it is the money saved that drives you towards your goal of financial freedom.
Here are some ways to reduce your wasteful expenses:
Track expenses everyday: Not monthly, not weekly, it’s necessary to track expenses daily before going to bed. Research says tracking your expenses daily reduces your expenses as much as 15 % in a few months. This act of dealing with your expenses sits in your sub-conscious mind and controls wasteful expenses.
Ask for discount: Whenever you are about to spend money always try for some discount in price. Always ask without hesitation “is that the best you can do?” and you are more likely to see surprising results. As consumers we leave a lot of money on the table than we may think.
Check for impulse buying: Impulse buying is the main reason why retailers are earning heavily.
So to avoid impulse buying follow these rules:
Never shop with an empty stomach.
Never shop without a checklist of items.
Learn to check your impulses before you go shopping.
Use rewards or bonuses effectively: Make sure you utilize your bonuses in paying off the vehicle loan, home loan or an education loan. Because every interest saved on loans is extra money earned.
Get rid of credit cards: A credit card is a wonderful tool which allows you to buy things which you do not want with the money that you do not have.
You may argue in favour of the convenience that plastic money provides. Well, you have debit cards for the same. In fact, there is a difference in the way our mind thinks whenever we use a credit card or a debit card.
Credit card: Ok, I don’t have to pay it now. My bank balance is not impacted. We will see when the credit card statement comes.
Debit card: This is going to take off some money from my bank account. This hurts, I should go for it only if it is absolutely necessary.
So, keeping a debit card is a safer bet.
The ‘Zero Day Count ‘technique: This involves counting the number of days in a month when no expenses were made. Mark them in your calendar, if it crosses 5, reward yourself.
Cashify yourself: Try to do your regular monthly expenses in cash mode as far as possible. Cash spending helps control expenses, even though cards and digital m odes are being promoted. Our cash is emotionally connected to our brain so whenever we see cash moving out of our wallet, our brain tune itself to limit this outflow resulting in lower expenses over a period of time.
Be a smart online shopper: Most of the shopping platforms allow you to add product in wish list and keep a watch for prices, allow notification for price drop. You can also compare prices of your product across various apps and go for the best deal.
The Diderot Trap: It means introduction of new possession into a consumers existence will often lead in a process of spiralling consumption. When you buy a shirt, you would want a new denim jeans to complement it to justify your first purchase. Avoid new purchases as far as possible. Even if you have to buy, look for its usefulness rather than trying to impress others.
Lever 3: Save on Taxes
“A penny saved is two pence clear”
~Benjamin Franklin
While earning more is important, saving is no less. One of the most neglected area of savings is the savings on taxes deducted at source. A lot can be done on this front with basic minimum awareness of tax laws.
So consult a CA and ask them to get maximum tax benefits in a safer manner.
Remember that tax saving is a by-product and have fair to moderate impact on your overall wealth accumulation.
Lever 4: Increase your Return on Investments (RoI)
This is the most powerful and the most under-rated lever to generate massive wealth. Let’s understand this with an example.
I used to earn INR 100000 per month in 2022, mostly focusing on my career to get a good performance rating and a decent appraisal. A yearly increment of 6% comes out to be INR 6000 per month i.e. INR 72000 per annum.
Over the period of 3 years I made a corpus of INR 2000000 and all my investments were mostly in debt based instruments generating a return of 6-7 % per annum. This came out to be INR 140000 annual increment by doing nothing. But the RoI in both cases remain the same roughly 6%.
Consider another case in which I would have invested my corpus in somewhat higher risk funds or equities with little pain of gaining financial knowledge, reorganizing and rebalancing my portfolio, it would not have been difficult to achieve a return of 10-12 % on my corpus yearly. Even if I consider a return of 10%, my corpus would have generated INR 200000 i.e. INR 60000 more than the return generated in debt based instruments.
So, by investing only a fraction of time in fourth lever, I could have generated 77.77% higher yield (INR 200000 vs INR 72000).
All this happening because in the fourth lever, we are making money work for us, while in the first, we are working for our money. This requires some fundamental awareness about finances, being disciplined and that’s the bare minimum price you pay for financial freedom.
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