Monday, 22 April 2013

Becoming Rich - Its Possible!!

When you hear of the word Rich, what is it that you really think of? A big house, luxury car, exotic vacation etc. are some of the pictures that come to our mind. But is it really possible to achieve that? The answer is a resounding Yes!!
But for that we have to dissect the meaning of Rich or Wealthy. Rather than visualising ourselves like Disney’s Scrooge McDuck diving into his treasure, we should define Richness or Wealth in more tangible terms. So, let’s go!!

As a first step let’s put all our ideas of wealth and arrive at a tangible and measurable definition of being rich.:

Richness :

Taking into consideration our changing responsibilities, social status, financial condition, economic scene etc. if we are able to provide for ourselves and our dependents comfortably, fulfilling our aspirations as much as possible without taking recourse to unwanted compromises, in the wake of predictable and unpredictable situations that we may face, then we can say that we have achieved Wealth or Richness.

Here Providing Comfortably includes catering to the essential requirements like a good house, decent education, medical expenditure etc. which you can think of as belonging to the basic necessities category and also catering to the non-essentials, like maintaining a lifestyle in keeping with the times that we live in, expenditure required to fit-in to the modern living culture which may include occasional purchases of modern items, vacations to recuperate, indulging in some amount of luxury and other aspirations that your mind may conjure in-keeping with your idea of lifestyle.

The definition is dynamic because our wants and desires are dynamic. It is advantageous to have a definition like this because that will keep our minds focused on what to achieve rather than some arbitrary lump sum amount that we may have been thinking of as a condition of wealthiness.

Next step is to put in place of a basic idea actions to be taken to achieve that wealth.

Enter Financial Planning.....

In order to make it easy to track, it is better to break the idea of financial planning into small sub-segments so that we can gauge ourselves and achieve the desired wealth. We can divide financial planning into four segments based on the type of situations we face in life :
  • Regular Expenses :

    This is the easiest of all the segments because it is easy to calculate. We generally have all the data we need for our day to day expenses and the sum total of our day to day ordinary expenses will constitute this category.
  • Saving and Investment :

    What is left from our regular expenses will ideally come into this category. It consists of two things; Savings and Investments. What is left after our expenses are savings and using those funds in various financial instruments to gain periodic returns is investment. Just saving is not going to fulfil our desire of richness. We need to invest and get enough returns to meet our goals. There are various investment instruments which one can choose from. Some investment avenues have been detailed in our article on Importance of Stock Investments. Although, emphasis was on equity investments, it is a good reference of other options too with associated pros and cons.
  • Contingency Plan :

    People generally refer to this also as the Rainy Day Fund. In case of any disturbance to the regular cash flow or loss of income altogether or any other sort of unplanned emergency expenditure there should be a fallback option and access to a source of liquid funds. There is no set rule as to how much should be the contingency fund. This fund is required to provide necessary financial cushion in times of emergency until normal sources of funding are restored. This fund is not the same as your normal investment pot.
This should be a separate allocation to be used only in-case of emergencies. Although funds should be allocated to this segment, caution should be exercised against putting too much into this segment and insufficient funds in normal investment segment for fear of contingency situations.
  • Risk Cover :

    Simply put, this constitutes adequate cover against unfortunate circumstances like death or medical situation. Typically allocating funds for various medical and insurance schemes come into this category. These provide a protective cover to the earning member(s) against unanticipated tragedies and medical situations.

Serious thought should go into how much funds to allocate into each of the categories. The right balance or right mix of the above four segments is always an individual issue and there is no one-rule-fits-all proportion that can be followed. If proper discipline is exercised and adequate funds are allocated into all the four categories, then our idea of richness is well on its way into our homes!!