The world appears to be caught up in a money-making loop, but where do we learn about money? Who was the first to introduce us to the notion of money? Who taught us the value of money? Who taught us how to handle our money?
In his book ‘Rich Dad, Poor Dad,’ Robert Kiyoksaki correctly said that the concept of money is taught at home rather than in schools. Everything we know about money is based on what our family has done with their money. If your family has a practice of saving a particular percentage of their income, you are more likely to appreciate the value of saving than someone else’s parents who do not. That is precisely where the issues arise. Only 24% of India’s adult population is financially knowledgeable, while the remaining 76% regard money as a mishandled asset. 76 percent of the Indian adult population who lack financial literacy are also the ones mentoring their respective children in the domain of personal financial planning, implying that the legacy of financial illiteracy in Indian society continues unbroken.
Schools have only ever taught us how to make money, what occupations are the most lucrative, and how to claw our way to the top. What they don’t discuss is what we should do with the money we make. Where to utilise it and how to use it. Assume Mr A makes INR 10,00,000 per year after working for 10 hours per day, five days a week. Twenty percent of his earnings are taxed to the central government, INR 2,50,000 goes towards his house mortgage, INR 1,50,000 goes towards monthly expenditures, and he purchases a new automobile for INR 4,00,000. Mr A is left with no income at the end of the year. He continues the pattern since it is what his parents did. He feels he has his money in order since no one has informed him differently, until the COVID-19 epidemic strikes and he loses his job, leaving him with no emergency savings to support his family.
That has been the unpleasant reality for the majority of Indians during the last two years. We only know how to work for money; we don’t know how to make money work for us. Investing in assets that generate cash flow is putting money to work for you. High-paying jobs imply that you are working for money, and your taxes will rise as a result. Understanding the distinction between an asset and a liability is key to financial prudence; affluent individuals accumulate assets, while other people acquire liabilities. A liability takes money out of our pockets, but an asset puts money in them.
In conventional accounting, a home, land, and automobile are all considered assets. However, not all of your assets generate revenue. The majority of us prioritise putting a roof over our heads as soon as we start earning money. However, prior to constructing the asset, we incur a liability in the form of monthly payments, which bind us to a financial outflow for years to come. That is the most common error we all make. One may either invest their money in a property and be obliged to work for the same company to fund the monthly payments, leaving them reliant on a third party to live a secure existence. Alternatively, we could invest the money we earn in our twenties and thirties in income-generating assets such as bonds, stocks, and start-ups, multiply the nominal amount at regular intervals, buy a house, pay for it with the income earned from income-generating assets, and have the freedom to change jobs and professions without feeling dependent.
Managing your personal money has less to do with your financial knowledge and more to do with your soft skills. Postponing buying that house on mortgage just because you wish to invest that money in some income generating assets, requires will power and grit. The epitome of soft skills in financial planning, is the case of the 2009 financial crisis. The financial crises was not the fault of subprime borrowers who couldn’t afford to pay their mortgages; rather, it was the fault of investment banks and mortgage lenders who became greedy in the expectation of generating quick money for their organisations. When money takes control of people’s emotions and souls, they make decisions they will come to regret. Personal finance is the only sector in which a degree is not required to flourish. A millionaire may be poorer than a middle-class guy at managing his finances and budgeting his income simply because the latter has greater emotional control.
People prefer to believe that money solves all of their issues and that more money guarantees happiness. Nirav Modi is the ideal individual to contradict the above statement. The fugitive Indian businessman was a rich individual who had lost everything in his pursuit of more money. Nirav Modi had successfully carried out two frauds with the assistance of a PNB employee, but the third time around, a new official was assigned to replace the former. Nirav Modi blindly trusted the new official to perform the same crime as his predecessor. But he did not, and Mr Modi’s happy days came to an end.
This is not to imply that money isn’t valuable. Money is as essential as air; you can’t live without it. This isn’t to imply that buying a mansion or a fancy automobile isn’t a good idea. Money avoidance is just as foolish as money attachment.
One starts the journey on the path of financial strains when one underestimates the strength of financial intelligence. Budgeting, investing in income-generating assets, and being thrifty are the principles that assure life stability, not the process of gaining money in itself. Working on your soft skills is as essential as working on your technical talents because when you acquire money, whether through a hard-earned wage or an income-generating asset, it will quickly go away if you don’t know where to stop. One is digging their own grave by falling into the trap of greed and taking foolish risks to quench their thirst for luxury.
Striking the right balance between making money and managing money is the only way to become a wealthy individual.
– Janvi Gupta
Picture Credits: zmp.com.au