How to get wealthy on a salary
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A myth that many professionals have is that a high income and working harder to earn more salary is the path to wealth. So, how should one do this right? Here are some principles that apply to everyone, although there is no one formula that suits everyone as life situations and ambitions differ from person to person.
Principle 1: Avoid ruin
The first principle that all investors need to understand in making wealth and keeping it, for the long term, is to avoid ruin. Risk is different from volatility. Most salaried people don’t understand this difference, while investors and those in business intuitively do.
Risk is something that can cause ‘death’—or, in money terms, lead to bankruptcy or severe loss of capital. Volatility is the ups and downs that can happen to the investment. Volatility may cause stress and heart burn but it does not kill.
Covering one’s risks is the first principle that must be followed assiduously. Risks that can upset your financial future—such as loss of job, illness, or concentration in one asset are some examples. Having appropriate plans to cover these risks is a must before venturing further. First protect, then save, and only then invest for returns. A lot of smart people think they are smarter than everyone else; they don’t cover their risks, and go big without having a Plan B. Eventually, the probability of risks catches up with them and their chances of wealth creation are crushed forever.
Principle 2: All benefits accrue from compounding
Warren Buffett is 84 years old and his net worth is a staggering $74 billion. But an equally staggering insight is that Buffett made his first billion at age 56, which is close to an ordinary person’s retirement age.
One does not get healthy eating an apple once. Things add up with habit. And in investing, habits work because of compounding. It takes a long time, a patient mindset, hard work and discipline to get to your dream number, whatever number of crores or lakhs that is. There are two takeaways in this for salaried professionals:
1. Slow, silent, steady, humble and passive investment strategies oftentimes beat super intelligent and active strategies. The silent growth of a provident fund account is one example.
2. If one breaks the cycle of compounding by dipping into the growing corpus, diverting or switching funds, then one is not compounding one’s wealth. Avoid tips and impulses to act in short term.
Principle 3: It’s not about the money, it’s about you
Buffett’s $74 billion do not mean that he eats more (or a better) lunch than me or you. Money by itself is a number in the bank. What it enables you to do in your life is what matters. Each person has a different outlook on things.
Risk profiles are different, and life stage, and even family backgrounds lead to large variance in people’s outlook. You should focus on your goals and your lifestyle choices rather than looking at others for social approval.
Unfortunately, our education system and workplaces encourage ‘monkey see monkey do’ behaviour. Most salaried people follow what everybody else is doing as default without thinking whether it is good or suitable for them. Buying homes, cars, where to invest…. Such choices are mostly a party game for social approval. This takes a toll on the wallet and psyche. It’s like you are busy climbing the rungs of a ladder only to find out it was leaning against the wrong wall. Chart your own course, have your own meaningful money goals and, therefore, you should have a customized, personal strategy.
Principle 4: Focus on the micro, not the macro
There have been great companies that gave high returns during the worst years of economic downturns. Many events keep happening—interest rates, central bank policy, gross domestic product (GDP) numbers, sectoral outlook and what not. I find many managers consuming news, reports and opinions from TV and papers. It is dangerous to devise half-baked strategies from such information. It may be valuable for a professional fund manager who is investing Rs1,000 crore to watch news and events every day. But for most of us, finding good micro stories—good businesses with long-term track record—is all that one needs. Macro trends can sometimes obfuscate our mind.
Another misconception is to lock-in one big asset, that one lottery ticket—usually property—to make one’s fortune. Forget the blockbuster, one-time major investment. Instead focus on small savings in a balanced portfolio every month.
Principle 5: Value freedom
Living frugally is thought to be so old fashioned that I mostly hesitate to mention it because it puts people off. This obsession of having the best is keeping us chained to our jobs for long hours, causing us to pay the price in terms of our health, relationships and most important luxuries of time and independence.
One definition of a rich person is he who has more than he needs. The craving to ‘need’ more is an assumption we need to challenge. For most people, if a corpus is built over 7-8 years, with modest expenses one can support a lifestyle in that much for rest of the years.
Rajiv Jamkhedkar is founder and managing director of Serengeti Ventures Pvt. Ltd