Ever since the concept of money was introduced to the modern day world, man has been on an eternal quest to gather more and more of the same, Money. And there are numerous ways to be rich. You can be the genius founder of a social media company who turned a college website into multi-billion dollar behemoth of an advertising company, Facebook. Or you can be an ace stock picker with a knack to find quality companies and be one of the wealthiest men in the world, Warren Buffet. But even if you are neither of these extremes, there still exists a way to becoming rich that doesn't really require much talent or hard work. All it needs is discipline. Here are the three ingredients of the secret formula -
Income , Returns, Savings
Income - The first one is obvious. More money has the direct perception of more wealth. And to a good extent, it's true. The more you earn, the more luxury you have to spend and to save. But let's be honest. What you earn and how fast your earnings grow is often a question of fate, rather than something you can methodically plan for yourself. And this pursuit of the hanging carrot only adds to the misery of getting more, without really getting anywhere close to where we want to really go. So while more income is good, it's not really something that we can actually control.
Returns - "Aha, I'm going to get rich by beating the market and getting the best returns by investing in the best stocks and mutual funds". Well, good luck with that. Not that because it's impossible, but because it's highly oversimplified. Most people think getting rich is the question of getting the highest return. But no one can guarantee the highest returns. No one. If someone does, you should probably dial for 1800-SEBI-HELP. Also getting high returns is the second part of the game. What comes before is what the returns are calculated on. And that brings us to...
Savings - Savings are basically what you set aside before making your expenses. It's the percentage of what you earn that really matters to get rich. Most discretionary expenses are capped at a certain level. There's only as much food or electricity a man needs for domestic use. Most things beyond these are cravings or luxuries that originate from intrinsic factors. I use the word intrinsic because these are completely under our control. And it is these savings that can open the doors to financial freedom and wealth
Consider an example of Chandresh, aged 30. He earns about 80k per months but spends it all on rent, movies, travel, food and e-commerce sites and hardly saves about 10k by the end of the months which he periodically parks in FDs. His junior Ramesh, also aged 30, earns only 50k a month. However, he judiciously sets aside 20k at the start of the month (SIPs, stocks etc.) and controls his budget of 30k for expenses. For the sake of simplicity, assuming the savings rate remains constant and grow at about 8% in FDs and 12% p.a for stocks, mutual funds, etc.
Rakesh is going to have 4.5 crores more than Chandresh by the time of retirement, or about 4 times what Chandresh is going to save by retirement. 4.5 crores more!! Imagine what you can do with that money!
Coming back to the secret formula - Income, Returns and Savings all matter in getting you rich. But Savings is the only factor that is really under your control. The only sure shot way to get rich is to develop a discipline in maintaining a healthy savings rate. Everything else is a hope for good fortune.