The other day I attended a relative's wedding.
Besides the fact that almost every woman had coloured her hair, I noticed that the attire was predominantly designer wear. Need I say that platinum, gold and diamonds clamoured for attention?
"These people must be fabulously rich." This statement was made by someone to my right who looked rather depressed. My cousin grinned and pointed out a few successful looking people who he claimed were earning well but swimming in debt.
The point he was making: they may be rich but they were far from wealthy.
Is there a difference?
Sure there is.
If you don't believe me, look at the antonyms.
The opposite of rich is poor.
The opposite of wealthy is broke.
Being rich is just a function of how much you earn. But being wealthy is a function of how well you manage your money.
Take the case of my cousin. The one who passed the comment. Appearance-wise, he is totally unpretentious. Has one car, which he shares with his wife. Uses the school bus to send his children to school. Never sports designer labels.
Nobody looking at him would call him rich. Yet, he runs his own firm which earns him a net profit (profit after taxes) of Rs 4 crore (Rs 40 million) per annum. And he has managed to save and invest wisely enough to build on these earnings.
He is not just plain rich. He is wealthy.
Are you wealthy?
You may be earning a lot but what you do with your money is what matters. In fact, someone earning less than you may be wealthier simply because they know how to manage their money and you don't.
The first step to determining whether you are on your way to wealth is to ask yourself where your money is going.
Let's say you are earning Rs 1,00,000 a month. Definitely, you will be considered rich.
But what if 50% of your money is spent on servicing your credit card debt, your personal loan and your home renovation loan? And the balance is blown up on petrol, eating out, buying expensive liquor and hectic socialising?
With all your earnings channelised towards loan repayments and lifestyle maintenance, you certainly are not wealthy; neither are you heading in that direction.
If you are spending the bulk of your earnings, you are certainly not on your way to wealth.
What will make you wealthy?
To be wealthy, you should invest in assets that give you money.
There are all types of assets. Anything owned by you that has a cash value is an asset.
The value of assets like cars, bikes, televisions and electronic goods decreases over time. They are assets that depreciate in value.
While you will spend some amount of money on them, you should also look at assets that will increase in value over time.
Land, homes, antiques, art, equity are all wealth building assets. You can get phenomenal returns from them over the long term.
Other investments like bonds and fixed deposits will ensure your money is returned to you with interest, but the highest returns come from the above assets.
Even your jewellery is a depreciating asset. The value of jewellery generally falls when you resell it; you are dependent on the jeweller's opinion as to the purity of the gold or the salability of the design (Read Why jewellery is a bad investment).
But, if you buy a gold bar, the price you sell it for will solely depend on the current price of gold and not on a jeweller's discretion. So, a gold bar will be an appreciating asset (if the price of gold rises).
Tips to get wealthy
In The Millionaire Next Door, authors Thomas Stanley and William Danko studied the habits of 1,100 rich Americans and found some common, yet simple, traits.
A few of them are:
~ Live below your means.
~ Budget your spending.
~ Save on taxes.
~ Have a planned, disciplined approach to investing money.
According to them, millionaires focus on building wealth, not consuming goods. They are also frugal, a quality that most non-millionaires don't possess.
Here's what you can do.
1. Get out debt
Pay off the loans that have the highest interest rates and no tax breaks. Credit card debt, personal loans and home renovation loans are classic examples.
You still get a tax break with home loans and educational loans.
2. Pay yourself first
Before you spend, pay yourself some money.
Put some amount in a recurring deposit or invest some amount in shares every month. You could even put it in a mutual fund via a Systematic Investment Plan (investing small amounts in your mutual fund every month).
3. Plan your investments
Decide how you want to spread your money across various avenues.
List down all the options with their corresponding risk: post office schemes, Public Provident Fund, shares, equity mutual funds, balanced funds (these invest in shares and fixed income instruments), bonds, property and gold. Decide how much you want to invest per annum in any/ some/ all these options.
Get yourself a life insurance cover and a medical insurance cover.
When deciding which investments to park your money in, make sure you explore all the tax saving avenues. Money saved on taxes means more money at your disposal.
Don't just plan for next Saturday night or your annual holiday. Plan for your retirement (however distant it may appear).
Creating wealth is all about wisely managing the money we earn; about ensuring we spend less than we earn and save more than we spend.
So what are you?
Rich or wealthy?
I figured I am neither :).
Being rich is having money to burn (which I don't have).
Being wealthy is not wanting to (and I do so badly want to!).
Illustration: Uttam Ghosh
