Cash flow: The Incomplete Truth of Personal Finance
Everyone dreams of getting rich and almost all Of us try finding a nap to do 10 Mont of an initiative that having a higher income will make us rich, so if your business earns more profits, or if you get a salary hike, you will be richer. And why wouldn't we think this way? After all, we always associate 'wealth' with our 'income'. But is this the correct approach? Let's talk about the richest man on earth and his 'income'.
Since 2018, Jeff Bezos has been recognized as the world's richest person. Do you think it is because his company makes the most profit or because he draws the highest salary? For the record, in 2018, he drew an annual salary of $80,840, and, Amazon (his company) made a profit of $3,033 billion (source: Global 500 by Fortune). It should be noted that Amazon was not even in the Top 50 most profitable companies in the world in 2018 and Bezos Teja had around only 17% shares of the company.
He is the wealthiest person not because of his monthly income or business profits but because of the valuation of his business holdings or his assets. We are always so caught up in improvising our income and expenditure account (the one which shows our income and expenses) that we hardly have time to focus on our balance sheet (the one which shows assets and liabilities).
The first time Tanya saved money was to buy a brand-new Hero bicycle. Afterward, she saved for sunglasses, a badminton racquet, make-up, and so on. She aimed to save more, to spend more. When she started getting a salary, this habit didn't change. She continued to save only to spend on all kinds of luxuries.
I cannot name a brand she didn't own. Everybody was mesmerized by her choice of clothing, perfume, and, shoes. She used to say, Never compromise on your shoes; it's the first thing people notice. She was like an eye-catching flowering plant in the middle of
a garden. Always the of attraction. She lived a le that was the dream of many. She saved and spent relentlessly. Her life basically revolved around her income-expenditure statement.
The two wings of your income and expenditure account are nothing but your income and 'expenses'. Your income is money that you receive in exchange for any service, goods, capital, and such. So, your income can be your salary, business profits, interest received on your bank accounts, and so on. 'Expenses' are nothing but the money
spent on your needs, wants, and desires.
This is how your income and expenditure account will look:
A large segment of Indiana's population is quite efficient in saving money. We are born with a frugal mindset. We bargain, We procrastinate expenditures and we save. But the problem is, we never think of anything beyond the income and expenditure account. We want to save money, but why are we saving it? To spend more money in the future. This is a vicious circle of income and expenses.
Now, let's talk about assets and liabilities. the balance sheet records your assets and liabilities. It shows your financial position at any point in time. We consider assets as anything with a reasonable chance of generating a cash inflow in the future. Thus, cash outflow for contributing to PF, buying gold, or buying a home is not your expense but your assets. Liabilities are things that demand a future cash outflow. Your credit card bill and debt are your liabilities. The difference between your assets and liabilities gives
your net worth, something that determines your
financial strength.
Unlike Tanya, Khushi was not focusing on her
income and expenses. She was very frugal-minded. but a happy person. I remember, when Khushi got her first salary in 2011, the first thing she did was buy a 5-gram gold coin for approximately ₹13,000 (this grew to ₹25,000 by 2020, when she sold it and bought equity shares for ₹10,000 and furnished her house with the remaining ₹15,000). I hate to break the suspense, but her investment of ₹10,000 in the stock market grew to ₹18,000 in another couple of years. She had bigger and better plans that none of us understood then. She was like a growing tree located in the corner of the garden. Nobody saw it growing, but she managed to grow roots strong enough to survive every financial turbulence in her life.
Let's get back to 'net worth' (i.e. assets minus liabilities). We often use it as a parameter to gauge à company or any business's financial position. When you buy a car, you record it as an asset, as it can generate a cash inflow at the time of resale. Now the linear suppose you have a car worth ₹10 lakhs, how much money can you make from it? Even if it is Iwo
time. Something available for ₹100 in 2012 would have cost more than ₹150 in 2015. On average, the inflation rate in India has been between 4% and 7%. This means your purchasing power decreases by 4% to 7% every year. If you can buy 100 chocolates for ₹100 today, then due to inflation, you will be able to buy only 96 chocolates for the same amount, the next year.
₹10 crores, Ms. B, a person who has ₹10 crores as cash (with no intention of investing it), Ms. C, who has ₹10 crores lying in a savings bank account, or Ms. D, who has ₹5 crores in a savings bank account and ₹5 crores invested in the land?
accounting net worth will increase by almost ₹15 Lakhs (3% of ₹5 crores, as land, will be recorded at purchase price only).
the worth appears to be constant, and her money is losing value on account of inflation. Ms. C seems to be the wealthiest after three years but has still lost money value to inflation; sadly, this is not visible in her account. The truth is, only Ms. D's land has successfully outperformed inflation and helped Ms. D to enhance her existing wealth. Hence, I feel that net worth is not an apt parameter when it comes to 'Personal Finance' and you cannot rely on it to meet your financial goals.
Assets are those assets that are capable of beating inflation in the long run. This implies that, for any asset to be classified as a True Asset and form a part of Personal Capital, it should provide returns of at least equal to the rate of inflation
it is a happy occasion like your kid's graduation or a mobilized medical emergency, your Personal Capital is going to be by your side.
Managing your personal finances doesn't aim to make you rich, it aims to protect your existing assets and mobilize them in such a way as to make
needs and desires at all times.
0 Comments