The Incomplete Truth of Personal Finance Money heist

 Cash flow: The Incomplete Truth of Personal Finance 

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:


Now, just to clarify, your outflows can be in the form of contributions to your Provident Fund (PF), money set aside in fixed deposits, etc., but they do not count as expenditures; they are your investments and are classified as 'assets'. Similarly, if you take a loan, it is a cash inflow, but it doesn't count as your income-_-it's liability.
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.

balance sheet

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 

days old, I am sure that you won't be able to sell for more than ₹8 lakhs. 

*In fact, even if you have ₹10 lakhs in your savings bank account, it Will lose its value over time, Wondering how? 
Let me introduce you to inflation,  the phenomenon responsible for the increase in the price of goods and services. It is not a secret that prices of commodities rise automatically with 
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.

So, for instance, if prices of commodities rise by 5% every year, while your money rises by 4%, your money is losing its value at a rate of 1% every year. suppose the cost of college education today is 88 lakhs and it grows by 5% every year, by the time your kid is sixteen, the cost of education will be over ₹17 lakhs. Suppose you already have ₹8 lakhs today, and 
you decide to keep it aside in a savings bank account providing post-tax returns of 3%, your post-tax corpus (total amount accumulated) will be around ₹12.84 lakhs. That means, even if you have the complete corpus to meet your child's education today, inflation could prevent you from doing so when it's required. In such circumstances, you will need to plan your finances in a way such that you are financially ready to meet all the milestones ahead of you.
Tell me this, who would you consider the wealthiest? Ms. A, a person who owns cars worth 
₹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? 
If you try to decide by accounting net worth, everyone's net worth will be the same in the first year. In just one year, cars will start depreciating by 15% (as per tax laws) and affect Ms. A's net worth; Ms. B's net worth will remain constant 'in the books' at ₹10 crores; Ms. C's net worth will show an increase o approximately 3% (30 lakhs) every year; Ms. D's 
accounting net worth will increase by almost ₹15 Lakhs (3% of ₹5 crores, as land, will be recorded at purchase price only). 

In reality, Ms. A's worth is less than what is presented in the books because the value of cars Will depreciate at a rate of approximately 50% (and sometimes, even more depending on the model and manufacturer of the car). Although Ms. B's 
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.

“Being rich is having money; being wealthy is having time.” — Margaret Bonanno

Till now, we have discovered an important feature of personal finances: our main motivation can't be to boost income or net worth. So what is that one metric that every individual should focus on? Personal Capital--that's what you should focus on. It is a concept almost the same as net worth, except that it considers True Assets instead of 'Assets'. True 
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

personal capital- true asset

Your Personal Capital is nothing but that amount of wealth that is working for you. By building your Personal Capital, you are ensuring that your money works for you. Since it is made up of True Assets, which do not lose value to inflation, they are going to be with you during all ups and downs. People say that even your own shadow leaves you in the time of darkness--trust me, your Personal Capital will stand by your side in every situation. Be 
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 
you financially independent and pave your way for Financial freedom. It's not important to sit on a pile of money, it is just one of those worldly pleasures. if is important to have sufficient money as and when you need it. The goal is to meet all your financial 
needs and desires at all times. 

To achieve this, you need to take care of the five drivers of Personal Capital. 

1. Savings 
2. Debt 
3. Investment 
4. Taxes 
5. Insurance 
The better you manage these five components,
the more handsome your Personal Capital will be.  

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