In life, you do not become rich simply by earning lots of money. How you control your spending is equally important.
The other day, I had an interesting discussion with my son, who is crazy about cricket. As a middle order batsman playing for his school team, he loves to score runs. I thought of taking this forward to impart some personal finance lessons, another field of his interest.
I remembered the record breaking ODI between Australia and South Africa that took place on 12th March 2006.
Australia had piled up a massive score of 434 runs in 50 overs and one felt they would win the match with a huge margin. South Africa thought differently. Australia still lost the match. 434 runs in 50 overs was a world record, but it remained a record only for the next 4 hours.
And how can we forget the classic 1983 cricket World Cup final that India won defending only 183 runs?
It is not about the runs scored alone, it is also about runs conceded.
In life, you do not become rich simply by earning lots of money. How you control your spending is equally important.
The wealth you create is also called net worth in accounting language. It is the difference between assets and liabilities. The higher the net worth, the wealthier you are.
How does one create these assets? Well, in order to create wealth, one needs to accumulate the right assets. Those assets which have the potential to generate income (either immediately or in future) or the potential to appreciate in value are the right assets. All the other assets can potentially bring your net worth down. For example, the car that you use for transportation purposes should not be considered an asset since you spend money to maintain it and the primary purpose of the same is consumption. It does not generate any income and it depreciates over time.
Any liability that you create generates expenses, which eats out of your net worth.
You create assets through investments and investments come from savings. Savings come from the difference between your income and expenses.
In other terms, the simple mantra to create wealth is to spend less than what one earns, create the right assets, and attempt to reduce the liabilities.
High income in itself is not enough if the expenses are very high. Australia scored 434 runs – high income – and still let the match slip away by allowing South Africa to score even more – expensive bowling.
Take care. Create wealth through simple planning.