Read This To Get Rich
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Hello Dear Reader,
In today’s post, I wanted to do an exercise with you. I want you to go through the last 12 months' bank statements and credit card bills of all your family members and I want you to segregate all expenses made in the following format.
Example 1: If you have taken an OTT subscription of Netflix, Amazon Prime, Zee5, and Hotstar, your category will be OTT, a subcategory will be the name of the OTT Service Provider (Ex: Netflix, Amazon) and Total Spent will be the total amount paid.
Example 2: If you have taken a subscription to a fitness app, a yoga app, diet coach, etc, your category will be Health & Nutrition, a subcategory will be the name of the Service Provider (Ex: HealthifyMe, Fittr) and Total Spent will be the total amount paid.
Example 3: If you have ordered from outside, say from Dominos, Pizza Hut, Zomato, or Swiggy, your category will be QSR, a subcategory will be the name of the Service Provider (Ex: Zomato, Swiggy) and Total Spent will be the total amount paid.
These are just a few examples.
The purpose of this exercise is that I want all of you to make a category-wise chart of how much you have spent on each and every activity over the last year.
If you do this as I am asking you to, you will be shocked to see the amount you have spent on each category.
To talk in terms of numbers, say you are earning Rs. 12,00,000 per annum and your annual expenditure is Rs. 8,50,000 and you are managing to save Rs. 3,50,000. If you can make the above-itemized sheet, I can guarantee you that you will be able to save an additional Rs. 85000 (if not more) on an annual basis by just eliminating the non-necessary expenses from your account statements.
A fundamental concept which is not talked about a lot in our quest for generating alpha is that often times we forget to check if our savings are going up and our expenses are going down, irrespective of the income we are earning. We could be earning Rs. 12,00,000 per annum but if we end up only saving Rs. 3,50,000 (29% of the total annual earnings), a person who is earning Rs. 6,00,000 per annum but saving Rs. 2,22,000 (37% of the total annual earnings) is doing a better job than us.
So, for this post, I give all of you an exercise. Rather than focusing on how much return your investments have made for you in the past, calculate your rate of saving of the last 5 years of the total income on an annualized basis and the rate of expenses of the last 5 years of the total income on an annualized basis for your family.
We will repeat this again so it becomes clear how you have to go about it.
For Calculating Expense Percentage
Step 1: You have to categorize all your expenses you do every year and then total them up.
Step 2: You have to divide this total by your annual income.
Step 3: You have to back track this process for the last 5 years.
Step 4: Once you get the individual rates for the last 5 years, you have to take out a 5 year average.
For Calculating Savings Percentage
Step 1: Calculate the amount you have saved from your income/salary and put aside in FDs, Mutual Funds, Gold, Property, Cash and Cash Equivalents over the past year. Total this up.
Step 2: You have to divide this total by your annual income.
Step 3: You have to back track this process for the last 5 years.
Step 4: Once you get the individual rates for the last 5 years, you have to take out a 5 year average.
This is where we talk about the 50/30/20 Rule.
This rule states that 50% of your monthly income may be reserved for spending on essentials like food, rent, medical bills, education fees, etc. While 30% can be put aside for discretionary spending and 20% of your income should go towards a saving pot.
So, to put it simply, you have to see if your total expense are 80% of your income or more and if your total savings are 20% of your income or less over the last 5 years. If you manage to be in this category where you are saving and investing 20% of your income every year and spending 80% of what you earn, then you should refer to the category wise table which I have asked you to make above and see if you can further reduce your discretionary spending.
I can assure you that this is no rocket science. The paths to wealth creation goes through frugality. Keeping track of our frugality is what determines the speed at which we get rich.
Rgds,
Ayush Agrawal
Disclaimer: The author of this publication is not a SEBI Registered Advisor or Analyst. The information on the company and its promotor mentioned in this newsletter is provided for information purposes only. It does not constitute an offer, recommendation, or any investment advice to any person nor does it constitute any prediction of likely future movements in the company’s stock prices or business performance. It should not be used as a basis for any investment decisions or as a proposition to buy or sell any securities. Please seek advice from a registered financial advisor and do your own due diligence before making any investment decisions.