Secrets of the Rich
Updated: Dec 12, 2020
Understanding the difference between Poor, Middle Class, Rich, Wealthy and Financially Free
Poor: People who spend everything they earn are poor. They earn less and are unable to save anything as the income is barely enough for their basic sustenance.
Middle-Class: People who earn more than their sustenance requirement. However, they spend everything they earn, sometimes more than they earn (like credit card expenditures, consumer EMIs, etc.). They may have some savings here and there but then, their savings are not producing returns above the rate of inflation.
Rich: People who spend less than what they earn, irrespective of the amount of their earnings. They incrementally increase their earnings by investing their money yet at the same time keeping their spending habits same. They know the true meaning of inflation and always try to keep their investment returns more than the rate of inflation.
Wealthy: While the previous three categories are defined in term of money value, wealth is defined in terms of time value. Let’s say, you have ₹6,00,000 of savings, and your monthly expenditure is ₹50,000, then you are wealthy for one year (₹50,000 X 12 months = ₹6,00,000). This means, you are free from the burden of earning a living for one year, as your wealth will last for this period without you needing to look for income. So, if you have ₹60,00,000, then you are (technically, if you don’t consider inflation) wealthy for 10 years.
Financially Free: This category of people is defined by both money and time value. Going back to the previous illustration, if your monthly expenditure is ₹50,000 and your investments (like stock dividends, bond interest payments, rental income from house, intellectual property royalty, etc.) provide you a free cash flow of more than ₹50,000 a month, then you are financially free. This means, you no longer need to look for work to earn a living, as your investments in your assets have started to generate enough money that it covers your regular expenses. And as long as you hold on to your income generating assets, you will be free financially.
Excerpts from my latest book ‘The Essential Financial Lessons For Stock Investment’.