Introduction
Being born rich is the only way of becoming wealthy. Right? Wrong! In this book, bestselling author Ashwin Sanghi and co-author Sunil Dalal discuss how to become wealthy even if you don't have the classic silver spoon in your mouth. Taking a radical new look at money, they explain that the path to getting wealthy is challenging, but not impossible.
Wealth is within anyone's reach with some planning and effort.
The steps outlined in 13 Steps to Bloody Good Wealth are simple to carry out and require nothing more than your commitment and enthusiasm.
The writers demystify the secrets that surrounds wealth and explains, how to obtain it through, exciting examples, insightful ideas, personal experiences, and common sense.
It has been found that more than half of high net worth individuals worldwide have generated wealth rather than inheriting it.
Step 1: Define wealth for yourself.
Looking back in time, we can see that the definition of wealth evolves with time. Wealth may have been a collection of sharp spear or axe 10,000 years ago. It might have been a basket of fish 8,000 years ago. Nowadays, it is the amount of money they have.
Let's go through why we need money:
Basic needs
Food, clothes, and shelter are non-negotiable components of your riches.
Higher needs
Exotic holidays, a second house, and expensive automobiles are examples of aspirational wants.
Financial independence
When you have enough money to live on without having to worry about making more money.
Retirement
It is impossible for two people to have the same definition of wealth. For some, wealth may refer to their material riches, or their acquired money, whilst for others, wealth may refer to their experience or knowledge. Consider what being wealthy means to you. Only when you understand what it means to you, will you be able to strive towards it.
Happiness lies not in the mere possession of money; it lies in the joy of achievement, in the thrill of creative effort. - Theodore Roosevelt
Step 2 - Make a plan
There are people who have money and then there are people who are rich. - Coco Chanel
Discover your passion. Discovering your life's objective is the best thing you can do for yourself. Make a strategy to reach your objective once you've determined what money means to you. Consider your plans to be an ideal GPS path from one location to another. Take an alternate route if there are any issues or bottlenecks. Keep your convictions strong and the eventual goal in sight. Avoid being trapped in traffic.
Analysis of the situation
Net worth = Value of everything you own (your assets) - Value of everything your owe (your liabilities)
You may measure your net worth using the following formula.
Average net worth = Age * Pretax Annual Household Income / 10
Apparently, no single formula is perfect. As our needs change, it's a good idea to think and categorise our objectives:
Short-term goals
Possible in one or two years
Medium-term goals
Within the next 2 to 5 years
Long-term goals
Anything taking longer than 5 years.
Step 3 - Beat Inflation
Inflation is taxation without legislation. - Milton Friedman
If you think about 'the good old days,' when everything was cheap, you're actually talking about inflation. Inflation is a destroyer of wealth. It is constantly eroding the true worth of your money.
Inflation influences the interest rates paid on savings and mortgages, in addition to the daily prices of goods. The actual worth of your money is continuously being diluted as a result of rising costs.
At this point, you must be aware of two facts. Inflation versus growth. If your wealth grows, inflation reduces your returns. As a result, you should invest in asset types that outperform inflation over long periods of time. Equity is one such example.
Real vs Nominal Returns
Consider the following scenario: you invested $100 in 2005 and received a 10% annual return. Your investment would have grown to 260 dollars by 2015. That is your initial investment's nominal return.
Assume you paid 30% in taxes and the average annual inflation rate was 5%. The actual return on investment is obtained by subtracting these from the nominal return.
Because of the effects of inflation and taxation, real returns are far lower than nominal returns.
Step 4 - Plan your expenses
Some people believe that spending less will result in more money. Others believe that generating more money is the best way to get rich. However, if you make more and spend more, you will wind yourself in the same position.
Wealth consists not in having great possessions, but in having few wants. - Epictetus
You must get control of your money or the absence of it will dominate you for the rest of your life. There are several straightforward methods for managing your finances.
Keep an eye on your bank account.
It's preferable to keep your money in your bank account than to spend it on an impulse buy.
Create a sinking fund.
Create a second savings account to save for a large future purchase.
Bonuses are for saving
Save and invest your bonuses and increases so you may treat yourself better in the future.
All costs should be planned.
Keep track of and classify all of your costs. Make use of technology to create a pre-budget for your costs.
Li KaShing's Model
The well-known Hong Kong millionaire has a straightforward budget allocation approach.
I would like to live as a poor man with lots of money. - Pablo Picasso
Step 5 - Build an additional income stream
The corporate environment is volatile in today's unpredictable economy. Just because you work doesn't mean you couldn'tdo you anything else in your free time.
To increase your financial stability, you should strive to generate numerous streams of income. An additional source of income will speed your savings and investing strategy. Such side hustles might frequently lead to your entrepreneurial journey.
After earning his B.Sc. in Chemistry, Mr. Karsanbhai Patel worked as a lab technician. In his spare time, he focused on developing a detergent powder formulation. He was able to sell his handmade detergent at a far lower price than the large detergent manufacturers in the surrounding areas. He quit his job after three years to open a tiny workshop. His company, "Nirma," now employs over 15000 people and is valued $5 billion.
Step 6: Exploit the power of compounding.
Money is a great servant but a bad master. - Francis Bacon
It doesn't matter how much money you make; what matters is how much you inves. Only when you combine saving and investing does the power of compounding work in your favour.
You have two options: work for money or have your money work for you. Your money could work round the clock to increase or drain itself. It is entirely up to you how you utilise it.
Use your money to make additional money by generating interest, dividends, or capital gains.
Step 7 - Build assets, not liabilities
An asset is something that makes money for you. A liability takes out money from your pocket.
The philosophy of the wealthy and poor is as follows:
The wealthy invest their money and consume what remains. The poor spend their money and save what they can. Rich individuals build assets. The poor and middle classes acquire liabilities that they confuse for assets.
Assets in the financial world include cash, bank deposits, real estate, jewellery, artwork, stocks, bonds, mutual funds, insurance policies, and metals such as gold and silver.
If you're tempted to buy Apple's newest iPhone despite already owning a good phone, reconsider. It will not boost your net worth, but investing in Apple shares may.
It is not an asset if you buy a property to live in. You will have to pay for repairs, maintenance, and taxes. However, if you intend to sell or lease it, it will provide you with a constant stream of revenue.
Similarly, purchasing a car is not considered an asset. However, if you join up to give rides for services such as Uber, you may be able to start earning money.
Your wage is your active income. However, you should aim to establish assets that can provide passive income for you. That is genuine riches.
Step 8: Become comfortable with the Wealth Trinity.
There is a trinity of risk, reward, and time in the world of finance. It is quite impossible to acquire wealth without understanding these three concepts.
Risk
It is the level of uncertainty in a financial outcome. Every person's risk tolerance is unique. It is determined by your income, lifestyle, ambitions, and aspirations.
The expectation of a higher return raises the possible risks. Exposing yourself to a high level of danger that you are unfamiliar with might cause your losses to spiral out of control. Understanding dangers is more important than knowing rewards while investing.
The risk may be measured in a variety of ways. Among them are:
1. Mean deviation
Used to predict future volatility. If an instrument has an annual average return of 10% with a standard deviation of 3%, the return might range from 7% to 13%.
2. Beta
It is an investment's systematic risk compared to the market as a whole.
If the beta value is less than one, the instrument is less volatile than the market.
If the beta value is more than one, the instrument is thought to be more volatile than the market.
3. Alpha
It is the risk-adjusted measure of performance.
If the market returns 12% per year and your investment returns 15%, the additional 3% is known as the alpha.
Return
Return can be defined in a variety of ways.
Absolute Return
If you invest $100 and it grows to $200 in six months, your absolute return is 20%.
Annualized Return
It is the absolute return over a 12-month period. The annualised return in the above example is 40%.
Compounded Annual Growth Rate (CAGR)
It is the rate of return necessary for an investment to expand from its starting point to its ending point, providing gains are reinvested over time.
Extended Internal Rate of Return (XIRR)
When there are many investments at different times in time and the investment length exceeds one year, this formula is used to compute returns.
Never be taken in by a high absolute return. Also, it does not indicate that the annualised returns are high.
Time
Wealth creation is a marathon, not a sprint.
The longer you keep a fundamentally sound investment, the less likely a negative return is.
Divide your investing time horizons into three categories:
Short term: Less than 2 years
Medium-term: between 3 to 5 years
Long-term: More than 5 years
Time in the market is far more significant than market timing.
Step 9 - Make a strategy for asset location
There are several methods to invest, including stocks, bonds, real estate, metals, and mutual funds. Asset allocation entails putting your money to work in the best possible way in a well-planned combination.
Your asset allocation should consist of a mix of uncorrelated investments with a risk level that you are comfortable with. These points may be useful in your asset allocation:
Decide on a time period.
If you have a lengthy time horizon, your portfolio can be 80-90 percent equities and 10-20 percent fixed income.
If the time horizon is short, a balanced portfolio with 50% equities and 50% fixed income is recommended.
A classic thumb rule: Percentage of equity in your portfolio = 100 - Your age
Understand your risk appetite
Gains in equities are greater, but losses in fixed income are less.
Know yourself
Understanding your decisions and why you make them is crucial in asset allocation.
Ask the right questions: Which asset class, not which product
You may reduce your risks by diversifying your assets across many asset types.
Understand why you own it.
Make sure you're informed of the investment you're going to make.
Consider Time vs Product
When the timing is off, even the best product might provide disappointing results. And the wrong product at the right moment might have remarkable effects.
Ask yourself: should I attempt to time the markets?
Warren Buffet once stated, "Be greedy when others are scared, and fearful when others are greedy."
Regularly rebalance and review
Rebalance your portfolio on a regular basis to retain your initial asset allocation.
Buy Low, Sell High
Step 10 - Understanding Asset Classes
Liquid: Can be quickly converted to money.
Publicly listed equities
Mutual funds
*Equity Mutual funds
*Hybrid mutual funds
*Exchange-traded funds
*Debt mutual funds
*Fund of funds
Fixed Income schemes
*Corporate bonds
*Government bonds
*Fixed deposits
Other Equity Investment Vehicles
*Portfolio management schemes (PMS)
*Alternative investment funds (AIF)
Illiquid: Not a good choice if you need the money immediately.
Real estate
Alternative investments
*Art/Antiques
*Gold
*Private Equity
*Venture Capital
*Hedge funds
*Commodities
Insurance
Publicly listed equities
Referred to as shares or stocks.
When you buy stocks, you are purchasing a little portion of a company. You become a co-owner of that business.
Mutual Funds
Mutual funds pool the money of many investors and construct a portfolio of stocks, bonds and other instruments.
Advantages
Professionally managed
Automatic Diversification
Dollar-cost averaging
Liquidity
Transparency
Disadvantages
Expense ratio
False diversification with multiple mutual funds
When investing in mutual funds, consider the fund's previous performance, fund management track record, fee ratio, and the rate of NAV increase over time.
Other equity investment vehicles
PMS and AIF are specialised portfolios managed by portfolio managers that are suited to the specific of each individual investor. Institutions and high-net-worth people favour them.
Fixed Income Schemes
Fixed income is the revenue generated by an investment with a fixed rate of return.
Bonds are similar to loans. When you buy bonds, you are lending money to a company or the government. In exchange for this loan, you will get interest for the duration of the bond.
Step 11 - Knowledge, focus, patience, review
These characteristics will help you negotiate the realm of money creation.
Educate yourself as a continuously
Develop your personal knowledge by reading books, networking with other investors, and visiting online tools.
Remove all distractions and concentrate on your strategy.
It's tough to know what to absorb, who to trust, and where to look in this information era. You should not believe everything you hear. Always verify the information.
Recognize the worth of time and patience.
To get the benefits of compounding, start early and have a long time horizon.
Constantly monitor and revise
You can't control something if you can't measure it. Try to analyse your portfolio on a regular basis to spot unusual behaviour and take steps to protect yourself from potential financial calamities.
Step 12 - Leverage good debt
Debt is just borrowing money to spend on items we couldn't afford to buy with our existing salary. It is costly since it has a high interest rate. However, if used appropriately, it has the potential to be beneficial.
Debt obtained for the purpose of investing in real estate, starting a business, or furthering one's education is often considered good debt.
Debt for thoughtless spending, such as purchasing an expensive item, an extravagant vacation, or a luxury lifestyle, is considered bad debt.
However, even good debt may turn bad if it is not used carefully. Pay attention to your repayments, interest rates, and any hidden terms such as repayment penalties and lock-ins.
Debt is expensive. Never utilise more than 36% of your pre-tax income to pay off debts.
Step 13 - Tax saved is income earned
Tax preparation is as essential as savings and investment planning in the accumulation of wealth.
Exemptions and deductions might help you save money on taxes. It is in your best advantage to be aware of all available exemptions and deductions. Try to save as much tax as you can legally.