If you want to know how to become rich, then you’ve landed on a right page.
In fact, what you’ll find here is unique on internet.
What’s unique about this blog post?
It gives a roadmap to its readers about how to become rich.
- Roadmap to become rich.
- 1. Building rich fund.
- 2. Utilizing rich fund.
- How rich can become richer?
- Quick Tips on handling money.
- How to become a better investor?
Let’s dig deeper into the concept of getting rich so as to make it a reality for oneself.
Roadmap to become rich
As indicated in the flow chart, the road that can lead us to financial richness passes through “Rich Fund“.
Why I call it rich fund?
Because it has potential to make one financially rich.
Understanding of two thing is critical here:
- Building Rich Fund: building it is a time taking process. It cannot be done in couple of years. Building it consistently over time though wise savings, and wise investments is the clue. Read: about building rich fund.
- Utilizing Rich Fund: As important it is to build rich fund, it is equally important to utilize it wisely. There are two key ingredients of its final utility: (a) Passive income, & (b) Size of asset base.
Let’s understand more about them…
1. Building Rich Fund
What is a rich fund?
The function of this fund is specific – income generation, and providing financial security.
For a common man, the most difficult step to become rich is building a rich fund for self. Why?
Because it calls for a strict discipline in handling ones income and expenses.
Why discipline is required?
Because it helps in overcoming two big hurdles in creation of ‘rich fund’:
- #1. Daily needs: Ideally one should divert 95% (net of EPF) of ones income to build “rich fund”. But in real life it is impossible. Why? Because we must also manage our daily spending needs. Hence, our savings, shrinks from 95% to only 30%. See the below flow chart:
- #2. Long Term Goals (Needs): For a common man, apart from daily-needs, he/she must also fulfil other BIG needs of life. They are like house purchase, child care, vehicle, vacations etc. Though these may not be immediate needs, but it’ll surely come with time. Hence, one must also be prepared for these expenses. This further shrinks the savings (for Rich Fund) from 30% to 15%. See the below flow chart:
Why I’m calling them hurdles?
Because it has reduced our capacity to build “rich fund” from 95% (net of EPF) to just 15%.
This is a huge challenge.
With such limited available funds, one has to build the “rich fund” – so as to become rich asap.
So, how to manage these two limitations?
By Effectively saving and investing money. Let’s see how…
1.1. Effectively Save Money
To ensure that maximum income is diverted to investment, effective saving is a must.
How to save effectively?
There are two ways of doing it:
1.1.1 Pay Yourself First
This is a very easy and effective way to save money. It is a no brainer.
Robert Kiyosaki calls it “Pay Yourself First” method.
What is it?
Every time the salary is credited into your account, pay yourself first. How?
Let me explain with an Example:
Suppose ones net salary is Rs.100,000. This amount gets credited to the bank account on 1st of each month.
How “pay yourself first” will work?
Give a standing instruction to bank that, as soon as the salary is credited, Rs.30,000 (30%) must be transferred to another savings account.
That’s it, this is how “pay yourself first” works.
What’s left in salary account (Rs.70,000) can be used to manage daily needs.
The money that goes into the savings account will be used for investments ONLY. Read more about pay yourself first concept.
1.1.2 Budget Expenses
What is the concept?
First create a budget for all expenses, and only then spend the money.
What does it mean?
Let’s understand this with an example.
Suppose ones monthly expense needs are as follows:
Now, create a break-up of the above needs (as detailed as possible).
How to do it? Create a sub-line items…
The estimated expense of sub-line items becomes the budget.
What it means by budget? Read: How to build expense budget.
It means that, one is not allowed to spend more (on each line item), beyond what is budgeted.
If monthly budget for groceries is Rs.10,000, one must not spend more than that.
If one wants to take budgeting one step further, expense tracking must be included. Read: Benefits of expense tracking.
Why to do this? Because it will prevent overspending.
Why to take so much trouble (budgeting, expense tracking)?
Because it will ensure that ones saving (of 30%) never falls below its mark.
1.2 Effectively Invest Money
In the process of becoming rich, there are two parts to investing:
- Step #1 Invest – To build rich fund.
- Step #2 Invest – To utilize rich fund.
Here we are talking about the former (invest to build the fund).
While doing this, there are two main goals:
- To Build rich fund (Primary).
- To simultaneously Build fund for ‘other financial goals’.
Why to care about other financial goals? Priority is to build rich fund, right?
Yes, but other goals cannot be missed. They must get an equal priority.
What is rich fund? It will enable one to become rich. Hence, it has a top priority, right?
But, other financial goals are also unavoidable. If they are not taken care, they will eventually eat-into the “rich fund”.
This way the whole purpose of “building a rich fund” will be lost.
So, what to do?
Build an investment plan in such a way that, it takes care of both the priorities.
- Rich Fund: Typically it takes close to 20-25 years to build this corpus. As time horizon in long, we can go aggressive. How to do it? By resorting to equity (SIP in a mid cap or small call funds). Read: Money required for retirement, and Small can vs mid cap funds.
- Other Financial Goals: The time of realisation of these goals varies. Hence, investment strategy must also be tuned accordingly. How to tune it? By selecting a suitable investment vehicles, which compliments the respective time horizons. Read: About goal based investing.
Calculator to estimate monthly investments
|Corpus to be Built (Rs.Crore)|
|Expected Return p.a. (%)|
|Time (in years)|
|SIP (monthly contribution) (Rs.)|
2. Utilizing Rich Fund
The built-up “Rich Fund” must be used in two ways:
- To generate passive income sources.
- To build a security fund.
What is the utility of passive income and security fund?
- Passive Income: To become rich, one must first attain financial independence. How to get there? By reducing ones reliance on earned income (like salary). How to do it? By generating enough passive income. For rich people, passive income is enough to take care of their daily spending needs. Read: Reduce salary dependency.
- Security Fund: How people feel financially secure? A salaried person is secure when salary and bank balance both are high. Security fund is like ones bank balance. What is its utility? In times, when income is not enough, the person can seek support from security fund. Read: Stages of financial independence.
Let’s know more about how to invest for passive income generation and building a security fund…
2.1 Passive Income
Not all type of incomes can be classified as passive income.
What is a passive income?
It’s an income which’ll continue to yield no matter what.
What does it mean?
It means, the income will continue to flow-in even if one is not working for it. Read: Sources of income of rich people.
Few types of income which are of passive in nature are explained below:
- Rental Income: Buying a real estate property, and putting them on rent will generate rental income. How it is passive income? Because every month the tenant will pay the rent. The chance of a tenant not paying rent is remote. Moreover, the advance deposit taken from the tenant works as a safety net. Read: Property investment ideas.
- Annuity Income: Annuity is an investment vehicle which is tailor made for steady income generation. Why it is steady? Because of two reasons: (a) As it is a debt based plan, it is risk free. (b) Secondly, the interest offered by annuity at the time of purchase remains fixed throughout its maturity. Unlike FD’s whose interest rates keeps changing with MLCR/Base rate. Read: About annuity.
- Dividend: How to earn dividends? Dividends can be earned in various ways: Stocks, mutual funds, REIT’s etc. How to make dividend income steady? Stocks- buy only blue chip stocks. Mutual Funds- Buy dividend plans of mutual fund schemes. REITs- Mutual fund companies offer REITs, but their concentration is only real estate sector.
[Read more about the concept of passive income with some ideas.]
In the process of becoming rich, it is essential to first become financially independent.
Beyond financial independence, lies the vast expanse of a rich and financially abundant life.
See a typical representation of financial dependency, financial independence, and an abundant life.
The higher is the quantum of “wilful spending”, the richer is the person.
What does it mean?
A financially independent person who can afford Rs.50,000 on wilful spending is richer than a person who can afford Rs.20,000 on it.
2.2 Security Fund
What gives a sense of financial security to a person?
The first is income. (we have already taken care of it with passive income above)
The balance what is necessary to complete the experience of financial security are these:
- Own Home: Every one must own a home. It feels far more secure to live in ones own home, than a rental property. When to buy a home? Do it as early in life as possible. I thought, had I bought my first house as soon as I graduated, would’ve made be richer today. Never wait for retirement (or big enough rich fund) to fund your home purchase. Do it asap. See the depiction of house purchase as shown in my flow chart. Read: Rent vs buy house decision.
- Being Debt Free: For a common man, one of the biggest deterrent to a financially rich life is – debt. Most of people lead a life with knee deep in debt. To becoming rich, one must first become debt free. How to do it? Just identify all the debts, and start paying them off. Which debt to pay first? One with the highest interest rates. Read: Plan to become debt free.
- Build Emergency Fund: What is included as part of an emergency fund? It’s main components are (a) cash, (b) life insurance, (c) medical insurance, and (d) auto insurance. What is the purpose? We can never predict the occurrence of emergencies. So how to manage it? By keeping a fund aside, so that when needs arise we always have a handful. Read: About emergency fund.
- Asset Base: After passive income generation, asset base creation is the next most important step. In ones endeavour to become rich, this step cannot be compromised. What is asset base? In our process flow, there are two types of asset: (a) income generating, and (b) capital appreciation assets. We are referring to the later here. The bigger is the asset base, higher is the person’s net worth. How to build it? By including assets like stock, equity funds, gold, real estate etc in portfolio. Read: How to build assets?
How Rich can Become Richer?
This is also represented in our process chart.
To do this, one must wisely utilise the passive income. How?
Lets see how our process-chart represents reinvestment:
What does it shown?
It is asking people to reinvest a portion of passive income back to buy more capital appreciating assets, and to increase emergency fund (mainly cash).
Quick Tips on Handling Money
People who have become successful in money making know the right things about “handling money”.
How to handle money? It must be learnt with practice.
It is like learning to ride a bicycle.
How to learn? Here are few quick tips which has proved to be helpful in handling money:
- Practice Frugality: How often we go out for dinning? How often we go to multiplex? Frequently we boy clothes which we do not need. How often we swap our credit card knowing that we cannot afford that purchase? If your answers worry you, it’s time for action. This is how money gets lost on needless things. Practicing frugality is a must. Read: use of frugality.
- Party, but don’t overdo it: Who doesn’t like to party, but excessive parting can draw a big hole in ones pocket. Socialising is a good thing. People enjoy meeting & hanging out with friends and relatives. But hanging out does not always need to be in expensive venues. Socialising can also be done in public places without spending too much. Read: Where people spend money?
- Improve financial intelligence: Only a tiny minority are financially knowledgeable. They take “informed” financial decisions. One such decision is “saving more money”. How majority deal with money? They earn money to spend it. This thought process can be altered with improved financial intelligence. Read: Good books on finance.
- Track credit rating: How knowing ones credit ratings helps? Good credit rating means, money is being handled in a right way. If ones credit rating is poor, it means few changes money handling is required. Being aware of one credit rating is like doing a periodic reality check. Read: How to improve credit rating.
- Reduce expense growth rate by 1%: This is unique. Our household expenses grow at a fast pace. It grows faster than our income (even surpassing inflation). Practically one may NOT be able to reduce monthly expense. So how to manage it? By slowing down its growth rate. How to do it? Review your last 5 years expense growth rate. Reduce the growth rate by 1% for the upcoming year. Read: Tips & tricks to save money.
- Involve family to manage money: Money management cannot be done alone. Include the full family. Allow them to make their own contributions. Start with setting up of small-small goals. These can be like small vacation, gadget purchase, furniture upgrade etc. The keyword is “more involvement”. Read: Calculate daily expense for self.
- Use credit card wisely: How? Use it as if it is cash (or debit card). How debit card is different? When we swap a debit card, the amount is debited from our savings account. So, to use a debit card we must have savings. Use your credit card as if it is your debit card. Never use a credit card for which you do not’ve back-up money in savings a/c. Read: How to use credit card?
- Save Maximum Tax: Before you start investing money elsewhere (stocks, mutual funds etc), use it for tax savings. How? Buy insurance, tax saver deposits, retirement plans, home loan etc. Try to utilize maximum (60% or more) tax deduction. Read: Income tax planning.
- Retirement Fund: Calculate the fund you’ll need for retirement. Most of us contribute to our retirement fund (EPF, VPF, etc). But do we know whether it is sufficient or not? How to know? Read: How much we need to retire?
- Forecast Income & Expense: Try to foresee your income and expense for next 20 years. How to do it? Add 6% p.a. average inflation rate to your existing income and expenses. If your current income is $1, 000, in next years it will be $1060, $1,124 etc. This process will be like living those years today. Remember, in next 20 years, there will be events like child birth, their education, your first home etc. Read: Benefits of budgeting expense.
How to become a better investor?
Almost all of us want to invest money to multiply our money faster, right? But how about changing our thinking a little? Let’s try to invest to earn a tag of a better investor. A “better investor” can make more money than majority.
How to do it?
Keep diverting a substantial portion of earned income to build “rich fund”. Essential here is to follow the investment basics and stay invested.
Remember this small graphics about why you are investing money in first place.
To get a broader picture, see the roadmap shown above.
Few things to remember about the process of investment:
- Be ready to fail: All investments will not make money. It is on the investor to keep investing and deciphering good investments with loss-making ones. The fear of loss-making investments should not stop one from investing. Similarly, few good investments should not make one overconfident. Perform periodic checks on your portfolio. Remove non-performing assets. Buy more of good ones. Read: Best investment plan for middle class.
- Learn to time the market: Buy more when others are selling. Sell more when others are buying. Ride against the crowd. But we actually do the opposite. We buy when everyone else is buying. But wise investors would not do this. Why? Because most good stocks trade at overvalued price levels in these circumstances. So, when to buy? When market/sector is most pessimistic. This allows to grab good investments at undervalued price levels. This is what is called timing the market. Read: Signals of market crash.
- Be informed: Information is power. Awareness also works. Keep your senses awake all the time. If you are passionate about stock investing, keep yourself updated about what is happening in the market. Buy a money magazine (Outlook Money, ET Wealth etc) every fortnight and read it all. Try to learn to judge company’s fundamentals. How? Learn to read their financial statements. Read: Evaluate financial health of a company.
- Experience counts: There is no better teacher than experience. Reading books about investing is good. But putting learning into practice is more important. Do not be over cautious. The best balance is to study and practice. There will be mistakes, so begin with only small amounts. Invest just for the sake of learning. A time will come when the “feel” of investment will come. By that time, it is important to keep investing, and gaining experience. Learn from mistakes and then invest again. Read: Buffett’s 3 rules.
This blog post presents a roadmap which explains how a person can become rich.
What’s the first thing to note about the roadmap?
Only spending money will take us no where. The path to financially rich life starts from investing money.
Then this roadmap explains how to invest money?
The primary goal of investing should be building a “rich fund“.
But along with this, the focus must also be on other financial goal of life.
The post also highlights the hurdle that comes in building the “rich fund”.
One way to handle this hurdle is to save and invest wisely.
As important it is to build rich fund, it is equally critical to use it efficiently.
The priority of building streams of passive income, and need for security fund has also been highlighted.
I hope you like the process of becoming rich. It is a time taking activity, hence it is better to start early.
In case you have some feedback/query on the topic, please post it in the comment section below. I will be more than happy to read and reply to your thoughts.
Have a happy investing.