Why you may NEVER be Rich, even if you make a lot of money

By Anubhav Srivastava (Register for his Confidence Building Workshop Here!)

People believe that the way to be rich is to make more money, well that is only half the story. You can earn a million dollars and still be broke, if at the end of the year you spend or owe more than a million dollars! It is not always about how much you make but how much you keep.

First things first, by earning more money all you increase is

Your Annual Income and not necessarily your net worth.

Whether or not you actually increase your net worth in that year totally depends on the other half of the story, the expenses you made, the debt you accumulated, the investments you made that year. In other words it depends on the habits you practised during that year.

First let’s take a look at the basic formula for sustained financial success over a period of time. A lot of you might have heard of it, some may have not but it is important to reiterate it because it is so simple and yet so important.

Financial Success comes from Spending LESS than you earn and then investing the difference.

The spending less than you earn part is straightforward. If you make a million dollars one year but you suddenly think you are rich and can afford everything in the world and go into overspending mode, what happens at the end of the year. You owe more than the money you earned. Not so rich any more, are you?

So when the first part of the equation, which is saving less than you earn so simple, why do so few people do it? Why is something that is common sense, not so common? There are two reasons behind it.

1) We take things for granted.

Layoffs? Can’t happen to me. Recession? Doesn’t affect my industry. My business? It will always have demand.

None of the above is true. Uncertainty is a reality of life and by assuming.it will never happen to you, you are at great risk of crumbling financially if any of these things ever happen.

Let me tell you a story about a guy I know from my university days. Now this guy was not able to get a job after graduation and worked in one of the factories in town. After a few months he was lucky enough to be offered a job by his friend who set up a company in the UK. As soon he got the money he started splurging it on buying expensive gifts for his girlfriend, going on expensive trips with her around Europe, staying in expensive hotels, buying only high end perfumes, designer clothes, designer watches and even designer underwear!

Now things went well for an year or two and this guy despite making quite a bit of money, lived from paycheck to paycheck because he splurged all that he earned and actually accumulated quite a lot of debt. But he figured it would never be a problem because he would pay it all off with his monthly income.

Guess what, after two years his friend sold the company to someone else. The new owner fired this guy and now not only does he not have a job, he is broke, in debt and working in factories again. Life is cruel? You bet. But it is much more cruel to those who take things for granted.

STOP taking things for granted. Stop assuming things can never go wrong because they often go wrong when you are least prepared. Had my friend saved much of the money and invested it wisely, even during his lay off he could be earning a decent income off his investments alone.

Here is the second reason people are not able to save money.

2) The urge to impress others or show off even if you cannot afford it.

Did you know there are self made multi millionaires amongst us who live so frugally that it would not be your fault if you assumed they are not very rich. There are also people out there living the “millionaire lifestyle” who are actually neck deep in debt.

Now I am not saying everyone should live frugally. There is nothing wrong with wanting to enjoy life and showcase your financial accomplishments through material possessions, but if you are buying things you cannot afford to impress people you do not care about, there is something seriously wrong.

Now some expenses are unavoidable and important like the ones needed to run the family, take care of health expenses, tuition for the kids, home loan repayments, car loan repayments etc.

But most of the expenses we make have little utilitarian value. We make those expenses not because they are required but because we wish to enjoy life or show off. Now like I mentioned, I don’t think there is anything inherently wrong in this, if you can afford it but if you try to go beyond your means and spend on things that you cannot afford, you are setting yourself up for financial DISASTER.

Suppose you make a hundred thousand dollars an year, but spend everything and have no savings for a rainy day. Suddenly you see your neighbour buy a new Ferrari and that makes you green with jealousy. So you decide to out compete him. You take out a Car Loan for a Lamborghini and the Lamborghini itself becomes the collateral for the loan. But because a Lamborghini costs a lot, the loan you will take out would huge as compared to an average car. So the bank decides that you need to put up your old car as well as other precious valuables that you may consider very dear to you as additional collateral.

So you are buying something that

1) You cannot afford

2) Will only depreciate in value. Cars lose their value considerably the moment they are sold.

3) Puts you at the risk of losing your old car and other valuables that may have a lot of monetary and sentimental value.

Now lets say things go good for a while, you manage to prove to your neighbour you are as rich as him and show off your new toy to your other friends who become green with envy. But then you realize buying the car was not enough, you will have to spend thousands of dollars, a good chunk of your income just trying to maintain it year after year. Then the unexpected happens and you are fired from your job or the company lays off a lot of other people along with you. So now you are without a job

Not only that, you are also broke. You have no savings because you lived paycheck to paycheck. So now you can no longer make the loan repayments or pay maintenance costs. Very soon you default on the loan.

The bank then seizes your Lamborghini and sells it off to recover its money. But it also sells off your old car and your other valuables. So now you are broke, without money, without a job and also without your old car and things that meant so much to you.

Was losing the job under your control? Probably not. Was not being broke so soon under your control, in most cases: ABSOLUTELY. Had you managed your finances well, maybe you would be without a job, but not without enough money for a rainy day that you could rely on until you landed your next job.

So please, an eye for an eye makes the whole world blind and a Lamborghini for a Ferrari (when you can’t afford it) makes you all go broke. So please stop trying to impress others, the only one you need to impress is yourself. Knowing that you have solid savings and investments that keep growing and will over time make you rich is much better than trying to buy things you cannot afford to impress people you do not like.

Stay Tuned for Part two of the article where I talk about more reasons why people do not become wealthy even after making quite a lot of money.

Summary of the Article

1) Making a lot of money is not the same thing as being Rich. You can make a lot of money and still be broke. You can have a smaller income but still be rich thanks to your savings and investments over time.

2) The simple Financial success formula is Spending LESS than you earn and then investing the difference.

3) Never take things for granted, no matter how much money you make. Your job may go, your business may under perform, your shares may tank. Life is uncertain. Always be cautiously optimistic. Always account for that uncertainty while making any new financial decision. This awareness alone will force you to save a lot more money than you usually do.

4) Stop spending money on trying to acquire things just to impress people. If you can afford them, great. If you can’t you are setting yourself up for financial disaster. You will be a poor man or woman with a Lamborghini that can be seized by the creditors at any moment.