Maximum income, least possible expenses, optimum returns on investment and preserving & protecting your money from the uncontrollable are the 4 pillars for living a zero-stress financial life. They are like the 4 tyres of the car on which your financial life moves ahead, smoothly.
A couple of weeks back, I ran a poll on LinkedIn to find out how people perceive the importance of these 4 pillars. Below is the screenshot of the poll result.
Let me explain all of the 4 aspects from my own experience. I was born and brought up in a humble middle-class family. My father is a driver. From the earliest childhood memories I can recollect about personal finance, I remember this one sentence from almost every elder relative and family friends.
“Study hard, get good grades, join a Government job or a reputed private company, earn a decent salary and your life will be set”
This sentence was repeated so many times in front of me that it made me believe that ‘Earning more Money’ is the only solution that can help me get rid of all the money related issues that I had been witnessing throughout my childhood.
Fast forward to the year 2003. I joined one of the reputed Insurance companies as an employee with a dream salary package. I was like, yes, I have done it. I have achieved what everyone was suggesting to me since my childhood.
Within the first year itself, I found out that there is more to the money game than just earning money. Working in the insurance industry, I was able to understand the importance of ‘protecting wealth from the uncontrollable of life’. It is quite obvious as the concept of insurance is basically built around protecting one’s wealth from unforeseen events in life.
The other aspect of the money game, I learnt about while working in the financial service industry was that of ‘return on investment’. You would agree that each one of us works hard to earn money and therefore our money, when invested, should work harder for us. In other words, our investment should earn a maximum return for us.
I learnt about the above 3 aspects of money management without paying any price. However, the last one came at a huge price. Despite earning a handsome salary plus incentives, I went into a debt trap almost every alternate year during the first 12 years of my career. Despite working in the financial service industry and advising & persuading people to invest for their bright and secure future, I, myself, had not invested a single penny till 2015.
All because of my lavish spending habits. It was only in the year 2014, I realised that spending money judiciously is as important as earning more money, getting a maximum return on your investment and protecting your wealth.
What made me write this article is the result of the poll. Most people think a higher return on investment and protecting our wealth are crucial for acing the money management game and having abundant wealth. While all 4 are equally important, one can’t ignore the significance of any of the 4.
Let’s look into the key areas of each of the 4 pillars of money management.
Earning Maximum Money:
Given a choice, every human being would want to earn the maximum choice. However, in order to earn money, you need to give something in return. Something which is useful and needed by other people in society.
You have time, money and people to leverage for developing that something which is useful and needed by people. This means you need to utilize your time, money and other people to develop a particular skill or system that is useful and needed by other people.
This is called your primary source of income. Your job or business where you are giving maximum time and efforts to earn money. However, in this day and age, it’s not wise to depend on just one source of income. Recent pandemic lead lockdown exposed many people having just one source of income.
Having multiple streams of income is what you should aim for to cope up with the challenges and uncertainties of this gig economy. How can I develop multiple sources of income? – might be the question popping up in your mind right now. Well, the answer is quite obvious. Utilize your spare time, extra money and other resources including people to develop something that is useful and needed by people.
Remember, you are not trying to replace your primary source of income here. You are just developing something that can help you earn some money by leveraging your spare time, money and other resources. It could be your knowledge, your secondary skill, your hobby, area of interest, invested money, etc which could help generate another stream of income.
Having fewer expenses does not mean compromising your lifestyle or living on the tightest possible budget. Rather, it’s all about making sure the following.
- First of all, you need to find out what you value, what’s important to you and align your spending with them. Cutting down expenses on what’s not in alignment with your values and importance. One crucial aspect to keep in mind is that you yourself should be deciding your values and what’s important to you instead of someone else or the society or the latest trends dictating them to you.
- Secondly, it’s about making sure that you enjoy the present at the same time you are not worried about your future financial needs. A clear understanding of instant versus delayed gratification is something that can help you immensely in this regard.
- Lastly, it’s about understanding the fact that you are going to earn actively for a limited time. Whereas you are going to spend money as long as you live. Hence, you need to build a passive source of income for the years you are not earning active income.
Maximum Return on Investment
We all want the maximum return on our investment. However, you must be aware of the fact that risk and return are directly proportional. In simple words, if you are seeking higher returns, you are exposed to higher risks as well.
It’s a human tendency to avoid risk as much as possible. So, what’s the way out? Not too complicated for sure. Here is what you need to know.
- Proper understanding of various types of asset classes
- Thorough knowledge of various investment risks
These two can help you decipher any investment opportunity available in the market and decide whether it is the right investment for you or not.
Apart from this, you need to aim for the optimum risk-adjusted return instead of the maximum return on your investment.
Protecting Your Wealth
Despite the development in astrology for predicting the future, the good or bad thing about life, whichever way you choose, is that it is unpredictable. Furthermore, the situations or circumstances we face in life are not always under our control. Hence it is critical to prepare for these unpredictable and uncontrollable aspects of life in a way that has a minimal financial impact on our life.
You need to dig deep into what are the things that are not entirely in your control and can not be predicted surely. Among those which are the critical few, if gone wrong can have major financial consequences for you and your family. These are the things and events that could have a huge impact on how much long term sustainable wealth you can have.
Once you have found out the critical aspects, the obvious step is to mitigate these risks or insure against them. Mitigating and insuring against these unpredictable and uncontrollable events will make sure your financial life has no or minimal impact even if one of these events occurs.
It’s more like making sure there are no holes in the bucket before you start pouring the water into it to fill it. After all, what you are trying to do is filling your life bucket with lots of money. Aren’t you?
Which Pillar is Crucial and How You Can Start Mastering the 4 Pillars?
As mentioned above, each of these 4 pillars has its own significance when it comes to your overall financial well-being. They are like 4 tyres of your car. If you and your car need to reach a destination, all of the four tyres should function in synchronization with each other.
Similarly, if you want to enjoy sustainable long term wealth, each of these four pillars must compliment each other. So, how should you start mastering these pillars?
Ask yourself this question. Which among the four pillars is completely in your control and the answer to this question would give you the first pillar to start working on.
In my case, I found out that among the four, my spending is completely in my control. Hence, I decided to take complete control over my expenses. The next pillar to focus on for me is protecting my wealth. Once you are in control of what you can control, the next logical step is to make sure that the things you can’t control have no or minimal impact on your wealth.
The other two pillars require a long term approach. In fact, both of them is an ongoing process. Think of your primary source of income. How many years of study and efforts did you put into before you started earning money? Quite a lot, right? Similarly, multiple streams of income would also require time, money and efforts before they actually start giving desired income.
The same is true with return on investment. Time plays the most crucial role when it comes to how much wealth you can accumulate which in turn can give you sizable passive income.
Earning maximum money by leveraging all the available resources, spending in a way to enjoy the present at the same time making sure that you need not worry about the future, getting optimum risk-adjusted returns on your investments and protecting your wealth from uncontrollable: the ideal scenario for accumulating long term sustainable wealth.
Having the right money mindset, required knowledge, an appropriate strategy and focused actions are key to mastering all these 4 pillars.
What is the one thing that you learnt from this article which you are going to implement in your financial life from today? Do let me know in the comments.
To Your Financial Well-being.