Want to be rich? - Part 12

In my last post I talked about impulsive purchases and breaking barriers of reluctance. Credit cards are instruments that help you spend unnecessarily and spend more. Since you do not see your net worth reducing, you get psychologically inured to overspending.

One way to escape this is to avoid the temptation to increase the credit limit of your credit card. I deliberately ignore mails from my bank to increase the credit limit. In one case, the bank increased the credit limit on their own because I am their valued customer. Yeah sure! I also carry just one credit card. I have surrendered all others I had.

I just read something called the ice glass method for reducing credit card spending. The following extract is from Predictably Irrational by Dan Ariely.

[The Ice Glass Method] is a home remedy for impulsive spending. You put your credit card into a glass of water and put the glass in the freezer. Then, when you impulsively decide to make a purchase, you must first wait for the ice to thaw before extracting the card. By then, your compulsion to purchase has subsided. (You can't just put the card in the microwave, of course, because then you'd destroy the magnetic strip.)

Go figure.

Want to be rich? - Part 8

There is just one golden rule when it comes to becoming rich. Aand that is ...

You should earn money even when you are not present.

So that rules out jobs.
Or even business where you need to be present all times.

Building a business where you employ clever employees is definitely a very big yes.
Investments in property, shares, mutual funds are a yes.
And surprise, surprise, monetized blogs (such as this one) are also a yes. At least for some (No! Not me! Not yet!)

The trick is to start early.
Reason: You have sufficient time to recover from setbacks - there will be setbacks, guaranteed. Youth is not risk averse. So that helps.

More importantly, the real benefit of compound interest kicks in.

How much do you think you get if you invest merely Rs. 2000 per year for 25 years that returns you 10% compounded annually. It is Rs. 2,16,363 ( more than 4 times)

You are risk averse?
You would like to put the money in a recurring deposit bank scheme that gives you just 5% returns compounded. In 25 years your money will become Rs. 1,00,227 (a shade over double)

But you should have 25 years with you. So don't start at 40. Start when you are 25 years old.

Want to be rich? - Part 1

I am an anti-thesis of Robert Kiyosaki, the author of Rich Dad, Poor Dad.

Reading Rich Dad, Poor Dad is thrilling. It is so well written that you start believing that you also can become rich. So what of me?

I have serialized the mistakes I made that perhaps has prevented me from becoming rich.

Some of you will identify with me: to them I would advise not to follow me.
Others will take a lesson from my shortcomings.
And by bringing myfear out in the open, I will change, ahem!

Basically, what I trying to do is introspecting into why I could not break out.

My father came from a huge family. He had 11 brothers and 3 sisters (Big family! What fun! In contrast I am single child.)

I grandfather was a lawyer in the town of Dhanbad.
I am told that he detested telling lies. So, one fine day, he decided he will stop practising law.
By then his eldest son started working (as a lawyer!!) but the overall income fell.
So the living standard suffered. This was pre-independent India.

My father left home at 16 to join the Indian Air Force (IAF). He was 6 ft and had - others have told me - a V-shaped body.

Someone once challenged him to a boxing bout and beat the hell out of him.
He resolved to take up boxing.
He went on to become the Air Force Boxing champions in various weight category.
He became known as 'Boxer Mukherjee'.

His boxing career ended after he married. My mother says that my father had near zero bank balance when she got married to my father.

In other words, he enjoyed his life as a bachelor. Boxing and enjoying life!
Mother then took charge of the household. She started saving pennies. This was early sixties. There was not much scope of investments in India.

Savings was all that was possible. She saved enough. Insured father's life. The insurance matured before father's death and with that money we purchased 'colour' TV and refrigerator.

This was when I reached college.
My parents managed to build a house from the savings and loan.
They managed to get me through school and college education.
And when father died in 1986 she did not have to ask money from anybody.
I am very proud of my parents.

My childhood has been a happy childhood. I was never denied any request.
But at the same time we never splurged. And we never went beyond budget.
People in Airforce cannot be called poor. But they are not rich either.
And we always saved. Banking was something that I learned fairly early.

So saving money is embedded somewhere in my brain.
Investment is risky, losing money is no fun.
Future is uncertain, so save money.

Over the years I have found it very difficult to tear myself away from the fear that arises from losing money.
Today, perhaps, I can afford risky investments.
However, most of my investments go into relatively safe instruments.

So what is Lesson #1.

To become rich you need to reformat your memory.
My parents did what they could do best according to their circumstances.
I should have done / should do what I can do best according to my circumstances.

Therefore, DO NOT LET YOUR PAST DICTATE YOUR FUTURE.

Wait for my next post for Lesson #2.

The Black Swan Predicted Financial Collapse

If I had pots of money, I would buy a copy of The Black Swan and distribute a copy of The Black Swan to every banker, economist and policy maker and all those hanging out at Davos.

Now, you have to remember that this book was published in 2007 and I am assuming the book would have taken about 15 months to complete (or more!) Read this extract ...

A similar effect is taking place in economic life. [G]lobalization; it is here, but it is not all for good: it creates interlocking fragility, while reducing volatility and giving the appearance of stability. In other words it creates devastating Black Swans. We have never lived before under the threat of a global collapse. Financial institutions have been merging into a smaller number of very large banks. Almost all banks are now interrelated. So the financial ecology is swelling into gigantic, incestuous, bureaucratic banks ... - when one falls, they all fall. The increased concentration among banks seems to have the effect of making financial crisis less likely, but when they happen they are more global in scale and hit us very hard.

And then in the footnote, Nassim Nicholas Taleb goes on to say ...

As if we did not have enough problems, banks are now more vulnerable to the Black Swan and ludic fallacy than ever before with "scientists" among their staff taking care of exposures. ... [T]he government sponsored institution Fanny Mae, when I look at their risks, seems to be sitting on a barrel of synamite, vulnerable to the slightest hiccup. But not to worry: their staff of scientists deemed those events "unlikely."

Spooky or what?

Just one clarification.
The Black Swan is not about prediction. It is about the unpredictable. The above extract is an example of how one should anticipate the unpredictable.

Picture Courtesy: 'Rolve'