There are a lot of actions that are recommended by experts for any young person aspiring to be rich. Can we single out the most important of such actions? In my opinion it is, “Pay yourself first.” This means “Save first and spend later.” This is not the first time we are discussing this principle. This is worthwhile reminding oneself any number of times.
People may ask, “Why not spend and save later?” The simple answer is it does not work. People have tried this but have failed miserably. It does not work because you will always have more reasons to spend the money and the reasons will be very logical. If you want to prove this wrong you can do so by practicing several decades of enormous will power. Should anyone take chances?
We have already answered the second question, “What if the balance (after saving) is not adequate?” It is very unlikely that this will happen because you will arrive at the quantum of saving in consultation with your Financial Planner. Possibly with your Financial Planner you can do what is called detailed ‘Need Analysis’ of expenses which may require you to spend for your needs and postpone some of your wants and luxuries to the future. It is very likely that you and your family members will come out with uncanny ways to manage the situation.
The other question many ask, “Is it not being miserly?” The unqualified answer is, “No.” After all, you may have to do this for a short period in life and the long term rewards are indeed too great and laudable. In fact we have discussed in our blog, ‘Moving from frugality to earning more’, being frugal life-long is not needed and is a defensive approach. The initial ‘sacrifice’ serves the purpose of giving a kick-start to one’s savings and investment. Afterwards, the focus should shift to higher earnings.
Now, let us turn our attention to the main point of ‘paying oneself first.’ The power of compounding works amazingly well when you start saving and investing early. In our ‘Happy Road to be Rich’ program we discuss the example of two people ‘A’ and ‘B’ to illustrate this point: ‘A’ starts investing Rs 50,000 per year at the age of 25. ‘B’ starts investing the same amount every year at the age of 30. When they attained the age of 55, A’s corpus is Rs 6.1 million while B’s corpus is Rs 4 million @ 8% return pa. The difference of Rs 250,000 in the amount invested made a difference of Rs 2.1 million to their corpus. Look at the enormous benefit of ‘paying oneself first.’
My mission is to assist millions of people particularly those who are beginning their career by highlighting the importance of this single most important action to be Rich. Please pass on this simple and powerful piece of wisdom to many you know and they will be grateful to you.
It is time to turn to the lighter side of life. A young man made a gain of Rs. 10,000 in the Stock Market. He called his close friend and told him, “I want to share my joy with you. I have made a profit of Rs. 10,000 in the Stock Market.” The friend replied, “It is great news. If you can share 50 % of your gain, I will share 75 % of your joy.” The young man immediately disconnected the phone!
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