Wealth= Income or Savings?

 It is more likely that a person earning more is looked upon as being wealthy. It is assumed that a person who earns more also saves more. But, you know nothing can be more far from truth than this.

Say Ajay earns a salary of Rs. 1 lac per month, while his friend Ayaaz earns a monthly salary of Rs. 40000. Ajay would in all likelihood be perceived to be wealthier.

So what makes you wealthy—income or savings?

In absence of their monthly expenses, it would be difficult to arrive at any definite answer. If Ajay were to spend say Rs. 80000 and thus save Rs. 20000. Ayaz was also able to save an equivalent amount.

The real factor to determine wealth is savings and not income. How much you save(and invest) before you spend rather that saving what is left after you spend will be the single most important factor that will determine whether you will be able to create wealth in the long term or not!

It’s time we ask ourselves: - are we rich just by high income (or salary) level or are we really rich by savings (and therefore judicious investing)? If you are able to answer this then you stand a pretty good chance of enjoying your retirement, else you would be scratching your head during your retirement trying to figure out what went wrong?

A high level of income during the working life usually gives us a false sense of security into thinking that current situation will be constant forever. Home loans, more home loans, personal loans, vehicle loans, credit card dues are forms of classic wealth destroyers, which is pushed down your throats by your banker—with your consent of course.

For example, people are tempted to take a second home loan thinking that since they are creating an asset, it is prudent to take a 2^nd.  Home loan. While the argument may be true for the home loan for your first dream home, using the same argument second time may not hold true. Indian Income Tax Act, levy a tax on Income from House property for your 2^nd. home. Home loans deprive you of creating your retirement nest. Real estate is not the only asset class that delivers returns—in a tax efficient manner.

Asset classes like equities have delivered far greater returns over long term—and that too in a tax friendly manner. (Read--Discipline--Key to equity investing).

Do ask yourself once in a while: - Am I living off my current cash flows? If the answer from within comes as a yes, then it is time to tweak your actions. Rather than buy that home theatre system that you’ve wanted to buy for a long time, better subscribe to a long term SIP.

After all, financial security is one thing you owe it to you and your family.