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Create wealth through simple planning

Wealth creation and expense reduction goes hand in hand. In life, you do not get rich simply by earning lots of money. How you control your costs is equally important, reckons financial advisor Amit Trivedi.

November 22, 2011 / 04:59 PM IST

The other day, I was having an interesting discussion with my 5-year old son, who is crazy about cricket. He said, when he grows up, he would score lots of runs and win the matches.

This discussion happened just around the time when Australia and South Africa were playing test match and Australia got out for one of their lowest scores to lose the match. I remembered the record breaking ODI between these two countries few years back.

Australia had piled up a massive score of 434 runs in 50 overs and one felt they would win the match with a huge margin. South Africa had different thoughts. Australia still lost the match. 434 runs in 50 overs was a world record, but it remained a record only for the next 3 hours.

And how can we forget the classic 1983 cricket world cup final that India won defending only 183 runs?

It is not about the runs scored alone, it is also about runs conceded.

In life, you do not get rich simply by earning lots of money. How you control your costs is equally important.

The wealth you create is also called net worth in accounting language. It is the difference between assets and liabilities. Higher the net worth, wealthier you are.

How does one create these assets? Well, in order to create wealth, one needs to accumulate the right assets. Those assets that have the potential to generate income (either immediately or in future) or the potential to appreciate in value are the right assets. All the other assets have the potential to bring your net worth down. For example, the car that you use for transportation purposes should not be considered as an asset since you spend money in maintaining the same and the primary purpose of the same is consumption. It does not generate any income and it depreciates over time.

On the other hand, any liability that you create generates expenses, which eats out of your net worth.

You create assets through investments and investments come from savings. Savings come from the difference between your income and expenses.

In other terms, the simple mantra to create wealth is to spend less than what one earns, create the right assets, and attempt to reduce the liabilities.
High income in itself is not enough if the expenses are very high. Australia scored 434 runs

first published: Nov 22, 2011 04:50 pm

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