What’s the secret to becoming rich? Most of us want a one-pointed answer to the question. Money is certainly not everything, but it’s important. Especially in these pandemic times, when jobs, incomes and careers have been ravaged. A good corpus helps us tide over such difficult times, help us repay our loans and meet our daily living expenses. We wonder what the rich have done to ensure stability and comfort in their money matters. What can we learn from them? And what is it that we shouldn’t? Here is a special three-part series on what we can learn from the rich – the crorepatis, as we often refer to them colloquially, or high networth individuals in investment parlance. Last week, we looked at their investing styles. Today, we look at their spending habits.
Question: What would you call a person who spends Rs 2 lakh a month? Extravagant? Hold on. Her monthly salary is Rs 2 crore. So, monthly expenses come to just 1 percent of her income. Now, is she frugal or extravagant?
You see them moving around in swanky cars, sinking into their business class seats on flights and in high-street shops. That gives a sense to others that the rich blow cash on too many luxuries. But you would be surprised. Barring some exceptions, the rich don’t necessarily spend all that much, especially when seen in relation to their income. Here’s what we can learn from them. Also, we touch upon their spending habits that are best avoided by the not-so-rich.
Most of the financial planners Moneycontrol spoke to swear that the rich don’t spend recklessly. Kavitha Jayaram, founder and head of Wealth Managers United (India), a Bengaluru-based financial advisory firm has many clients from the Information Technology sector. She says, “They are frugal and economical. Typically, the South Indian rich are conservative; even if they can afford the best of cars, they would still go and buy a mid-sized vehicle.” She says the rich from the IT sector are even more conservative than those who work in other industries.
Jayaram, though, is a firm believer that you must spend your wealth. Excessive frugality, despite a good income and a fine financial plan, doesn’t make sense. “If you don’t spend your own wealth and enjoy when you have to, then what is the point in earning an income?” While the absolute monthly spend might look a bit high, most financial planners we spoke to say it is proportionate to the earnings.
The rich typically know how to bargain and look for the best deals. “They usually have a network that allows them to figure out the best deals; whether they be about the latest iPhone online or about a cheaper offline deal,” says Pune-based financial advisor Sujata Kabraji. She narrates the case of one of her clients, who had three BMW cars, till some years ago. As Uber became popular, this client of hers sold two of his cars and started using Uber more. Another client of hers had adequate real-estate, but had his heart set on adding more. After a careful financial analysis, Kabraji suggested that he first sell the old one and only then buy a new property. “He was very keen on buying the new property. But he didn’t let his heart rule his head. He waited patiently to sell the old property first,” she says.
Giving away a part of their wealth
One key takeaway from the way the wealthy spend their money is keeping aside a portion of their income for a good cause. Mrin Agarwal, Founder of Finsafe India says many high networth individuals (HNI) have the good sense to give away a part of their wealth for a good cause. In the present times, when COVID-19 has spread throughout the country and disrupted the lives and finances of many, this trait comes in handy.
Agarwal says that many first generation millionaires are observed to have the urge “to give something back to society.” These are typically the entrepreneurs who themselves have come up the hard way and from humble backgrounds and worked their way up. “Lot of these people give silently, without telling the world about it,” she adds.
One way that the rich give back is by identifying a cause that they would like to support. Agarwal cites an example of a business family who support a medical clinic that takes care of terminally-ill patients. She says that this family had lost a member to cancer, recently.
Bad at estimating their expenses
This is one aspect the rich aren’t good at. Kabraji says that while making or reviewing financial plans with many of her HNI clients, she asks them to guess their monthly expenses. And then, they get a reality check. “In all my years as a financial planner, just about two clients have got this right. Usually, the actual figure of expenses is always far higher than what they think they are spending,” she says.
Jayaram argues that this is not just a trait of the rich. The middle class or the mass affluent, she says, is equally bad at guessing their expenses versus what they actually end up spending. What is the moral of the story? Spend, but keep tabs on your expenses. So long as your expenses are within control and don’t cross the set limits, say, half of your income, most planners say there is nothing to worry.
Here’s one habit that can go out of hand, if not kept in check. Vishal Dhawan, founder CEO of Plan Ahead Wealth Advisors, says that even though in his experience, much of this segment doesn’t really spend beyond its means, the gifting in the case of many rich families or individuals, can be a “bit too much.” Dhawan says that peer pressure can cause this to happen. But it also happens, he adds, when you think you are spending less but your actual expenses are much higher. “Expensive gifting habits, if left unchecked, can become a huge expense outgo over time,” he says. This also tends to happen, experts point out, when you income is substantial.