ARE YOU RICH ???

The Quadrant Theory of “RICH”

Are You Rich ?

This is probably a question you have never been asked before. People only make assumptions & then pass judgement on you when it comes to this question. Maybe you are also guilty of having come to conclusions on others. So how do we answer this question………               

The biggest irony in life is that neither at school nor at home we are taught how to create wealth or for that matter what is wealth. We are taught to be independent when we should actually run our life in an interdependent manner. We are taught to earn money but not how to build assets. Some of us could have had a different learning experience from parents or teachers but I believe that the vast majority of us are in the category of “Financial Illiteracy” when we start our career. So let me try and give you a very simple perspective not a prescription based on my own personal experience of making ridiculous mistakes.

There are basically 4 Quadrants you need to focus on:

              A:   Cash Poor & Asset Poor.

              B:   Cash Rich but Asset Poor.

              C:   Asset Rich but Cash Poor.

              D:  Asset Rich & Cash Rich.  

As we move through life we also move across quadrants & our financial status will be a function of time & the decisions we take. The starting position could be completely irrelevant.

If I were to go back to 1982 when I started my professional career with zero Assets & zero cash & fortunately zero liabilities, this is probably how I would think and operate.  

I am in Quadrant A. My behavior is based on my beliefs. So if my behavior is to change, first I must change what I think. Let me recall a few quotations:

“Don’t ever have a sense of guilt about creating wealth. “

“Someone is sitting in the shade today, because someone else planted a tree a long time ago.”

“Money is not important. Money is not everything in life. But make sure you make enough money before you make such statements.”

Now there is clarity in the mind. I have to make money. I will still accept a job with salary as only one criterion. Learning opportunities, the kind of people I will associate with, challenges etc will take precedence over money. However, once I start earning cash, I will save a fixed amount and only then focus on what I need to spend. I will also ensure that I do not spend frivolously. I will not be carried away by other’s lifestyle & spending habits. I will keep in mind the right balance between long term & short term. The long term goal is to create wealth.

I will first create 4 months cash requirements to live as a baseline for cash savings and only then think in terms of moving into other quadrants. I am still in Quadrant A but moving steadily from cash poor to cash rich. (Cash Rich is defined by me as having more than 6 months cash requirements as savings).

I then start thinking in terms of Investments that are relatively safe but will give me returns higher than any savings account in a Bank.  Systematic Investment Plans; Mutual Funds etc. As time progresses, I start thinking in terms of buying real estate – maybe an apartment & start living there and save on the current rental I am paying. I will probably ensure that my monthly repayment to the Bank does not exceed 25 % of my base salary. The lower I can make it the better. However, the decision on the apartment would be based on Quality of construction, builder reputation, area, possible capital appreciation etc. I will buy a car for the convenience it gives but realizing fully that a car is a depreciating asset. It’s value comes down with time & therefore the lower my investment in a car the better. I am still in Quadrant B because I am net asset poor after the purchase of the apartment due to the liability to the Bank. By now I would have started earning much more than what I started out with. I have 3 sources of cash:

1. Salary for the job that I am doing.

2. Interest from SIP.

3. Earnings from Mutual Fund transactions.

I will now start thinking in terms of strategies to move into Quadrant C. By now I know that the key is to be transaction driven. Buying & Selling assets must be a way of life. Only some assets we must be clear, is for keeps. I will start investing in the stock market with a small fund initially & then progressively grow the fund. As assets are being built cash holdings come down & I will seriously consider quitting my job & starting a company or joining a startup where I own equity. Fortune favors the brave but we must remember that business is not for the faint of heart. If we have a low courage quotient, we should never embark on that route. Now an interesting twist is there to the tale. I am getting paid in cash for the job that I am doing and at the same time I am also building an asset & therefore my net worth is increasing. Finally, I am minding my own business & not some one else’s business. I am in Quadrant C (cash poor, asset rich) but as the focus shifts to assets I will ensure that I have at least 1 year’s cash requirements in an emergency fund. When that situation arises I am slowly entering Quadrant D, the Quadrant we should all aspire to be in. By this time there will be a set behavior pattern as the beliefs have not changed:

·     Re-invest Profits

·     Be Different – don’t have a crowd mentality.

·     Don’t be governed by greed or by fear.

·     Watch small expenses

·     Limit borrowings. Never borrow more than 50 % of net worth.

At this stage the words of Premji rings in my ears. “Whether it be wealth of knowledge or business wealth, it brings a tremendous trusteeship in its train. To discharge this trusteeship in an honorable manner is sometimes far more difficult than building wealth in the first place.” In Quadrant D the focus will be on contribution. How do I use the wealth created to make a difference in the lives of others? You cannot measure your life with how much money you have made. You can only measure your life by looking at how many lives you have touched. Quadrant D is therefore a significant opportunity arena to give back & live a life of gratitude & a life of contribution. However, it is expedient to start giving at the very beginning when you are in Quadrant A. Giving then, over the journey of life, becomes a part & parcel of your character. Contrary to popular belief, don’t try to be a Go-Getter. Be a Go-Giver.

The Question: Are you Rich will have different answers depending on the quadrant you are in. It is a function of time. Try & get to Quadrant D & be a success there. Measure your contribution. That is being really RICH !! Good Luck & God Bless.