Financial Literacy

This may sound like an economics/finance course jargon, but its apparently not. Way back in the 80s the ABBA sang, 'Money Money Money, Must be Funny, in the rich man's world'. Whatever made them sing that song, money is surely not funny in a rich man's world. In fact its not funny in anyone's world.

Without money, life doesnt just go on, everyone understands this. So does it mean, one should have money just to suffice for the livelihood. Yes, definitely. But 'livelihood' is a broad term and it varies from individual to individual. As the 'livelihood' or more appropriately put 'lifestyle' of an individual changes, so does the need for money. Most of us individuals understand this but when there is immediate availabilty of money to satisfy a 'better' lifestyle, the understanding we had before is masked by the lure for the betterment in lifestyle. This is where most of us become 'financial illiterates'. The first and the foremost resource for 'immediate availability' -> credit cards. The next bieng 'loans at lower interest rates'. Just these two things prompt an average common man to 'spend' his money more and more on things that will be of less or meagre value with the passing time. These are classified as liabilities. So lured by a better lifestyle, a common man puts most of his money in liabilities. What we fail to see is, in due course of time, these liabilities lose their value whereas the money bieng poured to them keeps increasing day by day in the form of 'interest'.

Does that mean, we should not buy liabilities, no. We should buy liabilities but buy intelligently. Just because there is a sale going on some jeans, buying a pair even though the wardrobe is full of jeans is definitely not wise. Also if one starts thinking about a way of earning some money from a secondary resource ( part time jobs, investment in stocks, bonds ) and fuel those earnings towards buying liabilities, that'll be kind of ideal. These investments are termed 'assets'. Assets are defined as those which provide a moderate return on investment ( commonly called ROI in the business jargon ) over a period of time.

So it goes without saying, a salaried person earns more money by acquiring more assets and not by aiming for a higher salary. ( The more the salary, more the taxes and the finaly pay off is minimal ). It is an observed phenomenon that the 'rich' buy more assets, reduce the tax burden or intelligently and legally avoid tax and remain rich, whereas the middle class buys more liabilities, pays higher taxes and remain as middle class. As someone said. 'The rich remain rich, and the poor remain poor'. Yes of course, these are more or less the same words of 'Rich Dad, Poor Dad' :), a must read in my opinion.

I learnt this lesson the hard way, but there are few I know who are kind of born with this learning, who have managed to earn enough to sustain decently for a few years, retire at an early age (35 - 40) and pursue what their heart desires. Thats the pay off for bieng financially wise.