The first goal of personal finance is not to grow money but to protect your existing wealth.
You might have seen people who earned a lot of money by selling property or winning a lottery but money could not sustain in their accounts.
Many farmers near Gurgaon became overnight rich during the real estate boom in 2012. They sold their land to builders in multicrore but end up spending money at the wrong places.
Most of the farmers are back to their poverty levels.
I do not have any data to showcase to you but I have one more story.
Read this story of Sushil Kumar covered by TOI – who is struggling with finances even after winning 5 Crores in KBC.
Look at the chart below before I continue (enable the images if you can’t see).
By default, we all want to stay in the safe zone. It’s comforting because there is no risk.
I worked in the same IT company for 7 years. Gave interviews a couple of times but didn’t get selected in Microsoft & Google.
The truth is that I was not ready to prepare extra for big companies and there was no big difference to join a similar level company as my current job.
Then I was loving the culture and friends in my current company. Who wants to risk the current comfort for 10% extra salary.
Safe zones are dangerous for growth. I did not learn much in the last 3 years of my job because there were no incentives to learn extra.
The reality is that…
Safe Zone = Fearful State
.. we actually afraid to take risks.. the risk of being judged.
When I tired of the same routine, I became hungry for growth.
I invested my money to start a company as a side project along with my job. I left my comforting job once we were able to sell the product to a couple of clients.
I was in the growth zone.
Little risky but adventurous.
I divided my money into 3 portions
- Saved emergency fund equivalent to 1 year of expenses.
- Kept aside money required for 18 months’ expenses because I was not expecting any immediate income from the business.
- Invested the rest of my money into the business
And I was having sufficient health & life insurance.
That’s a calculated risk. The idea was to try out the business before we touch the emergency funds.
The hypergrowth zone has no safety net.
You feel you are growing fast but not prepared to handle the unexpected hit.
Investing in “Quick Rich” schemes is one of the examples. Ask a person who invested in MLM networking products, hear him how did he lose his 100% capital in a few months.
Tell me what do you understand from this illustration?
There is a goldmine where everyone is trying to reach.
The extra smart guy (actually a fool) wants to reach the gold fast and just jumps from the airplane without a parachute.
You can assume what might have happened to him. Don’t directly dive into the hyper-growth zone without safety tools.
You should invest in a parachute as a precautionary measure to land a bit slowly but safely to the gold mine.
We will talk about the financial parachute in the next lesson – that is creating an emergency fund and picking the best insurance.
And you can see that fearful guy who is standing at the airplane door.
He is too afraid to jump that he will not take a chance even with a parachute. In real life, these people work in government organizations – too afraid to take any financial risk even when their job is safe.
In real life, your Baniya friend would a person with a parachute. He will invest even from a small income. That’s why Bansals, Singlas, Goyals and Guptas are good at doing business.
So do check in which zone are you in and what are your next steps.