It is said that wealth creates wealth. But people often complain that they don’t have the initial wealth to invest and thus not able to create additional wealth.
If that is the case, how does one proceed?
Well the answer lies hidden in your day to day activities. All you need to do is convert your discretionary spending into investments.
So what do we mean by discretionary spending?
Discretionary spending refers to those expenses in your daily life which are more luxury purchases such as eating out, coffee at Starbucks, video on demand services like Netflix, spa visits, going to the movies, magazine subscriptions, annual fee based credit cards, concert tickets, upgrading to latest gadgets/ vehicles, travel expenses, hobbies etc.
In simple words, discretionary spending refers to those expenses that can be avoided altogether or reduced. On the other hand, non-discretionary expenses are those expenses that you cannot curb such as grocery, electricity, fuel, phone, laundry and other necessary expenses.
To determine if an expense in your budget should be classified as discretionary, ask yourself these three questions:
Do I really need it?
Is there a more economical way of doing it?
Will I need it permanently, or could I borrow or rent it cheaper?
Believe it or not, discretionary spending eats away a major portion of your monthly income. That’s been reaffirmed by a Consumer Consumption Insights white paper published by Hansa Cequity, a domestic customer marketing company. According to the report, the share of discretionary spending is expected to contribute as much as 56 per cent of Indian household expenditure by FY21.
“Rich people buy luxuries last, while the poor and middle class tend to buy luxuries first” – Robert Kiyosaki.
By this quote, what Robert Kiyosaki meant was that for wealth creation it is necessary to start buying real assets, not liabilities or personal effects that have no real value once you get them home.
Did you know: As per the current depreciation rate in India, a new car loses nearly 25 percent of the price you pay for it the moment you drive it off the lot.
So basically when you convert your discretionary spending into investments, you are investing in assets that appreciate with time and put your money to work even while you’re asleep.
Let’s understand this better with the help of the below example:
Shyam and Manoj have been friends since childhood and are earning INR 1,00,000 per month. Shyam is a gizmo lover who buys new gadgets every time a new model is released. On the other hand, Manoj believes in investing to grow his wealth.
In the last 10 years Shyam has exchanged his phone at least 5 times, whereas Manoj has upgraded his phone just twice. During the same period, Shyam has also exchanged his car twice for a newer model. Manoj believes that car is a depreciating asset and hence prefers to travel by taxi or public transport.
Over a period of 10 years, Shyam has spent a total of around 20 lakhs on cars and the value of his current car after depreciation stands at INR 5 lakhs. His cell phone purchased in 2018 too has depreciated by 40% and its current value stands at INR 35000.
By cutting down on his discretionary spending like cars and gadget upgrades, Manoj has managed to invest regularly in equities and save INR 20 lakhs in 10 years. With time, his portfolio has grown at CAGR of 15% to a whopping INR 46.53 lakhs.
In future, even if his investments give him a modest 10% returns, Manoj can still earn INR 4.6 lakhs every year which can take care of his discretionary spends like vacations, hobbies etc. as well as a comfortable retirement.
Why Investing Wins Over Discretionary Spending?
- With investing you let money to create money for you, whereas in discretionary spending, the assets you purchased depreciate over a period of time.
- By careful investing, there is a higher probability of living a secured financial life, whereas in discretionary spending, you are only experiencing instant gratification that leaves you with zilch benefits for tomorrow.
To create wealth by investing, you don’t need to be rich. All you have to do is curtail your discretionary spending to let money grow for you. That’s how you can create wealth from wealth.
And to help you take the first step of creating wealth from wealth, let me introduce our unique ‘5 in 5 Wealth Creation Strategy’. In this strategy, we design a portfolio consisting of 15-20 rigorously researched businesses that suits your risk profile and financial goals. And the best part is, this strategy has generated 77.96% returns in the last 32 months for over 6,000+ investors.
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Read more: How Long-term investing helps create life-changing wealth – TOI.