I could have easily adopted the text book method of defining wealth – and there are many available. Instead let us look at mindsets.
It starts from the basic question of “Why do we borrow?”
Most of us will today not need to borrow to buy a VCD or a television (did you note we have now stopped saying color television?). However some of us will have to borrow money to buy a small car, many of us will have to borrow to buy a big car, and most of us will have to borrow to buy a house.
If you have to borrow for consumption, you are not wealthy.
Let us say you need to buy a house for Rs. 10 million – and you do not have that kind of money, but you have a good job – so you borrow. That means you are not wealthy.
However, you wish to buy a house for Rs. 7 million, and you have Rs. 300 million in equities, mutual funds, unit linked plans, etc. and you take a call that since your portfolio is growing at a rate much above 9% p.a. you borrow and buy the house. In this case you are wealthy. Simple.
When a person has a Ferrari, it does not mean he is wealthy. It means he is willing to spend, that is all. And that could come from borrowing. A sign of wealth is seen on the face – there has to be contentment. Wealth seen in the bank is not wealth, wealth seen on the face is wealth – funny is it not?
What are the reasons that we borrow?
1. Consumption – long term and short term
Your short term consumption stories are many – a vacation, medical emergencies, regular consumption, buying a car, etc.
Long term consumption – house
Investment – buying shares, Loan against property, Business needs, educational expenses, etc.
If you have the money to buy all that you need – not worrying about the future cash flows that you can (may) earn, you are wealthy. If you have created that much of wealth, you are now past requiring life insurance – unmindful of what your insurance agent tells you. However, if you are still borrowing to buy things that you need, you need life insurance to cover all the loans, and the money that your family will need if you are no longer with them.
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