Most people who have no borrowings (visibly) think they do not pay any interest as an expense. Well, they may not be paying interest knowingly, but there could be other forms of interest. What if you are paying rent? What about a car taken on hire?
So if you have your own house, own car, etc. you do not pay interest, right? In other words –
When a company or an individual has NO borrowings, it pays no interest, right?
Let us take the case of a company first. Interest is what you pay for using some other person’s cash. Well if you use an asset you are paying interest in another form – called rent. So if you do not own an office, you pay money to the landlord – this is again interest.
So if you own your office, and have no borrowings, you pay NO interest, right? Wrong.
When you hire a person from an out station location, and pay him a salary, he pays rent. So technically some part of your expenses can be classified as interest (we will use interest and rent interchangeably in this post).
When you travel on a road where they collect toll, you pay rent, because you do not own the road. When you eat a masala dosa for Rs. 65, at least Rs. 10 out of that is rent, there could be interest on the borrowed funds too.
When you hire the services of an advertising firm, and they send you a bill, remember THEIR costs also include interest and rent.
Thus there is a lot of interest and rent (expenses) HIDDEN in all your expenses – be it salary, services, goods, welfare…..
Similar story even when you are an individual.
Therefore the classic saying ‘better to RECEIVE interest instead of PAYING interest’…..
What is means is “if your UNEARNED income is greater than your TOTAL EXPENSES ADJUSTED FOR INFLATION you are FINANCIALLY free – assuming that your income is Rock solid guaranteed in REAL terms”.
Once you create a corpus to do that, EVEN, your KID can retire on the corpus that you create, assuming he/she continues to maintain the same spending and investing pattern.
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