For Investors like us we think our wealth should go up day in and day out, but there are days, weeks, months, or even years when the wealth does not grow as much as we wish. Of course there are years when it rocks – but you know how it is!
What are the things that impact wealth building and why is it invisible?
- I am still earning money, so my dividends should get re-invested in my equity portfolio, but sometimes there is a lag. Let us say I have received Rs. 100,000 as dividend from Shanthi Gears Ltd. I should be buying shares of SGL worth at least Rs. 100,000 so that the Rs. 1L is not sleeping in my account. However on that day SGL is quoting at Rs. 134 and I feel that Rs. 125 is a fairer price, so I wait. Sounds funny, but this waiting means that the money is sleeping in a savings account till the amount gets invested.
- Spending more than one earns: well there are some weak savers and some strong savers. The weak savers save say 20% of their monthly income. They do a good job for 5 months, and suddenly their refrigerator needs to be replaced. So a sudden need erodes their ‘savings’. These are not seriously good savers – they are people who are just postponing their expenses. The strong savers save more than 50% of their income – so a single expenses like a car repair, or a fridge replacement does not impoverish them.
- Life-style creep: if your expenses keep increasing as your income increases, your ability to grow your wealth is impacted. If you cannot save (and then invest) increasing amounts as your income increases, you are not growing your wealth at the pace at which you can (or you wish to).
- Inflation: This is another small number which hits your wealth daily, on a regular basis. Even if you were to drop water on a rock (big huge rock) at one spot continually for a few days, weeks, months, – you can break the rock. Persistence is what inflation does to your wealth.
- Continuous Compounding: compounding is difficult in many assets and doing it continuously is even more difficult. Remember compounding is not easy to understand. One is the theory of compounding. One is making it work in your own life. One is over analyzing how it is. For example when I teach to a bunch of policemen the example I give for compounding is “do you know how many mangoes are there in a seed” – the correct answer is ‘infinity’ because each mango seed is capable of creating a new tree. Now puritans will say “this is not compounding, it cannot be captured in a formula”. Damn them. See what the mango tree does to your supply of mangoes for the rest of your life.
Seeing your net worth increasing is not very easy. Yes you can measure it by putting it on some website, however it is not the same as your wealth increase. Wealth increase is a mindset change. When you have a spare Rs. 82 L but the Merc ad does not even attract you, you have created the wealth mindset. After that creating wealth is easier.
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