The 9 Lies of Financial Life
Whether one accepts the answer to this question or not: What is the single most important thing in this world, which will shape your dreams, your time, your freedom and your identity? It’s money. And what is the most misunderstood, under-explained, mis-explained concept? That is also money. So, let us dissect the biggest financial lies which you may hear, probably, about money.   
 
Lie 1: School Education Is Important for Getting Rich
You may not hear a bigger lie than this because, if this were true, the world would not be full of educated drifters and school-dropout millionaires. You may be academically smart but, in life, to survive and succeed, you need to be financially smart. In school and college, children learn subjects like science, math, history, geography, medicine, engineering, accountancy, law, etc, but not something which they will have to continuously deal with, throughout their lives and at every point of their life—money. There is a gap in the education system. 
 
Today’s education teaches us to be slaves of money and not its masters. In school, one is taught and made ready to work for money. In the real world, one has to learn to make money work for oneself. Unless we educate our people in the ways of dealing with money, very soon, there will be a revolution where the school educated people will revolt against the financially educated people.
 
You may be a topper in your school but, when a bank sanctions you a loan, it will not ask for your school mark-sheet but your balance sheet. The education system is based on the system of elimination—the focus is not on advancing the stronger ones but on holding back the weaker ones. We get taught by both, teachers and life. The difference is that a teacher first teaches and then takes tests while life first takes tests and then teaches.
 
Lie 2: Insurance Should Provide You Returns
This is perhaps the most convincing of all the lies which you may hear. Because it deals with human psychology, the expectation is to get something in return for everything. But life and insurance do not operate that way. Remember, insurance is either getting everything or nothing for something. Therefore, don’t expect something in return for your money except the protection which it intends to provide you with. Also, never combine investment with insurance, since insurance is always bad investment. After the lofty expenses, the returns which you get on your insurance policy are dismal and investments should not provide you with insurance.
 
 
Lie 3: Savers Are Winners 
This is perhaps the most confusing lie which you will ever hear—that savers are winners. The truth of the matter is that, in today’s fast changing modern banking and technological currency age, savers are losers. Savers are losers if they save in terms of money, which keeps on getting devalued and loses value to inflation. Instead, invest in assets like equities or real estate which actually benefit with inflation and also give you tax-breaks. 
 
Lie 4: Professional Investors Are Better Stock-pickers than Common Man 
You probably will not hear a more blatant lie than this one. Professional investors simply have no real edge and right to believe that they can consistently beat the man on the street who has hands-on experience and understanding of specific aspects which affect investments. 
 
It may be an unrealistically ambitious task for a fund manager to consistently beat the passively constructed stock indices after the expenses and peer pressure of following the herd. It’s actually the common man who has great advantage over the professional investor, since he is not bound by the limitations of professional fund management industry.  
 
Lie 5: Income-tax Is Fair and Rational 
Another myth is that income-taxes are rational. The government has made tax laws very discriminating. The rich know it and take advantage of it while the poor and middle-class become its victims. The government’s regressive tax system puts maximum taxes on ‘earned income’—the income that you work hard for, like, say, salary. At the same time, it exempts, or taxes at a lower rate, certain other forms of income, such as dividends, long-term capital gains, rental income, etc, which constitute all passive and portfolio income—the income derived from your investment assets whether it be from shares, real estate, etc. 
 
The tax is also regressive because it taxes the rich at a much lower rate, if at all. For example, the ‘net marginal tax rate’ after deductions is much lower on a business than it is on salary. 
 
A salaried employee hardly gets any deductions and most of his earned income is almost fully taxed, while a businessman gets all kinds of expenses—whether he actually spends or not—as deduction and the net taxed money is lower. 
 
I say ‘whether he spends or not’ because there are certain expenses which the businessman actually spends money on, like staff salaries, telephone bills, electricity bills, etc, which are allowed as a deduction from income but there are certain other items, such as depreciation which is not a cash expense but is still a deductible business expense. 
 
That is why the tax system is regressive and favours the rich. The middle-class people buy assets in their individual names while the rich buy assets in their businesses; typically, the companies which they own buy the assets for them but they enjoy all the legally allowed benefits on them. Thus, income-tax is seldom fair and rational.
 
Lie 6: Debt Is Always Bad
Contrary to popular opinion, debt or leverage is not risky if you know how to harness the power of positive leverage. In fact, lack of proper leverage might hinder your goal of achieving financial independence. Positive leverage is that debt which multiplies your money by putting money into your pocket while negative leverage is that debt which reduces your money by taking money out of your pocket. Debt taken for buying assets which yield income is positive leverage, while loans taken for expenses, like consumer durables, foreign vacations, etc, are negative leverage. Never fall into a debt trap because, be it an individual, corporation or government, it is really difficult to come out of it. 
 
To unleash the ultimate power of positive leverage, you have to aim to reach the stage of net positive cash flow after tax because, once you have reached this stage, you start making ‘money for nothing’. You should never leverage for portfolio income, i.e., capital gains, but only for passive income, i.e., regular income in the form of rent, dividend, interest, etc. Inflation is your partner with positive leverage simply because you borrow costlier money today and 
 
pay back your loan in cheaper money in future, because of inflation. 
 
Lie 7: Accounting Assets Are the Same as Investment Assets
Recognise the difference between an accounting and an investment asset. Accounting asset is the term for any expense which cannot be written off in the same financial year, while investment asset is something which produces income and puts money into your pocket on a regular basis. For example, a car will be an accounting asset but actually it’s a cash-guzzling liability losing almost 20% of its value immediately as you touch its accelerator and drive out of the showroom and then continuously eats into your cash in the form of fuel charges, insurance costs, maintenance, driver’s salary, etc. 
 
On the other hand, rental property or equity stock will be an investment asset that puts money into your pocket on a regular basis in the form of rent and dividends, respectively. Don’t fall prey to the lie of accounting 
assets being the same as investment assets; otherwise, all your life you will, like a slave, keep working to gather accounting assets that continuously keep denting your pockets.
 
Lie 8: Spending Can't Make You Rich 
Just ponder, we spend money—often a lot of money—on our child’s education so that the child can earn money in future. Again, many companies spend millions of dollars on advertisement, publicity and sales promotion. Why? To increase their sales and profits. If you are a new investor, you would probably join some course related to investments and/or purchase some stock investment books. Why? Clearly, so that you can increase your knowledge and understanding and earn more profits through stock investing. In all of the above-mentioned cases, you are actually spending money in order to get rich. 
 
Thus, often, you have to spend money to get rich! The test is that the money spent should give you some kind of benefit or advantage which can then be converted into tangible wealth. Knowing when to spend, to get rich, is a tricky question. Cutting back on the correct method of spending to get rich is like cutting the cost on your car fuel and hoping that the car will keep running on its own. Neither can the car run without fuel nor can you become rich, unless you know how to spend money on the right things. 
 
Lie 9: Gold Is an Inflation Hedge
Several, so-called, financial experts will tell you that gold is a hedge against inflation. However, that may not necessarily be the case. Gold is an international commodity whose price is quoted in US dollars and is not directly related to inflation but to ‘real interest rates’ (nominal interest rates minus inflation) of US dollar-denominated assets like US Treasury Bills (T-Bills). 
 
When the real interest rate is down and close to inflation, gold is likely to appreciate in value because, to hold gold (which does not give any cash flow), the investor has to forego interest on his/her investments and, hence, real interest rates have to be low or negative to induce the investor to hold onto something which does not give real cash flow. 
 
It is pertinent to note that gold is essentially an alternate currency which quotes in international markets in US dollar terms; hence, weaker the US dollar, the higher is the price of gold and vice versa.
 
Either you control money or money controls you and then it controls your life, freedom, dreams, heart and soul. You may be told many financial lies throughout your life. These lies are bound to make you a financial slave. Know the real nature of money to free yourself from the shackles of financial slavery and move towards financial independence to achieve your higher self-actualisation goals. 
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    SNEHAL BHUPENDRABHAI TELI

    2 days ago

    One should must have to read Moneylife magazine n post ..Nice all Debashish ji and Sucheta ji..

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  • Be Your Own Bank
    From childhood, we endeavour to teach our children the importance of savings and how to open and operate a bank account. When we get our first salary or earn our first income, we are likely to invest in bank deposits. This is fine for a start; but it is not a good idea to continue for all times. The monsters of inflation and income-taxes will eat up a lot of savings. When we decide to start a business, we look to a bank for financing our business ventures. When the economy seems to be in trouble, we park our hard-earned money in bank accounts little knowing that the banks themselves are bankrupt in the short run, saddled under the burden of large non-performing assets (NPAs). Today, we will proudly and tirelessly use the various modern technological banking facilities like Internet and mobile banking, ATMs, etc. 
     
    What is a bank? Simply put, a bank is a money-lending business. But it involves astute liability management, judicious credit appraisal and lending, intelligent treasury operations, appropriate cost set-ups, vigilant risk monitoring, etc. All of this results in good banking experience for customers, timely loans for borrowers, systemic stability for the regulator and enhanced shareholder returns for investors. In the good old days, there used to be barter system—goods and services used to be exchanged for goods and services. However, man created money as a medium of exchange and store of value. Over a period of time, the creator became a slave of his own creation—wage slave of the employer, tax slave of the government and loan slave of the bank. Banking is the riskiest of all businesses because it’s nothing but a sophisticated system-oriented money lending business. Banks work under the ‘fractional reserve system’—they borrow Rs100 as deposit and can multiply it by, say, nine times and lend Rs1,000 in the form of loans. For example, say, there is a bank called XYZ Bank. Now, the owners or shareholders put Rs100 of their own money called share capital. Based on this, the bank is now allowed to accept around Rs900 in deposits (like current and savings accounts, fixed deposits). So, the bank now has total available funds of Rs1,000. Let us assume it invests Rs400 in government securities and bonds which results in its having surplus funds of Rs600 which it then lends. The typical balance sheet of XYZ Bank would look as follows:
     
    To puts things into perspective, XYZ Bank has lent and invested Rs1,000 with its own money (capital) being just a fraction of it at Rs100 and the remaining Rs900 is depositors’ money. Therefore, if we assume that all the depositors of Rs900 simultaneously go to withdraw their money on a particular day, then the Bank just has Rs100 of its own capital to pay them off immediately. Therefore, in the short term, all banks are actually always bankrupt! Even in the long term, the ability of the Bank to pay off all the depositors of Rs900 depends on whether it is able to collect back the loans from the borrowers or realise the value of its investments. 
     
    If even some of the borrowers default, eventually the bank will be forced to default to its depositors. In reality, if such an eventually should arise, the government will, most probably, bail them out. And this bailing out will not happen by any magic wand but either through ‘money printing’ which will result in inflation and the rise in the prices of goods and services in the economy will eat directly into the stomach of the poor or through additional taxes which will further burden the already strained finances of the middle-class. This may sound scary, particularly when almost all people somehow or the other deal with a bank either by way of a borrower, depositor, employee, shareholder, regulator and so on.  So what will you look for in a bank?
     
    If You Are a Borrower: The bank should be promoted by a reputed institution or government and be in existence for a reasonable amount of time.
     
    If You Are a Depositor: In addition to the point of the borrower (above), you will also ensure that the bank has adequate capital and has negligible, or low, net NPAs or defaulters.
     
    If You Are an Employee: In addition to the points of the borrower and depositor (above), you will also ensure that the bank has good HR (human resource) policy for its employees.
     
    If You Are a Shareholder: In addition to the points of the borrower, depositor and employee (above), you will also ensure that the stock of the bank is available at below or close to book value, unless it generates a high return on equity for its shareholders which justifies it to quote at a premium to book value.
     
    Hence, the next time you look at a bank don’t just judge it by the number of its branches or ATMs or the amount of technology it uses or the quantum of people following or liking it on social media or the courtesy with which its sales people and relationship managers talk to you. Of course, these are added services which the bank is, nowadays, expected to offer, to improve its quality of service and overall customer experience; but these are just superficial services. Remember, choosing a bank is somewhat analogous to selecting a spouse and, in both cases, we should not look at outward superficial beauty but inner core and soul qualities for enhanced long-term relationship. 
     
    Be Your Own Bank
    We saw how a bank with just Rs100 of its own capital collects Rs900 from depositors and uses the entire Rs1,000 in lending and investments. Now, assume that the bank pays you 10%pa (per annum) rate of interest on the deposits and lends and invests money at 15%pa, then its spread or income is 5% (15 – 5). It earns Rs150 (15% on Rs1,000 lent and invested) and pays Rs90 (10% on Rs900 deposits) thus pocketing Rs60 (150-90). Hence, it earns a return on equity for its shareholders at 60% (Rs60 of profit / Rs100 of shareholders’ funds). In reality, it is not so straightforward and there are operating expenses and other costs; but the principle is the same. 
     
    Yes, with very little capital of its own, a bank borrows money from depositors and lends and invests; thus earning income on that money which is not its own. And the good news is that you can also be your own bank. Confused? Just do what the bank does. Borrow money from the bank at, say, 12%pa and invest it in your business or any other investment yielding, say, 15%pa and pocket the net 3% (15-12). The more money you can borrow and invest in business at higher rate, the more money you can make. Yes, it sounds straight and simple in theory and not easy to apply practically; but it’s not that difficult also. Otherwise, so many large business entities would not have been successfully able to follow this principle for years and ages. 
     
    Learn before you earn; protect before it’s taken away; budget before you spend; save before you invest; create cash flows as you invest; leverage before it grows; insure before you risk; live before you die; and create and be your own bank. Remember, if you can be a depositor in a bank or a borrower from a bank or an employee of a bank a shareholder in a bank, then you can surely ‘be your own bank’ as well. 
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    COMMENTS

    Mentes

    1 year ago

    Interesting article..

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