I am not a financial investment guru but of late, I’ve realized that there are three financial habits that are keeping the working middle class poor all throughout their lives.
1. Saving Money in the Bank
2. Buying a Car
3. Building a House
Sounds a bit counterintuitive right? Ask anyone working in the bank if the above statements are true and if he is true to himself, he will agree. Let me explain.
I have seen many mainland Indians and even people abroad working for 20-30 years and retiring at the age of 45-50 years with a net asset of more than 5 crores. Over here in Nagaland, many salaried middle-class Nagas work until they are sixty years of age and when they retire, all they have is an old family vehicle. When they get their pension money, they buy a piece of land, build a house and remain poor all their lives. Why is this so? I think this is because of the three statements I made at the beginning.
1. Saving Money in the Bank
Opening a savings account in a bank and saving all your money in that account is the first step toward financial cancer. Currently, SBI gives an interest rate of 2.75 on a savings account. The rate of inflation in the country is now 7%. This means you are earning a negative real return and your purchasing power will diminish over time. You might be happy that the banks are giving you a 2%-3% interest rate but when you put the inflation rate of 6%-7% into the equation you’re losing money. Banks take money from you at an interest rate of 2%-3% per annum and give you loans at an interest of 10%-13% per annum. That’s how banks operate.
Consider Person A & B.
Both are working in a Govt. Office/Private Enterprise and earning a salary of Rs 30k-40k per month and they both can save around Rs 10k per month.
Person A saves his monthly 10,000 rupees in the savings account and after five years, he will have a total amount of around Rs 650000 inclusive of interest paid by the bank.
Person B, instead of parking his Rs 10,000 monthly in the savings accounts, opens a monthly SIP plan of Rs, 1000 per month and in 5 years, his investment becomes around Rs 9,50,000.
Or he invests in a post office scheme and after 5 years, the amount matures to around Rs 800000
Or he opens an RD account in the same bank (current rate 6%-6.5%) and after 5 years gets Rs 7,00,000
2. Buying a Car
Many young Naga working professionals make the terrible mistake of buying a car within 1-2 years after getting a job with bank loans which they think is an asset but is actually a liability. Buying a car whether with bank loans or without is never a good idea for your financial growth. A car will keep you poor all your life. In cities, many young professionals are now renting cars instead of buying them.
Person A, after five years, now with his total saving of Rs 6,50,000 in his account, buys a car for his family. He feels important and rich. Now his financial account is zero. But he has a car which he thinks is an investment but it is not. The car will cost him money in insurance, fuel, maintenance etc. It is a liability. Plus, the resale value of the car will depreciate by 10%-15% per year. After five years, he won’t be able to sell his car even at 50% of the original price.
Person B withdraws the Rs 9,50,000 and invests in real estate. He buys a plot of land.
3. Building a House
A Naga father feels that he has failed his job as a father if he doesn’t build a house for his family before his death. So he will work his ass off all his life to buy a plot of land and build a house. But upon careful observation, buying land may be an asset but building a house is a liability. Most of us end up in the debt trap while trying to build a building through bank loans. Building a house is a bad idea if you’re from a middle-income family and you want financial stability? A middle-class family won’t be able to purchase land and build a house unless you take a loan from the bank or wait for retirement from service if he is Govt. Employee. If you take a loan, you will spend the next 10-15 years paying monthly EMIs which will keep you poor. Now if you build the building for your home, then its value will depreciate over the years. If you rent the building for income generation, it will take more than 30 years to get the initial investment. By that time the building will be outdated and would need an expensive facelift. Let’s continue with our hypothetical case study.
Person A, after 15 years
He continues to save Rs 10,000 per month in his savings account and now he has Rs 20 lakhs in his savings account. He wants to buy a piece of land and build a home for his wife and children. So he borrows 30 lakhs from the bank and completes the building with land with 50 lakhs. Now he has a small piece of land, a building and he is in debt- to the bank. For the next 15 years, he pays monthly EMI to the bank and hence he can’t even save money. At the same time, the value of the building where he invested more than 30 lakhs is depreciating.
Person B, after 15 years
The price of the land which he bought 15 years ago is now valued at around Rs 30 lakhs.
For fifteen years, he was also investing Rs 10,000 per month in different SIPs, mutual funds, real estates etc and now he has Rs 50 lakhs plus the Rs 30 lakhs from the land. Total 80 lakhs.
His family is pressuring him to build a house on the land he has purchased earlier and buy a family SUV. Person B however has a better plan.
Instead of building a home for his family, he moves into a modern apartment/building on rent with all the modern facilities and pays around Rs 15k as rent. His family thinks he is wasting 15k per month by living in a rented apartment/building. This 15k building on rent is way better for living than the house Person A has built for his family.
He carefully invests the Rs 80 lakhs in more real estate, mutual funds and FDs for 15 years while he pays the rent from his monthly savings.
He retires with a net worth of Rs 5 crores.
Person A and B. Same Job. Same Salary. Same Expenditure.
Person A retire with a piece of land and a crumbling old building.
Person B retire with Rs 5 crores.
Person A generally represents most of the Naga Middle Class: Get a salary, Buy a shiny car, and build a shiny home. Retire with a small plot of land and a crumbling old building with no further assets. Person A doesn’t have any capital to invest in the dreams/ventures of his children.
Person B represents most of the Indian Middle Class: Get a salary, invest in bonds/SIPs/Mutual funds/Real Estate. Retire with an asset of Rs 5 crore. Person B has money to invest in any dreams/ventures of his children.
