Often we hear people say,
When I Make a lot of money, all my money problems will be over.
In reality, new money problems would just be beginning. One of the reason so many newly rich people suddenly go broke is because they use their old habits to handle new money problems.
In our experience in lending for last 47 years, we have come across many instances of over night Millionaires (Crorepatis) who became rich by selling their inherited family property to a Multi National Company.
This was the early 2000’s when the sleepy Old Mahabalipuram Road dotted with Engineering Colleges and Industrial Zones was at its cusp of slowly turning into a Information Technology (IT) hub.
Many of our clients in the OMR belt holding prime properties turned rich over night when their land was acquired by IT Companies. They were neck deep in liquidity (cash) and all their dreams had come true overnight.
But as we fast forwards 20 years ahead to present day 80% of them are now facing cash flow crunch. The cash which made them kings overnights was completely exhausted baring few smart who managed their money well, while others failed to realise that “CASHFLOW IS KING“
Seeing this, I am often asked an important question,
Why Do Rich People Go Bankrupt?
Lets discuss some of the possible reasons:
1. FAIL TO UNDERSTAND BETWEEN GOOD AND BAD EXPENSE
The key to retaining the wealth is the understanding the difference between good and bad expense. In general any expense that add to your asset list shall add more to your future cash flow and hence make wealth for you, and the expenses that adds to your liability list will make you poor and hence force towards bankruptcy.
Good Expenses: Investment in shares, fixed deposits, rent fetching property, self owned / new business, Insurance (Health & Life) and Precious metals.
Bad Expenses: Expensive Cars, Watches, World Tour, Buying things you rarely use (include gadgets), Discretionary Spends and buying businesses they don’t understand.
2. MONEY BOOSTS THE EMOTIONAL EUPHORIA THAT ACTS AS A DRUG
When a person becomes crorepati for the first time in his life, the money acts as drug by boosting their emotional euphoria giving them a “HIGH”. This high that hits people feel more intelligent, when in fact they are becoming more stupid. They think they own the world and immediately go over and start spending like King Tuts with tombs of gold. They buy liabilities and divorce an asset (Cash).
3: THEY FAIL TO ALLOCATE CASH IN RIGHT PROPORTION
Putting all eggs in one basket is the key to going bankrupt. We have noticed that people who went bankrupt had invested 100% of their hard cash in assets that delivered zero cash flow. They fail to allocate funds appropriately that will give them access to cash. In maarwari Baanya community our forefathers have always advised to allocate funds in a proportion of 25% equally among following asset a. liquid assets like shares & fixed deposits, b. gold, diamonds and jewellery, c. Real Estate & d. Invested back in own business. So even if one fails, the other will take care of you.
4: MONEY MAKES THEM INVESTOR BUT WITHOUT KNOWLEDGE & EXPERIENCE
When a person has money, they suddenly get calls from stock brokers, real estate brokers, investment brokers offering new ideas frequently. In market parlance its called “Churning”, these brokers advise the person to buy and sell regularly, so that broker makes the commission on each buy and sell. Just because the person meets the qualification of an accredited investor (simply a person with money) does not mean they know anything about investing.
Before we commit to use our money for any spends, lets ask our selves whether this will be get added to my asset or liability? This does not mean we do not enjoy our lives, the idea is to build cash flow so strong that it takes care of our monthly expenses and allows us have our financial freedom. Once our goal of financial freedom is reached, we can always spend the cash flow on our desires and wants, but until then its recommended to maintain financial discipline.
To understand on to how better manage cash flows, call Sushil Bokdia at 9150132003 / 98841 33636 to fix a online meeting over zoom. To know more about Bokdia Finance and what we do please visit our website http://www.BokdiaFin.in
– Sushil Bokdia (Managing Parnter , Bokdia Finance & Estate)
Credits: This author was inspired from Robert Kiyosaki’s book Guide to Investing.