High income & yet NOT Rich!
Only ~6M Indians in a population of 1.30 Billion have an Income >1M INR/Year. These 6M are ‘HIGH EARNER’ BUT not ‘RICH’!
In fact, ALL Income tax payers are one of THE HIGHEST EARNERS In the country. BUT, hardly anyone amongst them is ‘RICH’
To understand this. First, let’s digress for a bit. Let’s understand a Sportsman’s Personal Finance.
Sportsman’s Personal Finances
Sportsman's career is unique. They play professionally for 10 years in their life. Maybe 20 years. Their career is severely bound by their physical health.
In terms of financial value, successful sportsmen observe 10–20 years of EXTREME INCOME. Followed by 40–50 years of NO income.
What happens when a sportsman blows AWAY ALL the money? Does not plan for 4–5 decades of No income?
BANKRUPTCY!!!!!
Mike Tyson is the most popular BANKRUPT sportsman. He is NOT an outlier. The list of bankrupt sportsmen is long!
It’s quite common! In fact, there is a dedicated Investopedia page about this! Let me pick a line from there:
Sports Illustrated once estimated that 78% of NFL players file for bankruptcy or are broke only two years after retiring, and after five years of retirement, 60% of NBA players suffer the same fate.
Unless sportsmen specifically plans for 4–5 decades of no income. BANKRUPTCY is INEVITABLE!
After retiring as a professional player, many resort to coaching or commentator/some administrative work. WHY? Lack of Money to SUSTAIN LIFE. They are trying to make a buck! This income is typically paltry compared to past income. Alas, even this income doesn’t last a lifetime.
All good Sportsmen are short term ‘HIGH-EARNERS’. But not necessarily long term ‘RICH’!
Agreed that Sportsman’s finances are unique?
Unfortunately, that is wrong! Sportsman’s finances are SPECIAL! But it is NOT UNIQUE!
We ALL have that! Our jobs won’t last 6–7 decades!
We ALL have 3 decades of career. Followed by 3–4 decades of NO income!!
Why? Same reason as sportsmen. Physical health boundaries. Science has prolonged our lives. But health of humans deteriorates quickly in the decades leading up to death!
Some conveniently label this phase as ‘retirement’.
Sure, sportsman is a ‘special’ case where career is “shorter” than (job) typical 3 decades. But, the concept is NOT unique for sportsman! We ALL go through it!
It is RARE to find a person who is ‘RICH’ in the long term!
High Earner, I guess, is a pre-requisite criteria. But NOT SUFFICIENT!
Let’s understand how difficult ‘RICH’ is!
How DIFFICULT is it to be long-term ‘RICH’?
Let’s state some FACTS first:
- PRE TAX Salary growth must be 9–10% for IN HAND CASH to play catch up with inflation (7%)! Proved here.
- Investment Portfolio returns are in the low single-digit. (After inflation & taxation)!! Proved here.
- Like me, if you have any stupid investments such as Insurance plus investment schemes (popular example: LIC Policy) then you are staring at negative returns from investment portfolio!! Discussed here.
- All this with merely government reported inflation statistics, does NOT include practical REAL life inflation!
- We have 3 decades of earning followed by 3–4 decades of NO income. a.k.a. ‘Retirement’.
Assuming in hand salary growth is around inflation & Investment Portfolio growth around Inflation. And, 3 decades of earning followed by 3–4 decades of NO income. What does all these imply? Consequence:
Saving 40%-60% of earned income is CRITICAL to AVOID BANKRUPTCY!!
Saving 40–60% of in-hand income ALL throughout the career of 3 decades!!
Sounds crazy right? I know. Even I am not there yet!
Some important callouts:
- Saving 40–60% is a RATIONAL estimate! NOT a Conservative estimate!
- This is without even any typical adult goals! <House. Car. etc.> <Even 40–60% overall Saving WILL NOT suffice, in such cases.>
- This Savings does NOT even include Life/Health Insurance!
NUTS!
We are so deep into consumeristic culture (i.e. spending money on crap) that we are essentially forcing ourselves to be BANKRUPT in the future!
CRAZY! We are so short-sighted!
Risk-averse person
There is a lot of fluff in the finance world on the portfolio of a risk-averse person. Which instruments are right? What is the holding time period?
That is not the right way to think of a ‘risk-averse’ person. Given the above facts presented, there is ONLY one type of risk averse person:
‘Risk-averse’ person wants to AVOID BANKRUPTCY at ALL COSTS.
How does he avoid BANKRUPTCY?
True RISK AVERSE PERSON:- Saves a GIGANTIC* portion of their Income!
*GIGANTIC portion: >60%. ALL throughout the decades!
Anyone NOT saving enough, is a RISK TAKER. Taking incredible amounts of BANKRUPTCY RISK.
You are NOT long-term Rich, Unless..
You have a lifestyle that is long-term sustainable, at your income levels.
Actually. That’s merely break-even!
Rich requires more money than just long-term sustainable life!
Conclusion
There are many short term HIGH EARNERS but they are NOT necessarily long term RICH!
Being Long term RICH is incredibly RARE & CHALLENGING!
I wouldn’t be too wrong to label, myself & most of my readers as NOT long-term RICH.
Dare I say, we are on our way to BANKRUPTCY!
Post Script:
Indian’s naively expect their offspring to take care of finances post ‘retirement’. Lousy Reason!
With such a mentality, Offspring is THE survival strategy! ONLY SURVIVAL STRATEGY. They DESPERATELY NEED offspring. Such people aren’t passing their ‘tradition’ or ‘culture’ or ‘values’ across generation. Rather, dumping the consequences of incompetent financial planning onto their offspring.
Indians spend decades working for money. It wouldn’t hurt to plan finances in a better way.
To be clear, I am not saying that Indian parents should go fend for themselves. Rather, financial planning should be better than: “offspring is my ONLY survival strategy!”
