If you are not making money while sleeping then you will end up working till you die.
Continue reading till the end and you may get some ideas to make money without working daily.
Peter Thiel, the billionaire Co-Founder of PayPal asked this question to understand the mindset of entrepreneurs.
“What’s the one thing you believe in that no one agrees with you on?”.
For me it’s the belief that building a net worth is more important than increasing your regular income from job.
Look where the income goes for most of the people.
To achieve financial freedom,
You must own multiple assets that generate monthly passive income for you. If one asset stops working then your financials will be supported by other assets.
In media, it is always the net worth of millionaire and billionaire individuals that is discussed. No one asks them what is their monthly income.
Consider this. When you are focused on income from job, you are always thinking about the next job, the next promotion, investing in an MBA, and so on.
I am not saying that is bad…
… but focussing only on monthly income means accepting the fact that you are destined to work forever.
You might earn more money today but your spending also increases as more salary hit your bank account. Ah, the human desires!
Means you will keep working long hours, by sacrificing time, that you should have spent with your kids & family.
That is not enjoyable life, isn’t it?
But, once you have a sizeable net worth, you can worry less about money, take your foot off the income accelerator….
… and care more about things which are important in life that are beyond money.
Essentially, you will work out of your love for work.
In the words of Thomas J. Stanley
“Wealth is not the same as income. If you make a good income each year and spend it all, you are not getting wealthier. You are just living high. Wealth is what you accumulate, not what you spend.”
Select Your Favorite Section
- Shifting your mindset to become rich and wealthy
- #1. Depending on Income from Job is Foolishness
- #2. Invest in multiple income assets
- #3. Hire Experts to Manage Your Finances (Only Smart People Invest Here)
- #4. Wealth creates Wealth (Power of Compounding)
- #5. Business People Pay Less Taxes Than Salaried
- #6. Feeling of Security
- #7. Helps deal with Unforeseen Events
Let’s have a look at some of the reasons why I strongly believe that building net worth is more beneficial than just earning more monthly salary.
Only a Government employee can say that his job will last forever.
Most of us get our income from our job in the form of salary. Our parents had stable jobs because they worked in a time where most of them were employed in government companies where layoffs was unheard off, worker unions were powerful, private sector was relatively small, and disruption of sectors was very minimal.
Your private job is much more volatile making you sit on a financial bomb. Your income could stop growing after few years or it might disappear altogether.
Have a look at the below stats showing the wave of job losses that hit the old and new economy.
Below is a snapshot showing the impact of Automation on IT Sector
Below is a snapshot showing the layoffs across sectors – from Textiles to Information Technology .
Anything could happen affecting your income like a financial crisis hitting the economy. Do you remember the layoffs of 2008 financial crisis?
Besides, there is a fear of artificial intelligence taking away your job, your company getting bankrupt like Kingfisher Airlines, or you could be stuck in a job without getting a promotion for a long time.
But, if you start working towards building a sizeable net worth by saving and investing in the right asset classes, then eventually your net worth will automatically generate enough income for you every year.
Say if you are currently earning an income of Rs 12 lakhs per annum, after promotion you might get a raise of 10% or a maximum of 20%. I am sure you must have worked really hard and slaved yourself for the company, but the upside limited.
But if you focus on building your net worth by investing your savings in asset classes that have a potential of high return, sooner or later you can accomplish your goal of retiring early.
For example if I had savings of Rs 10 lakhs in my bank then I would diversify the savings in the following way.
- 8.3 Lakhs in Mutual Funds
- 70,000 in buying website domains
- 1 lakh in cypto currencies
In the future, my mutual funds investment will compounded @15%, I may sell some of my domain names at 5x to 100x value (on an average 15x returns), and the bitcoin’s value might hit the sky.
Note: I actually sold a domain name at $15,000 that I bought in $76 two years back.
Next month, I will write a detailed article on making money from domain names.
That’s the power of building multiple income assets.
Can you see the upside of focusing on income and focusing on net worth? Which do you think puts you on a path to early retirement?
Having said that, I understand that I was lucky when the website domain gave me a huge returns. I wasn’t expecting such returns too but you cannot discount the fact that I focused on asset creation with the idea of building large net worth that led to such huge returns.
Some of you must be thinking that you don’t have Rs 10 lakhs to start with. That’s a genuine concern. Even, I was not able to build these kind of savings when I was doing my regular corporate job.
Only after starting Cash Overflow things got much better – less stress and more income.
- Shifted my focus on wealth creation
- Started my blog in 2015
- Income re-invested in more assets
- Wealth Creation
- More re-investments (And loop goes on)
You can also start a blog/website of your own.
Here is the step by step guide if you are thinking about starting a website or blog for a long time but did not take any action.
People spend lakhs of rupees in education so that they can get a job. But they never learn how to manage money.
They again spend at least 10,000 every month in educating their kids (so that he can also get a job in the future) but afraid to spend Rs. 10,000 to hire a financial expert.
What an irony. For financial advice they listen to “that bank guy” just because he offers FREE advice. He offers free advice so that he can sell you shitty financial products.
You end up losing more than 10,000 Rs. every year after investing in wrong places. Popular example of loss making financial products is ULIPs and Insurance Plans that banks sell you on the name of saving plans.
I will go deeper into the topic some other day and explain how banks fool you by selling products that gives less than 4% annual return.
Let’s come back to the main topic.
Safe assets for a common man
- Fixed Deposits
- Government Bonds & Schemes
- LIC Products
- Provident Funds
- Real Estate
Risky assets defined by a common man
- Stock Market
- Any type of online trading (forex, commodity)
- Online business
- Anything innovative & new thing
You should avoid investing randomly but make a personalised investment plan that suits your financial goals. Make a balanced portfolio with the help of experts who don’t have commissions by selling you banking products.
Equities, Hedge funds, Startup investments, and perhaps even Real estate fall under this category of investments which give much higher returns often in double digits and sometimes even in three digits.
To give an example, Porinju Veliyath, a popular stock market investor and CEO of Equity Intelligence India Ltd offers equity portfolio management services for investors through his firm.
Basically, he helps people to invest in the best possible stocks. Over the past many years, he was able to generate very high returns for his clients as seen in the below picture.
Same goes for investments in hedge funds, startups, and other such asset classes.
Fixed deposits would take 10 years to double your money. A portfolio advisory services can help you compound your money at 35% CAGR, doubling your money in just 2 to 3 years.
But, there is a catch:
Porinju’s portfolio management service is only available to people who can invest Rs 50 lakhs to Rs 1 crore, making these kind of investment opportunities not accessible to regular people because they do not meet the minimum wealth levels.
I am Kanjoos Baniya, I always find ways to get discounts for myself and my readers 🙂
- The first call is free, so try their service at no risk.
- Pay only if you feel that they can help you save more than Rs. 10,000 (that I am sure they can)
Again, the point I am trying to make here is that you should focus on managing your finances in a way that you aim for building assets.
The wise & wealthy people focus on building large net worths so that they have access to these kind of investment opportunities which create even more wealth for them.
I often say this to my friends. It is always hard to make the first ₹ 1 crore than the subsequent ₹ 1 crore.
For example, to go from ₹1 crore to another ₹1 crore requires a 100% growth. Depending upon the type of asset classes you have invested in, it could take anywhere between 2 to 10 years to achieve the 100% growth i.e doubling the money to ₹ 2 crores.
But, the next ₹1 crore requires only 50% growth. So, the time would also cut down by half.
Similarly, the subsequent ₹1 crore would just require 33% growth and so on. So, does the time cut down by 33% and so forth.
This is called the power of compounding which is one of the most foremost reasons how rich become even richer.
One of the reasons that building the first ₹1 crore is hard is because it is such a large amount of money relative to where most people can begin from.
This is especially true if you are working as an employee for a company. Companies generate huge profits, keep it with themselves, and just distribute the bread crumbs in the form of salary.
As an employee you are making someone else rich. But, if you are an online business owner like me (even if it looks like a blog), you are making yourself rich.
You own 100% of your online business and keep all the profits. Besides, if you plan to sell your business tomorrow you can do so at multiple times your earnings.
That’s why I suggest people to start an online business like a blog or a website.
It helps you build that initial capital and makes it relatively faster and easier to make the subsequent crores paving the way for your financial freedom.
After that, you can put a chunk of your fortune in the interest generating assets and live off happily with the passive income you would be making off that.
If you look at the way our Govt. taxes, it is designed to tax your personal income more than your wealth.
Let me explain through a simple example.
Below is the income tax slab rate for the FY 2017-18
|Income Slab||Tax Rate|
|Income up to Rs 2,50,000||No tax|
|Income from Rs 2,50,000 – Rs 5,00,000||5%|
|Income from Rs 5,00,000 – 10,00,000||20%|
|Income more than Rs 10,00,000||30%|
If you have a salary of Rs 12,00,000 per year and assuming that is your only source of income, then Rs 12 lakhs is your total taxable income. Now, let’s have a look at how much tax will you be liable to pay based on the above income tax rates.
|Income Slab||Tax Rate||Tax Calculation|
|Income up to Rs 2,50,000||No tax|
|Income from Rs 2,50,000 – Rs 5,00,000||10% (Rs 5,00,000 – Rs 2,50,000)||Rs 25,000|
|Income from Rs 5,00,000 – 10,00,000||20% (Rs 10,00,000 – Rs 5,00,000)||Rs 1,00,000|
|Income more than Rs 10,00,000||30%( Rs 12,00,000 – Rs 10,00,000)||Rs 60,000|
|Cess||3% of Rs 1,85,000||Rs 5,550|
|Total Tax||Rs 1,90,550|
So, the total tax you end up paying on your income of Rs 12,00,000 is Rs 1,90,550. ( For convenience, I have not included deductions under section 80 )
As a result when you focus only on growing your income you might earn more salary but also end up paying more taxes as seen in the above table.
But, when you start focusing on building net worth you move towards creating assets. The kind of assets that are tax friendly because of which you can create more wealth.
Different asset classes are taxed differently in India. With that in mind, let’s have a look at the various types of tax friendly asset classes.
1. Equities (Stocks)
Equities are the best tax friendly asset class out there in the market. Some of the richest people in the World and in India have created their wealth through equities. Be it Warren Buffett, Charlie Munger, Rakesh Jhunjhunwala, Ramesh Damani, Porinju Veliyath, and so many countless others.
Apart from the fact that equities offer greater returns, the reason that people who are focused on building wealth invest in them is because the capital gains arising out of investments in equities held for more than 1 year are completely tax free, whether the profit is Rs 1 or Rs 100 crores.
This is referred to as long term capital gains tax. (Note: The rules are changing in India but it’s still in the favor of investors)
For instance, couple of years ago I invested Rs 60,000 in a stock. Recently, I had redeemed it after the stock had appreciated by 5x. The long term capital gains tax was zero.
Now, I plan to reinvest that amount into equities to create more wealth. This is the net worth mindset that I am talking about.
2. Mutual Funds
Like equities, mutual funds are also one of the best tax friendly asset class out there. People who cannot directly invest in equities due to lack of expertise can instead invest in mutual funds, where you have a dedicated fund manager working to grow the fund.
Earlier in this article, I have mentioned that my mutual funds investment have compounded @15% since last year.
Should I chose to redeem this investment today, my long term capital gains tax on a profit of Rs 124,500 would be zero.
3. Return on Investment in Startups – Flat 20% or zero if that amount is re-invested
This asset class is not for a regular investor but if you really want to invest in startups then the gains would be treated at flat 20% after 3 year holding period.
You pay zero tax if you re-invest the gains in similar asset class (like real estate, covering in next section).
You can become startup equity holder even if you are not angel investor. The other way is working in a startup and earning their shares as your salary compensation.
The early employees of startups get more equity shares than the employees who join later. If the startup becomes a billion dollar company then owning 0.01% of that company means non-taxable income of $100,000.
Of course you have to wait till the company goes public and you can sell your stocks in the market.
But how would you feel when $100,000 equivalent Rs. 65,00,000 appear in your account as zero taxable income?
4. Real Estate
Indians love investing in 3 asset classes – gold, fixed deposit, and property.
But, what many people don’t know is that real estate as an asset class is a tax friendly asset too.
The capital gains on a real estate property held for more than 3 years is taxed only at 20%.
Compare this with the personal income tax slab rate where you are at taxed at 30% for income exceeding 10 lakhs.
Besides, you shall be exempted from the long term capital gains tax if you chose to invest the capital gains
- In purchase of another residential property within 1 year before or 2 years after the due date of sale of the property (Details of the rule here)
- Construction of residential property within a period of 3 years from date of sale of property
Alternatively, you are also exempt from long term capital gains tax if the gained amount is invested in capital gains bonds (NHAI, REC) within 6 months from sale of the earlier real estate asset.
Lastly, I don’t want to comment on the rate of growth of your real estate asset’s value. You may lose your money if invested in the wrong property or even right property when selected at the wrong time.
5. Business Income – 30% on the profits not revenue. Advantage of offsetting losses, if any.
Business income is taxed flat at 30% but only on the profits.
If I have 1 Crore income from my business and incurring 70 lakh cost to run that business (including equipments, operational cost & salaries of employees) then I am liable to pay tax on 30 lakh only.
That means 10 lakh tax.
But in case, you incurred any losses in past year, you can offset that with the profits of current year.
Also, you can defer the tax payments to next year by investing your profits back into your business.
In many ways, it’s in the hands of a businessman to optimise the income taxes, while salaries person have a limited option to save tax capped by the limits decided by the government.
6. Business Service Income – Under presumptive scheme, 50% of income is taxable.
If you are running a service business than serving as a full time employee then you can avail the benefits of presumptive scheme of government under section 44AD (read what taxation expert Karan Batra says – section 44AD)
Let me give you an example.
Let’s say if I earn 20,00,000 annual income by providing content marketing services to startups. I would have paid 30% tax on the income above 10 lakh if I worked as a salaried person.
But government allows me to pay tax at 50% of my professional revenue without asking me the proofs of business expenses. That means, I can pay tax on 10,00,000 income when filing income tax.
A saving of Rs. 3,00,000 from income tax just by changing your mindset (& income category) from a salaried employee to a business owner.
Now think about this:
Do you have good enough reasons to focus on building wealth in the form of net worth than just focusing on growing your monthly income, which actually gets taxed even higher as your income increases further?
I have more interesting things to share with you before your close the browser.
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Abraham Maslow, a famous 20th century American psychologist has created a framework called as Maslow’s hierarchy of needs as seen in the above image. According to his framework, people move through different stages of needs in their lifetime, that motivates their behavior.
For example, we take certain decisions in life to ensure our own safety & security. You purchase a health insurance to protect yourself financially if you were to fall sick unexpectedly.
Similarly, feeling of security is the one of the most important reasons to focus on building a net worth vis-a-vis focusing only on building your income.
Let’s consider two scenarios side by side:
Scenario 1 in which you plan to make Rs 2 to 3 lakhs per month and have reached this goal. Scenario 2 in which you build a networth of Rs 10 crore but income less than 1 lakh.
Which of the scenarios do you think would make you feel more secure in life ?
Personally, I am of the belief that the scenario 2 would make you feel more secure for the reason that although Rs 2 to 3 lakhs per month is a good income to have and one should definitely work towards more income but it’s not guaranteed for life.
On the other hand, your net worth is a big bulk amount (or equivalent assets) that is safely invested in fixed deposits or other safe financial instruments, not only giving you interest income but also giving you a greater sense of security.
We humans have something which is referred to as normalcy bias in the field of Psychology. It means that we always operate under the assumption that since nothing bad has happened till now, so nothing bad will ever happen.
This is a dangerous perception because you never know when things can go wrong in your life.
For example, there could be an unforeseen health situation that demands huge resources both financial and human. In cases like cancer, organ replacement, severe accidents etc your health insurance can only offer you a limited help.
During such bad times your regular income and insurance won’t support you. Instead a large financial net worth will help you avail the necessary treatment without running from pillar to post.
You can sell your assets like gold, real estate, websites, stocks, domain names, crypto currencies and fixed deposits.
If the financial needs are temporary then you can get the loans against your property and pay back as per your comfort.
But you will never have to beg to a friend or family member for your financial requirements. You don’t have to look upto a banker for the approval of a personal loan (that anyways incur high interest rate)
As I stated at the beginning of this article, with increasing income, your spending also increases proportionately. The more the income, the more you splurge on the latest gadgets, those lavish meals at restaurants, new clothes, and so on.
No wonder people face money shortages at the end of month because most of their income has dried up on their monthly spendings.
We all agree that financial freedom is very enjoyable. But, most people do not achieve financial freedom because they do not have the right mindset.
Everyone wants to retire by the age of 40 but they don’t change their mindset about income and wealth.
If you have read my entire article, you must have realized that income is just one piece of the puzzle. Working towards increasing your income is important but that alone can not give you the financial freedom.
Instead, you should focus on building your net worth.
This can be achieved by saving a lot, investing in the right asset classes that can go up higher in value…
.. and most importantly creating more than one source of income. (I will explain in the series of articles on the topic Starting Passive Income Engine)
One way to do it is to start a blog/website of your own.
Here is the step by step guide if you are thinking about starting a website or blog.
Last month, I met my cousin after more than a year. He has been making about Rs 25 lakhs per year. But, when I asked him about his net worth, he had nothing substantial to speak off.
There is no way one can achieve financial freedom with that kind of mindset.
Let me know in the comments how can I help you if you want to change your mindset to asset generation?