Wealth Creation – Don't Confuse It With Income

Humans frequently conflate wealth and income. According to our estimation, someone making Rs. 1 lakh per month is wealthier than someone making Rs. 40,000.

Yet, it is challenging to draw conclusions so quickly because we haven't specified how much their monthly costs are, monthly spending, or savings are. What if the cost of living is Rs 90,000 for someone making Rs 1 lakh and Rs 20,000 for an arsonist making Rs 40,000? In that situation, the person with a lower income will save more money. Long-term wealth generation will be higher for the person who saves more. 

WHAT MATTERS IS SAVINGS, NOT INCOME

You can see that saving money is more important than making money in the long run. More income ultimately results in greater savings, although this isn't always the case. Your savings, not merely your high income, are what actually produce wealth. Hence, you are in an excellent position if you make a lot of money and save a lot of it each month. Nevertheless, if you are making a lot of money but also spending a lot, you are really no better off than someone who makes less money but saves less. In that circumstance, wealth creation will either be too modest or simply not occur from a future perspective. Many people with big incomes are not very good at saving money – they’re used to higher spending, so they don’t pay enough attention to the money saved.

So, the question is , just because someone is getting higher income, can we say that his wealth is higher?

A lot of people earn very high salaries, but they end up spending most of it. You can blame this on high symbols of lifestyle, high-status symbols, and all sorts of expenses, but your real worth is what you save in the end.

Now the question is – How much of your income do you save? By Saving, I mean any kind of savings which is left with you at the end of the e month after expenses.

WHAT IS THE SAVING RATIO?

A good indicator to know is finding a simple ratio called the “Savings Ratio”. Just divide your savings at the end of the month by your income and that’s your saving ratio.

Let’s see an example. Say Sanjay makes Rs 50,000 a month and he pays rent of Rs 10,000, pays another 12,000 in home-related expenses, spends another 6,000 in entertainment and outings and at the end of the month he is left with Rs 22,000, that’s Rs 22,000 saved with income of Rs 50,000 – which is 44% saving ratio. You can calculate this ratio on a monthly or yearly basis.

A saving ratio of more than 40% is good. But if it is below 20%, you should really do something about it.

The point which is to be noted is that the savings ratio needs to be maintained So that good wealth creation can be accomplished.

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