July 05, 2020
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The Secret Road To Riches

Across time and space, these are the three eternal laws of making money

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The Secret Road To Riches
8633 BC. Bhima and Baka, two friends in central India, are cowherds. They capture, domesticate and breed cattle. Both started out with one cow and one bull each. Today, in 8618 BC, Bhima has multiplied his cattle to a healthy 57 cows and four bulls. He delivers milk to some of the other members of his 1,078-strong community in exchange for grain, chicken and some services. Occasionally, he even exchanges some cows for land. In the rarest of rare cases, he trades a healthy bull. Baka, on the other hand, has just three cows. He had to exchange his sole bull when debts piled up and uses the services of Bhima's bull for breeding them.

644 BC. Herodo and Dotus, two friends living in Asia Minor, are traders. While Herodo trades in fish and spices by financing ships that sail across the seas, Dotus operates on the cutting edge of technology by producing the popular currency electrum (a naturally occurring amalgam of gold and silver) coins. Dotus notes that an increasing number of coins he's melting are headed towards Herodo's sea-facing mansion, while he's tied up in debt. It is even rumoured that Herodo has diversified into exporting coins from Lydia to Aegina, Athens and Corinth.

816 AD. Ho Chin and Xhi Chang, two friends living in China, are skilled professionals—Ho makes the best soups in the city while Xhi is a renowned calligrapher. Both carry home approximately the same number of copper coins for their toil. Facing an acute shortage of copper coins, Emperor Hien Tsung begins to issue paper money notes to replace the copper currency. Fearing the worst, Xhi exchanges all his copper coins for paper money. Ho realises the value of scarcity and buys Xhi's coins for paper he's now earning. Five years later, the value of copper has gone up—the paper currency coexists, but each coin buys more paper today—and while Xhi continues to excel at calligraphy, Ho has become a financier of ships.

The point: take a sojourn on the money ship across time and space and you'll find the same stories repeated millennium after millennium, continent after continent—if history is any evidence, there will always be a handful of wealthy people and millions of poor. The question is: do you have to take huge risks to be wealthy?

That depends upon the scale. If you want wealth that can finance towns, cities and even states, if you want money that can generate enterprises on which hundreds and thousands of people can express themselves through work and create prosperity for themselves, if you want assets that your next five generations can live out of without working, then the risk you need to take will be very high. Your route to wealth creation is through enterprise, through innovation, through finding opportunities to deploy your knowledge, skills and capital accordingly. In the India of today, there is opportunity anywhere you look—in road building, in retailing, in food, in agencies. Anywhere.

But what about the rest of us? How can we get rich? Just like Bhima. He understood the power of compound interest. He started out with one cow and one bull, bred them and got two cows and one bull next year, a rise of 50 per cent. In year two, he bred two cows, each of which delivered two more cows. He could have sold the bull (as Baka did) but he didn't and was left with five cows. This went on and he multiplied his wealth. Quite like Herodo and Ho, who, realising that money breeds more money, first accumulated wealth and then deployed it carefully. When the dividends came from those deployments, they redeployed them, but made sure they diversified into other opportunities.

You can do it too—and almost effortlessly. Let's say you're 25 and you make Rs 25,000 a month, save Rs 5,000 a month and invest it in an instrument that gives you a return of 8 per cent per annum.Do you know what you will be worth at the end of your foreseeable 40-year-long working life? Rs 1.76 crore. Does saving Rs 5,000 a month sound too heavy? Well, if you invest Rs 1,000 a month for the same period, you will be worth Rs 35 lakh when you turn 65. Take a little higher risk, in a 12 per cent instrument like equity funds or stocks, and your Rs 5,000 saved regularly every month would be worth, hold your breath, Rs 5.94 crore.

While you're young, you would invest Rs 1,000 per month in low-risk instruments like a small savings scheme that also helps you save taxes (see "A Time To Lock-in"), another Rs 2,000 per month in medium-risk instruments like gilt or debt funds and 60 per cent of your savings (Rs 3,000) in medium-to-high risk instruments like equity funds or even shares (see "Trim Your Risk" and "Makin' Sense Of It"). Later you may like to create another kind of asset—your house—for which you may need to borrow (see "Crowning  The Buyer King"). There is no certainty of life, so make sure your loved ones and your assets are protected in case you pass on (see "Sell").

But whatever you do, never give up these three eternal powers of wealth creation: saving, investing, diversifying. Do it regularly and you'll be rich—it's really that simple.
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