This is a guest post by Brijesh Vappala a SEBI registered fee-only financial planner and member of fee-only India (FOI). This post marks his entry into my list of fee-only financial planners. I met Brijesh during the second FOI meet at Hyderabad last month. I requested Melvin Joseph, a familiar name to most readers to introduce Brijesh.
Brijesh Vappala was associated with the Financial Services Industry since 1998 and some of the roles handled were as follows:
- General Manager – Regulatory Compliance with Team Lease Services, Bangalore;
- State Manager – Customer Service & Operations with ICICI Prudential Life Insurance;
- Senior Authority Holder with Allianz Cornhill PLC which is a UK based non-life insurer.
Having interacted with thousands of customers during his employee phase, it became evident to him that irrespective of general education levels, professional standing and social strata, the level of financial awareness among the public is very low. This resulted in people getting advice from the nearby and known persons who may/may not be professionally capable of doing so. He could see the rampant misselling of financial products.
This prompted Brijesh to start out on his own by opting for the SEBI RIA model which puts him solely in the client’s team. What he brings to the client is his vast experience in the financial domain, the knowledge as a CFP, Fiduciary duty as a SEBI RIA and a firm commitment to Fee only model in letter and spirit.
He founded BVare Financial Planners & Trainers which started operations in October 2017 and now has clientele in Bangalore, Hyderabad, Middle East and Europe. Apart from Financial Planning consultancy, he also does training/ workshops on Personal Finance.
You can get more details about Brijesh from his website bvare.com. Now over to him.
All our lives we have been taught to get into a high paying vocation so that we will get “rich and settled”.
Nothing is farther from the truth. A high income will not make us rich. Worse, it cannot even prevent us from going broke.
Look at the below names.
Michael Jackson – He ruled the pop music world for more than a quarter of a century. Approximate lifetime earnings around Rs.7590 crores. Debt at the time of his death in 2009 was Rs.3300 crores. (7 years after his death, his stake in Sony/ATV has turned things around).
Mike Tyson – Boxing legend in 80s and 90s. Lifetime earnings of Rs.1320 crores. Filed for bankruptcy in 2003 with an unpaid debt of Rs.152 crores. Now living paycheck to paycheck.
Boris Becker – Tennis legend. The youngest Wimbledon champion at the age of 17 in the year 1985. Ranked 7th in the list of all-time highest paid tennis stars. Declared bankrupt in June 2017.
The above stories might be extreme examples. But take an honest look at your own finances. Irrespective of our income levels, a lot of us live not very different lives. We live paycheck to paycheck. If we don’t work for a month, we will struggle to pay our bills. We are stuck in the “Rat Race”.
Why has this happened to us? Because we were only taught how to make money. And not the habits needed to handle money.
And don’t let the odd insurance policy, mutual fund or fixed deposit which we have bought make us believe that we are an exception to the above. We just happened to be sold a “Lifebuoy” or “Dettol” without first making us aware as to why it was important to take bath; and what to do with the “Lifebuoy” or “Dettol” which we have been sold.
The first step in cultivating sound financial habit is to understand how money is spent. Everybody, whether it is Bill Gates or the roadside beggar can spend money in only 4 ways. The sooner a person understands these 4 types of spending, the faster he will become financially independent.
You can only spend your money in any one of the 4 quadrants below:
|Quadrant I – “Roti, Kapda aur Makan” expenses. They are Urgent & Important.||Quadrant II – “Onida” Expenses. They look Urgent but actually not Important.|
|Quadrant III – “Devdas” Expenses.They are neither Urgent nor Important.||Quadrant IV – “Your real salary”. They are most Important but never look Urgent.|
Let’s look at these Quadrants in a little detail:
Quadrant 1 – “Roti, Kapda aur Makan” type of expenses
These are your basic living expenses. Example – Rent, clothing, groceries, child schooling, routine medicines, commuting, Gas, water, electricity, telephone etc.
Absence of any of these severely impacts the quality and dignity of your life. Hence, it is important.
Almost all of these are to be paid every month. Hence, it is also urgent.
When the price of things in this Quadrant increases, we crib of rising cost of living.
Interestingly, you don’t need to push yourselves to spend in this Quadrant. Others will automatically push you to pay. Like, if you don’t pay rent you will have the landlord ringing the bell. If you don’t pay the fees, your child will be sent back from school.
The expenses in this quadrant are very important and urgent. However, keep in mind that you will never again see the money which you pay in this Quadrant. It is gone forever into some other person’s pocket.
Quadrant 2 – “Onida” type of expenses
Remember the Onida TV ads of 80s and 90s where the devil asked you to buy the TV which will become neighbors’ envy and Owner’s pride. Well, the devil was stroking that part of your mind which deals with peer pressure, ego pampering, impulsive buying etc. The Ad and the TV became a huge success in those times.
You can find new avatars of the same psychology in the all too familiar scenarios below.
- Do you feel ashamed to pull out your “desi” phone when in the company of your colleagues who all flaunt Iphones?
- Do you park your old car a long way off so that you don’t feel small in front of your luxury sedan/SUV driving friends?
- Every year, 2 or 3 months after getting your bonus, do you wonder where it has all gone and ultimately trace it to the 48 inches curved HD LED TV adorning your living room?
- During your weekend shopping visits, do you feel the strong urge to buy a branded dress or a gadget and end up calculating the cost if converted into an 18 month EMI on your credit card?
- Have you taken a higher than required home loan to build a bigger than required home which forced you into a high and long EMI bondage leaving out little cash for anything else?
If you can relate to the above, you know the “Onida” type of expenses which I am talking about.
These expenses look very urgent to you. You will not have peace of mind till you match your neighbour‘s flashier car. You will not sleep till you get that gadget which you saw in the mall.
But the hard truth is – they are not at all important. They only pamper your own ego and nothing else. They make you feel good – Only till you see your next “Object of desire”.
While you hate spending in the Urgent and Important Quadrant 1, spending into the Not Important Quadrant 2 is highly tempting. It requires all your will power to avoid the temptation of giving into theQuadrant 2 expenses.
While you crib privately and publicly at the slightest increase in Quadrant 1 bills, a high Quadrant 2 bill though privately cribbed is publicly bragged about. You wouldn’t remove the price tag if you could help it!!
Similar to Quadrant 1, the money which you pay in this Quadrant also goes into somebody else’s pocket. You may argue that now you own that flashy car which is an asset. Reality – The moment you drive your asset out of the showroom, 30% has immediately evaporated from its value. Quite an asset!!
Majority of the high income earning population never become financially independent because they spend most of their lives paying into this Quadrant. Having said that, spending in this Quadrant is not by itself bad. We will see later as to when it is bad and when it is acceptable.
Quadrant 3 – “Devdas” type of expenses
This is a no-brainer. This Quadrant consists of spends on all your vices – smoking, drinking, drugging, gambling and others..
You have seen several examples of people around you from various social strata ruining their financial, professional and physical lives due to an addiction.
Even those who are not addicts but have only a moderate indulgence in this Quadrant, fail to have a correct perspective in relation to more purposeful spending. Example below:
One pack of cigarette or couple of drinks per day can total upwards of Rs.4500/- per month. You don’t think twice before spending this. But you will not spend Rs.1000/- to provide financial education to your child which will save her a lifetime of trial and errors with money management (Conflict of interest alert – I conduct Financial Education Workshops, among other things). You will not spend Rs.1250/- p.m to take a Term Insurance Policy of Rs.1 crore which will ensure that you don’t compound the emotional trauma for your family with a daunting financial trauma as well (Disclaimer – I don’t sell financial products. If you buy, you gain; I don’t).
If you don’t spend in Quadrant 1 – The quality and dignity of your living will be affected.
If you spend in Quadrant 3 – The quality and dignity of your living will be affected.
To state the obvious – Any spending in this Quadrant is neither Urgent nor Important.
Quadrant 4 – “Your real salary”
Regardless of whether you are an employee who earns a salary, a professional who earns fees or a businessman who earns a profit – The spending in this Quadrant is the real salary which you pay yourselves. This is the only type of spending where you will get to see your money again.
The spending in all the other 3 quadrants was for somebody else’s salary, fees or profit.
The most common and basic goals in this quadrant are:
- Saving for child’s education
- Saving for Child’s marriage
- Saving for a financially free and dignified retirement
Other than this, there may be other goals which may differ from person to person such as Home, Car, second home, Family holiday, setting up own business, Supporting parents, Supporting a charity, Leaving a legacy etc.
Everyone agrees that these are the most important. However, everything in this Quadrant appears far away in a distant future and never looks Urgent. And because it never looks urgent, the deceptively urgent looking Quadrant 2 hijacks the money leaving little for Quadrant 4. And as a result, you are left with little when the really important juncture of Childs’s education, marriage or your retirement comes.
Every time you see the warning on your rearview mirror, keep in mind that it applies to your Quadrant 4 also – “Objects appearing in the rearview mirror are closer than they appear”.
Because this Quadrant is the most important but never Urgent, it requires a lot of discipline and motivation to effectively spend money here.
The above post will help you to identify and classify each of your expenses into the four Quadrants. I suggest you do this exercise which will be a revelation. Involve your family in the process so that the entire family starts becoming financially savvy and responsible.
Footnotes: While creating the above Quadrant concept, I have been inspired by the “Eisenhower Box” which is used in Time Management. However, other than the broad concept, the thoughts that have gone into the above post are firsthand (or so I believe).
This article was first published on Brijesh’s website. If you wish to work with him, you can contact him via this website.