Last Updated on December 28, 2021 at 6:48 pm
In April 2018, when SEBI registered fee-only financial planner Brijesh Vappala and member of fee-only India (FOI) was added to my list of fee-only financial planners, he had written a guest post highlighting a common problem among young earners: A high income will not make you RICH!! He partitioned money spending into four bins or quadrants and showed that if we are not careful, we may spend a lot of precious time spending money the wrong way.
In the second part, Brijesh also offers a simple solution if you are worried about finding money for future goals. A few simple alterations here and there and you could suddenly find the money you are looking for – as if it grew from thin air.
If you would like to work with Brijesh and get your money management in order, please contact him via his website: bvare.com. Now over to him.
=-=-=-=-=-=-=
Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! 🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥
In the previous post, we saw that whatever money we spend invariably goes into one of the following 4 Quadrants. In case you have missed out to read the previous article, I suggest you to first go through the same by clicking here so that we are on the same page before we discuss further. A summary is given below.
Expense Quadrant | |
Quadrant I – “Roti, Kapda aur Makan” expenses. The basic essentials. They are Urgent & Important. | Quadrant II – “Onida” Expenses. Ego/Feel good expenses. They look Urgent but actually not Important. |
Quadrant III – “Devdas” Expenses. Your vices. They are neither Urgent nor Important. | Quadrant IV – “Your real salary”. Goal based expenses. They are most Important but never look Urgent. |
It is obvious that Quadrant 4 is where the real game happens. Unfortunately, a lot of people would have also realized that they have a non-existent Quadrant 4.
Starting block – Quadrant IV = 0
The first step in getting on top of your finance is to figure out your Quadrant 4.
This involves clearly stating how much money you want to have, for what purpose and at what point in time. Your goals depend on a lot of things – your age, profession, dependents, dependents’ age, current and aspirational lifestyle, existing family cash flow, existing family savings, your personality type, individual ambitions, return expected, inflation assumed etc.
It is very important that you
- Write down the goals in clear rupee terms and
- Involve your family in this exercise.
This is because these written goal statements are going to be your main weapons to counter the temptations of Quadrant 2 and 3. They act as motivation for the temporary sacrifices which you and your family would need to make in the process.
Forget about being mathematically perfect at this stage. More important is to get started. Google will give you any number of calculators to project your goals based on future returns and inflation. They will also tell you how much money you will need to save monthly to reach those goals.
Now that you know how much money you need to put into Quadrant 4 every month, you need to find out where to get that money.
Unfortunately, money doesn’t grow on trees!!
Money for Quadrant 4 can only come from either of the following:
1) By increasing your income OR
2) By reducing your expenses
While the first option, ie, increasing your income is the ideal method, the majority of the people don’t have this luxury or don’t realise that they have this luxury. Hence, for most people, the practical option is the second one, ie, reduce your expenses. Which brings us to the next question – Reduce expenses from where? Let’s look at each Quadrant.
Quadrant 1
These are basic essentials. Hence theoretically, there is very little scope for reducing expense here. However, the meaning of the term “basic essential” can vary from person to person depending on the standard of living one has got used to.
The biggest trap most people fall into in Quadrant 1 is to raise the standard too high too soon.
Consider this scenario. It’s appraisal time. You get a good performance rating and as a result a good pay raise. Now that you have more disposable income, you proceed to change the place you live, you upgrade your mode of transport, you choose more swanky places to go for lunch. These are actually Quadrant 1 expenses but a bit of Quadrant 2 slowly creep into it without you even realizing it.
It thus becomes the new standard. Once you get used to a standard in Quadrant 1, it causes a lot of heartburn to scale down and is done only as a last resort. Therefore, thinking very hard before you change the standard is better than trying to reduce the same afterwards.
Quadrant 2
In Quadrant 1 we found that though theoretically nothing can be reduced, practically there is a lot of excess present there.
Quadrant 2, or in other words the Ego spends, are quite opposite to this. Though theoretically, Quadrant 2 doesn’t matter at all, a bit of it is required practically. This is because human beings by nature are fuelled by the aspirations of their Quadrant 2. Everybody deserves a good life. Which makes Quadrant 2 not altogether bad.
You have heard about the house called “Antilia” owned by Mukesh Ambani . 27 floors. Valued between $1billion and $2billion, it is the most expensive private residential property in the world. It has Quadrant 2 written all over it. If we consider it purely from a personal finance perspective, this hugely extravagant house by common mans’ standard becomes totally acceptable by Mr Ambani’s net worth. That 2 billion is just 5% of his net worth of $40 billion. If he wished to be known as the owner of the most expensive private residential property in the world by spending just 5% of his money, financially it doesn’t look out of proportion.
Now consider this against your own house. If it’s worth Rs.50 lacs, going by the same proportion of 5%, you should be having a net worth of Rs.10 crores. If it is worth Rs.1 crore, you should be having a net worth of Rs.20 crore. Do you have that kind of net worth? Which one is more out of proportion here – the $2 billion house or the Rs.50 lac house?
So, for Quadrant 2, it’s not the absolute amounts that matter. Instead, it’s the proportion of your Quadrant 2 spends that is more important. The trick to master Quadrant 2 is to ensure that your Quadrant 2 does not happen at the expense of your Quadrant 4 and fix a proportion to meet this objective – whether it is your gadget spends, eating outspends, impulsive shopping spends or whatever. And stick to it relentlessly.
A note of caution – Fix this proportion consciously for both your regular monthly income as well as windfalls like the annual bonus. For example, you know that you will get your annual bonus on May 31st. Even before the amount gets credited to your account, fix the percentage which you will splurge and fix the percentage which you will take to your Quadrant 4. And once it gets credited, waste no time in moving it into Quadrant 4.
Consider the most important Quadrant 4 as a marathon. You need periodical fluid/energy stops so that you get the energy to complete the marathon. Without the fluid stops, you will not finish the run. On the other hand, if instead of a fluid stop you go for a full course meal in the middle of the marathon, then also you will not finish the race. When your Quadrant 2 serve merely as fluid stops and does not end up as a full meal, you are on your way to finishing the race.
Quadrant 3
Quadrant 2 becomes acceptable if it’s proportion to Quadrant 4 is acceptable.
This rule does not apply to Quadrant 3. Irrespective of the proportion, Quadrant 3 is best eliminated entirely.
This is because Quadrant 2 cannot harm you but Quadrant 3 has the capacity to harm you physically, mentally, morally and financially.
Let’s again take Mukesh Ambani’s help to explain this. You would agree that Mr.Ambani can afford to have the best of liquors every day. Let’s assume that he consumes a full bottle of the costliest whiskey 365 days of the year. It will barely impact him in absolute rupee terms per bottle. But more seriously it will destroy his physical and mental faculties which helped him to multiply the empire which he inherited.
Therefore, though this may sound preachy, it makes sense to make your Quadrant 3 spending zero. Period.
Money does grow out of thin air!
Remember – You started with Quadrant 4 = 0 and were wondering where to find the money from.
You now know the rules to create that money:
Quadrant 1 – Delay upgrading the standards
Quadrant 2 – Fix your limits. And stick to it.
Quadrant 3 – Eliminate.
If you diligently do what is stated above, you will find that you have the option to create a lot of money out of thin air. And all of this goes into your Quadrant 4.
Maybe, you will have to tweak some goals here and there. Maybe, you will have a shortfall now. But it is definitely a start. Keep at it and as years go by you will find ways to achieve all your goals.
All the best.
🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 5000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! ⇐ More than 1,000 investors and advisors use this!
New Tool! => Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
Podcast: Let's Get RICH With PATTU! Every single Indian CAN grow their wealth! You can watch podcast episodes on the OfSpin Media Friends YouTube Channel. 🔥Now Watch Let's Get Rich With Pattu தமிழில் (in Tamil)! 🔥
- Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
- Have a question? Subscribe to our newsletter using the form below.
- Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.
Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!
About The Author
Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course! Increase your income by getting people to pay for your skills! ⇐ More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!
Our new book for kids: “Chinchu Gets a Superpower!” is now available! Most investor problems can be traced to a lack of informed decision-making. We made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, what would it be if we had to groom one ability in our children that is key not only to money management and investing but to any aspect of life? My answer: Sound Decision Making. So, in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parents plan for it, as well as teaching him several key ideas of decision-making and money management, is the narrative. What readers say!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
- Twitter @freefincal
- Subscribe to our YouTube Videos
- Posts feed via Feedburner.
Our publications
You Can Be Rich Too with Goal-Based Investing
Published by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want This book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.
Your Ultimate Guide to Travel
This is an in-depth dive into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)