Earning money is difficult and so is spending it correctly. Learning to spend it wisely is more important than learning to earn it. There is a quote of Warren Buffett as follows
“If you buy things you don't need, soon you will sell things you need”.
You would have noticed that there is a big difference in ways that rich and poor spend their money. We will today discuss briefly about those ways. Before we dive into the complexity of spending, we will have to understand a few terms i.e. Liabilities, Assets, Revenue and Expense. Let’s dive into each one of them independently.
It is the monthly or annual income that an individual or a business earns in exchange of its business or services. In case of regular jobs, it may be referred to as salary or pay.
It is amount of money that an individual spends to buy stuff or avail services. It may be used to buy food, groceries, clothing or anything that a person or a business wants.
Liabilities are the things which people buy for any purpose but they tend to continuously incur additional amounts of money. There can be many examples for liabilities, for example, buying a sports car which incur money for its maintenance, buying a cell phone package that incur charges for regular usage, having a business which has expenses to run it. Liabilities may be anything which charges you money whether periodically or randomly. These may also include stuff which is just bought actually for no good reason i.e. spending money on decoration or other useless stuff.
Assets are the objects or properties that may provide economic value or revenue stream in future to the holding individual or business. These may vary for different individuals and businesses. Assets may include royalties, rents, service charges or anything that may generate income for the holder.
So, now as we are clear about the meaning of these terms, we shall now discuss about how differently poor, middle class and rich people operate their money. As in some parts of the world, poor people hardly make their hand to mouth. So they actually do not have choice to invest or spend by their choice. We shall talk about middle class population and rich people.
Middle class people are those people who earn enough to keep running their daily routines and still have some amount at the end to save, invest or buy additional stuff. These are the people who try to stay in race with the rich assuming that they can cope with them by just looking like them. They try to dress like rich, drive like rich and follow them in any way possible for them their pockets. These people usually buy stuff that will not pay them anything to them in the future instead it will consume their current wealth which should have been invested in some useful way. So we can say that middle class buy liabilities, which will cost them money but their return over investment (ROI) will always be zero.
Many of the times their Revenue gets lower than their Expenses while their liabilities keep on increasing. Their focus is not on buying assets instead they keep buying liabilities.
These are the people who actually earn much more than they need to live their lives. Many of them actually knows how to invest, and how money works in our current market. Of course they spend much on luxuries and looks but that is never their prime objective with money. Their prime focus is to invest in objects and properties which may have greater return over investment. Always remember people require more money on their invested money. So we can easily say that rich people invest in assets.
Their Revenue is always greater than their expenses, and they focus on buying assets instead of liabilities.
People sometime try to figure out some methods to double their money. If you really don’t have anything right in mind to invest correctly then the best method to double your money is to fold it in half and put it back into your pocket. And invest it later when you have a better opportunity. So we think that we have learned a secret formula to spend our money wisely. Following the habits of rich and middle class people we can say that it is better to invest or buy assets instead of liabilities, that’s it.
