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.
|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 of 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, majority of the people doesn’t have this luxury or doesn’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.
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.
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 out spends, 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 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 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.