Rich or Poor, Accounting for Sure!

This is a mail I got from my uncle, which I thought would like to share it with you. I had a different opinion myself, that I have appended. Whats your take?

K Ramesh, B.Sc, ICWA, CA, BL, I forgot his other designations...
(He is also a teacher for ICWA, CA, FERA, practices Company Law, gives regular talks on All India Radio, advisor for Citibank NRI portal, plays the mridangam beautifully, he is a self-proclaimed retiree and all of 40 yrs old - he looks more like 30 though)

Incidentally, after listening to my series of lectures in All India Radio, the Director of AIR Mr. B R Kumar, who has since retired, and joined GYAN FM Channel (this is a Knowledge Channel that propagates only Education) has asked me to give a series of lectures on the title " You, me and Money" for laymen.

My feeling is that you are a rich person, not by what you acquire buy what you share with others. And everybody can be rich. Think of different between an ASSET and LIABILITY. Asset puts money into your pocket -- Knowledge, investments, bonds, deposits etc. Liability takes away your existing money -- House, gadgets like washing machine, PC, AC, Oven, fittings etc. I am not saying you should not buy House or Home. But, only buy it when you have created enough cash flows to sustain that. The rich knows how to appreciate really assets.

The poor and particularly middle class (i) Do not know the difference between A and L and (ii) Buys Liability, worse thinking that they are really assets. They want to buy liability quickly, say, bigger house, initially so that they can look Rich. In the long run they loose and remain poor. The poor and middle class want their sons and daughters to repeat what they were doing to continuously remain poor and middle class -- that is read and get good grades, get job, work hard, get married, get children, fund their education, ask them get good grades etc.......repeat them to remain poor/middle class only to pay for everybody else (other then themselves!). For example, they pay for Government (taxes), Banks (loans, credit card), and remain poor. They work for money.

The rich, on the other hand, buys assets, looks initially poor, but in the long run are not only actually rich, but pass on their legacy to next generation. The richness of a person is not how much money you have, but if you retire today, how long you can comfortably carry on without any support. For instance I had retired long before. That is why you are saying that I am earning at comfort from Home.

The poor and middle class: Earn, pay taxes, spend, whereas the rich: Earn, spend and Pay taxes!.
In short, the poor and middle class work for money. The rich class make money work for them!

Random Access (BE, MIEEE, MCP, MCAD, MCSD, trying hard to make up other stuff ;)
Somehow its very tough to get words to describe my exact opinion on this matter. Yes, you are right in defining some things as assets and liabilities. But things like House have a rate of depreciation much lesser than that of electronic gadgets. Also, buying a house is usually in lieu of an expense (rent). So, I would like to still classify this as an asset. Assets are something that generate cash flow in the short or long term. In this case of a house, it is a short term liability but a long term asset. Atleast its not like in Singapore where houses are not owned but only taken on a 99-year lease!

I would classify getting things like electronic items as not all being too bad, as some are for necessity. For example, a computer is an absolute must for our professions. But it is in deciding between what you need to have and what you like to have is the tough thing. For the last 4 years, I have been thinkin about getting a laptop, but every time I think it is really not necessary at this point of time. Success or failure is relative, but both stem from the decisions we make in our lives. I think assets are good, but some liabilities are essential. The rest is what we must be careful about. There must be enjoyment in life and that will in turn incur some liabilities. But these must be kept under control. The basic accounting statement A= L + E applies everywhere in life. But I found another interesting definition of the same.

Asset = Liabilities + Contributed Capital + Retained Earnings
Retained Earnings = BF Earnings + Net Income - Dividends

Though this applies to companies, if you look at it from an Individual perspective, I would define that

Contributed Capital = Birthday gifts, Providend Fund, Goodwill gestures
Net Income = Salary, Bonus, Miscellaneous Sources of Income, Interest on Savings, Dividends on Investments and Stocks
Dividends = Tax, Goodwill gestures to others, Essential commodities

So Liabilities become very limited to what Liabilites mean...that is things that we are liable for. We are not liable for the food we take (essential commodity) or the birthday gifts we give to the people we love (goodwill gestures) or the tax on our income, because of the simple fact that we cant escape all that, and these will not affect our financial position adversely. On the other hand, the real liabilities that we must be worried about (and the only thing in the equation that is really under our control) are the ones that will not give us value equivalent to the cost. Value can be material or otherwise, and the cost can also be material or otherwise.

A typical example will be whether u are willing to sacrifice your saturdays to help out children who struggle in their studies or just spend time getting a smile onto the children in orphanages and other special children. You cannot term this as a liability as you have to spend one day (cost), as the value(happiness) outweighs the cost. This is more of what I would term as a goodwill gesture and that is what I like about this definition.

People are maybe confused because Liabilities comes with a (+) sign in the equation. It is actually A = E - L. And yes, you can always strive to increase your net income while keeping your liabilities to the bare minimum so that you can increase your assets. But I would give considerable thought at increasing my Dividends as well, even though it is with a (-)ve sign in the equation. That is what I think is the difference between a successful life and fulfilling life. Given the choice, I would choose to live a fulfilling life. And the best part is that a fulfilling life is also a successful life, even though the material assets might be lesser...

Every person only has to realise that this basic accounting equation is what governs him and he has to think about what he needs to do to balance his needs and desires. I dont think anyone wants to be a pauper, so everyone needs to be educated at identifying properly what is what. And I am sure your talk will make a lot of people appreciate the simplicity of managing their finances and make it big, not only in financial status, but also as a person and an integral part of society.

So in essence, I feel that everyone can make money work for them, if only they work to utilise the money in a proper way. As one wise man once said,"You cannot make everyone equal, but you have to realise the difference and provide for them". I do believe that this accounting equation just proves it scientifically and provides for everyone, rich or poor to manage their money properly.

Random Access
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