‘The Way to Wealth” is an essay by Benjamin Franklin, first published in America in 1758. Compiled from Franklin’s Poor Richard Almanack, the essay draws together his wit, wisdom, and practical observations on wealth-building, offering a roadmap to financial security and independence that resonate across generations.
I am the youngest of three sons, of farmer parents, who farmed about 5 acres of non-irrigated land, in the district of Bargarh, in the state of Odisha, India. I was a good and hardworking student throughout my student days. My education was financed by our parents, both of my elder brothers, and merit scholarship from 5th grade through medical college. I also obtained student loan from government of Odisha, during my four and half years of medical college in New Delhi. After graduating from AIIMS (New Delhi) in 1969, I came to the United States for further medical training in June 1970 with eight dollars and stayed. While in India, I had no knowledge about money management (there was never any surplus money to manage) or stock market investment. While I was a pediatric intern in USA, I subscribed to a free (free to doctors and medical students) magazine titled “Medical Economics”. The main aim of the monthly magazine was to educate doctors and medical students about finance, bank loan, life and disability insurance, and practice management. That was the beginning of my financial education which continues till today. This article is a brief summary of my understanding of “The Way to Wealth”.
1- Invest in Yourself
Invest in someone you know yourself. Get the maximum education you can get in the field of your choosing. Multiple studies have shown that in general, people with higher level of education, have higher amount of life time earnings than people with lesser degree of education. Students who graduate in STEM fields (Science, Technology, Engineering and Math) have better job opportunities and higher amount of life time earning than students who graduate in liberal arts (English, Social Sciences etc.). While in your present job continue to learn newer skills which can lead you to promotions and higher salary.
Studies have shown that in general, educated people smoke and drink less, eat a healthier diet, exercise more, can afford better healthcare and live a longer and happier life.
2- Live Within Your Means
Income and Happiness
“Annual income twenty pounds,
Annual expenditure nineteen nineteen and six,
Result happiness.
Annual income twenty pounds,
Annual expenditure twenty pounds ought and six,
Result misery.
- Charles Dickens, David Copperfield.( 1849)
This is one of my favorite quotations on debt and happiness. Live within your means. Do not gamble, do not womanize, and do not do drugs including alcohol. If you do, ultimately you will be on the street. There is an old German saying; “young gambler, old beggar.”
3- Learn About Money Management
Educate yourself about money management and keep learning. Delay getting married and having children until you have financial stability. Know the difference between “need” and “want”. Avoid credit cards debts. They come with very high interest if you do not pay them on time. Save at least 10-15 % of your income every month. Build an emergency fund to cover 6-12 months of your living expenses, in case you get laid off or you plan to change job. Fully match your employer’s retirement plan. Make it auto deduction from your salary. Invest your retirement and other savings in an index fund. Take advantage of various government saving plans and minimize your taxes.
4- Insurance
Insurance is an effective tool in reducing unforeseen financial risks. Buy health (if your employer does not provide it), disability, property and liability insurance (for auto, home, apartment). Buy term life insurance if you have family to support. Disability insurance is more important than life insurance. Your chance of being disable is many times more than your chance of dying. The insurance policy should be guaranteedrenewable policy feature. A guaranteed renewable policy is an insurance policy feature that ensures that an insurer is obligated to continue coverage as long as premiums are paid on the policy.
5- The Magic of Compounding
‘The most powerful force in the universe is compound interest.”—Albert Einstein
In simple term, compound interest means you earn interest not only on the initial amount invested (principal) but also on the interest that accumulates every month. This compounding effect creates exponential growth. For example, as a new parent you invest $1000.0( or 1000 rupees) in an index fund to pay for your child college education and the index fund grows by 10% a year, at age 18, the value will be $5,560 (or rupees). Now you assume that, you do not withdraw the money and keep it invested until his retirement at age 65. The value of the original $1000.0 onetime investment will be $490,371, or nearly a half a million dollars (or rupees). The moral of the example is; when saving for retirement, start early, do not withdraw the gain or interest and let it compound.
Know the Rule of 72
No of years it takes to double the principal amount = 72/ annual interest rate
For example; If you invested $1000(or rupees) and earn a return of 8% a year, your money will double to $2000 in (72/8) 9 years.
6- Where to Invest
“A low cost index fund is the most sensible equity (stock) investment for the great majority of investors.”—Warren Buffett (considered to be one of the great investors of all time).
Multiple academic studies have concluded that in the long run, you will be better off investing in a low cost index funds than buying hot shot individual stock.
What is an Index Fund?
John Bogle (1929 – 2019), the late chairman of the Vanguard Group is widely regarded as the ‘father of index fund’. He made it available to public in 1976. The academic foundation for the index fund was laid in 1960s by economists Paul Samuelson and Eugene Fama.
An index fund is a type of investment fund, often structured as a mutual fund or an exchange –traded fund (ETF), that aims to mirror the performance of a specific market index, like the S&P 500( New York stock exchange) or Nifty 50 or Nifty 100( India’s Sensex index). Instead of being actively managed by a fund manager picking individual stock and charging high fee, an index fund passively holds a portfolio of stocks or bonds that closely matches the components of its target index. The key advantages of an index funds are: great diversification, low cost and superior long-term returns. The index fund eliminates the risks of individual stock and selection biases of mutual fund manager. However, the stock market risks remains. If the general overall market goes up, the value of the index fund will go up and if the overall market goes down, the value of the index fund will go down.
The annualized return of Nifty 50 index in India, over the past 20 years has been 16%. and S&P 500 index (USA) has been 14%.
7- Honor Your Financial Commitment
Honoring financial commitments is a fundamental aspect of personal responsibility. Financial commitments range from paying bills on time, repaying your debts to your family and friends, banks or credit card companies or local vendors. Not paying your debts to your bank or credit card companies will affect your credit score. Higher the credit score lower the interest rate for the borrower. Try to pay all your debts on time.
8 – Help Others Financially If You Can
Whether financially helping loved ones, contributing to charitable causes or investing in community projects, is our moral responsibility. Financially helping others, not only benefit the recipient, it also provides personal fulfillment and happiness to the giver. The Bible says: “To whom much is given, much is expected”. (Luke 12:48). It means, individuals who have benefited from privileges such as supportive family, quality education, or career success, should “pay it forward” by helping others in similar ways. This might include financial help like scholarship or mentoring.
Conclusion
To conclude, get the maximum education you can get, be a lifelong learner, be financially educated, live within your means, save minimum of 10-15 % of your income, have an emergency fund, have proper insurances appropriate for your individual situation, invest your retirement money and surpluses in a low –cost index fund. Resist the temptation of buying individual stock. Keep in mind that any investment that seems too good to be true is likely to be a fraud. Make yourself financially solid and help your loved ones and others if you can.
Sources:
1- John C. Bogle. The Little Book of Common Sense Investing. 10TH Ed. Wiley, New York; 2017
2- Www. bogleheads.org
