New Delhi. For most people, money is like a mystery – they earn, spend, save a little and leave it to the future. But the top 1 percent of the country sees money completely differently. In Sharan Hayes’ popular show ‘1% Club’, bestselling author and financial literacy expert Dr. Anil Lamba revealed that rich people see debt not as a source of fear but as a force for growth. Lamba says that most of the people in India do not understand the real game of money because financial education is not given anywhere in school, college or job. That is why the middle class gets nervous on hearing the word debt, while the rich use it as a means of progress. According to him, saying ‘I am debt-free’ is not always an achievement. Sometimes this means that the person has stopped growing, or is meeting his needs with very expensive equity. Lamba says that equity is three times more expensive than debt. Companies, and even individuals, should shed the fear of taking loans and understand that money works only when it is used to bring high returns at low cost. Rich people understand this rule – they know that debt becomes a problem only when it is accidentally invested in the wrong place.
The science of using debt correctly: Two rules that can change your life
Dr. Anil Lamba explains that there are only two very simple rules to use the loan properly. First- Invest the loan money in such a project where the investment return is more than the cost of the loan. Second- Make sure that the money is returned as soon as possible so that there is no problem in repaying the liability. According to him, unless these two rules are broken, debt becomes the most powerful catalyst of growth. Giving an example, Lamba says that if an entrepreneur wants to start a business worth Rs 100 crore, then instead of Rs 100 crore, he should make a plan of Rs 300 crore – Rs 100 crore from his own pocket and Rs 200 crore as loan. Due to this, not only the business grows faster, but the return of the owner increases manifold. Lamba also questions the thinking of people in which they feel proud by calling themselves ‘debt free’. According to him, this often means that a person is driving all his growth through very expensive proprietary funds. He says that ‘People consider the owner’s investment as free, whereas in reality it is the most expensive.’ He claims that 90 percent of the world’s companies fail not because their products are bad, but because their owners do not realize the cost of their capital. Financial ignorance is the biggest reason for business failure, wrong investment and fear of debt.
Inflation, FD and savings confusion – why is the middle class always left behind?
A large section of the Indian middle class invests its savings in FDs and secured schemes, where it feels that it is earning 6–7%. But Lamba says that the real income is that which is left after reducing inflation. If inflation is 10% and post-tax earnings from FD are 5%, then in reality the person is becoming poorer by 5% every year. Giving the example of Mexico, he said that for some time banks there were giving 80 percent interest, but inflation was 100 percent, which means people were becoming poor at a faster rate than what they were earning. If this situation continues in India too, not only will people’s wealth decrease, but the banking system may also be in danger. Lamba says that the middle class does not understand that the real game is of inflation vs returns and not just interest rates. This is why instead of saving, rich people choose investments that beat inflation – like business, real estate, equity and productive assets. At the same time, in the name of security, the middle class keeps money where it gradually loses its value. This fear does not let them move forward, and instead of using the loan, they keep running away from it.
Financial literacy is the real security – not savings, not distance from debt.
Lamba warns that financial ignorance can ruin any person’s life. They say that there are many such sad cases where people save their entire life, but after retirement they realize that the money saved will not last even six months. According to him, every Indian must understand at least four things – inflation, taxation, compounding and investment. Family, society and job never prepare us for these subjects, hence we keep repeating mistakes throughout our life. He says that understanding money is more important than saving. Real security is neither bank balance, nor FD – but knowledge. If a person understands debt, investment, capital and returns, he can not only improve his financial condition but can also change the direction of future generations. Ultimately his message is clear – learn about money, use debt strategically, and make your knowledge your real asset. The rich understand this principle, so they move ahead. The middle class is afraid of this principle, so it remains standing there.
