When it comes to finances, everyone wants to multiply wealth, but very few are able to follow the basic principles of saving, investment and spending wisely. Legendary investor Warren Buffett once said: “Do not save what is left after spending, but spend what is left after saving.” The key to creating wealth lies in saving and investing.
Wealth, in the simplest term, can be defined as the sum total of all your assets. An asset is any investment that generates positive returns over time. There are various asset classes to invest one’s hard-earned money in. The most common are fixed deposits, real estate, gold, mutual funds, stocks, bonds, provident fund and insurance. Each asset class can be defined by two terms, which are co-related — returns and risk.
Mutual fund SIPs
- Always invest for the long term
- Be patient and stay invested
- Increase investment amount with time
- Be in touch with your financial planner
- Stop your SIP mid-way
- Change the scheme frequently
- Take hasty decisions in volatile market
- Give in to short-term trends/behaviour
- Earn enough to cover your basic needs, and inculcate the habit of saving.
- Manage your spending so that you can maximise your savings.
- Invest in different asset classes so money is properly diversified for the long haul.
Asset allocation: The reason why majority of people are unsuccessful in building wealth over time is not because they didn’t have enough money to invest, but because they didn’t invest their money in the right asset.
“Asset allocation has over 90 per cent weightage in the successful journey of wealth creation. If your portfolio is strategically designed with the right mix of asset class, your dreams can turn into reality much sooner than expected,” says Saksham Diwan, assistant vice-president, Anand Rathi Wealth Ltd.
Beating inflation: Inflation is the silent killer for wealth. If your portfolio is not able to give returns which can even beat inflation, then your wealth creation journey will end before it can even start.
Optimise risk: Every individual has a different risk appetite. Some may be risk-averse, some may be risk-neutral and a few might have no risk at all. Risk optimisation is nothing but making sure that for generating a certain amount of returns, the risk associated with the portfolio is the least possible. This can be achieved only when you have the right mix of assets in a portfolio.
The rule of 72: It’s an easy way to calculate how many years it will take to double your money. Divide the number 72 by the returns expected from your portfolio. The answer gives you the approximate number of years it will take for your money to double. For example, if your portfolio is giving a return of 12 per cent, it’ll take six years for the portfolio to double in value.
Goal-based investing: Having a clear objective makes decision-making easier. Before investing, one should have a well-defined goal. All investments should be made in a way that they don’t deviate from the ultimate aim.
Make a strategy
Whether you want to save money for children’s education, financial independence, home or retirement, finding a suitable strategy is important. While there are no sure-shot ways to get rich, there are genuine ways to accumulate money over time.
Invest in stock market: The stock market is a lucrative way to multiply your savings. By investing in listed companies, one can get dividends and capital appreciation. But before investing in the equity market, undertake thorough research about the companies, diversify your funds, and assess your risk-taking capacity. Evaluate your investments regularly to ensure that they continue to support your long-term goals. You can open a trading account or take the help of a professional financial planner.
Real estate: Investment in real estate can grow in value over time and provide a reliable source of income. When buying a property, it’s crucial to consider not just the price but also the location and maintenance expenses. Before finalising the deal, get the title investigated by an expert and calculate how much money you might make by selling or renting it.
Additional income: If you have a specific skill-set or interest, use it for earning additional income by freelancing and consulting. It is important to search for your intended audience and then dedicate significant time and resources to start your pursuit.
Mutual funds and ETFs: Investors in mutual funds and exchange-traded funds (ETFs) have access to a diverse array of stocks, bonds, and other assets. Since these instruments are managed by experienced fund managers, these are ideal for those who lack the knowledge to manage their wealth. Since investing is a long-term process, it is vital to conduct research and select mutual funds and ETFs that gel with your long-term goals and risk appetite.
Retirement planning: The earlier you start, the better it is. There are many options available in the government as well as the private sector. You can choose from the National Pension System (NPS), run by the Pension Fund Regulatory and Development Authority, or various schemes offered by different insurance companies.
Invest in yourself: Investment in self-improvement has the potential to provide significant results. By improving your professional skill-sets, you can increase the chances of getting a more lucrative job opportunity or by setting up an enterprise. You can go in for online courses which are related to your work profile and help in progression of your career. This will definitely help increase your income.
Automate savings, investments: You can earn additional money by automating your savings and investment. These days, it’s very easy to manage with mobile applications of banks. Give standing instructions for automatic transfer of money from your account for various investments, and you can save wisely. By these methods, you can minimise your impulsive purchases, thereby helping in wealth creation.
Pay off debt: It is the fastest way to multiply your wealth. Don’t take more loans when you are still paying EMIs. Try to pre-pay the debt as early as possible by increasing the amount of your EMI. In this way, the tenure of your loan will automatically reduce and you will be free of debt early.
There are no get-rich-quick schemes. The tried and trusted way to build wealth is through regular saving, investment and having the patience to allow that investment to grow over time.
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