Building net-worth as a beginner

More than how much one earns, a high net-worth individual is defined by what she or he does with that money. Building net-worth and allocation of money in respective portfolios of asset classes has been a subject of intense debate in families across the world. Opinion differs and there is no one-size-fits-all answer to this. The subject of money management is hence called personal finance, as it is always personal to an individual and is more often than not structured by one’s family background, cultural conditioning, level of financial literacy and emotional impulse.

Getting rich, financially free and retiring early are the dreams of any individual, but very few reach the desired goals. That’s because financial literacy is limited and one tends to overspend in lifestyle inflation at the beginning of the career, and ends up in a debt trap.

For a youngster who has just started his career and wants to structure his finances to build a net-worth, there are a few broad guidelines. These could help one create a net-worth from the very beginning of his/her career. What percentage of finance should be allocated to which asset class comes much later, when one has a few years of career and savings behind.

STAGE I

Invest in yourself: This may sound to be counter-intuitive to conventional financial wisdom. But investing in self is not at all about indulgences. Most importantly, it’s about not falling into a debt trap, as many youngsters nowadays even get their holidays financed and pay much higher interest cost with their future earnings.

Investing in self as a concept is about investing in your personal growth, be it through higher education or skill development that could land you a better paying job. It should be all about your ability to earn more money in future. Along with that, nowadays, every youngster must ensure to get health insurance, as any health emergency could rob you of your future earnings of many years.

Travelling (if one can afford it without the loan burden) is recommended as it helps one to have more exposure to the opportunities around the world. But it should be carefully evaluated for value for money, and definitely not lifestyle inflation. Your initial one or two years at the start of the career should be focused on investing in self.

STAGE II

gold, an emergency corpus: A lot has been spoken about creating an emergency corpus of 6-12 months as an exigency can hit anytime, including but not limited to job loss. However, most of the financial analysts themselves get confused as to whether or not to put that money in bank savings or fixed deposits. The reason for this is that bank deposits are not tax-efficient avenues to park an emergency fund. And one may not even need to put that emergency fund to use, but can still end up paying the price of negative returns.

Gold is a far better option to invest as an emergency corpus. One can liquidate it as and when needed, and it mostly beats inflation with at least 200-300 basis points year-on-year. So, some exposure to gold actually goes a long way in creating a sustainable net-worth. Gold plays the dual role of safety as well as an emergency option. Gold investment should be around two years of one’s earning.

STAGE III

Venturing into Stocks and funds: At the initial stage of the career, when one is insulated against any potential emergency like health problems or job loss, one should focus on long-term wealth creation through stocks or mutual funds. These financial instruments give sizeable returns over a long period of time.

The caveat here is that one should not be adventurous to gamble in the market (Futures & Options or trading) without financial knowledge. Those with no or limited knowledge of the financial world should restrict themselves to mutual funds. Direct stock market investment is advisable only if one gets educated about the financial world.

Stock market exposure throughout your life should be the percentage of your total asset divided by 100. Say, for instance, you have Rs 30 lakh at the age of 30, then your market exposure should be 100-30 = 70 per cent of Rs 30 lakh, that is Rs 21 lakh. Likewise, with advanced age, one should lower exposure to financial markets, since it is by far the most rewarding but most volatile asset class.

STAGE IV

Acquiring property: The cultural conditioning of Indians has always been to go in for property acquisition at the early stages of one’s career. However, buying property at an early stage of life is not a healthy financial decision. With lesser amount for down payment, one often borrows a higher amount and ends up paying higher interest cost. Many youngsters fail to understand the add-on costs, like closing cost (stamp duty, GST, brokerages, etc) and move-in cost (interiors, etc). But, at a later stage of life, when one is sure to settle in that given location for long and has a decent level of savings, the overall acquisition cost of the property is lesser.

If one can afford to buy a commercial property, then that is also a wiser decision as the rate of interest is much higher with that. Residential property should not be 30 per cent of your net-worth and borrowed cost (EMI) should never be more than 30 per cent of your take-home salary.

STAGE V

Opt for speculative assetS: Speculative assets are for those who are financially settled and can afford to go for high risk and high return assets, like investing in start-ups or cryptocurrency. And by the time one reaches this level of net-worth, one is more or less financially free and can afford to take a high risk for higher returns. Finally, an individual must evaluate the ROI before investing in any asset class. ROI stands for return on investment and definitely not return on impulse.

— The writer is CEO, Track2Realty