Today we are flooded with a lot of information, much of it is useless since it does not meet our investment needs. Whatever is relevant, may not always be comprehensible, so we are unable to derive benefit out of it.
We begin by asking the following questions:
Knowing individual needs
i. What to do when I face an unforeseen circumstance with large monetary implications?
ii. What kind of savings do I need at each stage of my life?
iii. What are the best tax saving options available with me?
iv. How can I build a corpus which will let me wealth grow without inviting too much risk?
Answers to these questions provide the basis for the investment plan to be drawn up. Once this is done the investor can take a simple approach to give shape to his wealth creation plan and dreams.
First, let’s see what’s wealth creation.
What is Wealth Creation?
Wealth Creation is the process of creating and establishing a stable source of livelihood so that one doesn’t struggle to make ends meet.
The simple way to wealth creation is to
- begin early,
- invest for the long term and
- invest in appreciating assets.
Now let’s see the laws to wealth creation.
What are the Laws for wealth creation?
The laws are:
1. To spend less
2. To invest surplus
3. And let the money grow
Now let’s see why wealth creation is important.
Importance of Wealth Creation
1. Regular source of income: Investing in appreciating assets helps you earn regular income even after retirement. It helps during emergencies, like a health crisis or other such emergencies. It helps to sustain the standard of living.
2. Happy Retirement: Wealth creation is important for a happy retirement as it helps you fund the years after retirement.
3. Goal-based investing: Having a financial goal helps you focus and achieve it. Goal-based investing is to measure the progress in wealth creation towards financial goals like children’s education, marriage, retirement, etc.
Simplicity as a strategy
Simplicity is the essence of good investment management practice and hence a recipe of simplicity is presented:
i. Opt for simple products
ii. Follow a simple plan
iii. Believe in simple execution of the plan
It is always difficult to cope with complex investment plans, especially if one is not sufficiently proficient in handling them. It might even result in the erosion of wealth due to a lack of knowledge and expertise required to implement such plans.
We present a few rules which are based on the simplicity strategy discussed above and which can be adopted for eliminating stress in the process of building wealth:
1. Product simplicity
Before investing in a product it is necessary to make sure what the product is about, why it is intended to be invested in, and if at all it fits into the scheme of things in the overall investment plan. It is always advisable to purchase investment products that are easy to understand and can be explained to someone else in an unambiguous manner. Researching investment products before investing, helps you gain the financial security you need.
The future is uncertain and the longer the duration of the investment the more uncertain the returns. A lot of things could change in the long run, from government policies to industry patterns and of course demand-supply parameters. So if the investment option is in the form of alternative investment or in options that are likely to be volatile in the future it is better to avoid them.
2. Simplicity in Planning
For wealth creation, it is imperative to draw up a plan and it is also necessary to make the plan in a manner that makes it achievable. It is important to span out the major requirements of life like – purchasing a house, set aside money for children’s education and marriage and last but not the least, retirement planning.
Once the spanning is decided, investment is to be made in a manner that the returns are enough to meet the demands of the particular event at the right moment.
It is a fact that gains and losses are two sides of the same coin, so an investment that might be giving good returns in year one may not continue to do so in the years to come. A simple plan will ensure that contingencies are in place to take care of eventualities like this.
What is an Ideal Wealth Creation plan?
A wealth creation plan should cover questions like how much should be invested for each goal, and how much to be invested in equity and debt.
The steps for an Ideal wealth creation plan are to:
1. Create a budget
2. Understand the impact of inflation on saving.
3. Invest in appreciating assets
4. Become Debt-free and
5. Cut unnecessary expenses
How does a wealth creation plan help?
A wealth creation plans help to
a. Identify your financial goals
b. Make investments
c. Follow the plan
3. Simplicity in Execution
For the successful execution of any plan, the objects which form part of the plan should be easily manageable. Likewise, in investment plans, the number of products at hand will decide the ease of execution. The less the number to handle, the easier it is to research and review them.
Before you invest, look at your financial situation, especially if you have never made a financial plan before. Find out your goals and your risk tolerance. Based on your risk tolerance fix your financial goals.
All investments in the plan should be reviewed and measured against the planned expectation. This method is known as benchmarking. Through benchmarking it is easy to measure the performance of the investment portfolio against the requirement and expected return. If there are any changes then you can rebalance or revise it, to minimize the risk.
Another important aspect of the successful execution of an investment plan is to know one self. It is most likely that mistakes will be made and we may or may not react to a particular situation. Knowing our instincts and psychology is essential as they have a direct bearing on the creation of wealth. Making the process stress free depends on us, whether we can keep it simple is entirely up to us.
If you have any comments or questions, write them in the comment box below.
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