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Today we are flooded with a lot of information, and 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 from 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 to me?
iv. How can I build a corpus which will let my 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.
The very first step to building wealth is to spend less than you make –Brian Koslow
Now let’s see the laws for 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 toward financial goals like children’s education, marriage, retirement, etc.
3 Key Steps of Wealth Building
Here are the 3 basic steps of Wealth Building.
Hope You will like it.
Follow these simple steps for building Wealth. No Complex theories or Investment Strategies are required.
These steps follow the KISS formula…. well it means… “KEEP IT SIMPLE STUPID”…..!!!!!
HAHAHAH….. just kidding!
1. Pay Off all the Debt and Stay away from New Debt:
This is the first important step in starting your wealth building. You have to first pay off all the debts before starting a serious wealth building (maybe Except Home Loan).
Credit Card Debt is the worst one. So first of all pay off all the credit card bills. After that comes other loans like Car loans, vehicle loans, personal loans, shopping EMIs, or any other kind of debt.
Paying off debt is an investment. No need to pay off the whole home loan before starting wealth building. So first pay off all of your debts. No matter how many years it will take… but this is important. Maybe it will take 3 years or 5 years or maybe more…. but don’t worry…. paying off all the debt is necessary and has proven very effective scientifically and mathematically… If u can pay off your Car loan within a year don’t wait for 3 years.
Stop Borrowing Money NOW! Take a Scissor and cut down all of your credit cards. Don’t pamper yourself by saying that “A Credit card is for emergency purposes. I will use it in an Emergency.”
For an Emergency, you should have an Emergency Fund and not a Credit Card. Replace your credit card with the debit card first. Don’t take any other loans. If buying a car is your necessity then also don’t take loans but instead buy a 2-5 years old second-hand car… but in no way…. borrow the new money.
2. Build an Emergency Fund before doing Investment –
After paying all your debt, the second step is to build an Emergency Fund. Emergency funds MUST have a minimum of 3 to 6 months of your monthly expense. So in case of your disability or Hospitalisation until you claim your medical insurance policy. Or during job loss, your family’s day-to-day expenses can be met easily. If your monthly expense is Rs. 1 lac then your emergency fund must have at least 3 to 6 lacs before you start investing..
Remember, Emergency Fund is for Emergencies. You want to arrange a party for your birthday and u don’t have enough money in your pocket… this is not an Emergency.!!!!
3. Invest For Long Term (more than 10 years ) –
Once you pay off all your debts (Step 1) and build an Emergency Fund (Step 2) then and only do this step. Please don’t try to be over-smart. Kindly don’t jump directly to this step. Otherwise, what will happen? You may have to liquidate your investments in an emergency to pay off your debts and for day-to-day expenses.
Start Investing in Well-diversified, Equity Mutual Funds with a good past track record of at least 5 years via SIP. Don’t see market ups and downs daily. You will gain nothing except stress. Park your money here for long-term means for 10-15 years or maybe even more. Equity has given the highest return over every other Asset Class in the long run in the last century. So it is better that you invest your money in equity funds if you don’t need it for at least the next 5 years.
If you have invested Rs. 10000 Lump-sum in an equity fund before 28 years then in the last 28 years Indian stock market has given more than 20% compounded annual return. So today its value was more than Rs. 22 Lacs. Rs 10000 invested in Nippon India Growth Fund in Oct 1995 could have become Rs 22,38,251 on May 2023. This is the power of Equity and the power of compounding. So, Invest for the long term.
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 the 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 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, setting aside money for children’s education and marriage, and last but not 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 fewer 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.
Bottom line
Another important aspect of the successful execution of an investment plan is to know oneself. 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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