By BankBazaar | 13 Sep, 2013, 12.32PM IST27 comments | Economic Times
Although the process of building wealth is not complex, it is difficult to implement, simply because of the discipline it requires.
Building wealth is a topic often spoken about by many, but followed by very few. The reason for this is that wealth creation involves time and a lot of effort. Although the process of building wealth is not complex, it is difficult to implement, simply because of the discipline it requires.
Here are a few simple steps which will help you build your wealth:
The Earlier, the Better:
It is often said that the earlier one starts investing, the better it is to grow your money. As with anything else in life, investing also benefits with an early start. The principle of compound interest works magic on building money.
When you begin your career it is understandable that the initial salary will be low. However, even small amounts of savings in good investments will help in slowly and steadily building your wealth.
For example, let us look at the case of Raj and Shyam. Raj who is 25 years old needs to invest Rs. 1,500 per month for the next 35 years to build a corpus of Rs. 57.4 lakhs at the return rate of 10% pa. Now Shyam who is 30 years old will need to invest close to Rs. 2525 per month at the same return to accumulate the same corpus after 30 years, assuming both retire when they are 60 years old. A difference of 5 years in investing results in a difference in savings needs of over Rs. 1000 per month over the entire tenure of investment. Hence remember to understand the power of compounding and start your investment plan early in life.
Another mantra to build your wealth is regularity and discipline in investing. Often, a break in investing plans disrupts your goals and hampers the growth of money. The best way to make sure you are not irregular in saving is by starting Systematic Investment Plans in good quality mutual funds.
Try and automate this so that you do not forget your monthly investments. Also, if at any point, you happen to miss investing in a particular month, make it up for this in the subsequent month by investing double the amount. You must also look at upping your investment amount gradually, as your income increases.
Long Term Investing:
Often, people complain that despite being regular in investing, they do not see a growth in wealth. This is because they withdraw the money invested frequently, not giving it a chance to grow. Remember that the longer you leave money invested in a good investment option, the higher it will grow due to the compounding effect.
Having said that, remember to regularly review your investments to assess its performance. If you find a particular investment giving you very poor returns, you must immediately withdraw your money from such an investment and invest in better performing assets. Also remember to track your investments regularly and modify your asset allocation pattern depending on your age and risk profile.
Keep Yourself Updated:
Another important thing to be remembered is make sure you have the required knowledge in an investment class before investing in it. For example, Priya had heard a lot about derivatives and how investing in derivative instruments gives handsome returns. However, she did not have any knowledge about this. Nevertheless, she blindly went ahead and invested a sizeable amount of her savings in various derivative instruments.
The global recession saw a crash in stock markets, and as a result she lost almost all of her investment. Hence you must always have knowledge of both the pros and cons of any investment, and must invest in learning and upgrading your skills for the same. However, remember to always do your research before investing and not blindly follow the advice of anyone else.
Understanding the Ratios:
Track all your income and expenses regularly to understand your cash flow positions. If you are left with a surplus cash flow month after month, it means you should start investing more in order to grow your wealth. On the other hand, a constant deficit in your cash flows spells trouble and it means you must watch out for your expenses or look at ways of boosting your income.
Insurance is an often neglected aspect of building wealth. Although it does not result in direct building of wealth, it helps in times of emergency by providing the necessary risk cover. These simple steps will help you grow your money steadily and systematically. Building wealth requires a dedicated effort from your end, as there is no short cut to achieving wealth.
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