How to Grab the Key to Wealth Creation

  • 27th Jun, 2018

Home and work, quality time between own parents and in-tlaws, affection for children, the list items in your life that require balancing acts is a long one. In that list features another item relating to the balancing of financial needs of today and tomorrow. While you need to meet essential expenses like transport to work, monthly grocery and utility bills, there are also recreational expenses like going to the movie and dining out. At the same time, you need to save enough for the future to buy a home, children’s higher education and retirement. So, how do you enjoy the present even as you secure your future? The answer to the question lies in understanding the wealth creation process. Wealth creation needs regular savings which has to be invested well to create ample wealth for future needs. The issue is how do you maintain this constant supply of savings to your wealth creation  factory? Here is a thought most financial experts echo. 

‘To create wealth, one has to invert the traditional thinking that savings should be done after meeting all the expenses. On the contrary, expenses should be met after adequate money has been saved on a monthly basis,’ says Rajesh Iyer, CEO, DHFL Pramerica Mutual Fund. But what is the rationale behind this approach? ‘Saving alone is not enough for wealth creation. Money needs to be invested systematically in  assets like equities and equity mutual funds that beat inflation over the long term. For wealth creation, one needs to stay invested for a reasonably the long time,” adds Iyer. Just in case you think that’s a big ask, Sampath Reddy, chief investment officer, Bajaj Allianz Life Insurance has some handy tips for you. 

Income, expenses and financial goals “One needs to understand one’s reality when it comes to saving and investing. Try and be aware of your monthly income and expenses, and find out where you can save money. Wealth creation towards a particular goal will help decide how to invest the money,’ says Reddy. What if your expenses are always closing in on your regular income in hot pursuit and you typically save low amounts? ‘Sometimes an individual may not have a lot of money saved at the end of the month. However, even a small amount invested in a methodical manner can help create wealth in the long-term, due to the power of compounding,’ suggests Reddy.  A compass called financial planning Periodic savings needs to get. directed to the right investments. 

Remember, you need to have the right amounts at the times of you need. This is where financial planning works hand in glove with wealth creation. Reddy defines financial planning as: “The entire process of making a list of your life goals, having timelines towards each one of them and an investment plan against each life goal is financial planning,” says Reddy. ‘Once an individual gets into the habit of financial planning, he invariably also gets on route towards wealth creation as financial planning brings in a bit of discipline and patience, the key ingredients for wealth creation,” he adds. Sums up Brijesh Dalmia, founder, Dalmia Advisory Services and a leading financial planning expert, “Wealth creation is an extension of financial planning.” 

With the wealth creation process broadly in place, let’s look at some of the things you must do and must avoid, in order to create ample wealth. Wealth creation must dos For starters, you need to take the help of a qualified financial adviser to create a financial plan for you. This will give you an idea of the amounts you need to save for your various financial goals and the regular investments you need to make. Thereafter, you need to assess whether what is left is enough for your family to enjoy a decent life in the present. If not, you might want to postpone or downgrade some of the financial goals. So, you may want to postpone your home purchase by a year to four years instead of three and look for a two bedroom apartment, instead of a three bedroom apartment. Of course, it is a great idea to have a home budget where you list and track your essential and non- essential expenses, and establish a financial discipline. 

But doing that, or cutting down expenses, may not be enough to deliver the goods.  Vote for equities Next, when you make investments you need to get help from your financial advisor on investments that are broadly aligned to your risk appetite. At the same time, for distant needs like children’s higher education and retirement, you need to invest in higher risk investments like equities that typically provide high growth. “Remember, that one of the key objectives of wealth creation is to beat inflation by a healthy margin over the long term. Equities has been one of the top performing asset classes over the long term and has managed to beat inflation,” says Reddy. But what about the turbulence in equity markets impacting investments? “Although it comes with intermittent volatility and downside risk, past data shows that longer the holding period for equities, limited is the chance of generating negative returns,” says Reddy. 

Individual investors typically do not have the time and expertise to invest directly in equities: they can get the benefit of growth from the financial products that invest in them. Equity mutual funds and other mutual funds that invest in equities is one large set of options offered by mutual funds. Life insurance companies offer unit linked insurance plans (ULIPs) which provide a combination of life insurance and growth investments in equities. Depending on your family’s needs and based on the advice of a qualified financial advisor you can consider various options like these. When making investments you need to also ensure that they are tax efficient since you will get to retain a greater portion of the growth of your investments. 

Wealth creation no-no When you create wealth, you create future income. The reverse happens when you take loans where you are committing your future income to loan repayments. Therefore, you need to be very careful about the loans you take. Experts suggest that you take loans that could add to your income in the future like an education loan. A loan like home loan that saves you money in the form of rent or creates future income in the form of rental income also gets their approval. Since high cost loans are sometimes unavoidable, it is suggested that one opts for lowest amounts of such loans with lowest possible interest rates and are retired as soon as possible. Anything that makes you deviate from your financial plan without considerable thought and analysis also needs to be avoided. This includes reacting to news about markets, interest rates and not to forget, free but unqualified advice from relatives and friends. 

Experts like Dalmia also urge people not to use accumulated wealth for current needs like a car down payment, no matter how tempting it might be. They also suggest that they avoid making many investments since tracking their progress becomes a problem. Clearly, smartly balancing today’s and tomorrow’s requirements is the key to creating ample wealth for future needs. In this endeavour, a sound financial plan comes to your assistance to chart a path that will lead up to the various milestones of your life goals. 

The author is a personal finance expert and founder of FundooMoney Media, an e-learning company  

UDAYAN RAY

Brijesh Dalmia FOUNDER, DALMIA ADVISORY SERVICES “Wealth creation is an extension of financial planning”  

Sampath Reddy CHIEF INVESTMENT OFFICER, BAJAJ ALLIANZ LIFE INSURANCE “Even a small amount invested in a methodical manner can help create wealth for in the long-term due to the power of compounding”  

Source : Outlook

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