To be free of any financial troubles is a dream shared by many. To realise this dream, however, you need a solid plan for creating and managing wealth. Let’s understand what wealth creation is exactly and how you can speed up the journey to building financial wealth and security.
What is Wealth Creation?
First things first – wealth creation meaning can be understood as the process of increasing your wealth over a long period of time. You can create wealth by:
- Increasing your primary income by advancing your career.
- Finding ways to earn money with minimal effort, that is, earning a passive income. An example of passive income is income earned through rent.
- Saving more money with the help of a realistic budget.
- Putting your money to work by investing in assets such as mutual funds and stocks.
There are many other steps involved in wealth creation but ultimately it is all about growing your money so you can secure your family’s future and realise your all financial dreams with ease. Naturally, this is a long process, one that demands consistent effort, patience, and careful planning. But there are ways you can accelerate it. Have a look at eight ways you can speed up the wealth creation process:
Tip 1: Create a Wealth Creation Plan
The simple path to wealth creation starts with a plan. Here are three key things that your wealth creation plan must clarify:
Your Financial Goals
Financial goals tell you about where you want to be in the future and how you want to use your wealth. Do you plan on sending your children abroad for their higher education? Travel the globe in your retirement? Or simply leave an inheritance behind for your loved ones? Clearly defining these goals helps you set realistic expectations about how much wealth you need to accumulate and in how many years.
Your Risk Tolerance
Risk tolerance refers to how much risk you are comfortable taking and how much risk your current finances allow you to take with your investments. Your investment choices and risk tolerance should always align.
Your Financial Situation
Financial situation includes factors such as your income, expenses, liabilities, assets, and savings. A thorough assessment of income and expenses will help you create an effective budget. Your liabilities include debts such as education loans. Slowly reducing these liabilities will free up funds to invest in wealth-building options. Assets represent your properties and investments, and savings cover your bank balances and emergency funds.
As your financial situation is a continuously evolving factor, you should review and update your wealth creation plan as your situation changes. For example, if you’ve paid off a debt completely, you should reallocate the funds you were using for debt repayment toward new investment opportunities.
Tip 2: Start Early and Invest Consistently
An early start will help you harness the power of compound interest. Compounding happens when the returns on your initial or principal investment start generating their own returns. You won’t see the effect of compound interest during the early stages of your investment, but as time passes, you’ll begin to notice its exponential impact and understand why it is called the ‘eighth wonder of the world’.
Consistency is also important when investing for wealth creation. You’ll notice one habit of financially successful people is that they take a disciplined approach to investing. Even if you start small, an early start and consistent contributions over time can lead to considerable growth.
Systematic Investment Plans are excellent options for achieving both these goals. With an SIP, you can start investing in a mutual fund for as little as Rs. 500, and invest consistently. SIPs also prevent you from timing the market. Direct equity investors often wait for the perfect moment to invest. They try to predict when the market will peak or bottom out, which can lead to missed opportunities, stress, and inconsistency. SIPs, however, benefit from rupee cost averaging.
Since you are committing to invest a fixed amount at regular intervals, you buy more units when the NAV is low and fewer units when the NAV is high. The overall cost of your investment averages out over the years, and you don’t have to wait around for the perfect time to invest.
Tip 3: Diversify Your Investments
The performance of an asset class depends on the market conditions, and not all types of financial assets perform the same. For example, when the inflation rate is high, the value of existing bonds decreases. Meanwhile, high inflation rates can greatly benefit stocks of companies producing inelastic products such as consumables. Similarly, under other conditions, the stocks of pharmaceutical companies may skyrocket while the stocks of automobile manufacturers fall freely. When investing for wealth creation, it is important to diversify your portfolio to reduce the risk posed by fluctuating market conditions.
Diversification means investing in a variety of assets across different sectors and industries. This way, should one asset or sector underperform, the rest of your portfolio can help balance the overall risk and reduce any losses. Mutual funds are inherently diversified. For example, every rupee you contribute to an equity fund is spread across 40 or 50 stocks from different sectors and industries.
Tip 4: Minimize Debt and Liabilities
Many individuals in our country struggle with debt. If not managed well, debt can severely hinder your wealth creation journey. There are different ways to manage debt, such as the debt snowball method, where you pay off the smallest debt first and build some momentum to tackle the large debts, and the debt avalanche method, where you prioritise paying off the loans with the highest interest rate first. This method helps you save more money in the long run.
An important thing to remember here is that not all debt is bad. For example, taking an education loan for higher studies can help you earn a higher salary down the line. Similarly, a home loan can help you build a long-term asset, the value of which will only increase over time. It’s also wise to keep an eye on your credit score. A good credit score will allow you to get quick approval for loans at lower interest rates. So while debt should generally be avoided, it can also be beneficial if you are borrowing within your means and have a clear repayment plan from the start.
Tip 5: Focus on Long-Term Growth
When it comes to wealth creation, a patient approach works best. Hearing about the success stories of some investors who made quick gains in the stock market or cryptocurrency can be tempting, but these short-term wins often come with very high risks. More often than not, people lose money as they treat the stock market as a gambling platform. For most people, a focus on consistent investing and long-term growth is a more reliable and sustainable strategy for wealth creation.
Tip 6: Utilize Wealth Management Services
Wealth managers can help you create a personalised financial plan that includes:
Investment Planning
This involves assessing your financial goals and risk tolerance to design a tailored investment strategy.
Tax Planning
Wealth managers help you legally minimise your tax liabilities by taking advantage of various exemptions and deductions.
Retirement Planning
Through wealth management services, you can accurately determine the amount you would need to live your desired lifestyle during retirement and get recommended appropriate investment options to achieve your retirement goals.
Estate Planning
Also called succession planning, estate planning makes sure that in the event of your demise, your wealth is transferred to your heirs or loved ones as per your wishes.
Consulting with a wealth manager can significantly speed up your wealth creation journey.
Tip 7: Keep Expenses in Check
You can’t create wealth if you spend more than you earn. The most effective way to keep spending under control is through budgeting. With a monthly budget, you can track your expenses and figure out areas where you might be overspending. A budget allows you to see exactly where your money is going and helps you prioritise savings and essential expenses over non-essential ones. Unnecessary spending can deplete your savings, prevent you from investing, and even force you to take on debt, so practise financial discipline and remember, a penny saved is a penny earned.
Tip 8: Continuously Educate Yourself
Learning about personal finance and financial products can do wonders for your wealth creation efforts. Knowledge in itself is a kind of wealth, so the more you know, the better your decisions will be. For example, you can educate yourself about:
How The Market Works
This is a wide topic that covers a number of things such as learning about what makes a stock or mutual fund worth investing in, why stock prices go up and down, what role inflation and interest rates play, and when you should buy or sell your investment. Learning about market cycles and trends will equip you with the ability to make efficient and well-informed decisions.
Taxes
Taxes are an annual obligation that can take a significant bite out of your hard-earned money. There are many ways to reduce one’s taxable income which most people aren’t aware of. Reading about these benefits, deductions, and exemptions can help you speed up your wealth creation journey. You can also consult with a tax advisor who can educate you about the impact of taxes on your investments and how you can maximise your savings.
Risk Protection
Risk protection is all about transferring the risk posed by unforeseen events to insurance companies. After all, wealth creation isn’t just about accumulating wealth but also about protecting it. A serious medical condition can quickly deplete what took you years to earn, so it’s essential to have comprehensive health insurance for the entire family.
Similarly, an untimely demise of the main earner of the family can put the financial future of the dependents in danger, but life insurance can help beneficiaries maintain their standard of living and meet their financial needs. You can also explore alternative options such as ULIPs (Unit Linked Insurance Plans), that combine the benefits of life insurance with investing.
Emergency Planning
Emergency planning is about creating an emergency fund, which is a reserve of cash you use only to cover unforeseen expenses such as home repairs. Learning about emergency planning will help you understand how much you need to save and where, and the many ways doing so can benefit you.
Different Investment Options
There is a wide variety of investment products available in the market that suit different investors. Knowledge about these products will help you select the most suitable options and also enable you to build a diversified portfolio tailored to your financial goals and risk tolerance.
Conclusion
The road to creating financial wealth is long and challenging. It takes patience, discipline, and a long-term vision to stay on course. It may seem intimidating at first, but remember that a journey of a thousand miles begins with a single step. A wealth advisor can be the perfect partner to bring along on your adventure, so take your first step towards wealth creation today!
