Every now and then, we come across a rags to riches story where a person would win a big sum of money in a lottery or perhaps a game show. While it surely evokes strong emotions and garners attention in the public eye, these stories are few and far. One would be lucky to get their hands on such prize money, but financial wealth isn’t created overnight. Instead, it’s accumulated through careful financial planning over a period of time.
Given these misconceptions, it is often easy to see why so many people usually refrain from taking the actual steps to achieve their financial goals. However, building wealth is not a gigantic task if a disciplined method is followed. Channelling expenses in a positive and meaningful way can help one accumulate enough wealth.
Pay Yourself First
Paying yourself first is perhaps the most effective wealth-building habit. It is in fact one of the easiest to implement as well. By implementing this simple strategy, you end up directing part of every paycheck to a savings account, mutual funds, or any other investment vehicle, forcing yourself to live on less than you make.
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Start Saving Smartly
While saving is the first step towards wealth creation, it is also a matter of saving smartly. It is not about saving whatever you are left with at the end of the month but it is about managing your expenses in such a way that you can accumulate wealth over a certain period of time. The easiest way to do so is to put away a certain amount of money in a different account, as soon as you receive your salary and then manage monthly expenses with the remaining amount. For instance, if you earn Rs 1, 0,0000 a month, it is advisable that you set aside at least Rs 30,000 for savings and investment purposes on a monthly basis. Gradually, this will help you accumulate wealth and create a corpus. The most important thing about creating wealth is being regular and disciplined with your savings and investment.
Invest Monthly Through SIPs
Saving only is not enough. Channelizing expenses into proper investment options is the key to generating wealth over time. Investing in monthly systematic investment plans (SIPs) is a great way to create wealth over time. However, having a financial goal in place can help you pave the path of wealth creation in a much better fashion. Here’s what one can do –
- Define your financial goal, for instance: saving money for a car or retirement
- Decide the investment tenure for each goal
- Select the right mutual funds as per your investment tenure and keep investing through SIPs
Since we usually tend to have multiple financial goals with various objectives and timeframes, it is better to opt for different SIP investments aimed at achieving the goals.
Also Read: Financial Planning: Six money lessons from year 2022
Increase Your Investment Periodically
Just as salary increases every year, your investment should also increase every year. For example, if you receive a 10 percent increment at the end of year 1, then in year 2 you must increase your investment proportion by 20%. Similarly, if you receive a 20% hike in year two, then in year three, you should up your investment by 20%.
Say, you have 3 financial goals – X, Y and Z. For X, you have a SIP of Rs 2000. For Y, it’s Rs 5,000. And Z is Rs 10000. So on getting a hike of 10%, your investments should be Rs 2200 for X, Rs 5,500 for Y and Rs 11,000 for Z. Now, for a 20% hike next year, your investments should be Rs 2640 for X, Rs 6,700 for Y, and Rs 13,200 for Z. This way, gradually it will lead to accumulating wealth.
Create a Financial Safety Net
Having a financial safety net is essential to cater to expected expenses like retirement or a child’s education is not always enough. Having an emergency fund in place is highly essential to address uncalled-for incidents – such as an accident or a medical crisis. Build up an emergency fund to the value of three months’ income
Just as Rome was not built in a day, so is wealth creation not an easy day job. It takes years to draw the benefit of savings after earning for several years. Wealth creation requires meticulous financial planning and most importantly regular discipline.
(By Shilpa Mahna Bhatnagar, Founder, Haeywa)