Wealth creation is an aspiration of all individuals. Wealth creation gives a sense of fulfilment, social status and security. However, all are not equally blessed for wealth creation. It varies individual to individual. In this article, we will discuss the importance of wealth creation, and how you can create wealth successfully.
What is wealth?
Wealth is having assets both tangible and intangible which can generate income or monetary resource. It can be house, business, investments, land, reputation, patent, copyright, jewellery, ships, orchard, farm house etc. Another term equivalent to wealth is Networth. It means value of all assets minus all liabilities. If it is positive a person will be known as wealthy. Higher the networth higher is his wealth.
So wealth creation is a process of acquiring assets and limiting the liabilities. Wealth creation refers to building wealth through several financial products with the aim of gaining high returns over a period of time. How you create wealth depends on your financial knowledge and personal objectives.
The importance of wealth creation
Warren Buffet has very nicely explained why wealth creation is important by saying that “If you don’t find a way to make money while you sleep, you will have to work till you die”. Wealth creation is the solution to it.
- By generating wealth, you ensure a steady flow of income which can take care of your need irrespective of your employment or unemployment.
- Wealth helps in creating further wealth making you a wealthy person in the society.
- Wealth ensures security for self, family and future generation.
- Wealth is a shield to meet economics challenges and conduct a smooth living.
- Wealth helps you to realise the life dreams and fulfil desires.
Wealth creation process
The wealth creation process is different for different people. One process cannot be adopted by all. It depends upon the person’s income level, risk appetite, financial goals etc. However, there are certain principles which are applicable to all. They are as below:
- Inculcate a saving habit. Unless there is surplus over income, wealth creation is not possible. In current economics situations many families are struggling to meet their daily needs. With high inflation, cost of living has gone up substantially. Therefore a family has to be very discipline and mind full about their expenditures so that they can create surplus towards savings.
- Invest the money in the right scheme. Depending upon goal of the investor, the money need to be invested in different schemes. A young person can choose to invest money in equity mutual fund for buying a house in 15 years from now. However, a person in mid-forties should not invest equity mutual fund. He may choose to invest in hybrid funds. Likewise, depending upon age, purpose, investment should be made in the right scheme.
- As you progress in your work life, your income also increases. So, keep enhancing your investment year on year as income increases.
- Choose different product for different goals. You may think of NPS, PPF etc for retirement corpus. However, Mutual Funds schemes are right product for creating corpus for education, marriage etc. A corpus for emergency has to be built through liquid funds.
- Delay your gratifications. Markets are abundant with choices and options. Therefore there will be a tendency to fulfil your desires immediately, even if you don’t have means. Banks and institutions are also readily giving loans. Such traps may derail your effort to create wealth. So you need to stay focused and delay your gratification, if any.
- Remember that wealth creation is a continuous process. So, after you make a plan, follow it in a disciplined manner. Make the right choices with investment instruments, and you will succeed in creating wealth over time.
Do’s and don’ts of wealth creation
- Start investing as early as possible. The magic of wealth creation lies in benefit of compounding. It means along with the invested amount, the return on investment also earns. The effect of compounding is more when the frequency of compounding is high like daily, weekly, monthly quarterly, half yearly and yearly. So more an investment gets time, higher return it gives.
- Put your investment in various short, medium, and long-term financial goals. Short-term financial goals are those which you propose to fulfil with 3 years or less time. Example vacation, buying gadgets etc. Medium-term goals are usually investment goals that have to be achieved within a period of 3 to 5 years. Examples saving for a new car, saving for the down payment for a new house, etc. On the other hand, long-term goals such as ensuring sufficient retirement savings can easily have an investment horizon that extends into multiple years and even decades. In this case, you need to ensure that you create enough wealth during your working life to support your post-retirement financial needs.
- Adopt different strategy for each of the goals. If you are saving for a financial goal that you need to reach within 3 years, you have to prioritize the safety of the amount invested over the potential returns you might get from the investment. That’s why low-volatility options like Liquid Funds and Fixed Deposits are the best investments for short-term investment goals. But even though the safety of your investments is important, you have to prioritize growth of your investment to achieve long-term financial goals. A common instance of this mistake is opting for fixed return investments such as Fixed Deposits (FDs) over Equity-oriented investments such as Flexicap Funds when saving for long-term goals like retirement or a dream house. The idea is to generate a return from the investment which is above inflation after adjusting for taxes. A FD return cannot beat inflation after tax adjustment.
- Assess your risk tolerance before investing. Each individual has different risk tolerance level. Since any type of investment carries risk, high or low, know your risk absorbing capacity. If you are a person who can not tolerate high risk go for low or medium risk product like, debt, mutual fund, FD, PPF, liquid fund etc. If your risk bearing capacity is high go for direct equity, equity mutual fund etc.
- never stop or discontinue your investment. During your investment journey, you will face many hinderances and challenges. There will be situations when you have to choose between investment and expenditure. Best option to avoid such situation is to have emergency or contingency funds. Alternatively, manage to overcome such situations by some other means. But never stop or discontinue your investment. Because once discontinued, it is very difficult to catch up again. Further, you lose the compounding effect once stopped or discontinued.
- Avoid easy and quick return schemes. Return on investment is linked to market vagaries. There are market elements who knows the investors frustrations and lure them to easy or quick return schemes. These are illegal and unprotected scheme. Never fall for these.
I hope you found this article useful. If you did, please share it with your friends and family and help us reach more people. If you have any questions or you need clarification on what I have written here, do ask in the comment section below, and I will be happy to respond.