The definition of wealth varies from one person to another. For some, it could be being so rich that they don’t have any financial constraints. For others, it could be about earning enough money to meet their financial expenses. However, they could be rich, yet not wealthy. They may be wealthy, yet not rich. ‘Rich’ is a comparative definition, while ‘Wealth’ is an individual perception.
Let’s take an example.
Person X is richer, but his financial portfolio has a higher debt as compared to Person Y. Person Y not only has a lesser debt vis-à-vis his assets, but he also has more money at hand to invest and re-invest. Person Y is wealthier, and that’s who you should try to be.
In simple terms, wealth should give you the financial freedom to do what you want to do in life. It doesn’t matter how much you are earning. What you should look at is whether you are investing your money intelligently today, so that it buffers you against all expected and unexpected financial risks in future. Wealth should aim to keep your debts in check, and to create a huge financial corpus. So, that if you are not earning at one point of time, your cash inflow from your investment should be able to let you live your desired lifestyle.
You must also understand that wealth is not built overnight, rather it is a disciplined and systematic process. Now that you know the right definition of wealth, here is your investment guide to securing your wealth.
1. Start Early
Ideally, you should begin your investments from an early age. In fact, as early as your first salary or business income! The earlier you start, the more money you would have to invest and leverage the compounding rate of returns.
2. Plan Your Finances
List down all your short term and long term financial goals along with timelines. This would help you to set a budget and give an idea how you want to save and invest. Most of these goals would align with the key milestones in your life.
- Education and Marriage of Children
- Care for Parents
- Contingency Fund
3. Educate Yourself / Take Professional Advice
As an investment beginner, you may have various apprehensions in mind. You may be unsure about your risk-appetite or investment style. You may not know what is the risk-return trade-off or what are the different investment options available to you? Hence, you should educate yourself to establish your comfort and confidence level with your investing habit. You can read articles and books on investment and speak or listen to seasoned investors. You can even hire a professional wealth manager, who can give you a strong ‘wealth creation’ start, taking every tiny financial detail into consideration.
4. Save, Invest and Spend in That Order
You should allocate a major part of your income towards savings and investment. At any given point of time, your savings should be equivalent to these two buckets: 1) 6-12 months of your routine expenses and, 2) Emergency Fund. After your savings in place, you should think about investments.
If you are a spendthrift, then it would be a good idea to create a separate savings account and set up an auto-debit instruction for a monthly deduction of ‘X’ amount from your salary account.
5. Keep a Long Term View
When your goal is to create wealth, it’s very crucial to keep a long term horizon. The objective behind wealth is to let it increase steadily, over a period of time. If you are planning to withdraw your investments within next 3-5 years (let’s say for buying a house), it would be advisable to invest in financial instruments with a short-term tenure. Long term options, such as equity funds can absorb the market volatility and can reward higher and better returns.
So, be honest with yourself – invest only that amount which you aren’t going to require for at least next 7-10 years. And, be patient.
6. Don’t put all your eggs in one basket
The ‘Don’t put all your eggs in one basket’strategy will ensure that you take a calculated risk and diversify your interest. Your financial portfolio should be a good mix of debt and equity funds, depending on your financial goals and risk tolerance. Also, do remember that your life protection is also as vital as your financial protection. So, you should set aside a portion of your investment towards a life insurance policy.
You could also consider investing in an all-purpose wealth plan, which not only saves money and grows wealth, but also covers your life. The wealth plans from ICICI Prudential are a fine example of this kind of investment. These wealth plans allocate your money in equity and debt funds so that your investment is both secured as well as offers good returns. Additionally, you get a life insurance coverage and tax-saving benefit.
7. Track Your Investments
Monitor the performance of your investment against your financial goals. If required, you can reset your goals or review your investment strategy. However, at the same time, do not overdo the tracking. Keep a weekly or fortnightly check and follow your gut instincts.
8. Learn from Your Mistakes
In spite of being a prudent investor, do understand that you do not have a control over the financial market. Even the most matured investors can go wrong in his calculations. So, be prepared for some bumps (losses) on your way. Learn from your financial mistakes and move ahead.
Are you now investment ready?