When you know the rules of the game, you have a higher chance of winning or at least playing even.
So you want to know the rules of wealth building? Remember the road to wealth can’t be traveled only on the back of wishful thinking. A traveler on that road must possess discipline and courage – two attributes that great wealth-builders have in copious quantities.
As an individual, you are entirely different from everyone else around you, and hence you must set your own wealth-creation plan, keeping in mind relevant factors like your age, objectives and risk appetite.
Determine your Life Stage
A keen understanding of your life-stage is a pre-requisite of sorts. It will clearly define where do you stand in terms of obligations, responsibilities and duties both in relation to yourself and to others in your family?
Appropriate life-stage planning, indeed, can make all the difference to a wealth creation exercise. Risk-taking abilities keep on altering in line with changes in life-stage.
Here are a few broad life-stage classifications:
- Early life: Typically single, a student or entry-stage professional in business or service. You have a relatively low income but have limited responsibilities to match.
- Change in marital status: Higher responsibilities; need to fortify income from employment or business; change in life style; increase in expenses; risk-taking ability is on the high side
- Mid life: Typically with child/children; increase in work pressure; high level of obligations, often towards dependent parents; lower risk taking ability
- Pre-retirement: Need to round off plans; exercise options; perhaps with lower responsibilities towards children; personal health issues are likely to crop up
- Retirement: Lower income; possibility of taking up post-retirement assignment; higher dependence on earlier savings; higher dependence on children
Personal Financial Statement
Once you determine your life-stage the next is to ascertaining the current financial status. A personal financial statement serves, reflecting one’s assets and liabilities, as the very foundation of the strategy. Such a statement can capture the very essence of an individual’s status, needs and expectations.
The risky part
A successful creator of wealth knows his risks – just as he knows that it is critical to start early and invest regularly. Risks come across as a probable loss, damage or threat. These are often spawned by events, decisions, economic factors.
In this context, the following points are worth considering:
- It is impossible to correctly predict market conditions
- Adverse economic conditions and corporate sentiments, may impact your wealth creation exercise
- Medical emergencies and revision of legislations may also have its effect
How to minimize risk?
Two rules stand out.
- Remember to begin your investment early in life.
- It is important to invest regularly.
Investors need to remember that your requirement changes constantly with time. In order to take advantage of time, an early start has no substitute.
The right asset allocation is a major requisite. An investor who has a modest appetite for risk can not afford to invest in assets that generally qualify as high-risk.
Typically, a young investor (say, a 25-year old) with limited obligations can invest in equity, which is generally considered as a risky asset. He has plenty of investment years ahead of him – and he can, therefore, have the patience to ride the ups and downs of the equity market.
Diversification of assets
At the same time, it is vital to diversify any portfolio. Diversification – that is spreading one’s investment over a range of asset classes – would enable an investor to reduce dependence on one (or just a few) of them. Diversification, incidentally, can be done well through mutual funds which necessarily invest in a pool of assets.
Here are a few quick dos for an aspiring wealth-creator:
- The investor must make an attempt to correctly identify his needs.
- While risks can’t be entirely avoided, their impact can be minimized if the right measures are adopted.
- Follow a strict regime of discipline. A systematic investment plan makes way for automatic payments.
- Change strategy when circumstances warrant such a change.
Major roadblocks in wealth creation
Normally, the two greatest enemies of a diligent wealth-creator are inflation and taxes.
Inflation stems from rising prices, a matter that is far, far beyond the reach of an individual control. However an investor can successfully hedge inflation by investing in asset classes like equity, which will help you over long term.
Taxes too can have a deadly effect, especially if an individual doesn’t follow tax-efficient strategies. Investment in mutual fund will give you various tax benefits, as applicable.
Remember in this context that liabilities have a silent way of increasing. For example, loans and interests on such loans can have a negative effect on wealth. Personal loans, above all else, usually come at a steep cost. Home loans, auto loans and consumption-related loans too can often prove quite expensive for the average person.
A certain individual’s net worth can be depleted on several counts. A decrease in income, depreciation in the value of assets, a step-up in debt obligations or an increase in the cost of living can lead to a decline in net worth.
A wealth-builder will do well to remember that some assets may well lose sheen over a period of time. For instance, shares of companies that are owned by you can decline heavily. Fixed assets may significantly depreciate in value. And hence revision of assets is must – in technical term this is called asset allocation review.
Final Tips for You
The following set of tips may prove handy:
- Regular review of portfolio so as to check the latest scenario.
- Re-balancing portfolio in line with changes in investment objectives.
- Systematic and regular investment so as to build wealth over a period of time
- Listen to sane advice – it is important to contact a financial planner who can guide an investor through the vagaries of the market.
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