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What are the 4 ways to build wealth?

Here are the 4 steps that you should follow to create wealth over time. Step 1: Save Smartly. Step 2: Turn your monthly saving into investment through SIPs. Step 3: Increase your investment periodically. Step 4: Invest lumpsum when possible.

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When we dream – we usually dream big! A beach house, a BMW, or a piece of land in the moon – there are so many things we want to buy/achieve in life. But, then we think, it’s impossible to create such kind of wealth in our lifetime and slowly start compromising with our dreams. Now, it is true wealth can’t be created in one day, but it’s not impossible to create wealth over time if one is regular and disciplined with one’s investments. In this blog, we will talk about a few things you need to do to create wealth over time. Here are the 4 steps that you should follow to create wealth over time.

Step 1: Save Smartly

Saving is the first step towards wealth creation. Now when we say ‘save smartly’, it does not mean saving whatever you are left with at the end of the month; it is more about learning to manage your expenses in a way so that you can save the amount that you want to save every month. Now, the easiest way to do this is by putting away the money you want to save every month as soon as you receive your salary. And, you manage your monthly expenses with the rest of the amount. For example, say your monthly salary in hand is Rs 1 lakh, and want to save Rs 30,000 every month. So for this, first you put Rs 30,000 away as savings/investments. And then you manage your monthly expenses with the rest of the money, i.e. Rs 70,000. Also, review your spending habit periodically to check if there is any scope to save some more. The most important thing about creating wealth is that you have to be regular and disciplined with your savings and investment.

Step 2: Turn your monthly saving into investment through SIPs

Saving is not enough; based on your financial needs channelize your monthly savings into investments. Now, your investments have to have an objective and accordingly, you should define its tenure and then select the right investment tool for it. This is not an impossible task, but you have to do it right. Here is what you should do. You should define your financial goal, whether you want it to save money for a trip, a car, or retirement etc. As per your goals, decide the investment tenure for each of the goals. Third, now select the right mutual fund as per the investment tenure of your goal and keep investing in it through an SIP every month.

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Since we usually have multiple financial goals with different objectives and timeframes, there should be different SIP investments meant for achieving each of these goals in time.

Step 3: Increase your investment periodically

Your salary increases every year, so your investments should also increase every year. And your investments should increase in the same proportion as the rise in your level of income. That is, if you get a 10% increment at the end of year 1, then in year 2, you should increase the proportion of investments by 10%. Again, at end of the year 2, if you get a 20% hike, then in year 3, your investments should rise by 20%. Let’s understand how it works. Say, you have 3 financial goals – A, B, C. For A, you have a SIP of Rs 2000. For B, its Rs 5,000. And C is Rs 10000. So on getting a hike of 10%, your investments should be Rs 2200 for A, Rs 5,500 for B and Rs 11,000 for C. Now, for a 20% hike next year, your investments should be Rs 2640 for A, Rs 6,700 for B, and Rs 13,200 for C. Now let’s see how your wealth increases over time if keep increasing your SIP amount periodically. Say you have two investments X and Y. For both the investments, you start by investing Rs 10,000 a month with a 10-year goal in mind. Now, for investment X, you keep the investment amount the same, i.e. Rs 10,000, all through. But for Y, you keep increasing the investment amount by 10% every year. Though mutual funds do not provide guaranteed returns, let’s assume that your investments provide 12% annualized returns in 10 years’ time. Accordingly, let’s calculate the corpus. Investment Investment amount in the 1st year Tenure Yearly increase Returns Total amount invested Total Corpus X ₹10,000 10 years Remains the same throughout 12% ₹12 lakh ₹23 lakh Y ₹10,000 10 years 10% 12% ₹19 lakh ₹34 lakh

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So just by increasing your investment by 10% every year, you earn Rs 11 lakh extra over the years. Now, the easiest way to do this is by giving your SIP a top-up boost periodically.

Step 4: Invest lumpsum when possible

Whenever you receive a lump sum in hand – like when you receive a bonus or a maturity amount for an investment – instead of splurging the entire amount, invest a part of it in your existing mutual fund. This way, your money will also grow faster helping you in two ways. Either, you can achieve the goal before time; or if you want to keep the tenure fixed, then at the time of maturity, the amount that you will receive will be more than the target amount. Let’s suppose you are investing Rs 10,000 in a SIP (12% expected returns) with a target or creating Rs 23 lakh in 10 years. Now, in the 5th year, you put a lump sum amount of Rs 5 lakh. That way, you can create a corpus of Rs 23 lakh at the end of 8 years. Meanwhile, if you want to keep the tenure as 10 years, then the amount at maturity would be Rs 32 lakh.

Bottom Line:

They say – Rome was not built in one day. This holds true for wealth creation too. But, if you are disciplined in your saving and investment approach, and follow a few investment rules you can create enough wealth over time to live a comfortable life all through.

etmoney.com - 4 Simple Steps You Should Follow To Generate Wealth - ET Money

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