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What are the principles of wealth?

Top 10 Simple Principles for Building Your Wealth Never Spend More Than What You Earn. ... Understand Your Motivation For Wealth Creation. ... Make your Money Work Harder Than You. ... Give Your Investments Sufficient Time to Grow. ... Know How You Can Benefit From The Power of Compounding. ... Know How To Implement Leverage. More items...

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In this blog, we will discuss 10 timeless wealth creation principles that you must know to ensure that you are financially successful during your lifetime.

1. Never Spend More Than What You Earn

If you spend more than what you earn, you will never be able to start on your wealth creation journey. No matter if you are rich or poor, we are all tempted to spend on expensive items like the latest iPhone, an expensive watch, the new Play Station, a vacation home, and so on. But this type of conspicuous consumption might not add any value to your life, while adversely impacting your ability to save money. In fact, most wealthy people actually live quite modestly and this helps them save money that they can later use to grow their wealth. Additionally, if you spend judiciously, you will be able to minimize your debt and this can play a key role in making you financially independent. But, not all debt is bad. Good debt such as a home loan helps you add assets that can appreciate in value and grow your wealth. Bad debt, on the other hand, refers to using borrowed money for purchasing assets that decrease in value over time. While this is actually a poor way to spend your hard-earned money, various financial products like credit cards, no-cost EMI offers, and buy now, pay later offers are designed to promote this illogical behavior. A simple way to reduce the chances of spending beyond your means is to minimize your debt and if possible live debt-free. This can help you can stay on track to reach your wealth creation goals.

2. Understand Your Motivation For Wealth Creation

Trying to generate wealth simply because you want to be richer might not be the best motivation. In fact, if your sole motivation is to make more money, you will find it difficult to stay focused and grow your wealth in the long term. The long-term focus and motivation required to ensure you achieve your wealth creation goals will be possible only if you internalize your goals. For example, you will be more motivated to pursue your wealth creation goals if you have a clear target in mind. Such targets can include saving up for your retirement or saving money for a new car. Other motivations for staying on course to achieve your wealth creation goals can include pursuing an educational opportunity, sponsoring a charitable cause, etc. Having a clear goal and motivation can help you overcome the various distractions that life throws at you so that you stay on the right path to achieve your wealth creation goals.

3. Make your Money Work Harder Than You

All of us work hard to ensure that we make more money. Earning more can help us save more so that we can create more wealth. However, having a secondary source of income by wisely investing our savings can help us realize our wealth goals sooner and with greater ease. One example of such passive income is the dividend income you can earn from Equity shares. In fact, in some cases, dividend earnings can exceed the original purchase price of shares. Similarly, the interest earned from Public Provident Fund (PPF) investments can exceed the original investment if you stay invested for the long term as shown below: Year Financial Year Maximum Investment(₹) Interest Rate Interest Earned(₹) Investment Corpus(₹) 1 2006-07 70,000 8.00% 5,600 75,600 2 2007-08 70,000 8.00% 17,248 157,248 3 2008-09 70,000 8.00% 35,428 245,428 4 2009-10 70,000 8.00% 60,662 340,662 5 2010-11 70,000 8.00% 93,515 443,515 6 2011-12 70,000 8.60% 137,677 557,677 7 2012-13 100,000 8.80% 195,553 715,553 8 2013-14 100,000 8.70% 266,506 886,506 9 2014-15 100,000 8.70% 352,332 1,072,332 10 2015-16 150,000 8.70% 458,675 1,328,675 11 2016-17 150,000 8.10% 578,448 1,598,448 12 2017-18 150,000 7.80% 714,827 1,884,827 13 2018-19 150,000 8.00% 877,613 2,197,613 14 2019-20 150,000 7.90% 1,063,074 2,533,074 15 2020-21 150,000 7.10% 1,253,572 2,873,572 As you can see, by the time your PPF account matures, the interest earned has significantly exceeded the deposits that you have made into the account. But this ability of savings to grow substantially can only be realized if you stay invested for the long term and this investment period can even stretch into decades. So, the earlier you start investing, the better placed you are the maximize the wealth creation benefits from your savings. To understand this better, let us consider an example. Suppose you start investing Rs. 1,000 per month at the age of 25 years and increases his investment by Rs. 100 every year. Now if you continue making this investment for the next 35 years and earn 12% returns on the investment, this is what your investment corpus will look like: Year Investment Per Month (₹) Total Investment Corpus (₹) 1 1,000 13,440 5 1400 100,534 10 1,900 320,401 15 2,400 750,572 20 2,900 1,551,372 25 3,400 3,005,347 30 3,900 5,610,437 35 4,400 10,244,189

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As you can see in the above table, the total investment required to reach this Rs. 1 crore corpus was around Rs. 11 lakh over a 35 year period. This means that around 90% of the total wealth was created by the interest earned from the PPF account while the remainder came from the investments you made.

4. Give Your Investments Sufficient Time to Grow

No matter how well you plan your investments, you have to give them sufficient time to grow. While a young investor might not have much money to invest, time is on their side. The reverse is true for older investors. The latter might have more money to invest but they have little time to watch their investments grow. One way to ensure that your investments have more time to grow is to start investing early in life no matter how small the amount invested is. This would ensure that you can keep adding to your investment corpus slowly and steadily so that you do not have to stress your finances at a later date by trying to save more within a short time later in life. This is why, as an investor, you should understand the value of time and stay invested for the long term to ensure you reach your wealth creation goals.

5. Know How You Can Benefit From The Power of Compounding

Compounding is what makes your investments grow over time. While it is one of the most powerful tools of wealth creation, it can seem like a tall task at first. This is because compounding starts off slowly, but as time passes and your wealth grows, your money will start to grow much faster. This is why how much you investment matters more than your returns when you are starting your investment journey. The below table shows how compounding makes money grow exponentially with the passage of time: Growth of Investment of ₹1 Lakh at 26% p.a. Year Corpus Size 0 ₹1 lakh 10 ₹10 lakh 20 ₹1 crore 30 ₹10 crore 40 ₹100 crore 50 ₹1000 crore As you can see, while it took 20 years to reach a corpus of Rs. 1 crore, it took only an additional 10 years to reach Rs. 10 crore. Within another 20 years, the Rs. 10 crore would have grown to a mammoth Rs. 1000 crore. In the above example, we have assumed a compounding rate of 26% p.a. This can be a tall task even though some investments such as Equity shares have proven themselves to be very effective wealth creators. However, few investments would be able to generate returns of 26% p.a. as shown in the above example. So you might have to settle for lower returns and increase your savings accordingly to reach your wealth creation goals. This is why having a clear understanding of how compounding works will help you grow your savings faster.

6. Know How To Implement Leverage

Working hard and earning more money might not be enough to ensure that you will reach your wealth creation goals. This might be simply because, one has limited amount of time to work after attending to other daily activities. Moreover, all of us have finite capital and there are limits to our investment knowledge and skill. This is where leverage can help you grow your investments faster. An example of leverage is financial leverage where professionals such as fund managers and banks utilize the money of others to earn money for themselves. Other examples are time leverage and technology leverage where the individuals and companies utilize the skills of specialists to achieve more than their own abilities. In fact, correctly applying leverage can help you get to your wealth creation goal faster by taking benefit of others’ skills. One way to apply leverage is to invest in Equities through an Equity Mutual Fund. This gives you access to the skills of a professional fund manager to grow your wealth.

7. Do Not Compare Your Wealth Goals to That of Peers

We have a tendency to compare our personal achievements to that of our peers. These comparisons can range of workplace accomplishments to the monthly salary that one is drawing. When it comes to wealth creation, we might end up comparing our savings to that of others and this can limit our ability to be successful in achieving financial goals. The problem is that these wealth goals tend to change over time. So you need to have clearly defined goals to make sure that you do not deviate from your financial target. One way to do this is to create a comprehensive list of your wealth creation goals for the next 5 years. This list should include details like the specific goal i.e. amount you need to save, how soon you need to reach the goal, a plan to achieve the goal, and also how you plan to reward yourself once you have reached the target.

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8. Do Not Take Shortcuts To Reach Your Financial Goals

As an investor, you are spoilt for choice when it comes to choosing investment options. These include tried and tested investment options such as Mutual Funds, ETFs, Sovereign Gold Bonds, FDs, etc. But beyond these investments options, many are lured by new and untested investments such as non-fungible tokens (NFTs), cryptocurrencies, green technologies, etc. But trying to take a shortcut by investing in these new and untested products might not work favorably for many retail investors. This is because, while these new investments might be exciting, they lack the established track record of the traditional and less exciting investment routes. So, it is better to invest systematically and steadily in a tried and tested investment option rather than trying to take a shortcut to reach your wealth creation goal faster.

9. Never Stop Learning

Learning about money management and financial products gives you an edge in being successful in your wealth creation endeavors. Earlier, finding information about these aspects of finance used to be a tough task, but that is no longer the case. You can now log on to websites like the ET Money website, check on social media, and even use educational apps to get in-depth information about money management and details of how various financial products work. As finding and accessing information has become much easier, you should definitely take advantage of this to continuously hone your understanding of key aspects of money management. If you turn this interest of learning into a lifelong habit, you will be in a much better position to grow your wealth than those who do not learn.

10. Create Greater Value To Generate More Wealth

It has been said that the wealth one generates during their lifetime is dependent on the value that one provides. This relation between value and wealth is the reason why high-level management officials get paid significantly more than entry-level workers. It is the same in the case of companies too. A company that provides products or services that are useful to consumers is valued more highly than companies that do not provide equally useful products or services. The same is true when it comes to wealth creation. Individuals who can provide more value than others will be in a better position to monetize their skills and abilities to create wealth as compared to others. It does not matter whether these skills revolve around entertaining, writing, selling, cooking, etc. If you have the ability to do any activity better than your peers and can monetize it, you will get a headstart in your wealth creation journey.

Bottom Line

Wealth creation is not a one-time activity, it is a process and you will need both time and patience to stay the course. If you incorporate these 10 wealth creation principles into your life, you will definitely be on the right track to reach all your financial goals, no matter what those goals are. After all, you might not be able to control whether you were born rich, but if you set the right wealth creation goals and stay on course to achieve them, you can definitely get rich during your lifetime. We 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 we have written in this blog, do ask us in the comment section below, and we will respond.

etmoney.com - Top 10 Simple Principles for Building Your Wealth - ET Money

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