The dynamics of long-term Wealth Creation differ markedly from the dynamics of Wealth Management. The former involves putting together a sizable corpus of money over time, whereas the latter involves investing an already created corpus in line with one’s risk tolerance and investment objectives. A few people get wealthy from ‘black swan’ events (think – a lottery win, or a start-up venture getting sold for millions or ESOP’s getting encashed), and they naturally make the headlines. However, for most people, the path to wealth creation will likely be paved with consistent, arduous efforts towards managing their spending habits and saving patterns.
Live below your means
This is the most important “golden rule” of wealth creation, and a difficult one to adhere to in today’s age of aggressive consumerism. Conversely, many people haplessly live above their means – and this vicious cycle of earning followed by debt servicing completely negates any chances of their creating wealth from their savings. It is absolutely imperative that we live below our means at all times, so that there’s enough left over to save consistently, and not in an ad hoc manner. As a general rule, one must aim to not spend at least 30% of their post-tax, net income each month. Pay increases may be accompanied with lifestyle bump-ups, but only inasmuch as to not compromise this ratio.
Long Term = Aggressive
It’s not enough to simply “not spend” a certain portion of your monthly income. As Robert G. Allen once said – “How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case.” In order to create wealth from your savings, you need to take on a higher degree of risk – for instance, by channelizing your savings into high risk, high return equity mutual funds instead of booking fixed deposits every time you’ve got a surplus left over. Equally important is the act of making this saving “automatic” in nature through a monthly or quarterly SIP (Systematic Investment Plan). Lastly, make sure you accord your regular savings a higher priority than your spends, by scheduling your auto debits early on in your earning cycle. If you receive your salary on the 5th of each month, schedule your SIP’s on the 7th, so they get debited before your monthly spends commence.
Follow your gut – but not recklessly!
Occasionally, you could come across a potential investment that you just ‘know’ deep down will reap rich rewards. This could be in the form of a new investment vehicle altogether, a bright idea that requires seed funding, or a scrip that you’re absolutely certain is poised to be a multi bagger. Confronted by such a possibility, its vital that you do go ahead and speculate. After all, it is these ‘out of the box’ investments that could go on to add that vital ‘alpha’ to your portfolio. However, learn the art of measured speculation. Invest 20 lakhs instead of 50 lakhs into the start-up. Start with the minimum ticket size for the private equity fund instead of going all out. Make measured, high risk/high reward investments with amounts that you can afford to lose. You never know which one could go on to make you wealthy beyond your expectations!