“Being rich is not equal to being wealthy.” - Psychology of Money, Morgan Housel
Saving money is the foundation of building long-term wealth. Many of us are not able to reach our savings goals and often our expenses exceed the budget. To start saving efficiently, write down basic accounting of how much money you make vs how much money you spend. Allocate your income for specific purposes like living expenses, savings, elimination of debt, and ‘fun’ money(you will feel motivated to make more money). After you start achieving your savings goals, take a step towards building your emergency fund to cover your expenses in case of an illness or injury or any other emergency.
Building long-term wealth requires plenty of time, diversification, and an appropriate asset allocation. Put aside at least 10% of your monthly income in long-term investments like stocks, mutual funds, ETFs, bonds, insurance, etc. Before you dive in, you need to determine your investment horizon, the financial goals you want to achieve such as buying a house or a car, education of children, marriage, retirement, etc., and your risk appetite. Investing can be intimidating and confusing at the beginning but don't worry we have got you covered.
You can invest in mutual funds through a Systematic Investment Plan (SIP), which helps you in investing in a disciplined manner without fearing the market volatility and timing the market. It is also important to follow the principle of asset allocation as different types of asset classes such as equity, debt, gold, etc. are available within mutual funds.It is also important to follow the principle of asset allocation as different types of asset classes such as equity, debt, gold, etc. are available within mutual funds.
The following chart depicts value of building wealth through systematic investments over a long period of time:
A monthly investment of Rs. 10,000 over a 20 years period can yield about Rs. 1 crore at an assumed return of 12% pa, while the total investment will be Rs. 24 lakh.
The important part about investing is to start early. The power of compounding allows you to make money from the gains made on the principal investment. Thus, instead of waiting to accumulate a sizable amount of savings, start early with a small amount and let the power of compounding do its magic on your investments.
Draw an entire roadmap of your financial goals such as children’s education, buying a car, retirement savings, saving for a medical emergency, etc. After identifying your financial goals, make a list of your income, expenses, savings, loans, insurance premiums, etc. The next step is to allocate the funds in different buckets. The last step is to carefully assess various investment options and invest in them with the potential to earn compounding returns. It is also essential to choose the right financial advisor who can closely look at your goals, expenses, plans, retirement savings, etc., and provide you objective, unbiased and experience-based advice.
When you are nearing your financial goal, you should focus on preserving your corpus. Your ability to take risks decreases when you are getting closer to your goal and remaining invested in equities can prove to be counterproductive at times. When you are about to reach your financial goal, you should exit the scheme and shift your corpus to a liquid fund or a safer avenue.
Mutual fund investments are subject to market risks. Please read the scheme information and other related documents carefully before investing. Past performance is not indicative of future returns. Please consider your specific investment requirements before choosing a fund, or designing a portfolio that suits your needs.
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