Wealth is more than money. It is a series of learned strategies and behaviors.
Earning money is not difficult. People without formal education or college degrees, ambitions, or experience make a comfortable living. To become wealthy what matters is what you do with the money you earned. Rather than trying to look wealthy by acquiring material possessions, we should be looking at creating wealth for our future and next generation. By taking strategic incremental steps an average person who is honest, hard-working, and disciplined while living within means can be wealthy. What I have learned in the last 27 years of working life is that accumulating wealth is all about strategies and habits. Here are the core actions you need to take to build wealth:
1. Spending less than you earn.
This sounds simple, but it is a challenge that a lot of us are unable to fully recognize. Wealthy people know how to manage their expenses well.
If you earn INR 10,000,000 a year, spending INR 5,000,000 a year isn’t unreasonable. In fact, it’s only half your income. But if you spend INR 9,50,000 of it, that’s almost 95% of your income that goes right out of the door leaving you with very little to use in achieving the goal of becoming truly wealthy. So to become wealthy we should learn to keep track and manage our expenses.
- Net monthly spending amount = Gross income – Taxes – contributions to all Savings and Investments.
- Net monthly spending – Fixed expenses = Money available for discretionary spending.
- Fixed expenses like rent, food, water and electricity and other utilities, subscription services, vehicle insurance, term insurance, medical insurance, and so on.
- A good saving rate is 20% but for a comfortable retirement, it should be 30%.
Example. Gross income – 40,000 INR per month, Tax – 4,000 INR, Saving – 12,000 INR, Fixed expenses – 12,000 INR and money available for discretionary spending is 12,000 INR. The discretionary money is the money available for enjoying (fun and guilt-free spending) and for unforeseen expenditure.
2. Invest 15% of Your Income in Retirement Accounts
Saving alone is not sufficient because your money isn’t being used to purchase something — an asset, equity, securities, etc — that may appreciate in value over time while also providing a return on your initial contribution. If you only save, your money will lose purchasing power over time thanks to inflation. When you invest, you take on more risks — but you also open yourself up to greater potential rewards.
Start early – Start small. Never underestimate the power of compounding interest.
The first 15% of your gross income should go directly into your retirement accounts. These accounts are an absolute necessity. Because retirement accounts are long-term investments, their earning power comes from the magic of compound interest. The money in your retirement accounts will continue to compound or grow over time. Ideally, making it possible to retire wealthy. The best available investing options for pension is PPF and NPS account (saving plus income tax instrument).
3. Invest another 15% in Diversified Portfolio
Most of us have heard the phrase, “Don’t put all your eggs in one basket.” The same principle holds true with investing. Consider all the risks associated with the investments you plan amongst all the options available. I always study the market and undertake nothing short of detailed research before investing. Remember it is your hard-earned money and be extremely cautious. A lot of investors would charm you and promise high returns while you only have to twiddle thumbs. Never trust them. Invest in instruments that you are comfortable with. Avoid herd mentality and stop believing what others are doing is “Sahi hai”.
People who are wealthy invest in a number of ways, depending on their strategy for growing wealth. Here are just a few things you could consider investing in (noting that the best option for you depends on your specific situation, needs, and goals):
- Gold or gold bonds
- Mutual fund
- Stock market
- Real Estate
- Commodity market
- BIT coin etc.
4. Investing in yourself
One of the best pieces of advice I have ever received was to allocate a percentage of my income towards self-improvement. Because the most valuable and unique asset you can offer the world is yourself. When you go to work every morning, you are essentially selling your labor. So if you are more qualifies and skillful then for the same time and energy you earn more. Consider following as investment:
- Never stop reading, learning, and improving.
- Devote 30 min for professional development and another 30 min towards general reading.
- Take your skills and hobbies to the next level.
- Acquire skills and educational qualifications of your boss’s boss.
- Always be alert to changing market and job requirements along with demand.
5. Increasing Income
Being wealthy is about so much more than your career income or salary alone. It is common to settle on your career salary and focus solely on getting incremental or performance-based raises. This is fine, but it severely lowers your ceiling for earnings. You can increase your income by freelance work or business. This way you would also be making money from other sources while obviously increasing your income. Some examples are
- Freelance writer for magazines or content writer
- Sports or fitness instructor
- Additional part-time job
- Freelance IT projects
- Tuition for kids or colleagues
- Music/Dance teacher/instructor or choreographer
- fine arts – painting/drawing/drama
- Sales executive or agent.
People double up their income with ease and subsequently take them as a full-time job. Do not be lazy or ashamed. Hard work always pays. Increasing your income is a huge part of learning how to become rich or wealthy. When you earn more, you have more resources available to deploy and your ability to grow wealth compounds.
6. Decreasing Fixed Expenditure
Even if you’re working at a boring job, doing your work well and going above and beyond almost always pays off. Your work ethic and drive will speak for itself. Whatever job you do, give it everything you’ve got. People will notice and opportunities will start coming your way. This is important to increase your income and promotion chances. Now consider the other side of the equation also. If you reduce your fixed expenses, you have more money to enjoy. Not many people know how to keep overheads lean.
- Differentiate between wants and needs.
- Avoid luxury or branded items. If you do not have money, buy a less expensive version of mobile, clothes, accessories, vehicles, vacations, or appliances.
- Rent Accommodation according to need.
- Pay off loans at the earliest
- Avoid credit cards. If you can not pay cash you can not afford it.
- Buy a second-hand vehicle, it is more economical.
7. Pay Off Loans Earliest Possible
Lenders will permit you to put your loans on a 20 or even a 30-year payment plan. You should always plan to pay your loan at the earliest. It also gives you emotional or psychological relief. But the main reason is the income that is going toward servicing loans cannot be used to build wealth. We generally overestimate the amount of happiness they will get from owning a large, expensive house. Combining this with widely available “affordability calculators” available on the internet gets many professionals into financial trouble. Always keep an upper limit of loan to less than twice your gross annual income. Anything more than that and you will soon realize there are very serious consequences to doing so, including working longer and spending less in other areas of your life.
The list of actions mentioned above are relatively simple and straightforward. It doesn’t take a financial genius to understand and implement them. But apart from these, you need to change the way you think about money and happiness. We will learn about that in the next blog.
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