Grow Your Wealth: Learn the Basics of a Savings Plan

 

We’ve heard it time and again, “It’s the big risks that bring in the big rewards.” Well, not all of us have the appetite for or the privilege of risking it all. That’s the kind of stuff books are written about. But it’s also true that when you risk nothing at all, you end up losing heavily.

The basic idea behind growing your wealth is to put your money to work by taking acceptable risks, with a clear financial goal in mind. The incremental growth that you achieve year on year will accumulate into significant savings.

Wealth Creation & Compounding - The Key Factor!

Let’s start with getting our fundamentals right.

• Wealth creation happens when you create new savings using what you already have. For example, you put your money in a fixed deposit and earn interest, buy a house, invest in the stock market, invest in gold bonds, etc.
• It is very important to invest in multiple asset classes, to reduce the impact on your financial goals in the event of a sudden downturn in one class.
• Just as a businessman pours his profits back into the business to make it bigger, the more you reinvest your gains, the more exponentially you grow your wealth. This compounding factor is often the primary indicator of success.
• Lastly, it is important to start early. The sooner you begin your wealth creation journey and the longer you stay invested, the faster you achieve your goals.

Set Your financial goals

Well begun is half done, isn’t it? We fret over every small review of the next smartphone we’re getting or draw up an exhaustive itinerary for our upcoming vacation. But when it comes to our financial goals, we’re hazy at best! “I want to have lots of money” is an admirable thought, not a goal.

• Start with your current salary and the year on year growth you can expect in your chosen profession.
• Factor in your cost of living and extrapolate assuming a standard inflation year on year.
• Now bring in your liabilities and major expenses – health care, travel, education, marriage and other familial obligations.

Choose the Best Investment Plans

The best investment plans are chosen based on your financial goals. We will now understand the basics of savings plans to help you narrow down your options.

• Risk Profile-
  

  In any investment scenario, there’s an element of risk involved. Higher risks over a longer period, usually lead to higher rewards. But, if you need liquidity over the short term, bet on lower-risk debt instruments like balanced and secured funds. 

• Withdrawal Facility-
  

  Many instruments promise a higher rate of returns with a lock-in period. But, life can throw you a curveball, as experienced by the COVID-19 pandemic. Ensure that your investments allow you to partially withdraw funds after a 5-year lock-in.

• Death Benefits–
  

  The death of the primary breadwinner carries an emotional toll compounded by a financial one. Your portfolio must include highly-rated life insurance plans to provide financial succour for your family in times of dire need.  

• Brand Value–
  

  Review the company you are investing in online. Get opinions from trusted financial counsellors and investors within your family. Look for standardised ratings to understand their growth journey. 

Increase Your Contribution towards Investment with Your Rising Income

A common rookie mistake people make is sticking with the investment plan for years on end. They do not increase their contribution over time. Remember, your salary is not a static value. Every time you get an increment or a bonus, revisit your investments and see if you can afford to commit a little more. This can be in the form of one lump-sum investment or a new systematic investment plan (SIP) or a systematic transfer plan (STP). By doing this, you can maximise the effect of the compounding factor. Not only do you control unnecessary expenses, but you also navigate the market ups and downs easily and eventually grow your wealth. Alternatively, lump-sum payments to bring down a car loan or home loan also contributes towards your life goals.

Investment Management

Let’s wind down by looking at some tips concerning portfolio management.

• Use your common sense–
  

  If you’re looking to go off the beaten track, invest in assets that you understand. For example, if you’re planning to invest seed capital in a start-up, ensure that the business model is something you can follow.

• Focus on the operating performance–
  

  Don’t stress too much about the stock price or the market indexes. Review your portfolio and see which investments are beating inflation significantly and showing growth. Continue to invest in those.

• Be conservative–
  

  When you calculate how much your investments will fulfil your financial goals, don’t assume a sky-high rate of interest. Start with a conservative rate of returns of 8-9%. Anything above that is obviously a welcome addition!