Monday, 17 July 2017

Art of building wealth ...

Good evening

In my last blog I touched upon financial security and planning.
Today I would like to share my experiences on the art of creating wealth.
At a young age when you have just gone through your campus interview and got your dream job, you are excited and the urge to indulge in lavish spend is hard to resist. It goes without saying  that starting out on your first ever work assignment in a new work place and receiving that first ever monthly cheque gives one a strong sense of mental independence and freedom.
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But once you reach there you have to be ready to handle your responsibilities which many of the young adults even are apprehensive of discussing, leave aside the planning part. It will be totally incorrect on my part to blame anyone of you but it is people like us who should take the lead and educate their children about this very important phase of life without thrusting our views on them. I always believe that today's generation is much more enlightened but need help and guidance to channelize their energy and creativity.

This is the phase when one makes important life choices, not only in personal life but in matters relating to finances too. These choices involve various desires; to be rich, to buy a car, to buy a house, to start a family, travel to exotic places around the world, safety of the family and yourself, children's education & marriage, to do something for your parents, to have a comfortable  retired life without compromising on lifestyle etc.

Some of these needs may seem too far fetched right now, but sooner or later you will be compelled to start thinking of them which is inevitable. And the sooner you finalize them the better it will be for you in future.

Always remember your desires are end goals and to achieve these there are some basic principles which must be followed.
* Needs and desires:
1. Write down your financial goals, take help if need be.
2. Include factors which may impact on it, like how much and where you are going to invest, the investment time horizon, the risks you can afford to take etc.
3. Specify action plan for each goal.
4. Get it concurred by those who know about it and matter to you
5. Implement in Toto
6. Follow up and review
7. Introduce corrective measures if required
8. Resist immediate gratification as it never pays in the long run
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* Go from the day you start earning with long term perspective:
The earlier you start, less is the amount required to earn better returns. For example, you are 25 years old and start investing Rs.  10000 every month, at 12% average yearly rate of return, At 55, you could land up with a Rs. 3.5 crore corpus. Now if you had started 10 years later, that is at 35 years of age, at 55, your corpus will nearly be Rs. 1 crore. Your corpus shrinks by two - third just because you missed those 10 golden years of investing.
This is because of compounding of your investment. .

* Always start with insurance first :
As I said earlier this has to be  the most important part of your portfolio. Gone are the days when people in this field used to talk about death, some still do, but it's now life we refer to in insurance.
 This also includes health insurance apart from mandatory vehicle insurance.You need to enjoy your investments and live life king size as long as you live.
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* No amount is too small :
You can always make a beginning by investing as little as Rs. 500 in a mutual fund, which works as a great tool for investing into asset classes like stocks, bonds and gold. And the most important aspect is that you develop a  habit of saving and investing consistently, and discipline in the long run.
One must not forget that there is always a need to move on from 'investing what is left after spending' mindset to 'spending whatever is left after investing'. This philosophy will certainly ensure long term wealth creation. And never forget that as your income grows, start allocating more money towards achieving your goals.
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* Risk management :
It is always advisable not to park your money only in one or two instruments. Always  invest in different financial instruments which allows  your risks to spread across the risk return spectrum. This will also help you to get a chance to understand various instruments and also gradually increase your returns by concentrating on the allocation. Remember, the advantage of being young is that you can take on maximum risks considering you don't have many dependents in most of the cases. But it's equally important to have the appetite for it. Homepage Deep Link
* Learn from experience of others
You being a young and excited investor are bound to make mistakes and learning from such mistakes is a continuous process. It always helps to join a group of  like minded people with similar financial position and aspiration where you can use the platform to share and learn from each other's mistakes.
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* Shamelessly seek help :
Great people on this planet earth have never been shy of asking for help from anybody and everybody which pays without an iota of doubt. Why should we ? Never shy away from asking for help, especially when it comes to investing for your future. If you are busy with your job or unable to do time management or don't have enough information to plan your finances, take the help of a qualified financial adviser to do so.
There are many experienced brains to provide help and guidance.

* Trust yourself :
And, last but not the least, trust yourself once you have accepted the philosophy. Don't get deterred by obstacles which are bound to be there during the journey, as long as your goals are well defined and you never loose sight of them.
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* Extent of information :
          Now let me share a case study to throw more light on the subject.
Two competing explanations as to why consumers have trouble with financial decisions are gaining momentum day by day. One is that people are financially illiterate, lack understanding of simple economic concepts a cannot carry out simple exercises such as computing compound interest leading to sub optimal financial decisions. That is, some people persistently choose immediate gratification, instead of taking advantage of larger long term payoffs. This is because it has never been taught anywhere in school or college and you are suddenly up against the challenges at a young age.
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Experiments show that the measure of impatience is a strong predictor of wealth and investment in health. Financial literacy is also correlated with wealth though it appears to be a weaker predictor of sensitivity to framing in investment decisions.
A study was made on the behavior of a bunch of MBA students in managing a small endowment portfolio that invested in a simulated financial market, in two mutual funds, under a set of pre-decided rules. Before the game began, one had to choose how often he would like to receive information about performance of the fund i.e.every moth, every year or five years. And  then only he could change the allocation.

After 25 years of simulation, those who got performance information every five years earned more than twice than who got monthly feedback. The answer lied partly in the nature of the two funds money was invested. The one which invested in bonds, had low average rate of return but also a much higher variance, losing money in 40 of the months in five years. In the long run, the best returns resulted from investing all of the money in the stock fund, since the higher return made up for the losses.

This fund rarely had a losing year and never had a losing five year stretch. People who got monthly feedback, got a lot of information but it was short term information that was not representative of the true, long term pattern of performance for the two funds. The short term information created an illusion of knowledge that the equity fund was too risky. More information may have led to less understanding for the investors.

* What Young Adults Should Know ?
1. Where does your money come from ?
2.Where does your money go ?
3.Learning the difference between needs and demands
4.How to budget with the money you have ?
5.Save some money for a rainy day
6. Difference between saving and investing
7. How compounding works ?
8. Why taxes matter ?
9. 30-70  mantra - Save 30% of your earning consistently come what may happen and manage lifestyle with 70%. Remember it is your money.
10. Plan for your retirement the day you start earning

Wishing you all a great beginning on achieving financial freedom...

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1 comment:

  1. Wonderful thoughts and advice by you Sir. Youngsters have to follow it.


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