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A guide on how to go about building wealth

The Smart Girl’s Guide to Finance: Creating Wealth Prudently

We put together a primer on how to go about building wealth over a period of time

Building wealth can seem like a daunting, far-fetched goal, especially if you’re just getting started with your career, or live from paycheque to paycheque, irrespective of your salary. The good news, however, is that it is never too late to get your finances in order. While there are several get-rich-quick schemes in the market, in reality, it takes time and patience to build wealth. Here are a few tips to get you started on your wealth creation journey.  

Take stock of your finances 

The first and most critical step to building wealth is to decode your finances.  It is essential to understand your income number correctly, as all your expenses and savings emanate from here. Combing through these numbers and accounting for every rupee may seem like a tedious exercise but it gives you a clear picture of where your money is going and how much you could potentially set aside each month.

“When you sift through the income and expenditure lines, look at them carefully to see if any efficiency can be built in,” says Vishal Dhawan, CEO and founder of Mumbai-based Plan Ahead Wealth Advisors. This could mean identifying and getting rid of income leaks—seemingly insignificant expenses that are draining your money—like take-out bills that are creating gaping holes in your finances, or the newspaper subscription you forgot to cancel.

First things first—identify and clearly define your financial goals. Image: Pexels

First things first—identify and clearly define your financial goals. Image: Pexels

Experts recommend setting up two accounts—one for expenses and another for savings—with an auto-debit facility in place. Image: Pexels

Experts recommend setting up two accounts—one for expenses and another for savings—with an auto-debit facility in place. Image: Pexels

Once you have a clear idea of the numbers, figure out how much you can set aside as savings each month. Experts recommend setting up two accounts—one for expenses and another for savings—with an auto-debit facility in place. This way, the money you decide to save each month is ferreted away into another account before you’ve even had a chance to lay your finger on it. If you are married, make sure your spouse is on the same page. If your spouse and family are not aligned with these financial goals, it might be difficult to meet them.

While there are several get-rich-quick schemes in the market, in reality, it takes time and patience to build wealth

While there are several get-rich-quick schemes in the market, in reality, it takes time and patience to build wealth

Identify your financial goals

First things first—identify and clearly define your financial goals. What is it that you are hoping to save for? Is it a luxury holiday? A new car? Are you saving for a house? Or are you saving for your child’s education? Once you have them jotted down, divide them into short-term goals and long-term goals. Typically, short-term goals are ones that come with a one-to-three-year timeline,  such as saving for a holiday, buying a car or planning for a master’s degree. Anything beyond this time frame should be looked at as a medium-to-long-term goal. The next step is to identify the right asset class that is suitable for each goal. For instance, if you are setting aside money for short-term financial goals, it may make sense to put your money in fixed income or debt rather than equity. On the other hand, if you are saving for long-term goals, it might be wise to invest in equity, which tends to outperform fixed-income investments over a longer period of time. 

This is important because when one is younger, one tries to look at their goals in a very short period of time. When planning for financial goals, people might want to purchase a car in a year, the next year they might want to take an international holiday, the year after they might plan on doing a master’s programme abroad. 

“What happens is that they don’t get enough time for the money to grow itself. If your investment horizon for this money is only a year before you want to spend it, then it doesn’t get time to compound or grow at all. Therefore, by default, you are only saving money, you are not really investing it,” says Dhawan.  It then becomes important to be able to segregate your goals by identifying short-term goals where it would be okay to earn a lower rate of return, and your  investments for long-term goals which you won’t touch to fund short-term goals,” he adds.   

Save, save, save 

It is never too late to start saving money. However, starting early on clearly has a disproportionate advantage even if the amounts are much smaller. As life progresses, with promotions, bonuses and raises coming your way, it is important to avoid the lifestyle inflation trap. If you can live comfortably on your current salary and receive an increase in the form of an increment or a bonus, it would be prudent to invest that money right away. 

“WHEN IT COMES TO WEALTH CREATION, WHAT IS CRUCIAL TO UNDERSTAND IS THAT IT IS NOT REALLY THE RATE OF INTEREST THAT MAKES YOU WEALTHY BUT THE PERIOD FOR WHICH YOU STAY INVESTED, THAT DOES”

Vishal Dhawan

What tends to happen is that an increase in income tends to correspond with increased expenses where you’re tempted to spend that money to upgrade your possessions–perhaps your phone or bag or car. But being prudent and squirreling away that extra income will allow you to improve your quality of life gradually. 

Patience is a virtue

One of the toughest things to come to terms with as an investor is that it takes patience to build wealth. While there is no dearth of get-rich-quick schemes in this world, these usually come veiled with high risks. So it’s crucial to do your due diligence before falling for a deal that is too good to be true because more often than not, it is just that. 

“What we do find is that when people set aside money in a disciplined manner, they expect the returns to come to them quickly, or they expect that the results will appear in a linear fashion. This means that if equity as an asset class is expected to give, over long periods of time, 10 to 12 per cent a year, they expect it will occur every year. However, equity does not behave in a linear fashion. It will give you 20 per cent at times, and minus 10 per cent at other times. Understanding this is very important before you put your money in there,” says Dhawan. “Don’t expect results overnight.”

Building wealth can seem like a daunting, far-fetched goal, especially if you’re just getting started with your career, or live from paycheque to paycheque, irrespective of your salary

Building wealth can seem like a daunting, far-fetched goal, especially if you’re just getting started with your career, or live from paycheque to paycheque, irrespective of your salary

Build an emergency fund

Another pillar of a sound financial plan is to have an emergency fund to protect you from unforeseen expenses. You and your family must be protected against risk; this could be in the form of health insurance, general insurance and life insurance. Emergencies emanating from sudden expenses in these areas can set you back financially and even push you into debt. Emergencies could also range from job loss, sudden home repairs to unexpected medical expenses or death. This is why it’s important to have an emergency fund in place to get back on your feet. If both partners are working, then their emergency fund should ideally cover three months of expenses and six months of EMIs. If it is a single earning member, then that emergency fund should cover six months of expenses and 12 months of EMIs.

Consider a side hustle

While saving more money is a priority when building wealth, an equally powerful aspect to consider is earning more. The more you earn over your lifetime, the more you will have available to invest. There are several factors to consider here. For instance, how can you make more money at your primary job? Is there a hobby you could pursue to create an additional income? Are there freelance or consulting  jobs you could take up to supplement your existing primary income? All of these could prove useful and should be considered if you need that extra income. However, the decision to have a second income needs to be carefully considered. “You have to be absolutely sure you need it. It can’t be a default option,” cautions Dhawan. “If you try to enhance your income and make that your primary objective, you might realise that you’re burning out too fast, or your family is not getting the attention they deserve, or you’re not doing  enough justice to your primary job, and then end up giving up on promotions and salary hikes.” 

How can you make more money at your primary job? Is there a hobby you could pursue to create an additional income? Image: Pexels

How can you make more money at your primary job? Is there a hobby you could pursue to create an additional income? Image: Pexels

What tends to happen is that an increase in income tends to correspond with increased expenses where you’re tempted to spend that money to upgrade your possessions. Image: Pexels

What tends to happen is that an increase in income tends to correspond with increased expenses where you’re tempted to spend that money to upgrade your possessions. Image: Pexels

Pick an accountability coach 

It’s great to have an accountability coach—this could be your partner, sibling, a professional financial advisor, or someone else who could help you stay on track to meet your financial goals. If you don’t have an accountability coach then like every other good intention, wealth creation could be an intent but may not translate into a reality, because there will always be pressing wants.

Also Read: The Smart Girl’s Guide to Finance: Investing in Mutual Funds

Also Read: The Smart Girl’s Guide to Finance – How to negotiate the salary you deserve

Also Read: The Smart Girl's Guide: Why you should consider saving through a Systematic Investment Plan


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