It is 100% true that building wealth will take time and disciplined planning. It is not necessary that you are accumulating wealth just because you are earning well. I am not going to bore you by repeating the same old statements like SIPs and long term investment. As the year 2010 came to an end, I thought of suggesting 6 steps, which will help you in accumulating wealth right from the start of the New Year 2011.
Let us discuss these 6 points in detail:-
1. Work Smart, Earn more, spend more and Save more
Work hard was the old saying, now it is the time of working smart. Life long association with a company till retirement is no more getting accepted with the new generation. Changing companies for betterment and faster career progression is common. Spending more is for quality life. What is the use of earning more and saving the entire amount for the old age? We have to spend more to ensure a quality life. At the same time, we must know how to save more to ensure a comfortable retired life with increasing longevity. Remember we are going to have 20 to 25 years of retired life!
It is often the small things that matters over a long period of time. For example, where your monthly salary is getting credited? In an ordinary savings account or an account with a sweep in facility? An ordinary savings account will give you interest at the rate of 3.5%, but a deposit in a sweep in deposit will give you interest rate equivalent to a 1 year fixed deposit.(of course proportionately for the period of deposit) while ensuring all the benefits of a savings account. Timely investment of your hard earned money is very important in wealth creation.
2. Don’t spend on Investment linked Insurance
You have seen a lot of regulation changes in the insurance sector in 2010. IRDA is now trying to clean up the mess in the system. There were policies with the entire invested amount going as expenses in the first year under various heads. After 2 modifications this year, products are bit better, but companies are finding out ways to by pass the law. Agents are hard selling these products for attractive commission. Now they started selling the old traditional endowment and money back policies, where commission is as high as 40% and return to customer is only 5-6% in the long term! IRDA has recently banned Universal Life Policies overnight.
Don’t mix insurance with investments. Take a pure Term assurance for a decent value for your life insurance needs. Invest the balance in good performing mutual funds with a proper asset allocation according to your age and risk profile. This will give you the best of insurance and investment. You can go for a term assurance for 1 Crore for term of 20 years at an approximate yearly premium of Rs.9200/- if your age is 30. Investments in best performing equity mutual funds have given a CAGR of 20% for the last 5 years. Then, why to go for 5-6% returns? Also go for a health insurance to cover everybody in the family (family floater for the younger age group). Please go for an extra health insurance even if you are covered under your employer’s scheme, so that you will be covered even after you are leaving the company. You can renew this policy to the maximum permitted age.
3. Have a financial plan ready by an independent and reliable financial planner
It is a known fact that we plan small things but ignore big things. If we are planning to go for a car or a new LCD, we will consult different people and then take a decision. But when it comes to important financial decisions like our retirement planning or children higher studies funding, we will either ignore it or just go by some rough calculations.
A financial plan will show you where you are today and where you want to reach and what are the best means for it. This can help you to lead a relaxed life, because you are sure that your financial needs have been taken care of.
4. Delay spending on luxuries
If we spend more today, we will save less and this can affect your long term financial plan. But if you can delay expenses on luxuries, this will help you in early accumulation of wealth. If you spend Rs.10000/- more today and invest less than what is already planned, at the end of 20 years, your accumulation will be reduced by 1.6 Lakhs!
5. Be careful with Loans
Don’t get into the debt trap by availing all possible loans available in the market. Please note that you should not go for more 30% of your income as monthly EMI for all loans put together. Also be very prompt in repaying all the loans, because these are getting recorded at CIBIL and can affect your future loan eligibility. Please avoid credit card loans because interest rates are beyond imagination. Try to avoid loans for unproductive expenses. But if you want to go for a house then don’t worry, go ahead and avail that home loan and enjoy income tax benefits too.
6. Review and track your wealth
It is necessary to ensure that you are reviewing your financial position atleast once in 6 months to ensure that your wealth creation is happening in the way it is planned. Also analyse your income and expenses and ensure that you are spending on necessities only and saving the maximum. Meet with your financial planner atleast once in a year and discuss the progress made. Together you can decide whether any change in asset allocation is necessary for the next year.
I am sure, if you follow these 6 points, you can maintain a lifestyle of your dreams even after your retirement. Let us make a beginning in the New Year 2011.