7 Habits that can lead to Future Wealth

Unless you expect to win the lottery, or inherit the estate of a wealthy aunt, or write a killer app that Google or Amazon pays several million dollars to acquire - it is unlikely that you will get wealthy overnight.

Forget about the rags-to-riches stories. Most of them are really that - stories. People who are wealthy have put in a lot of time and effort to achieve their successful financial status.

If you wish to own a tree that will bear delicious fruits for many years, you won't be able to just buy it. You need to buy a sapling from a nursery, plant it, water it, fertilise it, protect it from the elements for several years before it can bear fruits.

To build wealth for the future, you need to make long-term plans and have a disciplined approach towards saving and investing. It is possible to do it on your own. But it is better if you seek advice from an experienced financial planner.

Sarah Chandler explains 7 habits that can lead to future wealth in an article in investopedia.com. Read it here.

How to Save your way to greater Wealth

Why do people invest their savings? That's a simple question, and should have a simple answer - like "For a rainy day." Turns out, it doesn't.

Just ask around. You will hear answers ranging from "To get rich", "To retire early", "To travel the world", "To buy an apartment", "To buy a BMW", and so on. The answer that makes most sense is: "To build wealth." 

It goes without saying that wealth building requires a meaningful amount of savings every month, which in turn requires adequate earnings. 

If someone is earning only Rs 15000 per month then he will barely be scraping through, and won't be able to save much. What will he do then?

Find ways and means of increasing his earnings. Acquire some new skills. Start a home-based business, or take up a second (part-time) job. It will be tough, but not impossible.

If someone is already earning a decent amount of money, life becomes a lot easier. Or, does it? Often spending tends to increase in proportion to earnings.

Priority is given to better furniture, a bigger TV, a foreign holiday. Whatever savings are left get invested in ELSS funds at the end of the year.

Wealth building requires availing the full power of compounding. That means starting early, having a financial plan, and staying true to the plan for the long-term.

Haphazard buying of mutual funds, stocks, fixed income instruments, insurance policies will provide inadequate returns, even if earnings and savings are substantial.

Check out the advertising in print, online or TV media. They are all screaming 'buy', 'buy', 'buy more'. Consuming may be good for the economy. But buying clothes and jewellery and gadgets won't help you to build wealth.

Having discipline and self-control to buy only what you absolutely need - except for the occasional indulgence in a movie or dining out - can help you to meet your financial goals and enable you to retire in comfort.

5 Steps to Build Wealth and Grow it Over Time

Most people know how to earn money. Some become engineers, computer programmers, accountants. They earn a lot of money. Others become movie stars, sports stars, rock stars. They earn a lot more money.

Then there are doctors, lawyers, drug smugglers, terrorists, politicians. They earn a tremendous amount of money - mostly in cash. They try to hide it from the taxman in dubious overseas accounts and real estate deals.

This latter group is spending sleepless nights of late, as the Indian Prime Minister has declared a war on ill-gotten gains - first, through a self-declaration scheme, followed by demonetisation of high value bank notes.

Earnings don't necessarily lead to wealth creation. Why? Because most people spend what they earn, and save and invest whatever little they have left.

Wealth creation requires proper planning, systematic investing in different assets according to the plan, and allowing compound interest to do its magic by investing for the long-term.

So, how should you get started? Here are 5 easy-to-implement steps:

1. Get in touch with a good financial adviser to make financial and asset allocation plans according to your earnings, financial goals and risk tolerance. You can do this yourself - but it may be better to seek the advice of a professional first.

2. Save first and spend later. From your financial plan, you will know how much you need to invest every month to achieve your goals. This amount should be invested first before you spend a single Rupee.

3. Live within your means. Whatever is left after investing should be your spending ceiling every month. That means you can't resort to debt - of the credit card or EMI variety. Already bogged down with EMIs? Pay them off early.

4. Invest regularly and consistently. This may pose problems if your earnings are irregular. All the more reason for you to be more disciplined about your planning, saving and investing.

5. Have a long-term view. Don't get swayed by short-term fluctuations in the prices of your assets. The longer the duration of your systematic investing, the greater will be your wealth.

Read more in this article by Diane Manuel in investopedia.com.

A simple Strategy to achieve your Financial goals

(When Paul McCartney wrote the words "I don't care too much for money, 'cause money can't buy me love" he probably didn't have enough of it!)

There are three ways of making money:

1. Work hard
2. Own assets that earn money
3. Work hard and own assets that earn money

Unless you are born with a silver spoon in your mouth, you can't start adult life with option 2. So, you have no option but to work hard - whether at a job, or a business.

What you do with the money you earn by working hard will determine whether you will achieve your financial goals and will be able to retire later in life to benefit from option 2.

The simple strategy to achieve your financial goals? Save and invest. And the sooner you start, the better.

But you knew that already - right? 

Do you also know how much money you will need to save today, and what mix of assets you need to invest in so that when you eventually stop working you will be able to live comfortably on what your assets will earn?

Probably not - as per anecdotal evidence from a few young working people. 

One complained she hardly has any savings left after paying for rent, food and the daily commute. Another said he is putting some money into a mutual fund every month, but hasn't figured out how much he will need 30 years from now.

Would it be a surprise to know that both own high-end smartphones and laptops, commute only by app-cabs, wear designer clothes, eat out 2-3 times a week and rent apartments in posh localities?

Living the good life now may mean that you will neither be able to retire early to do the things you really love, nor will you be able to enjoy retired life without cutting corners. 

Is there a way to live reasonably well now - and in future when you will not be able (or willing) to work any more?

There is - but you will need to plan for it:

- Set financial goals - near-term, medium-term and long-term
- Figure out how much money you will need at each stage
- Save and invest accordingly

For longer term goals, you can and should invest in riskier assets like equity or equity funds for better returns. For nearer term goals, invest in less risky assets like bank fixed deposit or debt funds.

From your monthly/quarterly earnings, invest first (according to your financial plan) and then spend. 

Stay a bit farther away from town, commute by autorickshaw or train, eat out only once or twice a month, buy a cheaper phone and laptop, pay off your credit card dues in full every month. 

You will be amazed how much these small sacrifices now can lead to a more comfortable retired life. (Believe it or not, you will get old and retired life will be upon you sooner than you expect!)

What if the stock market remains in a down trend for another year?

The Sensex and Nifty indices had touched their peaks one year back. Since then, both indices have been in down trends – neither falling a lot, nor rising much during counter-trend rallies. A gradual drift downwards that has all but sapped the bullish energy of small investors.

Several rounds of interest rate hikes by the RBI have failed to restrain rising inflation, but has started affecting economic growth. The high interest rates have led to postponing or cancelling of capital expenditure by companies, which in turn has affected the order books of capital goods makers, and engineering and construction companies.

The RBI had indicated the possibility of pausing the rate hikes if inflation begins to moderate. If the situation doesn’t improve within the next month or so, the RBI may be forced to hike the interest rate again.

Even if there is a pause in the rate hike, the already high rates are unlikely to be reduced immediately. Market sentiments do not turn bullish when interest rates are high and the GDP growth is slipping. It is quite possible that the Sensex and the Nifty may continue to trend downwards for another year.

However unlikely or pessimistic the above may sound, the path to success in stock market investing is to assess the surrounding environment at all times, and have strategies and plans in place. So, what can small investors do to prepare for another year of down trend in the stock indices?

The most important – and I can’t emphasise this more – is to have a financial plan, and based on it, an asset allocation plan. The queries I receive from small investors are mostly of these two types: “This stock is going up in a bear market – should I buy now or wait” or, “That stock has fallen a lot – should I wait longer or buy now”.

Hardly anyone asks me: “How do I make a financial plan” or, “How do I work out an asset allocation plan”. Without a plan, random buying and selling of stocks will lead to an unwieldy portfolio and very little returns.

Once plans are in place, a portfolio to suit the plans and the risk tolerance level of an individual can be built. A stock market in a down trend is the best time to build portfolios, because many good stocks are available at bargain prices.

What if you are one of those enlightened investors who already has plans and a well thought-out portfolio in place? Allow your portfolio to grow and prosper. How do you do that in a down trend? Mostly by not being overly aggressive. Within an overall down trend, individual stocks may perform better or worse. Use opportunities to book part profits or add to fundamentally strong stocks that have been beaten down.

Needless to say, whether to buy, sell or hold should be determined not by market fluctuations or gut feel, but by your asset allocation plan. When you book part profits, try to control the impulse of buying some thing right away. The high interest regime has its benefits in the form of higher bank fixed deposit rates and good returns from debt funds. Invest in them – as per your asset allocation plan.

Use the stock dividends that you receive at this time of the year to reinvest in your portfolio companies. Dividend reinvestment is like adding fertiliser to your plants. It helps them to grow better and faster.

Continue with your regular savings and systematic investment plans. There is a tendency of many small investors to stop investing when the markets are down. If you haven’t developed the skills to time the market (very few investors do), stick to your regular investments. Again, follow your asset allocation plan in a disciplined manner.

That is all there is to it. No magic formula will produce phenomenal returns in a down trending market. Just a boring, disciplined approach to planning, saving and investing for building wealth over the long term.