- Date : 13/12/2018
- Read: 6 mins
Developing the savings habit early, together with patient investing, can make you wealthy
It does not quite work that way; wealth cannot be created overnight, nor is the process easy. You need work on developing certain skills and habits to build wealth. Let us examine how to go about it:
In an interview to Yahoo! Finance in May this year, legendary investor Warren Buffett said that for young people, starting to save early was more important than being smart. Buffett should know about starting early; he bought his first stock at age 11 with money earned delivering newspapers, and saved/earned enough by age 15 to buy a 40-acre farmland (in 1945).
But you may think, “I’m no career investor, why start early when I have my entire life before me to save?” If you take this approach, you will only hurt your chances of creating wealth faster, because you will be losing precious time.
Moreover, if you begin early, the pressure to save more every month will be less since you can compound your money over a longer period of time. Plus, you can also pace your investments and plan your portfolio as per the time and goals in hand. (Yes, starting early also involves setting goals early; this will be discussed later).
In this context, keep in mind an old Chinese proverb: “The best time to plant a tree was 20 years ago. The second best time is now.” Perhaps you can start the savings habit – right now – and work towards building some wealth for yourself. If you are in your 20s, this is the perfect age to start; if you are older, you have no time to lose.
Aren’t we all familiar with the eternal debate: Who is the all-time greatest footballer – Pele or Maradona? Or who is better among the two now – Ronaldo or Messi? But what we forget is that without a goalpost to target, none of these greats, Pele, Maradona, Ronaldo or Messi, would have scored any goals.
So it is with life: unless you set life goals – including financial goals – you will be like a great footballer running around the field aimlessly, doing miracles with the ball but not scoring. Buffett had set himself a target of becoming a millionaire by age 30; he did it. You don’t have to aim to become a millionaire, but every person ought to have some goal in his or her lifetime.
The best financial goals are those that are most important to you. Goals can be long-term in nature (anything that takes over 8 years), medium-term (3-8 years), or for a very short term (less than 3 years).
Once you have noted down your goals it becomes easier to prioritise them, and this will help you structure your financial plan. Take the financial goals according to priority, see which investment strategy is best suited for you, and identify any gaps that must be bridged to achieve the goal. If you have trouble raising finances for any of them (e.g.: your daughter’s wedding), you can identify which financial goal needs to be compromised.
If your work does not call for it, naturally you do not need an extensive knowledge of finance. However, if you intend to become wealthy, a basic knowledge of financial issues that touch you, such as taxation, investment, inflation, and personal financial planning, will stand you in good stead.
Lack of financial literacy can lead to poor investments, so here are some guidelines:
- Taxation: Financial literacy can help you reduce your tax burden – legally. You can lower your taxable amount by legally declaring certain transactions as necessary or tax-exempt expenses. Therefore, it is important to have a decent knowledge of taxation.
- Investment: The cold truth is that you will never become rich investing your time in a 9-to-5 job on a monthly salary. But through investments, you can make your salary make more money. Financial literacy can help in this.
- Inflation: Financial literacy will help you beat inflation through various investment schemes.
- Personal financial planning: Financial literacy, in terms of the economy, taxation, investment, and inflation can help you plan your financial future. For instance, different amounts of income deductions are allowed under different sections of the Income Tax Act, so you should have more clarity on these things:
If you start early (when your salary is presumably at the level of a junior employee), you should look at investments suited for long-term wealth creation. One instrument you could look at is an ELSS (Equity-Linked Saving Scheme).
You could also look at investing in a large-cap and a midcap equity fund; this route is also suitable for meeting long-term goals. You can re-balance your portfolio once you get closer to your goal and start transferring your money from equity funds to debt funds, which are a type of mutual fund that generate returns by investing in bonds or deposits of various kinds. Also, these are less volatile.
Ideally, you should align your investments with goals such as retirement, children’s education, car/home purchase, etc. As has been said repeatedly, it is never too early to start saving for such goals.
Most people pay off their bills and spend the remainder; wise people first put their money into a savings account and then live on what is left. In a similar vein, most people increase their standard of living when there is a rise in income; wise people increase their investments and savings instead.
In other words, the decisions we make shape our lives. Knowing the difference between instant gratification and delayed success will influence how easily or laboriously you make money. Have patience, be consistent, and success in the form of wealth will be yours.
And do remember it is always advisable to take the guidance of qualified financial advisors.