- Date : 21/06/2022
- Read: 5 mins
The journey to becoming rich has six steps, starting from creating a budget to investing in tax-efficient products. We have discussed these steps in this article.
Many people wonder how to become rich, especially when they see or read about rich or successful people. But one must understand that becoming rich or creating wealth can't happen overnight unless one wins the lottery or inherits a big amount. It is a journey that you need to plan and execute step by step. This article focuses on the basic steps you would need to follow on your wealth creation journey.
1) Create a budget - It's all about money management
Budgeting teaches you how to manage money. The process of budgeting involves the following steps:
- Estimating overall revenue and expenses for a period (for example, monthly, quarterly, yearly, etc.)
- Allocating money from one’s revenue for various budgeted expenses.
- Review at the end of the period (for example, every month) to see whether the actual revenue and expenses were as per the budgeted revenue and expenses.
The process of budgeting helps you take control of your finances. It helps you identify areas where you are spending more money than required and cut back on them. Budgeting helps in saving money by eliminating avoidable expenses and channelling it towards investments. So, budgeting is your first step towards your journey of wealth creation or becoming rich.
Also Read: How To Save Money: Strategies For Budgeting
Once you have done the budgeting and have clarity on the cash flows available for investing, you can start investing towards your financial goals. You can start by investing towards your retirement corpus. For example, Karan starts a monthly SIP of Rs. 5,000 at the age of 25 years. If he continues with this SIP till retirement, he will accumulate Rs. 7.34 crores in 35 years if the expected rate of return is 15% CAGR. If he increases the SIP amount by 10% every year, he will accumulate Rs. 16.75 crores.
3) Build and maintain an emergency fund
Along with your investments, you can start working on your emergency fund. You need to build and maintain an emergency fund. It is required to meet any unforeseen or unexpected emergencies, such as hospitalisation, job loss, salary delay, a temporary salary cut, transitioning from one job to another, etc. Having an emergency fund in place reduces the possibility of doing premature withdrawal or redemption of investments.
The amount in the emergency fund should be equivalent to 3-6 months’ income. The amount can be invested in debt mutual funds such as liquid mutual funds. Some liquid funds allow instant redemption through IMPS, subject to certain terms and conditions.
4) Protect yourself and your assets
On your journey to financial freedom, it is vital for you to take good care of yourself and your assets. It is essential to by an adequate amount of life insurance for all the family bread earners. You should take good care of your health by following a healthy lifestyle. Many of us work hard towards wealth creation but, in the process, don't pay much attention to our health. It will be ironic if you create wealth by sacrificing your health early in life, and when you are older, you are forced to spend that wealth to regain your health.
Along with following a healthy lifestyle, you should have health insurance as a backup. Make sure you invest in an adequate amount of health insurance for the entire family under a family floater health insurance plan. Finally, you should take adequate general insurance for your house, vehicle, and other assets.
5) Practise appropriate asset allocation
Now that your budgeting, emergency fund, and insurance are sorted, it is time to focus on saving and investing towards your financial goals. While doing this, it is important to do appropriate asset allocation. The asset allocation process involves investing money in diverse asset classes such as equity, debt, gold, real estate, etc. Asset allocation depends on various factors such as an individual's risk profile, age, time left to achieve financial goals, financial liabilities, etc.
6) Plan your taxes sensibly
While investing towards your financial goals, it is important to make sure the financial products chosen for investment are tax-efficient. Taxes can reduce your overall returns. So, tax planning is an important part of wealth management.
At the time of investment, many financial products allow you a deduction from taxable income under Section 80C of the Income Tax Act. The maximum deduction allowed in a financial year is the amount invested or Rs 1,50,000, whichever is lower.
Some of the financial products under Section 80C are listed below:
- Equity Linked Savings Scheme (ELSS)
- Public Provident Fund (PPF)
- National Pension Scheme (NPS)
- Employee Provident Fund (EPF)
- Unit Linked Insurance Plan (ULIP)
- 5-year bank or post office fixed deposit
While investing, you should give preference to those financial products that give you tax benefits at the time of investment, where the returns are also tax-free. For example, with PPF, EPF, and ULIPs, the returns are tax-free, subject to certain terms and conditions. In the case of NPS, the lump sum amount withdrawn (commutation) is tax-free up to a certain limit, and the annuities are taxable.
In the case of ELSS, in a financial year, the first Rs 1 lakh long-term capital gain (LTCG) is exempt. The incremental LTCG is taxed at 10% without indexation benefit. In the case of a 5-year fixed deposit, the interest amount is taxable. So, while choosing an investment product, consider the tax benefits at the time of investment and the tax aspects at the time of maturity/redemption.
Also Read: Tax Planning Tips For Every Age Group
The wealth creation journey: Well begun is half done
The wealth creation journey, or the journey to becoming rich, can be long and challenging. However, if you plan it well, you can be assured of success. Now that you are aware of the 6 steps to becoming rich, it is time to implement them - and tell others about your journey towards wealth creation.