Do you want to become a Millionaire or in Indian parlance a ‘lakhpati‘ ? Who doesn’t want to be come one. But in order to become a millionaire, one key phrase to keep in mind is ‘Money creates Money‘ !
Let me expand it with an example. Joe is a salaried professional who started working early in his life at age 20. He started investing 100K each year and increased his investments each year by 10%. In the example, we have assumed 10% annual return. The column ‘Annual Saving’ is the yearly contribution by Joe and ‘Return’ is the annual growth in the investment. With these set of assumptions, you would notice that :
- In initial years, the outcome of investments was hardly material;
- By the time the investment journey was in the 10th year, the annual return earned by the investments was equal the annual amount invested by Joe. Things starts looking interesting and the path towards becoming a millionaire is now clearer.
- While it took 10 years to touch first 25 lakhs (yellow row), the next 25 lakhs were added to the portfolio in 5 years (age 33) and the next 25 lakhs were added in 2 years (age 35) and then sooner, each year.
The point I am trying to drive home is > For money to be able to work for you, it needs to exist in your investments in the first place. And for it to materially add value, it needs to be accumulated in material proportion – RELIGIOUSLY & with DISCIPLINE! After crossing a threshold, it ends up becoming a snow ball and churns out additional money for you, provided you stay invested AND are invested in the right place.
So how do you reach your first material threshold – in this example, first 25 lakhs ?
Too Much Idle Money in Bank
It is critical to have sufficient liquidity in your bank account to take care of your day to expenses. In addition, emergency funds are a must to tackle with unforeseen circumstances. But beyond that, every additional Rupee in your bank account is making your bank rich, i.e. your bank is making money on your money. Your bank gives you a meagre interest of 2.5% to 6% and in turn loans that out earning in double digits. Turn the table and invest that money.
Invest in Growth Assets
Each individual has life goals which needs to be achieved in short to long duration. Any goals which are over 10 years should be gainfully supported via investments in options such as Equities / Real Estate options which could generate wealth at a faster rate compared to other options. In this journey investing via Mutual Funds in a Systematic Investment Plan can work like magic for most. Read our blog post ‘How SIPs Work‘ for more details.
Compounding Magic – Let it Grow
Once invested in a growth asset, avoid churn and exits. If you end up withdrawing funds on & off to meet your needs, this will put significant breaks in the compounding engine of your wealth journey. If Joe withdraws 20% of his funds every five years, you cand see the impact. His first 25 lakhs is pushed by over a year. His first 50 lakhs is pushed to Year 16 (vs Year 14 earlier). By the time he is 50, the difference is over 2.75 crores !
Watch Your Expenses
“Too many people spend money they earned..to buy things they don’t want..to impress people that they don’t like“Will Rogers
Investing for future is a simple equation.
Income – Expenses = Investable Surplus
The only way you can increase your Investable surplus is by increasing
your income OR reducing your expenses OR BOTH. While Increasing Income may not always be in one’s immediate reach and is a gradual process, reducing expenses could be a quick win. I am not saying that sacrifice your present for the future. But balancing it is a good middle path. What is the use of the future if there is no present. But there will be no future if you don’t invest for it.
Avoid Costly Mistakes
You may be on course towards your goals, but one costly mistake can derail from your track. While this could be a topic for a whole blog post, top mistakes which come to my mind include :
- Redeeming your investments seeing markets going down.
- Redeeming your investments to satisfy impulsive spends, holidays, fancy cars.
- Investing in avenues which may sound too good to be true. Always remember, risks and rewards come hand in hand and there are no free lunches
- Being a rear view mirror investor and hopping from one investment to other in hope of better returns, just because your investment didn’t as good as the ones out there.
Most of these mistakes can be avoided by taking help from an experienced Finance Professional.
There are primarily four key assets in the world – Fixed Income Instruments (FDs, Bonds, PPF, PFs, etc.), Precious Metals (Gold, Silver), Real Estate and Equities. All of them have their pros and cons. Like a cricket team, you need strengths of all of them and balance their weaknesses out. You need a Rahul Dravid AND you need a Virendra Sehwag. Both have their critical place. One provides much needed stability and another some really fast runs. A carefully identified asset allocation and staying on course is a good way to not only generate wealth, but also tries to maintain it.
Cover Your Risks
To reduce your chances of going off track from your target of accumulating your first material corpus, you should have your key risks covered by taking insurances. The better coverage you keep, the lesser uncertainity you will be exposed to and lesser will be the requirement for you to keep liquid idle funds. You could read our blog posts for more details > Medical Insurance – Health Is Wealth , Critical Illness Insurance and Term Insurance- First Step Towards Financial Planning
I would like to conclude this post with a quote from Robert G. Allen
‘How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case.‘