Wealth Creation needs no luck, no genius & is amazingly simple to achieve. Four separate yet interconnected ideas need to come together to make it possible.
WEALTH = (Cash Flows) * (Financial Habits) * (Consistency) * (Time)
Positive Cash Flows
Making more than you spend creates positive cash flows. Investment of such positive cash flow leading to virtuous cycle of additional cash flow & investment, fulfils the essential condition of wealth creation. The twin themes of earning more & spending less are not mutually exclusive but need very different mindsets.
Spend less – Keep a check on expenses by combining frugality with smart choices. Life should remain pleasurable because too much sacrifice is difficult to sustain in the long run A philosophical distinction has to be made between needs & wants because allowing expenses to rise with rise in income, prevents the expansion of savings pool. A check on expenses could be some or all of the following:
- ‘No loan for lifestyle upgrade’ rule controls expenses, as well as additional interest cost
- Track expenses to ensure accountability
- Check waste on food, transportation & unused services
- AMCs, warranties, repair (not replace) increase asset lifecycle
- Sell unused stuff before buying new ones
Earn More – Earning side is not limiting in nature & has better chance of success with a pro-active approach. Business presents better earnings prospect than service, but carries certain risks as well. Individual circumstance & passion should dictate the choice. Core earnings can be topped up through following initiatives –
- Education & Training improve compensation potential
- Increase job skills to move up the hierarchy.
- Change jobs to fast-track progress
- Do part-time, freelance, work overtime, if job prospects are limited
- Convert hobby into income
Invest with care – One need not be an expert but a working knowledge of finance would certainly help navigate the challenges in investing environment. Financial intelligence is not only key to better returns but also helps prevent financial blunders, that could prove life-altering. It is important to keep the investment philosophy simple & follow time tested tenets of asset allocation, tax efficiency, inflation targeting, risk management & periodical review.
Habits for Wealth
Financial freedom is a very desirable goal, the knowhow of which is very much in public domain. Yet, very few achieve success because means to this goal become an overwhelming chore over time & hence, difficult to pursue. Success demands that what needs to be done, be a natural response to you – a habit.
A habit breaks down a grandiose project into small bits that are easy enough to execute. It is these ‘small financial actions’ done over ‘long periods’ that compound into wealth large enough to make a person financially free. A good start would be to just pick up an element that either improves income or reduces expense, practice it till it becomes your default response. With each good habit, financial freedom becomes an easier goal.
Few good financial habits are as follows:
- Invest at the start of month so that spending options get limited to amount left
- Practice time management & multi-tasking to upskill yourself
- Think of every new purchase in ‘need vs. want’ framework
- Prepay small amount on long term loans
- Review all expense heads to explore eliminating or reducing any wastage
- Exercise & healthy habits (no smoking / drinking) have positive financial effects
Wealth management is a lifelong project & needs consistency in execution to support it. The mathematical wonders of compounding become possible only on account of consistency. A financial plan – appropriate but erratically applied – would struggle to make gains that are large enough to make a difference. Also, both income & expense need financial discipline because compounding on the expense side destroys wealth as furiously as returns create it.
Time & Wealth Creation have a multi-faceted relation. It is the time element in magic of compounding that metamorphizes small actions into huge results.
- Time determines the ease with which a goal can be met – because – need for savings rises at an increasing rate, with decline in time availability for the goal.
- Procrastination (delaying necessary action to later) is said to be wealth suicide in instalments – because – the lost time makes the climb that much steeper.
- It is however, possible to expand the time. Leveraging other people’s time allows one to move beyond 24 hours a day, get more work done & then, sky is the limit for income.