Most people worry about significant expenses in the future, like buying a car, funding marriages, spending on health and life after retirement. You may worry about having enough funds to support your needs while improving your standard of living. A straightforward solution to this is long term wealth creation.
The process of wealth creation is not a fast and easy process. It takes consistent efforts over a prolonged period. You must follow a pre-decided plan of action. Read on to know more about how you can successfully set yourself up for a comfortable retirement.
Wealth creation and the importance of starting early
Wealth creation refers to increasing your investments while simultaneously reducing your debts in the long term. You can invest in various asset classes to fulfill your personal goals. To gain the most benefits, it is paramount that you start investing early.
Let us take an example.
Assume Mr. X is currently 25 years old and earns an income of Rs. 2 lakh per month. X spends Rs. 1.75 lakh and saves or invests the remaining Rs. 25,000 into various schemes. X plans to retire at the age of 60 and hopes to live up to the age of 80.
Now, if X gets a yearly return of 7% on their investment (compounded annually), their retirement corpus at the age of 60 would be approximately Rs. 4.4 crore. If you assume that this Rs. 4.4 crore is not further invested, Mr. X would have a monthly income of around Rs. 1.86 lakh for monthly expenses till he turns 80.
As a thumb rule, your monthly income after retirement should be about 80% of your monthly income before retirement.
Now, consider another person Mr. Y. His financial profile matches exactly with X, but he started investing around the age of 35 instead. At the age of 60, his retirement corpus would be just a little over Rs. 2 crore. With this, Y’s monthly income turns out to be around Rs. 85,000 till he turns 80. This is significantly less than his pre-retirement monthly income.
Here, a ten-year difference has yielded a difference of over Rs. 2 crore between the wealth of the individuals. This is why the earlier you start investing, the better it is for you in the long term.
Let us look at some tips to help you create wealth for your future.
5 Tips for Long-term Wealth Creation
Investing and creating alternative sources of income is one of the major ways to create wealth in the long term. The following tips can help during investment.
1. Create a strong financial plan
Before you start investing for the long term, it is very crucial to define all the factors such as the duration of investment, your risk appetite, and the amount of investment. Ask yourself what you plan to purchase with your returns and where you would like to invest. Formulate a plan that considers all these factors while helping you reach your goal. Arbitrarily investing with no strategy can possibly hurt your long-term gains.
2. Have patience
Long term investing is challenging as there is no instant gratification that you receive from the act of saving. But the benefits are truly unparalleled. It is crucial to stay invested for the long term to reap the maximum benefits of asset appreciation. Moreover, some investment plans like mutual funds and stocks deliver the highest returns when you stay invested for the long term. Try your best not to pull out your investment for any expenses.
3. Diversify your portfolio
Not diversifying their portfolio is one of the biggest mistakes most people make. Diversification means that you invest in a wider variety of investments with varying levels of risk and investment duration. While diversifying, do not assign more than 5-10% of your portfolio to a particular section. This helps you reduce your risk significantly. Learn how to calculate your portfolio risk in our blog here.
However, it is also crucial to not over-diversify. It spreads your funds too thinly across various assets, tracking which can be cumbersome.
What is portfolio diversification? How does it affect your returns in the long run? Read all about it in our article on the TejiMandi blog.
4. Seek the services of a professional
Most people do not know the ins and outs of the financial world. You may need a little support, especially in the beginning. Reaching out to a professional financial advisor can drastically change your investment strategy for the better. They help in formulating a financial plan which aligns with your goals, suggesting investment options and so on.
The experts at TejiMandi come with years of experience and the trust of thousands of investors. Contact us to start your financial journey right.
5. Take Advantage of the Power of Compounding
A major benefit that comes with long-term investments is the power of compounding. Compound interest is earned on the total amount, including the principal and interest you receive on it. After the first year, interest is calculated on the principal amount along with the previous year’s interest. When considered according to simple interest and compound interest, the difference between your returns is astronomical.
Let us consider a simple example. If you have invested Rs. 1000 every year into a scheme that yields an interest rate of 10% for 34 years. When calculated with simple interest, your maturity value would be Rs. 37,400 (Rs. 34,000 principal amount + 3400 interest earned).
Now, if the interest received is compounded annually, your returns at the end of 34 years will be Rs. 2,70,000. The difference between both of the returns is massive at Rs. 2,32,600.
The pace of wealth creation increases a lot more when you choose to invest in options where the investment is compounded. The best example of this is a Systematic Investment Plan (SIP).
Conclusion
The best decision you could possibly make is to start investing at the earliest. Planning, saving and investing in an organised manner can help better your current spending habits and ensure that you have a comfortable standard of living for the rest of your life.
Read our blog here to learn more about creating a retirement plan depending on the stage of your life.
