Two most underrated factors of Wealth Creation

Ramesh, Raghav, Rahul are three friends who graduated and started their careers at the age of 25.

Let us say they got different salaries as follows. What factors determine their wealth?

The first one is known to everyone.

FACTOR #1 - Earnings Rate (Mostly known to everyone)

Ramesh landed up in a good job in a MNC that paid him around Rs 2.50 Lakhs p.m. 

Raghav picked up in an offer in an Indian firm that paid him around Rs 1.50 Lakhs p.m

 Rahul could get a decent job in a startup that paid him around Rs 1 Lakh p.m.

If I asked you to pick only one among the three who will accumulate more wealth in their lifetime who would you choose ? (Ignore Salary Hike and Inflation here)

Most of you would pick Ramesh as he has a better salary among the three.

It is easy choice as Earnings Rate is a one of the factors of Wealth Creation

FACTOR #2 - Savings Rate

If I say that Ramesh is a spender and he lives a good lifestyle not worrying about his future and hardly saves Rs 5000 every month.

Raghav is a saver and saves around 20% of his income which is Rs 30k monthly

Rahul is balanced and manages to save 15% of his income which is Rs 15k monthly 

If I asked you to pick only one among the three who will accumulate more wealth in their lifetime who would you choose ? (Ignore Salary Hike and Inflation here)

Now most of you would pick Raghav as he saves more than the others.

Raghav saves twice that of Rahul and six times more than Ramesh.

FACTOR #3 - Investment Return over long term

Ramesh wants to make quick money as his lifestyle is expensive and indulges in option trading and wants to multiply his capital fast. He borrows a loan of Rs 10 Lakhs and trades and loses his capital and spends next few years closing his loan. No Savings and only EMI. This pattern keeps repeating in his life every few years and he never creates any assets. He lives pay check to pay check.

Raghav does not want any risk to his capital and saves all his money in FD's and safe debt instruments at 6% return p.a. Rs 30k invested every month from age 25 to age 60.

Rahul takes a balanced approach and invests 50% of his savings Rs 7500 into FD & debt instruments at 6% return and the balance 50% i.e. Rs 7500 is invested into equities every month from age 25 to age 60. (assume a 12% annual return in this period)

If I asked you to pick only one among the three who will accumulate more wealth in their lifetime who would you choose ? (Ignore Taxes here)

Most of us think Raghav can get ahead, but when you see the actual numbers it is Rahul. 

Raghav would have saved Rs 4.14 crores in 35 years if he had saved Rs 30k p.m.

Rahul would have saved Rs 5.16 crores in 35 years despite only investing Rs 15k p.m. His Rs 7500 p.m in FD would have earned him Rs 1.03 crores and his Rs 7500 p.m in Equities would have earned him Rs 4.13 crores in 35 years.

How many of you could have guessed this correctly? Rahul despite having a savings rate of 50% lesser than Raghav was able to create a corpus that was 25% more.

KEY LEARNING 

One of the underrated factors of Wealth Creation is Savings rate which is hardly recognized by many. Most of our focus is on Earnings Rate and not the Savings Rate which is a key component of Wealth Creation

Second underrated factor of Wealth Creation is your investment return in long term which has a huge impact over decades. Start to focus on your Investment return on your overall portfolio. This shows what is your actual growth that you are having.

What are your learnings from this? Do share in the comments

Happy Investing

Ravi Padmanabhan

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