Wealth Creation Strategies: You Will Not Find Everything Here You Need To Know but Most of the Things That You Should

The last two editions of the newsletter focused on short-term and long-term goals. If you have not read those pieces, I would suggest reading as those are the fundamentals upon which financial well-being is based.

Today, let us dig deep into answering the questions about ways to build wealth.?Most of the answers are based on my learnings from my past mistakes. We will explore the following :

1. Reasons behind not being able to save money
2. Strategies to save more money from a primary source of income.
3. Investment instruments to compound your money

?I believe that one of the significant hurdles to building wealth is saving money. If you can save money, you can invest them periodically too.

It requires financial discipline to save money consistently.?

Why financial discipline??

Even if your salary is high, your lifestyle may correspond to that income and expense. I have a couple of acquaintances who, despite their higher income, express their problems of being unable to save money.

Hence, saving is a habit that needs planning and execution. Let me share my personal story. In??2014,?my annual income(8 years back) was five figures in USD, an income that is considered decent for that period. However, I struggled to manage savings and investments.

Because my expenses were controlled mainly by my wants rather than needs, I would buy stuff?driven more by my desire than my need and utility.?For example, I purchased a?Trek bike?which cost around?$800?back in 2015.

However, I have used it to ride only 100 miles to date. A general bike would have cost only?$250?then. So my desire cost me around?$550?extra, an expense with no utility.

Therefore, low savings result primarily from inefficiencies in lifestyle and habits rather than income limitations. Here are the top reasons and way to tackle low savings

1. You are not able to differentiate between your needs and wants.

Understanding the difference between needs and wants is crucial as it sets the boundary of expenses. The solution is simple to adopt. Before buying any stuff, ask yourself these two questions.

• What is the utility of this expense? Why this, and why not cheaper alternatives?
• If I do not buy it, will my work or growth suffer? Why am I buying this now?

2. You are influenced by others' opinions more than yours'.

Opinion matters to us. This fact applies in all stages of life. You are influenced by your friends' choices, peers in the office, and even random people at work. So, this situation is very typical for most people.?

You see stuff they are using, and you get attracted to its appeal. You cannot explain its utility but still want to have it. Such experiences were innumerable for me. This is where you do not want to get stuck. Such experiences lure you into buying stuff out of fascination and a fanciful lifestyle.

What is the solution, then?

You start by believing in yourself first. Respect others' opinions, but they should not interfere with your decisions.?Try to gauge its utility on paper by listing the pros and cons. You extrapolate your finances one year forward and measure the expense's impact on your current financial situation. If the cost impacts your saving requirements, you should not go for it.

3.?You prioritize your present comfort more than your future's comfort.

Comfort is essential to people's life. Otherwise, we would not be working hard to earn money.

When you consider spending your salary in the first few days of salary credit, you are more driven by your current lifestyle. You are not contemplating the future lifestyle that may affect your irrational spending. Such actions are a vicious habit loop that recurs every time you have money.

You get money, and you want to fulfill your long pending Wishlist. Thus, your savings never see the light of day.

One strategy that I apply is to think about future savings. You can avoid such practices by considering your wealth goal, which is based on future savings. A 10-year wealth goal may provide better clarity on your current commitment. Thus contemplating future savings, you can avoid spending on today's unnecessary comforts.

Moreover, the savings eventually lose their value to external factors such as inflation, emergency expenses, and opportunity cost. However, if appropriately invested, you can appreciate savings to a considerable size. This step is crucial for wealth creation.

4.?Your affordability is not what you can buy with easy money.

Above mentioned reasons can be considered as situations in which affordability will not significantly impact your lifestyle. You spend because you have money, and it does not interfere with your daily need.?

If your income does not suitably meet the expenses you planned to incur, you take Easy Monthly Installments (EMIs) of lower value and extend them over the long term. Such practices are an invitation to destruction. You may notice that you are accumulating huge liabilities by doing so.

You start with paying EMIs on one product, and then you end up paying such EMIs for three or four or more products over an extended time. You will always see lower EMIs amounts but may not notice the number of such EMIs you have to pay.?

This practice eats your savings because you have a liability to pay every month, and thus affects your savings. Over two or three years, you will probably have more needs or wants you want to buy, and this cycle of EMIs rarely ends.

How does it end then?

Avoid this cycle by periodically observing your EMIs as a percentage(%) of total expenses. I believe EMIs should never exceed 10% of your monthly expenses.

So now we know the reasons for not being able to save money,?let us dig into how we can save more.?If you see it from one perspective, learning to avoid spending, as mentioned above, can be reasoned as the way to save more money.

If you follow the above process, naturally, you will save more. However, I want to add a few more things you can do. To get the best out of it, performing these steps sequentially and simultaneously will allow an individual to build wealth effectively.

Strategies

The first thing?you can do to save more money is pay off high-interest debt. High-interest debts generally include credit card debts, Personal loan debts, and Payday loans. Credit card charges are usually between?36%-42%?annually for a loan. Similarly, depending on the loan issuer, personal loans' interest rate ranges between?12%-24%?annually.?

Payday loans are costly loans. These loans are short-term loans for people who do not have money to sustain themselves until the next paycheck. The interest rate is 0.5% to 1% per day.

However, if your salary gets delayed, you will pay high interest for the borrowed money. Paying off these loans will enable you to save more money in principal and interest.

My second strategy?is to hoard contingencies and emergency funds for future uncertainties. Even when you save money to create wealth, you may need to withdraw a portion of it from your wealth portfolio if emergency funds are unavailable. It is undesirable as both money and time have been spent doing the saving.

When such a thing happens, you lose motivation to save more again for wealth generation. Thus your emergency fund comes into the picture during such a crisis. If you deploy some portion of savings into an emergency fund,?you can utilize the fund when needed.

Doing this will not affect your wealth portfolio; thus, your journey to financial freedom continues to be on the correct path.

Generally, an emergency fund should have six months to twelve months of living expenses.

You can perform the first and second steps above to overcome financial instability. Remember, emergency funds are capital required at the time of crisis.?So, you cannot expect a drawdown of its value.

Hence, investing emergency funds in stocks or other volatile markets is not viable when you are just starting. You can make a recurring deposit in Banks, which gives you at least a 4% interest and is a financially guaranteed investment.

If you manage to do the?first two things?mentioned above, your monthly savings will probably increase substantially as your debts and funds are taken care of.?So the third thing?you want to do is make a few changes in your expenses to save more.

You can consider this when your costs are below?60%. Your debt is low and around?10–20 %?of your expenses. Your emergency fund is in progress and is only?15%?of your income. Then you can make enough changes in your expenses order.

Start by categorizing your expenses into accommodation, food, travel, and medical. Doing this will enable you to observe monthly payments and make amends to those visually.

Suppose your monthly expenses are?$600, and your food covers almost?40%?of your cost. In that case, your food expenses will be?$240.?When you convert your categorized expenses into a percentage, it gives you greater visibility.

A?$240?out of?$600?expense is?undesirable.?Such expenses indicate that your food habits are luxurious and unthoughtful or you mostly eat packaged or restaurant foods.

You can reduce such expenses by partly cooking at home and dining outside.?

Above is just an example of how you can arrange your expense order if you can make some changes to your lifestyle habits.

One of the most effective ways in my financial journey has been to track my expenses and priorities. Priorities will help you to manipulate the savings equation from the expenses side. It would be best if you did this.

Expenses= Income- Savings

Rather than doing this

Savings = Income- Expenses

Both equations are the same but slightly manipulated for priority. In the?first equation, Savings is your priority; thus, whatever is left after savings is your expense. This will happen only when you have a budget for savings every month. So keep track of your savings budget.

In the?second equation,?your priority is your expenses. This indicates that your priority is your current wants and needs, not future savings. So after meeting all your expenses, whatever is left is your saving.

There may be a few minor changes in your spending behavior that you can adopt to avoid the second equation.

• Always wait for a few days or weeks before you decide to buy something. This habit will allow you to contemplate the spending requirement and its utility.
• Always track your recurring expenses. Monitor those expenses as?%?of your monthly payments.
• Then categorize them into needs and wants. You will come to a point where you can differentiate and cut down on those "wants."

Now that we covered ways to save more money let's put our savings into wealth creation. Wealth creation is not a gimmick or short-term strategy. One has to learn the process to gain wealth. If applied religiously, financial freedom is achievable to achieve. Here are the?two ways?that you can use to generate wealth from your monthly savings:

The traditional way:

Since your high-interest debts and emergency funds are taken care of, building wealth in this conventional way is all about consistency and diversification. Your primary source of income should be a high-paying job.?

A high-paying job will allow you to invest a minimum of?30%?of your income in different financial instruments. Remember, the more your salary is, the less percentage of your income is required to invest.

As a rule of thumb, a saving of 30% of your income is needed to invest in Stocks, Bonds, digital assets, etc.

The alternate way:

Not everyone has a high-paying job. If you fall into that category, you need to add another source of income to your primary income. In this Internet era, plenty of side hustles can generate more money. Some side hustles require skills. These include writing, coaching, consulting, social media marketing, copywriting, coding, or creative design.

Some do not require skills such as working part-time in a restaurant, car wash, delivery executive, courier handling, etc. Your skills will guide you to the side hustle. But if you have skills, there are many platforms on which you can earn?while sitting at your laptop.

Here is a list of?side hustle ideas?that you can refer to.

Instruments

The Stable instrument:?Bonds, Savings accounts, Provident funds, etc, are the most stable form of investment. During the recession, bond markets generally provide good returns over stock markets as the Central bank's interest rates are high during a recession.

Similarly, savings accounts and provident funds(PF) are guaranteed instruments that provide an inflation-adjusted return. Allocations are subjective, but I try to put a?10%?allocation during recession time in the bond market.

In India, the savings rate is around?4%, and the PF rate is hovering at about?7.25–8.15%,?which is attractive.

So an allocation of 30% of my savings is voluntarily invested in the PF account.

The Volatile Instruments:?In this category, I put common Stocks, High dividend stocks, Index funds, and other Mutual funds. These are volatile markets, but you can obtain an annual return of?7–12%?if invested with solid analysis. High-dividend stocks are good products to invest in, as capital appreciation occurs in stock valuation and dividend payouts.

Index funds are probably the easy way to expose yourself to the equity market. A sizeable allocation in index funds is suitable if you are a conservative investor.

If you have good market skills, allocation in individual stocks is a better alternative, as the market conditions are not always constant. Any good correction in the market can serve you an entry.

30–50% of your savings are suitable for these instruments as a rule of thumb.

Closing thought:

Investment requires discipline and knowledge of the market apart from capital. If invested well, current market conditions can be a good entry for your portfolio allocation. As the recession and inflation fears are all around the globe, a market correction is what you need to get a reasonable margin of safety.

Keep an eye on the market, and the market will reward you well.

Disclaimer        

This article is about personal investment philosophy and a medium to generate awareness in the financial journey. None of the content, in part or whole, articulated here is any financial advice. Please consult your financial advisor before making any financial decision.

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