This is as true for your portfolio as it is for life. It’s difficult to build lasting wealth on hot tips and guesswork. The real power lies in strengthening your financial foundation – knowing why you are investing, how different products work, and what differing goals they serve.
So while seeking blessings from Lakshmi this Diwali, don’t forget to invite Saraswati, too.
Here are five money principles that can help you do just that.
Time value of money
There’s a sneaky monster called inflation that quietly eats away the value of your money. You’ve felt it: ₹100 can buy far far less than it could 10 years ago, and 10 years from now it will buy even less.
The rule is simple: your savings need to grow faster than inflation. At an assumed 6% inflation rate, 10 years from now you will need at least ₹1.8 lakh to buy goods worth ₹1 lakh today.
This is why your investments must earn more than the rate of inflation, and more still once you factor in taxes. Your take-home from this lesson should be to focus on the rate of return instead of gimmicky promises of “doubling your money in 20 years”. Do the math: doubling over 20 years is barely a 4% return! Ensuring your rate of return is above inflation keeps your wealth growing in real terms.
Power of compounding
If there is one financial mantra you need to tattoo on your brain and repeat whenever the urge to liquidate your investments strikes, it is that compounding has seemingly magical powers. Just like a good sleep quietly heals your body, compounding quietly grows your wealth if you give it time. No rocket science here!
Compounding is the magic that turns small, consistent savings into a substantial sum over time. This is because your money earns money, and then that earnings earns money too. The longer you stay invested, the more pronounced the effect. Picture this: over a 10-year horizon, assuming a 7% rate of return, ₹1 lakh would grow to ₹1.97 lakh. Start the journey just five years later and you will need to invest at least ₹1.4 lakh to bring home the same amount.
This is one of the reasons why financial products earmarked for long-term savings usually come with lock-ins. Internalise this mantra to ensure even smaller steps to save add up meaningfully over time.
Goal-based investing
Your money life isn’t much different from your everyday life. You plan your daily tasks, set immediate goals, and work towards long-term aspirations, and your finances need the same kind of treatment. In other words, don’t just save. Putting some money away each month without clear, earmarked goals is one of the most ineffective ways to build wealth over time. It leaves you vulnerable to poor product advice, the temptation to dip into savings, and worse, to chase the next hot trend.
Chalk out your financial goals and you’ll be surprised at the clarity it brings. A short-term goal naturally requires safer, more liquid options.Long-term goals, on the other hand, allow you to take calculated risks for higher rewards. Chalking out your goals is the best way to get your asset allocation right. If you have trouble setting or prioritising these goals, sit down with a professional.
You know you’re doing goal-based investing right when you don’t constantly touch your investments and allow it to work steadily over long periods. If you want to test yourself, ask yourself if the news about EPF withdrawals being extended from two months to 12 months of unemployment disturbed your sleep.
Ring-fence your investments
Your investment journey doesn’t start with the word ‘save’, but the word ‘protect’. Think of it as putting on a safety harness before you start managing your wealth. Protecting your money against life’s curveballs is the very first step toward building a sound investment portfolio.
There are two key protections to set up. First, insurance for severe risks like death, hospitalisation, or damage to assets such as your home or car. Second, you need an emergency fund – covering at least six months of expenses – for unexpected blows such as a job loss, sudden medical expenses, or any temporary hit to your earning capacity.
When you’re insured and have a solid emergency corpus, you don’t have to raid your goal-specific investments allowing it to work quietly toward the objectives you have set.
Cash-flow principles
Ultimately, wealth creation isn’t a one-time activity, it’s a continuous journey. To make it effective and effortless, some basic money rules need to become part of your lifestyle.
We all know the mantra: save before you spend. That’s why it’s often recommended to schedule your SIP for the start of the month. Not only does this ensure your savings are automatic, it also gives your money a little extra time to compound and grow.
But that’s not all. There are some thumb rules that will not only help improve your financial well-being but help you better navigate peer pressure, fear or missing out (FOMO), and other temptations.
Let’s stick to just two basic thumb rules: don’t spend more than half your income and invest at least 20% of it. Of course these are basic rules that shouldn’t stop you from saving more or spending less. Consider them as a balance between doing too little and doing too much.
Follow these and you’ll have a simple yet powerful framework to build wealth consistently.
