The best way to ensure that you remain wealthy is by creating wealth consistently. Read on to know about few smart moves that can help a salaried individual in becoming rich.
Salaried individuals often feel that with their limited income the chances of becoming wealthy is low. This may eventually turn out to be a myth as some smart financial moves and choices can help a salaried individual create wealth during their career.
In this article, we discuss 5 important life hacks to become wealthy.
Hedging The Risk
Salaried individuals have fixed monthly earnings and their income is low especially in the beginning of their career. This makes them vulnerable to several financial risks such as high medical expenses and debt due to unprepared emergencies. Salaried people should try to hedge the risk by taking appropriate financial steps. For example, to hedge the financial risk associated with health problems, salaried people should buy a Health Insurance policy with sufficient cover and pay its premium without any breaks. Similarly, to cover financial uncertainty, create sufficient contingency fund that can help during a liquidity crunch or under financial distress.
Benefiting From Compounding Return
Creating wealth is a slow and long-term process. To get the best results out of your investments, the earlier you start in your career, the better. A small monthly investment has the potential to grow bigger and give you a big corpus for retirement. When you start investing in the initial stage of the career, then compounding return helps your fund grow bigger in a longer duration. For example, at an age of 25 years you start Rs 2000 Systematic Investment Plan (SIP) in Equity mutual fund and keep on investing continuously for 25 years. Considering a moderate return of 14% p.a., you will build a wealth of Rs 54.5 lakh.
You must invest money consistently without any break in the long term. It is important to review your investment portfolio from time to time and make requisite changes as per your risk appetite and return expectation.
Focusing On Small Financial objectives
It is not possible to achieve big financial goals immediately at the beginning of your career. You need proper planning and a focussed approach to achieve such goals. The best way to do it is by targeting your short-term goal in sync with your long-term goals. For example, if you want to buy your own home, then you should focus on arranging the margin money and wait for income to grow bigger so that you can timely repay Home Loan EMIs. You may also start investing in building a corpus for early repayment of the loan. This not only help you in becoming debt-free but also garnering a decent interest over that corpus.
Manage Expenses In Line With Income Growth
You must keep expenses in check if you wish to become wealthy. Some people indulge in unnecessary spending while using credit cards or personal loan to arrange the fund shortfall. Such practices could lead to consistent financial crunch and you may never be able to create wealth.
If you really want to become wealthy, the focus has to be investments as per your financial goal and thereafter using the remaining funds for spending.
Save Taxes And Invest More Money
Taxes, if not managed efficiently, have the potential to eat away a significant portion of your income. Assuming your average income for last 20 years in your career falls in the 30% tax bracket and you invest Rs 1.5 lakh in ELSS u/s 80 (C), buy health policy of Rs 25K to get deduction benefit u/s 80 (D) and invest Rs 50 K in NPS to get a tax benefit u/s 80 (CCD), then you’ll get the total tax deduction benefit of Rs 2.25 lakh i.e. tax saving of Rs 67500 (30% of Rs 2.25 lakh). If you invest Rs 67500/year (i.e. Rs 5625/month) every year in equity mutual fund for 20 years, then you’ll get a corpus of around Rs 74 lakh considering a return of 14% Pa. If you use other methods to save the taxes, like salary restructuring for lowering tax liability, using benefits under other sections such as 80 (E), Sec 24 etc. and then you can save more tax and use such fund to create greater wealth.
Wealth creation requires financial discipline and dedication. Once you have created the wealth, you must take care of managing wealth so that it does not deplete over a period of time.