Building physical strength requires gruelling exercise and discipline. Financial might, too, can be built with hard work and discipline. It also needs planning, wisdom, and patience. No great wealth was built in a day. As Leonardo da Vinci said, “He who wishes to be rich in a day will be hanged in a year.” So take your time, create a plan, and invest in a disciplined manner over a long period to create your wealth.
Here are some tips to becoming a financial superhero.
- Invest in equity to create wealth
The world’s richest get their net worth from their equity holdings. They do this by either creating valuable companies, or by investing in valuable companies. So think of ways in which your wealth can appreciate faster. You have to invest in asset classes that will provide higher returns than simple, risk-free instruments such as bank deposits and PPF. To create wealth, you must be ready to take risks and invest in equity securities such as shares, equity mutual funds, ELSS funds, etc. These have the potential to multiply your funds over a short period of time. Equity investments are not for the risk-averse. To go the equity route, you must be prepared to absorb market shocks.
- Take ‘good’ credit and build appreciating assets
Taking ‘good’ credit is always advisable. This means that you are taking a loan for creating assets which appreciate over time, which is great from the perspective of building long term wealth. For example, a Home Loan can help you purchase a property whose value will increase over time, and you can also earn a rental income from it. But if you take a Credit Card loan to buy a TV, it’s bad for your financial health since you’re paying a high interest rate on a loan for a product whose value would depreciate over time. The more ‘good’ loans you take over the long term, the more appreciating assets you will have, and the wealthier you’ll be.
- Insure your life and health against uncertainties
No matter what your financial strength, you could lose it all if you’re not adequately insured. It could be due to a health issue or the loss of the family’s bread winner. It’s important that you safeguard yourself and your family from the financial hits of such tragic events. Life Insurance and Health Insurance plans are essential to any financial portfolio. They may not be investment assets, but they will keep your investments safe in case life unleashes a wrecking ball in your direction.
- Create an emergency fund
Confucius said, “Success depends upon previous preparation, and without such preparation there is sure to be failure.” This is also true about managing money. Prepare for trouble, because it comes unannounced. While life and health insurance help take care of your finances, you need an emergency fund to carry you through difficult events where your insurance may not help – events such as the loss of employment. An emergency fund is a must have. This would prevent you from dipping into your long-term investments, and keep you going till you’re back on your feet again. Ideally, your emergency fund should be able to cover you six to twelve months of your fixed and variable monthly expenses.
- Repay your debts on time
If you have availed of a loan, it’s your financial, moral, and legal obligation to repay it as per the terms of the loan. This includes your Credit Card bills. Repayment on time doesn’t just save you from the penalty charges but also improves your Credit Score, making it easier for you to take loans in future. You must have a repayment plan in place even before you take a loan. Avoid taking more loans to pay off existing loans.
You may not be the rightful heir to a mythical kingdom, but you could still be rich. Invest systematically, insure against life’s vagaries, borrow smartly—and keep believing in your money dreams.
(The writer is CEO, BankBazaar.com)