How is wealth created?
simply I say
it is created out of making investments. You earn, make expenses, save money and invest for the long term that is how wealth is created
Wealth is created with the help of strong wealth creating assets; every game has rules to follow and wealth creation is no different. Wealth creation has some rules to it and those who understand those rules are able to find cheese (true wealth) in life. Wealth is not about having a lot of money; many people think more money equals to wealth, which is not true. Wealth is all about building capital. Many people confuse high income with being rich. Wealth is something you create from money
Wealth is about building capital i.e. financial resources. You have to invest in those wealth creating assets where capital is created. You invest Rs. 50,000 in an Apple product, where no capital is created or you invest Rs. 50,000 in a mutual fund, where capital is created? The capital you build is the resource, which helps you in achieving financial freedom.
Many people’s overall networth sometimes does not match their yearly income even after completing 10-13 years of working.
“Your wealth will grow not just by the income you earn, but what you do with the income you earn”
Right now income comes in your life because of the job that you have. Now what you do with your saving determines how much wealth you will create. The money that you save you can either invest that money into security asset or you will invest your money in growth wealth creating asset.
Let me make you clear about these two wealth creating assets.
Security assets: They are considered safe wealth creating assets. As an investor, you are able to generate risk-free return in a few security assets. Some examples of security assets are fixed deposits, government bonds, Public Provident Fund, insurance policies, recurring deposits, NSC and money market instruments. Be clear that here your money is not working hard for you. Here the focus is on preservation of wealth rather than growth, because your real return is not positive (return minus inflation).The inflation itself eats what you earn on these investments.
Growth wealth creating assets: After working with many investors we have identified three Strong wealth creating assets. The strongest is when you own your business. Business is a strong wealth creating asset. If business turnover is Rs. 500 crore, one does not have to worry about children or any other financial goal; it is all taken care off. The second strong wealth creating asset is real estate and the third wealth creating asset is dired equity or equity mutual funds, If you want to produce wealth, your money has to be in one or any of these three wealth creating assets. Here the focus is on growth. Here you can make your money work hard, many of our clients have been able to generate 15% CAGR returns though growth wealth creating assets. However just understand that you should educate yourself on how these wealth creating assets work and the whole game by yourself.
“If you want to produce wealth, start to invest in growth-oriented wealtn creating assets. Choose a wealth creating asset that has the potential and capability to make you rich. The fear of losing money makes most investor choose the traditional security route”
Pick one strong wealth creating asset and then buy that wealth creating asset with a Time horizon of 10-15 years. Money masters source their wealth creating assets continuously no matter where the market goes.
| Name of Asset | Type |
|---|---|
| Mutual Fund | Growth Wealth Creating Asset |
| Life Insurance Policies | Security Asset |
| PPF | Security Asset |
| EPF | Security Asset |
| FD | Security Asset |
| Gold | Security Asset |
| Real Estate | Growth Wealth Creating Asset |
| Bonds | Security Asset |
| Cash | Security Asset |
| Stock | Growth Wealth Creating Asset |
No need to rush. Slow down and based on your overall financial strength pick any one wealth creating asset that you are going to source. Growth wealth creating assets are opposite to security assets.
As of now, choose one of the three and concentrate on one wealth creating asset fully. Most investors act as dabblers, they dabble from one wealth creating asset to another and in that they are unable to produce wealth in life. Focus on one wealth creating asset and strengthen it. Remember winners focus and losers pray. Make a commitment to the wealth creating asset, consistent no matter what others say or do.
Choose Business as a Wealth Creating Asset, IF
- You are highly entrepreneurial and you know the dynamics of doing business
- You are a high risk taker
- You have strong relationship with sales
- You are prepared to face uncertainty
- You are willing to work long hours
Choose Real estate as wealth creating asset, IF
- You are strong with legality of property
- You have good legal knowledge
- You can deal with headstrong tenants
- You are willing to invest in expensive properties
- You are a good negotiator – real estate is all about making a deal
- You are a high risk taker
Choose Direct Equity or Equity oriented mutual funds as wealth creating asset, IF
- You are analytic, and you can play a bit with numbers
- You are willing to invest in businesses
- Good with reading financial papers and annual reports
- You can study and select good performing mutual funds
- You are willing to monitor your stocks and funds on a regular basis
- If you are disciplined and your basic understanding of markets is sufficient
You have to pick the one that you can make a commitment to. Wealth creating asset is a long term commitment you are making with your own self.
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