Sunday, April 30, 2017

3 Simple Steps To Building Wealth




Courtesy :Investopedia



Building wealth – it's a topic that sparks heated debate, promotes quirky "get rich quick" schemes and drives people to pursue transactions they might otherwise never consider. "Three Simple Steps To Building Wealth" may seem like a misleading title, but it isn't. While these steps are simple to understand, they're not easy to follow.

The Steps

Basically, building wealth boils down to this: to accumulate wealth over time, you need to do three things:
1.     You need to make it. This means that before you can begin to save or invest, you need to have a long-term source of income that's sufficient to have some left over after you've covered your necessities.
2.     You need to save it. Once you have an income that's enough to cover your basics, you need to develop a proactive savings plan.
3.     You need to invest it. Once you've set aside a monthly savings goal, you need to invest it prudently.

Step 1: Making Enough Money

This step may seem elementary, but for those who are just starting out, or are in transition, this is the most fundamental step. Most of us have seen tables showing that a small amount regularly saved and compounded over time can eventually add up to substantial wealth. But those tables never cover the other sides of the story – that is, are you making enough to save in the first place? And are you good enough at what you do and do you enjoy it enough that you can do it for 40 or 50 years in order to save that money?
To begin, there are two types of income – earned and passive. Earned income comes from what you "do for a living," while passive income is derived from investments. This section deals with earned income.
Those beginning their careers or in the midst of a career change can think about the following four considerations to decide how to derive their "earned income":
1.     Consider what you enjoy. You will perform better and be more likely to succeed financially doing something you enjoy.
2.     Consider what you're good at. Look at what you do well and how you can use those talents to earn a living.
3.     Consider what will pay well. Look at careers using what you enjoy and do well that will meet your financial expectations.
4.     Consider how to get there (educational requirements, etc.). Determine the education requirements, if any, needed to pursue your options.
Taking these considerations into account will put you on the right path. The key is to be open-minded and proactive. You should also evaluate your income situation annually.

Step 2: Saving Enough of It

You make enough money, you live pretty well, but you're not saving enough. What's wrong? There's only one reason why this occurs: your wants exceed your budget. To develop a budget or to get your existing budget on track, try these steps:
1.     Track your spending for at least a month. You may want to use a financial software package to help you do this. If not, your checkbook is the best place to start. Either way, make sure you categorize your expenditures. Sometimes just being aware of how much you are spending will help you control your spending habits.
2.     Trim the fat. Break down your wants and needs. The need for food, shelter and clothing are obvious, but you also need to address less obvious needs. For instance, you may realize you're eating lunch at a restaurant every day. Bringing your own lunch to work two or more days a week will help you save money.
3.     Adjust according to your changing needs. As you go along, you probably will find that you've over- or under-budgeted a particular item and need to adjust your budget accordingly.
4.     Build your cushion – you never really know what's around the corner. You should aim to save around three to six months' worth of living expenses. This prepares you for financial setbacks, such as job loss or health problems. If saving this cushion seems daunting, start small.
5.     Get matched! Contribute to your employer's  and try to get the maximum your employer is matching. Some employers match 100% of the participant's contribution, and this can be a big incentive to add even a few dollars each paycheck.
The most important step is to distinguish between what you really need and what you merely want. Finding simple ways to save a few extra bucks here and there could include: programming your thermostat to turn itself down when you're not at home; using plain unleaded gasoline instead of premium; keeping your tires fully inflated; buying furniture from a quality thrift shop; and learning how to cook. This doesn't mean that you have to be thrifty all the time: if you're meeting savings goals, you should be willing to reward yourself and splurge (an appropriate amount) once in a while! You'll feel better and be motivated to make more money.

Step 3: Investing It Appropriately

You're making enough money and you're saving enough, but you're putting it all in conservative investments. That's fine, right? Wrong! If you want to build a sizable portfolio, you have to take on risk, which means you'll have to invest in equities. So how do you determine what's the right exposure for you?
Begin with an assessment of your situation. The CFA Institute advises investors to build an Investment Policy Statement. To begin, determine your return and risk objectives. Quantify all of the elements affecting your financial life including: household income; your time horizon; tax considerations; cash flow/liquidity needs; and any other factors that are unique to you.
Next, determine the appropriate asset allocation for you. Most likely you will need to meet with a financial advisor unless you know enough to do this on your own. This allocation will be based on the Investment Policy Statement you have devised. Your allocation will most likely include a mixture of cash, fixed income, equities and alternative investments.
Risk-averse investors should keep in mind that portfolios need at least some equity exposure to protect against inflation. Also, younger investors can afford to allocate more of their portfolios to equities than older investors, as they have time on their side.
Finally, diversify. Invest your equity and fixed income exposures over a range of classes and styles. Do not try to time the market. When one style (e.g., large cap growth) is underperforming the S&P 500, it is quite possible that another is outperforming. Diversification takes the timing element out of the game. A qualified investment advisor can help you develop a prudent diversification strategy.

38 comments :

  1. Thanks Sir for this very timely article

    ReplyDelete
  2. Dear VP
    What's your call on Asahi songwon and Uflex ??

    ReplyDelete
    Replies
    1. Asahi Songwon is a stock suggested around Rs.85 .

      http://value-picks.blogspot.in/2010/11/asahi-songwon-colors-ltd-buy-on-decline.html

      At CMP , Rs.305 , neutral on it.

      Not tracking Uflex


      Delete
  3. Dear VP your views on Shree digvijay cement after its results? Do you think it will be a beneficiary from teh affordable housing theme in medium term?

    Regards
    Mukesh

    ReplyDelete
  4. Dear vp ji
    Please share views on sika interplant.
    Thanks a ton

    ReplyDelete
    Replies
    1. Sika Interplant suggested below Rs.70 , High risk investors may hold at CMP Rs.197

      Delete
  5. Sir would like to know your views on RSWM.?

    ReplyDelete
  6. Sir your opinion on arrow green tech pl.

    ReplyDelete
    Replies
    1. This stock already appreciated about 35 times from the suggested level of Rs.14 , prefer tp book at least part profit .

      Delete
  7. Sir your views on Pennar industries ltd at current price?

    ReplyDelete
  8. Your view on Himatsignka Seide please

    ReplyDelete
  9. sir want to know your view about wpil?

    ReplyDelete
    Replies
    1. Already suggested more than once at lower level , neutral at CMP.

      Delete
  10. Dear Sir, Your views about Persistent Systems and Ujjivan. Ujjivan is in downtrend for the past few days !

    ReplyDelete
    Replies
    1. Microfinance sector facing some challenges in recent times , that may be the reason for downtrend in Ujjivan.

      Persistent is for long term passive investors.

      Delete
  11. Dear vp ji

    What's your opinion on balaji tele films, now they are focussing on digi business for future growth. Do you think its the right time to enter for a long term investor.
    Thank you

    ReplyDelete
  12. Dear VP Sir, Plz share your thoughts on Selan Exploration. I am kind of stuck here from last 3 years. Plz excuse for posting anonymously.

    Thanks for help and guidance all these years.

    ReplyDelete
    Replies
    1. Purely depends on Crude price movement ,which is difficult to predict at the moment , but seems only range bound movement in short to medium term.

      Delete
  13. Whats your view on MIC Electronics as of now???

    ReplyDelete
    Replies
    1. Expecting improvement in business , but lot of equity expansion happened in recent past which may affect price movement at least in medium term.

      Delete
  14. Sir can u please share your views on
    Mac Charles

    ReplyDelete
  15. Dear VP sir,

    Kindly share your view on valiant communication and Gujarat borosil results.

    Thanks
    Varun

    ReplyDelete
  16. Sir, do you track KISAN MOULDINGS or KRITI IND? Thanks

    ReplyDelete
  17. sir can you please share your views about western india plywood ltd.

    ReplyDelete
  18. What is your view on ASIAN GRANITO for long term from here one of your old pick. Holding since the level of 30 rupees.

    Thank you.

    ReplyDelete
    Replies
    1. Asian Granito suggested at Rs.49 which is currently trading around Rs.381

      http://value-picks.blogspot.in/2014/06/asian-granito-ltd-emergence-of-dark.html

      Though this stock already multiplied by 7 times , those with some risk appetite can still hold , others may book part profit to make it free of cost and hold the rest.

      Delete
  19. Sir, please advice me May I accumulate Eco reco at current level? Please reply sir.

    ReplyDelete
  20. Sir, please share your thoughts on Moldtek Pack, Motherson Sumi, Prima plastics, Vascon Engineers.

    Best Regards,

    ReplyDelete
  21. Sir, which one of these is a good buy ... Dr. lal pathlabs, Rallis, Sobha, and Karnataka bank?

    ReplyDelete

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