As you know by the title, the topic is ‘3 ways to become rich. Here I would like to give some clarifications. What does becoming rich mean? There is no single definition for this like holding Rs.1 crore or Rs.20 lakh makes one rich.Becoming rich depends on arranging savings and investments out of your income and planning for various expenses. The expenses can be buying a house, car, and children’s education and marriage. If you save your money by preparing a budget and plan money for your income as per important needs, you are rich.
Following this, I have brought today that talks about 3-4 things that can help manage and save money. I will discuss tips that will make you rich regardless of whether your income is Rs. 1 lakh, Rs.10,000, or Rs.5,000. Every week we bring 3-4 videos to help you become an intelligent investor.
Now, let’s talk about the first point, which can make you rich when taken into consideration. It is the ‘Power of compounding. Every investor or even a normal person who wants to save money for basic needs must know about compounding. When one earns a return on return on a long-term investment, then it means that compounding has begun. You start taking the benefit of compounding when you start earning interest on interest or profit on profit. Compounding is quite important. Let’s talk about the trick of making the most benefit of it.
Compounding works by delivering good returns on money for long-term investment by accumulating it to a huge amount in the future. The hidden trick of compounding is the time period.Compounding works virtuously only when there is a long term investment. Assume that you made an investment for the next 3 years. Here you will receive a compounding effect, but this will be less than the benefit received in 25 years of investment.
Let’s see how you can benefit from this. Assume that you are 25 right now and retire after 25 years of age, i.e., aged 50. Today you will start investing for the next 25 years. Here you can take the benefit of compounding only for 25 years. If you have to retire, you have 2 options. The first option is starting investing aged 20, the second is at 25 years of age. Now I will tell you the benefit of a longer time horizon in compounding. To explain the power of compounding, let me take you to my screen. I had thought about two investment plans.
Assume that I invest Rs.25,000 every month for the next 20 years in an asset which gives a 12% return every year. By doing this, I will make an investment of Rs.60 lakh in totality. Here the total value of an investment will equal Rs.2.5 cr. It means that with Rs.60 lakhs investment, you can make an amount of Rs.2.5 cr. Now I talk about the same amount and asset but the different time periods. If you invest for 25 years instead of 20 years, your return, in this case, will be Rs.4.7 cr. Today you make an investment of Rs.75 lakhs, and your return will be Rs.4.7 cr. Comparing both, we find that with Rs.60 lakh and Rs.75 lakh investment, the return will be Rs.2.5 cr and Rs.4.5 cr, respectively.
The difference between the two is the starting point of investment, early in the second case. If you want to become rich and save money for your requirements, you should start investing early. As early as you start your investment, and as long it is, the power of compounding will be more impactful, and your returns will also improve. When returns improve, the goal for which you saved money will be fulfilled. Also, if you have enough money for your needs, you will definitely become rich.
The second trick is actually a mistake that can act as a hurdle when you want to become rich. A lot of people and investors commit this mistake. Investment starts when a person makes returns on the savings (the amount left) after earning money and fulfilling all needs. But some people start investing in small amounts. When they find a 10-20% return on investment, they start taking loans for further investments. Let me clearly tell you that you must invest your own money. Never take debt for investment as it is quite risky. Let me give you an example over here.
Assume that you have taken Rs.10 lakh debt to invest in an asset, which will give a 10% return. On the contrary, the loan of Rs.10 lakh has 8% interest payable. So this 8% interest is fixed. Now assume that you have invested Rs.10 lakh in an asset where you felt that 10% return will be receivable. But in reality, you receive 0% or negative 10% return. In this case, you will have to pay 8% interest on the debt and will also suffer a 10% loss. So your overall loss will be 18%. In this case, the benefit will only be when the return is more than the interest amount. This is always risky. You should not invest money by taking up debt. As no return is payable on debt, but you have an extra interest payment. Whenever you make an investment in risky assets for higher returns, the chances of losses are high. I have seen in many cases where people have incurred huge losses in such conditions. Hence you should save your money in one place. After saving, the amount the money left should be invested by you so that your risk is minimum and your return is virtuous. Also, always make long term investment in assets.
The third and important trick is maintaining an emergency fund. What is an emergency fund? As told in the beginning, the definition of being rich includes having enough money for your needs. Assume that you bring Rs.10,000 income home every month. Out of Rs.10,000 of income, house expenses are only Rs.5,000. Here you can save Rs.5,000. In this case, out of the expense and savings of Rs.5,000, each the latter amount can be added to the emergency fund. What is the Emergency fund?
Assume that all of us do a job. When there are chances of losing the job, the emergency fund offers the money to survive. A common question asked by a lot of people is- How huge the emergency fund should be? An emergency fund is normally 5-6 times of monthly income. You must save this amount and invest in such an asset where you will not take any risk. You can either put this money in liquid mutual funds or bank F.D. This money is for your emergency time. Whenever you need money, you will not have to take money out of the investment. Here emergency fund will be there, which can be used to fulfill emergency needs.
A lot of investors commit the mistake of not preparing an Emergency fund. Through this video, I want you to maintain an emergency fund from today so that you can have enough money in case of any unexpected event in your life. In these cases, you don’t have to use invested money but have to take your emergency funds. Because if you use your invested money in an emergency time, then your investment return will get ruined in that case. Also, the long term benefit of compounding will get ruined. You should maintain an emergency fund equal to 5-6 times of your salary. You have to invest this amount in such an asset where there is absolutely no risk.
For risk, you have already made an investment in many avenues where you will be getting great returns. Last but not least, you must do mandatory/important insurances like health insurance. Assume that you have a monthly income of Rs.50,000 and you got really sick, which leads to Rs.5-6 lakh expenses. After Rs.5-6 lakh expenses, your entire income will be diverted towards hospital income, and in this case, your long term planning of getting rich would be in vain and get ruined.
Hence it is said that you should take your health insurance in advance. If there is any unexpected event related to your health, then a cover is available, and there is no need to panic. More than just not panic, your savings, and personal finance are not ruined in an emergency time. Besides this, you should spare money for unexpected events and do insurance like term life insurance. It is normally said that you can plan a budget for planning an event. But assume that your health goes wrong or some unexpected event occurs, then you cannot plan its date nor its budget.You must do mandatory insurances for unexpected events in advance so that you don’t need to worry about the budget in these cases. Also, your investments will be safe.
This was today . where I explained to you that risk is not important for getting rich. Getting rich means that one should be able to save his/her income as per the needs. So that in the coming times you have enough money for your monetary needs. It is important for you to invest at a virtuous place, know your risk, prepare an emergency fund, and plan your insurances. So that in case of unforeseen events, you have enough liquidity. If you take these things into consideration, then I believe that you will fulfill your needs and excellently manage your personal finance. Keep these things in mind and invest in remarkable assets. More than investing in good assets, it is important that you take the benefit of compounding. For this, you should invest for a long time as a long period will increase your returns, and you will be able to plan your expenses accordingly.