Wealth creation plan & its Importance

What do you have on your vision board? Do you have long-term goals like buying your dream house, saving up a retirement fund, or financing your child’s higher education? Or, do you have short-term and medium-term goals like buying a car?

No matter what you desire, having a wealth creation plan can bring you closer to achieving it. Wealth creation refers to building wealth through several financial products with the aim of gaining high returns over a period of time. How you create wealth depends on your financial knowledge and personal objectives.

In this article, we will discuss wealth creation’s meaning, importance, and how you can create wealth successfully.

What is wealth creation?

Wealth creation goes beyond earning a stable income. It involves creating an additional income source, building financial assets, and increasing your net worth over time. To create wealth, it’s important to invest consistently across different asset classes, such as stocks, bonds, real estate, and mutual funds, to balance risk and return. Additionally, you must invest for the long term to give your investments ample time to grow.

Setting aside a portion of your monthly income regularly can help you build a financial cushion and invest in wealth-generating assets. Make sure to avoid any unnecessary debt and reinvest your earnings into the market to take advantage of compound interest, which accelerates wealth growth over time.

How can you achieve your wealth creation goals?

Achieving your wealth creation goals requires clear planning, disciplined investing, and regular tracking. Here’s what you need to do:

1. Start by defining your goals

Mention your long and short-term goals. Remember to be specific. For instance, write “save Rs. 10 lakhs for a new car” instead of “invest more money each month”.

2. Evaluate your finances

Know where you stand today. Prepare a record of your income, existing investments, expenses, and debts.

3. Select the right investment strategy

It is crucial to invest in the right investment instruments. Pick index funds, stocks, and equity mutual funds for long-term goals. Debt funds and bonds are for medium-term goals, while liquid funds and fixed deposits are for short-term goals.

4. Start early and invest regularly

Begin investing in the early days of your career to benefit from the power of compounding. Systematic Investment Plans (SIPs) or automated transfers help in generating wealth steadily.

5. Diversify your portfolio

Don’t invest all your money in one type of asset. Allocate your money to different types of financial instruments to reduce risk.

6. Track and monitor

Review your portfolio frequently and make changes if there are market fluctuations or changes in personal preferences.

7. Limit debt and expenses

Do not take high-interest debt like personal loans, and try to grow your savings over time by reducing expenses.

The importance of wealth creation

Wealth creation is essential for the following reasons:

1. It helps you systematically accumulate money. Even if you start small with SIP and fixed deposits, you can achieve your goals.
2. By generating wealth, you ensure a steady flow of income even when you are no longer employed. It allows you to have liquidity, ensure security, and provide for your family.
3. It allows you to be independent post-retirement and cover recurring expenses like healthcare.

Each individual can have multiple objectives of wealth creation across different time horizons. Depending on these factors, you can pick a suitable strategy, like investing in fixed deposits, gold, or mutual funds online.

Additional Read: Simple Strategies to Build Wealth with Mutual Funds In 2022

Creating your wealth creation plan

Most investors get confused when it comes to creating a wealth creation plan. Should you focus on fixed deposits, mutual funds, or stocks? While there is no fixed answer, focusing on your financial goals, risk appetite, and income potential is key to building an effective wealth creation strategy.

The following 3 principles, the ABCs of wealth creation, can help in formulating a plan for success.

1. A - Accelerate your investments

If your income increases, increase your investments, too. This principle helps in maintaining consistent progress towards your financial goals.

2. B - Boost your savings

Cut down on unnecessary expenses and create passive income sources to get into the habit of savings. This strategy gives you more capital for investment.

3. C - Choose the right exit

Determine when you’ll exit your investments. It is ideal to do so when you are about to achieve your financial goals. Timing the exit is crucial to mitigate risks and secure your profits. Don’t delay, or you may suffer losses.

Creating a wealth creation plan requires a balanced combination of consistency, discipline, and strategic decisions.

How to select the right investment option for creating wealth?

Wealth creation requires picking the right investment instruments after a deep understanding of financial goals, risk tolerance, and market trends. You can choose from the following options:

1. Stocks and equity mutual funds: The returns from stocks and equity mutual funds are high in the long term. If you have a long-term horizon and a higher risk appetite, equities are suitable for you. They help in appreciating capital and growing wealth.
2. Real estate investment: Many investors consider real estate for wealth creation because properties are an appreciating asset and offer rental income and capital gains. However, the investment is long-term and demands significant capital.
3. Fixed deposits and debt funds: These investment options provide secure and stable returns. You must opt for them if your risk appetite is low and you desire an assured income. Debt mutual funds are less risky than equities and offer more liquidity.
4. Public Provident Fund (PPF) and Employee Provident Fund (EPF): These tax-saving funds are the best for retirement planning. Backed by the government, they ensure security and let you enjoy the magic of compounded interest over time.
5. Gold and digital gold investments: These are traditional options of investment and help you beat inflation. Based on your financial goals, you can invest in gold ETFs, Sovereign Gold Bonds (SGBs), or physical gold.

Factors to consider when selecting a wealth creation plan

The right wealth creation plan determines the stability and certainty of your financial future. It helps you maximize returns while minimizing risks. Thus, remember to evaluate specific financial aspects before committing to a particular plan.

1. Financial goals

Start by defining your short-term and long-term objectives, such as retirement, children’s education, or buying a home. Your goals determine the type of plan you should opt for.

2. Risk tolerance

The risk level differs for every wealth creation plan. The returns from equity-based investments can be higher but involve volatility, while the returns from debt-oriented options are stable with moderate growth. Choose a plan that you are comfortable with.

3. Time horizon

Every investor can comfortably stay invested for a specific period of time. This period is referred to as the time horizon. A longer horizon allows you to overcome market fluctuations and benefit from compounding.

4. Costs and charges

Check the entry loads, exit loads, and management fees, as these can impact your overall returns.

5. Tax management

Plans offering tax benefits under Section 80C or tax-free maturity gains can maximize wealth creation.

Tips for a long-term wealth creation plan

Wealth creation in the long term requires discipline, patience, and efficient financial choices. The following tips can help you create a strong, long-term wealth creation plan.

1. Start early

Start saving and investing early, as it allows your money to grow with the power of compounding.

2. Define clear goals

Have specific goals, like retirement, buying a home, or your child’s education, to determine an investment strategy.

3. Diversify investments

Spread your money across asset classes like equities, debt, gold, and real estate to balance risk and reward.

4. Control debt

Avoid high-interest debts like credit cards or personal loans. Pay off loans early to have more funds available for investments.

5. Mitigate risks

Don’t invest only in stocks offering high returns. Make investments based on your risk appetite and time horizon.

6. Review frequently

Track and monitor your portfolio at periodic intervals. If it is not aligned with your financial goals, readjust it accordingly.

7. Stay consistent

Make regular investments in financial instruments like stocks, fixed deposits, mutual funds, etc. Opt for SIPs to build wealth gradually.