Wealth Creation – Meaning & Importance of Wealth Creation Plan

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 the importance of wealth creation 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?

To achieve your wealth creation goals, it's important to start by defining your short-term and long-term goals and your risk tolerance for each goal. This will help you create the right financial strategy for each financial goal and make it easier to select appropriate asset classes.

It's important to diversify your portfolio across equity, debt, ETFs, gold, etc. to spread out the risk and optimise your returns. If you're new to investing, you can consider investing in mutual funds since they are managed by professional fund managers who track the market and adjust the portfolio to maximise returns.

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

What is the correct path for wealth generation? Mutual funds, fixed deposits, or stocks? Well, wealth creation strategies are not one-size-fits-all. They depend on your savings potential, financial goals, and risk appetite.

However, there are some best practices you must stick to throughout your plan. These are the ABCs of wealth creation:

- As your income increases, increase your investments proportionally.

- Be sure to increase your savings. You can do this by setting up a passive income stream and cutting down avoidable expenses.

- Choose the right time to exit. Plan your exit when you are nearing your goal. 

Choosing the right investment instrument

Today, you have access to a wide variety of investment options. But, not all of them are the right fit for your wealth creation plan.

For example, say you are saving up for a short-term goal for the next 15 months. Now, you cannot do so with a high-risk instrument that can underperform in the short term and compromise the value of your invested amount. In this case, the safety of your money takes priority over your potential returns. The safest option here is to go with liquid funds or fixed deposits.

Conversely, if you want to save up for a house over the next five years, you can choose mutual funds for long-term wealth creation.

Additional Read: Is ELSS a Wealth Creation & Tax-Saving Tool?

Frequently Asked Questions (FAQs)

1. What are the most important factors for wealth creation?

The most important factors for wealth creation include a solid investment strategy, consistent saving, financial planning, risk management, tax efficiency, and compound growth.

2. How much do I need to invest in order to make a corpus of four crores in 20 years?

To create a corpus of 4 crores in 20 years, you can invest in two ways:

- Invest Rs. 86,150 monthly with a 6% annual return for 20 years.

- Invest Rs. 40,035 monthly with a 12% annual return for 20 years.

3. What are the 4 pillars of wealth creation?

The four pillars of wealth creation are income generation, savings, investment, and financial management.

4. What is the wealth creation theory?

The wealth creation theory includes the principles and strategies to build and accumulate financial assets over time through effective capital accumulation, compounding, diversification, and financial planning.