Earning more income does not necessarily make you wealthy!

Investment

oi-Sneha

By Kripananda Chidambaram

Published: Wednesday, December 19, 2012, 12:45 [IST]

Are you confused reading the title? Wondering where is the conflict in the statement? You may argue; both income and wealth is same.

But that is not the case; perhaps we can go to an extent of even saying both are mutually exclusive. You may have personally experienced this in your life too. Your salaries have gone up manifold from the first salary you earned and yet your investment corpus has remained stagnant. In fact you EMI have shot up to sky.

Ever wondered why this conflict? More income yet less wealth.

This is primarily because we were focusing on earning income and presumed wealth creation will happen automatically. Or many of us were busier in improving the immediate standard of living.

Smarter ones are those who can create a good balance between income, right lifestyle and wealth creation.

How do you do this?

Continue chasing higher income opportunities and yet keep a tab on your lifestyle. Income is inflow of money that immediately goes out as expenses. So if you are not able to plug the outflow nothing will remain with you. It is like a city that has good rainfall and still it has water scarcity as it let go all the water it got to drains and sea.

Similarly we too will have money scarcity if we let go all our incomes to meet just our current needs. Outflow should always substantially be less than your inflow. Then what remains with you is surplus.

Now, is just having surplus good enough for wealth creation? No, we need to go one step further. We need to ensure it is stored well so that it can give us the value in the future.

Now the big question, how can you do this?

You may take the help of COMPOUNDING.

Yes, the one proven and easily implementable method of wealth creation is compounding. Compounding is very powerful and unfortunately many of us underestimate its utility. Compounding happens when you invest your money and the return it earns is reinvested back. That literally means you invest and do not take any returns till the last.

Assume a person is investing Rs 15000 pm for 25 years. He lets it compound for 25 yearsand assume the investment is growing at 15%,and at theend he may have cool Rs 2.5cr.

You may still have one more question. Where to invest? Compounding itself is a powerful thing irrespective of the product you invest in. But one thing you always want to do is preserve the values of money i.e maintain the purchasing power. For that to happen you may have to choose products that can beat inflation. Conceivably equity and equity related products, gold and real-estate are the products that have the power to beat inflation.

Author

Kripananda Chidambaram, Director at Fintotal