3 Pillars of Wealth Creation

The world of Finance is full of products and services that entice you to part with your money, in an effort to create wealth on your behalf. They are as diverse in their risk-return offerings, as they are in the range of know-how required to profit from them.

Some of us find the task of spotting a good investment in equity shares or IPOs too daunting, while others operate effortlessly in exotic derivatives that “short” the market to make money even when it’s on its way down. Some speak of Real Estate as a sure thing, while others can’t even afford to pay their rent (mortgage), let alone dream of a second property.

Essentially, there are just three levers you can use to your advantage:

  1. Earn More
  2. Spend Less
  3. Invest Better

I know, I know. It sounds so simple and obvious. But, let’s examine them for a moment.

When faced with a situation of needing more money, we often tend to think of only one of these 3 levers to improve our current situation. The fact is that, at any point in time, all three choices are available to us – independently or in combination. What matters is a better understanding of our own Risk Profile, and the assumptions we are making in our decision process.

Let’s take an example. Say, you’d like to save up to buy a car in a few years time.

Your typical response would be to start blocking some of your money in a separate account, or start a Systematic Investment Plan (SIP), so that it is earmarked for the goal you have defined – in this case, buying a car. However, you have several options before you.

A. Invest Better
Since this is a specific, goal-based investment objective, you may be able to afford a slightly higher risk on this particular investment than the rest of your portfolio. For example, venturing into a more aggressive top-rated Equity-based Mutual Fund to improve your chances of earning returns.

B. Spend Less
In addition, you could also take on a target of going out for a meal, one less time than you normally do each month, parking that saving too in your goal-based investment.

C. Earn More
Finally, you also have the option of taking on a part-time assignment that utilizes your skills and helps you earn some extra bucks.

The possibilities are endless, but the concept remains the same; these three pillars are all that’s involved while evaluating any form of financial investment, however basic or advanced the underlying products may be.

When you start thinking actively about the levers at your disposal, you can make a more informed choice about the path you want to set yourself on, to achieve those financial goals sooner.

As always, understand your own risk appetite and the expected reward ratio for any form of investment, before you venture into a new category.

Note: This blog post is strictly an educational and informational service, and does not constitute personalized investment advice. The commentary, analysis, opinions, advice and recommendations represent the personal and subjective views of the Editor, and are subject to change at any time without notice.

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