Most investors including myself desire to see our portfolios grow steadily. All you want to see is for it to go up and only up. Unfortunately, life and markets do not always comply with what we want. Wealth Building is important irrespective of the circumstances.
There will be times when your cash outflows are more than inflows. In such instances, how would you know you are actually building wealth? When you track your portfolio performance on a day to day basis, you’ll notice that wealth grown is almost invisible.
While tracking your net worth, its swings between positives and negatives, which is totally dependent on the market that day. A good day or a bad day. Or a good month or a bad month. Or a good year or a bad year.
Do these fluctuations mean that you aren’t building any wealth? Well, NO. You are simply measuring the noise in the market. I’m sure this will help you understand better; wealth building is compared to rising ocean levels. All of us are well aware that ocean levels have been rising for a decade now, but how many of us can actually see it rising when we go to a beach? Maybe NONE. The process is very slow and watching the tides and waves will not help you see the ocean’s rise. These are just noises in the system.
All the online financial tools will help you track the day-to-day cash flow levels. However, its just wave-watching. Wealth building is slow, yet very powerful. And also, almost invisible if you are tracking it on a daily basis.
This article helps you to deal with the problem of invisibility, and keep building wealth amidst market noises and tidal forces of the economic cycles.
Wealth building is majorly about two mantras – spending less than you earn and investing more, to earn more. These two habits will help you build wealth. Sounds simple? Then, why isn’t everyone a millionaire? The key to this is being consistent. We get bored. Change jobs. Priorities change. Life gets in the ways and it gets difficult to save. Make sure you follow these two mantras throughout and the wealth will follow.
Save – Spend less than what you earn
If you were saving 20% of your salary for a year, but in the end, you spend it on something that isn’t actually necessary. What’s the use? Your savings disappear. Don’t be weak and spend all your savings. Relentlessly hold on to your savings and aim to save at least 50% or more of what you earn. No matter what, be strong and save more. Don’t fall prey for a new iPhone, car or every changing fashion. Don’t care about what people are thinking, do not spend due to societal pressures. Buy things only if you feel they are necessary. After all, it’s about practising.
Investing in instruments that give you compound interest isn’t enough. Compounding should also be in amounts you invest. In other words, you need to regularly keep stepping-up your investment value. For example, SIPs in mutual funds help you in increasing your returns by averaging out your cost and risk. But, stepping up your SIPs annually, will help you achieve your goals more comfortably. Another way is to keep reinvesting dividends.
Aiming to build wealth is good, but you need to make sure the returns are not eroded by inflation. Like it or not, inflation has become inevitable. This has an impact on your wealth on a daily or regular basis. The only way to beat inflation is either to earn a salary that grows faster than inflation or invest in assets that earn greater post-tax returns than the rate of inflation.
Next, to inflation, this is the biggest contributor to eroding your returns. Lifestyle creep is the gradual increase in lifestyle expenses. In other words, getting used to higher comforts and luxury. With increasing salary, you tend to spend higher. But that’s not how it should be. You should aim to save more. Only then you’ll be able to grow your wealth.
Wealth building isn’t easy to track. It’s a long process – boring and invisible. Noises in the markets are inevitable. Do not get carried away by short term movements, stay put for longer durations. Make it a habit to spend less and save more. Keep increasing your investments gradually. Be consistent with these and wealth will follow. Talk to an advisor if need be, who can help you in investing in the right assets that help you reach your goal.
Good luck with wealth building!