Can you grow rich just by saving money? Definitely Not. You must not only save but also invest to grow rich. The best way to grow rich is earning compounding returns or return on return. To earn compounding returns, you must invest based on risk profile and stay invested for a sufficient period of time. This is the secret to grow rich. How do the rich build assets in India? Let’s find out.
The trick to grow rich is ‘Invest’ money and ‘accumulate’ assets. This looks really simple, but to understand this you must know the relation between investments and asset accumulation.
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Investments are the process of buying assets. These assets generate returns over time.
You have to acquire assets over time and hold them for the long term. This is when assets accumulate. If you invest in equity (stocks and mutual funds) you need to stay invested for the long-term. (This is a time horizon of 5 years or more to generate wealth). This protects you from short-term volatility and you get tax efficient returns. The cost of the investment evens out and you enjoy cost effective returns.
Lets understand accumulate assets through the power of compounding. You are 30 years old and plan to retire at 60. You invest Rs 8,000 a month in an equity mutual fund scheme through SIPs to accumulate a Crore at retirement. Systematic Investment Plan or SIP is a method of investing in mutual funds. Let’s assume a conservative rate of 8% a year. Using IndianMoney investment calculator let’s see how much the retirement portfolio grows at retirement. You get a retirement portfolio of nearly Rs 1.47 Crores. (Do note that inflation is not considered and actual returns are lesser). Through the power of compounding you have earned nearly a crore and a half which shows asset accumulation can make you rich.
This is the gradual collection of assets with the purpose of accumulation. Without accumulation, buying assets is meaningless.
You earn regular income through a job. You are heavily dependent on your salary for living expenses and this means you never enjoy financial independence.
You must reduce financial dependency by being less dependent on salary. You need an alternate source of income to experience financial independence.
Rental Income: This is a common form of passive income. You could buy a second house and rent it or even invest in a commercial property. You earn passive income each month.
Interest Income: Many retired people survive on interest income. You invest in a fixed deposit and earn interest income.
Dividend Income: Many blue chip stocks give dividend income. Buy good undervalued stocks which offer high dividends and earn passive income.
Royalty Income: You can write ebooks and publish them online. You can easily earn royalty this way.
Most people never enjoy financial independence as they can never leave the clutches of their job. Worse, many people don’t even have passive income. Even if you have passive income, it could be 20-25 years before this income replaces job income or becomes a job replacer. You must take baby steps to move from job dependency to passion dependency.
Many rich people who wanted to enjoy financial independence quit their jobs as attaining financial independence through a job has a low success rate vis-a-vis financial independence.
Quit your job and follow your passion.
With a fixed salary, no matter how hard you work, earnings are capped. If you earn Rs 50,000 a month, you still get Rs 50,000 a month no matter how hard you work. If you work for a passion, this is like generating income by doing nothing. There is also no limit to what you earn.
To grow rich:
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