Are Wealth Creation And Financial Goals The Same?

One wishes that the process of creating wealth through investments was the same as achieving your financial goals, as for example, buying a house or paying for your child’s education. But it is not. There is a difference in how you approach the two and this article explains the finer points

Often enough, we have seen people solely chasing returns and preferring those investments that give them higher returns irrespective of the risk undertaken to generate such returns. This clearly shows that such investors are more inclined towards wealth creation. They firmly believe that if they are following the right investment strategy for wealth creation, it will help them in achieving their financial goals as well. However, this is a big myth. This article will help you understand why it is necessary for investments to be backed by financial goals.

“All you need is a plan, the roadmap and the courage to press on to your destination” – so said American radio speaker and author Earl Nightingale. And it applies well to the investment scenario. We all are uncertain about what the future holds, but a well-planned roadmap could get you much nearer to what you would have thought or dreamed about. Planning is very necessary for all aspects of life. Likewise, for financial decisions, ‘financial planning’ is very crucial. Financial planning is nothing but a well-articulated composition of all your financial goals and strategies to achieve them.

Not just that, but it also includes risk management through taking appropriate insurance cover and also includes estate or succession planning. It even helps you keep a good check on your income and expenses. Quite often, financial planning is misunderstood as a way of getting ‘rich’. However, this is a myth. In fact, financial planning is a way that would help you achieve your financial goals in life. It comprises identifying short-term, medium-term, and long-term financial goals, devising an investment strategy to achieve them, managing cash flows, mitigating risks with insurance, planning for retirement, and much more. A well-articulated financial plan helps you know where your money should go, rather than wondering where it actually went.

Importance of Financial Planning

Here are some of the factors that would be worth keeping in mind:

Discipline

Moving step by step often helps you to create the right foundation. Even while planning your finances, the first step is to have the right foundation by managing your cash flows. Having a budget in place will help you have essential insights into your regular cash flows (i.e. your income and expenses). Further, to achieve your financial goals, you need to save each month in a disciplined way. The cost of living is not expensive, but the cost of lifestyle is.

Emergency Fund

Emergencies never intimate. So, it makes more sense to be prepared in advance. Hence, there is no harm in assuming that there is something that would be coming in the next few months. For this having an emergency fund in place is vital. With unemployment on rise amid the ongoing pandemic, it is quite clear that having an emergency fund should assume topmost importance. You should have at least six to nine months of expenses as emergency fund.

Financial Goals

Financial planning helps you to plan your short-term, medium-term, and long-term financial goals. However, for that you need to define your financial goals. Further, you need to divide them between needs and wants. Needs are those financial goals that you won’t be able to defer to any future date and wants are those which can be deferred.

Financial Independence

A proper financial plan in place can help you set financially free. This involves regular cash flow management, risk planning, investment planning, retirement planning, etc. These are foundational steps towards attaining financial independence. Financial independence is nothing but a situation where you no more require a regular employment to serve your expenses to spend the rest of your life.

A lot of people are obscure about financial planning and wealth creation. Are they different? And if so, what is more important – financial planning or wealth creation? It is safe to say that proper financial planning can indeed lead you towards creating significant wealth. In fact, we can say that wealth creation is an outcome of financial planning. As American philosopher Henry David Thoreau put it, ‘Wealth is the ability to experience life fully.’

What is Wealth Creation?

Wealth creation is nothing but the process of creating sufficient assets to have a steady source of income that would set you financially free. “Don’t work for money; make it work for you,” said American businessman Robert Kiyosaki. Financial planning involves investment management which in turn helps in wealth creation. To create a good amount of wealth, starting early is the key. This is because you give your investment time to appreciate and benefit from the power of compounding.

Case Study

Things get much clear when you quantify things. So, let us quantify and understand how the goal of wealth creation may not essentially help you achieve your financial goals. For this let us assume that you are investing Rs 20,000 per month via SIP which is not backed by financial goals. For equity we assume you invest in Nifty 50 and for debt we assume you invest in CCIL All Sovereign Bonds Index. Further, let us say that you started investing in 2018 with an intention of wealth creation. This means that maximum investment would be in equity.

We assume that you invest 80 per cent in equity (Rs 16,000 per month) and 20 per cent in debt (Rs 4,000 per month). However, in March 2020, you needed money for your child’s education and for which you decided to use the corpus from wealth creation. Let us see whether you would be able to do so or not.

As seen from the above infographic, not having financial goals can seriously harm not only your wealth creation goal but also your financial goals. It is clear from the picture that linking your financial goals with wealth creation is disrupting your wealth creation goal. Hence, it is quite clear that you should not mix your financial goals with wealth creation. This is because wealth creation is pretty much a long-term goal and financial goals may vary from very short-term to very long-term.

The image also shows that for the purpose of wealth creation you might be more inclined towards equity investments. However, in a short-term period, equity is quite volatile. Hence, it makes more sense to trim your equity investments and shift to debt. If you had created a proper financial plan, you might have shifted to debt. It would be more prudent to shift to debt as you move closer to your financial goals. And if your financial goal is short-term, then there is no way you would be getting into equity.

Conclusion

Creating wealth is of course every person’s ultimate dream. However, it does not essentially help you in achieving your financial goals. This is because wealth creation in itself is a financial goal. Therefore, it is prudent to define your financial goals and have a proper financial plan in place. Further, don’t mix your wealth creation with your other financial goals. You will only end up messing with your finances that may lead you to fulfil neither of them as the purpose of your financial goals may not be fulfilled with wealth creation. Also, it is better to understand that wealth creation is a pretty long-term financial objective and your financial goals might not necessarily be as long.