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Wealth Creation is Easy

| 3/21/2013 9:00 PM Thursday

Says Deepak Sahijwala, Executive Editor with DSIJ from 1991 to 1996.

‘Wealth Creation is Easy’, ‘Anybody, even with a single stream of income can create it over a period of time.’ Shocked? Well one shouldn’t be. How else would one explain that more wealth has been created and more billionaires have cropped up in the last two decades as compared to, may be, fifty years before that?

In my opinion, it is all in the mind. It is an urge within oneself that gets ordinary individuals out of the blue mortals on to the rich lists. But there is a catch - It takes a vast amount of discipline to do so. There is a ’mool mantra’; It says ‘sacrifice today’s pleasures for tomorrow’s gains’. What it means in simple terms is to curtail the unnecessary, the ego boosting and social pleasuring expenses that melt your money faster than an ice-cream cone.

That said; let’s look at the serious side of the business. Statistics reveal that at any given point in time, almost 8 per cent of a family’s money spends are wasted due to a lack of finding the right place to buy products, including bargaining etc. This implies that an average of that amount can be saved across annual expenses. Then there are other ways you can cut expenses. All it takes is a serious analysis of your expenditure. But the analysis must happen before the money exits your pockets. 

When the annual amount is considered, it does size up to a tidy sum. Squirrel it away! Assume it is spent and forget it in a bank’s fixed deposit. The longer the term; the better! Then watch the power of compounding come into play. A single rupee multiplies itself into 5.38 times at an interest rate of 8.5 per cent compounded over 20 years and around 2.32 times in ten years.

I love this quote of billionaire Warren Buffet. He says “My wealth has come from a combination of living in America, some lucky genes, and compound interest.” Note the emphasis on ‘compound interest’. This one I love better. Attributed to Albert Einstein, it says “Compound interest is the eighth wonder of the world. He, who understands it, earns it. He who doesn't, pays it. The most powerful force in the universe is compound interest.”

Simply put, the power of compounding is pure magic. And there are many other forms to do it. Top on the priority list should be a Public Provident Fund (PPF), where again the power of compounding plays a great role. Just Rs 1000 saved per year becomes Rs 30901 in 15 years. What more? Its tax free and safe.

Then there are insurance products that are available and help you do that. But, don’t get carried away by the claims of the ‘Johnny comes lately’. Some of these from the private sector insurance companies promise the moon and deliver misery.

I personally only trust the LIC. I love their ‘Jeevan Anand Policy’. It offers a life cover – takes care of the unexpected- and also pays out an amount on maturity of sum assured, compounded with an average of five per cent returns that are tax free. The returns, if analysed statistically, are amazing. Perhaps no other scheme from a credible company could match the returns.

As regard the investments in gold, real estate and equities; these are capital intensive and come with a risk. But again, if long-term averages are considered, they are safe and still play an important role in the multiplication of wealth. But first, the wealth has to be created.

To sum it up: Real wealth accumulation is achieved by allowing money to multiply on its own steam. Like success begets success, money begets money! I love the way the Marwaris plan their wealth building. They believe in the generation gap. Meaning; grandfather saves for grand children, and in between the generation, they encash upon the power of compounding.

 

Find More Articles on: DSIJ Magazine, Guest Column, Research, Articles

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