If I ask a bunch of people, 'Who among you really wants to be rich?', I don’t think anyone will deny it. People don't become millionaires from hefty salaries alone. Those who have earned well and invested their savings from hard-earned money early in their lives can create a huge corpus and plenty of net assets later on. One of the world's richest individuals, Warren Buffett, started investing when he was 11 years old. His ability to make good investment decisions, along with patience and perseverance, took him to the pinnacle of the financial world.
To have a comfortable life, resources are needed. Money is that precious resource that can buy comfort. Money creates assets, and in turn, assets provide passive income for the long term. With this extra income, you can acquire more assets, creating additional sources of income. Generally, you have three choices to secure more money in the future:
- Reduce your expenses drastically and keep reducing them while keeping the same income.
- Increase your income drastically and keep it increasing while maintaining the same level of expenses.
- Keep your existing savings ratio same and invest in assets that provide better returns to generate an additional source of income.
The first two choices are really hard to implement. Even if people increase their income, their expenses often increase proportionally, and reducing expenses is a difficult task that nobody likes. Most people tend to be lazy, compromise with their current savings ratio, and hardly put in effort to make additional income. They aspire to live a luxurious life with the same income flow. Their expenses often exceed their income, resulting in personal debt. Intelligent and smart investors would rather choose to reduce expenses in some areas without hurting themselves. I see people choosing the third option and struggling. Making better investment decisions is not easy for everyone especially when you don't understand the nuances of investing.
Around 20% to 30% of middle and upper-middle-income people do nothing with their saved money; they just keep piling it up. Money kept in your closet loses value day by day as inflation reduces its purchasing power. In developing countries, inflation remains around 4-10%. With the same amount of money, you can’t buy something today that you could have bought a year ago. Keeping your money in a savings bank account that provides around 3.5% to 4% annual return is a bad idea as it cannot combat inflation in a country like India. This amount of money is never enough to fulfill your future financial goals.
Investment is your friend, while the real enemy is inflation. The investment return that surpasses the inflation rate creates real wealth for you. Investment in most risk-free financial products hardly surpasses inflation, and if they do, they come with serious liquidity risk. So, here comes the question of where to invest and how much to invest. The availability of financial products is more than you think. But all investments are built on a basic principle: the higher the risk, the higher the return.
The intelligent investor is one who can either mitigate the risk somehow or find that rare opportunity of having low risk with high return. Again, the amount of risk one can take depends on their financial profile and attitude. Someone with multiple income sources or high net worth can take more risks compared to someone with a single income source and no savings.
Some people get the wrong impression of financial products simply because they have no idea about them or lack understanding of their financial profile. I have found some people who buy insurance just to save taxes.
You should choose financial products not based on preference but on your financial profile, financial goals and current circumstances. You should not always choose financial products that promise the best return because they come with risks that may not fit your financial profile.
Smart investment is based on understanding your financial profile and fully understanding the product. Smart investors never invest in a product just because it performed well in the past for others. They invest because it has good future prospects and suits their financial profile, nature, and understanding.
To accumulate significant wealth and be rich by your retirement, one must invest their money smartly to gain the maximum return while keeping the safety net. Risk is not a bad thing; it is an opportunity. Smart people take calculated risks and exploit opportunities. Rich people are rich because they have played these games many times. You can't transform yourself from middle class to upper class or rich, if you don't know how to put your money to work by taking calculated risks. Asset allocation and proper diversification based on your profile with systematic and disciplined investing habit create a corpus which can change the financial status.