We can speed up the process and achieve our goal in less than 50 months if we can find out ways to invest this monthly savings and get a return on them. Here the selection of an asset is important. Investment and returns carry a risk. High risk will give you higher returns and low risks will give you lower returns. If you keep your savings in a bank account you will get a return of 3% to 4% for savings accounts and 6% to 7% for fixed deposits. If you invest in the stock market you may get a better return but the risk is high. History has proven that the stock market investments have always been risky and returns have never been steady. For a steady flow of returns and to achieve our goal of wealth creations as per our plan we need to invest our savings in less risky assets that can give us a steady flow of returns on our investments.
The above example has been revised with investing our savings in a bank savings account. By doing so we have been able to reduce the time from 50 months to 46 months.
What we have to understand is the selection of the asset and the returns from the asset will decide on the time taken for achieving our goal. If the rate of return increases then we can achieve our goal is lesser time. If the compounding is on a quarterly or monthly basis the time required will get further reduced.
Compound interest pays interest not only on the principal, but on the interest as well, increasing the rate at which your money grows.
For example if the interest was compounded yearly and you started with a Rs.100 investment at a 10% interest rate, you'd have earned Rs.10 interest the first year, and would now have Rs.110 at the end of the first year. In the second year, you would earn interest on Rs.110, giving you Rs.11 in interest in the second year, so at the end of the second year you would now have Rs.121, and so on. So after 20 years you'd end up with Rs.672.75
So what is required for creating wealth in a planned way are:
- A plan to achieve our goal
- The amount of monthly savings that we can set aside for investing.
- The goal – total wealth we plan to achieve.
- The selection of a suitable asset to invest our savings.
- The returns from that asset.
- The compounding method whether monthly/quarterly/half-yearly/yearly.
Remember, for achieving a goal the most important factor is determination and the desire to achieve it. You may have worked out on all the above 6 points, but if you lack the desire or determination to achieve it, the whole exercise will become a futile exercise.
The above examples are to make you understand the concepts. You will have to work out yourself for creating a wealth creation plan to meet your requirements.
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If we want to become rich and create wealth then it is a long-term exercise. This is the first lesson we should all learn from them. The next step is to create a plan. A plan that shows the time period and the amount of money we can afford to put aside for investement. Your plan should be realistic. The plan will never work if the goal is to create a wealth of Rs.1 crore in one year. Such plans will de-motivate and frustrate you. The first step is to decide upon the amount that you can set aside every month. With this and the amount of wealth that you plan to create you can calculate the time it will take to achieve your goal.
