8 Wealth Creation Lessons to Accelerate Your Financial Planning Journey

In this article, we will discuss eight important wealth creation lessons that will guide you and make your journey seamless.

1) Make a Financial Plan and Map Your Investments to Your Financial Goals

Before you start investing, it is important to consult an investment expert. They can help you identify your financial goals, list them in the order of priority, make a goal plan for each financial goal and start investing towards them.

Investing without mapping the investments to your financial goals is like setting out on a journey without knowing the destination. In such a scenario, you can easily get distracted or lost. The same can happen with investments without mapping them to your financial goals. During times of volatility or when markets are going down, you will be tempted to stop your SIPs or redeem them. Similarly, when you see some profit on your investments when the markets go up, you may be tempted to book profits and re-enter later at lower levels by attempting to time the markets.

However, when your investments are mapped to your financial goals, you can stay focused on them. There will be no temptation to pause, redeem, re-invest later, etc., till you achieve your financial goals. Thus, mapping investments to your financial goals is the key to wealth creation.

2) Diversify Your Portfolio and Follow Asset Allocation

You should diversify your investment portfolio to include various asset classes like equity, fixed-income, gold, real estate, etc. Within equity, you can further diversify among large, mid, small, and micro-cap mutual funds.

Diversification among various asset classes and further within asset classes helps you spread your investment risk. Different asset classes take chances to outperform each other over the years. Hence, when you follow asset allocation and diversify your portfolio, you can earn better risk-adjusted returns and create wealth for yourself. 

3) Don’t Over-Leverage

It is important not to over-leverage with high-cost loans like credit cards, personal loans, etc. You should pay your credit card outstanding fully every month after the bill is generated. It is recommended to avoid personal loans. Instead, you may accumulate the money for the short-term goal and purchase it with your own money rather than a personal loan.

Certain loans may be required. For example, a home loan may be needed to fund the purchase of a house for staying in it. An educational loan may be required to fund your higher education. A car loan may be needed to finance the car purchase required for travelling to the office and other purposes. While taking these loans, ensure that not more than 40 to 50% of your income goes into paying the EMIs of these loan(s). If you over-leverage and your loan EMIs exceed a certain percentage of your monthly income, it can derail your investments and wealth creation journey.

4) Invest in Yourself

One of Benjamin Franklin’s famous quotes says: “An investment in knowledge pays the best interest”. To accelerate your wealth creation journey, you should always keep investing in yourself. You should constantly invest in the required courses/training to upgrade your knowledge, skills, qualifications, etc.

It will help you grow faster in your profession and increase your income. A higher income will generate higher free cash flows for investments. Higher investments will lead to higher wealth creation for yourself.

5) Cut the Weeds and Water the Flowers

For many investors, accepting their investing mistake(s) is difficult. If an investment decision doesn't turn out as expected and results in losses, investors find it difficult to cut/stem the losses by selling the investment. They hold on to it, hoping the losses will recover and the investment will become profitable again. As they continue to hold on to the investment, instead of recovering, the losses may aggravate further. Instead, some investors sell their profitable investments earlier than scheduled to make up for the other losing investment(s).

To create wealth, you should recognise your mistake if an investment decision goes wrong, book the loss, learn from the mistake, and invest the sale proceeds in a better investment opportunity. At the same time, you should hold on to your profitable investments rather than selling them to make up the losses from a bad investment.

Legendary investor Peter Lynch had mentioned a famous quote in his book: “One Up on Wall Street”. The quote says: “Selling your winners and holding losers is like cutting the flowers and watering the weeds”. In the wealth creation journey, keep watering the flowers and cut the weeds rather than the other way round.

6) Start Early and Invest More in Equity Mutual Funds. Increase the Amount With Step-Up SIP

You should start investing as soon as possible, preferably the moment you start earning. The sooner you start investing, the higher the likelihood of achieving long-term financial goals like retirement fund. Also, when you start investing early, you can start with a smaller amount than people who start investing in the later years for the same financial goal.

As a young investor with a higher risk appetite, you can make a higher allocation to equity mutual funds than to other asset classes like fixed-income and gold. When you start early, you can give time for your investments to grow. In the long run, your equity mutual fund investments will benefit from the power of compounding and create wealth for you. Rather than a fixed SIP, if you increase the monthly SIP amount by 5 to 10% annually, you will reach your target faster.

7) Have Multiple Sources of Income

Most successful people have multiple income sources like salary/business income, dividends, rent, interest, etc. You should also start developing multiple sources of income with your investments. You should not depend on a single income like salary or business income. During the Covid pandemic, many people lost their jobs (and lost salary income), and many people had to shut their business (and lost their business income). Such incidents can derail your wealth creation journey.

In such a scenario, your income(s) from other sources can come to your rescue to sustain your family expenses. You should also maintain an emergency fund with three to twelve months of monthly expenses. You can rely on the emergency fund during times of financial contingencies.

8) Review and Rebalance Your Portfolio Regularly

You should regularly review your investment portfolio, maybe once every six months to one year. During the review, if any investment is not performing on expected lines, it can be replaced with another suitable investment. If a new financial product has been introduced, you may evaluate whether it needs to be included in the investment portfolio.

During the review, you should rebalance your investment portfolio. For example, equities and gold have done well in the last couple of years. As a result, the percentage allocation of equities and gold in your portfolio may have gone up compared to the base asset allocation. In such a scenario, you may sell some of your equity and gold investments and invest the proceeds in fixed income to return to your base asset allocation.

Achieving Financial Goals During the Wealth Creation Journey

Wealth creation is a part of the financial planning journey. On this journey, it is important to focus on the wealth-creation strategies that we have discussed in this article. If you do that, the wealth creation process will be smooth, and you can achieve your financial goals.