Posted On Wednesday, Dec 10, 2014
There are so many reasons why we might want to be wealthy. Wealth opens up doors to pleasures only money can bring, bestows an esteemed social status, and gives you independence…, just to mention a few. But the prospect of a longer lifespan is one of the great benefits of being wealthy, although it may not have been looked at as a motive per se.
Higher income and better socio-economic status tend to improve the life span of people. The link between incomes and life expectancy has been accepted by statisticians and economists since long. They have called it by terms like the Wealth Gradient, Longevity Gap, Preston Curve etc.
It is no surprise why the relationship between higher income levels and longer life expectancy holds. Higher income level helps one have access to better education, better health technology, vaccinations, improved provision of public health services and better nutrition. With these external improvements in health the longevity of the population tends to increase.
Cross-national studies have demonstrated that health of populations tends to increase with a country's level of economic development and to decline with level of economic inequality. However the longevity gap is higher when observed within a society than amongst different countries.
Take the example of the results of a medical research* undertaken in the state of Kerala. The study found that men from high income households with good housing conditions, materially privileged households and small households had a 2-3 years longer life expectancy as compared to the deprived persons. Those who went to college lived longer than the illiterates. The study concluded that wealthy people from Kerala had a longer life expectancy.
So now coming to the million dollar question...
How to get rich?
You would have come across a thousand news articles, notes, presentations and advertisements answering… or promising to answer this question. The internet is teeming with articles on websites telling you how you can get rich fast, get rich slowly and even the laziest ways to get rich!
Broadly most people agree that entrepreneurship, or having one’s own business, is the best way to create great wealth. We only need to look at our society to infer this. But for the purpose of our discussion we will focus on how to create wealth with investments.
There are not many things to do to create phenomenal wealth with investments. In fact there probably are more things to “not do” to succeed here! Here are 3 principles to keep in mind for the success of your investments:
i. Start early
At least a few of you might wish you had taken this simple step serious enough a decade or two back…but then you could pass on the wisdom to the next generation.
Take the case of two friends Ajay and Vijay who have similar financial background and aspirations. Ajay starts investments religiously from age 25 with Rs 5,000 a month, in an equity mutual fund giving a modest return of 12% annually. He stops contributing on reaching retirement at age 60. Vijay, on the other hand, takes investment less serious and does not start until the age 30. He allocates the same amount every month for a similar return rate, until he turns 60. At retirement where, do you think, will these two friends stand? This is how their final corpus would look like!
|Monthly investment (Rs)
|Final corpus (Rs)
A difference 5 years of investing and merely Rs 3 lakhs (Rs 21 lakhs - Rs 18 lakhs) translates to a difference of about Rs 1.5 crores! Moreover, in order to have a similar corpus as Ajay at retirement, Vijay would have to invest Rs 11.4 lacs more than Ajay i.e. Rs 9,000 every month instead of Rs 5,000, for delaying by just 5 years! Thus compounding, when coupled with time, lightens your load in the task of accumulating corpuses for your goals, much like a pulley that makes drawing weights immensely easier.
ii. Allow investments to compound…leave them alone
This second principle is an extension of the first. If you have invested in a good fund for long term goals don’t be perturbed by interim market volatility. Stay long term and leverage the power of compounding. Compounding is the ability of an asset to generate earnings, which are then reinvested in order to generate their own earnings.
Take a look at the figure below showing compounding returns from an investments of Rs 1,00,000 and how the returns pan out across the years. Returns have been assumed at 12%.
|Investment grown to (Rs)
Observe that the longer your investment is allowed to compound, higher your final corpus grows to. Like they say, it is the last compounding that creates wealth. Remember Einstein’s words, “Compound interest is the eighth wonder of the world. He, who understands it, earns it; he who doesn't, pays it!”
iii. Watch the tax
Taxes are an important factor deciding what returns from investments we actually get to keep. So while making the choice of investments, especially the long term ones, take taxes into consideration. Returns from equity funds are not taxable in the long term (defined as investment held for more than 1 year). Whether it is equities, FDs or bonds go for the tenure and product type that maximizes your tax savings within the framework of your end investment goal.
The principles here are simple but actually practiced consistently by only a few. Stick to them and you would see wealth being created down the line for you and your dear ones. Please consult a financial adviser for your investment related queries.
* Research article Socio-economic factors & longevity in a cohort of Kerala State, India published by The Indian Journal of Medical Research
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