Chapter 2: Building Wealth through Strategic Investments

..Continuation of Chapter-1

During my formative years, I realized that life is not an equation; no formula can guide me to my desired solution without continually adjusting, upgrading, and steering myself along the way.

As a routine practice, I remained committed to my savings habit and continued investing regularly. This habit of self-discipline began to pay off significantly across all areas of my life, including my work, family, and finances.

I learned that without qualities like self-control and discipline, it’s impossible to accumulate or grow capital. People with strong financial discipline can avoid the following temptations:

• Lifestyle Creep – This phenomenon occurs when people increase their spending as their income rises. It's crucial to prioritize spending, distinguish between needs and wants, set clear financial goals, and regularly review your budget to prevent overspending. Although most are aware of the pitfalls, many still succumb to this temptation until it’s too late.

• Impulsive Buying – This involves making unplanned or spontaneous purchases without considering their necessity or consequences. It often stems from sudden urges or emotions like excitement, desire, or boredom, rather than rational decision-making based on needs, budget, or long-term goals. Such behaviour can be addictive and control you.

• High-Interest Loans – Falling victim to loans with high interest rates for depreciating assets can be financially detrimental.

• Competitive Comparisons – Competing with others can divert your focus from your core life objectives.

Taking wise steps can help you achieve your ‘Financial Independence’ goal faster. Here’s a breakdown:

I. Positive Loans: These are debts incurred for productive purposes or investments that can generate income or increase wealth over time. Examples include:

• Buying Property: Purchasing property can be a good investment. While your first house may be a liability as it’s used for personal residence and blocks funds, buying additional properties can generate rental income or profits from sales. I borrowed to build my assets but managed to repay by age 48.

• Home Improvement Loans: Loans for home improvements can increase property value and enhance quality of life. I managed such improvements from savings, so I never used a home improvement loan.

• Student Loans: Though burdensome, student loans are often considered positive because they invest in education, leading to better earning potential. I avoided such loans through careful planning.

• Mortgages: Mortgages can be positive debt when investing in real estate, which may appreciate over time. I haven’t explored this option.

• Business Loans: Common for entrepreneurs, business loans can help start or expand businesses. When used wisely, they can foster growth, increase revenue, and generate profits.

• Overdraft against Fixed Deposits (FD): An overdraft facility linked to an FD allows access to funds against the FD’s value, often with lower interest rates compared to traditional loans. This can be a useful option.

II. Debt Repayment Strategies: Being debt-free is crucial for a stress-free life. Here are some strategies to help:

• EMI Management: Ensure timely EMI payments by budgeting to cover these payments each month.

• Increasing EMI Amounts: As your salary increases, consider raising your EMI payments to reduce the loan tenure and save on interest.

• Additional EMI Payments: Paying more than the standard 12 EMIs annually can reduce the principal amount and shorten the repayment period, saving on interest.

• Extra Payments: Make extra payments whenever possible to reduce the principal and repayment period.

• Utilize Windfalls: Use unexpected income, like bonuses, to pay down loans faster.

• Avoid New Debt: Refrain from taking on new debt while repaying existing loans to avoid financial strain.

III. Family Security: Ensuring financial stability and protection for your family is prudent. Some investments I focused on include:

• Emergency Fund: Maintaining an emergency fund covering at least 12 months of expenses acts as a safety net during financial setbacks.

• Health Insurance: Adequate health insurance is essential to protect against medical expenses. Evaluate different plans to find the best coverage based on premiums, deductibles, and coverage limits.

• Asset Allocation: Diversifying investments across stocks, bonds, real estate, and cash equivalents helps mitigate risk. Proper allocation depends on individual risk tolerance, time horizon, and financial goals.

• Children’s Education Policies: I trusted plans like the ‘LIC Jeevan Tarun Plan’ and ‘LIC Children’s Money Back Plan’ for their combination of protection and savings features, addressing educational and financial needs while the child is growing up.

While financial prudence is crucial, finding a balance between saving/investing and enjoying life is also important for overall well-being. Throughout my career, I have always maintained that balance.

I have encountered many individuals with extremely high incomes who, despite their financial success, were derailed by distractions and harmful habits during their careers. Those who successfully navigate these challenges and maintain their focus are the true winners in their professional pursuits.

Tune into Chapter 3, which focuses on 'Mindful Spending, Staying Debt-Free, and Estimating Your Retirement Corpus'

Kaushik Sarkar

mail id: tokaushiksarkar@gmail.com

Disclaimer: This article completely reflects my recollections of experiences over time. Better to seek the help of a certified financial planner for your individual situation.