Chapter 1: Laying the Foundation of Wealth Accumulation

This article is designed with Gen Zers in mind, who may take some guidance while planning their finances. Achieving financial freedom at an early age is a dream for many, but very few can reach that goal. We all need money for our livelihood, and hence we are forced to work. We earn to support ourselves and our families for better living. My intent of sharing my experiences is to help and motivate youngsters so that they can accumulate the necessary wealth and come out quickly from the slavery of the job pressure to live their lives on their terms.

So, let's get started-

The idea of “retiring early” is often like a mirage in the desert; the closer you get to it, the more it seems to vanish. It is important not to get carried away by advertisements or social media advice, as they won't benefit you unless you carefully plan your financial journey, combining discipline, commitment, and certain sacrifices.

My principles were: ‘Spend wisely, invest carefully, avoid impulse purchases, use extra money for luxuries, and stay debt-free.’

Social media is filled with guidance on topics like 'investment planning,' 'investment options,' and 'retirement corpus determination.' However, no one focuses on the following three crucial aspects, which are the essential pillars for achieving financial freedom. Without these, reaching the goal is nearly impossible:

i. A Stable and Successful Career Journey.

ii. An Income Management Strategy.

iii. Accumulate and Growing Financial Wealth in a Planned Manner.

i/ A Stable and Successful Career Journey: Whether through business or employment, having a successful career journey is crucial, as it generates the necessary fuel (i.e. money) that support all kinds of expanses (needs), helps fulfil dreams (wants) and even live a scope to save and invest. A successful career often leads to higher earnings, promotions, and other opportunities that can significantly boost your financial situation. By excelling in your career or business, you lay a strong foundation for financial independence. However, any wrong decision in your career path (such as frequently switching jobs, taking extended breaks, or staying too long in one position) can delay the process of becoming financially independent. In fact, many people find themselves having to work beyond the traditional retirement age due to such poor decisions.

ii/ An Income Management Strategy: Managing your income effectively is key to achieving financial independence. This includes budgeting, controlling expenses, and prioritizing savings and investments over unnecessary spending. A proper income management strategy ensures that you are living within your means and consistently setting aside money for future financial goals. It requires discipline, planning, and commitment to sticking to your financial plan.

Unaware of any specific rule, I divided my income into four parts:

1. The first part covered basic and essential costs, including EMIs.

2. The second part was set aside for emergencies.

3. The third part was for savings and investments.

4. The final part (the surplus) was used for entertainment.

I was surprised to learn about the 50/30/20 rule* only in my mid-40s. However, it’s good to know I was on the right track, even though I don’t remember the exact percentages I followed.

*What is the ‘50/30/20’ rule? This concept helps you create a budget by breaking your finances into three separate parts. i.e.: 50% for needs, 30% for desires and 20% for investments.

iii/ Accumulate and Growing Financial Wealth in a Planned Manner: Accumulating and growing financial wealth involves saving and investing your money wisely. This could be through stocks, bonds, real estate, or other investment vehicles. The goal is to build a diversified portfolio that grows over time, providing you with a steady income stream or significant assets to rely on during retirement. By planning your investments carefully and taking advantage of compounding, you can grow your wealth steadily and reach financial independence sooner. This is a stage where your behaviour and knowledge are put to the test.

Based on my personal experience, I can say with great confidence that building financial wealth is not rocket science. However, you need to practice and master the following points over time:

• Habit of 'Savings' and Investing: It is important to inculcate the habit of savings and investments from an early age to give your investment time to grow.

• Starting to invest at a young age (sharing few advantages below): Power of Compounding: Starting your investment early in life, helps in benefiting from the power of compounding Interest. Risk Management: Young investors can afford to take more risk as they have more time to recover from potential losses (if at all). Generally young people can allocate a sizable portion of their portfolio to growth-oriented assets like stocks, which historically offered higher returns over long run despite short-term volatility. Learning Opportunity: Starting to invest early always provides valuable learning experiences. It helps in acquiring knowledge about different investment vehicles, market dynamics, and risk management strategies. Financial Independence: By investing early and consistently, young individual increases their chance of achieving financial independency at a relatively young age. This can even help them to support their desired lifestyle without relaying solely on employment income.

• Financial Discipline: This is the most important area, as the practice of saving and investing regularly can lead to greater financial security and stability in the future.

• Long-Term goals: Investing early allows you to pursue long-term financial goals such as buying a home or retirement. Starting early gives you longer investment horizon, enabling you to ride out market fluctuations.

• Risk Taking : Taking risks with investments in your younger years can be beneficial. You have more time to recover from market ups and downs. High-risk investments can lead to higher returns over time. In 1997, I took the risk of investing in SIPs (Systematic Investment Plans) by stopping my Recurring Deposits, despite not thoroughly evaluating the product's future. I wanted to grab the winds of change. Since then, I have never looked back. This decision led to extraordinary long-term results. SIPs appealed to me because they allowed me to invest a small portion of my monthly salary, with the added flexibility to increase my investment amount (commonly known as a ‘top-up’ today) whenever my annual salary increased, which I did regularly.

Over time, my salary increased, and so did my investment habits. I discovered the 15*15*15 Rule much later in my life, but by then, my SIP portfolio had already yielded impressive results thanks to the ‘long tenure’ and the ‘power of compounding’ effect. I never spent time analysing the reasons behind the exponential growth of my systematic investment portfolio; instead, I focused on advancing my career. Seeing my portfolio grow, I became addicted and began exploring other investment avenues.

To give a brief of the 15*15*15 Rule to those who are still unaware - It is said to be one of the most basic rules that helps an investor to become a millionaire.

For Example, let say that you invest INR 15,000 a month for a period of 15 years in an equity based mutual fund that offers 15% interest on an annual basis, then you will amass an amount of INR 1,01,52,946 at the end of 15 years. The power of compounding your money can undergo a multiplier effect in which the initial capital generates return, and then the accumulated return generates more return subsequently. The longer the investment period, the greater the capital output due to the compounding effect.

Albert Einstein, once said: "Compound interest is the eighth wonder of the world. He who understands it, earns it…he who doesn't… pays it."

As my career progressed and my income grew, I diversified my investment portfolio to include various asset classes. The amount I invested in each type changed over time based on my savings, risk tolerance, and investment horizon. My portfolio included:

• Real estate (i.e. more than one property, as the one you occupy is often considered a liability)

• Mutual Funds (was always my favourite after SIPs)

• Bank Fixed Deposits

• VPF (Voluntary Provident Fund)

• Post Office Schemes

• ULIPs (Unit Linked Insurance Plans)

• Deferred Pension Schemes

• Children's Education Schemes

• NPS (National Pension System)

• Gold Coins (occasionally)
  

However, for family security, I ensured we were always covered by health and term insurance policies.

I avoided investing in the stock market because I always believed that 'risk' comes from not knowing what you are doing, and I had no clue about that asset class. Hence, I never ventured into the stock market until I exited my job. This might be an area where I missed an opportunity, but I have managed to make it up now.

Point of Caution: Aiming to retire too early is typically achievable only with a stable and lucrative career that generates high income, allowing you to accumulate sufficient savings in a shorter period. For those with moderate incomes, it requires a longer time to save and invest. Building a solid retirement fund takes years of consistent saving, wise investing, and careful planning. This extended period helps your wealth grow through compounding and manage market risks, ensuring you have enough resources to support your desired lifestyle in retirement.

Before wrapping up this chapter, here is a quick observation: I have encountered many individuals who claim to know everything about wealth building but still struggle with their careers and lives. The reason is simple—knowledge without action is meaningless. It is always better to know less and take action than to know everything and do nothing.

‘Tune into Chapter 2, which focuses on 'Building Wealth through Strategic Investments.

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. Image sourced: Google free download.