Concept of Wealth Creation!

The objective of this blog is to enable Wealth Creation for all participants.

We would try our best to provide relevant and implementable suggestions. This initial post explains our thought process behind wealth creation. Later posts will focus on specific recommendations to enhance each area listed below.

Wealth for some is due to luck or inheritance but for many is through hard work and diligence. We will help you to be diligent in your various decision-making processes across the areas of investments, insurance, real estate, equities and tax planning.

We earnestly believe that wealth creation is possible during the lifetime of an individual and this blog will feature ideas to help you do that.

Our simple definition of wealth:

Wealth Addition = (Regular Income + Investment Income + Other Income) -(Regular Expenses + Capital Expenses + Unplanned Expenses)

A brief description of these parameters is given below. We will come back to these in greater detail in the following posts.

Regular Income is the income we earn from our daily activities. It could be a fixed salary or business income. The inflow is either regular(monthly)or erratic. For our purpose we will consider the average monthly income as(yearly income/twelve).

Investment Income is the income we earn from our earlier investments. It is the most important element of wealth creation. The moment this component has grown to an extent where it covers the three expense categories, a person is on his way to financial freedom!!

The income is primarily from fixed income instruments (bank deposit, post office MIS, PPF etc), equity markets (dividends, capital gains) and real estate (rent, capital gains). Asset allocation amongst the different asset classes is the single most important factor.

Other Income - Apart from our regular income, often we can supplement our income with other activities (new businesses, consulting, short term trading gains etc). One caveat here is we should not spend too much attention here to the detriment of our regular income!!

Regular Expenses - This refers to a person’s regular expenses in the course of the month covering from rent, EMI’s, utility bills, school fees and provisions. Our objective should be to generate wealth to sustain these expenses.

Capital Expenses – These are our significant known expenses through our lifetime - Education, Wedding, Purchase of a house etc.

Unplanned Expenses - These are expenses, which are not budgeted for. They turn up both on a monthly basis and at irregular intervals (they are unplanned!!).

In the following posts, we would like to share ideas on how to optimize our income/spends in the six areas highlighted above. We need to ensure that this equation remains positive on a yearly basis. A planned approach towards revenue enhancement pays off in the long run.

To sign off now, a quick move from the abstract to the practical !! Almost all of us have mobiles now (for self and spouse). The total mobile bill is often in excess of Rs 1000/ month. Several banks nowadays offer cash back schemes for paying mobile bills through their credit card. The cash back is in the range of 2-3%. A quick calculation reveals that this amounts to at least Rs 30 per month. While this might be trivial it adds up to around Rs 400 per year (enough for that unplanned pizza!!)