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Earning more does not guarantee wealth creation. Here is why

Sudeep is a young investment banker who plans to buy a house in the next four years. He has already shortlisted a few properties and now wants to prepare himself financially. The problem is that despite getting paid better than the others of his age, he is unable to save much. The type of house that he is looking for will cost him around Rs 4 crore in four years. However, with what he is able to save at present, he will only be able to accumulate Rs 2 crore.

Sudeep is confident that over the next four years, his income will increase enough for him to be able to afford the house of his choice, without taking a loan. However, does earning more guarantee wealth creation? Sudeep associates wealth with his income level. If this was true, only individuals with low incomes would be opting for car loans, home loans, loan for vacations, credit card spending, etc. The fact is, there are takers for loans at all income levels; only the quantum changes. Needs change, and types of loans change accordingly.

Many people like Sudeep can barely get by every month, irrespective of how much they earn. Expenditure tends to increase with income. Therefore, Sudeep must analyse his expenses and curtail the unnecessary ones, to set aside some savings. He must start by setting a financial goal. By saving with a number in mind, he is more likely to do it diligently, so that he ultimately meets his target. He must invest for the long-term in a growth-oriented investment like equity.

Further, he must consider topping up his investment amount every year as his income increases. This should be easy to achieve with a higher income. Sudeep should focus on paying off his debts at the earliest, so that he is relieved of unnecessary financial burdens. Making more money instead of saving right is like hoping for a miracle. He should start with a plan, well in time.

(Content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)
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