7 STEPS TO BUILD YOUR FINANCIAL NET WORTH
Step-1
Invest Smartly
Step-2
Pay Loans With SIPs
Step-3
Park Surplus in Overnight Funds
Step-4
Retire Debts
Step-5
Don’t Chase Higher Returns
Step-6
Generational Wealth
Step-7
Hire a Wealth Manager
Whenever we hear this term “NET WORTH” we immediately tend to think of net worth as it relates to billionaires and celebrities, but not to ourselves.
However, we all have a net worth, and today’s Blog is all about understanding your net worth and learning how it determines your financial decisions and what steps you can take to build your net worth.
So what is Net worth and how to calculate it?
Net worth is the value of the assets a person or a corporation owns, minus the liabilities you owe.
In simple words, it is the difference between the value of what you own like your house, retirement funds, investment accounts, checking account balance, etc.—minus liabilities such as the mortgage, credit card debt, and so forth.
It is an important metric to gauge personal financial health and provides a snapshot of the current financial positions.
Now you may take out a few minutes and calculate your net worth with this simple formula.
Are you happy with the number or did you expect your net worth to be higher?
If so, don’t worry! There are a few things that you can do to increase your net worth, starting today.
An Eicher Motor Royal Enfield bike costs Rs. 70,000 in 2001.
However, had you invested Rs.70000 in Eicher Motor Shares back then it would be worth more than Rs. 7 crore Today!
Similarly, 1 lakh invested in Tata Motors became Rs.7 Lakhs in just 18 months.
There are plenty of options to invest in, but finding the right investment option that suits you, is called smart investing i.e. making the right investment choices that meet your specific needs to help you achieve your future financial goal and match your risk profile.
There are plenty of options to invest in, but finding the right investment Option that suits you is called smart investing i.e. making the right investment choices that meet your specific needs to help you achieve your future financial goal and match your risk profile.
Smart investing helps you achieve the following things:
- Builds an additional source of income
- Offers long-term financial security
- Creates sufficient post-retirement wealth
How to sense the right investment opportunity
- Hire a wealth management expert.
- With your wealth Manager, draw a personal financial roadmap.
- Evaluate your comfort zone in taking the risk.
- Pick those companies which have life-changing abilities.
- Consider an appropriate mix of investments.
- Create and maintain an emergency fund.
- Monitor and evaluate your portfolio on regular basis.
STEP 2- Pay off Larger Loans with smaller SIPs
Well, we all need loans for some purpose or the other.
What if you can take the loans smartly and repay them without any extra burden?
Let us understand this with the help of an example:
Similarly, 1 lakh invested in Tata Motors became Rs.7 Lakhs in just 18 months.
Example:
You took a Loan of Rs. 5 Cr for 20 years @ 8.35%.
Monthly EMI = Rs 433,912
The Total amount paid to be paid = 10.41 Cr
Now, what can you do to pay off this huge amount?
Solution:
Start small SIPs to cover your big
loans.
Monthly SIP = Rs 107,498 (25% of EMI)
for 20 years.
Compounding @ 12%
Total investment: 2.5 Cr
Amount earned = Rs 10.41 Cr
i.e. the whole amount that you have to pay for the loan.
This helps you utilize the loan in your favor along with a steady investment to repay the loan after its tenure.
Overnight funds are debt funds that invest in overnight assets, or securities with a residual maturity of one day.
Ideal for those with an investment horizon of one week or less, as investors can redeem after holding the units for even one day.
Suitable for
- Conservative Investors
- For Parking Surplus Cash for the short term.
- For Parking emergency Funds
These Overnight funds invest in CBLOs, overnight reverse repos, and other debt or money market securities that mature in one day.
Advantages of Overnight funds
1. Safest Debt Fund: Overnight funds are the safest among debt funds as they have the
- Lowest Default Risk
- Lowest Interest Rate risk
- Lowest Liquidity Risk
2. Highly Flexible: This flexibility or liquidity is a big advantage of overnight funds.
They do not have any entry or exit loads and enable investors to redeem their money efficiently and in no time.
3. Low cost: Overnight mutual funds are low-cost debt mutual funds, primarily because their debt holdings are passively managed.
4. Efficient Utilization of surplus funds: Overnight funds help investors improve their returns at minimum risk.
Investors do not have to wait for long as overnight funds permit them to generate gains in a shorter tenure.
To summarize – Overnight funds offer safety, liquidity, and flexibility of withdrawal.
They have the potential to earn higher returns than bank savings deposits, especially given the tax advantages of debt funds.
Invest your idle money in overnight funds and be surprised by inflation-adjusted returns and High liquidity!
Increasing your net worth isn’t just about accumulating money, but reducing or eliminating what you owe to others.
Credit card debt, student loans, car loans, and mortgages all count against you when it comes to calculating net worth.
You should work hard to eliminate all these debts as early as possible.
How to reduce your debt?
OPTION 1- USE DEBT SNOWBALL METHOD
You can follow the below-to do so:
- List all debts in ascending order from smallest balance to largest.
- Commit to pay the minimum payment on every debt.
- Determine how much extra can be applied towards the smallest debt.
- Pay the minimum payment plus an extra amount towards the smallest debt.
- Once a debt is paid in full, add the old minimum payment from the first debt to the minimum payment on the second smallest debt and apply the new sum to repaying the second smallest debt.
- Repeat until all debts are paid in full.
OPTION 2- HIKE EMI EVERY YEAR TO RETIRE DEBT EARLY
Another method of paying off debts faster is by hiking the EMIS every month. Let us understand this with the help of an example.
In this illustration- A debt of Rs.50 lakhs can be paid in four different durations depending upon the payment of EMI:
- In 25 years if EMI remains constant.
- In 19 years 3 Months if one extra EMI is paid every year
- In 13 years 3 months if EMI is hiked by 5% every year.
- In 10 years 3 months if EMI is hiked by 10% every year.
Do not be tempted by greed or fear while investing your hard-earned money.
Chasing the returns on your investment is surely a sad approach.
The purpose of investing is not just to earn the highest returns but to help one predictably and easily achieve the various objectives and goals that come up over time.
Consult your financial planner and have a proper blueprint and a plan considering your risk profile, the number of years to retirement, tenure and liquidity needs, taxation, etc., and then arrive at the right allocation mix.
Successful investing doesn’t always mean seeking the highest possible returns in the shortest period of time.
Smart investing tells us that low risk and steady investments that are done over a long period of time are the ones that grow the best.
It is rightly said that if one stays invested in the equity markets for longer-term, the investment is likely to generate magnificent returns in the long run.
Mr. Warren Buffet says” If you aren’t thinking about owning a stock for 10 years, don’t even think about owning it for 10 minutes.”
Given the fact that Buffett’s time horizon is a decade, we have also analyzed some of the stocks from the Nifty 100 list that has generated more than 20% CAGR over a period of 10 years.
STOCK ANALYSIS
Company Name |
17-Aug-11 |
17-Aug-21 |
10 year CAGR |
Bajaj Finance Ltd. |
67.3 |
6,410.1 |
57.7% |
Bajaj Finserv Ltd. |
488.4 |
14,737.3 |
40.6% |
Berger Paints India Ltd. |
37.3 |
815.0 |
36.1% |
Eicher Motors Ltd. |
136.0 |
2,515.7 |
33.9% |
Havells India Ltd. |
68.1 |
1,224.4 |
33.5% |
As per the above table figures, we can draw a point that if one stays invested in a good company for a longer period of time it will surely provide good returns.
Stay invested for longer periods to earn the maximum profits on your investment.
Illustration
Journey of MRF Share
MRF is India’s No 1 tyre company. It was founded 74 years ago in 1946 – even before India got its Independence.
Yet, the stock has destroyed the wealth of investors who bought at peaks and couldn’t hold when the stock fell 90%.
At the same time, those who bought the shares of the company after deep corrections, have created immense wealth.
The stock crashed from more than 3500 in 1996 to 500 in 2001.
The stock also crashed from 8000 in 2007 – 2008 to nearly 1500.
And in the first month of 2021 – the stock crossed its previous high and then suddenly went on a record-breaking spree. It crossed 85k, 90k and 95k in less than 2 weeks and almost touched the 1 lakh mark.
Fluctuations do happen in the stock market but a good company always shows long-term price trends.
It’s impossible to make money in the stock market without suffering through its ups and downs.
The hallmark of successful long-term investor is his ability to ride through difficult times.
It is a fact that globally 70 percent of wealthy families lose their fortunes by the second generation and an astounding 90 percent by the third.
Generational Wealth/Family Health or Legacy Wealth- It is the wealth that is passed down from one generation to the next.
Do not just focus on earning money for yourself, instead focus on contributing to the growth of
Generational wealth in your family.
The `“Family Wealth Paths” to explain how family wealth travels over time.
1st Path – Path 1 increases and gradually starts to decline due to family consumption and not upgrading with technological advancements
2nd Path- Path 2 declines faster due to poor investment strategies and family conflicts and division of wealth.
3rd Path- Path 3 grows and regenerates due to wise financial planning, correct investment strategies, and family unity.
How to build Generational Wealth?
- Invest in Life-Changing Companies
- Build a good credit score
- Build a business to pass down
- Take advantage of life insurance
- Invest in your child’s education
- Make your family financially literate
- Create multiple streams of income.
- Create an estate plan to avoid future disputes.
To know more about generational wealth read here : Click to read
Financial Literacy is understanding the various financial components like budgeting, investing, borrowing, taxation, and personal financial management.
This is the most imperative step while planning your financial journey, however, this is the most overlooked point also.
People often hesitate in consulting a wealth manager as they don’t feel comfortable in
sharing their financial positions and want to keep it to them.
Hiring a great financial advisor can make you and your family financially aware and literate so that you can make well-informed financial decisions.
Following are the perks of being financially literate:
- It makes you confident to make better financial decisions
- You spend less and save more
- Effective management of money and debt
- Greater equipped to reach financial goals
- Less financial stress and anxiety
- It helps you protect and grow your generational wealth
- Increase in ethical decision-making when selecting insurance, loans, investments, and using a credit card
iVentures is a financial boutique firm that offers bespoke solutions in Asset Management, Credit Solutions, fixed income and Wealth Management.
Established in 2005, iVentures Capital has helped 2000+ families build their legacy.
And managing over 500cr of Investments for its clients.
To know more about financial planning and to get your personalized portfolio strategy, contact us at wealth@iventures.in
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