Four wealth eroders and how to avoid them

Everyone wants to get rich and lead a comfortable life. Nevertheless, very few of them possess that attitude. There are a few common mistakes, which if we avoid will help every one of us to create wealth that is long lasting.

Late start

It is said that more money is made by staying in the market for more time than timing the market itself. This can be highlighted by this illustration, which shows the impact of timing on a portfolio. Ramesh, a 20-year-old decides to make Rs. 5,000 SIP every month to a mutual fund. If the fund manages to achieve a 12 per cent annualised return, that Rs. 5,000 investment will have grown to Rs. 4.1 crore by the time Ramesh is 60. Had he waited to make the investment until age 40, the same Rs. 5,000 monthly investment grows at the same rate will be just Rs. 50 lakh. By starting at age 23, the portfolio is worth eight times what it would have been had he waited until age 40. Imagine, the massive chasm that would exist between the two portfolios. Although it is hypothetical, it highlights the importance of early start.

Spending and small indulgences

Your daily two cups of tea, going out for lunch every alternate day, your subscription to Netflix may cost you over Rs. 1 crore over your lifetime. Most of the things you can cut down and are not the things that you need. We are not suggesting that you should stop drinking tea or discontinue your Netflix contribution I use this illustration in order to make you realise how much these habits cost over time and how can you correct them to shore up your investment and wealth. You definitely will have an edge over them who spend and indulge.

Taxes

Your financial advisor will show you how his recommendation has performed and beaten the benchmarks. Nevertheless, what they do not show is the net benefit you have after paying taxes. Research shows that a loss of up to 50 per cent on certain investments to taxes such as high-turnover equity strategies or some of the taxable bonds. Hence, you should not settle with pre-tax returns but should see the net returns post-tax.

Inflation

Most of you might have heard that gold is one of the best bet against inflation. Nonetheless, there are better ways of beating inflation such as owning a business that has the pricing capacity and benefiting from those inflated prices in the form of long-term profits and dividends. Pidilite, Asian Paints, HUL are examples of companies that routinely exercise their pricing muscle in the marketplace. However, there have been a few occasions where bonds did an effective job fighting inflation but they are not consistent.

Some of the above wealth eroders might have already robbed you, however, you can always correct the future course in order to maximise your returns.