The Hindu Business Line : How to hit a million

Getting really rich has always eluded the middle class. It always seems like you are just a few steps away, but your monthly salary does not seem to be enough to catch up with the elite crowd. If there were just a few simple rules to follow!

Albert Einstein once said that the power of compounding is indeed the eighth wonder of the world. Making your money benefit from the compounding that you learnt during your school days, is the key to hit a million.

We chalk out a few key points to help you build that million in your bank account.

Do your number crunching

As you start on the million rupee project, you first need to have clarity on how much you can set aside towards this key goal in life. For this you need to assess your net earnings (the amount that gets credited monthly to your bank account) — pull out the household expenses/commitments towards liabilities thereof and arrive at the net savings. Of this, you can set aside about 10-15 per cent as a buffer towards contingencies.

If you are a 25-year-old and in a position to set aside Rs 5,000 a month on a regular basis, in precisely 10 years with an achievable 10 per cent return, you would hit a million.

Chalk out your plan of action

Once you decide how much you can put aside, all you’ve got to do is settle on where to put the money. Stacking them up in your bank account is a sure way not to achieve the required corpus. Employ your money to work for you and pay you — that’s the best scenario to be in.

Now that your goal is fixed, evaluate your risk appetite and based on that, start scouting for the best investments to achieve the returns. Equity as an asset class provides superior returns, especially in the long term.

Statistics point out that globally they have been able to provide a 10 per cent compounded annual returns.

However, if a pure equity portfolio appears risky, arriving at an appropriate asset allocation is important. Strike a balance between direct equity, equity mutual funds, debt mutual funds, bonds etc.

The key factor in asset allocation is that one should not get carried away when the going gets good in equities and overexpose the portfolio to stocks.

Stay disciplined, focussed and at the end of the tenure, you will have what you set out to achieve. Always have a part of your investment into equities, with higher exposure while you are young and gradually reducing the same as you get older.

Buy right, hold tight

In the investment, time is your only ally — buy what you understand, hold on to it irrespective of all the intermediate glitches. Often, one tends to react emotionally; but fear and greed are the party poopers in the world of equities.

Get a reality checK

Being realistic is hard especially in the world of investments. If you have picked the wrong stock, don’t hold on to it till eternity — miracles don’t happen often.

Let go of the bad ones as soon as you are convinced that things aren’t getting prettier with your holding, its time to say your ‘goodbyes’.

Keep monitoring your portfolio, bear in mind that ‘Rome was not built in a day’ and this applies to your wealth creation as well.

(The author is CEO & Founder of Right Horizons Consulting.)

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