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How to create wealth: 5-steps to success and prosperity

Wealth Creation has always been one of the deepest secrets of the world. Although the steps to wealth creation are ridiculously simple, yet they are ruthlessly ignored by most of us. How could this be possible? Probable reasons could be, lack of financial education, emotional handling of money, or irrational financial planning. Maybe it is the simplicity of the wealth creation process that makes it unattractive – people think it to be too simple to be effective.

Brief guidance on wealth creation strategies and education on universal laws of money can be immensely useful in fine-tuning the financial mindset. It can be instrumental in amassing wealth in the long run. 

A question often bothers people who wish to increase their net worth. Is it possible to create wealth without first increasing active income or generating an additional source of active income? The simple answer is YesAnd this breaks the myth that one has to switch to a higher paid job or work overtime or even get engaged in two or more jobs to increase net worth. Here are some guidelines.

5 steps of wealth creation with a constant active income:

1. Living within the means:

 Deal with monetary matters rationally. Begin to differentiate between your needs and wants. ‘Needs’ are the necessities of life, whereas ‘wants’ are the luxuries. Prioritize your needs and do away with your wants, at least for the time being. It will help live within your means and curtail overspending. 

Spending more than what you earn is disastrous as it either leads to depletion of already existing wealth or necessitates obtaining loans to bridge the gap between income and expenditure. A continuous habit of overspending can lead to a debt trap.

2. Getting out of debt on priority: 

If your debt amount exceeds your assets, it means you have a negative net worth. It indicates an unstable and alarming financial situation. Therefore, if already in debt, priority should be to clear the debt in minimum possible time, even if it means further cutting down on some of your needs.  

3. Saving:

 There is a famous saying, “Pay Yourself First.” Whenever monthly or weekly salary is received, general practice is to spend first and keep whatever is remaining as saving. Spending means paying somebody else, whereas saving means paying yourself. 

Wealth creation principles suggest that at least 5 to 10% of your income must be saved first and then the rest spent on necessities. However, wealth creation cannot be achieved only by savings. Devaluation of currency and inflation eat up any uninvested savings.

4. Investment in income-producing assets: 

With regular savings, a pool of money will form in a short time. Some amount out of this savings pool is to be reserved as an emergency liquid pool, depending upon your environment and nature of requirements. Invest the rest of the amount in income-producing assets.

Income-producing assets are those financial instruments that generate a steady and continuous source of passive income in the form of monthly, quarterly, or yearly profits, returns, or dividends. Examples are stocks, mutual funds, bonds, and fixed deposits in banks. A SIP (Systematic Investment Plan) is most suited for investments through monthly savings. 

5. Generating additional streams of Passive Income and creating a snowball effect: 

Hence by following the above step, along with your active income, you additionally start receiving passive income. It eases your financial difficulties and increases your spending power. 

But remember, all of your newly generated passive income should not be exhausted. At least 30 to 40% is to be saved out of it and again put in the savings pool. It will cause your savings pool to swell at a faster pace. Keep some amount aside to cater to emergencies, and invest the remaining pooled amount in income-producing assets. It will further increase your returns from investments. 

This practice continued for the long-term will create a snowball effect and gradually keep on increasing your wealth. It is the simple process of long term wealth creation without requiring any increase in the existing active income. This basic idea of wealth creation is for anyone, irrespective of the present financial status, net worth, and profession. Just try it and prosper!

Post Author: Kamran Mahmood

The author is a seasoned financial investor and a prolific writer on matters related to stock exchanges, capital markets, wealth creation, and asset management. He keeps a keen eye on the global macroeconomy, financial world, personal wealth management, and investment opportunities.

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