In my previous speech on ABC's Wealth Creation, I have given you some understanding on the true meaning of wealth and the three simple processes of wealth creation.
Today, I am going to give three scenarios to illustrate my point further so that you can have more in-depth understanding of this hot and popular financial topic.
Assume that you receive monthly income of 5k and you spend all your income to acquire the lifestyle you want. Hence, you do not leave any residual income at the end of month. As such, your personal wealth will stay status quo forever over times.
In Scenario II
You are in the similar situation as the Scenario number I, with exception that you spare 2k per month for your savings and of course with a less luxurious lifestyle. In this case, your monthly residual income will grow over times. Assuming that you place all of your savings in the Fixed Deposit with Financial Institution earning interest of 3% per annum. Ultimately, your monthly residual income will give you net worth of 2k plus the interest earned.
Bear in mind that we are living in higher inflation regime, let say the real rate is 6% per annum, despite the official rate of around 3%. By saving solely in the form of Fixed Deposit, the inflation will eat into your saving as the interest earned from the savings does not adequately cover the inflation rate. In the real sense, you lose out 3% per annum. In short, the Saver is a loser in this sense.
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However, your Wealth/ Net worth is still growing over times, i.e. the residual income and interest will multiply with times in absolute term and not in the real term because of the inflation factor.
Everything is the same as in Scenario II, but instead of saving in the form of FD, you decided to invest your monthly residual income of 2k which earn you an average return of 10% per annum.
Hence, even with the real inflation rate of 6%, you still grow your wealth by 4% per annum in the real sense. By doing so, you are growing your wealth both in absolute amount and in its intrinsic value.
Now, you can see why you need to take positive action to hedge your money against inflation no matter what. No doubt, investment does not guarantee you that you will enhance your wealth. By not doing so, you are surely not doing yourself a good favour of letting your money to work hard for you.
In summary, therefore you need to acquire the skills and know how on how to invest your money wisely so as to generate the return that far exceeds or at least is sufficient cover the inflation rate the country you are living in.
Stay tune and I will share with you more of wealth management in my next few speeches.