Wealth Creation v/s Wealth Preservation
Having a sound financial plan that reaps benefits in the long run is essential for every household. Generally, financial planning includes two broad aspects – wealth creation and wealth preservation. Most people spend their lives engrossed in the continuous process of wealth creation and tend to ignore the importance of preserving that wealth. However, to achieve financial goals, it is essential to find a financially healthy balance between the two and know when to focus on each. Let’s see how the balance between the two can be achieved and maintained.
What is Wealth Creation?
Simply put, wealth creation is the steady accumulation of income and assets over a period of time. Even though most people are constantly in the pursuit of increasing wealth, they may not know how to do it properly.
Process of Wealth Creation in 4 simple steps
1. Fixing goals
The first step in successful financial planning is setting clear goals. Goals differ individually but can be classified as short-term and long-term. Generally speaking, goals can include paying bills on time, funding a child’s education, securing health, saving for retirement, etc. It is important to prioritize your goals and devise a financial plan around them.
2. Planning strategically
Once you assess your goals and bifurcate your needs and wants, you can develop a strategic plan that keeps a tab on your spending. Strategic planning includes making a budget. Sticking to a steady budget decreases the chances of frivolous spending and leads you to accumulate and save your wealth for your needs. As they say, ‘Save more, spend less.’ You can use a savings goal calculator to determine the growth of your savings.
3. Evaluating risks
Wealth creation comes easily only with a steady stream of income. This income can be increased with extra hours of work or getting side jobs. The best way of creating an additional source of income is by investing. However, you must consider your risk appetite before choosing your investments so that you don’t end up taking more than you can handle. It is advisable to take the help of a financial advisor to thoroughly study different investments and their risk component.
4. Allocating assets
Asset allocation is perhaps one of the most important key factors in multiplying your wealth. But you must structure it carefully. There is a range of areas where you can allocate your money, for example, equities, real estate, bonds, etc. This can be done only when you have a clear idea of the risk and returns involved in each security. You must research well to understand the nuances of asset allocation.
What is Wealth Preservation?
Simply defined, wealth preservation is the maintenance of your income and assets. This can be challenging as most people tend to get passive about wealth preservation.
4 Simple steps to Wealth Preservation
1. Re-evaluating risks
It is difficult to preserve your wealth with volatile markets and changing trends. That is why it is necessary to re-evaluate the risks associated with every investment you make. With clever marketing gimmicks, investors are sometimes deceived into believing that certain investments are ‘risk-free’. Keep in mind that while no investment is completely risk-free, nevertheless, with regular re-evaluations, you can secure good returns on your investments.
2. Diversifying investment
As you grow older, your goals might change. Your portfolio and financial standing might also change. Which is why you must diversify your portfolio or check the market for better investment options.
3. Getting insurance
Insurance is a must-have in today’s unprecedented times, and it is a good way to preserve your wealth. Insurance plans work as a monetary cushion during financially difficult times. Insurance policies provide cover against, death, medical injuries, etc. at a monthly premium. Different companies offer different policies. You can find out the one that suits you and your family and use it as a medium to preserve your wealth.
4. Having an emergency fund
Remember the savings account you put a few dollars into every now and then? You can use this savings account as your emergency fund. Investments can be tricky and insurance policies can expire, but an emergency fund is the surest way to preserve your wealth. An emergency fund will provide you cover during unpredictable times of crises and losses and act as a buffer until you secure additional funds. Generally, it is advisable to have an emergency fund that can cover up to 3 to 6 months of your living expenses.
To sum it up
Both, wealth creation and wealth preservation, are equally crucial. Striking a balance between the two is tricky and many people falter along the way. Review your portfolio from time to time and see if your wealth is truly growing. To attain financial security, use the resources at your disposal cautiously and make well-informed decisions after considerable consultation and evaluation.
Wondering if your financial goals are balancing wealth creation and wealth preservation? Consult financial advisors and get their expert advice on how to achieve the optimal balance.