Traditional methods of wealth creation (Real Estate, Stock Market, Own a Business)

Before we get into the topic, it would help to understand a little bit more about wealth. Our usual way of thinking is that if the cash inflow or income is high, we are wealthy. However, if the cash outflow i.e. the expenses are high, the net savings ends up being low and hence we tend to live paycheck to paycheck. In case a personal emergency comes up or if you have some medical emergency that is not covered by the insurance that you have taken, you end up having to dig deep into your savings. In my corporate career, I have seen numerous cases like this and I was in the same boat myself. The important thing is to realize that and make the attempt to change things. We need to be able to have multiple sources of cash inflow so that in case some dry up, we can always lean back on the others.

First, we need to be clear about why we need to create wealth. I am a strong believer of “The Secret” and the Laws of Attraction. You have to focus on positive things and positive things will start happening. e.g. there is a difference between focusing on earning $5000-$10000 a month versus thinking that we will clear off this debt or this loan or pending payment. Good things start happening when you focus on the earning rather than the expenditure. We should understand the options we have at hand and also understand more about our risk taking quotient. It depends a lot on the cash reserve that we have. A higher cash reserve will automatically give us the backup to go for higher risks. But, we should take calculated risks. We should be prepared for the eventuality that things may go wrong or may take more time and plan for that. The rosy picture portrayed usually does not work out. So, we need to be careful there and plan ahead.

Some options are:

  1. Real Estate: This is an excellent way of creating wealth. Most people tend to go this way but end up taking bank loans to purchase houses or land rather than using cash reserves. The negative aspect of bank loans is that the bank owns the house or land till the loan is cleared. Most people take up the loan thinking that later their income or cash inflow will increase at a later point and they tend to discount any cases of reduction in cash inflow due to emergencies. In case of loan defaults, the bank ends up taking over possession and the entire loan amount paid till date gets lost. Banks then end up selling these houses in auctions at much lower prices. What we can understand from this is that we can use these foreclosed properties to get good deals. Secondly, builders often give very good deals when the money is ready at hand as home loans usually take some time for processing. Ready money gives you the option to bargain better. Of course, I should put in a disclaimer that we need to do our due diligence and ensure that the property documents are clear, builder is a good builder with good past history, location of property, potential for increase in value of property, neighbouring areas and that there is no dispute about ownership and the seller has clear rights to make the sale. Real estate can earn good money provided we are cautious about it. The game “Monopoly” is an excellent game to understand how we can go about it. “Buy Low” and “Sell High” works.
  2. Stock Markets: Warren Buffet is an inspiration in this field and numerous books have been written about making money through stocks. Here also the “Buy Low” and “Sell High” motto works very well with a very clear understanding of our risk profile. We need to understand more about how valuable the stock really is and how much it is likely to grow. Then only, we should take the decision to buy or hold. If the stock is already overpriced, we should not buy it. The volume game works especially if we diversify and buy stocks across different industries. There are a lot of predictions about how the stocks may do and lot of experts talk about that and sometimes, we tend to blindly follow the experts. However, we should first understand that experts may or may not invest in those stocks. Its very likely that they would have already made the purchase at a very low price and by the time you make the purchase, the stock would be already very overpriced. We should do the due diligence ourselves first and then use the experts advice as a guidance. Once we do a few test runs, we are able to figure out which techniques work and which ones don’t. Stock Markets can also earn good money and we have to keep an eye on the fact that timing of entry and exit matters as there are a lot unforeseen circumstances that could make the stock prices increase or suddenly fall down.
  3. Own a Business: Owning a business is an excellent way to earn money. There are numerous opportunities available (Opening a restaurant, Owning a Franchise, Import/Export Business etc) and we need to understand that no business is 100 % failure proof and it is quite challenging. Each opportunity is different and the necessary due diiligence needs to be done to ensure that the terms are as favorable to us as possible. We need to plan for cases where the business may not do well and we need to have a strong reason for doing the business so that when the downs come, we are still ready to work on the business. Also, we need to focus on building multiple businesses so that if one dries up, we can always lean back on the others. Building the business is the toughest and we need to focus a lot on that. There is plenty of scope for working on online or e-commerce opportunities and we see a lot of cases where the brick and mortar shops have had to change strategies in order to try to compete with online stores or in some cases had to shut shop completely. Online is the way forward. However, we need to have a proper business strategy in place as only the ones with a clear approach will succeed as the market matures. Building the customer base and clear understanding of products/services and the target market is important but reducing prices below the margin price will not sustain the business.

These wealth creation methods will generate sufficient wealth, the type that cannot be generated from just putting savings in a bank in various deposits or mutual funds.