Everything About How To Make Your Money Work For You

No image 5paisa Research Team

Last Updated: 30th March 2022 - 10:59 am

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If you work hard in your career, be it your job or your business, there is an interesting question that you need to ask yourself. Is my money working hard enough? Let us look at some background. We all have bills to pay and lifestyles to manage. So a monthly expenditure budget is something you cannot avoid. But the key to long term wealth creation is not about earning big money. It is a lot more about making money work hard for you. What do we mean by making money work hard?

If you don’t know your goal, it does not matter how fast you run

This is the basic requirement to make your money work hard for you. Start off with goals, both long term and medium term. Then translate these goals into monetary targets. Once that is done, make a plan to achieve these goals. You may be progressing at break-neck speed in your career, but you may be doing little to create a solid corpus for your future. Knowing your goals and directing your efforts towards these goals is the starting point. Once you know your goals and the sum you require after a specific number of years, the next challenge is to put money to good use.

Create a budget and squeeze corners

When Mr. X created a plan he realized that he needed to save Rs20,000 per month but his current monthly surplus was just Rs.9,000. Since his surplus is inadequate, he decides to put off financial planning. That is the wrong approach. If you have a surplus of Rs.9,000 then start investing that on a regular basis as SIPs. Then review your budget and see where you can squeeze corners. Take a few samples. You may be spending too much eating out too often. In the process you are overspending and not doing any service to your health. Look to cut that down. Secondly, you may be paying for an endowment plan which you can surrender and convert into a pure risk plan and save premiums. Or you realize that you have shopping offline for your apparel and groceries. You calculate that by shifting all your purchases online, you can cut down your bills by 20%. These are just examples and if Mr. X were to add these up, he would probably meet his target. The moral of the story is to do a hard review of the budget and cut the flab.

Create SIPs in equity for your long term needs

You will be surprised how hard your money can work for you if you invest regularly in wealth creating equity funds. The most important aspect of making money work for you is time and not timing. In fact, timing hardly matters in the long run. Let us see how time makes a big difference to wealth creation.

Fund Name

Tenure

Annual Return

Monthly SIP

Final Value

Wealth Ratio

Alpha Fund

5 years

14.50%

Rs.5000

Rs.4.40 lakhs

1.47 times

Delta Fund

10 years

14.50%

Rs.5000

Rs.13.51 lakhs

2.25 times

Theta Fund

15 years

14.50%

Rs.5000

Rs.32.20 lakhs

3.58 times

Gamma Fund

20 years

14.50%

Rs.5000

Rs.70.61 lakhs

5.88 times

 

This is a classic example of money working hard for you via the power of compounding. The longer you continue your regular investments in equity, the more the principal earns returns and the more your returns earn returns.

There is one more catch here. Ideally, go for growth plans over dividend plans. These growth plans are not only auto compounders of wealth but they are also more tax efficient compared to dividend plans.

Lastly, money works hard when you continuously review and rebalance

Even with our best of efforts and the most well-meaning advice from your financial advisory, you may quite often end up with the wrong investments. That is part of the game. What you need to ensure is two things here. Firstly, keep a long tenure so that you have the time and the opportunity for course correction. Secondly, do an annual review of your investments and in case you find a particular investment underperforming, then it is time to rebalance. In the long run, your financial plan is an auto-balancer because it ensures that you take profits at higher levels and allocate at lower levels. In a tough and competitive market, this is one of the best ways of making money work hard for you.
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