In today’s world of global capitalism, people use many words to depict a person’s worth. There are many terms used such as “assets”, “capital”, “money” and “wealth”. The biggest irony is that all these are not the same. Especially money and wealth are not interchangeable, one’s goal should be to generate wealth out of the money that one earns or owns.

Many people think that money is simply cash. But there is much more to money than that. These days most money is never in the form of cash — it’s just a bunch of numbers sent by electronic means from one computer to another.
So, what is money? As with many words, “money” can have a number of different meanings. One of the definitions is “money is medium of exchange”, another goes like “Money is an idea, backed by confidence”. Let me elaborate on the latter. If you have a Rs. 500 note and you use it to buy something. Only if the buyer is confident of being able to use that same Rs. 500 note for something else, would the sale be possible. Thus it is only a confidence that resides in the one owning the note.

Wealth is somewhat different compared to money. A very recent refined definition of wealth says, “Wealth is the ability to survive a number of days forward”. This would sound alarming. The moment the question is about survival, one really doesn’t care how much money is there with him or not. It’s ultimately whether one is going to have a house to stay, a good supply of food and a decent lifestyle without much illnesses. Well, that’s exactly what Wealth is all about.

To become wealthy first try to meet all your survival needs. Then as and when the needs are met, invest excess money in instruments that are capable of growing your money. Always keep a tab on the things that are adding to your survival or enhancing them.

Boiling down to the one thing on how to create wealth? Wealth is about the hard assets that you have for your own use. If you have money (i.e. some numbers in your bank A/C as we saw the explanation earlier) that would not help you in times of a storm, but a house will protect you. So it is important to start keeping aside some money for shelter for yourself and family. Best would be to put money in a high interest bearing Corporate or a Bank Fixed Deposit with a lock in period as high as possible. Such lock in money will prevent you from spending it, will get you higher returns and on maturing will give you a good amount of wealth to buy a house for yourself. If you have a higher net worth then it would be beneficial to put in higher interest paying long term bonds. The latest 10 year bonds on various Government utilities are one of the best ones for such a purpose. If you do this over a period of 5 years then at the end of 15 years of your job, you will definitely be able to buy a nice and comfortable house for yourself.

A large chunk of your money would be going into the purchase of food and other necessary consumables. The best way to create security for this is to spend cautiously. Always avoid borrowing money for this purpose and use what is in your means. If it means to cut down on a couple of dinners or drinks it’s okay. It’s necessary to keep a track of your expenses. The idea is to not be a miser but it is to be able to spend money wiser! If you are good with numbers try to keep your savings such that the Bank interest is enough to meet your food and consumable expenses for the ensuing year. Banks pay interest to meet inflation and not to create wealth.
Look at the table to get a sense of what happens to extra money lying in the bank.

Food and House, being the most important necessities to ensure long term wealth, once taken care of solves most of the other problems. It also opens up a plethora of wealth creation opportunities. The best way to make money is by using it. Does this make sense? In the early days, all the wealthy zamindars and babus just lent out money at high interest rates to become wealthier. So in other words, they were giving it to someone to spend it and charging for it.

Similarly, deploying funds is the best way to grow, try to buy hard assets such as Gold which can be given on loan. Focus on buying good stocks, Equity Mutual Funds, High quality Debt funds through consistent and systematic investments. This is indirectly feeding your money to the growing economy of the country, thus creating it into Wealth.

So to cut the long short, to create wealth it is a must to use your money rightly. Make investments in land/home for yourself.

The world population will keep growing and the needs of people will keep rising, it’s good to secure a fixed piece of land for yourself in your lifetime. Excessive money lying idle in banks is safe but not sound, since its real value is eroding over time.

There are a number of other safe investments that can help you grow money faster. Lastly, leverage on the existing money that you have, lend it directly or indirectly through the capital markets to companies that are aiming to grow fast and thus grow your money accordingly. It always helps to have a financial advisor who can design your investments with suitable plans.

Vatsal Shah is Research analyst and member of the managing committee at Sushil Financial Services Private Ltd.

So you are actually eroding money that is lying idle

Particulars Amount (Rs.)

Money in savings account at beginning of Year 100,000
Interest earned in 1 year (@ 4.5% per annum) +4,500
Closing balance at the end of 1 Year 104,500
Tax on Interest (@ 30.9%) -1391
Impact of Inflation (@ 6.5% per annum -6500
Value at the end of the Year 96,610