Published Article Details

Does higher income automatically lead to growth in wealth?

Posted by: Arti Bhargava on May 08, 2017, 06.30 AM IST

Vikramjeet is an equity analyst who plans to buy a house in five years. He has already shortlisted some, and wants to prepare himself for the upcoming expense. But he finds himself unable to save much, despite getting paid more than the average at his age. The type of house that he is looking at will be worth Rs 5 crore in five years, but he only has the capacity to shell out Rs 2 crore.

He is confident that over the next five years, his income levels will increase enough for him to be able to afford the house of his choice, without taking a loan. But does earning more guarantee wealth creation?

Vikramjeet associates wealth with his income level. If this was true, only individuals with low income levels would be opting for car loans, home loans, credit card spending, etc. The fact is, there are takers for loans at all income levels; only the quantum changes. Those who once took a personal loan to plan a holiday to Kerela might eventually want to take a loan to for a foreign holiday, and then for a cruise and so on.

Many people like Vikramjeet can barely get by every month, irrespective of how much they earn. Expenditure tends to increase with income. Therefore, Vikramjeet must analyse his expenses and cut down the unnecessary ones to free up some cash, which can be set aside as savings. He must start by setting himself a goal. By saving with a goal in mind, he is more likely to do so diligently, so that he ultimately meets his target. He must invest for the long-term in a growth-oriented investment like equity.

Further, he must consider topping up his investment amount every year as his income increases. Ths should be easy to achieve with a higher income. Paying off loans is also a crucial part of money management. Vikramjeet should focus on paying off his debts at the earliest, so that he is relieved of unnecessary financial burdens. Making more money instead of saving right is like hoping for a miracle. Higher income alone may not be enough to fulfil all of Vikramjeet's financial dreams. He should start planning to arrange for the funds he needs, well in time.

(The content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta) This article appeared in Economic Times dated May 08, 2017, 06.30 AM IST

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