Guide to riches. Five money habits that make you wealthy

Here are five money habits that give you a shot at serious wealth.

Share of business

Running through Forbes’ annual rankings of the world’s biggest billionaires, you will seldom find salaried staff on the list. The 2023 ranking has Bernard Arnault (founder LVMH), Elon Musk (founder SpaceX/Tesla), Jeff Bezos (founder Amazon), Larry Ellison (Cofounder Oracle), and Warren Buffett (founder Berkshire Hathaway) making up the top five, with Sundar Pichai or Satya Nadella nowhere close. This shows entrepreneurs, who run a successful business and reinvest its profit to scale it up year after year, amass far more wealth than employees.

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Many folks shy away from equities because they are spooked by the daily gyrations of the market and think of equities as a gamble. But if you move away from the notion and embrace the thought that you become part owner of a company when you buy its shares, you’ll enjoy investing success.

The business-owner mindset will force you to put more effort into understanding the firm you’re buying into, and help you hang on to investment through business downturns. If you aren’t good at selecting stocks, there are always mutual funds, where a professional manager cherry-picks businesses on your behalf.

Be frugal

Seriously rich folks often come across as stingy. Sam Walton, the founder of Walmart, was known to drive around in an old pickup truck. Many Indian billionaires do not sport clothes or accessories that single them out as super-rich. Frugality is an important quality both to create wealth and preserve it, so that it compounds over time. Morgan Housel says: “Spending money to show people how much money you have is the fastest way to have less money.”

If you are not brought up with a frugal mindset, there are two habits to cultivate. One is to get used to delayed gratification. The moment you feel a need to buy something, especially a big-ticket item, ask yourself how much you can postpone having it. The second habit is to prioritise saving over spending. Commit a fixed portion of earnings to investments as soon as money lands in the account and spend only what is left over. There are many investment tools such as Systematic Investment Plans (SIP) in mutual funds that enable you to invest before you spend.

Don’t overthink

Many folks keep putting off investing because they are paralysed by overthinking. They keep researching options and wait for the right time to invest. But if you make a quick start and give investment sufficient time, even volatile assets deliver good returns.

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When evaluating investments, many folks focus on returns and ignore everything else. But, in the compound interest formula you learnt at school, the critical variable is N — the number of years, and not R — the rate of return. Getting to an eight-figure net worth is easier when you start investing in your twenties, rather than your thirties. If you start at 25, you can get to a corpus of ₹1 crore by the time you are 50, by investing ₹5,322 a month in a SIP in an index fund if it delivers a 12 per cent CAGR (compounded annual growth rate). But if you delay your start by just five years, the monthly investment you need to almost doubles, to ₹10,109. Starting early and allowing compounding to work for longer, is far more important than choosing the best product or precisely timing investment.

Avoid borrowing

Einstein called compound interest the eighth wonder of the world. If compounding multiplies your money when you invest, it decimates it equally efficiently when you borrow.

Most folks who take on EMIs (Equated Monthly Instalments) to buy everything don’t really add up EMIs to know how much money they’re handing over to the bank. When you buy a ₹10-lakh car on a loan with 8.5 per cent interest, the EMI of ₹20,517 may seem quite manageable. But at the end of five years, you’d have paid the bank ₹12.3 lakh. You paid 23 per cent more than you would have, had you saved to buy the car.

Compound, sans break

Some folks are frugal and invest regularly, but they keep tinkering with their portfolio. They keep obsessive track of markets and frequently switch assets or products, in their chase for higher returns. Such behaviour is a big impediment to wealth creation.

Frequent churn leads to transaction costs and capital-gains tax eating into returns. Worst of all, churn interrupts compounding, the investors’ best friend. Once you’ve chosen good investments and they are earning satisfactory returns, learn to leave your portfolio well alone until you need the money.

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Frequent churn leads to transaction costs and capital-gains tax eating into returns. Worst of all, churn interrupts compounding, the investors’ best friend.

Once you’ve chosen good investments and they are earning satisfactory returns, learn to leave your portfolio well alone until you need the money.

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