Every investor has a different set of financial goals, risk tolerance capacity, and time horizon. Despite the difference in our goals and investment horizons, most investors share the wealth-building objective. However, the goal of becoming wealthy is easier to dream of than achieve. When it comes to wealth creation, the road ahead is not always easy. Applying a few fundamental principles to build your wealth can help guide you and make things easier. This article outlines the 3 most crucial wealth-building principles you must master to achieve the long-term goal of wealth creation.

• Living within your means helps you save money to invest and grow wealth.
  
• Investing wisely and consistently is the secret to wealth creation.
  
• Managing and minimising debt can boost your wealth-building potential in the long run. 

Unlike most wealth creation principles that are easy to understand but difficult to implement, the following three principles are both easy to grasp and follow:

Principle one: Spend less than you earn

This is one of the most basic principles for building your wealth. Living within your means and spending less than you earn may seem commonsensical, but this basic principle is often overlooked. In a world dominated by consumerism and instant gratification, sticking to this principle can seem like a daunting task for most. At its core, this basic principle of wealth creation is about limiting your expenses, no matter how much income you generate. By consistently spending less than what you earn, you can save more, invest better, and accumulate wealth.

How to implement this principle:

Step 1: Create a budget

Budget your expenses to track your income and spends. Allocate 50% of your income to expenses like utilities, rent, EMIs, and food, 30% to discretionary spends, and 20% to savings.

Step 2: Avoid lifestyle inflation

Resist the temptation to increase your spending as your income rises. Avoid status purchases like luxury items and expensive clothes since these are assets that depreciate over time. Keep your lifestyle expenses stable and save the increased income.

Step 3: Practise conscious spending

Spending money solely on things that bring value to your life can help you avoid the allure of impulsive purchases. If you feel a purchase impulse, try delaying the actual purchase to a later point. Nine out of ten times, you will realise that the impulse has passed.

Principle two: Invest wisely and regularly

Saving money is the first step to wealth creation. However, idle money in your bank account cannot help you create wealth. This is where the second principle of wealth building comes in. To build wealth, you must invest your savings wisely. Money stored in savings accounts earns negligible returns, especially when adjusted for inflation. Investing helps your money grow at a faster pace under the power of compounding.

How to implement this principle:

Step 1: Start early and be consistent

The key to this wealth-building principle is starting early and maintaining consistency. When you start investing money early, you give your funds ample time to grow and accumulate compound interest. Compounding helps produce a significant wealth corpus over time. Remember, consistency is crucial in investing, even during market downturns. If you are looking for a safe investment option, you can consider fixed deposit. They offer guaranteed returns and a fixed interest rate throughout your investment tenure.

Step 2: Understand your risk tolerance

Investing in market-linked instruments carries certain risks, and the types and degrees of risk vary from one instrument to the next. For instance, equity investments are exposed to market risks, while debt instruments carry credit and interest rate risks. By understanding your capability and willingness to take on investment risks, you can invest in assets that best align with your needs. Also note that your risk profile changes with time, necessitating periodic portfolio revisions.

Step 3: Diversify your investments

To effectively implement this principle of wealth building, you need to curate a well-diversified portfolio. A diversified portfolio spreads investment risks across asset classes to minimise risks and boost return potentials. In simple words, try putting your eggs in different baskets of stocks, real estate, mutual funds, gold, and FDs to balance out risk and returns. You can consider investing Bajaj Finance Fixed Deposit. With a top-tier AAA rating from financial agencies like CRISIL and ICRA, they offer one of the highest returns, up to 8.60% p.a.

Principle three: Manage and minimise debt

One of the most critical principles of wealth building is minimising and effectively managing debt. Excessive debt, especially high-interest ones like credit cards and personal loans, can significantly hamper your saving and investment capabilities.

How to implement this principle:

Step 1: Tackle high-interest debt first

Pay off high-interest debts first to avoid interest build-up over time. Start with your personal loans and outstanding credit card dues. Apart from impacting your credit score, these debts can quickly accumulate and become unmanageable.

Step 2: Practise good credit habits

Implement good credit habits like paying your credit card bills in full instead of meeting minimum payment requirements. Doing so helps avoid extra interest charges on the debt. Avoid frequent loan applications, as frequent and repeated hard inquiries into your credit history can negatively impact your credit score.

Step 3: Use debt strategically

Remember that not all debt is bad. Use debt strategically like buying a property or expanding your business. For instance, if you borrow to invest in real estate and the investment appreciates over time, you can potentially amplify your returns. As long as the income from the property covers the cost of the loan, debt is being used strategically. However, always remain cautious to ensure the debt is manageable and ensure that you stick to your repayment plan.

The act of wealth building is an uphill task that requires time, patience, and a disciplined approach. These three core principles of wealth building can help make this uphill journey a bit easier for a novice investor. By consistently spending less, investing wisely, and managing debt, you can simplify your wealth creation endeavour to a significant extent.