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How you can become a crorepati!

January 23, 2007 08:52 IST

Thomas Stanley in his book The Millionaire Next Door wrote: "Save and become rich."

Napolean Hill said: "Think and grow rich."

Amitabh Bachchan and now Shah Rukh Khan say, "Kaun Banega Crorepati? Kheliye aur crorepati baniye. (Who will become a millionaire. Play and be one)."

With popular game show Kaun Banega Crorepati-III having begun on Monday, all of you must have seen several billboards and several ads telling us easy ways to become rich.

In one of the KBC-III ads, a grandfather tells his grandson about his early life and struggles in Bombay when he had to sleep on the streets, sometimes hungry. But he worked hard with determination and diligence and became a crorepati after many years. The grandson replies, "It's very easy now. All you need to do is answer a question and you can become a crorepati."

Millions of people try their luck to get a call on this coveted show and crores (millions) of rupees are spent on the Rs-6 SMS, besides countless hours and energy spent on dialling your luck.

Now we all know who becomes a crorepati in the end! Is it Airtel, Star TV, Shah Rukh or you? We all know the answer to this one and I hope you get my point.

For most people, there are five legal ways of becoming rich; some of these might be faster than the other. I have arranged the five in the descending order, starting from the fastest and probably the easiest.

  • Inherit it
  • Marry it
  • Save and Invest
  • Become an owner (own equity) and not a loaner
  • Win a lottery

However, 'Save and Invest' is one strategy -- or should I call it a 'principle' -- that is relevant for most of the people, right from the daily wage earner to corporate executives in the upper echelons of the industry.

Some principles, however old or simple they might sound, are still applicable even in today's time, as they were several hundred years ago. Burton Malkiel, in his book Random Walk to Investing, has written: "Even in fields such as medicine, where true expertise really exists, the greatest gain comes from following a simple advice. Despite all the gains from various wonder drugs, gene therapy and new surgical techniques, most medical progress has come from one old invention and one simple technique. More lives have been saved and prolonged by penicillin and by washing hands than by any other pharmaceutical or medical technique."

By keeping your strategy simple, you are likely to implement it, and achieve results. A byproduct of this is how you take time out to spend with your family, friends, and in more creative pursuits and fulfilling dreams.

The key point is to understand the basic principles and implement strategies based on these principles.

Simple steps to strike gold

Savings are the building blocks of wealth creation and you should ensure that you are able to save at least 20% of your gross income and invest this money every month in a diversified equity mutual fund and large cap stocks.

There is no better time than today to start your investment programme. Waiting for the golden moment will not help in any manner. We all know that tax-planning investments can be done right from the start of the financial year in April, but how many people actually do it?

Transfer all risks such as death, disability, critical illness, accident, health and property to the insurance company. Understand the consequences of risks more than anything else and do not think of insurance as an expense.

Stay away from short cuts

Albert Einstein once said, "Only 2 things are infinite: the Universe and human stupidity, and I am not sure about the former."

Ensure that you have addressed the issues of wealth transfer by having a simple document such as a will. The whole world watched the Ambani brothers' saga in the recent past.

Having addressed all the above, the next step is to simply invest a fixed amount every month and whenever you can in debt and equity.

Finally refrain from these 6 mistakes that most equity and mutual fund investors make:

  • Having irrational expectations.
  • Selling out in bad markets.
  • Investing short-term money in equity and long-term money in debt.
  • Being affected by news, interest rates, oil prices and losing confidence too soon.
  • Trying to time the market and waiting for the best time to buy or sell.
  • Getting greedy and opting for spicy derivatives, commodities, trading without understanding the risks associated.

Even if you come close to doing the above six steps and not committing the six mistakes, I am confident that "Aap Banenge Crorepati."

Finally, just knowing the right thing is not enough. You must do the right thing to get results. Benjamin Franklin said, "The person who does things makes many mistakes, but he never makes the biggest mistake of all: doing nothing!"

We strongly believe that even if your financial decision is not perfect, it may still leave you in a better position than if you had done nothing.

The greatest barrier to your success or becoming a crorepati can only be YOU.

The author is a practising Certified Financial Planner. He can be reached at amar.pandit@moneycontrol.com.

Amar Pandit, Moneycontrol.com