5 mundane keys to financial success

Don't gravitate toward investment alchemy. There is no magic or get rich formula.
By Larissa Fernand |  11-06-22 | 

In the crazy dash to make money, individuals jump into sector funds or crypto or the latest fad. If you remind them that there is no magic bullet in the wealth creation journey, they don't want to listen.

Just as many people seek a magic nutritional formula to help them get a great body without the working out and culinary sacrifices, so do investors gravitate toward investment alchemy to help solve their financial problems. If they can just hit on a hot stock or two, the rest of their financial plans will fall into place without a lot of heavy lifting on their part.

Unfortunately, there is no magic or get rich formula. CHRISTINE BENZ, Morningstar's director of personal finance, lists down the keys to financial success.

1. Maintain an appropriate Savings Rate.

It is not just about earning well. You need to save a substantial amount that gives you the raw material to invest and build upon. Even if you make killer investment selections, it's tough to make a plan work if you haven't saved consistently and lived within your means.

If you're in accumulation mode, push yourself to have a high savings rate. The right level of savings depends on a huge gamut of factors. But do increase the amount saved every year.

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2. Nurture your Human Capital.

If you're just starting out in your career, you're long on human capital and your financial capital is likely small. How much you can contribute to your investments--not the gains on them--is going to be the biggest share of your portfolio's growth at that life stage. The best and most painless way to increase those contributions is by enlarging your earnings and not overspending.

That's why investing in human capital is such a smart use of funds if you're just starting out in your career. If you can increase your earnings power with such an investment, you have a long time until retirement to benefit from it.

Explore all avenues. It may or may not mean enrolling for a business degree. You could pursue certifications. Develop new skills. Attend the right workshops and conferences. Look for a mentor. Read about the subject you want to increase knowledge in. Learn new technologies. Take advantage of additional training. There are plenty of podcasts available online. Just never stop learning.

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3. Develop a sane asset-allocation mix. Asset allocation can seem hopelessly black-boxy, but it's useful to remember that your financial capital should align with your human capital. When you're young and long on human capital, your own earnings power is your biggest asset. It makes sense to invest as aggressively as you can stand because it's unlikely you'll need to rely on your investment portfolio for living expenses for many years. You can afford to withstand more volatility, and that means more stocks.

As you get older and get closer to drawing upon your portfolio, you'll still want to make sure your portfolio has growth potential, but you'll also want to steer more into safe investments because you don't want to be in the position of withdrawing from investments as they're falling.

Tailor your asset allocation to factor in your own situation.

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4. Don't skimp on insurance.

Investing won't protect you against big risks--only insurance products can do that. That means the best health insurance, property insurance, home loan insurance, and life insurance if you have dependents.

Whether you end up claiming anything from these policies is beside the point; the idea is to protect yourself financially from catastrophic risks that could otherwise derail your plan.

And of course, knowing you're insured provides immeasurable peace of mind.

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5. Limit costs.

Fund expenses aren't the only cost investors face. There are brokerage costs. Fees if you rely on a financial professional for advice. Capital gains tax. All these can be a drag on bottom-line returns.

All of these expenses look pretty innocuous on a stand-alone basis, especially because they're often expressed in percentage rather than rupee terms, so they don't look like real money. But compounded over a typical investing time horizon of decades, they can mean the difference between a plan that's on solid footing and one that's on shaky ground.

Speaking of costs that erode returns, one of the biggest costs all of us investors face is the toll that irrational, emotion-driven decision-making can take on our returns--selling when we're nervous and buying after the easy money has already been made.

If you find that your emotions are contributing to financial decisions that you regret later, money spent on professional financial guidance can be money well spent.

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