In today’s commercial world, it’s important to know how to save and invest your money and ensure you’re financially free. The process of saving this money is known as accumulation and it requires one to be smart about how they invest.
The process of accumulation and distribution is one that takes a few years to master, but once you do, you’ll be able to know exactly how to use your money.
What is accumulation and distribution?
Accumulation is the process of building up your wealth so that it can serve you well when you need. It also means investing in a smart way. We work tirelessly, so why allow our money to lie lazily in a savings account? Every drop counts and drop by drop an ocean can be filled. It requires you to make smart analytical moves and identify the exact goals you want to accomplish in your life.
Distribution, on the other hand, is to spend the money you’ve accumulated to fulfil the goals and live a happy and satisfied life. This satisfaction leads to higher productivity in our life and enhances our earning potential to achieve bigger goals. Thus, the cycle of accumulation and distribution moves on.
Why is it important to save up for accumulation?
The more you’re able to save and invest money, the faster this money will grow. This is the result of compound interest. Compound interest is also known as the eighth wonder of the world.
Proper compounding allows you to accumulate interest directly on the original investment, along with interest on the interest itself. So, the accumulated amount is way above the original amount.
What’s the best age to start accumulating?
There’s no real “best age”. The moment you start earning your own money, you should begin accumulating.
The normal equation is Income – Expenses = Savings
We need to modify this to : Income – Savings = Expenses
This means you need to control your expenses and can put away a fixed amount of money earned (say 30%) so that you can begin the process. You could also increase or decrease the amount based on your comfort at that time.
How to accumulate?
The best way to begin accumulating is to save the moment you get your income or salary. A lot of people make the mistake of saving their money right after they reach the end of their expenditure cycle. This is not a good practice because the more money you have in hand, the harder it is to resist spending it.
The moment you receive your salary, put away some percentage of it as investments into equity mutual funds and bonds which compound over time. After that, you can use the rest of the money for your expenditure. By doing so, you also understand how to manage your finances better, allowing you to make smart investments.
What’s a good benchmark to accumulate to?
Rather than setting a benchmark on the amount you can accumulate, it’s more important that you set the right goals. Your goals can vary depending on what you want from life. This can be anything from saving for your childrens’ futures, a new car, vacation time, retirement money and so on.
These are the goals that give you an understanding of how much you need to save rather than just one lump sum. By budgeting your savings, you will soon be able to smartly invest in the things you want to achieve, at the right time in life.
It’s important that you learn how to distribute your money as well because that’s what gives you a sense of accomplishment.
How do you distribute?
By distributing from the pool of money you’ve accumulated, it becomes easier for you to allocate the right amount to your goals. Once you reach a particular accumulation target, distribution can either be as a single withdrawal or at regular intervals. In both scenarios, you need to plan for it in a systematic manner.
This is important because markets continue to fluctuate on a daily basis and just like one uses monthly investments to average out entry levels, one needs to plan for averaging out at the time of exit. In case of a single withdrawal, this can be over 3 – 4 months. On the other hand, for withdrawal at regular intervals, the planning needs to be more detailed based on time horizon and requirement.
The ultimate goal is to have enough investments which last till you until you survive. You will have enough money in your bank so you don’t have to depend on anyone during your retirement years.