You might be familiar with the three Factors of Production (FoP)—Land, Labour, Capital, and Entrepreneurship. This concept was introduced 300 years ago and remains relevant today. FoP is the study of how manufacturing companies remain profitable, how to price their product, how to substitute labour if the capital is in short supply, and how to measure their performance against their peers.
Similarly, there are three factors of personal wealth creation: Time, Effort, and Money. These three variables will change with your age, and it is important that you understand how to find the right balance to build generational wealth. Today, we are going to examine the merits of these factors and identify a pathway to excellence.
The Factor of Time
Time is the only factor that is given equally to all human beings, i.e. 24 hours in a day. No person can negotiate, exchange, or trade time. Everyone has access to the same time, regardless of their location, gender, age, or status.
Even though time is constant for everyone, it moves at different speeds across age groups. In your 20s, you would literally have time for everything. In your 30s, you need to prioritise your tasks as you start a family. In your 40s, you need to focus only on income-generating activities. In your 50s, you might have to say “NO” to most of the non-productive tasks. And finally, if you are 60 or older, you may have more time to unwind after retirement.
The impact of time cannot be purchased by spending money or putting in more effort. Let me illustrate it with an example.
A Rs 5000 SIP for 30 years, assuming a 12 per cent return, would generate a corpus of Rs 1.76 crore.
People assume that doubling the investment to Rs 10,000 will buy back 15 years of time, but the math does not support that; the final corpus would only grow to Rs 50.46 lakh (less than one-third of 1.76 crores). In both cases, the total amount invested was exactly Rs 18 lakh, but time helped the longer-tenor investor visualise a 3x return compared with the shorter-term investor.
The SIP amount required to generate Rs 1.76+ crore in 15 years is Rs 35,000 a month, i.e., 7 times the original contribution of Rs 5,000/month.
Time is a crucial element for wealth creation. You may be able to spend more time in your 20s & 30s to create a wealth generation model, so that you can look up to that to replace your income in your late 50s and 60s.
The Factor of Money
To make money via investing, you need to invest money. If the amount you invest is too low relative to your income, the final corpus won't be sufficient to cover your expenses. If the amount is too high, it would deprive you of leisure.
Finding the right amount to invest is an art, and I suggest you set aside at least 20 per cent of your income for this purpose.
Start investing only once you have disposable income, as the influx of money should not stop once the asset creation process starts. Withholding money in between by not investing would be like forgetting to water a seedling in its early days. The result—the asset will never reach maturity.
If you have high EMIs and expenses currently, it is prudent to bring them under control before initiating an investment plan.
The Factor of Effort
Nothing is built without labour. Creating wealth requires a lot of effort, making good decisions, and avoiding bad ones. We have heard stories of decades-old institutions going bankrupt because of a single bad decision. To make the right decision requires effort, i.e., labour.
You have to invest in the right kinds of schemes and plans that can generate wealth for you. This is a never-ending process, and the upkeep required may be very high. This is where a product such as Mutual Funds comes to your rescue. There is a dedicated fund manager appointed to research and invest in the right assets and pull out money from the wrong ones.
Thankfully, you can depend on a fund manager to put in the required efforts to grow your capital. This simply means that of the 3 factors, you only need to control 2—Time and Money. Even then, a small amount of effort is still required to check whether the fund manager is doing the right things and decide whether to switch to a better manager.
When you balance Time, Money, and Effort, you create a winning combination for personal-finance excellence.
The writer is a SEBI Registered Investment Adviser (RIA), INA000021757, and author of ‘How to join the top 1% options traders club’.
The opinions expressed in this article are those of the author and do not purport to reflect the opinions or views of THE WEEK.