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Wednesday, July 14, 2010

Wealth Creation for Financial Freedom

Accumulating wealth—as distinct from just making a big income—is the key to your financial independence. It gives you control over assets, power to help shape the corporate and political landscape, and the ability to ensure a prosperous future for your children.

You want to create personal wealth, right? So does Rakesh.

Rakesh is 35 and works for a pharmaceutical company. He looked at his finances and realized that at the rate he was going, there wouldn’t be enough money to meet his family’s financial goals. So he chose to embark on a personal wealth-creation strategy. His first major step was to pick up a copy of this workbook for guidance. Rakesh began by learning the language of wealth creation. The first lesson was to understand the meaning of assets, liabilities and net worth.

A wealth-creating asset is a possession that generally increases in value or provides a return, such as:

• A savings account.
• A retirement plan.
• Stocks and bonds.
• A house.

Some possessions (like your car, big-screen TV, refrigerator and clothes) are assets, but they aren’t wealth-creating assets because they don’t earn money or rise in value. A new car drops in value the second it’s driven off the lot. Your car is a tool that takes you to work, but it’s not a wealth-creating asset.

A liability, also called debt, is money you owe, such as:

• A home mortgage.
• Credit card balances.
• A car loan.
• Hospital and other medical bills.
• Student loans.

Net worth is the difference between your assets (what you own) and your liabilities (what you owe). Your net worth is your wealth.

To calculate how much he is worth, Rakesh used the following formula:

Assets – Liabilities = Net Worth.

Note: The market value of a home is an asset; the mortgage, a liability.

Let’s say your house is worth Rs 20,00,000 but your mortgage is Rs 8,00,000. That means your equity in the home is Rs 12,00,000. (Equity contributes to your Net Worth)