Rupakumar Pradhan, CFPCM, CWM®

Personal Financial Advisor

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Wealth Creation v/s Wealth Erosion

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Wealth Creation v/s Wealth Erosion

Wealth Creation v/s Wealth Erosion
September 04
05:50 2018

Generally we are savings are likely to be held in five major categories—property, equity, debt, precious metals, and cash.

Whatever the investment product, however complex it’s terminology and working, it is likely to fit into one or more of these categories. Equity shares, IPOs, equity funds, PMS are all equity.

Your investment in the PF, PPF, Bank fixed deposits, bonds, post office schemes, and everything else that returns the principal after a particular time and pays interest, is debt.

Your diamonds, gold, silver, inherited jewellery, and coins can all be classified as precious metals. Whatever lies in your savings account, or in your vault, is cash.

Property includes everything in real estate that you buy—residential, commercial or land. As long as you are not spending all that you earn and are putting something aside in any one of these, you have begun well.

Wealth Creation

Wealth Creation involves the building of assets by means of careful investment into assets based investments, usually over a long period of time so as to achieve an income stream that will ensure a continuation of a high quality lifestyle in the years beyond retirement.

Wealth creation for the long term need not be complex. It should be a very simple strategy to create wealth thru the desired schemes as per your risk appetite.

  • Not only for working life span i.e. pre-retirement stage in life
  • But also for a decent future life i.e. post-retirement stage in life
  • For Emergencies and
  • For Anticipated Expenses

Basic Norms – Wealth Creation

The process of wealth accumulation will always be subject to some basic norms:

  • Time span of an individual’s earning life is limited, encompassing child and old age dependencies.
  • The process involves managing of current expenses to maintain the expected standard of living in such a manner that out of the earned income, disposable savings are earmarked to make provision for dependency subsistence before and after retirement.
  • Keeping in view unexpected interruptions in the accumulation process on account of temporary unemployment, redundancy, sickness, morbidity, disability, changes of job etc.
  • Strategizing is necessary to manage environmental changes such as economic, socio-political, financial, legal with statutory compliance etc.

Strategies for Wealth Creation:

In wealth creation, you should give prime importance to following points

  • Knowledge of investment options
  • Creation of a diversified portfolio
  • Flexibility of reshuffling the portfolio on changes in personal needs and risk tolerance.
  • Transparency of costs including incidental and intermediary costs.
  • Availability of finance to the dependents after the retiree’s pre-or-post retirement death
  • Stable income after retirement
  • If you are not able to do it yourself, get professional financial planner help.

Time Factor for Wealth Creation:

Time factor for savings and investments for wealth accumulation plays very important role. One should determine working life span and residual post-retirement life span.

Take an example:

Wealth Creation! 100 Lakh Wealth! 1 Crore Wealth!

Crorepati = 100 lakhs  ~ A big amount for a middle class family.

Many of us first start earning money, do small savings and then try to make several lakhs and then become crorapati. However, if your target amount is 1 crore then think about your required interest rate and investment time horizon.

Do you want to achieve it through one time investment (lump sum) or small amount investing regularly?

Check out how by investing a fixed lump sum amount annually or monthly for a particular period of years at a fixed rate of return you can massively grow your money.

Say Interest rate @ 12% p.a.

If the time horizon is 35 years, then the investment amount per month is only Rs. 1540/- for creating 1 crore wealth.

If you invest Rs. 5000/- mentioned above for 35 years (total investment amount ~ Rs. 21 Lakh only) then you would have a whopping amount of Rs. 32,476,345/- (Rs. 3.24 crore).

You are saving and creating wealth during your working life span but you are not thinking about the impact of wealth erosion.

Yes, Wealth Erosion! It may be a new concept or new terminology for you but it’s the most important part of wealth management.

Wealth Erosion

The “erosion” is a “slow destruction process”

  • Since it implies a slow process covering a long period, its effect is not felt immediately.
  • The eroded productivity results into irreparable loss and no time is left to recoup the damage caused.
  • Therefore, proactive steps need to be taken.

Implication of Wealth Erosion:

  • The total value of present day wealth many not remain at the same level in future
  • The slow process of erosion will reduce substantially the money value of the wealth accumulated.
  • Over a long period, this may result in a steep fall in the value of money.

Impact of inflation on your  money, just check it.

For an Example

Impact of inflation on your money

How the inflation rate affects Bank Fixed Deposits or any other fixed-income investments?

Investors in bank fixed deposits, bonds and other fixed-income investments hate inflation, precisely because of the erosion of purchasing power that it causes. When the inflation rate rises, Bank fixed deposits that promise a fixed payout long into the future become less valuable, because the real value of that future payout is less if prices are increasing more quickly.

An investor who invests Rs. 10 Lakh with an annual inflation rate of 6% p.a. will lose half of their principal in 12 years.

This is one of the examples for wealth erosion. Other causes are also there.

Causes of Wealth Erosion

  • A continued fall in value of money
  • Reduction in purchasing power per unit of currency
  • Rise in the cost of living
  • Withdrawal of present day savings to finance of increasing expenses towards day to day living
  • Liquidation of current assets to meet contingent liabilities.
  • Disposal/ attachment of assets mortgaged against secured loans for clearance of outstanding debts.
  • Taxation on investments / returns / returnable asset value (Capital Gains Tax)
  • Fall in interest rates
  • Sudden discontinuation of income on account of earning individual’s death, disablement or unemployment.
  • Inadequate insurance for properties resulting in total or major loss consequent upon happening of a risk event.
  • Inadequate life insurance cover
  • Prolonged sickness of the client and dependent family members requiring substantial treatment expenses etc.
  • Increase in tax rates applicable to immovable properties (estates)
  • Mutation expenses to be incurred for documentation of contract of sale / purchase of properties.
  • Local market situation affecting the realizable value of immovable properties/assets.

With this article in mind, you should try to protect your purchasing power by choosing investment products with returns that are equal to or greater than inflation.

So, the next time the value of your wealth rise, make sure whether your wealth has actually increased, or are you being subjected to the wealth erosion effect!

An investment in knowledge pays the best interest. ~Benjamin Franklin


I am a CERTIFIED FINANCIAL PLANNERCM. For the moment, I have shared my experience growing up with you because it had a tremendous impact on how I do what I do.

If you have a question about your own financial situation please connect with me.  I’d be delighted to try to be of service.

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Client’s “Comprehensive Financial Plan” Experience. Read it.

About Author



Mr. Pradhan has over 22 years of experience in financial services industry. He was previously working with leading Life Insurance Companies, Broking Firms, Distribution Company, Financial Planning Company and Health Insurance Company. He has cleared several NCFM modules & is also AMFI Certified. His expertise is in Comprehensive Financial Planning, Technical Analysis, Portfolio Management, Investment Advisory, Wealth Management & Business Development.

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