ARC Formula - How to Build Wealth Over Time

ARC Formula

ARC is an acronym for Asset Allocation, Regular Savings, and Compounding. It is a simple but effective formula for building wealth over time. Lets understand each of these components, then helps you to plan your personal finance, and helps you to build wealth over time. It also subjects you to efficient financial planning.

Asset Allocation

Asset allocation is the process of dividing your money among different asset classes, such as stocks, bonds, and cash. The goal of asset allocation is to create a portfolio that is diversified and has the potential to grow over time.

There are many different asset classes available, each with its own risk and return profile. Stocks are generally considered to be riskier than bonds, but they also have the potential to offer higher returns. Cash is the least risky asset class, but it also offers the lowest returns.

The right asset allocation for you will depend on your individual circumstances, such as your age, risk tolerance, and financial goals. A financial advisor can help you create an asset allocation strategy that is right for you.

Savings

The amount of money you can save each month will depend on your income and expenses. However, even if you can only save a small amount, it will add up over time. For example, if you save $100 per month for 30 years, you will have saved $36,000.

The best way to make sure that you are saving money on a regular basis is to automate your savings. This means setting up a direct deposit from your paycheck into your savings account. This way, you won't even miss the money.

Regular savings is the process of setting aside money on a regular basis, such as each month or paycheck. Regular savings is important because it helps you build wealth over time, even if you can only save a small amount each month.

Compounding – and its Super Power

Compounding is the process of earning interest on interest. When you invest your money, you earn interest on the principal amount. However, you also earn interest on the interest that you have already earned. This means that your money grows at a faster rate over time.

For example, if you invest $100 at an interest rate of 5%, you will earn $5 in interest in the first year. In the second year, you will earn interest on the original $100, plus the $5 interest that you earned in the first year. This means that you will earn $5.25 in interest in the second year.

The longer you invest your money, the more time it has to grow through compounding. This is why it is important to start saving and investing early, and you enjoy the super power of compounding.

If you do not find a compounding instrument with your bank or financial institution, you can build yourself one, this way:

• Invest your money for a fixed 1 year term, say 100. Say you get 5% interest.
• At the end of the year, when your deposit matures, you will get 100+5 = 105.
• At that day itself, put another 100 add the proceeds of 105, and invest 205 for 1 year.
• Repeat the process every year.

This way, you have good flexibility of liquidation of funds, as per condition, you can increase your investment, or even decrease or withdraw, and also can also enjoy the full power of compounding.

Remember, the time period of investment should be less than, or equal to 1 year. If you can do it at a 6 months interval, for example, you will benefit a lot more.

Here are some additional things to keep in mind about asset allocation, regular savings, and compounding:

Asset allocation is a long-term strategy. It is important to stay disciplined with your asset allocation plan, even when the market is volatile.

Regular savings is a habit. The sooner you start saving, the easier it will become.

Compounding is a powerful force. The longer you invest your money, the more it will grow through compounding. It is truly the superpower to build your money and finance.

Steps to follow in everyday personal finance to have ARC formula work effectively in your favour:

Set financial goals

What do you want to achieve with your money? Do you want to buy a house, save for retirement, or send your children to college? Once you know your goals, you can start to develop an asset allocation strategy that will help you achieve them.

Make a budget

This will help you track your income and expenses so that you can see where your money is going. Once you know where your money is going, you can start to make changes to free up more money for savings.

Automate your savings

This is the easiest way to make sure that you are saving money on a regular basis. Set up a direct deposit from your paycheck into your savings account.

Invest your money with caution

There are many different investment options available, so it is important to do your research and choose the ones that are right for you. You should also consider your risk tolerance when making investment decisions. Exercise caution and don’t become greedy. You may consult our investing page for more on the same.

Be patient

Like all good things in life, building wealth takes time and effort. Don't get discouraged if you don't see results immediately. Just keep saving and investing, and you will eventually reach your financial goals. It's the system and discipline that's more important.

Here are some additional tips for following the ARC formula effectively:

Start early

The sooner you start saving and investing, the more time your money has to grow.

Get professional help

If you are not sure how to create an asset allocation strategy or invest your money, consider working with a financial advisor. Use the search box given below to find a financial advisor in your area, or ask for references from your friends and family, who are happy with a particular financial advisor and their services.

Rebalance your portfolio regularly

As your financial situation changes, you may need to adjust your asset allocation in periodic intervals. Your financial advisor should help you majorly in this, but you should also do your research and keep a tab on your investments.

Stay disciplined

It is important to stay disciplined with your savings and investment plan, even when the market is volatile. As given earlier, it's the system and discipline that's of prime importance.