Building your Wealth

3 December 2016
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Category Singles
3 December 2016, Comments 0

A full piggy bank starts with one coin. Rome wasn’t built in a day. So wealth takes time to accumulate and build. Its not something that just happens overnight and by accident, it is an outcome of shrewd decision making and active management so that you even make your money work for you. So how is it done? There are 3 fundamental steps to the process:

  • Making Money
  • Adequate savings
  • Sound investment decisions

building-your-wealthbuilding-your-wealth

Making Money

Lets start with saying there is not get rich quick scheme that really works in the long run. Yes there may be attractive sounding schemes that sound like they could be the ticket to making you millions but more often than not, these are schemes that are out to actually cheat you of your hard earned money so don’t be a fool and fall for these. The only person who makes money out of such a scheme is the person who came up with the scheme. You might hear the terms Ponzi scheme – these are the types of schemes you need to know about and avoid. Bottom line is that it is hard to make money but the hard work can pay off.

Generally two ways that people earn money. One is earning an income. This is a safe method and can result in a stable income stream. However earning a salary as an employee means that you are only as good as what your boss wants you to be and you can be stuck at a particular salary level unless you are successful in your political skills in the workplace and can move up the career ladder in the company that employs you. It also carries the risk that once you reach a certain age, you become expensive and when management looks for low hanging fruit to cut to manage their cost, you might be the one to be “managed out” because of cost saving targets

The second common way to earn money is buy running your own business and providing a product that someone wants or a service that is marketable

Whichever way you want to make money, you need to do it well and that will work the basis of your wealth accumulation

Adequate savings

A no brainer in my view. If you spend every cent you earn, you end up with nothing to show for it. Worse is that you are a spender and you overspend and then depend on consumer credit to finance your indulgence. Definitely a no no in the pursuit of wealth. Better to think about how much of your money you want to put aside and save each month. Only if you are disciplined in this approach, will you ever be successful in building your assets.

How much is enough is a tough question to answer. It depends on you and your circumstances because only you will know your budget well and your outgoings. But it is important that once you have analysed your finances you can save the amount that you earmarked every month and start to build your cash for the proverbial rainy day.

Sound Investment Decisions

There are many different types of assets that you can invest in.  Some people choose stocks, some people like the traditional bricks ad mortar, some like a safe savings plan and some like to have more exotic choices for the instruments they buy.

Whatever it is, you are advised to decide on an asset allocation strategy so that a portion of your overall wealth is in each of the categories you are interested in. This is spreading the assets and the risk and is a process called diversification. In laymans terms you are not putting all your eggs in one basket.

Before you decide the type of asset you wish to purchase, it is worthwhile knowing some of the differences in the asset classes you may be considering.

Equities – these are shares in companies and the returns can come in the form of dividend and also capital gain as the stock price can fluctuate

Debt instruments such as bonds are classed as fixed income instruments as the payout is a fixed amount based on the coupon rate applied to the notional amount. It is like being paid interest on your investment

Hybrid instruments – this is a mixture of the two as it can have characteristics of both debt and equity. An example of this is a convertible bond which is a debt instrument that can convert to an equity instrument if certain conditions are met.

Lastly there are derivative instruments whose value are derived from the price of an undelying asset. These are considered more risky and are to be treated with care

No matter what your investment preference, it is advisable to consult your professional financial advisor who can talk you through the pros and cons of each asset type.

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