The new year is nearly upon us, and what better time to review and refresh your financial goals! Growing your wealth takes time and consistency, however, you can start with where you are now. Laying solid foundations to build upon can help you to get closer to your goals in 2021.
How to start building your wealth now
It can be easy to think that building wealth is something to put off until later in life. The reality is that there are many reasons why starting now can help you get ahead.
If you’re thinking about medium to long term goals, investing your money is one option that can help you to grow your wealth over time. The sooner you start, the more time your money has to work harder for you.
So how can investing now help build your future wealth? Investments benefit from compounding, which is the phenomenon of earning returns on your returns, rather than simply the original amount of money you invest. Over time, compounding can have a huge impact on your investments. Do remember, however, that the value of investments can go down as well as up.
When you invest your money, one key consideration which can reduce your risk is how diverse your investments are. Investors aim to diversify their assets, which means spreading your money across different types of investment. Each type of investment provides varying opportunities and risks for investors. The length of your investment horizon will affect the amount of risk you want to take with your investments.
Where can I invest my money to build my wealth?
Understanding the different assets can help you to manage investment risk. There are all sorts of asset classes that you can invest in, including some of the more exotic assets like fine wines and art. However, the majority of investors focus on three main types of asset.
- Cash is the least risky asset, as the value of your cash doesn’t fluctuate on a day-to-day basis. The downside to cash is that it is exposed to the effects of inflation, which erodes the buying power of money over time. For that reason, if you have longer term financial goals, it may be worthwhile looking at other asset classes which are higher risk, yet offer more potential for growth.
- Both governments and companies often need to raise funds, and one method of raising the money required is through issuing bonds. Bonds are a type of government or corporate IOU, which allow you to hand over your money to the bond issuer for a number of years, and receive your money back with interest paid. When you buy a bond, the details of the payout and usually the amount are already clear, which is why bonds are considered low risk investments.
- Of the main asset classes, the highest risk assets are company shares (or stocks). Shares are pieces of company ownership, therefore the value of the shares that you own depends on the value of the company at any given time. This is why shares are riskier than cash or bonds, as the company value – and consequently the value of your investments – can fluctuate hugely.
Focus your investment portfolio on including a range of assets to maximise the opportunity to grow your wealth and manage the risk exposure.
How to create wealth building habits
Whether you earn a little or a lot, there are ways that you can begin to build your wealth whatever your financial circumstances. It’s worthwhile creating positive financial habits now so that as your wealth increases, you already have a healthy approach to money management to keep you on track. There are many simple habits that you can incorporate into your routine which can help you on your wealth creation journey, for example:
- Check your bank balance regularly. The more familiar you are with your income and expenses, the sooner you can spot any areas where you’re overspending or where money disappears without you noticing. Set a reminder to check your accounts and before you know it, you’ll be logging in on autopilot.
- Create an effective spending plan. You probably know the benefits of a budget, however, the most important part of creating a budget is ensuring that it’s effective and sustainable. It’s easy to create a budget and theoretically cut out all of your ‘fun’ spending, but the reality is that reaching your financial goals doesn’t have to mean sacrificing everything else. Work out a plan that allows you to enjoy yourself at the same time as making progress financially.
- Get organised. It might sound simple, yet staying organised with your finances is one of the easiest ways you can maximise your financial position right now. Plan your meals for the week and write a shopping list before you head to the supermarket, and don’t shop hungry! Once a month, review all of your bills and direct debits to ensure you’re paying the right amount, or whether there’s an option to switch to a cheaper rate.
Key takeaways
- Rather than waiting, start building your wealth now and you can get ahead on your wealth creation journey
- Investing is a key tool which can help you build your future wealth thanks to the power of compounding
- As an investor, it’s important to have a diverse mix of assets to maximise your opportunity for growth and minimise your risk as investments can go up and down in value
- Implement wealth building habits into your everyday money management and you’ll get closer to your financial goals
When investing, your money is at risk and you may recover less than the original investment.
Tags: Investing, Saving
