Everyone wants to be wealthy, but not everyone knows how to go about creating wealth. There are many strategies for wealth creation, but the most important factor is to start investing for wealth creation as early as possible.
Accumulating wealth is all about building your assets, particularly those that generate additional income. The best way to accumulate wealth is to allow it to compound. The more wealth that you have the more opportunity for growth exists.
Table of Contents – What is a Trading Journal?
What is Wealth Creation?
Wealth creation is a means of building assets or income over time. The key to this is “over time”. In order to create wealth in a short period of time requires a high level of risk. High risk investments typically end in losing money and having to start over.
The goal of wealth creation is to invest in varied assets that fulfil your investment goals and risk appetite. Income or asset growth should be stable and provide a forward moving accumulation of wealth.
Rules for Wealth Accumulation
In order to accumulate wealth, you need to follow a few basic rules. Unfortunately, many Australians fail to follow these rules and find it difficult to build wealth for the future.
Wealth Accumulation Rules:
Spend less money than you make
Pretty obvious, right? You can’t build wealth if your outgoings are larger than your incomings. Obvious, but not always easy to do, try to balance your budget to allow for investment.
Re-invest regularly
If you’re looking to accumulate wealth it makes sense to re-invest whenever you have excess funds. However, only do this using excess funds, only invest what you can afford to lose.
Understand what you are investing in
It’s highly important to understand the risk of an investment. You’ll want to know what the risks are and how you can avoid or limit those risks. Having a solid understanding of an investment will also help you with timing the investment. If you’re considering an investment that you don’t quite understand but everyone else seems to be cashing in on… well, that’s a risky endeavour.
Know your goals and invest appropriately
If your investment goals are to build wealth over a 10-year period, you shouldn’t be looking for high risk investments. You should know what it is you want to achieve and when you want to achieve it. Knowing this information will help you choose investments that are built to achieve these goals.
Let your investment grow
Compounding is a powerful force when it comes to investing. Whether it’s interest, fixed returns, dividends, they’re all based on the current amount held. The more you grow an investment the greater the potential for those returns. If there is no legitimate reason to withdraw funds, let them grow exponentially.
Have an exit strategy
Understand your goals for each given investment. You need to have an exit strategy in place even before you begin investing. You should know whether there is a particular return to be reached before exiting. You should know if there is a certain point at which the investment isn’t going to be profitable for you. You want to be pro-actively managing these situations rather than being reactive.
Wealth Creation Strategy
Smart investors have a wealth creation strategy; They plan ahead and think about what they want to achieve. Some people want to use their wealth for specific things, like sending their kids to college, traveling, or retirement. Other people want to make their money work for them so they can help other people.
When building a wealth creation strategy, you need to consider your goals as well as where you currently sit financially. From there you need to set short, medium, and long-term goals. As always, when creating goals, make them measurable by applying a timeframe and milestones.
Review Your Finances
Before you enter any investment, you need to have an understanding of your current finances. You should look at your assets and liabilities in order to get an idea of how much you can invest without financial strain. Don’t invest any money that is needed to cover expenses, it’s also a good idea to keep some money aside for emergencies.
For these reasons, the Futures markets are the most accessible for traders with small accounts
Set Your Financial Goals
Write down your financial goals and where they sit on your investment timeline. Set goals for short term (under 2 years), medium term (3 to 5 years), and long term (5+ years). When writing your goals you should keep in mind the funds required to achieve these goals and whether they are realistic. Not all investments need to fall in all 3 categories, some may be purely short term, others may be purely long term.
Risk vs Return
You’ll need to understand the balance between risk and reward for each investment. How much risk are you placing in this investment and is that risk worth the projected reward. In researching your investments you should look for each type of risk for that investment.
Know Your Risk Tolerance
Any investor should know their risk tolerance before entering an investment. You can look online for a risk tolerance questionnaire or seek advice from a financial planner to find your tolerance.
Your risk tolerance is based partly on how you view money and risk on a psychological level, as well as your age and capacity to recover from losses.
If an investment is high risk and you aren’t comfortable with seeing large drawdowns then this is not an investment that fits your risk tolerance.
Build Your Portfolio
You can begin to build your portfolio of investments once you know your goals, timeframes, and risk tolerance.
If your risk tolerance allows it, a short-term investment could be something slightly speculative that has an impending catalyst. If you’re conservative when it comes to risk then you might consider bonds, or term deposits.
Since medium, and long-term investments have the time to mature it’s good to look for something that has a stable track record.
When building your portfolio try to stay diversified and don’t put all of your money into one investment, or even on type of investment.
Monitor Your Investments
You don’t need to stare at your investments every day, but it’s a good idea to keep an eye on them from time to time. You should review whether your investments are achieving their goals, and whether you need to rebalance the investment. Rebalancing could mean moving funds out of an investment or adding funds to an investment.
Investing For Wealth Creation
When it comes to investing for wealth creation you should first and foremost follow your plan. You should also make sure that you have investments across various assets. Here are 6 basic rules for investing for wealth creation:
Investing for wealth creation:
1. Start with a plan: Know what you’re looking for in an investment and what your exit strategy will be.
2. Invest per the plan: Seek investments that fit the plan when it comes to money invested, risk involved, and time frames.
3. Stay diversified: Don’t put all your eggs in one basket. Invest in a variety of different assets to improve your chance of returns being consistent.
4. Take advantage of rebalancing: Rebalancing your portfolio helps to keep your investments on track and growing.
5. Educational Opportunity: Investing in education can lead to better investment opportunities. The more you know about investing the better you can manage your investments
6. Seek professional advice: Seeking independent advice from a trained and licensed professional is a good way to find appropriate investments for your goals.
Wealth Creation Bottom Line
There are no “one size fits all” investments, you need to find what works best for you and your financial goals. There are some basic rules for wealth creation that apply no matter what it is you choose to invest in. It’s very important to diversify your investments to hedge against crashes a given market. The other important things to remember are to keep your investments balanced, and know when it is time to exit an investment.
If you’re unsure whether an investment is a good idea or not, seek professional help from a licensed financial advisor. An advisor can help you understand what your goals are and point you towards appropriate investments.
And finally, stay patient and allow your investments the time to grow.
If you’re interested in learning to trade as a possible means of wealth creation you can join us for our next free trading class
