Principles of Wealth Creation

Principles of Wealth Creation

There are many philosophies, strategies, and ideas for investing. However, the journey to becoming wealthy is riddled with hazards and pitfalls like lack of discipline, stubbornness, ignorance, and poor decision making. With these obstacles, many people with potential end up falling short of becoming financially stable, leave alone becoming a millionaire. To help you navigate these murky waters, you need to set principles that can serve as your foundation to achieve your financial goals.

However, before diving into the main blog, you need to keep in mind that some strategies will bear more fruit than others, and some might be unrealistic for your situation. You ought to, therefore, find a balance and find what works best for you.

Invest at an Early Age

If you want to invest and become successful in fulfilling your goals, you need to start early. The right time to start investing is right after graduation or as soon as you get a job, which is around your early 20s. By investing at an early age, you gain invaluable knowledge on financial independence and discipline, which will make you money savvy when you are older. The little you invest today will grow bigger and put more money in your pocket in the future. Some critical reasons why investing at an early age will give you an advantage include:

Time

Remember the phrase “time is money”? There probably no better place to apply it than during early investments. If you start investing early at the ages of 20, you will have a lot of time to grow your investment by the time you reach 60. For instance, if you save £10,000 in a bank when you are 20, you will have about £70,000 by the time you hit 60, based on a 5% interest rate. Conversely, let’s say you save the same amount of money when you are 30 or 40, you will end up with £43,000 and £26,000 respectively by the time you hit 60. Now imagine if you invested the money in a growing business.

• Increase Your Financial Knowledge

Investing has a lengthy learning curve, which puts young adults at the advantage as it gives them time to study the fluctuating markets and refine their strategies. Besides, you will have the time and flexibility to enrol in a school and take financial courses to become a better manager or marketer for your business. Early investments will also allow you to learn from both your success and failure, which will make you a wise and successful investor in the coming years.

• It’s the Best Time to Take Risks

It goes without saying that investing is a risky endeavour, and some investments can sink your money or make you wealthy. Young investors are more willing to take risks than their older counterparts. This is because older investors are more risk-averse and prefer stability, which is why they avoid uncertain ventures. Young adults, on the other hand, go with the well-known saying, “the more the risk, the more the reward.” As such, they end up taking high risks and end up becoming successful. Besides, young investors have time to recover when an investment goes awry.

• Improves Spending Habits

One important wealth creation principle is “never spend more money than you earn.” In fact, you should only spend your money on absolute necessities and invest the rest. Investing at an early age helps you generate a positive spending habit since you get to know the real value of money. As such, you will be able to control your spending; thus, you’ll make wise financial decisions. Knowing how to spend your money is a valuable lesson that will ensure that it will help you in the future.

• Better Quality of Life

Investing when you are in your 20s increases the chances of achieving your financial goals. As such, you will have enough income to live a better life when you are in your 30s. This means that you will provide your kids with better education, medical attention, and a better overall life.

• Support Your Retirement Plan

Early investments go a long way in ensuring that you will have a stable life after retirement. If you start investing for your retirement when you are in your 30s and 40s, you will face a lot of challenges, which will affect your retirement plan adversely. Some of these issues include education, medical, and bill expenses for your family. Besides, if you begin your retirement plan early, you will have enough money to make investments without having to worry about the future.

Investing as a young adult is a very wise decision as it will afford you the time to learn, make mistakes, and correct them effectively. It allows you time to see your business grow exponentially.

Clear Your Debts

As an aspiring investor, one of the most challenging questions you will face is whether or not to pay off your debts before investing. Generally, debt isn’t good for wealth creation as a whole. Having too much of it will deplete your wealth and make investments pointless. As such, you need to clear as much debt as possible before making any investments.

However, there are some instances when paying the debt makes more sense than others. Some of these instances are explained below.

• When to Pay Your Debts First

Credit card debt is the main reason that most people fail to invest or make them a little bit poor than they were before using them. This is because credit cards come with high interest rates and have a minimum balance that has to pay monthly. This minimum balance keeps you on a paycheck to paycheck lifestyle, which makes you completely incapable of saving. As such, you need to pay off your debt to stop the cycle of feeding an insatiable interest rate.

• Debts Annual Percentage Rate Vs Your Expected Return on Investment

The key to figuring out whether or not to pay your debts is to determine what will be more beneficial between the two options. For instance, if you have a loan of £3000 at a 6% interest rate, but you could invest that same amount of money and earn an interest rate of 8%, it would be wise to invest instead of paying off the loan.

As such, you can comfortably conclude that debt with an interest rate that would be higher than your investment should be paid off. On the other hand, a debt with a lower interest rate should not be paid off, unless you need to free up monthly cash flow.

• Investing Versus Paying off a Mortgage

A house is a considerably wise investment, especially for people with a family. While taking a mortgage is often considered as a wise debt, it can still be a hindrance to your investment. In most cases, a significant amount of people believe that their house is extremely important and end up taking a mortgage before investing. Ideally, you ought to invest first before taking a mortgage. However, if you already have a mortgage, try to save bits by bits and invest some money as it will increase your income and help you pay off your house with ease.

• Other Loans

Loans like student debt and cars aren’t generally an obstacle to investing as their interest rates are typically very low, and there’s no urgency in paying them off before investing. As a general rule of thumb in wealth creation, you ought to set up an investment account whether you have debt or not. Also, get rid of any debt that hinders your ability to invest.

Automate Your Wealth Accumulation

When it comes to growing your wealth, being hands-on is the best action you can take. However, you will be surprised by the way automating your finances will help build your wealth accumulation. Some of the best strategies that will help you increase your wealth include the following:

• Decide How Much to Contribute Automatically

You need to decide an amount that you need to save on a weekly, bi-weekly, or monthly basis. One rule of thumb is saving is that no amount is too small or too big. This rule applies to every saving goal you may have in mind, whether you are saving to open your own business or towards retirement. Most people save between 5% and 20% of their income regularly. It would be in your best interest to try and walk around your budget and find ways in which to reduce your monthly expenditure. Whatever amount you derive from reducing your spending should go directly to your savings account.

• Automate Cuts from Your Paycheck

An easy way of accumulating your wealth is to contribute to your retirement portfolio through automatic salary reductions. You may opt to add to your company’s retirement plan. If your company offers a match on your contribution, ensure to get the maximum amount they offer. Besides, deducting a portion from each paycheck will go into a tax-advantaged retirement account, which will help you grow more wealth.

Automatic deduction of money from your account will see to it that you have invested every month without giving much thought to your investment.

If your company doesn’t provide a retirement plan, you can still deduct some money from your paycheck. You only need to open a pension account and send whatever amount you want. For this part, you have to be extremely disciplined and ensure that you deduct that amount without fail.

• Set up Automatic Savings

You may set up a day that a certain percentage of your income is deducted and credited to your savings account. Whether you receive weekly or monthly payments, you need to find a fixed day every week or month when the money will be deducted. You can even decide on the amount and frequency with which the money will be transferred to your chosen account. For instance, you may decide to have a large chunk of money transferred at a go or distribute that amount into different transfers targeted on different days.

• Review Your Finances Regularly

Even with automation, it’s important to review your financial situation regularly. This will help you determine whether the automatic contributions to your set accounts are adequate in meeting your financial goals. This review will also allow you to decide whether you need to tweak some of your amounts. Ideally, increase your automatic contributions as your financial situation improves.

A smart investor always puts something away to provide small financial security for future use or emergency use. Automating your wealth accumulation will omit any chances of chickening out and failing to save. You can use your savings to invest for a particular time frame, as explained in the following wealth creation principle.

Set a Time Frame and Invest According to that Plan

Investing without a plan is the key to failure. As such, you need to set financial goals and create a time frame. What this means is that you should invest in some sort of business that will give you returns at a particular period. Most time frames fall under three main categories, which include short-term, mid-term, and long-term. Follow the following ideas.

• Short-Term

This time frame for these types of goals should be three years or less. Some of the common short term financial goals include house deposits, debt payment, and property improvements. When you set short-term goals, you will want to minimise any risks because the time frame is pretty small, and there’s no time for recovery. You will also want to focus on liquidity. This means that you ought to invest your money in banks or credit unions.

You may also invest it in businesses that are highly likely to increase in value. A good example is in a bank saving account as it will offer you some interest. Investing in liquid investments like treasury bills, funds, and money market accounts is also a great idea. These investments have short maturity dates and have very small risks.

• Mid-Term Goals

This time frame should be between 3 to 10 years. Mid-term goals are typically focused on earning a considerable amount of money for future investment that you are not ready for but are looking forward to achieving it. For instance, you may be looking for capital to open a business.

Choosing the right investment for mid-terms goals is a little bit more complex than short-term goals, and for a good reason. You need to strike an effective balance between achieving a growth that will help you build on your assets while offsetting inflation and protecting them from potential risks.

Since mid-term goals offer you more time than short-term goals, they can afford you a little bit more risk. For instance, you might want to invest some of your assets in stocks since they have the potential to give you higher returns on investment, which will allow you to achieve your goals sooner. Ideally, when you are closer to the end of your time frame, you may move your assets into a more stable investment.

As a great investment strategy, you may invest in a mix of the business portfolio like bonds and stock. You should, however, invest in well-established companies that pay high dividends for a better return on your investment.

• Long-Term Goals

The time frame should be more than ten years. For most people, long-terms goals are directed at securing money for retirement and paying for their college or that of their children. While it’s okay to save up the money, you can only build assets by investing in something that gives you higher interest.

Saving your money in a bank doesn’t cut into this category. All banks do is keeping your money safe, and while you will be relying on the interest, you may lose quite a lot due to inflation. As such, it would be in your best interest to make whatever you have work for you. What this means is that you may look for a way to make your principal investment to grow over time.

The advantage of long-term goals is that the time frame allows you to take risks while aiming at a higher reward. As such, you may allocate most of your principle to growth investments like stock mutual funds, individual stock, and stock exchange-traded funds. Over time, you will end up with more money than you initially had and increase your wealth at the same time.

Investing with a time frame is a game of skill, and you need to have the best tools to become successful. When investing in stock and bonds, it’s important to understand and accept the market. All markets go up and down, which will affect your earnings, whether you have invested in the long or short-term. This means that the longer you stay in the market, the higher your chance of making more money. Ideally, never trade of pull out your money when the market is down.

Know and Understand the Portfolio in which You Want to Invest

Borrowing a leaf from billionaire Michael Lee-Chin, you need to understand a business before investing. To understand any business or company, you need to perform a fundamental analysis. This is the process of scrutinising a business to determine vital quantitative and qualitative parameters. These factors include overall value as well as relevant economic, financial, and non-financial factors. In simpler words, performing a fundamental analysis grants you knowledge on the health and performance of a company.

This scrutiny will grant you the basic knowledge that will come in handy in laying a better foundation for your investment decision before and after investing. The following are goals of fundamental analysis and how it will help you make good decisions before investing.

• Predicting Growth in Sales, Margin, and Profit

For a company to build its value, it has to be constantly growing. While there will be signs of a downturn, the average compound annual growth rate must be positive over a particular period. Depending on the pricing power and market size of the particular company you are looking to invest in, it must have higher sales or high prices. By the end of the day, you are an investor looking to earn some wealth from your investment. The best method of knowing where the company’s growth is headed is to scrutinise the profit under such conditions as sales and gross margins.

If a company shows signs of dwindling profits, it’s best not to invest your money in that particular company.

• How is the Company Fairing

Performing analysis of a particular company will give you information on how it’s being run. While two companies may show signs of success, the only thing that can distinguish them is their efficiency. For instance, if you are looking to invest in an oil company, analyse its operation and determine how it’s able to maintain high levels of gross refining margins. If it’s a financial company, measure it to know how it manages to net interest margins. Ideally, if a company proves to have an efficient operation, you may invest in their stock.

• Valuation and Margin of Safety

This is the ultimate purpose of scrutinising a company before investing in its stock. By the end of the day, you want to earn the best value for your money and also derive some profit. As such, you need to decipher whether the company’s stock is under or overpriced.

For this step, you need to project the future cash flows of the company for the next few years. Consequently, discount the cash flows back to its current value based on capital discounting. If you feel like the current stock price is below the company’s intrinsic value and has the potential to grow, buy the stock. Alternatively, wait until the price goes far above the intrinsic value and sell your shares.

• Analysing the Company’s Financial Strength

Before investing in a company, the real test is to determine its financial strength and ability to settle its debts. No matter how efficient or excellent its management is, the financial strength of the company is crucial and should form the basis of your decision. In most cases, companies sell stock to look for fresh capital. But it’s one thing to seek capital and its anther to service it. As such, you need to determine the company’s ability to service its equity.

Compare the return on equity and return on capital employed. If these aspects are well aligned, it means the interest of the stakeholders is well in place.

Investing in other companies is an excellent way of increasing your wealth through earning profit from their success. However, you need to know every aspect of a business before pouring your money into their stock. Ideally, invest in a company that has a high success rate.

Own a Real Estate Property

You can borrow a leaf from The Duke of Westminster and Donald Trump by investing in reals estate. Besides these moguls, every wealthy person, billionaire, or a millionaire owns some real estate, whether in part or wholly. While you don’t have to be as wealthy as they are, you have to start somewhere. Whether you will secure one house or many, making a real estate investment will help you accumulate wealth in some of the following ways:

• Steady Income

It’s no brainer that steady income is an effective tool in wealth creation. For instance, by investing in a rental property, you will be able to earn a steady income. Depending on the location of your property, you could be earning enough money to cover your expenses and save enough to invest in another business. Also, you don’t have to stop there; you can continue with the rhythm and invest in several other properties and soon realise that your wealth has drastically increased.

• Long Term Financial Security

A real estate property will provide you with long term financial security, as long as you keep that asset under your name. This financial security you derive from your property will give you enough confidence to undertake risky business ventures that may provide you with an increased return on investment. Also, you could buy a rental property as your retirement plan since it will afford you enough income every month.

• Real Estate Appreciation

Properties like land and buildings are considered appreciating assets. This means that they increase in value with time. The key here is to invest in a location that has high chances of developing. For instance, you could buy a property located near colleges or universities or in a developing neighbourhood. In doing so, you will ensure that you always have tenants, and your building value will increase exponentially over the years as that location continues to develop. You could buy land or a building today for about £150000 and realise that its value has increased up to half a million in a few years. This is especially true if you keep at par with renovations and add a few modern touches to your building.

• Leverage for Capital

You could use a real estate property to acquire capital for another business or to purchase another property. As you continue to leverage one building to buy the next, soon you will have enough capital to buy a building without having to take a loan. Ideally, you could save on deposit and use your rental income to pay off the remainder when acquiring new property. This is a great way of growing your wealth.

• Real Estate Property is a Hedge against Inflation

Inflation is the increase in the price of goods when the pound loses value. If you want your wealth to keep growing even during inflation, real estate is the way to go. While other businesses, including stock, will have an adverse effect during inflation, real estate remains the same. Even if the entire monetary system were to collapse, people would still need a place to live and perform their businesses. In fact, you could even increase your rental price when there’s inflation, but that would just be greed. This means that your wealth will continue to increase, no matter the economic state of your country.

• Tax Deduction

Any penny that gets back into your pocket means that you have earned some sort of wealth. This makes real estate a wise investment. The government provides tax relief on rental properties. The first £1,000 of your rental income is tax-free. Landlords also receive deductible expenses like:

1. General maintenance and repairs to your property
2. Landlord Insurance
3. Water rates, council tax, gas, and electricity
4. Costs of services, which include gardening and cleaning wages
5. Letting agent and management fees
6. Accountant’s fees

If you don’t have the money to buy a new building, you may purchase an older one and make some improvements to attract new clients. You also need to do relevant research before buying any house to avoid sinking your money in a property that won’t provide any return on investment.

Choose a Business in a Strong Growth Industry

Michael Lee-Chin advises investors that success is often decades in the making. With these words, he advises people to adopt a long-term view when looking for a business in which to place all their focus. As such, you can emulate his words by looking at the future of the world, study global shifts, and population demographics to place yourself in a successful future.

Some of the best businesses to invest include:

• The Food Industry

As long as humans are alive, they will always be a demand for food. As such, businesses associated with foods like cereal, beverages, food packaging will continue to flourish, especially with proper management and excellent marketing skills. Ensuring quality will also guarantee that any food company will thrive for the long-term. Besides, most countries have regulations and measures that ensure the efficient production, supply, and purchase of food items, which makes the food industry a safe investment.

• Fast Moving Necessities

Stuff like toiletries, cosmetics, batteries, detergents, soaps, paper products, and dental hygiene products are considered fast-moving consumer goods (FMCG). Consumers rely on these goods daily and put less thought into purchasing them, which makes investments on such products safe and reliable. While the profit margin for such products is usually low due to the tough competition of similar companies, people purchase them in bulk, which makes up for the small profits. Companies that deal with FMCG also provide regular dividends, which make them ideal for stock investment.

• Legal and Compliance Industry

No matter how much we yearn for peace and love for each other, conflicts, challenges, and legal issues will always be with us. As such, the only thing you can do is hope that they don’t get worse. Until then, capitalise on such issues by investing in a service-oriented legal and compliance sector as its safe and profitable. No matter how many new laws are passed, there always will be someone requiring legal counsel.

• Health Care Industry

While everybody strives to lead a healthy life, the regular outbreaks of minor and major ailments like the cold and flu are a great reminder of how hospitals and medicines are critical to the human race. Besides, people have to multiply, and hospitals are the safest ways to do so. This means that there will always be market and demand in medicine, hospital equipment, and health care education. As such, a wise investor may consider investing in these sectors.

• Energy Utilities

The world is insatiable when it comes to energy. From firing up appliances with electricity and gas to powering locomotives like planes, cars, and trains, the world economy relies on the energy industry. Energy can be sourced from fossil fuel, natural gas, and nuclear reactors.

However, the world is changing, and an increasing number of people are opting for green energy, which means that you should start looking to invest in renewable energy sectors like solar energy and hydroelectricity. You can follow the footsteps of Elon Musk and invest in green energy.

• Water Industry

Water is an essential commodity. Providing people with clean water isn’t just a virtual but also a very successful industry. From transporting, treatment, and packaging, this industry has room for everyone.

• Textile Industry

People will always need clothes, sheets, and shoes, even if fashion trends come and go. The textile industry forms a basis of the entire fashion industry, which means it’s here to stay. This industry will continue to thrive as the world population is increasing by the day. The textile industry covers the production and processing of raw materials like silk, linen, and cotton.

• Technology Industry

Technology is and has always been the focal point for innovation. This is especially true in the current world we live in, where everybody is looking for the best gadget. From computers to the internet, our daily personal and business aspects of people’s lives revolve around technology. The future has a high potential for the technology business as the world becomes a smaller village. Technology also covers all aspects of humanity, including transport, health, work, and security. This means it is an industry waiting to be explored.

Investing in a business that has the potential to grow is an excellent wealth principle that will help you create wealth in the long run. This is especially true if you invest in a niche that you understand.

Leverage Other People’s Money (OPM)

There are two ways to kick start a business; use your cash or other people’s money. Using other people’s money to invest in your business is an old-age investment plan that ensures that a wise investor with no capital can start a business, pick it off the ground and turn it into a major company without using a dime from his pocket.

There is a small trick to this method, though; you need to ensure that you get the capital at a very low rate and invest in an opportunity whose returns will outshine the cost of borrowed money. This means that you must ensure that the business in which you invest will pay off your loan, the interest, and still give you a significant amount of profit.

There are several ways to get OPM, and these include:

• Government Grants and Subsidies- This is the best OPM loan you can get. Government grants are available in a myriad of kinds and forms, which include direct grants, equity finance, and soft loans.
• Direct grant– This is the money given directly to your business to cover start-essentials like training, equipment, and rent.
• Equity finance– This is when you sell a share and receive a 50% tax reduction on all investments made in new business.
• Soft loans– These are loans very low interest rates and no collateral.
• Private Money- This is the money you gather when you bring your friends, associates, family, and colleagues together and urge them to raise a little bit of money.
• 50-50 Partners- If you are willing to put in your time, talent, and little bit elbow grease into an investment, you could look for a willing investor to provide capital and become your partner. A classic example of this arrangement is a house flip where one partner provides capital while the other one does all the required renovations and markets the property.
• Seller Financing- In this situation, you use your property to get money from a willing party, not a loan. The current owner of the property (you) transfers the title of ownership to the buyer along with a deed of trust or private mortgage. This process also includes a promissory note that outlines the terms and conditions of the agreement. The agreement stipulates that the buyer owes the seller the remaining principal balance.
• Bartering- This situation involves offering your professional services to companies or individuals to obtain a financial deal. For instance, if you own a landscaping business, you may provide your services for free to several people and, in return, get a substantial amount of money to start another business or buy your own property.
• Hard Money- You can source your capital from private lenders who are willing to give large sums of money to investors. For this type of money sourcing, you present your investment opportunity to these people and draw up the terms. Hard money loans are a little bit expensive and need to be paid off in six months to a year.

Although OPM is a great way to fund your investment, it’s quite risky and requires a lot of caution. It comes with quite a lot of challenges that could spell doom to your entire investment if you are not careful. The key to becoming successful is to weigh the pros and cons of each type of OPM before making your decision. Again, I cannot emphasise this enough; you must ensure that the potential profits you earn from your investment outshines your interest rate. You also have to ensure that you are disciplined enough to live below your means and pay your debts within the agreed time table.

Performing Annual Rebalancing

Rebalancing is the basic exercise of adjusting your business holdings. Some of the basic aspects of this exercise include buying or selling certain stocks, security, or funds. This helps in maintaining your established asset allocation. Rebalancing your portfolio is the key to succeeding after utilising the above wealth principles. If you are utilising managed funds or discretionally manger, you ought to do the rebalancing yourself. Some of the reasons why you need to rebalance your portfolio include:

• It Gives You a Review of All the Mutual Funds in Your Portfolio

Rebalancing allows you to get insight into your funds’ performance. Depending on the market performance, you may find several current assets held in a single area. Your funds come in handy in earning sufficient inflation adjustment and beating benchmark indices. When rebalancing, if you find funds or stocks that are constantly underperforming or are stagnant, you ought to sell them and buy a stronger asset.

Additionally, if you find some that are not living to your expectation, it’s advisable to use those resources to purchases stocks that have a high potential to earn you ROI

• Helps with Tax Planning

If you are a small investor, you may redeem stagnating equities in a financial year and invest them elsewhere. In doing so, you will earn profits while still spreading your tax liability uniformly.

• Spread the Risks

Balancing your portfolio at least once a year will help you monitor your risk levels and make the necessary changes to reduce them to a level you can manage. You can use the rebalancing exercise to shift your assets and add stability to your portfolio. For instance, if a particular asset (A) increases its value by a large percentage while stock (B) gained only a little, most of your assets will be held in A.

If stock A experiences a downturn, you will suffer a significant amount of loss. This is where rebalancing comes in handy as it allows you to spread your assets. You may choose to add them to existing stocks or buy new ones. By spreading the funds to multiple areas, a downturn in one will only affect your portfolio partially; thus, you will have some sort of stability. You ought to rebalance your portfolio when there’s a major change in the market, as there are high chances that your stock will be affected.

While there are many strategies, ideas, and philosophies in investing, without the essential fundamental principles of wealth creation, chances are you will fail. To become a successful investor, you need to design your wealth plan based on proven business principles that have been known to lead to success. To follow these principles, you require discipline, effort, wisdom, and motivation.