TOTAL CAPITAL €7,061,025
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Should I become a homeowner, investor or an entrepreneur?

What to do when you secure a large amount of financial wealth? How do you ensure its security and growth from hereon? This is a question many middle-income earners face when they come across large savings. You will see three common suggestions: either you buy a home, establish a business, or invest this money. None of the ideas is better than the other, but it is very subjective to individual circumstances.

This article will evaluate their pros and cons to direct you to make an informed decision:

1. Buying a home

Homeownership is a big deal for many people as it is considered secure and can give you peace of mind. Your home appreciates in value as time passes by, and you can pass it on to your children, giving them a stepping stone towards financial security. Although homeownership is not a guarantee of successful wealth accumulation, household wealth appears to be positively impacted by homeownership. Wanting to own a home may be perfect based on your financial situation. 

But note that homeownership is not an investment, especially if it is your primary residence. Unless you are in the real-estate business, where you are buying homes to flip them, your primary residence should not be an investment. It is common for people to think otherwise because of its appreciation. Most people forget, however, that appreciation is simply a result of inflation. Not to mention, your home is not generating cash flow unless you rent a part of it out or when you sell it. Renting is not as easy because you, as a landowner, have to give significant time to find suitable tenants to ensure the safety of your property. Not to mention you still have to declare your rental income in taxes. 

If you plan to sell it, the most effective way would be to sell it after a significant amount of price appreciation and move to a less expensive house. That also takes a significant amount of time which many may not want to take on unless very financially motivated. 

If you do not rent or sell the home anytime sooner, then it is simply a shelter.

A home has other costs which cannot be recovered through sales. Costs including mortgage, estate taxes, insurance, bills, repairs and maintenance add up and often exceed the appreciation. Even as you decide to rent it out, you still have to cover repairs and maintenance and risk renting it to people who may not take good care of your home. 

A house is not your investment. It is simply a shelter that happens to build equity as it appreciates. Treating it as an investment is a risky thought that ignores the reality of your financial circumstances. 

2. Being an entrepreneur

Entrepreneurship can be a great source of consistent income to build wealth. Starting a business takes a leap of faith, but you get to reap significant financial rewards if it is done in the right way. Owning a business makes sense if you want to enjoy hustling and make a name for yourself in the market. Of course, entrepreneurship is different for everyone.

Some may be more successful than others, and some may end up working more than others. Some may even fail. Failure is one of the biggest risks of entrepreneurship as it takes time, patience, support and some luck. Starting a business costs money that grows as your business expands, and you will not see revenues at least for the first 5 years. This means you may end up going into debt to ensure its standing before you can even think about profits.

82% of first-time business owners fail in Europe, 50% fail within the first 3 years. Only 20% of new businesses succeed in their next venture. Failure is attributed to lack of research, poor business advice from the outset and failure to account for the costs, such as marketing, logistics, investment and capital backup. Not to mention, your competitors are big companies who have been in the industry for longer periods and have an upper hand in the market. 

You will also experience high levels of stress due to the inconsistent paycheck and the constant pressure to find new ideas to generate sales. According to a survey conducted by Mental Health UK and IWOCA - four out of every five small company owners suffer from poor mental health. It is a commitment that many are unable to stick to and you will be sacrificing a significant portion of your life to it to ensure success. 

3. Investing your money

Investing has become necessary in the modern economy. If you are not investing, you are missing a big chunk from the market. Luckily, investment is not a standalone process. Many of the benefits have been morphed into investments - pensions, for example, are simply an investment for retirement. Most people have multiple voluntary investments alongside pensions to secure their retirement. The idea of investments is making your money work for you.

You can invest in stocks, bonds, funds, ETFs and even alternative investments that are dynamic in their own way. Investments generate profits that you can either compound or set aside as a nest egg. Overall, investment growth can beat inflation if you invest for the long term and compound over time.

However, you have to assume risks in your investment. Regardless of your chosen investment tool, the market is volatile, and each tool has its own risks and benefits that you need to research before deciding to invest. There are some basic rules, though, that can help you navigate the market, such as: diversifying your assets, choosing funds with low fees, do not time the market, and always keeping an emergency fund before you invest your money. Investment education is critical, as is avoiding assets that you do not completely comprehend.

Rely on reliable advice from experienced investors while ignoring "hot ideas" from untrustworthy sources. When consulting professionals, search for independent financial advisers who are compensated only for their time rather than those who are paid on commission. 

Last update: 20/01/2022

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Disclaimer: Some text on this website is purely for marketing communication. Nothing published by Quanloop constitutes an investment recommendation, nor should any data or content published by Quanloop be relied upon for any investment activities. Quanloop strongly recommends that you perform your own independent research and/or speak with a qualified investment professional before making any financial decision.