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Should I become a homeowner, investor or an entrepreneur?

What to do with a large sum of money 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 for managing sudden wealth: either you buy a home, establish a business, or invest this money. None of the ideas are better than the others, but they are very subjective to individual circumstances.

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

What to do when you secure a large amount of financial wealth?

An unexpected financial windfall is like nothing else on this earth. Of course, the more money you have, the more stressful it is. Sudden wealth syndrome is a real disorder that has impacted many wealthy individuals. That tension can prompt recipients to take actions that could jeopardise their wealth. There are many stories of lottery winners who lost all their money. Because of this, the majority of wealthy people advise avoiding freeloaders, whether friends or family, who are obviously after the wealth; avoiding get-rich-quick schemes; and avoiding lifestyle creep.

The following are some basic things you can do when you come across a large amount of money. You can opt to buy a home, or a business, or you can simply invest them.

Buying a home

Homeownership is a big deal for many people, as it is considered secure and can give you peace of mind. 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.

Advantages of home ownership

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. You may also be eligible for a tax credit or deduction as a homeowner depending on whether you're a first-time homebuyer or whether you bought an energy efficient house or if you have children. Furthermore, some jurisdictions do not impose any capital gains tax at all (Luxembourg for example). Some allow discounts on paying capital gains when you sell your home, especially if you are selling your primary residence (United Kingdom, for example).

Disadvantages of home ownership

Most people forget that appreciation in the value of your house 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 for 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 soon, 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 an 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.

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.

Advantages of entrepreneurship

Most successful entrepreneurs will attribute their success and benefits to having the right mindset. One of the best things about being your own boss is that you can decide how much time you spend working and how much time you spend doing other things, and from where. Work-life balance and being able to set your own limits are important for entrepreneurship. Apart from setting your own work hours, you also have the flexibility to decide whether you want an office or want to work from home. As a result of having control over your own worklife, your job satisfaction goes up.

There are a lot of opportunities for growth in the entrepreneurial process. As an entrepreneur, you gain valuable leadership principles that can be applied to a variety of situations. You can acquire skills in time management, budgeting, and customer satisfaction, as well as meet new skilled people. Networking will allow you to expand your customer base and meet skilled people who are willing to help you out.

Disadvantages of entrepreneurship

The reality of entrepreneurship is that 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.

Investing your money

Investing has become necessary in the modern economy. If you are not investing, you are missing a big chunk of 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 investing is to make your money work for you. There are some basic rules that can help you navigate the market, such as: diversifying your assets, choosing funds with low fees, not timing 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.

Advantages of investing

One of the main advantages of investing is its ability to outpace inflation and grow in value over time. With the force of compounding and the balance between risk and return, investing has a greater chance of growing one's capital. Reinvestment of dividends and interest from an investment is known as compounding. Compounding is the process through which your investments generate future profits based on the value of prior ones. Those dividends or earnings, in turn, produce subsequent interests. Generally, investing is one of the most suggested ways to generate wealth. You can invest in stocks, bonds, funds, ETFs, and even alternative investments that are dynamic in their own right. If you're looking for something less hazardous than a traditional stock or stock market investment, try putting your money in a more stable asset, like bonds or passively managed funds.

However, it cannot be denied that taking on some risk may be necessary if you want to keep up with inflation. The potential for your money to grow may be increased if you choose a riskier approach.

Disadvantages of investing

There is always a chance that you will lose all of your money when you invest. As a result, when making an investment, you must be willing to take some risks. Before investing, make sure you understand the risks and rewards of any potential investment strategy you're considering. The market is unpredictable, so it's important to carry out due diligence. If you truly want to reap the benefits of investments, you must lock your money in the investment for a long period of time. In other words, you won't be able to get your hands on any cash. Although you can sell your investments, it will be at a significant loss or, if you do receive a profit, you will incur capital gains tax. Additionally, mental stress may arise as the market fluctuates.

How do you ensure financial wealth security and growth from herein?

It's time to keep and expand your money now that you've earned it. Wealth management has a wide range of meanings depending on how you look at it. The focus is on helping yourself to improve your financial status. Otherwise, mismanagement of wealth will reflect badly on your business or personal finances. Consultation is an important part of the wealth management process. When you have a thorough understanding of your financial situation, you may devise a strategy that is tailored to your needs. The following are some commo suggestions to ensure your financial wealth in the aftermath.

Treat your savings as a mandatory expense

Prioritise paying for your savings and retirement accounts first as a part of a long-term plan and as an obligatory expense. You will have a better chance of having a higher amount of emergency funds and you will have a better understanding of how much money you have left for discretionary spending, after the necessary expenses. You can implement this strategy by setting up an automatic savings payment, avoiding using credit cards, and putting your savings in a tax advantaged account where inflation will not eat away the value of your money.

Optimise your spending

Your expenses can come in two forms: mandatory and discretionary. Mandatory spending can include your savings, your retirement and other tax-advantaged investments, and your bills. When it comes to mandatory spending, it is difficult to cut down on these expenses.

As for discretionary expenses, while they can not be eliminated altogether, you can optimise your spending by reducing them. The first expenses under discretionary spending that you can limit are fees that you may pay on your credit cards or on your investment accounts. If you are using credit cards, aim to pay off the higher interest fees first, as they take the most out of your wallet. Try to use credit cards that offer more valuable offers, like cashback rewards.

Instead of active investment accounts, put your money in passively managed funds that are cheaper. If you do not need the money straight away, then invest your money in tax-advantaged accounts instead of taxable ones. Overall, your personal financial circumstances will dictate how you can optimise your expenses.

Readjust your portfolio often

Adjusting an investment portfolio's asset allocation is called rebalancing. You can achieve your preferred asset allocation by realigning the portfolio's assets. A wide range of assets is essential to develop and maintain a diversified portfolio, like equities, bonds, and funds. Investors must then decide how often to rebalance their portfolios to keep their holdings of stocks, bonds, and other assets at an optimal mix. When allocating investments in an investor's portfolio, individual asset risk characteristics should be considered. There is a good chance that the returns of different asset types will also fluctuate over time. An asset's good returns may lead to it becoming a larger chunk of an investor's portfolio than desired.

Most importantly, investors are free to rebalance their portfolios whenever they wish. In the end, it is a matter of personal circumstances and ambitions. With the profits from selling assets over the goal asset allocation, an investor might purchase assets below the target allocation. Investors can purchase and sell assets for a small fee with most online brokerages.

Summary

Not everyone can achieve financial stability. Once it is achieved, the next step is to maintain it, grow it, and secure it. You have the opportunity to grow your wealth through various avenues, such as home ownership, which has a correlation with your household wealth. Or you may establish a business of your own if you enjoy being an entrepreneur and you have the right amount of resources. You could also choose to let the money invest passively, generating more income. Each has its own advantages and disadvantages. Your house is not your investment unless you intend to buy-to-flip it or rent it. In this case, you need to have a lot of cash to be able to handle your real estate. Most businesses fail due to a lack of resources, and investments carry a significant risk of loss, which you need to have back up for. In either case, you must maintain your wealth through your choice by implementing basic financial advice. Such as having an emergency fund, separating and categorising your expenses and adjusting your portfolio whenever the market changes.

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.

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