2020 and 2021 has taught us that the topic of building wealth attracts many people who wish to achieve it as a financial goal. Often, they are faced with countless resources out there, some of which are either too generic, not subjective to the particular situation, or blatant "how to double your money" schemes. By now, everyone should understand that while growing wealth needs to be practical and straightforward, it also needs consistency and discipline.
Learn from our article on how to grow wealth in 2022:
- Set financial goals and priorities
- Build an emergency fund
- Build your equity
- Invest for the future
- Max out retirement accounts
- Protect your assets
- Pay yourself first
Setting a priority and establishing a financial goal are two different steps to be taken. A priority list should list the things that need to be done first, depending on the circumstances, to achieve a goal. For instance, someone requiring an emergency fund needs an income source or an increase in income if the current job does not provide sufficiently. That means the individual needs to focus on finding a job or a job that pays better and provides benefits. Here, he/she may require additional qualifications necessary for that job title. The role requiring extra qualifications may set the individual on the path to investing his money in getting an extra set of skills. Therefore, it is setting up an emergency fund that is the financial goal. Developing an income source or increasing current income through acquiring additional qualifications becomes a financial priority to achieve that goal.
Similarly, someone who has fulfilled the primary financial goals (for example, clearing debt and starting retirement planning) may want to set another goal for the future, for which there are different priorities. At this point, his goal could be to have a stable home, for which his priorities should be to collect down payments and grow his credit score to show the bank some credibility. Or he may want to establish a business for which his priority would be to secure capital. At the end of the journey, the individual priorities set the person on the correct path to achieve his goals, which, in turn, facilitates his wealth growth.
Look at the bigger picture
Setting a goal seems pretty straightforward, but following through is as difficult as it can get, especially if the goal is an open-ended one. The priorities will become muddied if one does not look at the bigger picture behind the goal. For instance, many prefer wealth growth through investing money and owning a business, in addition to having a full-time job on the side to have certain financial benefits (e.g. health insurance). Someone may have all the capital they need to both invest in stocks and create their own business and quit the job in the long run. The goal is to grow their money, and the priority is to keep the job for the benefits; hence, he decides to invest 10K in stocks and puts another 15K into creating his business. Of course, by no means is this approach wrong. The interest rates of his stocks will grow, but slowly over the long term, and the business will take years to develop and start producing a steady income. Here, he needs to look at the bigger picture.
If his goal is to start his own business and leave his job in the long-term, the individual could significantly increase his wealth a lot quicker if he focused on establishing his business and putting all the money there. He would also need to give the company more of his time, which means it could interfere with his full-time job - a risk he could be willing to take.
On the other hand, if he does not want to retire early and still wants to keep his employment benefits and have more time for his personal life, he could just invest his money in stocks and wait for it to grow slowly but consistently over time.
The aim of wealth growth should be what you are looking for in the long run.
Some of the most popular ideas to grow wealth include cutting down on expenses, investing money, and having an emergency fund in your bank account. While they are genuinely good tips, details are always left out, and it often seems ignorant in certain situations. Wealth is very subjective, and hence the recommendations should also be relevant to the individual.
People often throw financial advice and suggestions away, often ignorant of the individual's circumstances. Someone who keeps receiving the same recommendation to set up an emergency fund may not even have an income source to begin with. The current rate of unemployment in the euro area is 6.8% and 3.6% in the United States.
Even if the person has a job with a salary, the payment may not be sufficient to save after all the mandatory expenses. It comes off very insensitive to the needs of that individual. With rising costs and dependency on debt out of necessity, many are living off paycheck to paycheck and thus, cannot afford to have one. Only 15% was the household saving rate in the euro area in 2021 while inflation increased to 5.1% in 2022.
No one is denying the fact that emergency fund are necessary to have a head-start. But the way and the duration one should be achieving it depends on the person's individual financial goal and priorities. If someone is unemployed to begin with, there are many available government and non-governmental assistance that will help to find gainful employment. If someone already has a job, but it does not pay enough to create an emergency fund, multiple income streams maybe the way to go. How one should set up their emergency funds depends on the particular circumstances and not based on some standardised checking list.
Have optimal multiple income streams
Many people choose to grow their wealth by creating multiple streams of income - a popular subject that also attracts many fans. People choose to take up various additional work to supplement their primary income if they have one. The side jobs could be permanent freelance work, temporary gigs, or even having several small businesses simultaneously. However, it is not to be confused with passive income since side-jobs require active work on the individual's behalf. Passive income can be rental income or stock dividends that do not require additional work.
Having multiple income streams is a genuinely good way to have extra income and for wealth growth. However, there are significant drawbacks if it is not done the right way. The individual needs to see the bigger picture behind his goals and priorities and decide what he should really focus on.
Having multiple side-work will affect the performance of full-time jobs if you have one, which is especially important for people who need benefits, such as insurance. It can also lead to work burnout, which is very real.
This is why you can and should only focus on a few jobs that you are confident about bringing income. It is better to refrain from having multiple jobs that do not correlate with each other. For example, a lawyer may undertake freelance legal writing because the side-job coincides with the primary position. This is because the lawyer is learning from the job and updating the skills from doing additional legal work on the side, which requires more studying. The lawyer becomes more specialised in the area and uses the experience to charge clients more since he now has more skills and knowledge than the average lawyer.
The goal here is to diversify income between a primary job and additional work. The priority should be its management and still giving yourself time to rest.
Creating wealth is about owning equity. It can be in a business through owning the business itself, or its stocks or even its intellectual property. Or you can build equity over your assets, like your home. You will be growing your wealth through equity even when you are not actively working.
But all investments have risks and equities are a big investment. There are no guarantees that your equity will not be a financial burden on you instead. In terms of building equity through home ownership, that ship has already sailed. Income disparity, high property prices, and low earnings have all contributed to a decline in homeownership among younger households in Europe. There are many young families who are unable or unwilling to risk such a large and illiquid investment and as a result, they are unable to generate wealth. To offset some of the burden, many banks are now reducing down payment amount or offering low interest rates to young first time home buyers. Some are also offering additional home loan products at a reduced rate based on the use of green energy and energy conservation to encourage more use of sustainable energy.
To build business equity, you must either own a business or you own stocks in the business, both of which requires additional spare capital. Small businesses make up 99% of all companies in the EU, however, revenues for 70% of those enterprises have fallen since the pandemic began to spread. A lot of these businesses were established through bank loans. Bank loans are frequently used to launch, develop, and maintain these businesses. Getting a loan from a bank is now more challenging for new firms since banks don't want to risk lending to a company that doesn't have a proven track record. To offset some of the challenges, alternative financing institutions have been gaining traction amongst smaller businesses. Although the offered interest rates can be higher than banks, smaller businesses are still turning to alternative financial companies because the credit requirements are lower, it is easier to qualify under their checklist and companies get faster approval for financing.
Investing money is a critical part of being prepared for life's ups and downs. In any situation, the funds serve as a cushion. You might invest a specified amount of money each month for various purposes, such as saving for retirement or a child's education, or for the purpose of making quick money. You can also build wealth by investing.
All of these factors point to a single, overarching goal of investing: to provide a sense of self-sufficiency and control. If you have enough money in your investing portfolio, you may be able to spend your time and energy on more important matters.
However, it is easier said than done as prices keep rising without any increase in wages, preventing anyone from having savings to be able to invest in the first place. Many are still reeling from the impact of the financial crisis of 2008, only to be exacerbated by the pandemic. Although some families have managed to come out of it due to stimulus and other financial aid, many are still not taking advantage of investing. This could be due to poor financial education, risk aversion, aversion to forgoing consumption in the present or persistent emergencies that require access to liquid funds at all times.
Keep investing costs low
All investments have costs, and similar to returns, your costs compound over time as well. In comparison to lower-cost investments, investments with higher costs have a tendency to perform worse. You may assume that higher costs mean higher quality. However, this is far from the truth. Studies on mutual funds has shown that higher-cost mutual funds have been found to underperform. Fund managers who charge these fees have a hard time justifying them because they don't bring enough value to the table to begin with. Some funds may have a low cost expense ratio, but they may levy a sales charge to offset the low cost.
The bottom line is, while you cannot control all aspects of your investment, you can keep the costs low since it is the only thing you have complete control over.
Maxing out retirement accounts is one of the best investments you can make for your future. The primary argument for investing in a retirement account as opposed to a taxable one is that the after-tax return is higher in the latter. Up to a certain amount, you can save money for the future without paying taxes on it. The public's view on retirement accounts is two-fold. On the other hand, most people believe strongly that one should max out their retirement savings. On the other hand, many people recommend an investing account because of the retirement account withdrawal limit, despite the numerous tax benefits. Whichever option is for you, will depend on your financial situation. Maxing out retirement accounts may not be an optimal choice for someone who can compensate for the lack of pension funds with alternatives. Some European countries, on the other hand, now permit individuals to withdraw funds from their retirement accounts before they reach retirement age (example, Estonian retirees can withdraw their pensions at least 5 years before retirement age).
Protecting one's assets is essential for practically everyone, regardless of their financial situation. For too many, earning money is more important than protecting the assets they have accumulated so far, and they wait until the last minute to do so. Protecting your assets through the legal process of titling them ensures that they are safe from creditors and obligations in the future while still allowing you to benefit from them today. Personal and business assets, such as real estate, investments, liquid assets, and business assets, can all be included in your total assets.
Many options exist for protecting your valuables, but here are a few to consider:
- Document all titling and transfer of your assets through legal instruments, e.g. contracts or trusts
- Check for protected assets and adjust them to your financial plans. Examples of such assets are retirement accounts and life insurance, your primary residence and personal belongings
- To avoid personal liability, keep your corporate assets apart from your personal ones
It's only a small portion of the options accessible to you to preserve and safeguard your possessions. You can have more peace of mind knowing that your assets are better protected by implementing these and other asset protection techniques.
You can save money by prioritising your long-term requirements and financial security by paying yourself first before anything else. It's important to prioritise saving and investing, so that you'll be better prepared for the future. Paying yourself, for example, can include things like, adding money to your retirement account, purchasing insurance suited to your circumstances, establishing an emergency fund, and paying off debts. Paying yourself first will help you resist the temptation to overspend and avoid lifestyle creep.
In the face of mounting debt and other expenses, it can be frightening to begin paying yourself first. However, if you break down your goals into tiny chunks, it will be easier to get started saving. There are several ways to do this, such as automating your savings, automatically paying bills first, paying mandatory expenses in advance, and most importantly, starting small so that you don't get overwhelmed and give up as a result of this process.
The majority of us aspire to accumulate enough money now to be able to retire comfortably in the future. However, because there aren't any specific standards for increasing your net worth, the journey can seem overwhelming. Finding the appropriate steps without trial and error is challenging because everything is subjective. As a result, we present a series of wealth-building strategies that take into account the difficulties and roadblocks that individuals face in their personal financial lives. For example, before you begin your journey, you need to know your immediate financial priorities. Take a step back and consider the wider picture. Is it even worth the effort to pursue them? There are some processes that aren't worth your time, e.g. having multiple jobs at the expense of your health.
Build an emergency fund, which is a piece of advice that has stood the test of time, as well as numerous sources of income. Increase your net worth through accumulating assets such as a house, a business, or a portfolio of investments. Take advantage of the tax savings and financial security that come with maximising your retirement income. If you haven't started investing yet, now is the time to get started. Make an effort to reduce your expenses once you've begun investing. The most important thing you can do is hire an attorney and use legal instruments like contracts or trusts to try to protect all of your possessions. Last but not least, put your own well-being first.
Growing wealth should not be a topic for people to feel alienated. Although it is a financial topic, the discussion around it should be more inclusive and relatable. Everyone should have the opportunity to have a go in the financial market and take advantage of the benefits available. Hence we took the time to research and write to reach a wider audience of all kinds, hoping they could benefit from it.