We recently asked our community to send us their money questions and we have started answering them here on Medium. If you have a question which we haven’t addressed yet, you can submit it here.
Question: How do I build wealth?
From our Investment Manager, Deirdre Rooney:
Wealth is defined as an abundance or plentiful amount of something valuable. Four types of wealth have been identified: financial wealth (money), social wealth (status), time wealth (freedom), and physical wealth (health). This response will only address financial wealth but it’s worth noting that all four types of wealth are connected e.g you work to attain financial and social wealth at the expense of your time wealth. The balance between all four types of wealth is your choice and will vary over your lifetime. Further, research has shown that people with higher incomes are healthier. Therefore if you focus on your financial wealth, there are positive outcomes to be gained in other types of wealth.
The accumulation of financial wealth takes time and it’s a dynamic lifetime process associated with the theory of spending articulated by Modigliani and Baumer in 1954. The main tenet is that people make intelligent choices about how much they want to spend at each age, limited only by the resources available over their lives. By accumulating assets (wealth), people can make provision for their retirement and, more generally, tailor their consumption patterns to their needs at different ages, independently of their incomes at each age.
In other words, you can use your wealth to accommodate changes in spending regardless of whether your income rises or falls. Although this theory has seen many challenges in recent years, it still yields useful clues to building wealth. It suggests that the most important factor for saving is the rate of growth of income rather than the nominal level of income earned.
So here are some suggestions for achieving a positive rate of growth for your income over time:
Evaluate your expenses — we’ve written about this topic before. The larger the gap between your income and your expenses, the more wealth you can accumulate through saving and investing.
Invest in yourself: This could be getting a degree, an MBA, or getting a specialised professional designation. As you make it a habit to find ways to better yourself, you’ll discover new potential ways to build wealth. Everyone does it differently, and nobody will do it exactly like you. You’re unique and you’ll find your own path.
Protect your credit score: debt is a useful financial tool but if you don’t look after your credit score, you’ll pay more for your debt such as a mortgage or other major purchase than you need to.
Invest early and often: building your wealth will require:
- Patience — although investments grow with time, their value changes with the economic cycle. Invest throughout good and bad times and give your investments time to grow.
- Diligence — don’t throw good money after bad. Ensure your savings and investments are with an FCA regulated firm so that you’re assured high standards will be met and, if the worst happens, you have access to compensation or make a complaint.
- Discipline — Get a plan for your spending, saving, investing and budgeting and stick to it. Start now, start small and use the power of compounding to build your wealth. Simply put, if you start investing now and put the same amount into an investment account each month, you’ll avoid having to make much larger monthly contributions if you start later and want to achieve the same financial goal. If you fail to plan, you plan to fail!
Develop a second income to become more financially resilient and to increase your total income. There are many ways to do this e.g. investment income, side hustle. A side hustle is generally freelance or piecework in nature, providing a smaller but useful second income. Side hustles are often things a person is passionate about, rather than a typical day job worked in order to make ends meet. There are organised websites that help you do this such as fiverr.com and fivesquid.com or if you’d rather not pay for such services, there are plenty of ways to develop a side hustle without money.
Keep an eye out — more questions and answers to come! In the meantime, submit your question here and we’ll make sure to respond.
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This article is not advice. ikigai is a trading name of Ikigai Invest Services Limited, a company registered in England and Wales (Company number: 12011662). Ikigai Invest Services Limited is registered with the Financial Conduct Authority (FCA) as an EMD Agent (reference number: 902740) of PayrNet Limited, an Electronic Money Institution authorised by the FCA (reference number: 900594) and is an appointed representative of WealthKernel (reference number: 723719) which is authorised and regulated by the FCA. ikigai is not a bank. Registered address: 16 Great Chapel Street, London, England, W1F 8FL.