Beginner's Guide to Building Wealth PART 2
This is part 2 of a two part series. If you missed part 1 catch up here.
In this part, we shall discuss
My 4 EASY steps to build wealth & kick ass in your finances
My secret TAP method to instructing your cash
What investing is
The secret to winning big with your money
All your questions answered ( actually it’s some of my questions answered lol)
Four E.A.S.Y Steps to Building Wealth from Nothing
There are four main steps to creating wealth. The best part is it is super E.A.S.Y to remember so you won’t forget it any time soon. They are :
Earning
Adjusting and Automating
Saving and Spending
Investing
Step 1. Earning Money
No matter what stage you are in life or your current financial situation, there is always a legal way for you to start earning or increasing your income. How do I know this? I know this because I know you were born with unique talents and gifts that no one else on earth possesses, and because of the interdependent nature of us human beings, no man can be an island. This is good news for you and me because it proves someone else is living with a need, and our skills can meet that need in exchange for monetary gain.
To earn money you need a set of skills which you can leverage. Most jobs require a universal set of soft skills like good communication, punctuality, self-control, and patience.
As a university student, if you get the opportunity to apply for and undergo an internship, it will be a great source of practical experience.
As a young professional, you can put yourself on the route for a pay rise if you always go above and beyond in all your responsibilities, use your initiative, and have an all-around positive personality. This does not mean sucking up or kissing ass, it means you look out for solutions, you avoid complaining, and you have a positive perspective.
Professionals and parents (like myself) may be interested in starting a side hustle in addition to your 9 to 5 or turning your current side hustle to a full-time business.
Whatever you choose to do, it's important to know that in most cases your income is dependent on the level of service you provide. And, the service you can offer is dependent on your skills. So it is important never to stop learning, increasing and polishing your skills.
“When it comes to earning money you are your greatest asset and your greatest obstacle, so get out of your own way “- E. Buko
Step 2. Adjust & Automate
If you are like me once you start earning money, you already have a hundred and one things to spend your earnings on and a further million things fighting for wallets attention. Most importantly you have to reduce your debt. It is essential to pay off all credit card debt as quickly as you can to avoid paying their high-interest rates. If you have no debt that's awesome. You can hit the ground running.
No matter which side of the debt fence you reside, you will still have to do these two things.
Adjusting the way you spend
Firstly, you have to adjust the way you spend and make sure it aligns with your goals. What I am not saying that you have to cut back on everything you like to do. Not unless of course that cutting back on all good things is what you want to do for a while.
What I am talking about is spending consciously, I am not talking about being cheap. It is about knowing where your money is going now and deciding where you want it to go ahead of time. Choosing to spend money on those things that are important to you and cut back spending on things that are unimportant or unhelpful to you in achieving your financial goal.
To accomplish this, we have to know:
1.Where our money is currently going
You can do this by downloading and filling out my Free expenses tracker and use it as an aid to help you track how much you spend on your essential and non-essential bills, how much money you save and how much you have (or owe) at the end of the month.
Knowing where your money is currently going is the very first step in managing your money better.
2. Where we want our money to go
We all have dreams and goals for our lives. And I believe that we can achieve them if we want to. We create happiness in ourselves when we pursue those dreams and goals that align with our God-given values and purpose for our lives.
For example, one of my values is my family, and I would like to spend quality time with my husband and my kids while the sun is still out, i.e. before bedtime (midterm desire), I would love for our family to go on holiday to Disneyland Paris (short-term dream) and I would not want to be a financial burden on my children when I am older (long term goal).
Therefore I will adjust the way I currently prioritise spending my money. After paying my essential bills, I prioritise saving towards achieving my id term (time with my husband), short term (family holiday), and long term goals (retirement years) first.
The easiest way is to do this is by setting up a standing order to pay your savings account a fixed sum each month. Decide how much you want to put towards each goal and set up a direct debit to do so.
Most companies have direct debit options to pay all your essential and non-essential bills? Why do you think this is so? Could it be because they know how bad we are at budgeting monthly (and I am terrible at budgeting). So they offer discounts if you opt-in to pay via direct debit. That is to say; they collect their fees automatically from your bank thereby avoiding our human nature excuses. Now I know most of us are ok with the idea of paying our bills by direct debit because it's just easier right?
Three steps to instructing your money successfully
The TAP method is my 3 step plan to mastering your money with ease. In fact, it takes all of 5 minutes to do.
Track your money
Automate payment of your bills
Pay yourself always
The secret to wealth - ‘A part of all you Earn is yours to keep - G. Clasons, Richest Man in Babylon'
Step 3. Save & Spend
As your income increases, it is easy to feel like we should increase our spending. I am not against living well now, but I am just highlighting this point because it is easy to have a sizable pay rise and actually reduce the amount we have left to put towards our savings and investments, leaving us only appearing more affluent. However, we are stealing from our future. This is why it is good to get into the habit of saving and paying yourself a fixed percentage of your earnings by direct debit.
What is more important than how much you earn? - how much you save.
Here is the golden rule for building a strong financial foundation.
Spend Less and Save More.
It is super easy to say but hard to do; therefore so few people do it. But for the select few who can, you are setting yourself up for something genuinely miraculous which I will highlight in step 4.
If you are wondering how much to save, start with what you can afford and slowly push yourself. Aim for 10-20% of your monthly income for starters.
Nuisance Fund (for emergencies)
You should have some money saved for ‘nuisances’. Those things that are unplanned, unwanted and a great inconvenience. Yet they happen all the time. In the past, we tried to save up enough money to cover six months or more worth of bills, which I was super grateful for when I lost my job. But lately, that has been difficult to do. So we try to take good care of our home appliances and car so that we don’t wear them out and we pray against emergencies. Funny I know, maybe even borderline silly but you get the gist, have some money set aside for unexpected bills. If you can afford to save six months worth of bills, then I’ll give you a virtual high five! But if you can’t start with what you can afford and push yourself a little bit.
“Saved Money I just like Earned Money”- Not sure if I heard it somewhere or if I just made it up.
If you have debt, you may split your savings contribution into two. One to reduce your debts quicker and the other to fund your investments. But take high interest debt elimination seriously.
Now on to the fun part. Spending! I love spending money especially on things I value (which tends to concern my family). Spending is great when you spend the right way. Yes, there is a wrong way to spend money. That is when you spend only on things and experiences that don't align with your values, dreams and purpose.
For example, you know you are a philanthropist at heart, but you spend all your spare cash on take-out dining instead of cooking. This means you never have enough to give to charity when the need arises, thus making you feel unhappy because you think you don’t earn enough to help. Your big heart is starved of the opportunity to show love and receive love, joy and happiness.
Spending well is cutting back on things that don’t make you happy and spending strategically on things that bring you joy.
So for me, I continuously look for the best deals for my mobile phone, electricity and gas because I don’t want to give large corporations more cash than I need to. I wouldn’t mind splashing out on a family holiday though or extracurricular activities for my children.
Step 4. You must Invest
The final step in building wealth is to invest the money you have now saved up in the stock market, real estate, or commodities to earn a profit based on the rate of return. Investing involves delaying the excitement of spending all you earn now, to enjoy the comforts from being able to afford to spend even more cash later.
You can invest in different ways towards your short term, mid-term and long term goals. Ideally, you should leave your money invested for a few years to see good gains.
What is investing anyway?
When you invest, you buy part or all of an asset, e.g. companies, property or commodity with the hope that the value of the assets will increase significantly with time and/or it can generate an income for you.
Investing does one major thing for you.
It produces an income which you can spend, save or re-invest, this time bypassing the hard work of getting a job or running a business to earn. Literally speaking, your money is going to work instead on your behalf, and you get to enjoy the fruits of its labour. So you could be sleeping, chilling with your friends, sipping tea or working at your day job. It doesn’t matter. Your money will still be working hard. This all happens because of the miracle of compound interest.
“Investing is the easiest way to easy income”- E. Buko
Why should you invest?
The UK currently has an ageing population, where a lot of people are living 20 to 30 years after retirement. This means the national insurance “tax” we currently pay now is funding the state pensions of current pensioners. This expense is unsustainable, and we can see signs of things to come with the continuous increase of the pension age to 68 from 60 in 2010.
Therefore, you can not rely solely on your state pension to provide all you need during retirement. It should be looked at as a supplement to your investments.
Where can you invest your money?
Where you choose to invest is heavily dependent on your goals.
Short term goals of less than a year are best kept as cash in a high-interest savings account or premium bonds.
Cash ISA's and Stock and shares cash ISA's are good ways to save and invest for mid-term goals of (minimum of 4 to 10 years).
An invested Lifetime ISA's can be used to save towards buying your first home. Buying real estate in a good location is also an excellent way to cash in on the property market. Homeownership has proven to be one sure way for people to build wealth from little earnings.
You can also invest in commodities such as art, gold and silver.
For long term goals such as retirement (which may be 10 to 40 years away), investing in the stock market via private pensions (such as your workplace pension, or a self invested pension plan), lifetime ISA's are the ways to save towards the future. This is because little cash deposited and invested over many years can grow substantially due to the power of compound interest.
How and where you choose to invest your money depends on your values and risk tolerance.
The secret to Winning Big when Investing in the Stock Market
1.The duality of Compound Interest
The rule of 72 is a simple way to calculate the effect of compound interest. In his book ‘Making Money made simple’ by Noel Whittaker calls 72 a magical number which can be used as a simple financial calculator. For any amount of cash invested, if you divide 72 by the interest rate it will give you the number of years it will take for your initial investment to double. For example, if you invest a one-off lump sum of £1000 at a rate of 8%,( let's do our quick calculation 72 /8 is 9). So it will take nine years for the £1000 to double to £2000. And at the same rate, you will have £4000 in another nine years and £8000, nine years after that. With no extra effort on your part and in this example no additional contributions. It's really that simple and easy.
Utilising the power of Compound interest plus patience is the catalyst to supercharge and grow your investment.
2. Asset Allocation
This is your plan for how you want to invest. It is the recipe for how you spread /assign/mix/ allocate what you invest in. Basically, you should spread your investment over a mixture of assets to balance out how much risk (i.e. How much money you could loose vs how much you could make) your money is exposed to.
There are three main classes of assets when investing in the stock market.
They include
Leaving it as Cash: This is the safest and therefore has the lowest risk of losing your money except due to inflation.
Buying Bonds: This means loaning your money to the government. Governments seldom go broke, so this is also a low-risk investment.
Buying Stocks: This means buying a little portion of a company. Companies are unpredictable, and they could grow remarkably or fail spectacularly. Therefore they have the highest risk. This means if you invest in a company that grows at a remarkable rate (interest rate), your money will be double according to the "rule of 72" above.
The ratio of which you buy cash:bonds: stocks is how you allocate your assets.
3. Play the long game
Patience is a virtue especially when investing. Impatience people need not apply. Buying and selling your investments when pressure by fear can cost you dearly. Aim to leave your money invested for a long time. This is why having some savings towards unplanned expenses is essential, so you never need to cash out your investments in a hurry.
Tips for Success in building wealth no matter how little you have right now
Always go the extra mile and become a top performer.
Spend less than you earn.
Save more than you Invest wisely.
There are many ways to invest and different levels of risk involved, start small and investigate the type of investor you are.
Live generously.
Spend time with your loved ones and help those less fortunate than you.
Your Questions Answered About Building Wealth from Little
I confused where to start, what do I do?
When investing for the first time, it might feel daunting. If you are an employee start by speaking to your company about increasing your contribution to your workplace pension, if you are self-employed, look into setting up a Self Invested Pension Plan S.I.P.P.
What can I invest in?
Investment opportunities are very widespread, and you can invest in almost any business. The most popular include, investing in the stock market, and real estate.
What is a good investment platform for newbie investors?
Investment platforms like moneyboxapp, wealthy, moneyfarm, IG, evestor and nutmeg are very easy to understand and use. You decide your risk tolerance, and they automatically build your portfolio for you. But check the fees before you commit yourself.
Do I have to be rich to invest?
No, you can start investing right now from 1 pound.
How should I prepare for retirement
The first step is deciding what you want your retirement to look like. Once that is done try and put a cost to that lifestyle, you will have to take into account inflation. Once you have the price tag for your lifestyle, have a look at pension calculator from the money advice service to decide how much you need to invest to be able to afford to live excellently in your retirement.
Can I build my own portfolio?
Yes, you can develop your investment portfolio based on your values and tolerance for risk. You can choose the type of companies you want to invest in and the type you don’t want to support. If you are a vegan fashionista, for example, you may want to invest in retail companies, and you may decide to avoid food companies who don’t align with your vegan values.
Shall I buy stock options at the company I work for?
Yes, you can, but don’t over commit. It is best to diversify your investments. As the saying goes, don’t put all your eggs in one basket.
How do I know my risk tolerance?
I once read someone describes risk tolerance as deciding if you wanted to “eat well or sleep well”. All investments are risky as their value can always go up or down so you may make or lose money at any given time. Risk can be looked at as a percentage. Higher risk investments usually have a higher rate of return.
The Last Thing You Need to Know about Building Wealth
The EASY way to build wealth is by earning, adjusting your spending, saving and wisely investing the money you have saved.
It is important to remember all investments carry an amount of risk which means it can go up or down. Because of this, it is important to diversify and leave your money invested for a long time.
Above all, building financial wealth is most fulfilling when all areas of your life are in balance. That means investing in your mind, relationships, and health.
Sounds like a lot? I’m here for you
Does all this just feel so overwhelming? Do you feel like it’s an uphill climb? OK deep breaths! I know how you feel because that how I felt in varying degrees over the last 3 years. My emotions have gone from excited and comfortable to the worry that I would become a bag lady. I want to tell you something that took me 3 years to realise, you create my emotions, my life and if you could just get out of your own way a little, you would see the part to life you really want.
Don’t hold back, take tiny winy steps each day towards your goal, and you would be amazed where you would be in 1 month, 3 months or a year from now. If you need more support send me an email or let’s chat on Wednesday. What you choose, do something! Download the guide via the link above and read it again.
I believe in you!