Wednesday, September 29, 2010

Four tips to wealth


wealth There are some proven actions that wealthy people have taken in order to become wealthy. Unless you were born rich we all have to work to make our ends meet and the idea of achieving financial independence sounds pretty good to me.

Although many writers have created steps or tips on how to get rich the road is not easy. Each of these steps take persistency and patience. With the right attitude and doing the right things you are certain to get there.

1 – Pay yourself first

The purpose of paying yourself first is to accumulate capital for investment. It is very hard to save so you need to be diligent and motivated enough to always save a percentage of your wage. This may mean that you have to cut back somewhere but it is well worth it.

Accumulating healthy savings may enable you to acquire assets that will continually put money in your pocket.

You should be very careful with this advice. Some people say that you should pay yourself first even if you have debt. My opinion is that if you have toxic debt such as credit card debt, you need to first have an emergency fund, pay off the debt as soon as possible and then start saving for investing.

There are many variations on this theme but it certainly worked for me.

2 – The miracle of compounding interest

Compounding interest is simple getting interest on interest. If you money earns you say 8% per annum, and you reinvest , your original investment will grow and potentially double very quickly.

This applies to shares as well. If you have the ability to automatically reinvest your dividends you automatically get more shares in the company instead of dividends paid directly to you in cash.

Compounding interest can also help you to save in order to acquire assets. Without capital you cannot acquire assets and to have capital you either need assets that give you that capital or you need to save it.

If you need to save to start investing then make sure you choose a savings account that gives you the highest interest that you can possibly get so you can have the most benefit from compounding interest. 

3 – Invest your money instead of saving it

The idea behind this tip is to build assets. Before I elaborate it is important to mention that we should all have some cash set aside for emergencies. Your emergency fund may be a simple savings account or some form of very liquid investment because you may need the cash very quickly in case of emergency.

I am not saying that you shouldn’t save, I am saying that once you have an emergency fund that you are comfortable with you should focus on investing.

The purpose of investing is to build assets. I have blogged before about what assets are and the importance of building assets to help you on your path to financial independence.

In summary an asset is something that puts money in your pocket. Dividend paying shares, positive rental properties and business are some examples of assets. Wealthy people know how to build assets that put money in their pockets. The difference of rich and wealthy is that rich people have lots of money. Wealthy people know how to make money. It is very likely that wealthy people will be rich as well but the opposite may not be necessarily true.

So if you want to become wealthy you need to invest your money into assets that will put money in your pocket event while you sleep.

4 – Invest in properties

This is a slight variation on the tip above. An investment property is an asset. In my opinion, investment properties are one of the safest investment channels around. Many will argue with me saying that the share market can and has outperformed the property market many times but a company can always go broke or loose a lot of value. It is unlikely that the same will happen to properties.

If the property market does break you need to make sure that you can hold the property during the down turn because the crisis will pass and your property will most certainly recover. Properties are not like shares, people need properties to live in so owning investment properties is a safe investment of your capital.

It is not as simple as just buying a property and getting a tenant, the most important aspect of property investment is cash flow. You need to make sure that the rent you get from your property can cover all your expenses and still put a bit of money in your pocket, even if it is just a little bit.

Cash flow is important because if there is a crash you should still have enough cash flow to cover your expenses there fore you can hold your investment instead of having to sell it for potentially less than what you paid for it.

Research and learn well about property investment. It can be a bit hard to get into the market but once you are in things become easier.