The word wealthy means different things to different people. For some, wealth is all about money and an accumulation of assets that can be valued in monetary terms. That’s financial wealth (money). But there’s also time wealth (freedom), social wealth (relationships), physical/mental/emotional wealth (health) and spiritual wealth (spirituality).
We’re going to focus on financial wealth here. The definition of financial wealth is also different for different people. For some, it’s about having millions in the bank. For others, it’s having enough so they don’t need to worry about money. It’s a very personal thing. And up to you to decide what being wealthy means for you.
It could mean having a cottage by the sea with enough money to pay your bills and have a holiday every year. It could mean having a holiday home that you can visit whenever you want. It could mean having enough money in the bank that you never have to work again. After all, it’s your life. And you’re creating and growing wealth so that you can live the life you want.
If you want to build long-term wealth over time, then you have two main avenues. The first is to invest in assets which generate income and/or increase in value over time. The second is to run and grow your own business. Many people do both.
If you’re just starting out investing, then make sure your financial house is in order first. Save an emergency fund, pay off high-interest debt and save for things that you want over the next few years. That way you’ll have money available to invest each month. And the more money you invest then the more you’re able to grow your wealth.
There are many ways to invest your money. Some personal finance experts focus mainly on equities (stocks and shares) and bonds and within that, look at diversifying across different geographies and sectors. I like to diversify across different asset classes too. Diversification is great as it’s a way of managing risk by not putting all your eggs in one basket.
The types of assets you can invest in include equities, bonds, commodities (e.g., gold and silver), real estate, collectibles (e.g., classic cars) and cryptocurrencies. There are different levels of risk associated with the different asset classes.
It’s up to you to decide which asset classes you want to invest in and the allocation to them in your portfolio. This will be based on your investment goals, tolerance to risk, time horizon and personal preferences.
The reason investing is key to growing wealth is because of compound interest – which Einstein referred to as the 8th wonder of the world. Compound interest is interest on interest on interest. So, the returns get larger and larger over time.
You need to be aware that investing is not without risk as markets ebb and flow, and at times can be volatile. That’s why investing is considered a long game. You need to think in decades not days, weeks, months or even years. History has shown that whilst markets drop, they recover over time and then climb higher. So, it’s about time in the market not trying to time the market.
Investing has the potential to provide much larger returns than just saving your money in a bank. Since its inception, the S&P 500 has provided an average return of around 10% per year. Compare this to the interest rate you receive from money in your bank account, and you’ll see why investing is so important, especially when you consider the impact of compound interest.
There’s an urban myth that you have to be rich to invest but that’s not true. In fact, you can start with as little as £5.00 (and sometimes less), depending on the platform you’re using. In fact, it’s the other way round. It’s through investing that you can become wealthy.
Having your own business is also a great way to accumulate wealth. It allows you to leverage your skills and passion to generate income. And as a business owner, you have the opportunity to build equity and assets within your company. And as your business grows, its value increases, providing the potential for significant gains in the future.
Though not every business is one the owner(s) want(s) to build and scale. Many businesses are lifestyle businesses – they provide a lifestyle for their owner and are unlikely to be able to be sold.
A successful business can also serve as a legacy that can be passed down to future generations, providing long-term wealth and security for your family.
Investing in assets and running your own business are two primary avenues to accumulate wealth and achieve financial freedom. Both strategies come with their own unique benefits and consideration. Investing in assets allows you to grow wealth passively or semi-passively, while benefiting from the power of compounding. Whereas, running your own business empowers you to take control of your financial destiny, leveraging your skills and creating opportunities for expansion.
