Wealth Creation: Financial Lessons To Learn Sooner Rather Than Later

Author: Shereese Bailey, Research Analyst, NCBCM

Have you been working and saving, but finding that you are no closer to reaching your financial goals? You may be wondering why your results do not seem to match your efforts and trying to figure out what exactly you are doing wrong. Let’s explore some important principles to understand when you begin working towards your financial goals.

There are several financial lessons that can be viewed as rules of thumb that can better position individuals to achieve their financial goals sooner rather than later. These lessons have been gleaned over time by individuals on their path to wealth creation and now stand as core tenets that when employed, can put you on a sure path to realizing your financial goals and ensuring your financial independence. They include optimizing your hard-earned income, ‘owning’ your way to wealth, and making optimal use of debt. These lessons are important building blocks to establishing a successful financial plan for wealth creation.

Lesson 1: You Cannot Work and Save Your Way to Wealth?

If you could merely work a regular 9 to 5 and save your way to wealth, then the majority of the population, and savers in particular, would be wealthy. The idea of working and saving your way to wealth implies that you will be able to accumulate large funds such that you will not only be able to meet the financial goals you have during your working life, but also have sufficient funds to retire in comfort. However, savings accounts earn very low rates of return. As such, it is highly improbable, due to inflation and changes in your financial circumstances that could occur in the future, that you can save enough money to become wealthy. Inflation erodes the value of your savings over time, and uncertainties like health issues or other occasional financial emergencies can quickly deplete your savings. Therefore, by merely saving, not only are you highly unlikely to build wealth, you are also placing yourself at risk in a world rigged with ongoing and unplanned occurrences.?

So rather than thinking that you can work and save to gain wealth, put your money to work. To gain wealth, you need to make your money work harder than you do - invest. This is usually done through medium to long-term strategies like investing in assets that can earn higher rates of return than a savings account. This will aid in building actual tangible wealth that can be utilized as income later on.

Lesson 2: Ownership Is Pivotal To Wealth Building

To transition your pent-up savings to earnings, try ownership investments. Ownership investments include stocks, real estate, precious objects and collectables, or owning a business. The idea behind ownership investments is to use your funds to invest in assets that have the potential to see significant appreciation in value (earning returns or profits) over time. These assets provide some of the most consistent returns and are easily accessible to both new and more seasoned investors. For example, by investing in stocks, you now own a portion of the company and can earn from capital gains (increase in the stock price) or through dividend payments. Likewise, real estate, whether directly or indirectly through real estate funds, which now offer investors access to the benefits of real estate investing, are solid investments. When chosen right, they appreciate in value over time and are a great hedge against inflation and also generate cash flow through rental income. If you can’t afford to buy real estate at this time, real estate funds provide a great way to start. The returns from these ownership assets increase your likelihood of building wealth over time.

If you have the risk appetite and acumen, business ownership also offers a solid path to building wealth as it generates income and creates value. Owning a business is one of the fastest, most reliable ways to build serious wealth. While the start-up process may be tedious and fraught with risks, over time the effort and capital invested can translate into a stable source of income and a source of significant value creation that can speed up wealth creation. A well-managed business, with a solid strategy, in the right industry can be a great path to personal and generational wealth creation.

Lesson 3: Debt Is Not Always Bad

Generally, people perceive taking on debt as being an all-around bad decision if your goal is to create wealth. This is usually driven by the perception that owing money will reduce the amount of income available for investments and future goals. However, not all debt is “bad debt”. A simple rule to follow is, if the debt will allow you to manage your finances more efficiently, achieve a higher?rate of return?on your investments or build on your knowledge and expertise to increase your income, it is good. Although an oversimplification, the principle remains true. Good use of debt can involve consolidating several old debts, to facilitate faster repayment or lower payments usually at lower rates of interest. Obtaining student loans to invest in yourself and build your biggest asset - you - can also be a good way to use debt. Investing in yourself can build skills and competencies that lead to greater earnings in the long run. You can also borrow to make investments. Just as large corporations have issued bonds (corporate debt), bank loans and other debt to finance the expansion of their operations into new profitable product lines and markets, so too can you utilize debt to invest in and enhance your returns on profitable assets with attractive returns. Borrowing will increase your chances of creating wealth as long as the investment pays off the debt and exceeds the costs of servicing that debt. The key is to be thorough in your research and properly assess the investment opportunity, including the risks and return potential before making the decision to take on debt to fund it.

Wealth creation is a continuous process that becomes easier over time once equipped with the right knowledge. Knowledge is no doubt the most powerful tool to have when accumulating wealth. By understanding the difference between saving and investing and optimizing the usage of both saved funds and debt to invest and own assets, you can successfully accumulate wealth overtime and build a bright financial future. I hope these lessons will not only increase your wealth of knowledge, but that you will incorporate them to lay the building blocks for your financial independence and generational wealth creation.