When building wealth, it is important to understand the similarities and differences between saving and investing your money. Knowing when to save and when to invest your money is a key part of your wealth building plan.
Let’s start from the top. Basically, saving money is putting money aside on a regular basis. You spend less money than you earn and put the rest in a savings account at your bank. This should be an automatic part of your monthly budget. Remember, saving money is an important part of being financially successful.
Investing is taking this a step further, and putting money into the stock market by buying stocks, bonds, mutual funds, or other investment vehicles. Investing is absolutely imperative in building long-term wealth.
Once you have a good amount saved, you can begin investing money. Investing is the way that you will begin to really grow your money and begin to build wealth. For example, if you keep your savings in a savings account, the amount of interest you will earn will be very small. However, if you invest in mutual funds or stocks, your rate of return will be much higher.
The big difference? The stock market fluctuates, and it’s never a sure thing that you’ll earn money. In fact, you can lose money in the stock market, so be sure to keep that in mind when investing.
You will eventually come to the point where your investments make more than you are contributing each month. Your wealth really begins to grow at that point.
When you begin to build wealth, it is important to spread your risk. Mutual funds are an easy way to diversify your portfolio. These funds are spread out over many different stocks so that if one company fails, you do not lose everything. Another good idea? You should have your money invested in more than one mutual fund. You don’t need to have 20 mutual funds, but three or four is a good start.
If you feel confident with investing in individual stocks, be sure that you spread your investments over a wide variety of companies, businesses, and sectors of the market (For example, do not invest all your money in tech.) It is not enough to invest in different companies if they all in the same industry because sometimes entire industries can take a hit.
You may consider investing in other things. One example is real estate. This can bring you a good passive source of income. Real estate also tends to increase in value over time. However, do not do this until you are ready to purchase in cash, and can pay for any repairs or unexpected expenses out of cash flow. It also may require more work on your part, depending on how you choose to rent it out and whether or not you use a property management company, which can cut into your rental property earnings.
Real estate can be a great investment, but it also has its risks. Much like the stock market, property values can go up and down.
Most financial advisers recommend that you wait to start investing until you have paid off the majority of your debt. However, this really depends on your interest rate. If you are paying a 0% interest rate on your debt, it may make more sense to begin investing before it’s paid off, since you can earn a greater percentage in returns. (The average rate of return on the stock market is around 7%.)
It’s also a good idea to have a solid emergency fund saved before you begin investing. You should have money in your emergency fund that relatively liquid and easily accessible, without paying a large penalty. A money market account at your bank is a safe place to put this.
Investing can help you build wealth. But keep in mind that you won’t be able to truly build wealth – and increase your net worth – until you spend less than you earn and get out of debt. That’s why it’s still wise to stick to a budget, so you can save and invest effectively.
So you’re ready to invest, but you’re not quite sure where to start. A good first step is to meet with a financial advisor.
A financial adviser can explain the different types of investments that are available to you. He or she can explain the risks and the potential gains to help you find investments that you are comfortable with.
Another option is to select an online brokerage site or robo-investor. The fees are lower and if you know the types of investments you want to make, you can save money in the long run.
One final thing to keep in mind: Investing is a long-term strategy for building wealth. It’s important to be patient, and ride out the times when the market is not doing well. Once you do this, then you can truly be on your way to building net worth.
Not sure if you can afford to invest in property? Here are some creative strategies to reduce the capital requirements needed to get you started.
Investing in property is invaluable, offering long-term rewards and is still regarded as one of the safest permanent investments. Most people would like to diversify their property portfolio but think they won’t be able to afford it or that they will not have the money for a deposit.
“Purchasing investment properties can be capital intensive, but there are ways to reduce the capital requirements by approaching the investment in an informed manner.” says Craig Hutchison, CEO Engel & Völkers Southern Africa.
When it comes to property investment, there are many strategies to adopt, depending on your personal situation and goals. We look at a few creative ways to approach your real estate investments:
• Partnerships: a typical way of obtaining financing.
It is the way many young real estate entrepreneurs go about financing their projects. By finding investors who can put the money up and split the profits on the upside. This also limits your risk and makes the money go further.
Private Lenders: a less risky alternative to a better cashflow.
This is because you can often arrange the terms of repayment with the private party. They can be anyone such as a friend or business acquaintance. The loan’s terms are agreed upon by the two parties, which can make purchasing a property with little or no money a likely possibility.
• Rent-to-own or lease with an option to buy.
This option is especially great when considering how to buy first rental property. If you have a lease-option for 5 years, at the end of that time, you will need to purchase the house and can get a bank loan then. Meanwhile, you can use the time to fix your credit and/or save for a down payment. Some contracts may put some or all of the rental amount towards the deposit.
Read more: Rent to buy, can it work for you?
• Use a home equity line of credit from another property:
If you have equity in another property, you could use that as a deposit on purchasing another investment property.
• Borrow against your own home:
Some people in this situation choose to extend their mortgage to release the cash to invest elsewhere. Some financial institutions will be happy for you to borrow more against your house in order to invest in property. Once you are able to buy an investment property, you can refinance it in one year.
• Rent rooms in your home:
If you own your own home, you can raise money by renting out a spare room. If you’re willing to put in more work, you’ll get higher returns by renting your room through a short-term lettings agency. The profits can be very high if you live in an area with decent tourist, student or business demand.
• Borrow money for a deposit from a relative:
If you are fortunate to have a relative with some extra funding and you really know your stuff and can produce a compelling business case, it might be worth a shot, asking them for funding towards/for a deposit to purchase the property.
• Invest with friends:
If your friends or business partners are also have a passion for property, you could always invest together. If you do decide to invest with someone you know, make sure you’re 100% aligned, discuss what you want to do, and all those scenarios that could go wrong. Plan what will happen if someone wants to sell and the other doesn’t – or one person needs their money back unexpectedly, and get it all down in writing.
• An instalment sale:
Is an agreement, documented in a water-tight contract between a buyer and a seller that the buyer will pay off the purchase price in monthly instalments within 5 years. This enables a buyer to acquire a property by paying the seller in more than two instalments (in usual bank-financed transactions there are two instalments: the deposit and the final settlement amount) and over a period longer than one year, but not longer than five years. Once a buyer and a seller have agreed on a price, the payment arrangements and the terms and conditions, a special purchase contract is drawn up by attorneys that specialise in ALA transactions, which meets all the requirements of the ALA to ensure the transaction is legal and protects the interests of all parties.
Only a handful of investors will make it past their first investment whilst climbing the property ladder even though their intentions were to make it big in real estate.
“Establishing and expanding your property portfolio needs to be done with careful forethought to ensure you get the most out of it” Craig concluded.