In a perfect world all your investments would always increase in value, income would continually flow in and your plans would always have the best outcomes. But this isn’t the perfect world. When building wealth in the real world, we have to consider the risks of whatever activities we choose. The good news is risk can be minimised!
So how do you build wealth and minimise risk, so you don’t have to start from scratch if the unexpected happens?
01 Avoid “Magpie Syndrome”
Investing is exciting and there’s always new opportunities, so it’s easy to chase after every possibility to build wealth. But every opportunity isn’t a profitable one.
Avoid chasing every shining opportunity like a magpie by having an investment plan. Your plan will eliminate options that won’t help you toward your goal.
Some of the elements of your investment plan should be:
- Type of investments
- How much you need to replace your income
- Annual investment goals
- How much could a potential investment make
- Contingencies for a potential investment
- Exit strategies for potential investments
- Timing for adding new investments
02 Follow the numbers
Now that you have a plan that tells you what type of investments you’re going to make to reach your financial goals, evaluate the numbers for each potential investment.
Whether it’s a rental property, a land subdivision, mutual funds or stocks, the numbers will tell you if the specific opportunity is worth the risk.
This is where your emotions need to take a back seat. Let the numbers speak and listen to them.
If you need help reviewing the numbers for a potential investment, contact an investment adviser or contact us to get connected with one.
03 Get rid of debt first
Debt is attractive because it gives you instant gratification. But just like having one too many on a night out with the girls, it’ll come back to bite you later.
Personal debt slows down your wealth building capability because all your money is tied into paying interest. On top of that, the amount of debt you have increases risk because it means you’ll have a larger amount of financial responsibilities if an unexpected event happens and your income decreases or is lost.
Make your goal to have no personal debt, including your mortgage and short-term debt, so your savings toward investments are high and your financial liabilities are low.
04 Build an emergency fund for short-term protection
An emergency is not an excuse to get into debt. Since you know that unexpected events do happen, plan for it. Save an emergency fund of 03 – 06 months of your needs expenses.
In the event you have a drop or loss of income, your emergency fund can tie you over. This eliminates the need for debt or for dipping into your investments.
05 Anticipate non-emergency needs
Not all emergencies need to be paid out of your emergency fund. Some future expenses can be anticipated, such as home maintenance, car repairs, and a new pair of eyeglasses.
Add an amount to your annual spending plan that you’ll save up each year to cover these expenses. Use these funds as a first line of defence in the event you need to replace or repair a critical item. If needed, you’d have your emergency fund as back up, never needing to go into debt or touch your investments.
06 Get insurance for long-term protection
If you’re a homeowner, you’ll at least have home insurance, but it’s not enough if you lose or have a decrease in your income. Your emergency fund can be used in the short term, but you need something to cover your family and finances if you have a long-term situation.
That’s where insurance is key. Personal and landlord insurances will help to guard against needing to fork out large sums of money in the event of unexpected events that impact your livelihood.
To learn more, read or watch the video about 04 Insurances Homeowners Should Have But Probably Don’t
Keep in mind this article is providing general information and not individual financial advice.
If you’d like a review of your situation and customized advice for building wealth to reach financial freedom and live a fulfilling life, please book a free 15-min chat.