The simple answer is no, investing by itself will not make you rich. Investing is a tool that allows you to grow your money by purchasing assets that either rise in value, pay out dividends, or both.
Some examples of things you can invest in are real estate, stocks and bonds, businesses, items that grow in value, etc.
Even though investing by itself will not make you rich, it is essential to creating a future where your finances are under control and you can live comfortably. In this article, we will talk about building wealth and how investing plays a major part in it.
Principles of Building Wealth
Being Rich vs Being Wealthy
Let’s start by replacing the word “rich” with the word “wealthy.”
Being wealthy is less about having all the money you could dream of, and more about creating a lifestyle where you understand where your money comes from and where it is going.
The first steps to becoming wealthy usually include:
- Dissecting your finances to see where your money is actually going
- Creating a budget that helps you with your money management
- Tackling your debts and putting money into savings
- Finally, invest the money that you worked hard to save
If there are any questions you have about the steps above, check out my other articles as they go more in-depth into each step.
How Do You Know You’re Ready to Invest?
When you are new to investing, it will feel like you are never ready.
Oftentimes we find ourselves scouring the internet for, “best things to invest in” or “how to not lose money investing.” The unfortunate reality is that neither of those things exists.
The truth is that investing involves risk. Some investments have lower risk built into them, like purchasing bonds from the government. However, that lower risk also means lower reward.
On the flip side, you have investments like penny stocks. Sure, you can buy thousands of them for a little money down, but the chances of you losing all of that money are higher.
Now that you are aware of the risks of investing, you have to decide whether or not to take that first step. The next section will give you some tips on how to do just that!
Investing Tips for Building Wealth
Establishing Financial Goals
Before you start investing, make sure to consider what your ultimate goals are.
Ask yourself questions like:
- Am I investing for retirement or for the next 10 years?
- How much do I have to invest each month?
- Do I want to invest for growth or invest for cash flow?
These are just a few examples, but make sure you consider both your current situation and what you want your future situation to look like.
Starting Early
By starting early, you allow your investments to benefit from compounding over time.
For example, let’s assume you invest in a stock that has an average yearly rate of return of 7% and you invested $5,000 into it.
If you invested that money and put nothing else into it 10 years ago, it would be worth just under $10,000. Almost double in 10 years! Now, take that same scenario and change the time invested from 10 to 20 years. By starting earlier, it would be worth closer to $19,000!
Time is your most valuable asset that you can never get more of, and you have less of it left every year. If you feel confident to start investing, do it as soon as possible.
Diversifying Investments
Most of us have heard the saying, “Don’t put all of your eggs in one basket.” That saying could not be any truer with investing.
Diversification is investing in multiple things to build a well-rounded portfolio. There are going to be years when the stock market does not perform well, and sometimes it may go down in value. However, since you had more than one basket for your eggs, it didn’t matter that you dropped one.
There are many ways you can diversify your portfolio, but a simple way to start is by creating a portfolio that includes a variety of stocks and bonds.
Stocks vs Bonds
A stock is a small share in a company that you can purchase as an average civilian. Your hope is that the company does well so that the price of your share increases and you can eventually sell it for a profit.
A bond is like a contract between you and another entity where you pay them a certain amount of money and they agree to pay you back in a set amount of time, plus interest. Typically these have lower returns than stocks, but they can provide a more stable flow of income.
The question is, how much should I have of each? The answer that you don’t want to hear is: it depends. You want your portfolio to reflect your risk tolerance. Here are some examples:
- Low-Risk Tolerance: Have more bonds than stocks
- Medium Risk Tolerance: Have a similar amount of both
- High-Risk Tolerance: Have more stocks than bonds
Keep in mind that this is just a starting point and you can adjust your investments as time goes on. Remember that there is no “right” or “best” way to invest, there is only “your” way and “my” way.
Final Thoughts
Can investing help you diversify your income sources and help you on your path to being wealthy? Yes, it most certainly can.
There are lots of other methods of investing that were not discussed in this article, and you should always do your due diligence with any new investment. Just remember that the sooner you start, the better the benefits will be when it’s time to cash it all in.
