Wealth creation can mean different things to different people. Some see it as making money whilst others see it as accumulating assets.
How do you create wealth
Looking at wealth creation at its most basic, the underlying principle is:
To create wealth you need at least one of the following:
- Cashflow – money that you are able to save or divert to an investment on a regular basis. For example $50 p/w or $800 p/m (to learn more about saving see Budgeting & Cashflow Management).
- Capital– a substantial sum of money. For example $6,000, $90,000 or $1,000,000.
- Leverage– where you use someone else’s money to invest i.e. a bank or a venture capitalist etc.
Once you are ready to make an investment you need to decide where to put your money. There are five main areas:
- Fixed Interest – Australian Bonds, Corporate bonds etc
- Australian Shares
- International Shares
Another option is to develop an idea and/or start your own business i.e. Mark Zuckerberg’s wealth as at December 2015 was estimated at $46 billion^.
There are several things you need to consider when making an investment decision:
- Your risk tolerance– are you comfortable with your strategy and its risks?
- Risk reward relationship– generally speaking, the higher the risk you take over the long term the higher the return. The lower the risk, the more likely that the returns will be more stable over the long term. It is important to know, that depending on your strategy, investments can go down as well as up.
- Liquidity– consider how quickly you want or need your money back (days, weeks, years).
- Capital Preservation– if protecting your capital is important (i.e. self-funded retirees) portfolios can be established with this in mind.
- Taxation implications– always consider the tax implications of making money. Whilst it is overall a great thing to make money it also means paying tax on the profits. Being smart and tax aware can help reduce your liabilities.
- Inflation risk– the consumer price index (CPI) measures inflation. It is measured by the movement in the cost of a general basket of goods. For example $50 worth of oranges today is likely to be worth $52 in 12 months’ time. It is therefore important that investment strategies are made with the impact of inflation in mind.
- Timeframe–how long do you want to invest for?
- Diversification– not putting all your eggs into one basket.
At Singleton Financial Planning we are here to support you with establishing an investment portfolio that takes into consideration your needs and objectives.