Good income is necessary but not sufficient for becoming WEALTHY. Its what you do and how much you save and invest from your income that can make you wealthy. Saving money helps navigate tricky situations, meet financial obligations, and build wealth. Saving money is vital. It provides financial security and freedom and secures you in a financial emergency. By saving money, you can avoid debt, which relieves stress. Once we maintain the habit of saving, we can start investing our saved funds in order to build wealth. The next step is choosing the right place to park your money to generate returns. The perfect choice of investment depends on a variety of questions that only you can answer. These include your desired exposure level, your risk appetite etc,
At Vita Wealth Management, our team of investment professionals can help you make such decisions based on your resources and requirements.
Expense must be budgeted to fit in with the leftover after taking out 20-25% of income from income. A common budgeting strategy is the 50/30/20 rule. The 50-20-30 rule is a money management technique that divides your paycheck into three categories: 50% for the essentials, 20% for savings and 30% for everything else.
- 50% for essentials: Rent and other housing costs, groceries, gas, etc.
- 20% for savings: Savings accounts, retirement contributions, loans, credit card payments, etc.
- 30% for everything else: Nonessential expenses like clothing, restaurants, monthly streaming subscriptions, gyms, etc.
By regularly keeping your expenses balanced across these main spending areas, you can put your money to work more efficiently. And with only three major categories to track, you can save yourself the time and stress of digging into the details every time you spend.
Only savings is not sufficient for becoming wealthy. Savings must be made to grow at decent rate in a compounding way to create snowball effect. Compound interest makes your money grow faster because interest is calculated on the accumulated interest over time as well as on your original principal. Compounding can create a snowball effect, as the original investments plus the income earned from those investments grow together. The higher your starting amount and the higher your investment return, the faster your savings compound. And over time, it can seriously add up. Saving early and often can put the power of compound growth in your favor by putting your money to work—so you don’t have to. Many experts, including Warren Buffett, recommend investing in low-cost index funds, which allow you to own a small piece of many different companies. The S&P 500, for example, is a fund that holds stocks for the 500 largest companies in the U.S., including Apple, Google, Exxon and Johnson & Johnson.
Starting to invest early in life gives you an upper edge in comparison to those who start late. One of the main reasons behind this is a term known as compound interest. Essentially, compound interest is the interest earned on interest. By continuously reinvesting your earnings and not taking out your investments, you are exponentially increasing your return on investment. By starting to invest early, you will allow your investments to compound and grow for much longer, a return that would be considerably more than if you start later in life. In addition, by starting early, you will be able to get into the habit of saving more. The more you invest, the more you get in the future, you will develop the habit of cutting unnecessary expenses and diverting them into investments.
Investment, unlike popular belief that bigger amount is needed, can be started with smaller amount. Starting to invest with a small amount of money isn’t an issue. However, it’s important to know how much you can afford to invest, as you don’t want to harm your personal finances in the process. Investors at Blackwell have said, “as long as you aren’t using money [to invest] that you need to cover day to day expenses such as food, rent and high interest debt payments, I recommend you start investing.” The best way to start is to practice budgeting. The most popular method of budgeting is the 50/30/20 method. Here 50% of your income is spent on needs (such as rent, food, loans etc), 30% is spent on wants (entertainment and leisure) and 20% is saved.
To add to this, the method of regularly investing small amounts of money is known as Dollar Cost Averaging. Dollar-cost averaging (DCA) is an investment strategy in which an investor divides up the total amount to be invested across periodic purchases of an asset (like a stock or an ETF) in an effort to reduce the impact of risk on the purchase. This strategy helps reduce the burden and stress of trying to time the market to make the most out of your purchase and is one of the best strategies for investors that have a small amount saved up.
In investment, bigger amounts will generate higher returns than smaller amounts because of its ability to buy multiple assets. The investor will have the resources to be able to park their funds into different asset classes. These asset classes could include, investing into the Stock Market, Real Estate, Precious Metals and Bonds. The investor would be able to create avenues from themselves that can generate passive income such as Rental Income or being a Silent Partner in a business.
Due to having a larger amount to invest, the investor can also practice Diversification. Diversification is the act of spreading investment dollars across a range of assets to reduce investment risk. For example, if you own only one stock and it falls 20 percent, the value of your investments is down 20 percent. By adding in even one more stock that rises (or even doesn’t go down as much) when the other one falls, it should improve your portfolio. It’s part of what’s called asset allocation, meaning how much of a portfolio is invested in various asset classes, or groups of similar investments.
Such strategies are only really possible for those who have the ability to invest a large sum of money, however those who don’t have such an amount shouldn’t be discouraged as there are methods they can use to build up wealth on a budget.
You can create Financial Freedom (replacing your active income with passive income) for yourself when your invested money works efficiently to generate adequate income for you. Passive income can be a great way to help you generate cash flow. Some methods to create a passive income source include Rental Income which is one of the most popular methods. Investing in to companies with dividend-yielding stocks is another popular method, here the investor will receive payments from the company at regular intervals. Another popular method is to become a silent business partner, after your investment you’ll receive profits regularly and you wont have to contribute to the businesses daily operations.
Financial Freedom can be achieved by disciplined & consistent saving and investing over a longer period of time. Saving provides financial security for life’s uncertainties and increases feelings of security and peace of mind. Once an adequate emergency fund is established, savings can also provide the tools for higher-yielding investments such as stocks, bonds, and mutual funds. Saving money requires a lot of discipline. However, with firm determination and setting financial goals, it is not a difficult habit to adopt. The best way to be disciplined when it comes to saving is to adopt a budgeting strategy. The most popular method of budgeting is the 50/30/20 method. Here 50% of your income is spent on needs (such as rent, food, loans etc), 30% is spent on wants (entertainment and leisure) and 20% is saved. Starting as early as possible is also another important factor to achieve financial freedom. This is because you can start the process of compounding early so you can reap more benefits compared to someone who starts late.
Purpose of financial freedom is to buy back your TIME from the world so that you are free to spend your time for your choicest activities (spending quality time with family and friends, pursuing your hobbies etc.). Saving up money and investing for your retirement, or spending it on building a passive income source are all goals that can help you to break out of the regular 9am-5pm work life and spend your time stress-free with your family. The sooner you start working, saving and investing to achieve these goals, the easier, more rewarding and faster it becomes.
Lifespan is plastic. Delays in starting savings and investment may make it difficult for you to attain financial freedom. By investing at an early stage of life, you learn a pattern of financial independence and discipline. An early investment teaches the real difference between investments and saving. Never think young age is a barrier to making an investment, as you are never too young to invest. The Little amount of money invested now will put more money in your pocket in the future.
Early investments lead to compounding returns. The time value of money increases over a period of time. Regular investments made right from an early age can reap huge benefits at the time of retirement. Moreover, early investment facilitates your entry in the world of finance early. Your money grows with time. Because of early investments, you can afford things which others might not, at that age. This puts you ahead of others who prefer investing at a later stage of life.