Setting out on your wealth creation journey is a daunting task. There are a lot of rules and regulations and jargon to understand, and it can become overwhelming quickly. The best place to start is with the basics so you can comfortably start putting your extra money to work. This post explains some beginner knowledge to get you started with your wealth creation strategies.
Budget and reduce debt
Understanding your current financial situation is the first step to devising wealth creation strategies. It is also the foundation of good financial management.
Your budget should include all of your income and expenses to assess if you’re living within your means. This will give you an idea of where you should improve, or it can show you if you have extra money that you can put to work by investing it.
If you plan on moving forward financially, you should reduce or eliminate high-interest debts like credit cards. The longer you take to pay it off, the more interest you will have to pay.
Set clear and relevant goals
The next step in devising wealth creation strategies is to set goals that have a clear timeframe.
To set goals look at what you want to achieve and what timeframe you want to achieve it in whether it’s short- or long-term. This in turn should help you understand what types of investments will help you achieve your goals.
Understand the major asset classes
There are four major asset classes that perform differently and have different levels of risk from each other. They are:
- Cash – this is the money you have in a savings account or term deposit that earns interest. The interest that you leave in your account can also earn interest – this is called compound interest. Cash assets have little to no risk and generally provide a stable rate of return. Due to the nature of this asset (most liquid) you can access you money when you need it.
- Bonds – bonds (or fixed-income securities) are issued by the Australian Government or companies. Essentially, you’re lending money (capital) for a set period of time. In return, the government or companies will pay you back with regular interest amounts (coupon payments), and at the end of your term, they will give you back your capital.
- Tangible assets – Real estate is the most common type of tangible assets, but this includes commodities like oil, gold, silver, livestock, etc.
- Shares – also known as stocks and equities. This is partial ownership of publicly listed companies in Australia and worldwide that are traded in the Australian Stock Exchange (ASX). Shares normally outperform other asset classes in the long-term but can be volatile in the short-term.
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Create a risk profile
Before you start to invest, it’s important to understand the risk you are willing to take and what type of investment types align with the risk you’re willing to take. Generally, the higher the risk of investing, the higher to potential returns are. But the opposite is also true, so you should evaluate what type of risk you want to take and then take steps to manage those risks.
Take steps to manage risk – diversification
It’s not recommended to rely on only one investment—especially with investing in shares. It’s good to cover your bases and create a broad investing portfolio. When it comes to shares, don’t invest in only one company or sector and branch out.
Seek financial advice
Sometimes, the best place to start is to seek financial advice from experts. At Wealth Connexion we offer wealth creation services to help you strategize and manage your wealth creation for retirement. Contact us to get in contact with our team at Wealth Connexion, and we can give you peace of mind knowing you’re making informed decisions.