To gain true financial independence, you need to learn how to build wealth with your money.
Unlike us, money can keep working around the clock — without rest or sleep.
So, the smartest way to build wealth is to learn how to let your money do the hard work for you.
How do you achieve that? Here are 3 important wealth-building tips to hold close to heart.
1.Spend less than you earn
The only money that can work for you is the money that you have not spent.
However, “spending less than you earn” is easier said than done; and while it takes grit, it also requires budgeting.
A traditional budgeting system that has proven useful is the 50:30:20 rule.
Here, 50% of your income goes to necessities (housing, food, utilities). Thirty percent goes to wants (vacations, dinners, cable, internet). And the remaining 20% goes to savings and investments.
2.Invest your money in a passive fund
Investing helps you earn compound returns — the money you invest earns interest and that interest also earns new interest, on and on.
There are two broad investment philosophies: active investing and passive investing.
In the former, investors try to beat the market.
To beat the market, active investors incur high fees and taxes. Sadly, they have continuously underperformed the market.
Passive investors, on the other hand, track the performance of the market, usually through a market index, while incurring lesser fees and taxes.
Therefore, it’s better to embrace passive investing. And the best way to do so is through an ETF (exchange-traded fund).
But what is an ETF?
An ETF is a basket of securities that track the performance of a market index and is traded publicly on the stock exchange market.
Because ETFs follow passive investing principles, they generate low fees and low taxes.
3.Build a diversified portfolio
Investing comes with risk – the risk of losing your money. To make your money work for you, you must avoid losing it.
Therefore, as an investor, your goal is to minimise your risk and maximise your return.
A great way to do this is by diversifying your investments in uncorrelated and negatively correlated assets.
Therefore, instead of investing all your money in stocks, you should diversify and include other uncorrelated assets like bonds and Real Estate Investment Trusts (REITs).
The more diversified your portfolio, the better.
And here is where buying ETFs has another advantage.
Because an ETF is a basket of securities rather than a single security, it provides diversification benefits.
When you buy a stock of Apple, you are exposed to all the risks inherent in Apple (and the tech industry).
But when you buy an ETF like the Vanguard 500 Index Fund ETF (VOO), you have exposure to 500 US companies in different industries. So if the tech industry is down, another industry might be up to compensate for it (an advantage you can’t have while holding stocks in one industry).
In other words, every ETF you buy is already diversified.
When you now buy ETFs of different assets – stocks, bonds, and REITs, for example – you have an additional level of diversification.
In the end, your risk is minimised and your return is maximised.
The only way you can avoid working for money all your life is to make your money work for you.
To do this, you need to spend less than you earn and start to invest.
Opening accounts with robo advisors like Sarwa, an online financial advisor, can help. Sarwa helps investors to build a diversified portfolio of ETFs that match specific risk tolerance profiles and time horizons.
All you need is to open an account for as low as $500, and then watch your money start working for you.