Money

Mistakes to Avoid When Building Wealth

Mistakes to Avoid When Building Wealth

Six Mistakes to Avoid When Building Wealth or go Broke!

This article will explore the mistakes to avoid when building wealth. Building wealth can sometimes feel like a lonely journey with one step forward and two steps back. We live in an era where a blasé attitude to money is celebrated and the accepted norm.  

To emphasise my point a recent study in the UK found that two fifths of their working age population have less than £100 in savings. This is pretty shocking considering the UK is one of the richest countries in the world.

Whilst many factors can influence individual wealth including some outside of our control, the biggest factor in individual wealth remains the individual themselves and the decisions that they habitually make.

Never too late
Never too late

Whilst learning about wealth building and personal finance might not be fashionable it can prove to be incredibly rewarding and change your life. As an experienced finance professional I have seen first-hand what separates many wealthy individuals from the norm.

In an era when the norm is to be broke and buried in debt you don’t want to be normal! Be strange and make decisions with money that will give you the future that you dream of. Below are the six biggest mistakes to avoid when building wealth, avoid these or be broke!

The points below are generic and for consideration only and are not offered as guidance or advice. When investing you should always consider professional advice from a suitably qualified and competent financial adviser who understands your individual needs and circumstances.


1. Living at or above your Means

The first mistake to avoid when building wealth is living at or above your means. Working in finance I have always been surprised by the disconnect between income and wealth. I have seen many people on moderate incomes accumulate great wealth and many people on great incomes accumulate nothing at all. Why is this?

Well, the formula for building wealth is simple. Take what you spend from what you earn and the cumulative position at any one point in time is your level of wealth. Whether you earn $100,000 a year or $1,000,000 a year you will only accumulate wealth if you spend less than you earn.

This explains why we see so many rich celebrities and sports people going bankrupt. They may have earned more money than most people will ever see but our culture celebrates spending more than saving.

Consumer Debt is at Record Levels
Consumer Debt is at Record Levels

The number one factor in wealth accumulation is living below your means and saving money on a regular and habitual basis from any income received. The biggest mistake that so many people make is they don’t save and many even borrow to have the things that they truly can’t afford.

The financial author Dave Ramsey has written some excellent material around these principles and to learn more I would highly recommend his book the total money makeover – View on Amazon.


2. Taking Excessive Risk

The second mistake to avoid when building wealth is taking excessive investment risk. A well thought out high risk investment strategy can be fine providing when you understand the risks and have the capacity to accept total loss.

Investing money however at very high risk purely in the hope of a high return is more gambling than investing. As strange as it seems this kind of mentality is common and it is not unusual to see people taking high risks with money that they can’t afford to lose in investments that they don’t understand.

When you look to investing consider taking professional advice and don’t be drawn to taking excessive risk for the chance of quick and easy returns. Adopt a strategy that is consistent with your investment timeframe, capacity for loss and willingness to accept risk. For more around the factors to consider when investing see How to Stop Making Dumb Investment Decisions.

Understand The Risks
Understand The Risks

One of the reasons taking excessive risk often fails is the investor cannot afford to lose the money and because of this any fall in the investment can trigger an emotional rather than logical reaction. This often results in them selling their investments low to protect what’s left or doubling up to try and recoup their losses.

When investing you should always consider professional advice from a suitably qualified and competent financial adviser who understands your individual needs and circumstances.


3. Failing to Diversify

The third mistake to avoid when building wealth is not diversifying your investments. I recently read a study looking at the reasons why wealthy individuals were more likely to retain and continue to build their wealth.

A key finding of that study was that wealthy individuals were much more likely to diversify their holdings and take a more balanced approach to investing. Some of the most successful investors in the world such as Warren Buffet don’t diversify, however unless you are an internationally renowned investment genius putting all of your money in one asset could be a quick route to skid row.

Diversification is a risk management technique that mixes a combination of different types of investment and holdings within one portfolio. The rationale behind diversification is to reduce the risk that the failure of one company share, segment or asset class can wipe out a portfolios full value.

By diversifying investment risk can be spread and thus help protect some of an investments value in volatile markets, although it’s important to note that investment risk cannot be diversified away in full. Diversification is about spreading an investment across lots of different areas to achieve the optimal balance of risk and potential reward for your chosen risk level.

When investing you should always consider professional advice from a suitably qualified and competent financial adviser who understands your individual needs and circumstances.


4. Buying Liabilities

The fourth mistake to avoid when building wealth is buying liabilities. It’s easy to fall into the trap of accumulating liabilities that over time can completely decimate your wealth building capacity.

An example of buying a liability could be buying a luxury car or boat. Many people would consider these to be assets but they are not assets in a wealth building sense as they cost money upfront and usually generate no income or growth.

You could spend $100,000 on a luxury car or boat, which next year has depreciated and is now worth $50,000. Add to the mix the expensive upkeep, repairs, moorings etc. and buying liabilities can suffocate your wealth building capacity.

It’s fine to buy liabilities but these should be within your means and a small portion of your net worth. So for example having half your net worth in a new Mercedes is pretty dumb and the reason so many people fail to build wealth.

One of the biggest differentiators between the wealthy and the poor is where they spend their money. Whilst the poor often buy liabilities, the rich often buy assets such as stocks, bonds and rental properties. What all assets have in common is you expect them to make you money rather than just cost you money.

The financial author Dave Ramsey has written some excellent material around these principles and to learn more I would highly recommend his book the total money makeover – View on Amazon.


5. Following the Herd

The fifth mistake to avoid when building wealth is following the Herd. The majority of people are broke so best not to do what they do. This principle should be applied generally but especially when it comes to managing your investments.

The business news defines reality for many people and can set a tone of market chaos or invincibility. The reality however is that markets go up and they go down. If you investing long-term, in a well-managed diversified investment you have a high probability of growing your money based on historic performance. A note of caution here that whilst historic performance supports this, historic returns are not a guarantee of future returns.

There a no guarantees with investing other than it’s almost impossible to time the market. I have seen so many investors panic sell after a sharp drop in markets, only for markets to quickly recover and push on to new highs with investors unable to benefit from that recovery.  

Good Things Take Time
Good Things Take Time

When investing long-term, take advice if you need it, select an appropriate approach and stick with it unless something fundamental changes. There will always be events that disrupt the markets but don’t get pulled into the dramatics, if you are investing long-term remember this and stick to your guns. The most successful investor the world has ever know said it best –

Warren Buffet “Be fearful when others are greedy and greedy when others are fearful.”

When investing you should always consider professional advice from a suitably qualified and competent financial adviser who understands your individual needs and circumstances.


6. Building on Sand

The sixth mistake to avoid when building wealth is not starting with the basics. Before investing it can be sensible to ensure your overall financial position is sound and start your investment journey from a position of strength. 

Investing when you’re heavily indebted or financially stretched could increase the chance that you need to draw on your investments in the short to medium term just to live. This increases the risk that you may need to encash an investments when their value is low.

Solid Foundations are Key
Solid Foundations are Key

Typically it could be beneficial to focus on clearing high interest debt such as credit cards or unsecured loans before considering investing at all. Having surplus income each month and healthy cash balances for emergencies protects you and your investment strategy by better enabling you to adopt a long-term investment approach and ride out market volatility.


Conclusion

The financial author Dave Ramsey has written some excellent material around these principles and to learn more I would highly recommend his book the total money makeover – View on Amazon.

I hope you found the information in this article useful. You may also like How to Stop Making Dumb Investment Decisions, How to Achieve Anything and How to Accumulate Wealth From Nothing.

Good luck with achieving your financial goals and please feel free to share or comment on this article with what you are working towards and how you are doing! Please also subscribe if you would like to be notified about future posts as soon as these become available.

Wishing you and all those you love health, wealth and happiness!

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