Don’t be fooled. You may be a high earner, but you cannot call yourself wealthy until you have accumulated CAPITAL.
Income and wealth have incorrectly become synonymous in Western culture. Whilst the two concepts often go hand in hand, using the terms interchangeably is misleading. The UK’s most wealthy individuals don’t necessarily draw the largest incomes. Similarly, those with high incomes, such as top athletes and highly paid executives may find it difficult accumulating wealth because of the corresponding high costs associated with their lifestyles.
I like to think of income as the amount of money someone receives on a regular basis, while wealth is how much capital a person has. Capital can sometimes be tied up in various assets such as property, thereby limiting accessibility. Those who are said to be asset rich but income poor may be considered wealthy individuals, however life for them could feel like a constant financial struggle.
So how do you turn income into wealth? Not everyone can accumulate wealth, but most people with a decent income can build wealth if they follow the following principles.
1: Don’t build your castle on the sand: Trying to accumulate wealth whilst running significant short term non-mortgage debt is akin to building a castle on sand. Your first priority should be to get out of debt. Imagine trying to fill up a bucket with water. The interest you are paying on your debts is a bit like having a hole in your bucket. Much better repairing that hole before attempting to fill your bucket.
2: Live within your means: If you spend absolutely everything you earn, you’ll find yourself back to square one time and time again, unable to get ahead. It is incredibly important to understand your income and expenditure. Make a list of all your outgoings and compare this to the income you receive each month after tax. If you’re spending more than you earn, you’ll soon end up in debt. You can get ahead by reducing your expenditure through careful budgeting and cutting out frivolous expenditure. Or you can get ahead by increasing your income through changing jobs or getting that promotion.
3: Start small, finish big: Your circumstances will dictate how much you can save but aim to save 10% of your net income as a starting point. If for example you take home £2,000 per month, at least £200 per month of that should be going into a regular savings plan of some sort. As time goes on and your fund builds, you’ll find yourself more motivated to save more. The snowball effect of this can turn humble beginnings into a large nest egg over time.
4: Invest for the long-term: There are a wide and exciting range of options for the regular saver in the UK today. If you’d like to keep it simple, you could save up to £15,000 per annum tax free in a Cash ISA. The more sophisticated could consider a Stocks and Shares ISA or a Personal Pension or SIPP (Self Invested Pension Plan) which would typically carry a degree of investment risk. Alternatively, you could invest in an astute combination of all options. At this point, speaking to an independent financial adviser to help you make sense of the myriad of options out there would make a lot of sense.
5: Protect what you have built: Start by ensuring that you have the right insurances in place to cover any periods of unemployment through illness or accident. Then protect what you have built by using a life-styling strategy for investing. This involves taking a more aggressive investment approach in the early years of your investment when sums are smaller, then scaling back on risk as the value of your fund becomes bigger and more significant.
A high salary can help an individual appear wealthy, however building real wealth requires commitment, sacrifice, lots of patience and a long term mind-set. Have you got what it takes?