Investing is key to building your wealth and improving your financial future. But how do you get to the point of being ready to invest?
We’re here to look at how to sort out your money to prepare to grow your wealth and start investing, looking at:
What wealth is
How to sort out your money to be ready to invest
The four levers that will determine your financial wellbeing
How to find the money to start building your asset base
5 key points about wealth
What is wealth?
Wealth doesn’t mean being rich, or having lots of land. Wealth just means that you own more things than you owe. It allows you to choose the lifestyle you want to live and create a legacy with your money.
If you want to create wealth and live a life of financial wellbeing, there’s an important concept to understand: not every pound (or dollar, or yen) is created equal. 🙅♂️
What do we mean by this? Depending on how you use your money, it can lead to more or less wealth.
If you use your money to make more money (by saving or investing), your wealth will grow.
However, if you take on debt, this can be very expensive. You’re likely to pay a lot more for your debt than you earn on your savings or through investing. This means you’ll end up with less and put yourself in a less stable financial situation.
How do I sort out my finances?
Although investing is key to long-term wealth, that doesn’t mean you should start investing right away. It’s a good idea to make sure your money is sorted and that you’re in a comfortable financial position first. Investing carries risk and there’s no certainty that your investment will be profitable.
These are the steps you might want to follow before you consider investing:
1. Get your budget sorted
First off, make sure you’ve got your budget sorted. Budgeting isn’t the most fun part of personal finance but it’s the key first step you should take before doing anything else.
This shouldn’t be too complicated at first – it’s just a case of working out what money is coming in and comparing that to what’s going out.
Our budget calculator will help you with this.
2. Get more coming in than you’ve got going out
Once you’ve worked out your budget, try to get to a place where you have more money coming in than going out – so you’re not spending all your income each month. You can achieve this in lots of ways, including:
Taking on a part-time job
Cutting back spending on luxuries
Selling some of your stuff
3. Pay off as much debt as you can
The faster you can pay off your debt (excluding student debt in the UK – this is what’s known as ‘good debt’), the better. It’s a good practice to try paying off the high-interest debts first. It can be difficult to save if you’ve got a lot of debt and that debt keeps growing due to interest rates charged on top of the amount you owe. Try using your surplus money to pay off your debts until they’re gone!
If you need more ideas on how to pay off your debt, check out this article.
4. Set up an emergency fund
Things go wrong all the time. So it’s important to set some money aside in an emergency fund.
Your emergency fund can be anywhere between one and twelve months’ worth of expenses (one month is a good amount to aim for while you’re studying) that you save up, set aside and promise yourself not to spend except for in an emergency. Then, if you have to travel back home for an emergency, your laptop breaks or something else unexpected happens, you won’t be left scrambling for money.
As it shows above, it’s best to do this at the same time as paying off your debts – that way, if an emergency comes up while you’re paying off your debt, you won’t be left without savings, which could set you back a long way.
5. Save until you’ve got enough money to feel comfortable
Now that you’ve paid off your debt and saved up an emergency fund, you should continue to save until you feel comfortable with how much money you’ve got. This amount will be different for everyone, but you should set a number you’re aiming for. As with anything, having goals really helps when managing finances.
6. Make a plan
Take time to research what you’re going to invest in, how much you’re going to invest each month and make any other decisions about your investments. Again, this will be different for each person – your risk tolerance and goals will determine a lot of the decisions you make.
The four levers of financial wellbeing
Your financial wellbeing can be determined by the relationship between these four factors:
Income = money coming in
Expenses = money going out
Assets = things that you own
Liabilities = things that you owe.
Most people’s financial position looks like this:
The vast majority of their income goes towards expenses (spending on necessities and luxuries)
A small part of their income goes to paying off their debts
A tiny part of their incomes goes towards buying assets and building their asset base
Anybody can get by like this, but it’s only that – getting by. To prosper financially, you’ll want your situation to look more like this:
A part of their income goes to expenses (although we want to minimise this, there’s only so much we can cut expenses, of course – we’ve gotta pay to live 🤷♀️)
A part of their income goes to paying off debts, with the goal of eventually being debt-free
A lot of their income goes to building up their asset base
While you’re a student, it’s likely your financial situation will look more like the first example, and that’s okay! You’re not likely to have much money coming in and there’s going to be a lot of money going out.
But the goal as you move through life and earn more is to make your money work for you and go from the first financial situation to the better, second situation – where you’ll end up debt-free and with a large asset base! 💪
Finding the money to build your asset base
At the moment, it might be difficult to imagine having extra money to invest in assets, with all the expenses you’ve got and hardly enough (if any) money to make it to the end of the month. Hopefully, this will help to change that.
There are three scenarios you can be in with your money:
Scenario 1 (left): you’ve got more money going out than you’ve got coming in. This is bad as you’re likely to have to borrow money to make up the difference, which is expensive and likely to push you to financial difficulty. Unfortunately, this is a situation lots of students find themselves in
Scenario 2 (middle): you’ve got exactly the same amount of money coming in as you’ve got going out. This is much better than the first scenario as you won’t need to take on debt, but still isn’t ideal as you’ll have no money left after spending
Scenario 3 (right): this is the goal – you’ve got more money coming in than you’ve got going out. This will allow you to pay off any existing debt you have, save up money and then start investing 😎 This is the only of the three scenarios that lead to you growing your wealth
At a minimum, you want to get to the middle scenario, which will allow you to get to the end of the month without borrowing money. But ideally, you want to be on the right-hand side as the middle option won’t allow for any leeway if you come up against any issues now or later in life.
Plus, if you spend everything that comes in each month, you’ll have no money set aside when you retire – the State Pension isn’t very much (and might not even be around when you retire), so you’ve got to start looking out for your future self now, or you’ll have no money for retirement.
5 key points about wealth
Don’t build your castle on sand – you can’t build wealth if you’ve got lots of debt (not including mortgages or student loans). Try to get rid of debt before you start investing (unless the debt you’ve got is 0% debt: in this case, investing might make more sense than paying it off)
Live within your means – don’t use your money to try to look rich – use your money to get rich 💰
Start small, finish big – you’re never too young to start investing. Don’t invest money you can’t afford to lose and don’t invest on impulse
Invest for the long term – with life expectancy at an all-time high, take care of your future self as soon as you are able.
Protect what you’ve built – make sure you have insurance, and when you do invest make sure you’re investing with companies that are seen as secure
Here’s the recording of the full investing webinar with Vivi:
Blackbullion is an education company and is not authorised or regulated to give advice. All information presented should be considered educational and not guidance and Blackbullion takes no responsibility, and can not be held responsible, for decisions made, or the consequences of those decisions. You should seek professional financial advice.