The first step of building wealth is to make money either actively or passively. The next is to manage your spending and adopt a set of daily habits that’ll keep you disciplined, motivated, and successful.
The next challenge is to build and secure continuous wealth. In other words, you’ve ticked the first two boxes, but what can you do now to protect your assets and keep your money growing?
Below, we outline the key pillars of wealth-building:
· Making money
· Goal setting
· Saving money
· Protecting your assets
· Tax implications
We also explore how the above steps can help you build sustainable, long-term wealth and find new opportunities for success.
The first pillar of wealth building is making money; the two basic ways to do this are through earned or passive income. Earned income is your salary – the foundation and common driving force of a wealth-building strategy, and passive income typically comes from low-maintenance investing methods, which is an important factor that contributes to increased wealth.
One of the most popular passive investments is property, which generally offers a good likelihood that its value will appreciate over time. There are many ways to benefit from the property market such as renting buy-to-lets, or you can opt for indirect methods like REITs or bonds.
Whether you’re planning for the next two or 10 years, having a clear vision and a suitable plan of action is a crucial part of building wealth and staying on track. Perhaps you’re looking to buy another property, saving for early retirement, or planning a luxury family holiday – whatever your motivation, it’s important to outline your goals and how you’re going to achieve them to make sure that your actions and habits promote rather than endanger your objectives. Your financial advisors can help you map out a realistic, flexible, and focused journey, and don’t forget to review your progress and adjust it as needed.
To keep your wealth growing for the long term, saving money is just as important as making it. A simple budgeting system like the 50/30/20 rule of spending can be a useful way of managing your funds and making sure that your necessities, wants, and savings are well accounted for. You may need to adjust the ratios to suit your circumstances, but this easy-to-use rule encourages financial balance, promotes consistency, and offers a healthy practice to help build long-term sustainable wealth.
You can also simplify the saving process by automating your finances. Setting up a standing order could be a useful way of making sure that your money is automatically allocated to each pot every month without you revisiting the books, and the time you save can be put to better use elsewhere.
Part of your saving goal should also be a healthy emergency fund. Establish a suitable amount that you can afford to set aside regularly for a rainy day so that if your car breaks down or your house needs last-minute repairs, you can keep your wealth protected with the peace of mind that you have spare funds to cover life’s surprises.
Whether it’s making new investments or adjusting your existing assets, growing your money over the long term is an essential part of wealth building. While putting your money in a savings account can be useful, the interest rates are generally very low and inflation can reduce your purchasing power, so the value of your money reduces over time. On the other hand, making worthwhile investments that agree with your financial plans can help you continue to build wealth whilst protecting the wealth you’ve already accumulated.
One of the most important concepts to remember is diversification. Your investments should be spread across a variety of methods and markets to reduce the potential impact of market downturns and volatility over time. For example, if stocks aren’t performing particularly well, you may find solid returns in bonds.
Protecting your assets
You want to protect the wealth that you’ve worked hard to build and the effort it has taken to get there, so as well as having a solid emergency fund, you should also have insurance policies in place. This should include home and life insurance at the very least. You could also consider long-term disability insurance, which would replace your income if you were to become ill or injured. Even if you’re completely healthy, it’s useful to guard yourself and your wealth against any unexpected emergencies with insurance.
A big factor that can drag your wealth-building efforts down is taxes. As you earn, spend, and invest, you’ll be subject to several taxes such as income, capital gains, and corporation tax, so it’s important to understand your tax exposure and adapt your wealth strategy accordingly to minimise your bill. Remember that tax laws can change, so it’s essential to keep up to date with the regulations and how they might affect you.
One way to reduce your tax bill is to make full use of your tax-free allowance. The annual Capital Gains Tax (CGT) allowance for higher-rate taxpayers is currently £6,000 and the Dividend Tax allowance is £1,000. Using up your allowances is one of the easiest and most impactful ways to reduce your tax bill, so be sure to use them before they expire at the end of the financial year.
Another popular tax-free method is making the most of your Individual Savings Account (ISA), which is exempt from income tax and CGT. The current annual allowance is £20,000 (£40,000 for couples). There are several different types of ISAs depending on the interest you’re looking for, your time horizon, and flexibility. Rates are typically higher when you lock your money away for at least 3 years, so you may find a fixed-rate ISA useful, or invest while you save with a Stocks and Shares ISA.
You could also boost your pension as contributions are tax-free. The current annual pension allowance is £60,000 (a £20,000 increase on last year) and depending on your income, you could be eligible for significant tax relief on your pension contributions above the annual limit.
Wealth isn’t strictly defined by how much money you have in the bank – it’s just as important to invest in your education, wellbeing, and personal value through the right set of habits.
Continuous learning is one of the key wealthy habits that can help promote wealth building. Whether it’s on your commute, during a gym session, or simply over a quiet weekend, something as simple as listening to a podcast or reading a book can help you stay up to date with financial news and market conditions and sharpen your financial IQ. This can then translate to better decision-making skills.
Another daily practice that can benefit your financial planning is exercise. Taking care of your physical and mental wellbeing helps keep you healthier for longer and boosts your energy and productivity levels. This means less time off work and more time to focus on accumulating wealth as well as improved work performance.
There are plenty of other useful self-development habits that can promote wealth building such as regular and sufficient rest, a healthy diet, and a positive and outgoing attitude.
Final thoughts on building and securing wealth
Wealth building is a continuous journey that can always be enhanced, so it’s useful to go back over the above checklist every now and then and find areas of improvement and opportunities to keep your money growing. This can be anything from self-care and catching up with industry news to adjusting your portfolio and making new investments. Work with your financial advisors to adapt your plan over time and make sure that your objectives stay in line with your circumstances, abilities, and values.
For more wealth-building inspiration, the Propiteer Capital blog covers a range of topics including finance news, personal finance, and personal development.
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