Though there’s some truth to the adage “money can’t buy happiness,” research suggests it can buy you peace of mind and financial freedom. One of the many perks of accumulating private wealth while you’re young is retiring early and spending your peak years traveling the world.
But how do you acquire private wealth? “Wealth-building” refers to the process of accumulating wealth through income generation via multiple sources, such as a job, assets, and money sitting in a savings account.
Before elaborating on the pillars for wealth-building, keep in mind there’s no sure-shot method to becoming rich overnight. It’s a gradual process that requires consistency and patience to be successful.
Here are key strategies you should consider as you plan your financial future.
Diversify Your Portfolio
Diversifying your portfolio means having a mix of different kinds of assets and investments. The idea behind this approach is that it will give you a higher return. Plus, it will decrease your risk of losing all your money because the funds are invested in different ventures.
For instance, rather than investing all your money in stocks, divide them into different commodities such as real estate investment trusts, exchange-traded funds, and cryptocurrency. However, make sure you’re not going overboard and investing in more assets than you can manage.
Set Up Passive Income
Passive income is the money you’re earning without actively working. Examples include income generated through rental properties, royalties, dividend-paying stocks, and bonds.
Here are some passive income ideas to build private wealth over time:
- Run a blog
- Start your own dropshipping business
- Create and sell your own online course
- Run sponsored ads on Instagram
- Become a host on Airbnb
- Buy a property and rent it
Stay Out of Debt
Unfortunately, many people become trapped by accumulating debt at some point in their lives. Debt is one of the most detrimental things to your wealth-building strategy.
Mishandling your debt can result in poor credit history — further harming your financial standing. Therefore, you should only consider a loan as a last resort option. Instead, use solutions like debt consolidation, budgeting, and tracking your spending to dig your way out of debt.
Some people do not understand how compounding works and they lose money when they could be multiplying their gains. Compounding simply means reinvesting your earnings or interest to create wealth.
Suppose you invest $10,000 for 40 years at 6% interest. If you withdraw the interest income every year, you will be left with $10,000 at the end. However, if you reinvest the interest generated at 6% every year, your portfolio would be a whopping $102,000 in four decades. That’s how powerful compounding is.
To summarize, in order to build wealth over time, you need to diversify your portfolio, have one or more sources of passive income (making money for you even while you sleep), avoid debt, and compound your investments.
Sky Oak is a private wealth management company offering personal business and financial services for individuals and family wealth holders. If you need help managing your wealth, contact us to learn more about how we can help you grow your private wealth.