There is no set age for starting to build wealth, and many people are getting started with this stuff in their 50s or even later. I’ve said before that it’s never too late to do this, so I came up with the term ‘New Accumulators’. And there are a few things they need to understand to do it well.
Build on a Sure Foundation
It is essential to build wealth on a foundation which is strong and secure. Get some proper insurance in place so your savings aren’t at risk if you can’t work. Build yourself an emergency fund and have a clear idea of your regular expenses. Your personal finance management MUST be in order.
When to Start Investing
For those new to investing, often it is less about where to start and more about WHEN to start building wealth, and many people keep money in cash. However, there are triggers to help you move forward with investing, when you’re ready.
If you’re Planning to Invest, Don’t. Invest in Planning
It can be so tempting to pile in and chuck money into investments without much thought. But that can lead to sub-optimal outcomes, so it’s better to do some thinking and develop a plan. It doesn’t have to be complicated, but have some goals and timescales in mind. These will help you make a solid start and avoid mistakes.
Risk Tolerance and Capacity for Loss
Risk is an inevitable part of investing, and is closely linked to capacity for loss, although there are differences too. When starting out with investing, there’s a danger that we choose assts unsuited to our goals, which can lead to unnecessary stress and unwise behaviour.
Investing is different from saving in that it involves converting your money into real assets, things which produce an income, and which can increase or decrease in value. You need to understand how they work, what makes the assets different from each other, and similar to each other, and how you blend them to create asset allocations which will build wealth predictably.
The single biggest determinant of our wealth-building success is not our chosen asset mix, market timing or even the power of compounding, but our behaviour towards our money, and that can derail our financial success.
As emotionally-driven beings with a tendency towards self-preservation, we can struggle with making logically correct decisions on our investments, which can have a negative impact. Unless we can understand our basic biases and tendencies early on in the investing process, we risk big issues later on, once those tendencies are entrenched.
Before you start with investing, here are three things you should do:
1. Take a Risk Tolerance Test: If you’re a new investor, this is a key step. FinaMetrica offer one for £30, which you can access here: https://meaningfulmoney.tv/myrisktolerance. Don’t skimp on this and use a free quiz, because this one is a professional, scientifically-based calculator, and can give you a good starting point for thinking about investment risk.
2. Think About Your Goals: Spend some time thinking about what you really want to achieve with your finances. Do you want to aim for a particular target – financial freedom by age 55?Be wary of goals like ‘I want to be rich’ – we need some specifics.
For example, what number would you need right now to be financially free? As a rule of thumb, take your current monthly expenses, less your mortgage and multiply them by 25. Then add your mortgage balance to that number. There will be other factors too, but this is a good start.
3. Join the MeaningfulMoney Facebook Group: With over 1,200 members asking intelligent questions, this is a great place to find answers and like-minded people to interact with in a friendly environment. Go to https://meaningfulmoney.tv/community and ask to join. We usually respond within 12 hours.