OVER MY PAST FEW WEEKS, I have scrutinized the topic of spending, its direct relationship with saving and investing, and to some extent how thoughtful spending can steer one closer to one’s financial goals.
Today, I move on to take a deeper look at investing. I wish to establish the premise that once you earn a reasonably comfortable income, you have ample opportunity to become wealthy in your lifetime. Maybe you will not reach millionaire status but you can become wealthy with careful management of your income.
Wealthy in this case is a state where you have saved and invested your income to the extent that you are able to maintain your lifestyle for an indeterminate period without having to continue to work. Simply, it is living within your means, and eventually having the means to live at the same standard without having to work again.
A powerful analogy is to see your income as your earnings being poured into a glass. You control how this liquid flows in and out of the glass. By spending for consumption, the liquid escapes. By saving, you keep some of the liquid.
By investing, you replace some of the liquid that evaporates due to inflation. If you are able to sustain a rate of return on your investments that exceeds the rate of inflation, then you will gain more liquid in your glass than just the amount saved from consumption.
Given how being wealthy is defined, with care, even a low income earner can become wealthy. He would attain this enviable status by saving regularly and making wise investments … and so reaching the point where his investment income equals or exceeds his working income.
With this kind of wealth comes peace of mind and satisfaction. The earner has strategically employed part of his earnings to work for him rather than slaving well into retirement and maybe beyond. The choice is entirely his to continue to work or not.
Have you ever been asked by your bank to provide a “statement of affairs”, sometimes called a “net worth statement”? Using the same analogy with the glass, this is when your banker gets to know a lot about you, because the banker is able to look at your earnings over the years and see what has been kept in your glass.
That banker will be able to assess your propensity to spend, save and invest at a glance. This gives the banker a good idea as to what type of bank client you will be. Why leave such an important assessment to the bank? Wouldn’t you wish to know how well you are doing from year to year?
I say that this is an assessment you should make of your finances at least once per year. There will be no better motivation to becoming wealthy than will come from a regular look at your progress.
When you have saved and invested enough that you can generate income from your various investments that is equal to or more than your normal living costs annually, you have moved into the realm of real wealth. Instead of working, you can enjoy more leisure and allow your money to work for you.
Some people set a target of becoming a millionaire. However, given the meager investment rates prevailing, you may need more than a million dollars in investments to sustain yourself in the long term without having to work. No matter what, becoming wealthy boils down to maintaining sensible spending, saving and investing habits.
• Louise Fairsave is a personal financial management advisor, providing practical advice on money and estate matters. Her advice is general in nature; readers should seek advice about their specific circumstances.