Investing early has become the common method people are using to build wealth early. FIRE, which stands for Financially independent retire early, is gaining rising popularity with the early generations. The idea of investing as much as possible is to let compound interest do its magic and let you retire on the interest earn. While investing early does have its benefits, there are better ways to build wealth early. In this article, we will look at why investing early may not actually be a good thing. And answer what is the best way to build wealth early.
Why Investing Early may not be Good
I am a pro-FIRE movement activist, I understand why living a lifestyle of minimalism is good for a human and how we should not expect too much in life. It is for that reason that I am able to live off less than 20% of my income and invest most of the rest. This has allowed me to grow a networth to over $100,000 at 24 years old in Singapore. Our current financial culture of investing early into investments and not thinking about the rest is a big worrying sign.
Passive income is the word commonly used to draw investors into any investment. While the word passive income does sound interesting and exciting, imagine retiring by the beach in your early 40s or 50. The truth is, that many early investors who have invested early may be at a downfall. Read on to find out why.
The stock market doesn’t always go up
The problem with today’s financial market is that we are made to believe stock only goes up. With the craziness of the 2020 and 2021 investment market, 2022 is a good wake-up call to those that are heavily leveraged or in margin for their investment. Investors are not able to control and predict where the market goes in the short run. Therefore it is for that reason people should not be over-reliant on the market to build wealth.
Cut down on Social Life
Although the FIRE movement sounds like a great movement to follow in order to learn to build wealth early. The action required to achieve it often requires the individual to cut down on social life by any means necessary. As a fellow FIRE movement activist, I have sacrificed a lot in my social life in order to build stronger financial wealth. However, I realize that the cost of not having a social life I worst than financial well-being.
Don’t get to experience much in your early days
The best way to build wealth is to lower expenses, save as much and invest as much as possible. While that is true, it leaves out the most important factor for every young 20s to 30s, which is experience. The saying money can be made another day while an experience is only once in a lifetime. Experiences is such an important learning point for anyone as it grows and matures a person to make better decisions in the future.
Don’t take risk
“Invest into the S&P500 and forget the rest.” A common saying in the FIRE movement way to reach financial freedom with 10% per annum historical average growth rate at a time. The level of safety has resulted in many investors not taking adequate risks in trying to grow their money faster. Things such as starting a business, while seems risky, may allow an investor to grow their wealth faster. Sadly, risk-taking has always been looked down upon and shut off.
Over-reliant on one source of income
It is increasingly common to hear about working adults working for a secondary income. Typically, this secondary income is used to either supplement on daily expenses or used as a safety net cause the main income goes south. During the Covid-19 pandemic, we learned the importance of not having to over-rely on a singular source of income when the lockdown happen and essentially most businesses came to a halt.
Building wealth is not a steep up-curve many people think
It is not by any means to say that investing early is not a good thing. The issue at hand is how building wealth early is being misrepresented. Investment can’t produce overnight results, a business can’t 10x in a single day, and results from a single day won’t make a big difference.
Building wealth is all about staying consistent, which is why for investing, the habit of dollar-cost averaging is critical. The same goes for starting a business, it takes 10,000hours of practice and experience in order for a business to understand and grow the business well.
What should people focus on early in Building Wealth then?
there is a difference between the two: The rich have lots of money but the wealthy don’t worry about money
Robert Kiyosaki
The problem with our education system is that we are not taught how should one take it in order to build wealth. Here is some important lesson that I have learned in order to build long-term wealth.
Constantly educated oneself and be informed on the markets
Educating oneself does not stop at your school or degree. Staying educated and keeping up with technology is important especially if you are starting a business or investing in technology. A good example of why it is important to stay up to date with good business technology is a company like Apple.
Even though Nokia and Blackberry had a headstart when it comes to the mobile phone industry. Their rate of innovation was a lot slower and improvement to keep up with Apple led to the companies losing a large pie of their market share. To keep yourself updated and relevant to the rapidly changing economy, one must constantly read and do research into understanding up-and-coming businesses.
Take a calculated risk and set a timeline for those risk
Everything you do in life has its inherent risk. Not taking enough risk and taking high risk are both risks one must take in order to build wealth in any investment. So in order to do well in an investment when building wealth, having a deep evaluation of the subject for its risk to rewards is critical. From there, calculating the timeline needed for the risk to be worth it.
The average age of millionaires is 57, demonstrating that it takes three or four decades of hard labor for most people to amass a significant fortune. So take the time to enjoy the process of work, save and invest a portion of your earnings so that you can retire a millionaire.
Investing your money that you don’t need
Although quite easy to understand, many people don’t follow this important rule on money management.
- Build an emergency fund (grow your emergency fund equal to 6 ~12 months of monthly expenses)
- Use the remaining amount of money to invest in yourself first whether it is for reading books or going to courses.
- Build a sizeable investment portfolio and increase income to invest more
- Diversify the investment portfolio in other assets with high and low risk in mind
Building wealth shouldn’t be hard but it does take an enormous amount of time in order to reach there.
Build multiple sources of Income
Depending on a singular source of income is a death wish if shit hits the fan. Having multiple sources of income to depend on is key, the average millionaire has at least 7 different income sources. They are as follows:
1. Dividend income from stocks owned.
2. Earned income from paychecks.
3. Rents from rental real estate.
4. Royalties from selling rights to use something they’ve written or invented.
5. Capital gains from selling appreciated assets.
6. Profits from businesses they own.
7. Interest from savings, CDs, bonds, or other lending activities.
To be able to achieve all 7 different incomes is tough. This is why focusing on at least 3 different sources of income should be the number 1 priority. Going by this list, earned income, interest from savings, and profits from business (or side hustle) should be the easier ones for beginners to tryout.
What is true Wealth to you?
There are a total of 4 types of wealth one can achieve, these are:
- Money (financial wealth)
- Status (social wealth)
- Freedom (time wealth)
- Health (physical wealth)
To a dying person, the greatest wealth is time. To a starving person, having another meal is the greatest wealth. And finally to a working adult, having money to dictate what you want is wealth. We all have the power to achieve all four types of riches in our life, and it is only when we do so that we may begin to experience the wealth of fulfillment. This occurs when all four categories of wealth are present at the same moment and in the proper proportion. This is the goal for which we should all strive.
Each of these sorts of wealth necessitates years of hard work, practice, humility, learning, and comprehension. Building wealth should be considered as a lifelong process with no end point because there is none.
