When it comes to creating wealth, you need to tackle it from various aspects. Investing is not only about money. It is about your desires, what drives you, your human capital, and your relationship with debt.
Get these three right and you are on a solid financial footing.
#1: Find the why.
It’s a vicious cycle. You don’t invest because you have zero savings. You have no savings because you have zero motivation to save. You lack the motivation because there’s nothing driving you.
Saving has such negative connotation to it because it is associated with sacrifice. So let’s turn it around. Think of what you really want. What will bring a smile to your face.
- Status
- Experiences (such as a hot air balloon ride in the Sonoran Desert)
- Lifestyle (a global cruise every three years)
- Accumulating gadgets
- Building a fabulous home in your home town
- Not wanting to retire poor.
These are just some examples to help you get clear on your purpose. There is no right and wrong. There is no good and bad. There is no normal and absurd. Just be true and honest to yourself. And please don’t look at anyone else’s. Someone else’s pleasures may not bring you happiness. What fulfils them may not be your cup of tea.
If money is an end in itself, then you will never be satisfied or even motivated to save. That is why it is essential to have goals, because it gives you clarity on what really matters to you. Money is a just a tool. A transactional tool. So ask yourself, what is it that I want my money to do for me? What is it that I really would love to have?
Action Plan: What are you saving for? Find the driver. Once you know what you want to spend your money on, then you can cut costs mercilessly on the things you don't care about, and invest with a focus. I have covered this in more detail in 3 questions to quickstart your savings.
#2: Get debt free.
When your lifestyle is being funded by debt, you are swimming with the sharks.
There are three ways to comprehend how expensive debt can be.
- There is a huge emotional cost to it. Imagine getting a salary cut or facing a job loss. That debt will hang on your head like a sword.
- Recognize that the 18% or 24% or 30% you’re paying in credit card debt is costing you a lot more than you could ever earn anywhere else.
- The more debt you have to service, the more your savings lag. This will have long-term repercussions cause you need to start saving early to let compounding work in your favour. All the money going towards interest payments, if invested well could add up to serious money over a young investor's time horizon; wasting even a few of those early years can have a decent-sized opportunity cost.
Action Plan: If you are in debt, work on paying it off immediately. There is an immediate return there. Do read The Psychology of Debt Repayment where you will get help and strategies on how to get debt free.
#3: Invest in yourself.
When we look at investing, we tend to only look at financial capital – the actual money you have to invest today. What is almost always overlooked is human capital. Which is ironic, because one of the best investments you will ever make is in your own human capital.
Human capital is effectively your ability to earn money over time. It encompasses your skills, education, experience, talents, network, health, attitude – and is the most valuable asset you have in your lifetime.
When it comes to investing our money, we want to put it use to get a positive return over time. What about human capital? These are the sources of your lifetime earnings power. Can you invest in these to reap returns over time? Where is your time and energy being spent? Where is your focus? In what relationships are you investing?
Explore all avenues. Enrolling for a degree. Pursue certifications. Develop news skills. Attend the right workshops. Look for a mentor. Read about the subject you want to increase knowledge in. Listen to relevant podcasts. No matter your life stage, staying current on the latest major technology developments and news, both on and off the job, is a crucial way to ensure that you stay relevant.
Set goals and smash them. Get super focused. Stay intentional. Never stop learning.
Action Plan: Use RoI (return on investment) as a compass to help you identify the best use of your financial capital and human capital. And that means wisely allocating your time, energy and resources to what matters. Do read Your money goals should match your life.
Larissa Fernand is an Investment Specialist and Senior Editor for Morningstar India. You can follow her on Twitter.
