The “Game Plan”
Wealth Equation 📖
- Wealth Accelerator: Investments
- Wealth creation is driven by:
- Savings Amount = Salary x Savings Rate (% of Salary)
- Compound Interest on Investments via
- Return on Investments
Build Wealth by... 🏗️
- Increasing your earning potential (how?).
- Increasing your savings rate - without sucking all the joy out of your life.
- This can be achieved by spending extravagantly on the things you love and cutting costs mercilessly on the things you don‘t (recommended read).
- Investing your savings into assets that grow in value and have superior returns with well-diversified risk.
- Starting as early as possible and repeating the above-mentioned steps.
- Tip: Automate the process (recommended read).
Choose the stock market as your “workhorse” and starting point for wealth creation.
- Stocks allow you to participate in the value creation of the world economy 🌍
The world economy is anti-fragile, so are your diversified stock investments (if you hold on to them!).
Historically, stock market returns are on average significantly higher than the return of other asset classes 📈
- BUT: 1.) stocks are more volatile 2.) you need to broadly diversify your investments.
- Don’t have a trading mentality, buy-and-hold your stock market investments for a long time.
- Don’t pick individual stocks, invest in broadly diversified ETFs instead.
- A stock portfolio consisting of broadly diversified ETFs offers the best risk-reward relationship for your investments (here’s a good starting point for constructing your portfolio).
Real-Estate often doesn’t 🏠
- If you’re starting from zero, achieving “financial freedom” on this path might be very hard as your income, long-term investments returns, and time are generally limited. You probably won’t get rich 😢
- However, “financial security” is quite easily possible, and “financial independence” is realistic (given enough time and savings). Both can add tremendous value to your life by providing financial stability and by gradually increasing your financial independence 😁
- Investing gives you a very robust and time-tested way of building wealth if you’re aware of the pitfalls to be avoided and are willing to pay the necessary price.