5 ways to build wealth for early retirement

Q: I am an OFW working in Maldives. I have always wanted to save and invest but I don’t know where to start. Though I have saved some money in the bank, I am afraid I may spend this eventually if I don’t invest it properly. Can you help me? —Ali Keith by email

The road to financial freedom is very simple but it is not an easy task. It takes a lot of discipline, sometimes lifestyle change, for you to save consistently and build wealth over time.

Most people tend to spend rather than save when they earn excess cash from their income. It is not uncommon to see many people prefer to live like the rich than become wealthy. If you are committed to becoming wealthy, you may need to change some of your spending habits. Spend only what is necessary, cut down on discretionary expenses and increase your savings.

The more cash you save, the more capital you will have for investment. Keeping your money in the bank is not an investment. You have to grow your money by making it work for you. This is the challenge of wealth building.

Here are the five ways to build your nest egg:

1. Identify your retirement goal

How much money do you need to have when you retire? What kind of lifestyle do you want to have when you decide to stop working someday? Do you wish to go into semi-retirement once you have achieved a certain amount of money so that you can afford not to be an OFW anymore and start a small business back home?

Every goal has a price by which you can tailor your investment strategy to achieve it in due time.

2. Determine your timeline

The earlier you start to plan your wealth building the better. Your timeline to retirement will define your investment strategy. For example, if you plan to retire by 65 years old and you are 23 years old now, your timeline is 42 years, which is a very long period that gives you higher probability of achieving your goal. In fact, if you made the right investments, you may be able to achieve your goal sooner and retire early.

3. Understand your investment vehicles

There are many investment products that are available in the market. You can invest in stocks, fixed-income or mutual funds depending on your investment objectives. You can also invest in real estate for rental income.

Each investment vehicle has different returns based on your risk profile. For example, if you are a risk averse type of investor, you can choose to put your money in a more stable investment instrument like fixed-income. The risk of loss is minimal but the returns are also low.

If you want higher returns, you can invest in higher risk assets like stocks. If you want to invest in balanced funds managed by professionals, you can choose to invest in mutual funds. If you want something tangible for long-term investment, you can also buy a condo for rental income.

It is best for you to study the advantages and disadvantages of each investment instrument before you design your investment plan.

4. Develop your asset allocation

There is risk in every investment. Your goal is to manage your risk without sacrificing too much returns in the process. Don’t put all your eggs in one basket. Find your most comfortable asset allocation. For example, if you want higher returns, you can have 60 percent of your money invested into stocks and the balance into bonds and mutual funds.

But if you want to be more conservative and lower yield, you can put more money into fixed-income instruments and less on stocks.

Your average investment yield from your asset allocation will also have to be aligned with your timeline to make sure that you will achieve your investment objectives. Let’s say, if your timeline is shorter, you will need higher yield from your investment to achieve your goal. That will mean you need to invest more aggressively.

5. Diversify your investments to lower risks

You can further lower your risk by diversifying your investment per asset allocation. Using the same example, if you have invested 60 percent of your funds into stocks, you can further diversify your risk by deciding to invest in more stable stocks like PSE index stocks and less on second-liners.

This is also the same with fixed-income instruments. You can diversify your risks further by dividing your investments between risk-free government issued bonds and commercial bonds, which offer relatively higher interest rates.

Building wealth is more than saving money. It is a process that needs creativity and discipline. It will be great if you can capture your investment plan by putting it into writing. Create a road map on how to accomplish your goal in detail and make it happen.

If you feel that you don’t have enough skills to make your own investment plan, you can educate yourself by attending training and seminars to help you become more financially literate. The more you learn about investing, the better you will be in making investment decisions for your retirement.

If you need guidance and someone to mentor you, you can also hire the services of a competent financial advisor or a Registered Financial Planner (RFP). You can ask RFP professionals to help you get started with the essentials and learn from them as you go along.

Henry Ong is Registered Financial Planner of RFP Philippines. To learn more about investment planning for retirement, attend the 55th RFP program on July 30-Sept 17, 2016. For more details, inquire at [email protected] or text <name><email><RFP> at 0917-9689774.)