Friday 28 January 2011

Get Rich Slow

The DIY Income Investor approach is an example of a 'Get Rich Slow' investment approach. You may get lucky with an investment (usually a share holding) and make a lot of money quickly - but this is not a way to build wealth reliably. The key approach (I believe) is to live well within your means, save hard, have no debts and invest wisely.

Hopefully the DIY Income Investor approach will resonate with you as a logical and sensible path to wealth over the coming years.

1) Live well within your means

I think it all comes down to the equation:  income-expenditure = wealth potential

The less you spend, usually the more you save - the more financial potential you generate. This is in many ways the hardest part of the approach - put the Money Saving Expert (UK) at the top of your Internet 'favorites'.

2) Pay off debts first

You shouldn't think about investing until you have your debts under control. You are (probably) paying income tax on all that debt repayment, whilst the same money should be generating tax-free income for you.

This include the student loan and the mortgage (if you have either). Of course there might be some reasonable judgement about trying a little bit of investment whilst you have a particularly low rate of mortgage or student loan repayment. You will find that the DIY Income Investor approach makes it easier to make these sorts of decisions - as it is all about comparing 'after tax' returns.

3) Build up your Income Pyramid

The image of the Income Pyremid helps to understand the approach. Once you have the sound foundations described above, you can start with 'easy access' savings (covering 3-6 months of your expenditure!), then fixed interest cash bonds, then - and only then - move on to the more sophisticated (and - it has to be said - more risky) investments via an on-line brokerage account.

In the UK, 10% of households have a Stocks & Shares ISA (tax-free stock-dealing wrapper) - so to get to this level puts you in the top 10% of investors!

But don't rush it. Life can have many unpleasant surprises and a safe buffer of cash will help you to sleep well at night.

4) Watch your income grow

Once you have set up your DIY Income investments, you will be able to pretty much sit back and watch your income grow - there is not much maintenance. This is something you can easily do once a week -  during your lunch break at work, for example. 'Churning' investments (frequent buying and selling) only benefits the financial products industry, not you. Less is more.

5) Invest for the medium term

There are no guarantees in life, however, and the value of investments - and rates of return - can fall. This is why a reasonably long investment horizon is needed if you are thinking of moving to investment classes at the top of the Income Pyramid, such as shares, bonds or gilts. This longer perspective should then help you to weather the downward waves of any economic cycle that might occur. If you have structured your investments properly, you will probably weather any downturns without too much loss of income - or capital.

I am not a financial adviser and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.

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