The secret to building wealth

Most people are familiar with the idea of working hard for their money. But financially smart people have a different and more strategic mindset. They make their money work hard for them.

You too can use any surplus from your employment income to create passive income streams and valuable assets. Once you have mastered the tools and the techniques, you’ll be able to watch both your income and your capital grow consistently.

Money begets money in passive investment income streams

Whenever you have spare cash, rather than indulging in discretionary spending, use it to empower your future instead. Wisely invested, even a relatively small amount of money can continuously grow, delivering extra income which, reinvested, can develop into a sizeable asset over the years.

Depending on your financial goals and resources, you have a number of investment options:

• High-interest savings accounts. Ideal for the risk-averse who also need liquid assets.
• Term deposits. Lock in a higher interest rate by agreeing not to touch your cash for a fixed period – say from 12 months to five years – also reducing the temptation to withdraw your cash and spend it.
• Shares, ETFs and managed funds. An investment in equities like shares and ETFs listed on stock exchanges, or in managed funds with a professional manager and specific investment objectives, can generate dividends as well as increasing in capital value.
• Real estate investment. While not totally passive, a long-term investment in either commercial or residential real estate can provide net rental income and growing asset value. Appointing a property manager will increase costs but reduce stress and time commitment.

The financial magic of compounding

Remember those compound interest sums at school? Who knew that something so ostensibly boring could turn into such an appealing concept for delivering wealth?

Compounding is at the heart of all passive investment income. While you are sleeping (or awake and thinking about other things) your bank deposit or asset investment is generating a return, which, if automatically reinvested in the same source, produces an income and asset value which increases year after year.

For example, a $1,000 deposit at 5% per annum, with interest compounding daily and credited monthly, would grow into approximately $1,647 at the end of 10 years. The same principle applies to equities, where, even if dividends are paid, some funds are retained for reinvestment to improve income and asset value. Compounding is the ultimate ‘set and forget’ method of wealth accumulation.