The Truth About Wealth & Wealth Management II

Never build a house on a weak foundation.

The same applies when it comes to wealth building. Often, people neglect this simple rule and start exploring and entering risky investments, without having a strong foundation to start with. This explains why some have got 'burnt' in the stock market, and end up owing debts or even worse, declared bankrupt.

There are basically 3 layers of foundations to lay, before your wealth skyscraper can be built and soar.

Firstly, it is important to have cash on hand, to pay for any immediate needs that comes once in a while. You may also call this your 'emergency fund'.

As a rule of thumb, it is wise to keep 3 to 6 months' worth of your basic expenses in your bank account. This should help to tide over any periods of financial difficulties, such as retrenchment or hospitalisation. The exact amount may vary from person to person and your needs may be different. So work out your monthly expenses today.

Secondly, it is important to have adequate insurance coverage. Life is unpredictable and whether we like it or not, there is always a chance that a misfortune may befall on us and our loved ones.

Imagine having to liquidate all your investments and savings that you had painstakingly build up over the years, just to pay for medical fees and living expenses. It's like your assets suddenly disappeared and your financial status is as good as that of a fresh graduate. (That is provided your liquid assets are enough to cover your needs, without falling into debt.)

So insurance is an important tool to protect our wealth and give us a peace of mind to focus on other things in life, such as your family, career, or even investing.

Thirdly, you'll need to invest in some low-to-medium-risk financial instruments. Some examples are fixed deposits, bonds, and endowment policies. This group of investments may not be that 'sexy' when it comes to returns. However, most of them are non-volatile and usually stand up pretty well against market downturns and even recessions.

Don't rely totally on them for your portfolio to grow though. The kind of returns that these 'safe' investments provide are probably just enough to cope with inflation, meaning there is little or no 'real' investment returns. But as I mentioned, this is the foundation that you'll need before embarking on the riskier investments.

Now that the foundation is in place, you should have less worries about emergency need for cash, adversity that impedes your income, and loss of investment capital during market downturns.

Happy foundation building!

(Author's note: For the purpose of educating everyone regardless of their financial background, I have included some links above that defines some financial terms used. However, I shall not dwell into details on the different investment vehicles, be it stocks, bonds, forex, commodities, etc, as there are many resources out there that are doing so.)