Strategic wealth building: Make your money work for you

Most people are familiar with the idea of working hard for their money. But financially savvy 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, or side hustle 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, instead of blowing it on instant gratification, you can use it to empower your future. Wisely invested, even a relatively small amount of money can continue to grow, delivering extra income that, when reinvested, can develop into a sizeable asset over the years.

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

• High-interest savings accounts. Ideal for the risk-averse who also need an emergency cash buffer.
• 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 such as shares and ETFs listed on stock exchanges, or in managed funds with a professional manager and specific investment objectives, can generate dividends or distributions as well as an increase 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, produces an income and asset value that grows over time.

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[1]. 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.

The power of diversification, risk management and patience

Reliably building income and wealth from investments requires a well-balanced, disciplined approach rather than simply choosing high-yield assets.

Diversification – the spreading of your capital across different asset classes – is a recognised way of reducing risk and protecting the capital from market volatility in one area.

Risk management involves assessing the potential downsides of your investments, tailoring them to your risk appetite and income needs, and regularly reviewing your portfolio.

And last but not least: patience. “The stock market is a mechanism for transferring wealth from the impatient to the patient”, and “Time in the market, not timing the market” are quotes attributed to that most successful of investors, Warren Buffett[2]. A long-term perspective is most effective when investing.

Put a financial expert on your team

There’s a lot to think about when it comes to making your money work just as hard as it can. The ideal approach is to get tailored advice from a professional with the expertise to deliver the best results for your particular needs. Make an appointment with your financial adviser to discuss the ultimate way to secure your financial future.

[1] https://moneysmart.gov.au/budgeting/compound-interest-calculator

[2]  https://www.forbes.com/sites/johnbuckingham/2024/09/26/warren-buffett-has-it-righttime-in-the-market-trumps-market-timing/