The three steps to early wealth building

Your money or your life: A beginner's guide to early wealth building

Many Filipinos trade their time for income. That’s not necessarily a bad thing, especially if you’re utilizing your income to cover all your necessary expenses. But if you truly want to maximize the potential of your money, make sure a portion of your income is devoted to creating your wealth.

According to the latest Quarter Consumer Expectation Survey by the BSP's Department of Economic Statistics, almost 63% of Filipino households do not have savings, and most live paycheck to paycheck. While this can be attributed to several factors, many financially capable individuals lack the financial literacy to generate passive income and work towards financial success.

Passive income generation or wealth building consists of three steps:

• Making money
• Saving money
• Investing money

If you want to achieve financial freedom, it's time to focus not just on increasing your income but creating wealth.

What is Wealth Building?

Wealth building is the process of generating long-term income through multiple sources. You can start with affordable assets such as investment instruments with low-entry barriers before moving on to higher-risk investments such as equity funds and stocks.

Wealth building relies on proper financial planning and insight into your future goals. When done properly, it's an effective way to secure a strong financial future for yourself -- one that includes passive income generation.

The Three Steps to Building Wealth

Building wealth over time and finding ways to create passive income consists of three steps. Let's go over each of them.

1. Making money

This step may seem obvious but it's essential to have a stable source of reliable earned income. The small amount of regular savings that comes from your monthly income can compound into a substantial amount someday.

It’s also a good reminder that this is just the first step. You shouldn’t stop here. Bear in mind that if you want to build wealth, it's not enough to just rely on your earned income. You have to create passive income by making investments. We will tackle this in-depth later.

2. Saving money

Many people lead comfortable lives after finding financial stability through their earned income, but they're not saving enough. The second step to creating assets is regularly setting aside a portion of your earned income. The standard budgeting rule is to save at least 20% of your earned income per month. If setting aside 20% on the onset proves to be difficult, you can start at a percentage you're comfortable with until you slowly but surely reach your target amount.

Start by setting up a rainy-day fund that will act as a financial cushion for emergency expenses. Aim to save at least three months' worth of your expenses. This prepares you for financial setbacks such as health problems or sudden job loss. Once you've reached your goal, you can start investing to grow your passive income.

3. Investing Money

When you finally have a stable financial foundation, you can begin investing your money in appropriate investment instruments which can give you higher returns instead of just letting it sit in your Savings Account. You can start investing in instruments with low-entry barriers, such as UITFs or insurance investments. For instance, AXA has investment plans designed to make life goals happen, whether it's for starting your own business, buying a car, or purchasing your dream home.

Choosing the right instrument depends on your goals. For short-term financial goals, you can go for instruments such as a time deposit account or a short term fund. These are low-risk investments that yield higher returns than standard savings accounts.

For mid-term goals, you can opt for UITFs such as the Metro Aspire Bond Feeder Fund or the Metro Max-5 Bond Fund. These help your money grow so you can prepare for future expenses.

If you truly want to amass wealth and create passive income, then you’ll have to look at instruments dedicated to wealth building such as equity funds and stocks.

Don’t Settle for Increasing Your Income, Start Creating Wealth

Ultimately, you want to invest as much as you can over the course of your life. However, it's understandable if you want to take things slow while you learn the ropes and don't have a ton of extra cash to throw into the market. What's important is you find a pool of fund that that suits your goals, financial situation, and risk appetite.

Even setting aside as little as PHP 10,000 per month for your Metro Max-5 Bond Fund over the span of three years is enough to kickstart a successful investing career. Thanks to UITFs and the changes in the market value of its underlying assets, your PHP 10,000 can grow into a fortune over time and you can move on to higher-risk investments that yield higher returns. When you invest a portion of your income in wealth-generating projects, you can amass wealth even if you're not working for it.

Ready to learn more about the basics of investing? It's always good to be informed before you start your wealth building journey. Head over to Earnest and discover everything you need to know about saving and investing. You can also open a UITF account via the Earnest app and begin investing with ease.