Becoming wealthy might be a goal for many investors, but there are a few factors that could be essential to make it happen. I'd like to think that ASX shares can play a big part in helping someone on their financial journey, but there's more to it than just choosing the right investment.
There's more to being wealthy than just how much net worth someone has, but it can play an important role. If I were talking to a friend about becoming wealthy, this is what I'd advise.
Saving mentality
If someone said to me that they want to be a millionaire, I'd wonder in my mind if they mean they want to have a portfolio of assets worth $1 million or whether they actually mean they want to spend $1 million on stuff.
To invest in assets, we need to have a saving mentality to build up cash to use it. If someone is always spending all their money, they'll never be able to put money into investments. Even worse, over-spenders may fund that extra spending with debt, which is digging themselves into a hole.
Spending less than we earn is a healthy mentality to have, but it can also mean we have to build up less to be financially independent or retire. Every household's finances are different, but imagine one household lives by spending $70,000 a year and another spends $105,000 per year. The second household could require an ASX share portfolio that's 50% bigger than the first household to receive the required dividend cash flow.
If someone always has a big spending mentality, then they may never earn enough to compensate. There's nothing wrong with someone spending their earnings, particularly in the difficult economic environment, but it's hard to become wealthy if people aren't regularly putting money aside.
Long-term mindset
Investing takes time for results to show, people need a long-term mindset to see it through.
Imagine someone has $100,000 to invest (which is a lot) and they're somehow capable of producing investment returns of 20% per annum – which would be a Warren Buffett standard of returns – it would still take 13 years to get to $1 million.
I think the more time people allow to give themselves to reach their goal, the more likely it is to happen because investors won't take unnecessary risks.
Compounding is a very strong financial tool, Albert Einstein once said:
Compound interest is the eighth wonder of the world. He who understands it, earns it, he who doesn't, pays it.
I'd guess nearly all wealthy people take a long-term mindset when they make their investments.
Some of the biggest businesses in the world, such as Amazon.com, took decades to reach the position they have reached today. Greatness can take time.
Don't be greedy
I think wanting to become financially independent is a great goal. Building economic strength is a good move.
But, I'd suggest some investors may rob themselves of enjoying their life if they're always desiring more wealth than they currently have. Someone may never be happy with what they have.
If someone has unrealistic expectations of how much money they want to try to make, they could take big risks like taking on a lot of debt or investing in the most speculative ASX shares. This could lead to disaster if it goes wrong, and sometimes conditions appear that can make things go wrong.
The story of the tortoise and the hare springs to my mind. I think it's important not to rush wealth-building.
Bonus factor: Connection with people close to you
All the money in the world doesn't matter if a person is miserable, perhaps with no friends or family they're close with.
To me, wealth includes having a group of people, or even just one person, that we have a close connection with.
There's not much point saying to your kids, "We can go to Disneyland when I'm 80 – think of how much money that will grow into".
We can't buy love, the most important thing is to spend quality time with people while it's still possible.
