Building wealth: the best way to go about it
Building wealth means that you grow your money. For your money to grow, you have to invest it. But before you begin, there are certain points that will make your path to financial freedom considerably easier. We have summarised the five most important steps for you:
- Analyse your starting situation
- Pay off any debts you may have
- Build up an emergency fund
- Determine your investment goal
- Invest your money for strong returns on the capital market
If you follow these steps in order, you will create an ideal basis for building your wealth.
1. Analyse your starting situation
At the start, you should get an overview of your income and expenses. This way you can, on the one hand, establish how much is left over at the end of the month and, on the other, often already identify potential for saving. It helps to keep a household budget book in which you conscientiously record all income and expenses. For this you can, for example, use an Excel spreadsheet or an app.
Why is this important?
By breaking down your income and expenses precisely, you gain an overview of how much and on what you spend your money, and can understand:
whether you are in the black or in the red at the end of the month,
what you spend the most money on,
where there is potential to save and
how much money you have available to invest.
2. Pay off any debts you may have
Before you invest money, you should have fully paid off any consumer debt. This is so important because the overall interest costs rise the longer you take to repay. Overdraft facilities in particular often carry especially high interest rates that can barely be offset by the return on an investment.
3. Build up an emergency fund
The emergency fund is a common term for a cash reserve that should be available to you at any time for unforeseen expenses. As a rough rule of thumb, you should ideally have saved 3–6 net monthly salaries for this. This, however, is only a general guideline, and the size of the emergency fund can vary according to your personal situation.
Even though the name might suggest otherwise, it is best not to keep the emergency fund in cash or in your current account, but rather in an instant-access savings account or in money market ETFs. An instant-access savings account is an interest-bearing account in which interest is credited to you on the money you have deposited. Money market ETFs are passive funds that invest in very short-term interest-bearing securities. While your money in a current account continually loses value due to inflation, the interest on an instant-access savings account or the returns from money market ETFs at least partly offset this loss of purchasing power. In addition, your money is quickly available whenever you need it.
To build up an emergency fund, you can, for example, transfer a certain sum each month into an instant-access savings account or a money market portfolio, and thus steadily top up your financial buffer. You will find more information about the emergency fund and how large it should be in our emergency fund guide: How important is a financial reserve?
4. Determine your investment goals
As soon as you know how much money you have available, no (more) consumer loans need to be paid off and your individual emergency fund has been set aside, you can calmly set your financial goals. You are now in the ideal starting position to invest your money and build up your wealth step by step. To do so, you begin with the following considerations.
- Investment goal: First determine the goals you want to achieve by building wealth. Typical goals are, for example, the general desire for financial freedom, your own retirement provision or saving for children.
- Investment horizon: Your investment horizon is the period over which you can keep your investment invested. For long-term wealth building, a correspondingly longer investment horizon of several years is advisable.
- Investment amount: Now the question arises of how much you can and want to invest. You may have a certain sum of money available following a savings phase or through an inheritance. If money is left over each month after all expenses have been deducted, this is likewise excellently suited to building wealth.
- Risk appetite: Finally, you need to determine how much risk you can bear when investing. The more the value of an investment fluctuates, the greater the risk. Investments with high return potential usually carry a higher volatility risk, while particularly safe investments, such as short-dated German government bonds, deliver lower returns in return.
What does risk mean when investing?
With investing, risk means that it can fluctuate in value. Risk is classically perceived as a loss in value. This is the case, for example, when the prices of shares or bonds fall on the stock market. The safer and lower-risk an investment is, the lower the returns it normally delivers. More volatile investments can in return deliver higher returns. This interplay between return and risk is also referred to as the risk-return ratio.
As soon as you know what for, for how long, how much and with what risk you want to build your wealth, it is time to invest your money.
5. Invest your money safely and for strong returns
For building your wealth, various options are available to you. With shares, that is, holdings in companies, you can generally achieve the highest returns. Caution is advised here, however: individual shares, where you invest in a single company, carry a particularly high default risk, since the company concerned can file for bankruptcy at any time or be affected by events that lead to large price losses.
Therefore, it is particularly advisable for long-term wealth building…
- in a large number of different shares of companies of the most varied sizes
- from as many regions as possible
- and in as many different sectors as possible
to invest. This is easily achieved with funds. These invest in many shares or bonds – sometimes in thousands of securities. Here there is once again a distinction between actively managed and passive funds (ETFs). With active funds, a fund management team tries to achieve a better return than the comparable market and, to this end, regularly adjusts its portfolio on the basis of forecasts and assessments. Because of this active management, these funds are often relatively expensive. And studies show: only very few actively managed funds succeed in beating the market over the long term, and there is no way to determine which fund will manage this in the future.
Passive funds, so-called ETFs (Exchange Traded Funds) forgo active management and track a particular index, for example the DAX or the MSCI World. This means: the return that these funds generate corresponds to the actual growth of the underlying index – minus the fund costs, which, however, are significantly lower than with active funds. Since the global economy grows continuously over a long period despite intermittent crises, a portfolio made up of various equity ETFs offers attractive return potential. If this is diversified as broadly as possible, the risks can be reduced to the necessary minimum.
Investing made simple
Building wealth with ETFs
To invest in securities, which also include ETFs, you first need a securities account. You can open one with the bank or broker of your choice. Pay attention here to the costs of maintaining the securities account and also compare the additional services of each provider. There are two ways in which you can invest in ETFs, ideally straight into a whole portfolio of various ETFs:
- Lump-sum payment: You invest a sum of money into your ETF portfolio all at once.
- ETF savings plan: Via an automated standing order, you regularly pay smaller amounts into your ETF portfolio.
As a general rule: for people who do not yet have a larger sum of money, the ETF savings plan is the ideal way to build up wealth.
You will find more information on in which case a lump-sum payment or a savings plan makes more sense in our article: Lump-sum investment vs. savings plan: which suits me?
Setting up an ETF savings plan: how to go about it
Investing money by means of an ETF savings plan is especially practical because your desired amount is automatically paid in and invested regularly, ideally into a broadly diversified portfolio with various ETFs. However, since there is now a very large number of the most varied ETFs, choosing the right ETFs is not exactly easy.
At quirion, you do not have to take care of selecting the right ETFs yourself. On the basis of scientific findings, an ETF portfolio is created according to your personal risk profile that covers the world market as broadly as possible. In addition to equity ETFs, bond ETFs can also be added to the mix in order to match your individual risk profile precisely.
In vier Schritten zu deinem persönlichen ETF-Sparplan:
Get an investment proposal
Open an account
Set up a savings plan and deposit money
Auf Rendite freuen!
4 tips for long-term wealth building
You now know how you should go about building wealth and which investment strategies are suitable for it. The following tips additionally help you not to lose focus and to build up wealth that can last over the long term.
- Do not let the news unsettle you: Over time, you will repeatedly come across negative headlines about economic events. Do not let them throw you off course: over the course of time there have again and again been crises from which the global economy has always recovered.
- Do not react hastily to negative stock market headlines: Taking money back out of the investment when prices fall often means that you sell at a loss. If prices then rise again afterwards, you miss out on the return that you would have earned with your invested wealth. Investment practice shows, after all, that timely re-entry regularly fails.
- Stay invested for as long as possible: The longer your money can work for you, the better intermittent lows on the stock market can be offset. The probability that you will achieve a reasonable return with your investment increases with every additional day that your money is invested.
- Never invest money that you will need in the near future: In principle, you can of course take money out of your ETF portfolio and use it at any time. In doing so, however, you diminish the wealth that is meant to generate returns for you. For spontaneously necessary payments, an emergency fund should therefore first have been built up, which you use for this purpose. This way you prevent yourself from having to fall back on your ETF portfolio for it.
As a general tip on how best to allocate your expenses, you can use the 50-30-20 rule as a guide:
50% for fixed costs (housing, groceries, insurance, loan repayments, etc.)
30% for leisure (hobbies, eating out, holidays, pets, etc.)
20% for building wealth (first build up an emergency fund, then invest money)
These percentages are to be understood as reference points. So you can also turn it into a 50-20-30 rule. In all cases, the principle is: first cover the cost of living, then set aside a portion for maintaining your standard of living, and use the rest for building wealth.
Building wealth: how to make more out of your money
To build up wealth over the long term, even small amounts of money that are invested regularly are enough. ETFs in particular offer a balanced mix of safety and return potential. quirion helps you with this through broadly diversified, automated ETF portfolios and an investment strategy tailored to your life goals. This makes it possible to build wealth, minimise risks and reliably achieve your financial goals.
¹ Example: In the period from 30/06/2004 to 30/06/2024, the average return of the MSCI All Country World Index (MSCI ACWI for short, calculated in euros, incl. dividends) amounted to 7.96% p.a. The index predominantly contains standard shares from developed and emerging markets. Historically, there have also repeatedly been longer periods with (sometimes considerably) higher and (sometimes considerably) lower average returns. Around 8% p.a. is, however, a valid guideline figure. Important: the roughly 8% does not arise constantly year after year, but amid – at times strong – fluctuations. In the interim, losses in the higher double-digit percentage range can also occur. In principle, however, the following applies: as the investment period increases, the price swings smooth out. The return prospects are then easier to calculate, and losses become less likely.
