A high salary doesn’t guarantee long-term financial stability.

Our financial success is often determined by how much money we make from our jobs. When we earn more, we tend to feel better about our jobs and assume we will be financially secure. On the other hand, if we earn less, we worry about meeting our financial obligations.

When I began working twenty years ago, I believed that earning a higher salary would provide me with more excellent financial stability. I was envious of my peers who landed jobs in investment banking and private equity, where the starting salaries were often $8,000 - $10,000 or more per month.

However, I eventually learned that while earning a higher salary is undoubtedly helpful, it does not necessarily guarantee long-term financial stability.

Making smart investments is just as important.

Plan, Save & Invest

There are two ways to make money: working for money or getting money to work for us.

A good education allows us to become more competitive in vying for high-paying jobs, which becomes what we call our active income. Some of us may engage in side hustles to generate additional income. When working on these side hustles, we exchange our time for money. But is this necessary? In reality, far fewer of us focus on how we can get money to work for us.

Generating passive income is critical to building long-term financial stability. After all, there are only 24 hours in a day.

Passive income can take different forms. It could be investments that pay you regular dividends and coupon payments, the property you rent out, unit trusts, or investment policies you purchased. With sufficient funds, there are no limits to the profits we can generate passively.

Shifting From Active To Passive Income

Set aside a monthly portion of your employment income for investment. If you are new to investing, it’s perfectly fine to start investing with a small amount each month (e.g. 10% of your income). By being a consistent investor, you can enjoy the compounded benefit of seeing your investment grow over time. Once we are confident with investing, we can also increase the amount we invest to achieve our investment goals more quickly.

For example, if you invest $200 monthly over 15 years and earn a return of 6% p.a., your portfolio would be $58,455 after 15 years. However, if you extend your investment period to 30 years, your portfolio would be valued at $201,908. You get a return of about 3.45 times more, even though your investment period only doubled.

The rule of 72 is a simple way to determine how long it will take to double your investment amount. If your returns are 6% p.a., double your capital will take about 12 years (72/6 = 12). If your returns are 8% p.a., it will take nine years (72/8 = 9).

Understand Your Risk Tolerance

Being an excellent long-term investor isn’t just about maximising your returns. You also want to ensure that you have a portfolio where you can continue investing in good and bad times.

Your investments should align with your risk tolerance level. While it’s natural for your portfolio to be down during significant recessions, you must have the means to continue investing and perhaps expand it during these times.

Build A Diversified Portfolio

It’s common to find entrepreneurs who are so convinced in their business that they will put everything they have—their time, money, and sometimes even their health—into running it well.

As investors, we don’t need to adopt an all-or-nothing mindset. Even if we are confident in our investments, we should ideally diversify our portfolio across different asset classes and geographical regions. A well-diversified portfolio allows you to spread your risks and avoid situations where the failure of one or two investments can adversely impact the entire portfolio.

You can consider investing in products like unit trust plans or ILPs with solid underlying assets and credible track records. Some have added advantages, such as capital protection upon demised, making them a functional complementary retirement stack for legacy plans. Ready to explore your retirement passive income through ILPs? Contact us today for a free consultation to discuss your investment goals.

Conclusion

So remember, maximising active income shouldn’t be your only strategy to enjoy long-term financial stability. Instead, you need to ensure that you channel your savings into building up an investment portfolio over time that can generate passive income.

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This article is for informational and educational use only and is not a recommendation or endorsement of any particular investment or investment strategy. Investment information in this content is general, strictly for illustrative purposes, and may not be appropriate for all readers. It is provided without respect to individual readers' financial sophistication, financial situation, investment objectives, investing time horizon, or risk tolerance. You should consider the appropriateness of this information regarding your relevant personal circumstances before making any investment decisions. Past investment performance does not indicate or guarantee future success. Returns will vary, and all investments carry risks, including loss of principal.