In my role as a financial adviser, perhaps the most common question I am asked is ”what do I need to do?” My inevitable reply is usually something like –
“To achieve what?”.
“Why, to get rich of course”
“What does Rich mean to you?”
And so it goes. Of course, what is normally being asked for is “How do I get rich quickly, without any commitment on my part, and without making any sacrifices”.
The answer to this real question is, that it is impossible. It is quite simple to accumulate significant wealth over a long (ish) period of time – simple, but not necessarily easy.
Losing weight is simple – “Eat (and drink) Less, Move more” – but I am living proof that this is not easy, or at least I find it easier to talk about than actually do. Having said that, a successful wealth accumulation program is relatively simple, but like weight loss it requires a deal of commitment and is not necessarily easy.
The simple steps are:
- Spend less than you Earn
To be honest, if you can’t do this, then no one (including me) can help you. It is interesting that when people commit to something they really care about, like owning a home with an associated mortgage commitment, they can usually find a way to make the finances work. This is why setting aside money for your goals FIRST is so important. If you commit to saving only what is left at the end of the week, there is unlikely to be anything left to save.
- Invest the difference in high-quality growth assets being shares and property
There is no way you can save your way to riches – you have to be an investor. Current low interest rates have highlighted the link between inflation and interest. We have had historically low interest rates, and historically low inflation. I have myself paid 17% interest on a home loan, but at the time inflation was out of control. Put simply, money in the bank will keep pace with inflation – just.
The interest you earn will be eroded by the reduced purchasing power of money over time.
- Use Debt wisely
It is OK to borrow to invest if you do it wisely. People do it all the time when they borrow to buy their home, and this is neither an investment (for more on this see here), nor is the interest tax deductible. Taking advantage of tax concessions and using someone else’s money to acquire assets which go up in value can be a successful strategy if done prudently and within the bounds of financial capacity. Borrowing structures, of course, need to be suitable to your circumstances.
- Diversify your investments
We all know people who think that the only investment is made of bricks. We also likely know someone who believes that share market investing is the only path to riches. Both types of investment are “Growth Assets” and both have their place in a well-diversified portfolio. There are ways of accessing both property and share markets which do not involve directly holding the assets yourself. These should also be considered, particularly if the “get in hurdle” for buying investment property is too high.
- Minimise tax by taking advantage of tax effective structures such as superannuation
Superannuation is a tax-advantaged mechanism for boosting your savings, particularly designed for accumulating wealth for retirement. Of itself, superannuation it is not an investment (see here). Once retired, earnings on your superannuation assets can have the best tax rate in the world – zero. So you should take advantage of this where you can, but you do need to tread carefully as there are limits to the amount you can contribute. In saying that, superannuation is certainly part of any robust wealth creation strategy, and maximising the benefits will stand you in good stead.
- Remember that investing is not punting
The neighbourhood barbecue is as full of investment tips as the TAB is full of racing tips on a Saturday afternoon. You need to be an investor, but you also need to get investment advice from a professional, not from Joe down the pub. Buying an investment property in a mining town sounded fantastic a few years ago, and lots of folks were advising you to get in before it’s too late. Look how that is positioned currently. Similarly, there is no shortage of hot share tips with inside information about the next big thing – but can you bank on that? A well-diversified, soundly based, well-researched investment portfolio is what you need.
- Be systematic
Small amounts often is the key. For as little as $250 per week over a long period of time, you can achieve quite astonishing results, but it needs to be consistent. Discipline and commitment to the larger goal will yield results beyond your expectations, but you will likely need someone to hold you accountable and to help you stay on track.
Simple, but not easy. Want to get started? Why not give us a call to see if we can help on (02) 4258 0099
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