The key to building wealth is to spend less than you earn, invest appropriately, stick to your plan, and start early.
We all have to start somewhere right? Some people are trying to build wealth from ground zero, while others may have been gifted with a head start from the likes of an inheritance. Either way, the following four tips apply to everybody, regardless of where you currently are in your financial journey.
1. Spend less than you earn
You will hear plenty of professionals, institutions and the press talking about ways to boost your investment returns. At the same time, there are always apparent experts warning you to stay away from the stock market, or suggesting that property is immune from risk. Ultimately, boosting your return and the art of timing the market are neither important – at least, when you’re starting out. Instead, you should focus on your money habits and spending less than you earn – no other factors will have a greater impact. Sydney Financial Planning has written an entire blog on ways to spend less than you earn.
2. Get some structure. How is your money being invested?
‘Asset allocation’ is financial lingo for how your money is divided up between cash, fixed interest, shares and property. Years of research, wisdom and countless professionals suggest that 90% of the investment return an investor will receive is dependent on their asset allocation i.e. how much of your money is in shares, property or cash and fixed interest. Past performance suggests that shares and property have a higher rate of return than cash, term deposits and fixed interest. Obviously though, shares and property carry a higher risk. If time is on your side (at least 7 – 10 years) it might be worth restructuring your asset allocation - an investor who holds a higher allocation to shares and property should outperform an investor that has less allocation to shares and property.
3. Stick to your plan – Time in the market as opposed to timing the market
There will be times when you will want to steer away from the plan. For example, when the market is going well, people generally want to be more aggressive and more subdued when the market is down. Many investors give into temptations which are sometimes based on emotions as opposed to sound strategy and planning. The danger of acting on emotions is that often it leads to buying high and selling low, which if repeated will lead to failure. To avoid this, block out the media noise and stick to your plan. Don’t let the news of the day change your mind!
4. The 8th Wonder of the World – Compound Interest
Let’s assume you would like to be save a million dollars by age 65. Using a flat rate of 6% in the figures below, these are the monthly contributions you would need to make based on the age you start saving:
- Age 25: $499.64 per month
- Age 35: $990.55 per month
- Age 45: $2,153.54 per month
- Age 55: $6,071.69 per month
The message is simple. The earlier you start, the easier it is to build wealth. Even small amounts that are regularly invested can transform into large sums over time. Be warned though; compound interest can also work against you when you have debt. It is amazing to see that over a 30 year mortgage term, you generally pay (depending on interest rates) up to 3 times the amount originally borrowed. By making extra repayments (however small), you can save significant amount of penny’s over time.
You love this concept, but have a few more questions?
We are always here to help guide you on your financial journey. Contact us for advice on how to get started or have your current wealth situation reviewed, call us on 02 9328 0876.
General Disclaimer: This article contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information. Please seek personal financial advice prior to acting on this information.