Your guide to what it really takes to become wealthy
Your guide to what it really takes to become wealthy
Inside this guide…
1. Let’s get comfortable talking about wealth
2. How long does it take to become wealthy?
3. Clearly defined goals give you something to aim for
4. Why a long-term mindset is good for wealth
5. Your key ingredients for wealth creation
6. Cash flow helps you create wealth consistently
7. What to do to move your finances forward
8. What is a financial strategy?
9. Example strategies
10. What are the costs of wealth creation?
11. Getting started
12. Keep your future on track
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SECTION 1
Let’s get comfortable talking about wealth
How comfortable do you feel talking about money and wealth? Some people are bold and unapologetic in their pursuit of money and feel confident sharing their successes and strategies.
Other people can feel a little uncomfortable or embarrassed about pursuing money. They might be reluctant to want more, worried that it’s ungrateful or out of reach.
Regardless of how you feel about wealth, it’s our responsibility to set ourselves up to afford the life we want to live. Aged pension entitlements have not kept pace with the increasing cost of living, so it’s important to consider financial opportunities that will support your lifestyle, before and after retirement.
Wealth helps you and your family live a better life, filled with opportunities and possibilities. The benefits of creating wealth are far-reaching, and you can read more about them here.
So what do we mean when we talk about wealth? We’re talking about net worth, taking into account savings, cash, assets and investments. It’s value that’s created over time, resilient to changes or crises in the broader financial market.
And the financial value of wealth is relative to where you’re starting from and what your goals are.
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How long does it take to become wealthy?
Just as wealth is relative, so is the amount of time you need to create wealth.
Some people feel wealthier as soon as they know they have a plan in place to achieve their goals. Other people have more ambitious goals and need to see growing financial statements.
But if you want to put a figure on wealth, you can follow the 4% Safe Withdrawal Rule.
Start by calculating your annual living expenses, including essentials such as housing, food and utilities, as well as the costs of your lifestyle. This is the amount you’ll withdraw from your retirement fund every year.
And it’s the amount that should equal 4% of your retirement fund.
By following this rule, you can reasonably expect your retirement fund to last indefinitely. Each year, the funds you have invested will continue to return an income. And if your living expenses (the amount you’re withdrawing) are 4% of the total, then your funds should continue to increase at a value slightly faster than your rate of spending.
Once you’ve calculated the total amount you’ll need in your fund, you can figure out a plan to reach that target.
There are plenty of tricks and gimmicks to building wealth quickly. But they’re almost always unrealistic or risky.
What’s more, they’re unnecessary. Because the best way to build wealth is to commit to a long-term strategy, designed to slowly and consistently increase your wealth.
Over time, these increases will be compounded and become increasingly impressive.
You might remember compounding interest from high-school mathematics, but if you’re a little fuzzy on the details, here’s a quick reminder.
When we talk about money compounding, we’re talking about the ability an asset has to earn an income that can then be reinvested to create even more income.
For example, you might invest $1000 today, and then add $500 each month. In five years, you could have $40,000. And in 20 years, you could have $330,000.
You don’t need large sums of money to start making compounding work for you. All you need is time and a consistent plan.
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Clearly defined goals give you something to aim for
When it comes to Wealth Creation, I am a huge believer in the power of understanding what you want your life to look like, if you don’t know where you are headed it is easy to lose focus and stray from your plan. However, having a clear picture of what you are wanting to achieve really helps you stick to it because you have identified exactly what you will miss out on.
The important thing about goal setting in this sense is to set lifestyle-based goals and work out what they’ll require in terms of financial resources after.
Having a level of clarity around something you want to achieve and a plan to get there is great, as it means when something comes up along the way that you could potentially dip into your savings for you’ll think twice, as it means you will need to push your goals back and be able to make a really sound decision around whether you want to do that.
If you don’t know what you are working for, it is hard to stick with it. The desire for instant gratification will almost always override your desire for a healthy bank account.
A large component of financial success is having clarity around something you want to achieve and a plan to get there.
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Why a long-term mindset is good for wealth
Your wealth building plan should cover both your personal finances and your superannuation. It’s the only way to be sure that your short, medium and long-term financial goals can be met.
Your personal finances allow you to live the life you want before retirement. Once your personal finances allow you live comfortably, you can then direct any additional money to your superannuation.
A higher superannuation balance helps you minimise your need to rely on your children, or the government, to support you in retirement and old age. You’ll have more options to choose where you live and how you spend your time.
A wealth plan that considers both your personal finances and superannuation helps you prepare for life’s full journey. You might decide to pay off your home before retirement, or soon after accessing your superannuation. You might work less hours and transition into retirement by setting aside funds in your personal finances.
Assets, investments and taxes are treated differently in your personal finances and superannuation. This means you can grow your wealth more by taking advantages of opportunities to reduce the tax payable as you work toward your financial goals.
Building wealth is easier if you’re not starting from scratch, and the good news is that most people aren’t.
While your plan for wealth creation will be unique to your situation and goals, it’s likely to be based on a foundation of the following things:
With these foundations in place, you can consider your investment options. But first, you should look closely at your cash flow. This helps you ensure that your investments are affordable and sustainable, with minimal risk.
Well-managed personal finances. Your personal finances will affect the speed and amount of wealth you can create. The aim of creating wealth is to improve your life, so it’s important to find balance. Your personal finances should still allow you to enjoy the things that are most important to you. As a rough guide, you could aim to use 50% of your income for expenses, 30% for your lifestyle and 20% for investments.
Minimal consumer debts. Reducing or eliminating debt will help you increase your surplus cash available for wealth creation. Avoid credit cards, personal loans and fixed interest loans. Instead, look at opportunities to use savings, offset accounts and other tools to increase cash flow.
Assets and equity available. Superannuation balances and equity in property are common opportunities for further investment. Holding your money in these income-producing or growth assets helps grow your wealth. Check for structural changes that can help you save money on fees, interest and tax.
A cash surplus. Between $2,000 and $5,000 is required for most managed investments. Creating wealth from a modest savings balance will take longer than more established foundations like a sizable superannuation balance or the equity from a home or investment property.
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Cash flow helps your create wealth consistently
So what is cash flow? It’s the income you receive, MINUS expenses, PLUS the things you can add back in, like tax returns and dividends. Or, put another way, it’s the net amount of cash (and cash equivalents) being transferred into and out of your personal finances.
Cash flow is an important part of wealth creation. A positive cash flow, where your income is higher than your expenses, means you’ll regularly have cash available to use for wealth creation.
The actual amount of positive cash flow that you need is specific to your goals. You can use a calculator to get an idea of your cash flow needs. You can also see a financial planner, who will put together more sophisticated calculations and modelling.
1. Get clear on your goals
2. Manage your money
3. Build your emergency fund
4. Eliminate your consumer debts
5. Get consistent with saving
6. Protect your income
7. Get familiar with superannuation
8. Build your investment portfolio
9. Consider loved ones
10. Track your progress
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What is a financial strategy?
A financial strategy focuses on a specific area of your finances, finding opportunities to use your financial resources efficiently and effectively.
Some common strategic focuses for wealth creation are:
Cash flow strategies
Debt strategies
Investment strategies
Risk strategies
Superannuation strategies
Tax strategies
Choosing the right strategies comes down to your personal situation, Calculations need to be done to figure out which strategies can best optimise your financial resources to create wealth.
If you’re considering using a number of financial strategies, keep in mind that each strategy should work in harmony with the others to maximise your results.
You should also be aware that some strategies are more intense and risky than others. You can read more about the risks involved with wealth creation here.
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Example Financial Strategies
Creating wealth might seem complicated and confusing, but it’s actually pretty straightforward with the right strategies and know-how…
Thoroughly investigate a range of financial strategies to see how they can benefit you.
This range of strategies spans opportunities to use equity, to invest better for a greater return and ways to legally reduce tax, interest and fees so you’re not parting with money you shouldn’t be. Risk minimisation is also covered so your well-made plans are protected over time.
Working together, these strategies can help increase your cash flow and help you achieve your goals sooner.
Download 60 Financial Strategies You Can Use To Build Your Personal Wealth
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To build wealth, you need to be prepared to change your mindset and your actions. There are costs involved in making these changes and it helps to consider these at the beginning of your wealth creation journey.
It’s worth acknowledging and understanding these costs and challenges from the very beginning of your wealth creation journey, as you’ll be better prepared to address them down the track.
You can read more about wealth creation challenges here.
Money. When you grow your wealth, you’ll also find yourself paying more in the costs of advice, investments, interest, insurance premiums, tax payable, platform fees and commissions. Of course, a solid financial plan will ensure that you still see a net financial gain, even after these costs are taken into account.
Time. Many people work with a financial planner to create and implement a financial plan, and you’ll need to allocate some time to do this. Once your plan is in place, you can expect to spend about 12 hours per year working with your adviser to refine things. Or you might choose to manage your wealth creation plan independently, which will naturally require more of your time.
Discomfort. If you want to create wealth, you need to go outside the comfort zone of your regular income. This might involve changing your spending habits, investing in shares or property, or weathering uncertain market conditions.
It’s worth pausing for a moment to consider how you’re feeling about your financial future right now. Excited? Anxious? Overwhelmed? Determined?
Whether your emotions are positive or negative, they’re entirely normal. And right now, the most important thing to focus on is just getting started.
While you’re working, your superannuation and your assets are growing in value. If you start working toward wealth today, you can make the most of your working years for real benefits throughout your life.
If you’re ready to get started but want to ease in, you can begin with these simple steps:
But if you’re ready to dive right in, working with a financial planner will help you set up your financial affairs to suit your lifestyle and long-term goals. You’ll have someone to talk to who completely understands your situation and can answer any questions.
We’ve written a mini ebook with all of our insider insights into the financial advice industry. Read it over a coffee and discover everything you need to know to choose an adviser that’s right for you.
Clean up your personal finances and add some structure by following these tips.
Build your understanding of financial strategies by exploring our toolkit.
Read about other people’s wealth creation challenges and successes here.
Follow us on Facebook to keep learning about wealth and stay focused on your financial future.
Once you’ve got your wealth creation efforts underway, it’s important to regularly check your progress.
But we don’t recommend constantly checking your investment values and returns. Wealth creation is a long-term venture, so daily changes in the share market won’t be what determines your success.
Instead, you’re better off looking for improvements in some or all of these areas:
- Reduced debt
- Increased savings
- Increased income
- Increasing capital values
- Increasing equity to debt ratio
With a consistent commitment to building wealth, you’ll be able to avoid money worries and help your family live the future you hope for.
You can also track your success more precisely by:
Splitting large goals into smaller objectives. Monthly or quarterly targets will provide short term wins and highlight your progress.
Monitoring your current cash flow. Keeping track of your surplus cash flow and contributions toward your goals can help you correct issues before they become a problem so you continue to make progress.
