The best crash course in Wealth Creation you’re ever likely to read!

Do you dream of living the life of a rock star, or a business tycoon? A life where money is no object and, instead of worrying about the mundane things in life, you’re more concerned about where you will go on your next holiday.

 

This guide will give you a path to achieving this dream.

Even for people on a modest income, it is possible to grow a portfolio of investments that can give you the financial security and freedom that you dream of in the future.

Ok, you say, but that’s the future. What’s in it for me now?

There are some great things that you can experience almost from day one:

      • There is nothing like the peace of mind that comes from knowing that you never have to worry about paying your bills again. 
      • You get the joy of planning holidays to exotic places with the family.
      • Your kids get to have the things that you’ve always wanted to give them.
      • You begin to feel more and more in control of your finances and your life and shift from trying to “keep up with the Jones’” to becoming the Jones!
      • You can turn up at your friend’s home knowing that you’re at least as financially educated and savvy as they are and that you have investments of your own to talk about!

Tell me the purpose of creating wealth?

Put simply, the purpose of creating wealth is to HAVE CHOICE!  You get to choose. Your financial freedom is the result of using your hard earned money to generate passive income, to build assets and investments to building long-term wealth for your future and eventually, building wealth for your grand retirement. Whatever that is for you. Fishing in a tinny, jet setting the globe, building a foundation for a cause that is inspiring to you, leaving enough money for your children and future generations, but to still have them contribute to their life and community. Your choice! You get to choose.

What’s your Baseline

Before you read further, take a moment to fill in the following calculator to see where you currently stand as an investor.

Multiply your age times your realised pretax annual household income from all sources except inheritances. Divide by ten. This, less any inherited wealth, is what your net worth should be (courtesy of “The Millionaire Next Door” https://themillionairenextdoor.com/).

How did you score?

Are you in the Green?

If you are in the green, congratulations. You’ve probably saved, sacrificed and educated yourself and got your hard-earned money working for you. You’re likely looking at a diversified investment portfolio with different asset classes and are on your way to a sizable nest egg that will provide for you in your retirement.

Is your colour Orange?

From 90% to 110% you’re somewhere around the mark. You should congratulate yourself for achieving what you have to date and then start thinking about other ways that you can generate income. Reinvesting and taking advantage of the compounding effect can make a massive difference to your bottom line. Creating multiple streams of income is the way wealthy people get to where they are and that is a good strategy for you too.

Are you in the Red?

Anything below 90% and it’s possible that you could be doing more towards securing your financial freedom. Perhaps it’s going to take a shift in mindset. Perhaps a comprehensive budget will get you on the right path. 

Summary

If you’re on or ahead of the average, great, keep doing what you’re doing and perhaps incorporate some of what is to follow in your strategy. 

If you’re behind the target, don’t worry, there are plenty of things you can do to pick up the pace and get on top of things.

Let’s start the journey and see where you can go!

Uncover your Why

Everyone dreams of riches but so few people actually make it. Why is that?

Perhaps they had dream jobs that paid a fortune. Maybe. But you’d be surprised at how many people have financial independence who haven’t had executive positions.

Perhaps they inherited the wealth. Ok. That’s another way of getting wealth but:

    1. Who can rely on that as a strategy
    2. Who knows what you’ll eventually be left with
    3. People who inherit wealth and don’t have the right mindset usually blow the wealth before they can even pass it to the next generation

 

You need to uncover a Why.

      • A reason that is so compelling you don’t give up on the journey.
      • A reason that lets you make tough decisions that rob you in the short term only to pay you back tenfold in the future – and find it easy to make the decision.
      • A reason that you can articulate easily and simply.
      • A reason that you can look yourself in the mirror and believe it when you say it out loud.

Once you have your Why, it becomes easy to evaluate options and stick to plans. It makes it easy to keep going until you achieve your goals.

This is all well and good in theory, but how do you come up with your Why?

One good way is the “5 Whys” technique which was developed by Sakichi Toyoda, the founder of Toyota Industries in the 1930s. He developed the 5 Whys technique as a way of getting to the root cause of issues.

 

Your 5 Whys

Ask yourself why you want to become wealthy and keep questioning your answers until you can’t answer any more. This is usually the Ultimate Why. Let’s look at two examples for two different people. Remember, the “Why?” can also be “Why do you feel that?” or “Why is that important to you?”. The principle is to just keep questioning until there are no more answers.

WhyPerson 1Person 2
Why do you want to become wealthy?Because I want to travel the world and visit interesting places.So I don’t have to worry about paying my bills.
Why?
Why is this important?
Why does this matter?
Why do you feel that?
etc
Because I never got to go on overseas holidays when I was a kid and I want to make up for lost time.Because I hate the feeling of not being on top of my finances.
Why…?I always felt that other people had more than I didBecause I don’t have choices in life.
Why…?I don’t want to feel that other people are better than me and have opportunities that I never had.Because I don’t like my job and would do anything to not be tied here but feeling like I need to be to keep our heads above water.
Why…?To be honest, I feel like a failure and becoming financially free represents success to me.Being financially free means never having to do things that I hate again. It means freedom!

Now, these examples are made up but it illustrates the point that your Why is yours alone. It doesn’t have to be a noble altruistic motivation, it can be purely self centred in nature. It just has to give you the drive to TAKE ACTION! 

Without a compelling reason and action to back it up, you will never get the results you crave.

Ok. Once you have your Why, it’s time to start looking at the How!

Read on to discover the next steps in your journey to financial freedom. There are more calculators below so you can begin to see and understand the wealth that can be yours.

Create a budget (that you actually use)

If you’re one of those people who roll their eyes at the thought of doing a budget, have we got news for you!

One of the most important parts of wealth creation is having money to invest.

Where is this money going to come from? 

You guessed it, by setting a budget and sticking to it. 

We have put together a super useful budget calculator and workbook that takes you through the process of setting up, analysing and sticking to a solid budget that gives you the freedom to spend on luxuries, pay for essentials and, most importantly, have money left over to invest. 

Even if you don’t have a budget and you’re still putting aside funds each pay to invest, you will still get a great deal of insight out of creating a budget in a formal manner to see what else you can free up. Getting on top of your personal finances can make a huge difference to your life.

Here’s the link to our budgeting page where we have workbooks and spreadsheets and show how you can create an amazing budget that is flexible, allows for your hobbies and interests, lets you have holidays and still lets you save money to build wealth for your future.

Once you’ve filled in the budget come back here and enter your monthly investment contribution amount in the box below. We’ll give you some further suggestions from there.

If you don’t have a budget yet, just enter some figures to see what some of the options available might be. 

HINT try $90, $250 and $1000 to get some thoughts. Perhaps that might give you the motivation to go fill in the budget worksheet properly.

Rethink Your Relationship with Risk

When some people hear the word risk, they think in very negative terms about it. 

      • “What if I invest in this and lose my money?”
      • “What happens if the share market crashes?”
      • “What if property prices go down after I buy?”

Sure, these are all good questions to ask but, if you do your research ahead of time, it’s possible to have a balanced view of the actual risk involved.

Yes, there have been share-market crashes but, every time this has happened, the market has bounced back and gone even higher. 

Same with property prices. Australia has seen some ups and downs as well as some stagnation but, on the whole, prices have continued to rise decade after decade. 

The smart way to deal with risk is to make sure there are mitigating factors working for you. For example:

The way to mitigate the volatility of a single share is to invest in an index fund which is made up of the shares from multiple companies. That way, should one company falter, the impact on the fund is minimised and the fund will tend to continue to rise which makes future performance much more certain.

Even with property, there are ways of mitigating risk. Investing in areas where there is good infrastructure (schools, transport, shopping, jobs) is much less risky than investing in a boom or bust mining town. Getting a professional property manager to vet and manage your tenants can save you a lot of hassle and heartache. Having a solid strategy to pay down your debt can also remove a lot of the risk (if you don’t owe anything on a property, it really doesn’t matter if the value drops or you lose your tenant!). 

Risk management is the key!

The thing to remember is that with risk comes reward. The higher the risk, the higher the potential reward and the higher the chance that you will lose if something goes wrong.

If you can’t afford to lose anything, stick with less risky investments and let time and patience be your friends.

The other thing to remember about risk is that it is a relative thing. A 20-year old who is just starting out in the workforce and a 60-year old who is close to retiring will view the same investment opportunity very differently. Despite everything about the opportunity being presented the same way to each investor, their individual circumstances will see them taking very different actions as one is looking to grow wealth and the other is looking to protect wealth. 

Pay Yourself First

If you want 6-pack abs you need to have discipline with what you eat and with the exercise you do. It’s the same with building your wealth.

You cannot build wealth without actually investing and the only way that you will have the money to invest is if you “Pay yourself first”. 

This simply means that you need to consistently, regularly and without fail, take some of your take-home salary and put that into some form of investment. In the early days this could be put into a savings account. As your investment journey progresses, this could be into paying down an investment property or having a regular deposit into a share fund.

Sooner or later, paying yourself first pays off. You buy assets that appreciate in value and have other people (e.g. renters) pay off your assets for you. You can then continue to build stocks, other investments which give you investment returns to perhaps reinvest, or start investing in other markets and even more rental properties. 

Money working for YOU, instead of you working for money is the end game. Innately, we all dream of being financially free, living life on our terms and living our highest values. That is where we will have the most fulfilment, and we ALL want that for ourselves and our families.

Start Investing

Now that you have an idea of the monthly amount that you have available to invest and have begun to pay yourself first, it’s time to start investing. 

For a lot of people, the psychological hurdles are what you are going to have to overcome first. We are literally wired to do the same thing today as the thing that didn’t kill you yesterday. It’s a carryover from our caveman days and, for centuries, this strategy worked very well for us. 

However, we’re not living in caves any more and we need to be able to change from what we did yesterday which, in this case, means not sitting on the fence anymore, and just getting started. 

The biggest fear that most people have is about making a mistake and worrying that you’re going to lose money if you invest in the wrong thing. Sure this is a valid concern but a proper investment strategy will mitigate this risk. If you invest wisely, the returns can vastly outweigh the risks.

We have some excellent articles than might help here such as:

We recommend that you read these articles to help you get into the right mindset about your relationship with risk.

In short, there are low-risk investments available (think index funds for example) that will allow you to begin your investment journey in a way that fits with your current risk tolerance, wealth mindset and present-day belief systems. 

Create Additional Income

The next step is to create additional income.

No, this doesn’t mean taking on a second job or starting a side hustle (although this also works too), it means unlocking the wealth that you have available to you right now.

“What wealth?”, you ask.

If you stopped to fill in the budget spreadsheet earlier and work through the workbook, you would have found that it can be surprisingly easy to free up cash flow in your existing income. If you didn’t do the spreadsheet, it’s not too late to [create a budget that can kickstart your wealth journey].

What that budget is designed to do is to show you that it’s the choices that you make and not your absolute income that will define how much wealth that you will create in your lifetime.

Let’s take cars as an example. We’re not saying you shouldn’t have a car, we’re saying that there are expensive cars that cost you a lot of money over time and there are cheap(er) cars that cost you a lot less. The point is, once you’ve chosen your car, you then have to live with that decision and the financial impact that follows on. 

Sure, driving an exotic car would be fun but, for people who value money, having something that you own outright and are not paying high interest rates on can make a massive financial difference in the long term. 

The same goes for:

      • Massive TV screens
      • Boats (and other “toys” that we tend to accumulate)
      • Constantly dining out

All of these things are nice, but they won’t give you security when you’re looking to stop work and retire.

So far you’ve:

      • Established your baseline
      • Found your Why
      • Created a workable budget
      • Started a low-risk investment scheme in something paying higher interest rates than a bank
      • Looked to free up additional working capital to boost your investment process

The next obvious question is: where to from here?

While there is no one right path for everyone, a good next step would be to…

Diversify and Protect

You’ve made some initial, safe investments. How do you protect yourself and build your portfolio even more?

One of the rules of risk mitigation is to diversify your investment portfolio. If shares are going down, then property may go up and vice versa.

Protecting your wealth through diversification is a good strategy for ensuring external events that are out of your control (think Covid or a stock market crash), don’t wipe out your hard-earned gains.

More importantly, as you grow your foundation, you are much more able to increase your risk profile and take on investments that have higher risk but, more importantly, higher returns. 

To put that another way, if you were going to invest $10,000 in a risky investment that had the possibility of a big payday at the end, your attitude would be very different if that $10k was all of your investment capital than if it was only a small portion of your asset pool. In the former case you’re basically gambling with your future. In the latter case, you’re taking a strategic position on the investment knowing that, if it doesn’t pay off, you’ve not risked everything in the process.

The image below gives you some idea of relative returns and investment classes you can consider as your portfolio grows.

As you can see, simply saving money in the bank is the lowest rate of return that you can have whereas things like private equities and hedge funds can offer much higher returns. The problem is that they can be volatile and instead of earning 10%+, you could end up losing the bulk of your investment. Again, this sounds scary but, if you’re only investing a tiny portion of your asset pool into these types of investments and you’re not desperate or greedy, these can be excellent investments.

Now that you have the beginnings of a portfolio, the best way to grow it exponentially is:

Climbing the Investment ladder

As you can see, simply saving money in the bank is the lowest rate of return that you can have whereas things like private equities and hedge funds can offer much higher returns. The problem is that they can be volatile and instead of earning 10%+, you could end up losing the bulk of your investment. Again, this sounds scary but, if you’re only investing a tiny portion of your asset pool into these types of investments and you’re not desperate or greedy, these can be excellent investments.

Now that you have the beginnings of a portfolio, the best way to grow it exponentially is:

Reinvest your earnings to compound your returns

Too many people make a good start with building their wealth only to hobble themselves on the way. 

They buy an investment property and, instead of taking the rental returns and paying down the property more quickly so they can buy another property, they take any income and use it as spending money. They buy “toys” that lose value instead of investments that grow in value thereby missing out on capital growth.

While we’re not here to tell you how to spend your money, we can tell you that reinvesting will cause your wealth to multiply hugely if you continue to pay yourself first and reinvest constantly. 

Albert Einstein once said “Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it”. And the compounding effect can make a huge difference on the end result of your nest egg.

Take a look at the following graphic. A $10,000 deposit into an account earning 10% per annum compounded over 30 years equates to just under $200,000 at the end of that time. The interesting things is that, after year 20, you earn more in interest each year than 

As you can see, reinvesting can make a huge difference to your financial position at retirement age and that’s also due to knowing…

Borrowing as an investment strategy

Arguably the greatest investor of all time is Warren Buffett and his investing principles show the way. If I’m recommending people to invest their hard earned money we want it to grow, accelerate and compound over time. We in most cases, recommend Time in the market as opposed to timing the market. To back this up, Buffet says, they are not ‘stock pickers’ they are business pickers hence own stocks based upon expectations about their long term business performance and not because they view them as vehicles for timely market moves.  If you want to know what The Four ‘Giant stocks’ of Berkshire are, go here  and he also talks about investing in infrastructure assets and repurchasing as long term wealth strategies.

You may as well stand on the shoulders of giants, which means don’t reinvent the wheel, just learn from the best.. 

The other part of this equation is how compound interest works. The longer that you can leave your investments alone, the more they will grow over time. Eventually (and this is the goal), the interest and returns from your investments will outweigh what you have invested and it will become a growth machine that does the work for you.

So far you’ve:

      • Established your baseline
      • Found your Why
      • Created a workable budget
      • Started paying yourself first
      • Learned about your risk profile
      • Started a low-risk investment scheme in something paying higher interest rates than a bank
      • Looked to free up additional working capital to boost your investment process
      • Diversified and protected
      • Climbed the investment ladder
      • Reinvested your profits to accelerate your wealth
      • Understood the importance of Time in the market

From here, your journey is starting to mature so it’s time for some more advanced strategies such as:

It’s not timing the markets, it’s time in the markets

There is “good debt” and “bad debt” when it comes to borrowing money. 

“Bad Debt” is when you borrow money for things that go down in value. Things like a car, or a fridge, or a holiday. You might have convenience and immediacy, but you end up paying more for the item because of the interest rate and then you lose more money because it devalues over time. In short:

      • You end up paying more for the item
      • The item depreciates in value
      • You get no tax advantages for this type of debt

Compare that to “Good Debt”. 

If you borrow money for say, an investment property, you get multiple benefits:

      • Someone else ends up paying off your loan (the tenant)
      • You can claim the interest repayments as a tax deduction, in some cases
      • The value of the property goes up
      • You can use the increased equity in the property as down payment on your next payment
      • When you eventually pay off the property, you have a steady income stream coming in

What’s not to love about that!

You can also borrow money for shares, but there are some restrictions on this type of borrowing that make it a little riskier than borrowing for other types of investments so we won’t cover that off here.

Invest in yourself

Before you invest in a new asset class, you need to understand what you’re investing in. With shares, do you know what the ex-dividend price is for a stock? What about P/E ratio and what that tells you about the underlying value of the shares? 

With property, do you know how yield is calculated and what it means to the value of the property when you buy or sell?

None of these things are rocket science, but you should understand these concepts yourself rather than just relying on someone-else’s opinion. 

One of the rules for investment advisors is that they can only offer opportunities that reflect the level of sophistication of their client. In other words, they will not offer a speculative investment opportunity (with potentially high returns) to a novice investor. They will only offer simple investment opportunities that they feel you will understand.

So, in simple terms, the more you educate yourself, the better the opportunities you will come across and the higher the rates of return you can achieve!

Take some time each week to learn some new things about investing that you can use in the future.

Track your progress

One of the biggest motivations is when you can see something happening. If you’re trying to lose weight and you see progress on the scales it encourages you to keep going. If you’re trying to build wealth it is very encouraging to see the amount of your investments growing. It’s especially encouraging to see the amount of interest compounding each month. In the early days it won’t be much but, eventually, you will be delighted to see that you can earn more from the investment returns than what you are putting in from your pocket. 

That’s a good position to be in.

Tracking can be as simple as reviewing your bank statements periodically or, it can require a revaluation of your investment portfolio – when you get to that stage. 

Just be sure that you can see and appreciate the progress that you’ve made and take some time to reward yourself for the efforts and some of the sacrifices that you’ve made. 

Summary

Well done! You’ve made it through to the end of this “Crash Course in Wealth Building”. 

We hope you’ve learned a lot on the way through. More importantly, we hope you’ve got some strategies that you can implement to either start or boost your wealth-building process.

      • Perhaps you’ve created a budget for the first time
      • Maybe you started paying yourself first
      • Did you set up an regular deposit into an index fund
      • Are you starting to learn about shares and investing

Any of these things are a great way to start.

If you’re a more seasoned investor, we hope that we filled in some missing gaps in your knowledge that will allow you to become an even better investor. 

In either case, we’re here to help you.

Do you have questions about your financial journey and what you can do to improve things?

Our advisors are always here to help you make decisions that fit with your income, your risk profile and your goals. 

If you’d like to see if we can help your wealth creation process, book a time to have a discussion to see if we’re right for you. If you’re ready to jump right in, you can book a Whole of Wealth discovery session to get you on track for your future.

Good luck!

“The amount of money one accumulates is
at its essence, a measure of one’s choices.”

 Arthur Panagis

 

Disclaimer: This article contains information that is general in nature. It does not take into account the objections, 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.

This article is also factual information only. It is not intended to imply any recommendation about any financial product(s) or to constitute tax advice. The information in the article is reliable at the time of distribution, but may not be complete or accurate in the future.

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