Luck certainly helps some people get wealthy.
For the rest of us, careful planning and an understanding of markets, investing strategies, economics and finance are vital aspects of going down the path of wealth creation.
There are many aspects to wealth creation and the list below covers just five of those. These are the five characteristics or strategies usually evident in most wealthy people and if you follow them throughout your life, you will probably have more wealth than those who don’t.
Buy a house to live in
Owning your own house to live in is the best way to both meet the need for a roof over your head and to accumulate wealth. House prices were high 30, 20 and 10 years ago. They still are. Postponing the decision to buy a house has proven to be a financial disaster in just about every year since house price records started in the 1800s.
Mortgage repayments are not only ‘forced savings’ but even with modest price growth, on such a big asset the wealth gains over a long time frame (think well over 10 years) are substantial. Once you build some equity and wealth in your own house, it can be used, in time, to finance other wealth creating investments.
Look at your superannuation regularly
With compulsory superannuation set at 9.5 per cent of your income, there will be a decent chunk of cash put into your pension fund year in, year out, even when you start working in a relatively low income job.
Make sure the fund that is looking after your savings charge low fees – a 0.5 per cent per annum difference in fees over 40 years of superannuation performance can mean the difference between a comfortable retirement and financial pressure. Also look where the investments are made – high growth but volatile asset classes are good while you are young, but as you hit retirement, safe, low return investments are sensible. In other words, take time to look at and understand your superannuation.
Take some risks
Calculated risks can yield financial returns that boost wealth. Even when borrowing for a house, don’t always be put off by borrowing a seemingly large amount. Wage and house price growth abd your repayments will, in time, make the initial loan look small. When setting up a business, be prepared to spend and invest some money to make some money. It is not a surprise that every company in the ASX top 200 has debt. Other than the uber rich, all other wealthy people have taken on debt to take a risk at some stage in their life.
That said, before you invest in anything, do a lot of home work and scenario planning. The easiest one is to assume interest costs on you borrowing will go up. If they do, you will be well prepared. In not, you will have surplus cash.
Look at your finances
The Australian financial sector is competitive. The banks and other financial institutions that provide mortgages, personal loans, superannuation fund management and business finance are all hungryyou’re your business. To get that business, they often offer discounted fees, lower charges and interest rates so by shopping around and reducing the cost of servicing your loan or fees in running your business, you will save money. On your mortgage, for example, you can currently pay 4.0 per cent or thereabouts or pay the advertised rate around 5.0 per cent. On a $500,000 loan, the difference of 1 per cent per annum is over $400 a month. Shop around and be prepared to change who you do your financial business with. It will be worth it.
Never pay interest on credit cards
Having debt and paying interest are a vital part of any path to wealth creation. For your house, a business loan or other leveraged investment purposes, having debt is fundamental. But, and it’s a big but, never have debt on a credit card where interest rates are oppressively high. Make sure you pay off you credit card in full and on time every month.
Save your interest costs for loans that will enhance your wealth, not every day spending.
There you go.
Remember that most of these strategies are medium term – they will not make you rich quickly. Unless you are lucky, getting rich quickly wont happen. Don’t invest in things you don’t understand.
There are a range of other matters that can be wealth enhancing.
I am one of the speakers at the Money for Life workshop in Sydney on 7 October. This and many other topics about saving, investing and wealth creation will be covered at this event with a panel of top notch speakers. We will be discussing these and other matters in what should be a terrific event.
For tickets, go to http://www.quadrant2.net