The golden rules of wealth creation

June 1, 2022
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Many people fail to create wealth because they lack knowledge of where to start, or confidence in their ability to make the right decisions1. No one automatically knows how to budget, or save or invest wisely, these are skills you need to learn. If you’re keen to create wealth and a strong financial future, you need to begin by taking the time to educate yourself. Your comfortable retirement or prosperous lifestyle before retirement (or both) will need preparation, planning maybe a few sacrifices and some careful decisions. You may not love curtailing your spending now, or spending so much time thinking about the distant future, but you will love yourself in later years when your investments become a respectable nest egg earning you extra income.So, where do you start?

Spend less than you earn

It’s an oldie, but it’s sound advice. Jeff Rose, writing for Forbes magazine, says simply, don’t make rash spending decisions (he puts it more bluntly but we’re a little more polite at RJS)1. He also advises dropping your living expenses as much as possible. To create wealth, you need to have surplus funds left over to invest. You can’t spend your entire pay packet every month on fine wining and dining, or expensive electronic equipment (or whatever your weakness is), and expect to save enough money to make a decent investment.If you’re dedicated to the idea of creating wealth, reducing your spending is an excellent start. suggests refinancing loans could be a way to save, especially as lenders often have an attractive rate for new customers2. The same could apply to alternate utility providers who might give discounts to you if you switch to them. And avoid falling into the trap of wanting to drive the latest car. Drive an older model that you own outright instead.And finally, make a budget, track your spending. Think about saving on the little things, try eating at home more often, have one coffee a day instead of two, be more careful at the supermarket, take a list and a meal plan with you instead of throwing things wildly into the trolley. It all add up and leaves you with surplus money you can put to work.

Borrow less than you can afford

If you go onto a bank website and pop in your basic details, it will spit out an amount you can borrow for property investment. Most potential investors are surprised how big this number is. It’s quite amazing when you think about it. Based on the bare facts about you, your bank is suggesting they could be willing to lend you hundreds of thousands, even millions. Sure, they need to do further checks but it’s still an extravagant starting point. Be warned, just because you could borrow that much, doesn’t mean you should. In fact, you really shouldn’t3.Each extra thousand you spend (and therefore borrow) can come with added costs, not just interest, but stamp duty and administration costs.If you stretch yourself to your borrowing limit, you may have no room to move if your circumstances change or the value of the property falls below what you paid for it. You also might end up spending all your money on your mortgage and find yourself unable to afford expenses in other areas of your life. Consider whether you need to spend so much on your investment property.

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Invest wisely (and leave it alone)

Dale Gillam writing for The Wealth Within (in 2009 but this advice is timeless) says it’s wise to invest 10{89774503f1dc5a8067a215bf11c503ad6eecdd9fbdfb7beae4875fba6258e357} of your income4. If you are fortunate enough to have surplus income, set aside an amount for investment at every pay cycle. For the purposes of this discussion, investments do not include art, principal place of residence, car or jewellery. It means solid, growth style assets like shares, investment properties or high interest cash accounts or managed funds. A good quality asset gives you both capital growth and income4. The assets you will choose depends on your timeframe for investment and your risk appetite. ASIC5 has a good framework to help you get started, and we would always recommend you speak to a financial planner before making any concrete investment decisions.Here’s what ASIC suggests as assets to suit your various needs depending on your risk profile and your investment timeframe5.Short term investments: these are for one to three years, low risk of loss of value, and you can expect returns around 4-6{89774503f1dc5a8067a215bf11c503ad6eecdd9fbdfb7beae4875fba6258e357}pa. Such assets as term deposits or high interest bearing saving accounts. Be careful not to lock your money away so it’s hard to access when you need it.Medium term investments: terms are usually four to six years, with a low-medium risk of losing your money, medium volatility (value could go up or down 20{89774503f1dc5a8067a215bf11c503ad6eecdd9fbdfb7beae4875fba6258e357} within a year) and returns closer to 6-7{89774503f1dc5a8067a215bf11c503ad6eecdd9fbdfb7beae4875fba6258e357}pa. A managed fund could be a good idea for this timeframe.Long term investments: seven or more years, with negative returns four/five years out of 20, and high volatility, value could go up or down 40{89774503f1dc5a8067a215bf11c503ad6eecdd9fbdfb7beae4875fba6258e357} in a year, with an expected return of 8-8.5{89774503f1dc5a8067a215bf11c503ad6eecdd9fbdfb7beae4875fba6258e357}pa (over ten years). This could be shares or a high growth fund within super.

Leave it alone

Volatility is a normal part of an investment and you might find the value of your asset fluctuates over time (the longer you hold it the more it fluctuates). The trick is not to panic when this happens. Hold tight, and trust the decision you made in the first place3. Speak to your planner if you’re worried, he or she will let you know when it’s time to abandon a poor investment. Earnings on your investment could be added to it, compounding your returns. Left alone, allowed to compound, your investments may do amazing things._The golden rules of wealth creation have been around in some form for a long time. But they never get old. They’re so simple, yet if you follow them faithfully you are very likely to create a lifestyle with choices and later, a retirement of great comfort and reduced worry. Educate yourself, commit to a budget and save your surplus income, make wise investments and leave your investments to grow quietly on their own. Your future self will be grateful for the decisions you’re making now and for the prosperous and comfortable retirement you may create.If you’re keen to begin creating some wealth for your future, contact our experts at RJS Wealth Management. They’ll guide you as you turn these ideas into a plan for your financial future. Call us on 1800 27 28 29.Sources:

  1. Forbes Magazine, Jeff Rose Sept 2015– Ways to build wealth fast that your financial adviser won’t tell you
  2. – 5 ways to spend less than you earn
  3. The Simple Dollar, Holly Johnson Oct 2015– Why you should buy less house than you can afford
  4. Wealth Within, Dale Gillam May 2009– Golden rules to success
  5. MoneySmart – Investing, Choose your investments

This blog has been prepared by RJS Wealth Management Pty. Ltd. ABN 24 156 207 126. RJS Wealth Management Pty. Ltd. is a Corporate Authorised Representative (No. 438158) of Modoras Pty. Ltd. ABN 86 068 034 908 an Australian Financial Services and Credit Licensee (Number 233209). The information and opinions contained in this blog is general information only and is not intended to represent specific personal advice (Accounting, taxation, financial, insurance or credit). No individuals personal circumstances have been taken into consideration for the preparation of this material. Any individual making a decision to buy, sell or hold any particular financial product should make their own assessment taking into account their own particular circumstances. The information and opinions herein do not constitute any recommendation to purchase, sell or hold any particular financial product. Modoras Pty Ltd recommends that no financial product or financial service be acquired or disposed of or financial strategy adopted without you first obtaining professional personal financial advice suitable and appropriate to your own personal needs, objectives, goals and circumstances. Information, forecasts and opinions contained in this fact sheet can change without notice. Modoras Pty. Ltd. does not guarantee the accuracy of the information at any particular time. Although care has been exercised in compiling the information contained within, Modoras Pty. Ltd. does not warrant that the articles within are free from errors, inaccuracies or omissions. To the extent permissible by law, neither Modoras Pty. Ltd. nor its employees, representatives or agents (including associated and affiliated companies) accept liability for loss or damages incurred as a result of a person acting in reliance of this publication.

June 1, 2022

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