MONEY MATTERS MONDAY 12th NOVEMBER 2018
The Wealth Accumulation Journey
If two young people start out with similar incomes why does one retire with ten million dollars of assets and the other with just their home and compulsory super?
Is it luck? Did they fluke big promotions and pay rises? Is it skill? Is it due to being ruthless?
A high income is not essential for building wealth
It is necessary to have a reasonable income to do well. Yet financial planners see people with very high incomes who end up without much. They also see people with modest incomes who end up very well off. Having a high income isn’t essential, it’s what we do with it that counts.
A person who spends all they earn, or more, is unlikely to accumulate assets. We must spend less on ourselves and our family than we earn, so we can start saving. This requires discipline and a firm focus on a definite goal to accumulate wealth.
It isn’t possible to save $10 million. Once we have a little savings we need to start buying good quality assets that will appreciate in value – commercial or residential properties, farms, shares, managed funds or businesses.
The people who accumulate wealth most successfully can see opportunities others miss. They identify bargains, see situations where they can add value, anticipate future trends and think ahead.
Acceptable, considered risk is part of the journey
They are also prepared to take risks. They don’t take huge risks, but they do accept risks they have studied carefully, understand well and believe they can manage.
It will be necessary to use borrowings to buy good assets. This enables investors to make profits on other people’s money, gains on assets they cannot afford to pay cash for. Gearing accelerates both profits and losses.
Simplistically, if the value increases ten per cent and half the purchase price was borrowed, then the return on money invested is twenty per cent, before interest and costs.
It is essential to service the debt so assets that provide a good income are best. For example, commercial property may be better than residential because it pays much higher net income.
Compounding interest is a very powerful force. Understanding it allows us to know we don’t need to double our money every year. We just need good assets, and maybe ten per cent per annum, especially if using gearing.
Diversify and take a long-term view
It is also important to have a long-term view as returns will vary greatly year to year. We should be prepared to hold our purchases for up to ten years if we are confident they will provide profits.
A great way to start our wealth accumulation journey is with a managed fund saving plan and instalment gearing. Then we begin looking for opportunities, plan ahead and keep focused on our goal of wealth accumulation.
This is general advice and should not be treated as personal advice. Russell Tym is an authorised representative of MoneyLink Financial Planning Pty Ltd ASFL No: 247360.
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