4 wealth improvement tips from an experienced chartered accountant and certified financial planner?

1 – The people that earn the most income are not necessarily the wealthiest

To increase your wealth you do not want to have to rely on your salary and wage income. As a wise man once told me if you spend 100% of your wage on discretionary items, staples and lifestyle assets then you will have to work for the rest of your life.

When you see a person or family that appears affluent the chances are that they have a nice modern European car or nice well-furnished house in a desirable location and they are well presented. From my experience, while you the reader can see these assets, I as a chartered accountant and financial planner, see both the assets and the debt. Unfortunately, the debt would need to be large in order to acquire such assets, and unfortunately, interest on the loan(s) is not tax-deductible. 

In the above example, whilst the home will no doubt appreciate in value, it does not provide passive income. If you want or need to stop working or you are about to retire it may become necessary to sell the home, particularly where you have a mortgage that has not been discharged.

For simplicity, let’s compare, two professionals that earn the same income, one owns a $2 million dollar home and the other owns a $1 million dollar home and a $1million dollar investment property. The first will be perceived wealthier but over the longer term, the second will be more financially secure. The second will be able to use the net rent to pay down the debt on the personal mortgage. The second will have a choice to stop working sooner if he/she desires.

You may feel that right now you wished you were the first person, in the above example, however from my experience, by the time to you reach your 50’s most wish they were the second.

2 – There are only 3 ways to make a profit on your growth investments

In very simple terms there are only 3 ways to make money on growth investments, such as shares and investment properties.

The first is to buy a quality property in a good location and on good transport links or invest in quality well-known shares and hold onto these assets as long as possible. This is why we make money on our home. We buy our home and hold onto it for 20 or 30 years, inflation does the rest, the property continues to go up over the long term.

We can use the same strategy with shares, we buy quality stocks, generally, these are large companies on the Australian Stock Exchange that in total market capitalisation terms are worth well over $1 Billion dollars. These are companies that we see on a daily basis, we are familiar with their brand.

The second way is to sell the assets in a boom period, probably the best example here is with the rise in property prices over the past decade. That is, anyone that sold an investment property in the last couple of years must have made a profit. Property prices were at an all-time high.

The third is to buy quality assets in a depressed market. Possibly the best example here is buying shares after a GFC or during COVID. Again the emphasis here is on quality shares with strong balance sheets and low debt.

3 – Investment goals should be long term, not short term

Individual and family goals are critically important. It amazes me that many individuals and families live day to day, much like that movie “Ground Hog Day”. 

Some basic things that you should discuss include:

  • When do we plan to pay off our mortgage?
  • Will we require a bigger home in the future?
  • Are we prepared to sell the family home, and downsize so that we can afford a comfortable retirement?
  • When do we plan to retire?
  • How much money will we require on a monthly basis when we retire?

These a just a few discussion points, clearly there are many more depending on your circumstances.

Now that you have formulated your goals, focus on your long term goals first. Yes, long term goals first not short term goals.

Essentially your short term goals will be financed after establishing a financial planning strategy for your long term goals. This is the very reason that our Australian superannuation system is one of the most envied in the world. A small percentage of our gross wage goes into super and we do not notice it but the superannuation balance accumulates over the long term. We need to consider and implement a similar plan to achieve our long term goals

4 – Emergency account

Always have an emergency account. For people with a mortgage, I would suggest that they have 3-6 months net wage saved in their home mortgage offset account. You need to be disciplined as this money is only to be accessed in an emergency, not to pay for a holiday, not to purchase lifestyle assets such as furniture.

Should you have any questions with regard to formulating your goals or investment strategy, please submit an online enquiry now or call Peter Quinn on +61 2 9580 9166.  We also offer a FREE 45-minute consultation should you have other financial planning, taxation or superannuation issues you may wish to discuss.

The information in this document does not take into account your personal objectives, financial situation or needs, and so you should consider its appropriateness having regard to these factors before acting on it.  It is important that your personal circumstances are taken into account before making any financial decision and it is recommended that you seek assistance from your financial adviser.