Our ideas about money and ability to build wealth are most profoundly influenced by the people who raised us. These people passed on their understanding of what money is all about. So today you and I primarily act ‘instinctively’ or as a ‘gut feeling’ when making monetary decisions without considering where we gained the knowledge on such an important subject.
For more than twenty years, I have helped people manage their money. Through reading and researching the subject of money and wealth accumulation and observing diverse challenges and success, plus academic study, I have formulated a view that Kelly+Partners can help people master the important area of managing their money, to enable them to spend more time on the more important aspects of life: friends, family, connection with community and living the best life possible.
LET ME TAKE YOU THROUGH THESE IDEAS AS FOLLOWS:
1. Your Money, Your Choice
• Ideas are paramount
• Integrity is critical
• Your standards
• Your definition (goals)
Examine what ideas you have. The people you spend the most time with will influence you. What are their ideas and what are the ideas that your parents and upbringing instilled in you? Review them and think through whether they make sense or are the best ideas you can access.
Integrity, to us, is simply doing what you say and living according to what you claim to believe in. Think about where you spend your money, how you earn your money and whether what you are doing matches us to your professed values. It is no use saying you believe in investing and then not putting that into action.
Think about your standards. Do you regard saving 20% of your income and investing it excellent or maybe 80%? Or is thinking about saving but racking up credit card debt more your thing?
In the area of money and wealth, as in all things, the higher your standards the better. Your definition of what you want out of life, financially, and how you want to live is critical to determining what actions you must take to achieve your goals.
2. Protect Family
• Spend less than you earn
• Non-business assets in non-business owner spouse’s name
• Stay married
• Estate planning
When people think about protecting their family financially, they typically only think of insurance and even then most Australians are chronically underinsured. There are many other ways you can financially protect your family. Spending less than you earn is the most important one and seemingly obvious, but many people and families often struggle with this.
The long-term effect of overspending is massive, especially in terms of lost opportunity. Insurance is a must and should pay out any debt on death as well as replace income. Asset protection, by structuring assets away from risk, can make a life-changing difference. Don’t risk your life’s work.
Staying married makes a huge financial difference. The long-term financial impact of divorce is never, or seldom, discussed. Estate planning, if done professionally, will result in controlling who gets your wealth when you die.
3. Get a Business (as many as you can)
In the Australian taxation system, generating wealth as an employee is difficult, so being a business owner will make a difference for those suited to this type of role or endeavour. That said, I have seen hundreds of folk who have started a business and earned less than they would have in a job, so think hard about your idea for a business and, equally, your suitability as a business owner. If you cannot sell and cannot lead people you should think again. Everyone should seriously test the income-generating ability of their idea before giving up their day job.
4. Build Equity
Saving and investing then aggressively paying down debt is virtually never discussed by the average person as a wealth creation activity. The interest rate being charged by a financier if paid down and reducing your interest bill is a handy return for most investors.
5. Own Your Own (Modest) Home
That old adage of ‘people spending money on things they don’t need to impress people they don’t like’ is so true of housing, particularly in the Sydney market where real estate is as expensive as virtually anywhere on earth. Housing should be thought through as a need rather than a want. What do we need now. But plan for a future where you can upgrade. It is better to build income streams that can pay off a house than buy the house and then wonder how to pay it off. Houses should be bought on the basis of being paid off in 8 years or less, not 25 years.
You will argue that can limit what you can buy and I will agree that it does, but it only limits what you can buy today. If you buy well, improve your asset, accumulate equity and pay down debt, then you can more easily get what you want later.
6. Invest (in Growth Assets) for the Long
Term (>10 years) In general a long-term view can really test people’s thinking about an investment. Concentrating on the areas in which you have some expertise, or are prepared to become an expert in (shares, property, businesses) makes the most sense. Better to be an expert in a little than a fool about much. Target a return of 5% over the long term (net) and you will be well off, very well off. As Charlie Munger says, aim to be wealthy by 70 years of age, don’t rush.
7. Leave a Legacy
At the end of the day a clear financial plan, plus activity that is focused and thoughtful can free us from making money the primary focus of our life. With great advice and a good team you can be free to focus your attention on friends, family, community relationships and becoming the person you always hoped to be ‘when you grew up’. Life is limited: there is no time to be wasted!