In this blog, I am going to talk about the general characteristics of how to become wealthy!
Spend Less than you Earn
This is the most simple yet most important characteristic! It is estimated that about 50% of Aussies live paycheck to paycheck. The reason why living paycheck to paycheck is so disastrous is that not only are you missing out on the amount you could be saving, but also the compounding returns those savings make for you (either via investment or interest returns or reducing interest payable if you have debts). If you need help in this area, download our free Cashflow Guide.
Maximise your Investment Returns
You need to familiarise yourself with what an 'opportunity cost' is: "the potential forgone profit from a missed opportunity—the result of choosing one alternative over another". Consider the following annual rates of return:
Cash | 4% |
US Shares | 10% |
Investment Property | 3% |
Business | 25% |
You may see a return of 4% on cash and see that as a 4% return. However, if you look at it through a lens of maximising wealth, it is a -6% opportunity cost versus investing in US Shares (these are the 30 year average past performances for both).
I also often see this phenomenon with people wanting to retain the first apartment they purchased as an investment long term. However, when you do the maths, it may have only been generating a 3% net income and capital growth yield. Therefore, it makes it a -7% opportunity cost versus US Shares.
Now, am I saying you should sell up all your assets and put it into US Shares? Absolutely not, you need to consider your investment time frame, tax consequences etc. before making any investment decision, however you need to be absolutely ruthless in ensuring every dollar you have invested has a chance of maximising it's rate of return for you.
Being a Business Owner sure helps
It's no surprise to anyone that being a business owner can help make you very wealthy. The main reason for this is that many great businesses can target a profit margin percentage that is much higher than what you can derive from most passive investments that you purchase (as illustrated by the 25% above).
Going into business is a big risk as around half fail within the first 12 months and there are always new risks to counteract such as competitors and cashflow pressures. For this reason, good businesses should be compensated for this added risk by being able to obtain higher profit margin percentages than achievable with passive investments.
Utilise Borrowing and Tax Strategies
The numbers around borrowing to invest into quality investments stack up. Over the last 30 years, US Shares and some direct Australian Property (primarily houses with their value underpinned by land content rather than apartments, units etc.) have been able to generate around 10% per annum (capital growth and income yield combined). However, during this time interest rates have averaged around 6%. Therefore, there is a clear benefit of leveraging by using the banks money at 6% to generate a 10% return. However it is important to reiterate, this strategy only works for quality investments - those that do not generate a sufficient rate of return can actually cost you money when considering the interest costs.
Wealthy clients also take advantage of many tax minimisation strategies such as negative gearing, making additional super contributions and creating family trusts to increase their total wealth.
Invest Regularly and take advantage of Compounding Returns
A previous blog post I have made illustrates the power of investing regularly and letting time and compounding returns take care of the rest! In the blog, it explains how 94% of the total wealth generated is attributable to the rates of returns generated via investing and wonders of compounding returns, and only a tiny 6% of the wealth generated is due to the actual savings rate of the individual!
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General Advice only.