Do you want to be RICH?
Do you want to be rich? If this headline has caught your attention, then there is a damn good chance that you are not. So what are you doing about it? Your financial health and your financial success is a pure function of the decisions you make and the effort you put in.
Over the course of the next several weeks I will share with you some helpful hints on how you can change the financial circumstances you find yourself in. In these notes, we will cover topics that look at:
- Effective goal setting
- How to save and put in place an effective savings plan
- The 8th wonder of the world, compound returns
- How to structure your investments tax effectively
- Why you should avoid risk, not seek it.
- How to safely use debt when investing.
As Mark Ford, Wealth Coach and editor of the Palm Beach letter says “While you may not be the cause of your lack of wealth, you and only you are responsible for it. You are the only one who can make the necessary changes required and you are the only one who will ever do it for you.”
Yes, good and bad luck has an effect in the short term, but by having a plan and by remaining disciplined, you can achieve great wealth.
So, if you are up for changing your financial circumstances, even if you are already rich, here’s some things you can do today to get the ball rolling……..
Effective Goal Setting
You can’t plan to achieve success if you don’t have a good understanding of what success means to you. After all, how will you know when you have achieved it?
Your objective should be set so that you have a defined figure in mind, but set your goal in terms of how much passive cash flow or income you would need today to live the lifestyle you desire. Use today’s dollar amount of cash flow desired and then increase this amount by 3% each year for every year that you think it will take for you to achieve your objective. This 3% will take into account the impact of inflation over that period of time. If, like many, you are concerned about potentially higher levels of inflation in the years to come, then increase this 3% by the amount you think is reasonable.
For example, if you believe you need $50,000, excluding tax, in passive income to retire on to live the lifetsyle you desire, then over the course of 5 years the amount of cash flow you will actually need will be….
Year 0 – $50,000
Year 1 $50,000 x 1.03 = $51,500
Year 2 $51,500 x 1.03 = $53,045
Year 3 $53,045 x 1.03 = $54,636.35
Year 4 $54,636.35 x 1.03 = $56,275.44
Year 5 $56,275.44 x 1.03 = $57,963.70
That’s right, taking into account inflation and the errosion of purchasing power inflation has on your wealth, in 5 years time you will actually need a cash flow stream of $57,963.70 per annum to be able to afford the same lifestyle in 5 years time.
Once you have this figure, you can then start to divide your objective up into yearly amounts of passive income streams which will be need to have been accumulated so that you can ensure that you remain on course to achieve your objective.
To achieve financial freedom, you will need to accumulate a pool of assets that has the following characteristics:
- generates passive cash flow at a level that will provide for your desired lifestyle needs,
- generates passive cash flow from a number of diversified cash flow streams, and
- offers the potential to continually increase your cash flow at, but preferably above, average rates of inflation.
As far as I’m aware, unless you own your own business and that business runs without your daily involvement, then there are only two other asset classes that offer these characteristics:
- quality dividend paying and dividend growing shares, and
- quality rent paying and rent growing real estate investments.
So to top off your goal setting, your objective should be to accumulate a diversified portfolio of Australian and international dividend paying and dividend growing companies and rental paying and rental growing real estate investments at a pace that will allow you to generate the passive income stream you desire.
By focusing on stable, sustainable, quality and growing cash flow assets, you can be more certain that, even if a particular market suffers a significant downturn and capital values decline, the much less volatile component of your portfolio’s returns and the one that helps you pay for stuff, “cash flow”, should hold up relatively well.
Just as a side note, there are plenty of examples of companies in Australia and around the world that did not cut their dividends during the GFC and even grew their dividends above average rates of inflation even during the darkest days of the GFC, albeit their share prices were down some 40%+ from their highs for a period of time.
How to save and put in place an effective savings plan
To accumulate wealth you need to see yourself as the manager of your business. The business you are running is <insert your first name> <insert your last name> Pty Ltd. The business you are in is the business of YOU! You need to start thinking like any business owner or CEO and the first thing a business owner needs to do is ensure that the business is spending less than it earns so that it can earn a profit. You need to think like this also. You need to consider how you are going to grow the “shareholder value” in your business being the profits/savings you generate.
Without making a profit, you can’t make investments to grow that profit and outside of winning the lotto or receiving an inheritance, you simply will not become rich.
Making a small profit is also not good enough. You need to ensure that at a minimum you are achieving a solid profit margin, one that can continue to produce a profit, even in years where once-off expenses hurt the size of the profit.
Yes, there will be times when you will need to make large lumpy once-off payments, payments that will hurt your ability to save more in that year than others. But you should still make reasonable allowance for these expenses in your budget. There will be times when you need to buy a new car or make repairs to your house. That is inevitable. But if you allow these expenses to stop you from saving, then you should seriously consider whether you can afford the asset that creates that expense in the first place.
The amount you save each month will be a function of the speed at which you wish to achieve your objectives. However, for someone who has not yet saved and still has a 15 to 20 year time frame, you should be at a very minimum, saving no less than 20% of your take home pay. And no, that 20% does not include your 9% superannuation guarantee and does not include additional repayments to your mortgage or other loans. That money needs to accumulate so that it builds your income stream, not decreases debt in consumable goods, such as housing or cars or designer clothes that do not produce an income stream.
Now for some hard words on the house you live in, the car you drive and the clothes you wear. Too many people want to pretend to others that they are rich. If you want to ensure that you will remain poor or at least fail to achieve the objectives you have set to achieve, then go ahead and buy that “dream house” or “dream car” or “dream handbag”.
Rich people understand this. Poor people don’t. Poor people would rather pretend to others they are rich than acting like a rich person. This goes for high income earners as much as low income earners.
If you can’t afford to save at least 20% of your net take home pay and put it to work for investment, chances are high that you will be underwhelmed by your wealth in the future.
The fact is, the house you live in, the car you drive and clothes you wear make you poorer. They prevent you from using those funds to increase your income streams.
If you have assets like this and you are not generating the income streams you need to provide for your financial well-being, you will not achieve financial freedom because you will always be hoping that you die before you have cashed in all your assets.
What would happen if a pill was developed that would allow you to live an extra 20 years in good health. Wouldn’t you want to be able to afford to live for that extra 20 years?
If this is you, you need to take a big dose of reality because you will never achieve financial freedom to the degree that is as worry free as possible.
If you can’t save money which can then be used to build your portfolio of diversified income streams, not even Harry Potter’s wizardry and Warren Buffett’s financial acumen combined can help you achieve your objectives.
Wealth does not come about because of luck and hitting home runs. It comes about through careful execution of a plan that is based on sound principals, that is consistently executed in a disciplined manner. Focus on achieving lots of little base hits. Don’t try and hit home runs. If you achieve the base hits, the runs will come.
If you are looking to build and create wealth, you can do it, and there is no better time to put in place a plan than by starting today.
Don’t procrastinate, your wealth is your responsibility.
If you would like to speak to someone today who can help you develop and implement your plan, call UGC today and speak with one of our financial strategists for a No Cost, No Obligation consultation on 03 8657 7640 or email [email protected]. We would be more than happy to review your current arrangements and give you the advice you need for a more secure financial future.
The information contained in this report is General in nature and has been prepared without taking into account your objectives, financial situation and needs.