By Errol Umar*
wealth in retirement
If you Google ‘creating wealth’, you’ll literally receive millions of results. We now live in a world of information overload which can sometimes lead to inaction, uncertainty or utter confusion, and a temptation to bury our heads in the sand as we believe what we are currently doing is ‘working’. Even a broken clock works twice a day, but it doesn’t mean it’s really working.
Here are some relatively straightforward measures that can be taken to help achieve key financial objectives in preparation for retirement.
Spend less than you earn. Easier said than done, right? But this basic principle is genuinely the key to unlocking the path to wealth. A budget planner can help you note down what you earn and what you spend. Many feel a budget planner is all about restricting your spending, but it’s more about tracking what you spend. The Australian Securities and Investments Commission’s Moneysmart website offers a budget planner tool and is a good place to start.
We live in a consumer-driven world where each day a carrot is dangled in front of us as businesses want us to part with our hard-earned money. It’s time to really assess if that next big purchase is something you really need. What can make it worse is if you’re loading these purchases on a credit card or are using buy now, pay later schemes which typically involve paying off the debt in four equal instalments.
Some will argue it depends on the type of debt we’re talking about, but debt is debt and it must be paid off at some point. The point is we’re referring to ‘bad debt’ where repayments and the interest charged by the bank is sapping your cashflow. A home loan debt can fall into this category, and while most believe their house is an ‘asset’, it’s actually costing them money to maintain. In retirement you can’t eat the bricks to fund your lifestyle, so the sooner you can get rid of this debt, the quicker you can direct your cashflow to other investments that can generate income.
Setting goals and planning
What is it that you are really trying to achieve? Is it to pay for an around the world trip in three years’ time? Are you planning to retire in 10 years’ time? It is a good idea to firstly determine what it is you are trying to achieve and then plan on how you will meet those objectives. Think of goals and planning like the GPS in your car – you tell it where you want to go (goal) and it will determine the path you need to take (plan).
Time and compound interest
Naturally, the earlier your start your journey, the chances are you’ll arrive at your destination sooner. One of the tried and tested methods of creating wealth is compound interest where your investment earns interest, then your interest starts earning interest and so on. In other words, you earn interest on your interest. Over time, these incremental interest injections can accelerate the rate of return on your initial investment with the effect increasing the longer you’re invested.
There are many investment vehicles available for wealth creation. For example, some go down the path of investment property, direct shares, managed funds or even cryptocurrencies. Regardless, educating yourself on investments and investing in your knowledge can pay big dividends, though it has to be noted that all investments carry risk. In order to create wealth, you have to accept that some investments carry much greater risk.
Saving tax along the way can also boost a wealth creation strategy. For example, salary sacrificing into a superannuation account and only paying a 15 percent contributions tax may be more attractive than taking that income home and paying up to 47 percent income tax. You also have control over how much risk you want to take inside of super. However, there are a number of things to consider before salary sacrificing, read more here.
*Errol Umar has been a financial planner for over 20 years, specialising in the areas of superannuation and retirement planning.
This advice is general in nature and does not take into account your own objectives, financial situation or needs. Please consider if the advice is appropriate for you before acting on it.
Active Super financial planners can offer financial advice, at an additional cost. When you first meet with your planner they will discuss and assess your needs. If a fee is payable for the advice you require, you will be advised of the associated cost. It will then be entirely up to you to decide if you would like to proceed any further. Contact us for further information.