Growing your wealth is like losing weight

Achieving financial independence is easier than most people think, but there are several common mistakes people make. Over the next few articles, I will share some real-life examples that help people address the most common mistakes people make.

In my previous article, we discussed the mistake most people make – they follow what others are doing. In this article, the second most common mistake people make when they are on their path to financial independence is getting bogged down and confused by all the decisions they need to make.

Manage information overwhelm

People that are actively trying to grow their wealth will often read books or blogs and listen to podcasts endlessly. On the face of it, there is nothing wrong with seeking out information, but it can easily become overwhelming.

Just as there are many different diets you could follow to lose weight, there are many ways you can grow your wealth.

I need to lose weight and am not in a position to be giving anyone weight loss advice, but there are so many diets to choose from. There is the Atkins diet, Keto, and paleo, then there is the Scandinavian or Mediterranean diet, the DASH diet, the fast 800, or the flexitarian diet. The soup diet, the liver cleansing diet, the kale smoothy diet, and the cabbage soup diet. There are hundreds, maybe even thousands of them.

Likewise with building wealth. You could invest in one of the 240 Exchange Traded Funds, actively trade any of the Australian or International shares, invest in one of the 22,000 cryptocurrencies, or buy residential or commercial property. Further, you could invest through a family trust, an investment company, or by making additional super contributions.

Focus on the key things you need to do to achieve your goal

If you peel back the layers on the different diets, there is one common thread. Don’t consume as many calories as you expend.

Likewise with growing your wealth. Don’t spend everything you earn and invest the rest in a tax-effective and diversified way.

How financial advice can help – a case study

A 49-year-old couple I recently helped put together a plan had $1.2 million invested with two different fund managers, they were going to buy an investment property through a property buyer’s agent, and they were starting to actively trade shares by following an online investment adviser. At the same time, they weren’t putting anything beyond the employer’s compulsory contribution into their super (they each had around $250,000) and they had just left their super in the default investment option in the fund their employer set up for them more than 15 years ago.

Firstly, we went through their goals. While they wanted the ability to stop work before they were 60, they were happy to keep working up until then if necessary. They were happy to invest in assets that are more volatile knowing they generally provide greater returns – as this would be the best way to fast-track their retirement date. They didn’t need to put any money away for their teenage kid’s education, as this could easily be funded from their paid work over the next 5 years.

By looking at various cashflow scenarios, we worked out that when their investments (including their super) were worth $3.0 million, they would have more than enough to be able to stop work. This would give them enough to live the life they wanted and help their kids get started on the journey to adulthood.

We then reviewed their current investments and found that the investment funds they had were not appropriate (both were too conservative) and they could achieve their goals without borrowing to invest (which is what the property buyer’s agent and mortgage broker were recommending).

We put in place a plan that included:

• moving their super to a fund that has more appropriate investment options with lower fees (and would allow them to transfer their insurance)
• cashing out their investment in the two managed funds (there were minor capital gains tax implications)
• $300,000 was invested in a diversified Exchange Traded Fund with all dividends re-invested.
• they each put $440,000 into their super (this was non-concessional contributions across different financial years)
• they would continue maximising their concessional super contributions and make $30,000 of non-concessional contributions.

As a result, we expect they can stop working at 55 and use the $500,000 in their Exchange Traded Funds to fund their lifestyle until they can access their super; by the time they are 60 they are likely to have the equivalent of $3 million in super, that once converted to a pension, the earnings would be tax-free.

We specialise in helping professionals put together a financial plan that helps them live their ideal life. If you are interested in getting an independent financial plan that helps you achieve your goals, book a chat via the button below or contact us at team@constructwealth.com.au.