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Are you wanting to get started wealth building, but unsure where to start? So much information is available online.
Many hours can be wasted online without a clear actionable step by step approach.
You need to decide on a path and take action on a reasonable (not perfect) investing plan, or you will be still in the same spot in a year (or 5).
Above all, time in the market is the most important factor in investment returns. Ending the procrastination is critical.
Everything you need to make decisions will be outlined in this articles and it’s links.
Put Some Time Aside to Take Action
Stop procrastinating and work through the articles if you haven’t already.
The wealth building strategy index below is a collection of personal wealth building strategies of a series of financial bloggers and podcasters.
You have an unusual opportunity to read the actual wealth building strategies of these knowledgeable and well financially read individuals.
When making large decisions, it’s important to get more than one perspective, because it allows comparison between different strategies.
Then you can make more informed decisions on which strategy (or combination) is right for you.
No financial advice is provided in this blog. All decisions should be run past your financial advisor and accountant to check their suitability to your personal situation.
Set Your Goals
It’s hard to get the journey right without knowing the destination! This can be really tricky, particularly if you are in the fortunate position to be thinking several decades ahead.
The first step in working out goals to aim for is to dream. Read Big Hairy Audacious goals to start turning dreams into goals.
Work out your goals for retirement (the biggie!), at what age and rough income required. This is really hard 30 years in advance. You can always use your current spending as a guide, and adjust investment returns for inflation. Choose an age you would like the choice to retire, depending on health and passions at the time. After all, if you are fortunate enough to still be passionate about your work, no one is forcing you to retire!
Write them all down in preparation to work them into your financial plan.
Make a Financial Plan
You can do this with or without professional help.
The most important issue with making your own financial plan is not being overwhelmed by the need to make it perfect. It should be reviewed every year, and will be changed as your life and circumstances change. There is no such thing as perfect, it just needs to be reasonable.
Read the detailed information on how to make your own financial plan.
Many will want professional help with their financial planning. This is often the case that are severely time poor, who are intimidated or uninterested by the world of finance. It could be important for those with more complex situations including businesses.
Unfortunately, even with professional help, knowledge and understanding cannot be outsourced completely. Great care, research and reference checking is required to choose a financial advisor you can trust. There are a few unscrupulous ones out there. Choose carefully.
A financial advisor should have his or her interests aligned with your own. Because commissions provide motivation that is not aligned with your interests, if you want financial advice, you should pay for it.
Many financial advisers are now moving to an annual fee for ongoing service since the Royal commission. A one off strategy session is not cost effective for them, but an annual fee is often excessive for those without significant assets and complexity.
Once a financial advisor is chosen, you need to understand what they are advising. If your financial advisor convinces you to invest in a high risk strategy that goes wrong, no one is going to rescue you. You must understand the risks of investments chosen.
Spend Less than You Earn
In order to build wealth, a gap between your income and expenses is essential. There is no magic a financial advisor can do to eliminate this fact. First you need to know the current situation. The larger the gap between income and expenditure, the faster you can accumulate wealth.
There are three ways to grow the gap.
Wealth Building: Increase Income
If you are early on in a career with good earning potential, maximizing income is a powerful lever in increasing your savings rate. Just make sure to save most of each pay rise to avoid lifestyle inflation keeping up with the Joneses.
For medics, here is some information on how much doctors earn in Australia. If you have skills in demand, consider whether rural medicine is for you. Financial benefits can be great, and it ‘s so rewarding.
Wealth Building: Decrease Spending
Increased earning is increasingly inefficient due to our tiered tax system. Once you are in the top bracket, 47 cents cents of every hour is lost to taxation, reducing your hourly net pay significantly.
Annual spending kept under your top tax bracket would optimize spending and allow any money earned above the threshold to be directed into tax efficient investments.
Optimize spending would look like spending $50, 600 per year on a single moderate income or $125,000 on a gross income over $180,000.
It’s usually a lot easier to avoid overspending in the first place than to have to cut back. Which is where readers who are still early in their career and have an interest in their finances before they’re on the big bucks have a massive advantage.
Avoiding the drift state, and giving your money a job to do intentionally as your income increases will be a powerful wealth building tool.
After reaching your top income potential, living like a resident (or an average income individual) will allow you to shovel cash into investments and make fast progress over 3-5 years.
Parents taking parental leave often lose this potential with extended time off. It’s even more important to plan ahead if you want to be a parent.
Increase Your Savings Rate
Many bloggers focus on savings rate. Your obligatory superannuation contributes 9.5% of gross income, which is a start.
After this I tend to work in savings/net income, it’s easier.
Dev Raga (medical finance podcaster) suggests 20% of your tax return. The FI crowd try to save 50% + to reach complete financial independence as soon as possible. It is entirely up to you, depending on your goals.
Everyone needs to be financially independent before reaching retirement, where you will need to live off the income from investments.
No high income earners should be considering the aged pension, in my opinion. Few of us could live on $17k per year! And after a long well paid career, there is no excuse for taking resources instead of being self reliant.
Everyone Needs to be Financially Independent By Retirement
The table below demonstrates the difference in time to financial independence (when the numbers turn green). Financial independence is usually defined as having 25 x your annual spending in investments, based on studies back testing this against previous stock market performance.
The resulting 4% withdrawal rate has a more than 90% chance of not running out of money over a 30 year retirement. There is some controversy around this, but it’s a good place to start. Especially if you are young and forming a detailed financial plan is a little overwhelming.
The table below demonstrates time to reach financial independence, assuming a 7% compounding growth rate. Money has to be invested to achieve around 7% to achieve this. Stashing cash in your bank account or offset will not (earning currently 1-3%).
When the numbers turn green, the scenario has reached financial independence based on the 4% rule.
The actual income doesn’t matter. The time to independence will be same no matter what income, as long as you invest the same percentage of net income.
You can see, those with 41 years before they wish to retire are fine saving 10% of net income (that probably equates to superannuation contributions). This may make sense for those starting work at 18 and retiring at 60.
Increasing to a 20% savings rate takes an impressive 11 years off time to financial independence. Of course, reaching financial independence does not obligate anyone to actually retire.
But would you like the freedom to choose exactly what you want with your time in around 30 years time? I agree with Dev Raga on this, for early starters saving 20% of their net income provides a lot of benefit for small sacrifice.
For the majority who have left it a bit later, the increase to 30% takes a significant 6 years off time to independence. Increasing further to 40% takes another (probably worthwhile) 5 years off.
Going hardcore and saving 75% will result in financial independence in a total of just 7 years. This is what a lot of the FI crowd are chasing.
Choose the Right Savings Rate For You
After reaching a 40% savings rate, further increases provide less and less benefit. Is cutting another 10% to achieve a 50% savings rate worthwhile to take 2 years off time to independence worth the lifestyle sacrifice?
Probably not for most.
But increasing savings rate 20% above your ideal savings rate can create an immediate lifestyle improvement – reducing you working hours by 20-40% (depending on tax rate).
Not everyone wants to work part time, but it is a great way to combat burnout, have time to spend on hobbies and interests outside work.
Wealth Building: Reduce Tax
Have you seen the adverts warning us how much difference a 1% increase in investment fees damages long term returns?
Imagine the effect of paying 15% extra in tax!
Optimizing taxation is a powerful factor in improving returns.
SuperAnnuation and Salary Sacrificing
Many young people are put off investing in superannuation due to its inaccessibility until reaching preservation age, and legislative risk of the government raiding the cookie tin when they’re short on cash.
It is very likely superannuation will get less generous over the years. But it is in the governments interest to get people to put money into super instead of relying on the aged pension. Superannuation will always be advantageous as opposed to investing outside super.
Many articles warn about the inaccessibility of super, and advice not putting extra in too young. I think the inaccessibility can be a big advantageous to us in fighting the biggest risk to our investments – ourselves!
As long as savers have an emergency fund, superannuation can trap your money and help you stick to your plan, rather than impulsively withdrawing it for a holiday.
The graph below shows $10,000 invested and earning 7% compounded over 30 years. The difference between taxation at 15% and 37% is $224, 561 at 30 years! After 20 years, you would have $98, 703 more by investing $200,000 of your own money inside, rather than outside super.
Are you likely to earn more than $260,000 in your later career? If so, you will max the allowable $25,000 concessional contributions. Savings are post tax (at 45%) at this income level.
The biggest advantage of superannuation is contributing at a young age, and allowing it to compound for decades in a very tax efficient environment.
Take advantage of any “employee match” where extra contributions get matched by your employer. You’d be mad to give that up!
Consider trying to take advantage of more of your concessional cap at a young age. You can’t get that compounding time back!
The last step in reducing your tax bill is to optimize your tax return.
Defensive Strategies – Protect What You Have
Save an Emergency Fund
Before you start investing, an emergency fund needs to be saved. The often quoted 3-6 months expenses may seem excessive. It all depends on your situation. You need to have enough saved to cover emergencies that could affect you, requiring quick access to cash. Read about how much emergency fund you need.
All health care professionals, and many other professionals need liability insurance. Make sure you actually choose the right company for you, not just sign up with whoever turned up to your university.
Doctors can check out my comparison of liability insurers.
As income and responsibilities grow, insurance needs increase. Getting income protection at a younger age, on a lower income will save a lot. It’s worth putting in the time to get it right. Work out if you should protect your income.
There’s no point in saving and investing to lose it all. May sure you have the essential insurance covers (and Ideally no more!).
Avoid the Worst and Most Common Mistakes
Make sure you read about Money Confessions of a 40 Year Old Doctor – (aussiedocfreedom.com) My mistakes and other common financial errors to avoid.
The whole idea of this blog came from making a financial error, which I later discovered my colleagues had already made. If only we talked about money!
The best time to think about asset protection is when you laugh at the thought. Assets! What assets!
Consider getting advice about ownership structure when buying your home, particularly if you or your partner will be entering a high liability risk occupation (eg private surgeon).
Definitely think about this carefully before buying investments. I think only a minority of households will benefit from a family trust, and it’s not for us right now.
Reduce or Optimize Debt
Debt can be productive , tolerable or extremely destructive. Before buying your home, consider whether it can be counted as productive debt. I
f it is a great asset, with good capital growth potential, it will as it grows in value, allow you to leverage into more investments.
If like most people, your potential home is not a great investment in its own right, this is tolerable debt.
You will want to take into account the investment potential of the home before deciding how much of your income you want to tie up.
A home is just too expensive to consider only lifestyle considerations. Consider reverse rentvesting if your workplace is not in a good capital growth area.
Read more about debts, to avoid like they’re COVID, debts to minimize and those you can embrace if it suits your attitude towards risk.
If wanting to take on tolerable or good debt, improving your credit score will make it easier and cheaper.
If you have already made some booboos and taken on bad debt, welcome. I guess your human too. Start to unravel those mistakes by breaking free of debt.
Wealth Building Strategies:
Now comes the big decisions. And there are quite a few to make. The strategies that will suit you depend on your timeline, goals, current savings and investments, legal liability, borrowing capacity and surplus cash.
Some of the big questions included
- Should I pay off the mortgage or invest?
- Should I invest inside or outside super?
- Whose super should we contribute to? How does income splitting and re contribution strategies help?
- Do you want to invest for capital growth or income?
- Should you invest in property or shares?
- Can I be socially responsible whilst investing for my future?
- How to invest in property start here
- How to invest in shares start here (active vs passive investing)
- What is the likely return of the scenario
- Work out the RISK/WORST CASE SCENARIOs (to be glossed over at your peril!)
- What are the tax consequences?
- How much flexibility does this strategy provide if my life circumstance or goals change?
I have produced articles on some, but not yet all of these strategies. As more articles are written, they will be added here. But these will obviously be biased by my own perspective.
Wealth Building Strategies Index
If you had a room full of people with a serious interest in finances (but no conflicts of interest), there would be lively debate over strategy. In reality it’s very personal, and there is no one perfect strategy.
For this reason I am asking finance bloggers and podcasters to explain their personal financial strategy.
By having multiple different viewpoints from those in the know (who spend many hours reading finance every week!) I’m hoping the reader will gain a lot of knowledge and insight and ideas.
They will be released over the next few months, and will be available here as they are published. I will enjoy reading through the different strategies, and challenging my own thinking with the different perspectives.
I encourage readers to keep an open mind, avoid just reading the strategies you are already keen to pursue. Challenge your thinking by reading about other strategies and make sure your not missing any important considerations.
Passive Income Wealth Strategies Index
Have I included Everything you Needed?
This article has worked through every step in securing your financial future, and eventually achieving financial independence.
So, have I missed anything? Let me know what you’re irritated wasn’t included (I’ve been there at the end of a long blog post!) Tell me the answer you were looking for and I’ll do my best to research and answer it for you.
Now get to work! No progress will be made without action. In 10 years you will look back in amazement at the wealth building you have achieved if you start today.
Aussie Doc Freedom is not a financial adviser and does need offer any advise. Information on this website is purely a description of my experiences and learning. Please check with your independent financial adviser or accountant before making any changes.
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