Many Australians depend too heavily on the fortunes of a single asset such as residential property or relying on borrowings to fund their lifestyle, putting them in a fragile financial position despite seeming wealthy, says Lindzi Caputo, wealth management director at HLB Mann JuddSydney.

Seven strategies will help to create wealth, and to keep it intact, include:

Tip One: Saving to build wealth

According to Ms Caputo, the ability to save can be more important to building wealth than how much we earn.

“If you are able to spend less than you earn and do something meaningful with those savings, you are on your way to building wealth,” she says.  

“Committing to a regular savings plan that is aligned with your pay cycle, for example, can help to build wealth, as can making extra repayments on your mortgage. You could also consider salary sacrificing extra amounts to super when your cashflow allows.

“However, if you spend what you earn, or worse still, spend more than you earn, you may actually be destroying your wealth.”

Tip Two: Invest your wealth for your life stage

How you invest savings should be appropriate to your stage of life and personal circumstances. Repaying non-deductible debt such as the home mortgage should be the priority. As a general rule, once the mortgage is less than 50 per cent of the home value, savings could then be directed toward building wealth outside of the family home, such as investments and superannuation.

Accessibility is an important consideration when deciding where to invest savings.

“People may need to access money due to a change in circumstances or they may have a purpose for the money they’ve invested, such as funding children’s education or upgrading the home.”

“Accessibility can be a big factor when deciding to invest large amounts (using non-concessional contribution limits) into superannuation as access to these funds is restricted until at least age 60 for most.  So, investing a large sum in superannuation at age 40 may not be the best strategy as the money would be locked away for the next 20 years,” says Ms Caputo.

Tip Three: Have an appropriate investment strategy for investment wealth

Those investing for a long period of time, say five years or more, should consider investing in a portfolio with a higher allocation to Australian and international equities.

“These asset classes provide the opportunity for capital growth and higher yields but also come with more short-term volatility,” says Ms Caputo.

“However, if you are investing for a period of five years or less, or you need to access the money within a short timeframe, you won’t have the benefit of time to ride out that short-term market volatility, so a portfolio predominantly invested in cash and fixed interest assets may be more appropriate.”

Tip Four: Maximise deductible superannuation contributions

“Superannuation is the most tax effective place for wealth to be invested in retirement and those whocan maximise their allowable tax-free pension cap of $1.9 million should not waste the contribution opportunities available to them,” says Ms Caputo.

“When super is in the accumulation phase, income is taxed at 15per cent and capital gains at 10 per cent, while the income tax rate reduces to nil once the member starts to withdraw a pension,” says Ms Caputo.

“Building superannuation via concessional contributions is an incredibly tax effective way to accumulate wealth for two key reasons.  Firstly, they are one of the largest tax deductions available to reduce personal taxable income. Many people think negative gearing is the only way to reduce taxable income but super contributions are another strategy. Secondly, they boost superannuation savings, meaning a higher retirement income.”

“In my experience, many people question why they should make extra contributions into superannuation when they could be making extra mortgage repayments on their home.”

“While reducing the home mortgage is an important part of wealth building, extra contributions to super shouldn’t be overlooked as they deliver a better return due to the significant tax savings.”

Tip Five: Diversify your wealth

Wealth should be spread across different asset classes to lower the risk of investing through diversification.

“Focusing on one investment category is risky and means the portfolio is more susceptible to market downturns.  To avoid stress in retirement, it is important to take a diversified approach to building and structuring wealth in the pre-retirement years. The balance between lifestyle assets (non-income producing) and investment assets needs to be carefully considered,” says Ms Caputo.

“The portion in investment wealth should be enough to sustain living costs in retirement. For instance, if $100,000 of income is required to meet annual living costs, this would equate to investment wealth of $2,000,000, if that wealth produces an average annual return of 5 per cent after inflation. For investment wealth to provide the required income on a regular basis it should be diversified and include liquid and accessible assets,” says Ms Caputo.

She warns against holding too much wealth in property. “While residential property can provide attractive capital growth over the long-term, the rental yield is typically low and it’s not possible to sell down portions to provide cashflow. When planning for retirement, consideration should be given to the overall wealth allocation to residential property and the need for cash flow.”

For instance, a $2,000,000 residential property may produce an average rental yield of $60,000 or 3 per cent a year before costs. In contrast, a diversified investment portfolio of equities, listed property, fixed interest and cash assets invested with a balanced profile could provide an average annual return of $90,000 or 4.5 per cent a year after costs.

Tip Six: Ensure your wealth is liquid

Before investing, investors need to consider the liquidity of their overall wealth position and need to convert easily to cash, if required.

“Investors can often be asset rich but cash poor when too much of their wealth is tied up in illiquid assets, such as direct property or unlisted shares. This can leave you exposed if your income circumstances suddenly change and you can’t easily extract cash from these lumpy assets to cover living costs,” says Ms Caputo.

“Being asset rich and cash poor can cause enormous stress in retirement years when there is a need to draw a regular income from invested wealth to meet living costs. So, this is a very important consideration.”

Tip Seven: Protect your wealth ‍

Finally, all adult Australians should have adequate insurance and estate planning arrangements in place to ensure their wealth is protected for future generations.

“Income earning ability is likely to be people’s biggest asset, so it is important to ensure it is protected through income protection insurance. You should also consider life insurance and other personal insurances to leave your estate in good order. Transferring your wealth efficiently, tax effectively and to whom you want can be achieved with thorough estate planning arrangements,” Ms Caputo says.

By adopting the above strategies, Australians can ensure wealth is built over several years and survives for future generations.