Seven simple strategies to build wealth
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Many Australians depend too heavily on the fortunes of a singleasset such as residential property or relying on borrowings to fund theirlifestyle, putting them in a fragile financial position despite seemingwealthy, says Lindzi Caputo, wealth management director at HLB Mann JuddSydney.


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


Tip One: Saving to build wealth

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


“If you are able to spend less than you earn and do somethingmeaningful with those savings, you are on your way to building wealth,” shesays.  


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


“However, if you spend what you earn, or worse still, spend morethan 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 lifeand personal circumstances. Repaying non-deductible debt such as the homemortgage should be the priority. As a general rule, once the mortgage is lessthan 50 per cent of the home value, savings could then be directed towardbuilding wealth outside of the family home, such as investments andsuperannuation.


Accessibility is an important consideration when deciding where toinvest savings.


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


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



Tip Three: Have an appropriate investment strategy for investmentwealth

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


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


“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 thebenefit of time to ride out that short-term market volatility, so a portfoliopredominantly invested in cash and fixed interest assets may be moreappropriate.”


Tip Four: Maximise deductible superannuation contributions

 “Superannuation is themost 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 notwaste 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 tonil once the member starts to withdraw a pension,” says Ms Caputo.


“Building superannuation via concessional contributions is anincredibly tax effective way to accumulate wealth for two key reasons.  Firstly, they are one of the largest taxdeductions available to reduce personal taxable income. Many people thinknegative gearing is the only way to reduce taxable income but supercontributions are another strategy. Secondly, they boost superannuationsavings, meaning a higher retirement income.”


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


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


Tip Five: Diversify your wealth

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


“Focusing on one investment category is risky and means theportfolio is more susceptible to market downturns.  To avoid stress in retirement, it isimportant to take a diversified approach to building and structuring wealth inthe pre-retirement years. The balance between lifestyle assets (non-incomeproducing) and investment assets needs to be carefully considered,” says MsCaputo.


“The portion in investment wealth should be enough to sustainliving costs in retirement. For instance, if $100,000 of income is required tomeet 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 itshould be diversified and include liquid and accessible assets,” says MsCaputo.


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


For instance, a $2,000,000 residential property may produce anaverage rental yield of $60,000 or 3 per cent a year before costs. In contrast,a diversified investment portfolio of equities, listed property, fixed interestand cash assets invested with a balanced profile could provide an averageannual 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 oftheir overall wealth position and need to convert easily to cash, if required.


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


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


Tip Seven: Protect your wealth

Finally, all adult Australians should have adequate insurance andestate planning arrangements in place to ensure their wealth is protected forfuture generations.


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


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


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