Simple behaviors you can copy
Smart debt? – it sounds like a contradiction. How can debt be smart? In our personal lives we’re inclined to use debt for ‘lifestyle assets’ – houses and cars. A much as it is unavoidable, that isn’t the best use of debt. Cheap debt – like mortgage bonds for example are ideally suited to building a property portfolio – and the sooner you do that the better. Sure, we’re not as lucky as the West where interest rates are a couple of percent, but they are still manageable. For most of us it is a catch 22 situation. We want to own our own home and not “pay for someone else’s bond”, but it is going to take us 20 years to pay off, or we need to increase our earnings to a level that the bank will extend another mortgage. Changing this mindset is difficult, it requires overcoming deeply entrenched values and beliefs, but it an exercise that is worth doing with your financial coach. Do some scenario planning, and ‘what ifs’ to see if you can start building that portfolio, without giving up the dream of owning your own home. A change of behaviour as small as not moving house every 5-7 years, changing cars every 3 years and pumping bonuses into your existing bond can create ‘equity’ that can be accessed to buy a small rental property.
Ignore the Joneses: If you want to be really wealthy, you need to stop caring about what everyone else does, wears, shows off, drives, lives in or where they go on holiday. You just have to look at Warren Buffet’s investment in ‘lifestyle’ assets. He bought his house in 1958, and drives a 6 year old caddy. Frugal is not just the new cool, it is infinitely sensible for long term wealth and security. If you are constantly comparing yourself to your peers, change your mind set not your car. Do the math with your planner or financial coach – what is the impact of your conspicuous consumption?
Delayed gratification: We live in an instant gratification society. The roots of this behaviour is often set in childhood and goes to the roots of EQ – Emotional IQ. A low EQ will not just impact on your relationships, it will impact on your relationship with money. That is why credit has mushroomed in the last 50 years and has taken on a new level of insanity with ‘unsecured or payday loans’ at horrendous rates of interest. Media and advertising doesn’t help. The hype that leads to huge queues outside an Apple Store when a new shiny gadget is released – the fact that there is nothing wrong with the one you have is irrelevant. The biggest barrier to accumulating wealth is out of control ‘consumption’. Wealth comes from inputs minus consumption, if consumption is ballooning, wealth will be impacted. Lifestyle creep is another thing to watch – the increase in inputs from promotions or annual increases are consumed and having no impact on wealth.
Delegation: We all have the same amount of time and it is impossible to be really good at everything.Wealth is what is left when you’ve consumed your inputs. If you want to leverage your wealth you need to focus on all three.
How can you increase your inputs, reduce your consumption and grow your wealth. Where is your focus going to be? Where can you make the biggest difference?
- Usually it is in increasing the inputs – getting a raise, promotion or new source of income. If you’re stagnating, invest in some coaching to get yourself going again. Work with a financial coach to see if you can start building a second source of income – rental portfolio, a business (run by someone else perhaps while you do your day job) or even dividends from a share portfolio.
- Reducing consumption is the quickest and easiest to address – that is a once off – the next challenge is keeping it there and not letting lifestyle creep undo the good work. You and your financial coach can sort out your consumption in a couple of sessions.
- What about growing your wealth? Unless you’re an investment specialist and keep a very good eye on the markets, economy, tax environment etc – this is the one place delegation can make a big difference. There is a difference between abdication and delegation. There is a critical amount of knowledge you need to know so that you can choose the right advisor. You need to know that you don’t know. Having a little bit of knowledge and thinking you now know everything is a very dangerous place to be (and a dangerous client for an advisor). Growing wealth is not a one trick pony. It isn’t just unit trust portfolios or stock portfolios so make sure you’re getting holistic advice, advice that is probably going to extend into products that don’t fall into an investment specialists ‘Assets under management’ and he or she is not going to get paid on. Things like the correct, tax efficient structuring of companies and trusts, or how to build a tax efficient, lower risk rental portfolio. An advisor’s primary role is managing your wealth, not educating you. Everyone’s knowledge base is different and if you’re serious about building your wealth work with a financial coach who is tasked with growing you and your financial ability. Focus on your strengths and surround yourself with experts and advisors that you can delegate to.
Living below your means: This addresses the ‘consumption’ corner of your wealth triangle. Consumption is everything that doesn’t go into building an asset. Your car payments, the interest on your residential and holiday home bond, your insurance, holiday fund, gadgets and all the other expenses that come off your earnings on a monthly basis. WE are often blind to our own consumption behaviours, and if you’re a couple and your behaviours aren’t aligned it can be a fight looking for a place to happen. It is important to take the emotion and judgement out of conversation – probably with an outsider like your advisor or coach. Often getting outside help on this from a financial coach can make a difference – they can help you uncover what is important and what is not. Which behaviours are sabotaging your wealth and which are building it.
Action: Changing a mindset isn’t like changing a portfolio or policy, it requires changing attitudes, behaviour and beliefs. For that you need a financial coach to partner with and take your wealth creation to the next level. If you want to know more, have a look at our new financial coaching offering HERE
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Author Dawn Ridler ©