Studying ourselves is something most don’t find easy to do, and therefore don’t. However, building wealth and managing your finances is not just about how many zeroes you can add to your bank account, it’s also a personal journey, and with an open mind, not only can it be very profitable, it can also be an incredibly enlightening one.
The way you build wealth will not just be based on how much you have to invest, or how much knowledge you have, it will be impacted by your beliefs about yourself and around investing and money. For this reason you have a huge financial incentive to understand yourself as you build your wealth. Here’s how to have your finger on the financial pulse.
What do you believe about money?
Asking yourself questions is a good way to learn more about you. For example, start by asking yourself what you believe about money. You might be surprised by your answers, however, having this awareness allows you to be conscious of your own decision making, which means you are more likely to make better decisions.
Before you invest
Before you decide where to invest, document why you want to invest. The more emotional your WHY, the more likely you are to take the necessary steps. Then set the financial goals to achieve your WHY.
Remember to set clear goals for yourself, stating what you want to achieve and by when. Set sub goals to assist you to take the steps needed to achieve these.
A simple formula
My research has shown that for many of us, our finances and wealth creation rank in the top five of the most important pressing issues to address, however, this is such a big area, so where do you start? Not everyone is born with a silver spoon, or a financial pulse, most of us have to chart our own course. To help you on your journey I have a small equation for you to remember whenever you think about your wealth, which is:
Get the Knowledge + Develop your Skills + Get Experience + Put in the Effort = Your Success
You can apply this equation to any area of your finances, whether you are opening a new bank account, applying for a credit card or a loan for a property, or wanting to start your very own share portfolio.
Finding the best products and services
Always do your research and educate yourself before you invest, or prior to signing up to any product or service, so as to minimise your risk. To find information you could:
- Research government websites like Money Smart, which is a great place to start for general information on your finances and superannuation.
- Look for reputable providers of financial products or services. Perhaps companies you have done business with before, or those referred by others. There are companies on the internet that will assist you to find the best deals for insurance, credit cards, and other financial products. CHOICE magazine can also assist with certain purchases.
- Check the ASIC website for warnings about companies and products.
- Ask family and friends who have knowledge in the particular area you are interested in, however, always make your own decision, based on your own research.
- Read books and research the internet to build your knowledge. One good reference to get you started in the share market is a book called “How to Beat the Managed Funds by 20%” by Dale Gillham. You can also search for information on the Australian Securities Exchange website.
- Do a course to get the knowledge and build your skills. This is important if you are thinking about building your own share portfolio or you want to generate a second income from the share market. Wealth Within provide accredited education to help you to more confidently invest.
Vehicles for Building Wealth
There are so many ways to build wealth, and some of the areas include Cash and Fixed Interest, Shares and other listed investments, Private investments, Property, Superannuation, and your own business. To keep it simple, most choose Cash, Shares and Property.
Remember, the greater the potential return, the higher the risk, and therefore the more knowledge you require.
Cash investments can include Term Deposits or Bonds. Be prepared to shop around for the best rate on your term deposit but also consider the credit or risk rating of the institution. You are not going to deposit your funds with a financial institution just because they are paying a high return as you could be risking your capital. Bonds can provide better returns than cash in the bank, however, there are conditions with bonds that you need to fully understand before you invest.
When it comes to property, being smart about how you set up your loans can save you thousands over the term of the loan, so negotiate hard when you set up the loan, or get a quote from another bank and ask your current lender to match it. Don’t ever accept that a bank won’t negotiate on their lending rates. Also, consider using an offset account to minimise the interest you pay.
Finally, when making a decision about any aspect of your finances determine answers to the following three questions:
- What is my current level of knowledge, skills and experience and what do I need to do to fill the gaps?
- How much capital do I have to invest? The amount you require to start your own share portfolio will be different to what you may need to buy property. There may also be minimums for cash and bonds.
- How is my capital spread across different investments? You may find that your investments are heavily weighted to one area and therefore it may be time to better spread your risk across different investment vehicles.
- What is my investment time horizon, or when do you believe you may need to draw on the investment? Where you invest may be determined by how much time you have. For example, property generally has a long term investment horizon, so you wouldn’t be buying property if you knew you would need the money in a few years. Shares can be purchased for short, medium or long term, and cash or fixed interest investments can work the same way. With shares, the shorter the time horizon, the more knowledge you will require to invest.
Above all, have a plan for your finances and review your plan every year. Do this and the likelihood that you will achieve your WHY is very high.