success special
Top tips for wealth creation (at any stage)
Building Your Financial Future With your five steps to success in the bag, the next stage is to focus on creating and growing your wealth.
L
ove or loathe it, a fact of life is that we all need money. With data from the ASFA Retirement Standard showing that the average Australian couple will need $56,339 annually to retire comfortably1, and University of Canberra’s NATSEM unit reporting that the typical 55 to 64-year-old has a superannuation account balance of between just $54,500 and $113,2002, it’s evident that Australians need to get serious about banking some coin. Patrik Vachan, one of the principal financial advisors at Life Plan Financial Advisors (www. life-plan.com.au) says ‘It’s never too early or too late to focus on your fiscal future. The main way to create wealth is to devise a plan that will help you establish an income flow and accumulate assets that will grow over time’.
While the best wealth creation strategy has a mix of different options from the various asset classes (see box on facing page), registered tax agent and chartered accountant, Boris Aristoff (www. borisca.com.au) recommends sitting down with your accountant and financial planner to figure out the right strategy for you. ‘When making this decision, your investment goals, prospects, circumstances, age and risk tolerance should be considered holistically.’ Key questions to consider are: What is your investment goal? For how long are you planning to invest? How old are you and what stage of life are you in? What assets (if any) do you currently have? How much risk is right for you? The level of risk you’re prepared to take is directly proportionate to potential return (see graph), so having a clear picture of how much risk you can comfortably handle will help to steer you accurately towards the right asset allocation.
Failing to plan is planning to fail. Set a plan, stick to it, review it periodically and adjust the course as necessary. Pay yourself first. Boris Aristoff suggests putting away ten per cent of your salary (20 per cent if possible) to regain and retain financial control. Find the right advice. ‘Being tightfisted here is a false economy,’ insists Boris. The right advisor ‘could save you a small fortune in taxes and potential losses down the track’. Be positive! ‘Realise that YOU have the ability to create your own wealth by making a few decisions regarding your goals and taking proactive steps to reach them,’ advises Patrik.
start creating wealth right now! ‘The best time to start creating wealth is now. A good strategy would be to create wealth for the short term, medium term and long term,’ suggests Patrik. ‘If, for instance, you are aged 23 and have $3,000 in your bank account but would like to buy your own home, perhaps a first-home saver’s account may be the most safe and lucrative way forward. The government contributes 17 per cent per annum guaranteed to all funds contributed into the account.’ Just be sure to check the terms and conditions to make sure this account suits your situation. Patrik adds, ‘If you want to go on a holiday in one year, a secure investment such as a term deposit or savings account generating around four per cent (interest) would be a good medium. On the other hand, if you are happy to park this money away for the next ten years, a diversified share portfolio could be the way to go, since the interest earned tends to be higher (7 to 12 per cent). You have to take into account that the markets may go down and you may have to wait longer to sell the investment if you don’t want to realise your losses.’ CREATE MORE! If you’ve already had success with wealth creation, Boris suggests reviewing and re-evaluating your situation objectively. Is it time to try a new strategy and perhaps approach your asset allocation more aggressively, or should you bide your time and stick to the existing plan? ‘Reflect on whether your assets are, in fact, performing relatively well and (check) that you are not just pursuing a faster dollar at the risk of losing your fortune.’
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KNOW THE LINGO ASSET CLASS
DEFENSIVE ASSET
GROWTH ASSET
The term ‘asset class’ refers to the way the financial industry groups together similar types of investments. The assets in an asset class generally behave in similar ways – for instance, bank bills, cash management funds and term deposits all have a similar level of risk and a similar level of reward, so they’re grouped together under the ‘cash’ asset class.
A defensive asset is something that has minimal risk and a lower return on the investment.
A growth asset has a higher risk but the potential to generate a much higher return.
ASSET CLASS
RISK vs RETURN
DEFENSIVE OR GROWTH?
LENGTH OF INVESTMENT
Cash
Low
Defensive
Short term (1-2 years)
WHAT YOU SHOULD KNOW Viewed as being very safe
Fixed Interest
Low – Medium
Short – medium term (2-5 years)
Defensive
Lowest level of return May be eaten into by inflation Viewed as being relatively safe (more risk than cash, less risk than property or shares) Low level of return but generally provides a regular income source May be affected by inflation
Property
Medium – High
Medium term (5 years)
Growth
Higher risk but far higher return generally than cash or fixed interest Significant financial outlay to get started Inflation not concerning
Shares
High
Long term (5 years +)
Growth
Highest risk (especially in the short term) but generally considered to provide best long term growth potential Income from investment can be very uncertain and market dives can cause substantial losses
RETURN
❉ Property
❉ Fixed Interest
❉Shares
❉Cash RISK
Note This article does not constitute financial advice. You should see a qualified Financial Advisor to discuss your personal situation before embarking on any changes. References 1. www.superannuation.asn.au/resources/ retirement-standard 2. www.theaustralian.com.au/national-affairs/ superannuation-falls-short-for-retirement/ story-fn961iy1-1226085202767
FITNESS FIRST
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