Many articles and commentators can show you how to make incremental savings by changing your lifestyle. But, to us being smart with money is about being able to afford the things you want. So, what is that? We have worked with hundreds of Australian families, and they feel $100,000 passive income a year would optimize their happiness. That is equal to assets worth around $2,000,000 today or more than $5,000,000 in 30 years.
Cleaning your own home to save $80.00 a week is not going to amount to 2 million dollars in your lifetime. It is not as simple as going without, in fact even if you saved 30% of your income for the next 30 years; the average Australian would end up with just $720,000. To put it in perspective, this would be like retiring on $300,000 or about $15,000 a year.
Most Australians cannot save themselves to wealth. If they want to retire in comfort, they will need to invest proactively. So the only way to be smart with money is to invest smartly. What does that mean?
Give yourself a chance to make your money go further. Using leverage to increase the value of your investment, can accelerate wealth significantly.
If you invested $50,000 into an investment that returned 8% a year for ten years, at the end of the period, you would have just over $100,000.
If you invested $50,000 of your own money but also borrowed a further $450,000, into an investment that returned 8% a year for ten years, at the end of the period the value of your investment would be $1,000,000. So minus what you owe to the lender, you would have over $450,000.
Investing smart requires action, this, in turn, requires overcoming common fears. The risk of losing money, of not getting a loan, of interest rates, increasing, of a worldwide depression, the list goes on. There is uncertainty associated with investing. On the other hand, you can be sure that if you rely on your savings alone, you are unlikely to achieve your financial goals. So, the most significant risk you face is retiring on the poverty line, like 40% of Australians.
An astute investor will take calculated risks. This means gathering appropriate information and the ability to analyze data. Seeking the highest possible return without any consideration of inherent dangers can lead to disaster. Risk should be measured and scrutinized against potential returns. Is the risk worth the potential gain? Indeed many risks can be calculated and forecast. Vacancy rates, time on market, mortgage stress, even fluctuations in price, are all investment dangers that can be measured to understand the potential performance of an investment in the future. Investing smart means carefully considering this data and making an educated decision about the investment.
Finally, investing smart means investing with people that have the qualifications to understand the data and advise you appropriately. Armchair investors can be very convincing, but they are also extremely dangerous. It is staggering that people will take advice from friends or family that do not have any qualification in the area of interest. My firm advice to clients is that they research the credentials of their advisers and ensure they are highly qualified, proven and independent.
So, investing smart means: overcoming your fears of failure and taking action; taking calculated risks that do not outweigh the potential benefit; checking your resources and only taking advice from qualified people. Now that you know what to do, stop waiting and get into the market. It’s the only way to be smart with money.