How to achieve your first $500,000 in wealth

 
*Article by Financial Coach Christine Dang

When building wealth the question should not be “when?”, it should be “how can I start now?”. Human beings have a tendency to delay the actions we know we should be taking now because we have an overly optimistic view of our future self.

Most of us have dreams and desires to have greater flexibility in the future. Whether that’s to cut back to part-time work to pursue creative hobbies, to take a year off work and travel the world or to travel three months every year, investing is the most effective way to make these dreams into a reality.

Let’s face it, our wealth will only grow to $500,000 if we lay the foundations to invest now and move the dial forward, rather than waiting for the right time. With $500,000 in investments at a 4% income rate, you will be earning an income of $20,000 passively. For the average traveller, this give you that 3 months of travel a year!

Follow these five steps to build yourself a simple plan. I promise you, it’s easier than you think!

1. Start with your intentions 

Before we start talking about how to invest, let’s start with the why. It can be easily forgotten that your wealth is a facilitator for your life. Money may not be important to you but the fact is almost everything in life requires money to enable it.
Setting our intention with money means your journey to build wealth won’t be about getting rich only. Think about your last “splurge” purchase and your last holiday – which one brings you the most happiness and memories? The answer is no surprise and is likely to align with our findings in our Millenials and Money survey of 560 millennials. X said they valued experiences over possessions.
To set your intentions, follow these steps:
  1. Write down your values. To help you set your values, you can ask yourself the following questions – Why do you choose to live your life the way you do? Why does your week consist of certain activities? Why do you choose not to do other activities?
  2. Using your values as a guide, write down how you would like to intentionally spend your money?
  3. With each intention, how much do you require? By when? Could it be an annual spend? Or an ongoing target?
To help you with this exercise, here are some of my intentions:
  • Have a ‘Get Out of Jail’ account in place / Ongoing / $15,000
  • Travel to Tasmania / Easter long weekend / $2,000
  • Travel to Japan / Christmas or February / $10,000

2. Taking stock

Every weekend, most of you will take stock of what’s in your fridge and pantries to help you make decisions on what you will need to pick up at the market to keep you nourished for the week ahead. If we do a poor job at this, then your health will suffer. If we do a great job, your will be nourished with wholesome foods for the week ahead and feel great and energised.
The same principles apply to making decisions about your money. Taking stock involves working out what you own and what you owe. It’s important that we don’t spend too much time dwelling on your current position. What’s important is that we now have a starting point, whatever that may be.
  1. On a sheet of paper, draw out two columns labelled “Own” and “Owe”.
  2. Under the “Own” column, list all your financial assets. It’s important that we don’t list lifestyle assets (possessions, cars, etc.) here. Don’t forget your superannuation!
  3. Under the “Owe” column, list all your liabilities and associated interest rates. Don’t forget your HECS!
  4. Add up the “Own” and “Owe” columns – this is your starting financial position.

3. Align your intentions with your cash flow

Every time you get paid, a set amount of money hits your bank account. Understanding where this money goes is a vital part to building wealth. The most common form of budgeting is focused around pay cycles. This approach can often overlook periodical bills like electricity and car rego and cause significant strains on your cash flow when they fall due.
This template is what we use for our members and has never failed us. Notice how it is based on an annual period and broken down into four categories – income, personal spending, bills and savings/loan repayments.
Setting a budget allows you to consider every expense and how much value it brings to you. The less you spend in the short-term, the more capacity you have for savings/loan repayments. Leave the savings/loan repayments to the next step.

4. Build your wealth strategy

Now it’s time to refer back to step one and the intentions you set. As a general rule, we will have a savings or investment account aligned to each goal, for example:
  • Get Out of Jail savings account
  • Travel savings account
  • House deposit investment account
A high-interest savings account is best used for short-term goals (<5 years) while an investment portfolio is best used for long-term goals.
Under the “Savings / Loan Repayments” section of your budget, start to rename the lines with your goal accounts. This will then allow you to tweak the amounts allocated to each goal based on how much you require. You may find that you are off track with some goals so you may need to free up the surplus in your budget, review your goal or increase your income.
To give yourself the greatest chance to build wealth, there does need to be an element of risk taken in order to grow your money faster than a high-interest savings account. Whatever your goals, it is highly recommended you have an amount allocated to investing, even if it’s as little as $100 per month.

5. Be the boss of your cash flow

It’s time to lay the foundations to cement all of the above steps. The most common feedback we receive is that setting a budget is easy, but sticking to a budget tends to be where people become stuck. Building a bank account structure to support your cash flow is the key to success in sticking to your budget and building wealth. A home will not blow away if the foundation is solid.
Follow these steps:
  1. You will need a bank account that will act as the central part of your cash flow structure, we call this the “Cash Hub”. This is where your income will be received and all expenses will come from here. The key with this account is to not have any debit card attached to it.
  2. You will need a “Personal Spending” bank account. This will include all the day to day expenses included in that part of the budget. In your budget, there will be a line that calculates your “Total Weekly Personal Spending Requirements”.  Whatever that weekly amount is, set up a direct debit from your Cash Hub to this account. This is now your pocket money for the week and is the key to the success of your budget.
  3. The remainder of your accounts will depend on your wealth strategy. For example, I will have direct debits set-up into my Get Out of Jail and Travel account. Every month on the 15th, my share portfolio will debit my Cash Hub a set amount to invest. This automation will enable me to build my wealth constantly and is the key to success.
    • Invest $500/mth over 26 years, you will grow your wealth to $521,000.
    • Invest $1,000/mth over 19 years, you will grow your wealth to $533,000.
    • Invest $1,500/mth over 15 years, you will grow your wealth to $519,000. By 22 years you will hit $1,000,000.

Your life will change over time so it is important you repeat the above steps as your income or expenses change or when you have new intentions you would like to focus on. Starting now is the most important step and with time on our side, anything is really possible with the right structure behind you.

* 8% assumed total growth and income rate and no current investments

 

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