Your Wealth Creation
What is Wealth?
Creating wealth for a financial goal can be a short-term saving plan or a deposit on the purchase of your first home. This could also include more complex goals like early repayment of a mortgage or putting a strategy in place to achieve financial freedom.
At Money Mechanics we help make money work for you, rather than the other way around. To do this, we need to understand the benefits of compound interest and saving money to invest, while still ensuring you can enjoy the quality of life that you want.
To maximise the benefits of compound interest, starting early is better. If that’s not an option for your situation, we also can advise relevant wealth creation strategies that work for you.
Unpacking the Tax System
Learn more about the Australian tax system with Jane Hadrill from Hadrill Accounting on the Money Mechanics Podcast.
Why Invest?
Before investing, you need to know the reason behind it. Your purpose will direct you to your goals even before you start acting on the best practices in investing. Investment is commonly done for financial security. It matters that your concept of financial security is clear, so that when markets get volatile, you can always remind yourself of your reason behind investing, and you can gauge if you have achieved financial security.
Five-Step Process to Develop Investment Strategies:
- Clarify your why
- Understand yourself
- What tax strategy and whose name to invest in
- Investment Product Selection
- Regular review process in place
Unpacking Lifestyle Property
Learn more about the owning and managing lifestyle property and AirBnB with Narelle Glynn.
Types of Investment
There are three types of investments. They also share the same features such as, growth return (capital return), income return (interest), and a level of risk in volatility.
1. Debt Backed Investment (Defensive Assets)
This refers to any debt on a balance sheet like cash in a bank account, fixed interest investments, a term-deposit, bonds and debentures.
Types of Debt or Defensive Investment
- Cash – money you have deposited in bank accounts.
- Fixed interest investment and term deposit – issued by banks, governments or other companies based on the issuer’s credit quality.
- Debenture – lending your money to a business.
- Bond – an alternative asset. It sits on equity investment while its capital value can change overtime.
2. Equity Investment (Growth Assets)
This includes property and share based investments. They provide access to capital returns over time with the aim of trying to beat inflation.
Types of Equity or Growth Investment
- Shares – refers to part ownership of a company or a business.
- Property – includes residential, commercial, holiday or serviced apartments and vacant land.
- Private Company/Equity – unlisted and has more risk compared to listed companies. Good for more sophisticated investors.
3. Alternative Investment
This refers to usually unrelated to the debt or equities markets and has what is often referred to as an ‘uncorrelated’ relationship with the more traditional assets of debt and equity.
Types of Alternative Investment
- Hybrid Fixed Interest and Bonds – has the value that depends on: if the interest rates go up the prices of the security will fall because fixed returns offered becomes less attractive. If interest rates go down the price of a bond will rise.
- Agriculture – also referred to as Argi-business investments or Managed Investment Schemes (MIS).
- Commodities and Hedge Funds – the oldest and most traditional. They are the raw materials used to make things.
- Crypto or Crypto Currencies – the newest: block chain and crypto. Its ideology is around secure trading outside of institutions.
Unpacking Share Investing
Learn more about share investing with Liz Tran, Director at Citi for Equity Derivatives, Global Markets.
Diversification and Risk Management
This involves methods of reducing investment risk by investing in a number of different investment asset groups and having a good understanding of what you are investing into.
Three General Ways to Diversify:
- Buying a range of investments in the same asset class;
- Buying a range of investments in different sectors or areas; or
- Buying a range of investments in different asset classes.
Your Wealth Strategy Options
Risk Free Rate of Return? – all about opportunity cost. This is basically about what you are missing out as a return when you are not investing and had the money doing something else.
Goals Based Investment
- Short Term Goals – 1-2 years, cash or bash based term deposits
- Medium Term Goals – 3-5 years, monthly cash term deposit, blue chip shares or property trusts
- Long Term Goals – 5-10 years, shares or property
- Extra Long Term Goals – 10-30 years, mixed of defensive and growth based on age and risk appetite
Building Your Asset Allocation
This depends on your risk appetite and timeframe. Which type of investor are you?
- Secure – seeking income or have some specific short term objectives.
- Defensive – seeking income with the potential for some growth over the medium term.
- Conservative – seeking both income and the potential for some growth over the medium term.
- Balanced – seeking both income and capital growth over the medium to long term in order to achieve your long term financial objectives.
- Growth – seeking capital growth over the long term.
- High Growth – seeking to maximise capital growth over the long term.
Why do people borrow money for investment?
Legislation, as of this writing, allows you to claim a deduction on money which is borrowed and to generate an income return.But the golden rule for any investment is to ensure you do not just do something for a tax benefit or a perceived high return.
Account 1 Your Weekly Cash – a few key items in this account are ‘pocket money’- which is money that you can spend no questions asked. ‘kids or hobbies’ are regular weekly expenses for your children’s activities or for regular hobbies you have.
Account 2 Your Regular Bills – a key item in this account is the ‘home maintenance and repairs’ and ‘new furniture’ which is the emergency buffer for expenses around the home. Consider having a buffer account if you drive an older car or have older appliances. Overtime you will need to spend money on repairs and maintenance. The amount you allocate will depend on the size of your home and number of appliances you have.
Account 3 Your Travel Account – This account can be a great way to mix finances for the first time. If you are in a new relationship or just want to keep things separate. A joint account which is focused on something fun that you both enjoy can be a great way to start to experience how you each engage with money.
Account 4 Your Future Savings or Debt Reduction – Whatever is left in your budget should be going to future savings or debt reduction. See our tips below if you are not in surplus. If you have investments we suggest you have an account to manage each one. This provides transparency over the costs overtime so you know how things are really performing.
Unpacking Property
Learn more about Property from Elizabeth Jackson of Public Property.
Ethical or Socially Responsible Investment Decision Making
This refers to the consideration of both financial return and social and environmental good to bring about a positive change.
Negative Issues Surrounding Ethical and Social Responsibility
- Alcohol & Tobacco Retailing
- Animals (Meat Dairy processing)
- Animals (Meat/Dairy Retailing)
- Environmental Damage (Comprehensive Policy)
- Environmental Damage (General Statement Only)
- Oppressive Regimes (Pro-active, balanced policy)
- Oppressive Regimes (Strict Avoidance)
Important considerations regarding Ethical Investments:
A fund matching your ethical considerations may not necessarily match your attitude to risk. There might be a trade-off here;
There is a limit on the range of funds and asset class. They tend to be Australian and global equity funds only with some limited fixed income options coming to market recently;
Ethical Funds may be higher risk as they have a smaller universe of allowable stocks in which to invest;
The fund objectives are ethically based and therefore may not meet your stated objectives (for example the need to generate income).
Where to go from here?
- Your mindset, values and attitudes around money affect all elements of your life.
- Educate yourself and remember money skills are a learnt behavior.
- Have honest open conversations around money.
- Start focusing on what is important to you in life and what ideal life you want to be living.
- Build your financial decision making framework which is aligned to your investment framework and any ethical or social responsibility.
- Diversify your investments.
- Decide: D-I-Y investor or getting formal advice?
- Keep your investment costs and turnover low.
- Stay in the course even when markets get volatile.
A comprehensive wealth creation plan may include:
Salary Sacrifice
An arrangement with your employer to purchase specific goods from your pre-tax salary
Property Investment
Accumulating wealth by borrowing to invest in property for capital growth or cashflow
Share Investment
Building wealth by borrowing money to invest in shares. Also referred to as stocks, equities or securities.
Trust Structures
Includes Family Trusts, Discretionary and Unit Trusts to help protect your wealth while you grow
Regular Savings
Working with you to prepare a budget and manage outgoings to put away the balance into a savings
Taxation Management
Establishing your marginal tax rate and helping to make tax work for your wealth creation strategies
Debt Recycling
Increasing future wealth by leveraging your home equity to invest in other wealth creation opportunities
Margin Lending
Borrowing money to invest in equities and the lender uses the equities as security against the loan
Capital Protection
Providers usually pay back at least the original investment at the end of a specified period to minimise risk.
