A healthy retirement is something that many of us strive to achieve. Who doesn’t like the idea of living a comfortable lifestyle without a financial stress after working for 60+ years? But achieving financial freedom is something that only a minority of us seem to achieve, perhaps due to a lack of knowledge, investing in assets that do not bring the anticipated return, or having the common modern mindset of buy now pay later, leaving little room for building a nest egg.
Creating financial independence can easily be achieved by many of us, by following some basic rules when it comes to managing your finances. This is nothing new, in fact, I’ll refer to the 1926 book by George Samuel Clason; The Richest Man in Babylon which outlines The Seven Cures for a Lean Purse when discussing strategies to build wealth creation. Even though set in ancient times the rules still apply to us today.
The First Cure: Start thy purse to fattening.
According to Clason, the first step to wealth creation is to fatten thy purse. This simply means to save a percentage of your income. Our financial planner partner, Andreas Kettemann advises to save 15% of your income as a rule of thumb. How to save this can be up to the individual. It could be to increase your superannuation contributions from the standard 9.5% to 15%, or to put savings into a separate account at every pay day. Saving 15% of income over your working life can bring you to a situation where you have enough assets to secure your lifestyle and achieve that financial freedom. Not to mention the satisfaction of seeing your savings grow as the years pass by.
The Second Cure: Control thy expenditures.
Step one can only be achieved when there is control over expenditures. It sounds obvious to say money going out shouldn’t exceed money coming in, but it seems to have been forgotten. Credit cards and buy now pay later schemes aren’t helping these bad habits of spending what you don’t have. Carbon’s financial planners advise that living expenses (bills, food, school fees etc) should be no more than 50%. A simple way to control expenditures is to have a set and forget strategy via cash flow management. Structure your bank accounts in a way to have automatic payments going to different accounts on pay day. Examples include living expenses, savings, holiday fund and entertainment, with a set amount going to each account. It’s a simple and effective way of budgeting.
The Third Cure: Make thy gold multiply.
Once you have your savings in place, invest them smartly and make your money work for you. You may be fantastic within your profession, but that doesn’t make you a savvy investor. Engage with a professional who can ensure your investments are working for you. People often make the mistake of taking investing into their own hands, with little knowledge on what makes a good investment.
The Fourth Cure: Guard thy treasures from loss.
It’s easy to be attracted to get-rich-quick schemes that offer a high return on investment. But consider the risk involved and ask yourself how much money you can lose as well as gain from an investment. What’s the risk you’re taking to get a 20% return? Be aware of the risk that comes with a high return on investment. A financial planning expert can sense risk and advise against the possible loss.
The Fifth Cure: Make of thy dwelling a profitable investment.
Carson refers to the well-known Australian dream of owning your own property in his fifth cure. When renting, you’re simply paying off someone else’s mortgage. Instead, buy your home and pay off your own debt (mortgage). There is no capital gains tax on your main residence, so if you own your home, it’s a tax-free asset. In the current market here in WA, affordability of home ownership is at an all-time high, giving first home buyers an easier step onto the homeowner ladder.
The Sixth Cure: Insure a future income.
Your ability to earn an income is your most valuable asset, and Carson advises to insure this for times when you can no longer support your family through earning an income. What would you do if you had an unexpected accident or illness and could no longer work? How would your family pay the bills? Income protection ensures you can continue living your life without worrying where your next income is coming from.
The Seventh Cure: Increase thy ability to earn.
The final part of building wealth is to continually increase your knowledge/specialisation in order to increase your earnings. Never become comfortable with your level of expertise, but continually grow both professionally and personally, and become a specialist in your area. You will be rewarded by increasing your earnings power.
In summary, wealth creation is something that everyone can work on; it’s not just for the high-income earners. Financial freedom can be achieved by all of us by following a few simple steps. A good financial advisor on your side can give you the security to sleep peacefully at night, knowing your finances are working for you.
Our financial planner, Andreas Kettemann, is someone I recommend and he is happy to work on wealth creation strategies with you. Reach out if we can help.
Andreas Kettemann
andreas@carbongroup.com.au
08 6381 2404
