Top tips to become rich: 11 ways the richest Australians get ahead

Rich people seem to attract money like magnets, in the same way that battlers can repel cash, so what are their secrets?

The old saying “the rich get richer and the poor get poorer” is much older than you might think – more than 200 years, in fact.

Attributed to a British poet in 1821, it remains popular for a reason – because it is often true, and backed up by today’s statistics.

Australia’s average household net worth is $1.04 million, but the top 20 per cent own 63 per cent of it – an average $3.27 million each, according to social research group McCrindle.

The bottom 20 per cent of households combined have just 1 per cent of the nation’s wealth, just over $35,000 each, it says. The middle 20 per cent of Australian households have $588,400.

The barriers to climbing the wealth ladder may seem bigger than ever, but there are ways to improve your wealth by examining just how the rich get richer, and emulating their thinking and strategies where possible.

Tribeca Financial CEO Ryan Watson said it often came down to mindset, self-belief, setting goals and having daily discipline to work to achieve those goals.

“Don’t get me wrong, starting with a significant pool of money can make it easier to make more money, but it doesn’t mean those that start out in life with little money have to live and finish their life that way,” he said.

“You get what you focus on … a lot of wealth-building strategies are available if you know where to look. The key for middle Australia is to get informed, do you research and invest the time. In my opinion, 85 per cent of the battle with anything is mindset.”

Jacqui Clarke, author of Stop Worrying About Money. Picture: Supplied

Author and adviser Jacqui Clarke said wealthy people had a few advantages that set them apart, including early access to investment opportunities and large networks of rich friends and contacts.

But they also employed savvy money strategies over a long period and “there are still ways for individuals who aren’t as wealthy to improve their money management skills”, said Ms Clarke, author of new book Stop Worrying About Money.

Midsec Financial Advisors managing director Nick Loxton said the fact that rich people had more assets made it easier to invest in higher-risk, higher-growth assets without damaging their overall wealth.

“If it fails, they haven’t lost much of their cash so it doesn’t affect their lifestyle,” Mr Loxton said, adding that people with fewer assets often had to take risks with a larger proportion of their wealth.

But not every rich person stays rich. “There are a lot of people who were very wealthy and are no longer wealthy because they bet the farm,” Mr Loxton said.

Here are 11 ways the rich get richer, and how they can be used by anyone wanting to grow wealth.

1 Own property

You will struggle to find any wealthy Australian who does not own some sort of real estate, even if it is just their own – probably expensive – home.

Our homes are exempt from capital gains tax and enable us to use its equity to invest in more properties, shares and other investments – two massive positives that are unavailable with many other assets.

Mr Loxton said a home was a “fantastic tax-free investment” that could help people understand other investment concepts.

2 Take risks

Ms Clarke said high net worth people had a greater appetite for risk than average investors.

“They understand that risk and reward go hand-in-hand, and they are willing to take on more risk for the potential of higher returns,” she said.

“However, they do so in a calculated way and usually focus on investments that align with their passion. They are not afraid to invest in emerging markets, new technologies, or high-growth sectors.”

3 Pay for a team

Ms Clarke said wealthy people had trusted advisers specialising in areas such as tax, investment management, estate planning and risk management.

“In my experience, having a team that works in a coordinated way on a comprehensive plan delivers the best wealth outcomes,” she said.

Tribeca’s Mr Watson said wealthy people could afford to pay for good accounting and financial planning advice.

“This can help generate significant wealth through both investment and tax minimisation strategies,” he said.

4 Work the network

It’s not just paid advisers who can help. Friends, colleagues and other contacts give rich people extended reach when it comes to learning about opportunities, strategies and success stories that they too can mimic.

“They use their networks to make informed decisions and invest accordingly,” Mr Watson said.

“They use their friendship circles to generate a financial leg-up.”

5 Understand compound interest

Mr Watson said wealthy people used the power of compounding, where earning interest on your interest on your interest, and so on, multiplied investment returns dramatically over many years and decades.

“The greater the pool of money that you start with, the larger it can accumulate over time,” he said.

Tribeca Financial chief executive officer Ryan Watson. Picture: Supplied.

All Australians can benefit from compounding – their super fund already does – by injecting money regularly into quality investments, reinvesting the income earned, and watching the returns eventually multiply. Test out your projections using Moneysmart.gov.au’s free compound interest calculator.

Lightbulb Wealth managing director Heinrich Jacobs said high quality assets such as shares, managed funds and property could generate big returns over time.

6 Bank on borrowing

Using other people’s money to invest, usually the bank’s through an investment loan, enables people to hold a much larger asset base. So when it grows over time, the return on their initial outlay is much larger.

This is most common with real estate investment loans but rich people use it for businesses, shares and many other assets.

“Wealthy people often leverage debt to invest in high-quality assets,” Mr Jacobs said.

“By borrowing to invest, they can amplify their investment potential and take advantage of potential tax benefits.”

7 Clever tax strategies

Mr Jacobs said rich people used tax-effective structures and strategies, such as investing through a self-managed superannuation fund.

“Concessional pre-tax contributions are taxed at 15 per cent on investment earnings, making this a more attractive option than if the same investments were made in the investor’s own name and taxed at their marginal tax rate which may be as high as 45 per cent,” he said.

Super becomes tax-free in retirement, so someone who owns a property inside their SMSF and doesn’t sell until they retire can avoid a massive capital gains tax bill.

8 In trusts we trust

Wealthy Australians establish and use family trusts as a structure for accumulating more wealth, Mr Jacobs said.

“Through a family trust, profits and income can be distributed in a tax-effective manner to lower marginal tax rate family members,” he said.

“This allows for income splitting and potentially reduces the overall tax burden, enabling faster wealth growth.”

However, the once-popular tactic of sending a trust’s income to children to dodge tax no longer works, with the ATO imposing heavy taxes – up to 66 per cent – on children’s unearned income above $416 a year.

“Family trusts also offer excellent asset protection benefits to ensure wealth is protected for generations to come,” Mr Jacobs said.

9 Embrace mistakes, not emotion

Midsec’s Mr Loxton said rich people did not get caught up in emotions and worrying about what others were thinking.

“They generally had early mistakes and they have learnt from them,” he said.

“Little mistakes set us up to be better in the future.

“Richer people are patient and probably not as reckless with the bulk of their capital.”

Getting rich is a long-term project for most people, and remains achievable. Picture: iStock

10 It’s OK to pay tax

If you pay tax, it means you are making money, so do not try to avoid it all costs.

“Wealthy people accept that when you ware wanting to get ahead you have a silent partner – the tax man – and it’s just a cost,” he said.

“Everyone wants to negative gear but the first word is negative. It’s like a national sport trying to get out of tax. It’s crazy – accept that it’s a cost of doing things.”

11 Avoid knee-jerk reactions

Like billionaire Warren Buffett famously said, be fearful when others are greedy, and greedy when others are fearful.

That means buying in a downturn and selling in a boom – tough to do when there is excess excitement or fear circulating.

Ms Clarke said take calculated risks and do your homework.

“Avoid making impulsive investment decisions based on short-term market trends,” she said.

“Instead, focus on investing for the long term and benefiting from the compounding effect of your investments over time.”

Originally published as Top tips to become rich: 11 ways the richest Australians get ahead