Building wealth needs a big mindset change

Building good investment habits early is the hallmark of coasting into an easy retirement. But it’s almost never too late to start planning.

Some people think they can save their way to a fortune, but for the majority it is not a possible, or suitable, strategy

I get to see under the hood of a lot of people’s finances. Mechanically, sometimes, it feels like I’ve seen everything.

But I am often floored by something new, even if just a twist on an old familiar horror story.

I’m not suggesting everything I’m talking about is a financial disaster. Some of them are gobsmacking in a positive way. But every weird and wonderful financial story you hear teaches you something new.

There are some things that you see so often that they no longer shock. Like those people on huge incomes, who really have little to show for it.

And the opposite – the people on very modest incomes doing so well that you can see they are going to love their retirement and be able to do everything they want to do.

That is, no surprise, income and wealth don’t necessarily correlate. Far more important than income is your mentality around your income.

And your expenses.

Big, bad, spending habits can easily wipe out large incomes. Mentalities of keeping up with the Joneses, updating new cars every few years, eating out most nights, regular retail therapy, succumbing to whims, are always going to make growing your wealth harder.

Along with people who see money in the bank account as money to splurge, living payday to payday, and constantly say to themselves that “saving starts next month”.

Save a fortune?

Most people spend a good portion of their working lives trying to keep their heads above water financially – stay on top of the rent or the mortgage, have enough money to raise the kids, given them a good life, and have a life yourself.

For some, with anything left over, they consider trying to build some wealth.

The people who are best at it turn that on its head. They “pay themselves first”. That is, they make their future a priority and, before they do anything else, they prioritise saving, or investing.

The phrase, I understand, originated from the book, The Richest Man in Babylon.

I’ve always referred to it as sacrificing. You’re sacrificing some “now” for “future you”, but it’s the same principle.

Investing in property and shares, particularly, means you are investing in growth assets.

Some think the right way of doing it is to try to save their way to a fortune.

It’s not really a possible, or suitable, strategy for the majority.

Saving money in a bank account is more of a short-term strategy to hit a target, such as building a buffer, having money for a rainy day, building a home deposit, or to meet short-term, large, expenses.

Why can’t people save themselves a fortune? Even if people are good savers, the returns from cash are (at most points in the interest rate cycle) generally quite low and any income is fully taxable in the year it’s earned. That is, you lose up to half of it in tax.

It’s low risk and, therefore, comes with low reward.

Interest rates are pretty good at the moment. But, say the experts, they’re headed south, to varying degrees, at some point this year, potentially sooner than later.

Need to invest

Sometimes cash is the best performer in a given year. It’s rare, but it happens.

Returns from other asset classes (bonds, property and shares) beat cash over medium to long terms.

Why? Because they are incrementally higher risk as you move up that list. Investing in property and shares, particularly, means you are investing in growth assets. (And growth assets don’t grow every year, sometimes they go suddenly, even violently, south.)

Property and shares, in general, rise in value over time, along with usually providing income via rent, dividends and distributions.

But the main returns you are going to get from them are through the growth in the underlying asset value, such as a property increasing in value from $500,000 to $1 million, or, for example, BHP shares rising from $40 to $80 over time.

Lifelong, lifestyle, choice

People who achieve ridiculous wealth have usually done something outside the box.

Built a company, taken a big stake in a successful start-up, taken an enormous investment risk that went their way.

But people who don’t have those business building skills, or wish to take those sorts of extreme risks, generally will need to invest in shares and property, and build their stakes over time.

If you don’t want to take extreme risks, generally you will need to invest in shares and property to build your wealth.

It’s extremely rare that your first investment will deliver that kind of wealth. Again, unless that investment is taking extreme risk.

More than anything, building wealth requires a change of mindset. Moving first to one who is going to make investing a priority, to understanding that investment is not just a once-off, to understanding it is a lifestyle, and life-long, choice.

The best way for most people, who aren’t necessarily going to take too much active interest in it, to achieve it is to treat it like your superannuation.

Yep, super. Your employer puts 11.5 per cent of your salary into your super fund, every month or every quarter, and, if you’ve got your super fund set up correctly, it gets automatically invested.

Over the course of a working lifetime, generally 40-plus years (between your early 20s and about age 65), your employer’s super contributions roll in, get invested, and when you retire, you get to turn on a nice income stream.

Imagine if you could do that with your own money?

Making it automatic

Well, you can. And for most people, you should.

Invest. Automatically. Every month.

There are relatively easy ways to do it. And if you’re prepared to do the investigation and legwork yourself, you should be able to find options that will work for you.

However, if you value your time, to spend on your career, or with your family, or doing things you’d rather, like catch up with family, friends, watching your kids play sport, or playing yourself, then get a financial adviser.

Particularly if you think you might do it half-arsed. But, ultimately, really don’t want to screw it up.

Nearly never too late

Adopting the right mentality to investing is something you can do at pretty much any time of your working life.

For most people, by the time you get to retirement, investing some of your hard-earned each month is going to be hard, because you’re drawing down on your assets to cover your expenses.

(Though everyone should continue to take an active interest in their super, even through retirement, to at least know how aggressively you are invested and, if appropriate, to make adjustments.)

During your working life, if you’re wanting to make a real change to your later life to build something substantial, investing constantly, preferably monthly, has to become a lifestyle choice.

As early as possible. Preferably in your 30s.

In my opinion, not in your 20s, certainly not your early 20s. Your 20s should be, or should have been, about getting started in life or a career, having fun, and delaying adulting for a bit longer. Creating the lifestyle, and memories, you want to take through life.

Meaning something

If you’re a bit later in life, say your 50s, but wanting to get serious about it, what do you do?

Well, if it’s about creating a fantastic retirement for you and/or your partner, the more you can sacrifice, the better.

It might not be straight non-super investing. It might make more sense to do those investments into super, where you’ll get tax deductions, depending on your income and you individual position. And then super is tax advantaged anyway.

The closer you get to 60, the more likely super becomes the best investment option.

The closer you get to 60, the more likely it becomes that super will be the best option. Again, get advice if you’re not sure, or can’t figure it out with your own research.

Sure, you’ve got to “live”. And therein lies the delicate balancing act that everyone faces. Living and enjoying life now, versus making sure that you’re putting away enough so that you’re not on a shitty position, wishing you had done things differently, during your working years.

But don’t give me the “I can’t afford it” line. Bollocks. Well, it’s almost certainly bollocks.

If there’s any fat in your budget and you have that little piece of you that knows that you should have been doing this for a long time … get started as soon as possible.

Your time to stop procrastinating starts … now.

Bruce Brammall is both a financial adviser and mortgage broker and author of books including Debt Man Walking. E: [e-mail].

DISCLAIMER: Information and opinions provided in this column are general in nature and have been prepared for educational purposes only. Always seek personal financial advice tailored to your specific needs before making financial and investment decisions.

Originally published as Building wealth needs a big mindset change