What are you waiting for? If the years are ticking by and you keep putting off seizing control of your finances, look at the reasons why you are delaying. If you have had some bad money experiences, perhaps left over from childhood, it is time to work through them and move on. Don't hesitate. The sooner you start, the more money you will have.
2. Plan to succeed
Base your financial plan on a wish list. Write down everything you want. When do you want to retire? Do you want to change careers? Spend more time with the family?
Even if you can't afford it all, put it all down. A financial plan focuses the mind on what is most important. You can work out what you can afford and what is out of the question.
Lipman says one of the best financial aims is to be financially secure. Lipman tells his clients they need about 20 times their annual living cost at the time of their retirement. For example, if they spend around $50,000 a year they will need $1 million. If they spend $100,000 a year they will need $2 million of net investment assets.
He bases this on earnings of around eight percent each year, then taking away three percent for the rate of inflation, leaving a real return of five percent which will earn around $100,000 each year for every $2 million invested. Often your time horizon is the single most important influence on your financial plan. Also your tolerance to risk is important for selecting investments.
3. Save little, save often
You don't have to be rich to save. Anyone, on any income, can put money aside. Small amounts, saved regularly, become large chunks that can pay off debts and grow bigger when invested.
The golden rule of saving is to save first from your salary. Then pay your bills. If you pay your bills first and save what is left over, you'll never save anything because there is nothing left.
The best way to save is to have an amount automatically transferred out of your salary to an online, cheque or savings account. It is a painless way to save. What you don't see, you won't miss.
If your salary goes up, resist the temptation to spend the extra. Always resist the temptation to spend more than you earn. Household income makes little difference to saving, according to the Newspoll survey that showed the more you earn, the more you spend.
It found that 47 percent of people earning more than $70,000 have more debts than savings while only 34 percent of those earning less than $70,000 had more debt than savings.
4. It's time in, not timing the market
The crucial lesson for investors is that if the sharemarket is volatile, don't try to time it. It is better to retain some exposure to markets at all times.
Studies of the Australian sharemarket over the past 20 years from 1984 to 2005 show that most of the long-term gains on sharemarkets are made or lost in just a few trading days each year.
For example, if you invested $1000 in Australian shares in December 1983, 22 years later it would have grown to $12,968, making an annualised return of 12.35 percent, according to IFSA.
But if you invested the same amount over the same period except for the 10 biggest days in the market, it would have grown to $8240 or an annualised return of 10 percent, and if you missed the 20 biggest days you have just $6304 or an average of 8.7 percent each year.
Studies show that investors make money from stock selection rather than market timing. Your strategic long-term asset allocation should be diversified across all the major asset classes. This limits the overall risk of your investments.
5. Your home as a springboard
Increasingly Australians are opting for flexible mortgages that allow them to pay off more of their mortgage and redraw it later, either as a home equity loan or to pay for renovations.
If you own your own home, you can gear against your house at the same rate as your mortgage. Usually the interest rate for a home equity account is cheaper than a margin loan by about a little less than one percent.
The big plus of a home equity account is that you don't get a margin call. However, a home equity account does not provide regular statements and tax reporting about your shares or managed funds that come through from the margin lenders.
Increasingly the family home is being used to build wealth. Some adventurous investors such as Jan Somers, have bought numerous residential houses for the long term and utilised the tax advantages of negative gearing.
"Along the way we could enjoy some really significant taxation advantages," says Jan. She worked on a buy and hold philosophy and within five years had accumulated a property portfolio worth millions of dollars.
She has written her investment strategies in a number of books. The latest, More Wealth from Residential Property, outlines that investing in residential property can build wealth in 10 to 15 years.
6. Borrow to invest
A rising sharemarket has lured investors back to margin lending as a tool to rev up their wealth accumulation.
Gearing or borrowing to invest in shares or managed funds makes good sense when you believe the sharemarket is on the up and up. The problem with a margin loan for tumbling shares or managed funds is that gearing magnifies your losses.
If you have a margin loan, make sure you do the following:
- Choose your risk strategy to fit your level of comfort
- Diversify your investments
- Set your level of gearing according to your risk level
- Don't let your interest build up or capitalise. Pay it off ever month.
It is difficult for most investors to make investment decisions without the help of some professional services.
"People should seek out a good financial planner who can do the monitoring and give advice about superannuation and taxes," says Investec's Lipman.
However, conflicts of interest are widespread among financial planners. A high percentage of planners are recommending that people switch out of low-fee superannuation funds into high-fee funds that pay the planner a commission. For this reason, investors should seek out planners that charge a fee for service.
