In recent weeks we have talked about the strategies available to help purchase a first home, and then about starting to build wealth by saving to buy investments that will grow. Now we can discuss further wealth building.
Controlling household spending in very important. Budgeting is boring but beneficial. Try to economise without penny pinching. Form the habit of planning and monitoring where the money goes.
Pay the home loan payments promptly, preferably with a little extra each time. Most people have to take on car and personal loans and credit card debt sometimes. Limit their size and look for the lowest interest rates.
Even so, their rates are higher, so pay any extra income available off them. Cars and household goods depreciate. Borrowing is best done to buy appreciating assets.
Save a little each payday into a separate bank account by automatic transfer. Then take on some risk. Borrow to buy managed funds, shares or an investment property, assets that will grow in value.
Continue those strategies for a couple of decades, the wealth building years. Keep seeking shares that will increase in value. Look for an investment property that can be repaired, upgraded or extended to boost its value. Learn from the first venture, sell it, and buy another.
By the time people reach their fifties the mortgage should be coming well down. Hopefully there have been promotions and pay rises. There aren’t small children to raise anymore, and no school fees to pay. There should be healthy cash surpluses.
How is best to make the most of them? Keep paying extra to finalise the home loan. Continue saving, accumulating, and buying shares and funds.
Other strategies start to become important once workers are into the second half of their careers. Superannuation is one. Young people aren’t attracted to it because it isn’t accessible. Access starts from age 60.
So at age 30 it’s too far away and there are other priorities. By age 50 or 55 access is no longer so distant, and super offers outstanding tax savings.
Sacrificing pre-tax salary into super saves the majority of workers 19.5 per cent tax. Money going into super is taxed only 15 per cent while salary taken as cash is typically taxed 34.5 per cent. For higher income earners the tax saving is greater.
Super contributions are limited to $27,500 annually, including employer amounts. People whose balances are under $500,000 can do catch-up contributions, claiming greater tax savings.
Following a plan can enable people to arrive at retirement with no mortgage, a healthy superannuation balance, and other investments.