Are you wanting to build a higher level of Wealth, but feel you are being held back?
I know many people certainly feel that “if only” they were able to jump a pay grade and achieve a higher salary, it would be so much easier.
In my experience, people seem to think that the most important factor in building wealth is their Salary.
I can assure you that it is not!
It is probably a major factor in why a high number of investors prioritise cash flow.
They think additional income or a higher-paying job will automatically make it easier and would the key to making them wealthy.
Again, it will NOT!
Here are my thoughts;
Tax
Increasing your salary may result in more cash but it will also result in you paying more tax.
It is somewhat of a false economy, on one hand, you move one step forward, but you also need to take somewhat of a step back.
Sure, an extra $10,000 or $20,000 a year would be great but when you could lose up to 47% of it through tax, would it really change your life?
While there are legal ways to minimise your tax, it is clearly not a wealth creation strategy.
To live comfortably in retirement, most Australians will need to acquire an asset base in excess of $6million.
Ask yourself this question……
“If you were able to double your salary today, could you save more than $6million over the next 10-15 years? “
The answer would overwhelmingly be no.
You can’t save your way to wealth!
For one, you pay more tax, but you are also unable to use compounding to its highest and best use.
“Compound interest is the eighth wonder of the world” – Albert Einstein
In my experience, I have had clients earning $80,000 per annum, create wealth faster than others earning $200,000 per annum, despite the salary gap.
Granted, all things being equal and those two people following the same strategy, it would happen faster at the higher income, but the lower salary can still get there.
So, it highlights again that a person’s salary is not the biggest indicator of building wealth.
I believe the biggest requirement to building wealth is your ability to use compounding to full effect.
Here is a great case study;
In this exercise, it becomes as clear as night and day the effect compounding has when it can be used to its full effect.
In the first scenario, $2 is untaxed and compounding can be used to full effect.
It is a vastly different result in scenario two when tax is deducted each year.
As in the example, the difference in real life could be just as substantial.
Strategy
The strategy you should therefore adopt must be one that minimises tax but maximises compounding.
This is why cash flow strategies like flipping, granny flats and AirBnb, fail to create any great level of wealth.
A healthy profit will be savaged by capital gains taxes, agents’ commissions, and other fees.
Therefore capital appreciation should be first and foremost at the forefront of your investment strategy.
A great vehicle for that is residential property as it attracts a much higher level of appreciation or capital growth.
But you need to understand the investment-grade fundamentals, as most properties will not perform at a higher enough level to build a greater level of wealth.
Once you have found these properties hold them, add value to them but never or seldom sell.
Otherwise, you are back to paying taxes, fees and reducing the compounding effect.
Summary
In my eyes, a person’s Salary is a false indicator of a person’s wealth or ability to create wealth.
Most people think a boost in their salary or extra cash flow is the most important tool for building wealth.
I disagree and I have seen many cases, compounding wins out time and time again.
The most successful investors have used compounding to build their wealth.
Importantly they have focused their efforts on building their asset base while minimising taxes and other fees.
This also allows compounding to be used to its full effect and why I believe that compounding is the most important requirement for building wealth.
Therefore, a high salary is not a requirement for building Wealth.
You need to plan
So while the property markets will create significant wealth for many Australians, statistics show that 50% of those who buy an investment property sell up in the first five years.
And of those who stay in the investment game, 92% never get past their first or second property.
That’s because attaining wealth doesn’t just happen, it’s the result of a well executed plan.
Planning is bringing the future into the present so you can do something about it now!
Just to make things clear…buying an investment property is NOT a strategy!
It’s important to start with the end game in mind and understand what you need and what you want to achieve.
And then you have to build a plan, a strategy to get there.
The property you eventually buy will be the physical manifestation of a whole lot of decisions that you will make, and they must be made in the right order
That’s because property investment is a process, not an event.
We are here to offer guidance to help you achieve your financial and life goals. Reach out to us by calling 08 82314709 or at info@centrawealth.com.au.
Article courtesy of Michael Yardney’s Property Update.
