John Demartini, human behavioural expert, once wrote that the difference between people who have created wealth and those who haven’t was what they did with their money.
That may seem like a very obvious statement, but what Demartini was saying is that wealth creation starts with a certain attitude and an understanding of how money works.
He used the example of a person who wins the national lottery. A wealth creator would invest at least 80% of the money in growth assets. In time, that money would provide them with an income. A wealth creator understands that true wealth creation is achieved when your money works for you, not the other way around.
An individual who uses the windfall to buy depreciating lifestyle assets, such as cars and status symbols is a wealth destroyer. Over time, lifestyle assets depreciate and the value of that windfall has halved, if not disappeared altogether.
Whenever you receive a financial windfall, whether it is a bonus, extra commission or an inheritance, think about whether or not you want to be a wealth creator or a wealth destroyer.
1. Set goals
It’s very hard to reach a goal if you never set one up. Having goals helps to keep you motivated, but you have to write them down and put them somewhere that reminds you every day why you’re making those short-term sacrifices. The key is to set achievable goals that are realistic.
2. Have a plan
How do you eat an elephant? One bite at a time. Big goals aren’t achieved overnight and you need to form a plan on how you’ll reach them. For example, you may want to have R1 million of investable assets within the next ten years, but your immediate goal is to pay off short-term debt so that you can use those debt repayments to boost your investments.
3. Spend less than you make
This is one of those really simple ideas that isn’t as easy to implement without dedication and a budget. Write down everything you spend and understand where your money is disappearing to each month. You’ll always find that you’re spending money on irrelevant stuff which could be better used to help you meet your financial goals. If you think this isn’t possible, ask yourself how people who earn less than you survive.
4. Keep investing each month
You don’t have to win the lotto to become a millionaire. It’s achievable by ordinary people earning an ordinary income who simply put away a portion of their money every month to create wealth. If you put 20% of your salary away each month and earn a return of just 10% a year, you would have your full annual salary saved within four years.
When investing, don’t make the mistake of being too conservative and investing in cash. The only way to create wealth is through growth assets, such as equities (shares) and property.
5. Use your tax-breaks
If you’re only investing with after-tax money, you’re throwing away up to 41% of your money. As from 1 March 2016, you can invest 27,5% of your income in a retirement fund tax-free. If you have a retirement annuity, you can set the retirement age to 55 years old – you don’t have to wait until you are a pensioner to live off your wealth.
Also make sure you’re utilising your tax-free savings accounts where you pay no tax on capital gains, dividends or interest earned. Over 20 years, that can boost your investment returns by up to a third.
6. Debt is only for wealth destroyers
The only people who make money out of debt are banks and their shareholders. Rather than taking out a loan or credit card with your bank, buy shares in it. If you love clothes, don’t open a store account, rather invest in the retailer. Remember that wealth creators make their money out of wealth destroyers.