Laying the Foundation for Wealth: A Guide to Successful Investing

Now , if you're already an investor , then it's always good to go back and have a think about these foundational steps , just to make sure you're on the right track .

You know engineers know that if they want to build a really sound structure that lasts many decades , that most of the time and energy is spent on making sure the foundations are correct , because engineers know it doesn't matter how well your building is constructed above ground , if the foundations aren't stable , the building is just not going to last , and the same

is true for building wealth . There's several steps you can take , and that if you do take those steps , you lay the foundations sound foundations for building wealth and there's a greater chance it'd be a lot more successful . And so there's five matters that I'd like to talk about today , so let's get into it . The first one is know where you're heading .

Now it makes sense , right ? You don't just jump in your car and aimlessly drive around or at least I don't . What you do is you decide on your destination first , and then you consider you know the most efficient or fastest or quickest route to get to where you're going , your destination and that's exactly what you need to do with building wealth as well .

And Stephen Covey in his famous book Habits of Highly Effective People it was one of his tips , which he called start with the end in mind and essentially that means asking yourself if you do accumulate sufficient wealth , what does that really mean for your life ?

You know , for example , for some people , they'd like to retire tomorrow , retire in full tomorrow , and do absolutely nothing in terms of no more paid employment as soon as possible . For other people , they love their job .

They just might not want to do it five days a week and they might want to have more flexibility to choose the type of different types of works that they do . So , that is , they don't need to think about money when they're thinking about the type of work they want to do . My point is that you've got to have a rough goal .

You've got to know where you're heading , because without that context , it's going to be really difficult to work out . You know whether this asset I should invest in , asset X or Y or Z , whatever it looks like , it really does provide that context . You need to know just broadly where you're heading .

You don't need to have a perfect crystal ball on it , and you know you've got to understand that people's desires and goals and so forth will change over time as well , so it's also not set in stone . But often I find people just decide look , I need to invest .

I know I need to invest , I know I need to build wealth , but don't really consider what that longer term goal looks like . The second foundational matter or decision you need to make is who's on your team . Of course , when building wealth or really doing anything , we could try and do all ourselves , or we could try and leverage someone else's experience .

And I know in my life I like to think of it as a who question , not a what question . So if I'm facing an important decision or I need some just to solve a particular problem , I don't think about what should I do . I think about who should I speak to .

You know who has already travelled that road , who has a lot more experience than me in solving this problem or making this decision and then I'll go and talk to that person or people to obviously get their counsel , benefit from their experiences , so that I don't repeat the same mistakes that maybe they've made or they've seen other people make .

And the reason I know that's important is because I know knowledge is very valuable . Of course , knowing you know share markets and property markets and tax legislation and super rules , all that sort of stuff is absolutely necessary , but it's the experience that's the most critical element .

You know , knowledge without experience is really dangerous because you don't know when and how to apply that knowledge , whereas if you've had many years or even decades of experience in markets applying that knowledge , you are much better placed to work out when it's right to take certain actions and when , in fact , you should absolutely do nothing or do something

completely different . Financial mistakes can be costly , of course . Worst , you're going to lose money , at best maybe you just lose time and at times still a really valuable commodity and an absolutely necessary ingredient when building wealth , because quite often good quality investments just take time .

So the sooner that you can get into those good quality investments and not waste any more time , the better off you are . Warren Buffett says risk comes from not knowing what you're doing , and so , really , if you want to reduce your investment risk , then you really need to work out you know , you really need to know what you're doing .

If you don't know , if you don't have that experience , then you really need to leverage a team with experience , and that team might include a financial advisor , a mortgage broker , a tax advisor , maybe a buyer's agent or agents if you're looking at investing in direct property , and , of course , a lawyer .

And , depending on your situation , you might not need all those professionals now , but you probably will eventually .

And I think it's a really good place to start to sort of answer that who question you know who is going to be on my team , as opposed to jumping directly to what , and , depending on the complexity of your situation , you might actually benefit greatly from a holistic team .

So that is that , from the financial perspective , the tax , the financial plan of the mortgage broker , that they're all on the same team and in fact , my team and I are working on a particular client strategy at the moment .

That involves several tax planning opportunities and , in my opinion , it would be impossible to formulate the most effective financial strategy for him if we weren't able to workshop ideas with the client's accountant , which is that the accountant's obviously on our team .

They're internal , and so literally just only a few days ago it was demonstrated to me yet again of how beneficial it can be to have that holistic advice . Of course , it depends on your complexity the more complex your situation is , the more likely there is to be more value gained from that holistic approach .

The third foundational matter is mastering your cash flow . You can't build wealth if you're spending everything you earn . You spend all your income . Now it's a bit of a boring topic , but really there's two key things you want to achieve with respect to cash flow management . Firstly , you must eliminate costly , unconscious expenditure .

That is , spending money on things that add very little enjoyment or utility to your standard of living . That's just an absolute waste . Cash flow management isn't about eliminating or minimising expenditure as much as as much as possible .

If you love going out to find any restaurants , then that's exactly what you should do with your money , because you're going to get a lot of enjoyment from it . But if you don't care whether you have a takeaway coffee or make one at work or home , then you know wasting six dollars on a coffee is silly .

So good cash flow management is just getting the highest reward for your dollar spent . The second important part of mastering cash flow is spending less than you earn , so that you have a certain amount each fortnight or month that you contribute to boards building your wealth .

You can't expect to build wealth without having some sort of surplus cash flow and so you don't have surplus cash flow at the moment , then you absolutely must master your cash flow .

You must sort out your cash flow management before you begin your investment journey or before you add to your investment journey , and I've spoken about this before , and there's a link on the blog , on the website , to more information about how to structure your accounts , something that my clients almost or almost all my clients do with great success to make sure

that they eliminate the unconscious expenditure . Okay , the third foundational step is to set a goal , even a rough goal , and it kind of relates to the first step , which is really nowhere heading , but this is really putting some numbers behind it . You know there's that saying that , a goal that's not in writing and you don't have a plan how to achieve that .

How to achieve it is really just a dream , and you know setting dreams isn't going to be the answer , or is it going to be successful to building wealth ? Of course Now most people don't know how to set retirement goals . It seems all a little bit difficult , so maybe I should . I can give you a couple of tips to kind of help you out .

You know , the first thing you need to know is when you'd like to retire and how much money you need in retirement . Most people can access super at age 60 . So that tends to be kind of a common age target that we use for most of our clients , and most of my clients will spend somewhere to between $80,000 and $100,000 per annum on general living expenses .

Doesn't provide for any massive holidays a few holidays , smaller sort of domestic holidays in there , but just as a general sort of number . So in the absence of a more considered target , you know I would encourage you to maybe go with age 60 , $100,000 a year could be your target , but you might tinker with it as time goes on .

So once you know when you'd like to retire in terms of age and how much money you need each year , you then need to work out how much wealth you need to have or need to accumulate in order to be able to afford to fund that sort of living expense number .

And really this number is all investment , net investment assets , so really the net value of property super plus any other investment such as shares and so forth , but obviously not including your family home . And a good sort of rule of thumb , if you like , is to multiply that number by 18 .

So therefore , if your goal is to have $100,000 of income , then you really need around about $1.8 million of assets . Now it depends on how those assets are owned and the combination of those assets and whether there's any tax and so forth . So it is just a general rule of thumb .

But if you earn 7% on $1.8 million and draw $100,000 a year , assuming inflation is 2.5% , then it's likely you'll run out of money around about 98 years of age or so forth . So if you live beyond 98 , you're probably doing pretty well and imagine you'd have some equity in your family home to fall back on in that situation as well .

So of course , that's just a rule of thumb , and so it's important to do your own numbers and get some specific advice to make sure you're on the right track there . Okay , the fifth and final , and perhaps maybe the most important foundational step that you need to take is to develop your own investment philosophy .

An investment philosophy is really what you believe about building wealth and will guide you through your investment decision making . So it's really just a bit of a belief system and that belief system sort of guides you through your the next couple of decades of making investment decisions .

So , for example , if I think about my own investment philosophy , you know I believe that building wealth takes time . There's no shortcuts . I believe that silly to take really high risks if you can earn 7% to 8% per annum over long run and play it pretty safe , you know not take too many risks at all .

I believe that following an evidence based approach gives you the highest probability of achieving your returns . There's no need to throw darts at dartboards , that shortcuts really work and are often a futile distraction .

You know there's some of the beliefs in my own investment philosophy and these beliefs sort of guide me , you know , through that investment decision making process . So , for example , building wealth takes time . Don't get distracted by shiny objects .

You know , if a really short term investment opportunity arises , you know it helps me stick to sort of taking that long term approach .

So , adopting an investment philosophy at the beginning of your investment journey , as long as it's a sound investment philosophy , of course , I think will hold you in good stead , keep you on the straight and narrow , make sure you make some really good quality decisions and , most importantly , avoid making costly mistakes .

So that's why I think it's maybe arguably one of the most important of the five foundational steps . Okay , so there you go . There's the five foundational steps that I believe every investor must absolutely nail before they start investing or , if you've already started , before you continue investing .

And it's something there's something good to sort of reflect back on and ask yourself you know , am I comfortable with all these five really important matters ? The thing is that these are all really relatively simple steps . Unfortunately , they're easily avoidable as well . You can jump into investing . You don't have to nail these things down , but you'll be .

You'll stand in good stead if you do and probably put you miles in front of other investors as well . I hope that's been useful until next week . Bye for now .