Building wealth is like watching a cricketer catch a ball in slow motion. You don’t know whether it’s going to work out. It has its wobbles. You’re on the edge of your seat. Sometimes you hold your breath.
But in the end, hopefully it’s a perfect result.
In the money game, there are five main mistakes to avoid along the way that could well make it a financial miss.
Money Mistake No.5: Only being offensive
To continue the sporting analogy, you need to get defensive. Smart money management is not just about growing it but also protecting it… and protecting your family.
You do that, in part, by making sure you have the right risk insurances. I’m talking about life insurance, which is usually sold with total and permanent disability insurance.
Both pay a lump sum if you die or, yes, if you are totally and permanently disabled. Horrible thought, I know, but you need to think about these things.
Next in importance is income-protection insurance, which replaces usually up-to 75 per cent of your income, often up to age 65, if you are unable to work through accident or illness.
This is important, even for single people without dependents, otherwise, how would you afford to live? It is tax-deductible.
To encourage the uptake, there are often tax breaks for buying health insurance – or penalties if you don’t and earn over $90,000 as a single or $180,000 as a couple (the Medicare Levy Surcharge).
Money Mistake No.4: Failing to have a Holy Sh*t fund
In life, sh*t happens, and you need to be financially prepared for that so your future isn’t derailed by a small disaster – like a whitegood busting – or a big one – like the loss of a job.
The way you do this is to slowly and surely build a buffer of preferably six months of salary.
If you hold a mortgage, this emergency money should go in an offset account beside that mortgage, so it can be saving you loads of loan interest as well.
Money Mistake No.3: Buying without the bank balance
As wise, probably wealthier people have said for… forever, you need to spend less than you earn. Or at least the same.
The opposite, debt, is the enemy of wealth. You can easily fall further behind, not least because everything you buy with debt – unless you clear a credit card in the interest-free period – costs you more than it should.
You’re simply throwing away money because you can’t wait.
The big caveat on this is mortgage debt, which is very likely necessary if you are ever to get a home. But a mortgage is fine. It’s a form of forced saving against an asset that is hopefully growing in value.
Cars do not grow in value (typically). So here, cash is king.
Irrespective of what you borrow for, you should pay down loans faster than the lender requires. The savings in interest are simply enormous.
But the worst kind of ‘debt’ is that offered by loan sharks.
All those legit-looking ads for a bit of extra cash to tide you over? Many of them are payday lenders and if you fall prey, you’ll pay an effective interest rate of up to 900 per cent.
Unfortunately, because the costs actually come in the form of fees, rather than interest itself, these outfits slip through the cracks of the Uniform Consumer Credit Code.
Don’t fall for marketing. It’s a slippery slope into further financial trouble.
Money Mistake No.2: Believing the hype
If something sounds too good to be true, it more than likely is. It could even be a scam.
One of the qualities most conducive to wealth-building is a healthy sense of scepticism.
At the very least, if something promises above-average returns, invest only a tiny amount. Money that you can afford to lose. Hello, crypto!
Money Mistake 1: NOT investing… and you preferably need to start young
This brings us to the biggest money mistake you can make.
We are tremendously lucky in Australia to have a compulsory retirement savings vehicle in the form of superannuation. Employers must tip in 10 per cent on our behalf.
But this is locked away until perhaps age 60.
It may be prudent to save outside of super too, to give you the flexibility of access.
Now, the powerful mathematical concept of compounding means that the earlier you start investing, the less it will cost you to build a portfolio.
This is because – in what I call the ‘snowball of success’ – returns are paid on returns. Over time, on more returns. And on more returns.
In fact, if you invest just $6 a day from age 20, and earn an 8 per cent investment return, by age 67 you will have $1million. And nearly a full $900,000 of the money will be courtesy of compounding, rather than your contributions.
Whatever your age, the time to start investing is today.