Your Money

The five foundations of wealth

- March 2, 2022 4 MIN READ
The five foundations of wealth

If you want to get rich, start with some basic foundations of wealth and build from there.

The Australian Stock Exchange reports that nearly 25 per cent of investors over the past two years are aged 18 to 24. These young Australians were found to be knowledge seekers, keen to take on life and begin their journey towards financial security.

If this describes you, congratulations! You get it, you really do. You’re Next Generation Investors who know that building financial independence starts early.

However, according to the same study, Next Generation Investors, aware of their inexperience, are uncomfortable making financial decisions.

If this is also you, here are my tips for laying the foundations of wealth and building a secure future.

1. Avoid unnecessary debt

If there’s one thing guaranteed to keep you awake at night it’s debt. Naturally, some debt can’t be avoided and is considered ‘good’ debt, like when you borrow to buy a house.

But ‘bad’ debt is usually unnecessary and often comes with high interest; best avoided where possible. You know we’re talking about credit cards, right?

Credit cards can fast-track you into debt-strife, particularly as tap-and-go transactions are just so quick and so easy.

Additionally, while buy-now-pay-later schemes can be useful for emergencies (if, say, your fridge packs up), they’re a trap if you don’t stay in control.

Sure, online shopping and bill-paying means using cards, but you can avoid using credit.

Use debit cards instead of credit

A debit card functions the same as a credit card, except for one critical detail. It uses your money instead of the bank’s.

You can either link your debit card to your bank account, or load it up with cash. The cash option is handy for keeping track of your spending, as you can only spend as much as you’ve loaded.

Be accountable to any debt

If you do end up with debt, be accountable. Pretending it’s not there won’t make it go away. Further, unpaid bills can grow through late fees and penalties.

Read the fine print on contracts and understand what you’ve signed up for. Late payments and loan defaults can result in legal action, even bankruptcy, destroying your credit rating for years.

Pay down debt as soon as you can by:

2. Track your spending

On the topic of spending, get into the habit of tracking yours. Using a simple spreadsheet, or an app from your bank, log your purchases and reconcile spending with receipts.

You’ll see exactly where your money is going and spot any areas of unnecessary spending. Like those items you really don’t need but are the coolest ‘must-haves’.

Don’t fall for it. ‘Must-have’ is a marketing term. True must-haves are basics like food, shelter, transport and medical – not the latest trends and gadgets.

I’m not saying don’t treat yourself occasionally, but pause and consider whether the item is really worth burdening yourself.

3. Invest in superannuation

Think you’re too young to worry about superannuation? Prefer to put your money toward something for now, rather than later?

You may be right, but don’t dismiss super altogether. Here are some things you can do that won’t impact your current finances:

  • Ensure your employer is contributing the correct amount of super. If you are earning more than $450, pre-tax in any calendar month, your employer must contribute 10 per cent to a super fund on your behalf. These contributions are Superannuation Guarantee Contributions (SGC) and they are compulsory.

  • Low-income earners may qualify for government super co-contributions where the government contributes up to $500 to your super fund. When you lodge your tax return, your eligibility is automatically assessed, and if you qualify the government deposits directly into your super account.

  • Put unforeseen cash into super. Sure, you’re locking it away, but it’s money you weren’t expecting anyway! The longer it’s in super, the more it can potentially grow.

4. Save vs spend

You’re entitled to live, and you’re entitled to a social life. I’m not saying save or spend – I’m suggesting you do a bit of both. It’s a key part of building strong foundations of wealth.

This is how it works:

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The chart below shows the result of the above scenarios after ten years:

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Each scenario is based on a $1,000 initial deposit with 2 per cent per annum interest calculated monthly. In scenario 1, no further deposits are made. Scenario 2 shows $50 monthly deposits, and scenario 3 shows $100 monthly deposits.

Adjust the figures to suit your personal budget and commit to saving a small amount each pay while still enjoying life. Have the amount automatically deducted from your account and soon you won’t even miss it!

Regular savings accounts are available from banks and other financial institutions, and offer a variety of arrangements. For example:

  • Your initial deposit can be as little as $50.

  • Some pay bonus interest if no withdrawals are made in a month.

  • Some offer higher interest for 18 – 24 year olds.

Do your research, particularly websites providing independent product comparisons.

5. Seek financial advice

A professional financial planner can tailor a plan specifically for you. They will consider your debt, income, goals and much more, and work with you to structure a strategy for now, and into the future. You may even be surprised at how inexpensive good advice can be.

So, there you are, all the foundations of wealth you need! The future is laid before you and it’s loaded with potential; all you need to do now is get on with it.

This is an edited version of an article that originally appeared on AFA Group Wealth and is republished here with permission. This article contains general information only. This should not be relied on as independent finance or tax advice. If you are after specific professional advice, speak to your registered tax agent/financial adviser or reach out to AFA Group Wealth.