For many people, the first opportunity for wealth creation occurs once they begin earning a wage. At the very core of wealth creation is an individual’s ability to earn an income and the discipline to spend less than they earn – today and in the future.
It may sound simple and for some people it is. For most, saving is difficult. It is challenging to save income for later, when your impulse is to have things now. Interestingly, this paradox prevents even those on very high incomes from becoming good savers.
The compounding power of ‘delayed’ consumption is generally not well understood. Some prefer ‘today’ consumption – spending what they earn as they earn it. Most prefer ‘advanced’ consumption otherwise known as spending everything they earn and, for a price, borrowing more money. It’s called debt.
In Australia, we see more and more young families whose wealth creation hopes rely on rising house prices, low unemployment rates, rising incomes and their ‘it’ll be right’ attitude. Many people are living beyond their means, drowning, or at best, treading water, in debt.
The Reserve Bank of Australia’s tables show that average household debt levels measured as a ratio to average household incomes have more than tripled in the past 20 years. Low interest rates and ballooning house prices have helped fuel a debt bubble. A bubble that may now be slowly deflating.
In 1992, the then Prime Minister, Paul Keating, recognised that Australians’ struggle with adopting a savings discipline conducive to wealth creation. He took the politically unpopular step of ensuring every employer contribute money, in addition to salary, into a savings pool for the benefit of their employees. In Australia we call this superannuation but it’s simply one form of wealth creation. To this day, it remains one of the best systems of its kind in the world. Thanks to superannuation and the fact that access to these savings is restricted, the average Australian will have a modest amount available when their capacity to earn an income ceases.
Our income tax system levies taxes on three sources of income for individuals; personal earnings, business income (distributions) and capital gains. Income is taxed at progressive rates and some forms of income are exempt from tax. These factors enable planning opportunities that may help people to legitimately reduce tax, thereby increasing disposable income or savings.
Government benefits including the superannuation co-contribution and family orientated rebates, add to a family’s savings ability. Accessing every benefit you’re entitled to may require some work but it’s worth the effort.
One of the most effective ways to put yourself on the path to wealth creation is to gain an understanding of the importance of saving a set amount of income on a regular basis and then having the discipline needed to continue doing so year in and year out. In the first instance, those savings may be used to reduce debt.
WealthSpan has a proven method for getting people on track to begin their wealth creation journey. It’s by preparing two personal financial statements for clients:
- A Profit & Loss Statement
- A Balance Sheet
Similar in style to the major financial reporting tools used in business, these statements provide a clear picture of your current personal financial position and allows WealthSpan to base our recommendations on reliable information. This means a better outcome for you.
The profit & loss statement focuses on the family’s income and expenses. It’s a useful tool in determining where money goes and how much, if any, can be saved. You may think of this as a budget.
The balance sheet focuses on your personal net wealth. It’s a useful tool in determining what your financial strength is and how it changes over time.
With this knowledge you have the ability to modify spending habits and to take control of your future. Less than 1% of people we meet have and stick to a budget. Those who do are without exception better at managing their money.