Monday, February 29, 2016

Money trees take work


We're two months into 2016.  This means that it is time to end all of the procrastination that comes with the holiday period.  It's time to look forward and start working towards our exit strategy from earned income (work) and make the move to passive income (from our investments).

So far, George Samuel Clason's "The Richest Man in Babylon" has taught us to pay ourselves 10% of our income, and live within our means on what remains.  So, what do we do with all this money that we are putting aside?

Lesson 3: Make the most of your money

The first thing to be done is to keep and maintain an emergency fund.  This can be anything from one to twelve months worth of income.  Where you sit depends on your occupation and skillset, employment situation, your family situation and what the economy is doing.  For example, a contractor in a specialised industry will be, arguably, more sensitive to a weak economy than an employee in a general administrative role. 

Using the example from Lesson 2 (Keeping up with the Jones', January 17, 2016), on a salary of $70,000, you are saving $5,430 a year and will therefore need a minimum of $4,177 in your emergency fund to cover one month of unemployment.  This may sound like a lot, but keep the big picture in mind.  Having this in place will mean that you won't need to liquidate your investments if you find yourself suddenly unemployed, under employed or just having a career inhibiting mid-life crisis.  

Once you have that sorted, you can concentrate on the fun stuff.  What to do with the money that you paid yourself?  Remembering that the idea is that these funds will provide a passive income, so your best move would be to invest it.  Where you invest the funds is something that you should consult a professional on (cough, cough).  There are many, many different investment vehicles out there and they are definitely not all created equal, nor are they all appropriate for everyone.

While you are still in the earned income phase of life, the income from your investment should be reinvested.  Take advantage of compounding and let time be your friend.  If we use the example from Lesson 2, and you are investing the $5,430, then over 10 years with a return of 7%, you will have $88,916 in your investment.  That's not too bad, and that's assuming that your income remains the same over the next ten years, so your 10% contribution also stays the same.

At this point, I can hear my Australian audience muttering about superannuation.  It is true that most employees in Australia will be putting away 9.5% into superannuation for when they retire.  Keep in mind, however, that there are age restrictions as to when you can access the funds.  Does this fit with your plan?  More importantly, have you ever even looked at where your superannuation is invested?  My guess is that most of you have not.

Finally, a special note to my non-resident friends working in Australia. I would recommend seeing a taxation specialist and a financial planner to work out what investment strategy will fit you best.  All the rules that apply to residents don't apply to yourselves, so you can forget all the tips that you hear over a few tinnies at the much beloved Australian BBQ.  If you listen to the conventional wisdom that floats around, you could end up paying 47% tax when you leave our shores and return to your Motherland.  Yes, you read that right...47% tax.  I don't make the rules, I just help you navigate them.

By Erin Wright B.Int Bus Dip. FS(FP), Accredited Aged Care Specialist
Find Erin at Achieveit Financial Planning or call for an appointment on 07 4638 5011

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