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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