For most people building wealth sounds like mission
impossible. This is not because of the complexity of it but the lack of know-how,
commitment and consistency. Wealth creation is an ongoing exercise and a
journey that requires intent. A shift in the mindset is mandatory as one needs
to choose a completely different way of life to what is familiar. The following
are the essential steps to take to gain control of one’s finances:
- Know What you Own. Everyone who actively seeks financial freedom knows exactly what they own. They take stock of own assets and liabilities. The starting point is making a list of all the assets, income and all liabilities. This will assist in drawing the strategy for growing the assets and reducing the unwanted liabilities using the income earned. This is also known as determining your portfolio.
- Asset Allocation. To gain financial independence, one also
needs to cushion whatever assets they have. We do not want to lose what we
already own. The cushion can be in a form of portfolio diversification. The point
above is about determining one’s actual portfolio. And right now, we are
balancing it to ensure that the assets are spread across various asset classes i.e.,
cash, bonds, real estate, stocks, commodities, etc. This is known as asset
allocation. Asset allocation is always based on one’s age. Younger individuals
can afford a higher risk whilst those closer to retirement take lower risk and
therefore, lower returns.
Image by Mbini Kutta of SafeInvestingSA - Tax Avoidance. Taxation is one of the biggest bills we pay annually. Tax avoidance is a legal way of reducing annual taxes. Good asset allocation ensures that the tax bill is minimised. The wealth creators always pay as little tax as required by the law. One has to understand taxation and tax benefits of various asset classes.
- Balancing the Portfolio. Within each asset class there is always room for improvement. There are constant changes in the world of investing. Individuals that are seeking financial freedom are constantly shifting their assets around to maximise the returns. Right now, we have a real estate heavy portfolio at 56% with stocks at only 12%. We are trying to get our stocks to a similar value as our real estate assets. Our focus is on growing both local and offshore stocks. We are also set on growing our retail bonds.
- Lifestyle at Retirement. Retirement is also to be taken into consideration, as the lifestyle may need to be maintained. Downscaling should be for reasons other than insufficient funds. Some people prefer to retire early and others enjoy the kind of work that they do. The main reason people embark on seeking financial independence is to be able to do what they want with their lives without the need to get income from sources outside their assets. That helps in buying options like early retirement or slowing down by working part time. Being stuck at a job one does not want can pose a huge health risk.
- Debt Reduction. Most people that I have assisted with finances struggled with making a choice between debt reduction and asset accumulation. One needs to understand the reason they find themselves in debt and why they need to get rid of it. Consumer debt will always pose a risk on achieving financial freedom. In most cases the returns on investment are lower than the cost of debt. Eliminating consumer debt is an investment on its own. Always keep this in mind.
- Wealth Transfer. One of the most important aspects of building wealth is preparing the heirs for wealth transfer. This requires a lot of continuous knowledge transfer and mentoring. Your children have to understand most of what you know and do to build your wealth. It is a matter of passing a baton.
- Influence and Association. Finally, the company we keep will always be a factor. To ensure that we stay on course, we have to surround ourselves with like minded individuals. Fortunately for us, we live in the world with abundance of knowledge and social media with individuals that share similar goals. The more of personal finance we consume, the better are our choices.
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