You most important financial step for 2023


Good cash flow management is by far the most important practice that you must master to be successful at building wealth. I realise that it’s not a particularly popular topic, but bear with me, because it’s an easy thing to master if you know how. It won’t take you much time, and you will feel more empowered and in control as a result.

You can’t expect to build wealth if you spend all your income

Investment returns alone won’t help you build wealth, unless you already have a large investment base. You must contribute some of your own money/savings.

For example, most people that buy an investment property fund its holding costs (i.e., the shortfall between net rental income and loan interest) from their salary/wage income. A property’s holding costs might equate to $20k-30k p.a. on an after-tax basis. Essentially, that is their capital contribution towards this investment (assuming they borrowed the full cost of the property). However, if the investor decided to fund these holding costs through drawing additional borrowings, the interest cost would compound, and greatly diminish investment returns.

In short, you can’t build wealth without doing the hard work of making regular cash contributions into your investment portfolio. If you are not already doing that, you need to find a way to begin. Make 2023 the year you do that.  

Unconscious expenditure is the problem. You must minimise it.

Holidays are expensive. And since Covid, holidays have become even more expensive (although that might change over the next 12 to 18 months as higher interest rates temper demand). However, holidays are probably the best example of conscious expenditure. That is, we tend to think very deeply about where we want to holiday, how we get there, accommodation and so on. We carefully weigh up the cost-benefit of the expenditure. As such, holidays tend to provide a high utility per dollars spent i.e., they are good value for money.

However, unfortunately, we do not apply the same diligent approach to all expenses, especially low dollar value expenses. In fact, for some expenses, we don’t spend any time thinking about them. Consequently, we spend money on things that have no impact on our standard of living. These expenses are a waste, as they don’t provide any benefit or enjoyment. Whilst these items tend to be lots of small dollar value items, they certainly add up over the course of a year.

It is easy to reduce (eliminate) unconscious spending

We don’t need to worry too much about non-discretionary expense items such as mortgage repayments, utility bills, insurance, school fees and so on. It’s virtually impossible to over-spend on these items. Of course, we must periodically review them to ensure we are getting the best deal, but other than that, we don’t need to worry about them cash flow management wise.

It is discretionary expenses where over-spending (waste) occurs. Therefore, I recommend paying discretionary and non-discretionary expenses from two separate accounts as depicted in the diagram below.

Best practice cash flow management

The trick is to transfer a set amount each week, fortnight or month into the discretionary expense account. Use this account to pay for all discretionary expenses e.g., groceries, eating out, clothing, etc. – essentially everything that isn’t a non-discretionary expense. This will help you track and limit discretionary spending. You will also find that (somewhat unconsciously) you will tend to become more conscious about your spending. The silver lining is that your standard of living doesn’t suffer if you eliminate an expense that never provided any enjoyment, so it’s a pain-free saving.

If you use credit card/s, repay the cards at the end of each period from the respective account i.e., discretionary expenses from the discretionary account and so forth.

How much will you invest in 2023?

All employees are forced to contribute money towards retirement savings each year via compulsory super contributions. But if you want to enjoy a comfortable retirement, it is very likely that you need to invest more. They say that a goal not well defined is a mere dream. So, how much will you invest this year? Set a specific goal.

If you have an investment property (or properties), you will need to pay for the investment property’s holding costs (shortfall), so you can include that amount as an “investment”.

Other ideas for additional investing might include:

  • Additional super contributions (especially if you are not already contributing the concessional cap of $27,500);
  • Regular share market investing, as described here; and/or
  • Buying an(other) investment property.

If you are unsure, you should consider seeking advice from an independent and experienced financial advisor.

Rule of thumb: how much should you invest?

How much you need to invest depends on how far away from retirement you are and the value of existing investment assets.

For most people, the amount they invest should be between 10% and 30% of their gross (pre-tax) annual income into growth assets. For lower income earners, aiming for 10% (or maybe slightly less) is realistic. However, higher income earners should be investing more than 10%.