Three quick but powerful life lessons

When it comes to my role at ProSolution, there are two things I honestly love doing: 1. Writing articles, books, blogs and so on and 2. Meeting with clients and helping solve their problems and answering their questions. I really dislike doing any work other than these two things but hey, that’s life. One of the great things about my job (it’s not really a “job” when I’m doing the things I love) is that you get to learn life lessons and tips along the way – either through interacting with wealthy people, captains of industry or witnessing the outcomes of people’s good and bad decisions.

As I have written before, most people learn from their own mistakes, a fool never learns and a wise person learns from other people’s mistakes. Despite making plenty of mistakes myself, I try to learn from other people’s mistakes first. History leaves clues.

In this month’s newsletter I wanted to share with you three important life lessons I have learnt – three laws of successful investing. Whilst these are small little titbits of advice, they certainly pack a punch and are some extremely valuable (financial) lessons to learn if you are open to learning them.

Get a mortgage early and keep it for the rest of your life

There are very few wealthy individuals that I know that do not believe in gearing (i.e. borrowing to invest). In fact, I can’t think of one. Most successful investors borrow conservatively but they have made friends with the fact that they will probably have some level of borrowings for the rest of their life.

Of course, there’s good debt and bad debt. Bad debt of course is non-tax deductible and/or used to fund lifestyle assets (i.e. assets that aren’t purchases solely for the purpose of increasing your wealth). Good debt helps you growth your wealth.

Maintaining a healthy level of good debt throughout your whole life is probably the easiest way to achieve and maintain financial freedom. The sooner you understand that, the better. Of course there is one qualifier (assumption) to the previous statement. That is, you only invest in blue-chip, high-quality assets. If you do not have any good debt at the moment then chances are that you are not making the most of your financial opportunities. Also, the sooner in life you can learn this lesson, the better off you will be so teach your children. Teach them that debt is a good servant but a bad master. They must maintain control over borrowings and make sure the borrowings are working hard for them, not the reverse. If you go too far (i.e. borrow too much) you will find yourself working hard each week just to pay the bank (interest). Few people get a lot of satisfaction from that – myself included! In summary, two rules: firstly, borrow conservatively, borrow regularly and borrow for the rest of your life. Secondly, only invest in quality assets.

Property (investment) selection advice is cheap

There are two lessons here. The first lesson is specifically about getting advice before buying property. Often a property acquisition involves spending half a million or more dollars. Why would you spend that much money without seeking any advice/guidance?

Let me explain using simple numbers. Assume you buy a property for $100k. Investment-grade property should double every 7 to 10 years. Therefore, the property you purchase should be worth $300k in 15 to 20 years (so equity of $200k). That’s a relatively long period of time but most people would be very comfortable with that performance. Therefore, your “opportunity cost” when you acquire your $100k property today is $200k of potential equity. Most buyers’ agents charge a fee of between 2% and 3% to select and acquire a property. In this case, that’s a fee of $3k. Therefore, if you decide NOT to use a buyers’ agent and make the selection yourself, you have to be virtually certain that you can at least achieve equity of $197k over the same period. If you have any doubt, you should pay the $3k fee and therefore give yourself the maximum likelihood of achieving the $200k in equity. Incidentally, I wrote a blog recently in which I have included some comments from clients about what value they believe buyers’ agents add – click here to read it.

Of course not all buyers’ agents are equal. Some are not worth the money. However, as a client of ours, you have access to our trusted network of professionals. We never refer clients to any advisors we would not use personally ourselves. We also have never (and will never) accept or pay referral fees, commissions or any other benefits.

This brings me to my second lesson. That is, all professional advice is cheap. Free advice is worth exactly what you pay for it! The successful business people that I know are always willing to pay for quality professional advice be it tax, legal, financial, business and so on. You should never try and cut corners or costs when it comes to getting things set up and structured correctly as it protects your downside and risk. Of course, it is horses for courses. If you have very simple affairs you probably don’t need the best tax lawyer in Australia. But if your affairs become complex or if you are dealing with big numbers, make sure you are prepared to pay for professional advice.

Spend less or earn more?

There are only a few things you need to get right in order to successfully build wealth. Managing cash flow is probably the most important factor. In simple terms, you need to spend less than you earn. If you are spending everything you earn (or more!), there is little I can do to help you build wealth. In fact, I would argue that you are a lost cause because no one can really help you build wealth safely until you… start spending less than you earn. Of course there are some strategies that these “spenders” could employ such as borrowing against equity but, in my opinion, it is just too risky and beware of any financial services professionals that recommend them.

So what do you do if you are spending everything (or close to it) you earn? Well it is not rocket science. You only have four options:

  1. Reduce your spending without reducing your lifestyle. In my experience, the “spenders” actually have no idea where their money is going. That’s the number one cause of over-spending – you can’t manage what you don’t measure. Therefore, start by tracking what you are spending your money on. Use a credit card or EFTPOS as much as possible so that you don’t have to accumulate a shoe box of receipts. Monitor your spending for three months and you will probably find things you can trim back on that will not dramatically impact your lifestyle.
  2. Reduce your lifestyle. If you have tried the above exercise and have identified that in order to spend less you will have to do/enjoy less then you are faced with one of those important life decisions. My advice is to set some short, medium and longer term goals and categorise how important those goals are to you. That will give you some perspective because human nature always leans towards instant gratification.
  3. Wait. Sometimes during certain stages in life cash flow will be more difficult. For example, if all your kids are educated at private schools you certainly will have less surplus cash flow. An option is to ‘wait it out’ and defer investing until later in life. But you must be aware that this comes with increased risk as the less time you have to build wealth, the more risk you need to take.
  4. Earn more. If you cannot or do not want to reduce your expenditure, you need to focus on earning more. That might come in the form of investing in your career (to earn a pay rise), getting a second job or starting a small business. One warning here. Often people increase their lifestyle in line with their earning capacity. That is, they get a pay rise or bonus at work and upgrade the car, go on a holiday, renovate the house or all three. You have to resist the urge to do that, particularly since you are a spender. Pay yourself first which means tell your payroll department to deposit a certain amount of money into a separate saving/investing bank account that hopefully does not have internet banking access (out of sight, out of mind).

The simple rule is: if you don’t have any surplus cash flow you can’t build wealth.

Take it or leave it

There you go… three very valuable life lessons that I have learnt and which are regularly proven to me over and over, day-in, day-out. They are lessons for you to learn from or to ignore – choice is yours. But the irrefutable fact of the matter is that they are the laws of successful investing so if you break them, do not expect to successfully build wealth.