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10 Simple Ways to Make Money Work For You

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Here are the ten most important, yet overlooked, ways to make money work for you.

1. Your house is a lifestyle asset, you can’t retire on it, but you can use it to make you rich

A rise in the value of your house may led to a wealth effect (you feel richer), this increase in value won’t enable you to retire any sooner.

There are two ways to build wealth in Australia:

  • Start a business and / or
  • Borrow to invest.

Most of the large fortunes in Australia were built on a combination of the above strategies.

Guess where the security for the loan funds comes from in many of these cases? Yes, the family home.

2. An investment asset is something that puts money into your pocket

An investment asset is something that will generate you an income (make money), so that you can eventually give up your day job and let your money (wealth) work for you.

That piece of art on the wall may have investment potential, but it won’t earn you an income along the way, so it doesn’t pass the test. The same applies to your house, your car and your stamp collection.

Put simply, the two investment assets that will put money into your pocket are

1) businesses (in the form for dividends paid on shares) and

2) property (in the form of rental returns paid on investment property).

There is nothing else.

3. A bad debt is borrowed money used to purchase something that is likely to go down in value

A bad debt is when you borrow money to purchase anything that is not an investment asset (defined in point 2). The problem with having bad debts is that you are essentially mortgaging your future.

Thirty years ago people used debt as a short term solution and they always repaid the debt in full. Nowadays people happily live of debt as if it is the normal thing to do. They live in the moment, relying on their impulse to purchase things they want but don’t actually need and their wealth position spirals out of control.

A bad debt is like a hole in your rowboat, that you are attempting to bail out with your hand. If you get enough bad debt (holes) you will go under.

The only solution is to row your boat to shore, patch up the bad debts (by paying them off).

4. A good debt is borrowed money used to purchase something that is likely to go up in value, and you get a tax deduction for the interest expense

It is possible to use debt to help you build real wealth. It is quite simple really, borrow money to buy an investment asset (see point 2).

The Government is so keen for you to undertake this strategy they will give you a tax deduction for the expenses involved with that investment asset, including the interest costs on the loan.

Make money and get a deduction – pretty good hey?

Note: The mortgage on your house is still classed as a bad debt because it is not tax deductible.

5. Pay Yourself First

Warren Buffett says it best.

 “Do not save what is left after spending, but spend what is left after saving.”

It is that simple.

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6. Don’t Be The Banks Best Customer

Banks aren’t your friends. They are in the businesses of making money from your money and they are really good at it. So good in fact that you don’t even realise.

Remember the banking business model is built on hiring out money. Banks want to hire you as much money as you can handle, and they actually don’t want you to pay it back – they just want you to pay interest.

In fact the best bank customer is one that borrows as much as they can handle and only pays interest on the loan repayments – this is a lifetime customer.

7. Superannuation is a Structure Not an Investment

People get confused about super. Super isn’t an investment. You can’t go to the shop and buy super. You can however use super as a way to hold and invest assets for your retirement.

In fact super is by far the best way to accumulate and later pay out retirement benefits. The Government wants you to use super, so much so, that they give you all sorts of tax breaks that are simply not available in your personal name.

Take charge of your super and invest in it wisely.

8. Tax Matters

There are only two guarantees in life: death and taxes. So tax matters.

Every time you earn an income or trade an asset you will be taxed. Therefore to beat the system you want to

1) be very careful with what you do with the income you do earn

2) you want to minimize your trading of assets.

It doesn’t matter what you pre-tax income, or return on investment is – you need to focus on what you get in your hand after tax. Think in after tax figures.

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9. Beware Fear & Greed

Investment markets are, as the name suggests, just big markets for buying and selling investments. Like any market, people are involved. When people are involved, you can be sure that emotion plays a role.

The strongest forces in any market are fear and greed. At these two extremes people can make some very foolish decisions. One of the best example of this in history and the first real financial bubble ever was Tulipmania. It is basically where people got carried away buying and selling tulip bulbs (yes the flowers).

It has happened before and it will happen again. After all history doesn’t repeat, but it does rhyme.

10. Habits will determine your success

Most people think more money will solve their financial problems. This is wrong.

In all my time as a financial adviser, on thing has remained true – money habits will determine the success of clients.

Poor money habits are like holds in a bucket, no matter how much money you tip in, it will simply falls through the holes.

Take the time to develop good financial habits, here are three simple habits to get started:

  • Pay yourself first (save)
  • Get rid of bad debts (credit card, car loans etc)
  • Learn about investment assets (start with your super)

The sooner you start the sooner you will reach your destination – financial freedom.

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Joshua Stega

The Wealth Guy

Joshua Stega is an expert financial adviser and founder of JAS Wealth in Sydney. He specialises in the habits and behaviours of wealth. Joshua has a Masters in Taxation and Financial Planning and is regularly featured in the media

M.TaxFP, LLB(Hons), B.Bus(Acc), FTI, Adv.DipFP, Dip.FP, SMSF Specialist
The information on this blog and website is of a general nature only. It does not take into account your individual financial situation, objectives or needs. You should consider your own financial position and requirements before making a decision. We recommend you consult a licensed financial adviser in order to assist you.

 

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