A high salary can help an individual appear wealthy, however, building real wealth requires commitment, sacrifice, lots of patience and a long term mind-set. Have you got what it takes?
One of the challenges we regularly face in Harvest is with clients of relatively modest investment asset bases but with significant incomes. We typically see this with younger clients who are building excellent careers with significant salaries, but have not as yet turned this income into investable assets (wealth). So how do you turn your income into real wealth?
First of all we’re not against you treating and rewarding yourself when you get a big salary increase – we fully believe in celebrating success! But what we see quite often is that salary increases (and sometimes very significant ones) don’t result in you being any better off than before. And the reason for this is that the salary increase turns out to be the gift that keeps on giving – an extra holiday, more weekends away, more nights out, a new and bigger car, etc. And before you know it, you’re no better off at the end of the month or year than you were before the salary increase.
This is the place to start. Some people scoff at the idea of a household budget, but it is nigh on impossible to keep a lid on household spending without one. Build into the budget the lifestyle choices you make – holidays, weekends away, nights out, new car, etc. Once you decide you’re happy with your chosen lifestyle and can afford it, then salary increases should be extra money to put to another purpose, such as building your investment asset base. Commit to saving your income increases to building your real wealth, rather than improving your lifestyle.
This above all is the single most important step. Many commit in their heads to investing each month. When their income hits their bank account, they then pay their bills and fund their lifestyle, with the intention of saving “whatever is left over’. Which usually turns out to be nothing or very little – certainly less than they had anticipated.
Instead of this approach and based on your budget, you should know how much is needed each month for bills and your lifestyle. You should then be able to determine how much you should be saving each month. The key action is to pay yourself first – have this investment amount coming out of your bank account pretty much immediately after your income lands. This will help you prevent your income being frittered away and will turn your income into real wealth.
One of the big challenges facing investors with a lump sum of money to invest is how to time their entry into the market. There is always the fear that they will commit their money, and that the market will quickly experience a dip – and a sudden and early dip is hard to make up.
Imagine you invest €100,000 and the market immediately falls by 20%. You now have only €80,000. To get back to your original €100,000, you now need a 25% increase in your investment.
Instead if you invest regularly, using a concept known as “euro cost averaging”, you can protect yourself against large swings in the market. By saving a monthly amount into an investment portfolio, you can smooth out the highs and lows in asset prices. Because when the price of assets (think of company shares) you buy goes up, the value of your portfolio rises. When asset prices go down, yes your money invested will go down in value, but your next monthly saving will buy more assets as the price is lower. Also buying stocks at a lower price means you get a higher return when the market swings back up. So regular savings are a very effective form of investing – turning your surplus income into real wealth.
Another important element of turning income into real wealth is the capture of as many tax saving opportunities as possible. Tax planning is a very important and very significant part of wealth management. Quite a number of tax reliefs available such as the small gift exemption and pension contributions have a time limit on them – if you don’t avail of them during the tax year or by a tax return date, the opportunity is lost. So it makes sense to maximise the wealth building power of any surplus income by availing of all tax reducing opportunities before they expire.
Wealth management advice
Converting surplus income into real wealth is a critical part of a robust wealth management strategy. Building wealth first of all gives you a buffer and helps you avoid needing to make rash (and often untimely) decisions should you hit unforeseen situations such as illness or redundancy down the road. Real wealth also simply gives you more choices. Yes there might be a small price to pay in terms of your lifestyle today, but it will be worth it down the road.
How do I find out more?
To find out more, please contact us on 01 237 5500 or email firstname.lastname@example.org and one of our advisors will be in touch.
The material is not intended to provide advice and is provided for general information purposes only.
The information contained herein is based on Harvest Financial Services Limited’s understanding of current Revenue practice as at June 2017 and may change in the future. Please note that the tax treatment depends on an individual’s circumstances and may be subject to change in the future. You should take such independent tax advice as you deem appropriate.
Warning: The value of your investment may go down as well as up.