Building wealth a little at a time

Building wealth rarely comes from a big salary or one clever move. It comes from a clear plan and a few small habits you keep up for years.

That's good news, because it means you can start now, at any income and any age.

In short

• Wealth is mostly habit. What you do with your income consistently matters more than how much you earn.
• A plan won't predict the future, but it gives you a way to handle rate rises, income changes and surprises.
• Start with a savings habit, then put money into growth investments as it builds.
• Investing a fixed amount on a regular schedule smooths out the price you pay over time.
• Automate it, and get advice early. You don't need to be wealthy to have a strategy.

Start with what success looks like for you

We plan ahead for holidays, weddings and renovations. Your finances deserve the same attention, over a longer horizon. Where do you want to be in 10, 20 or 30 years?

A financial plan won't predict the future. Nobody can tell you when rates will rise, when your income will change or what life will throw at you. A plan gives you a framework for those moments, so one bad year doesn't undo ten good ones.

A good plan answers questions like:

• Am I saving enough?
• Am I paying more interest than I need to?
• Is my insurance right for my situation?
• Will I have enough super to retire the way I want? (Our retirement planner gives you a first read.)

The four fundamentals

Every wealth strategy, simple or sophisticated, rests on the same four habits:

1. Spend less than you earn. The gap is what you build with. A budget planner shows you where it is.
2. Reduce personal debt. High-interest debt works against everything else you do.
3. Save regularly. A small amount every pay beats a large amount now and then.
4. Invest in assets that suit your goals and your tolerance for risk.

Step 1: Build the savings habit

A common starting point is a dedicated savings account, with a fixed amount going in every pay. Keeping it apart from your everyday account makes it easier to leave alone.

Accounts with bonus interest are a sensible place to begin. Their earning power is limited, though. Once the habit's established, it's worth looking at how that money could grow faster. The compound interest calculator shows how much time adds.

Step 2: Put your money to work

Growth investments offer more potential to build wealth over the long term. One common option is units in a managed fund, a pool of money from many investors that a professional manager invests on everyone's behalf. The trade-off is that its value moves up and down, sometimes sharply.

That's where investing regularly helps. Putting in a fixed amount on a regular schedule is called dollar cost averaging. Your money buys fewer units when prices are high and more when they're low. Over time the price you pay averages out, and you're not trying to pick the perfect moment to invest.

Illustrative example only: say you invest $500 a month for three months, at unit prices of $2.00, $2.50 and $1.60. You'd buy 762.5 units for $1,500. That's an average cost of about $1.97 a unit, below the $2.03 average of the three prices.

Dollar cost averaging doesn't guarantee a profit, and it won't protect you from losses in a falling market. What it does is take the timing decision off the table.

Pairing regular investing with a managed fund gives you professional management of the underlying investments plus that smoothing effect. Our investments page covers the options in more depth.

Step 3: Make it automatic

The easiest habit to keep is the one you don't have to think about. An automatic transfer from your bank account does the job. Your payroll team may also be able to pay a post-tax amount from your salary straight into savings or investments.

A marathon, not a windfall

Building wealth works like training for a marathon or learning a language. Steady, structured progress beats any shortcut. It's also why sudden windfalls, such as an inheritance or a lottery win, so often disappear. Without a plan and the habits behind it, a large sum is surprisingly hard to hold on to.

You don't need to be wealthy to get advice

Two myths stop people from getting help early. One is that you need money before an adviser will see you. The other is that advisers only work with people nearing retirement. Neither is true. The earlier you have a strategy, the longer your habits have to compound.

A financial adviser can help you:

• match investments to your needs, circumstances and tolerance for risk
• understand fees, minimum investment amounts, how a fund is structured and how withdrawals work
• adjust your strategy as your priorities change, because your plan should change as your life does

Frequently asked questions

What's the difference between saving and investing?

Saving puts money somewhere safe and easy to reach, like a bank account, where the balance doesn't fall. Investing puts money into assets such as shares or managed funds that can grow faster over time, but whose value can also go down.

What is dollar cost averaging?

It's investing a fixed amount on a regular schedule, whatever the market's doing. You buy more units when prices are low and fewer when they're high, so the price you pay averages out over time.

Is dollar cost averaging better than investing a lump sum?

Not always. Investing in stages lowers the risk of putting everything in just before a fall, but part of your money waits on the sidelines in the meantime. Which suits you depends on your timeframe and how you'd handle a drop. It's a good question to take to an adviser.

Do I need a lot of money to see a financial adviser?

No. Advice isn't only for people with large balances or those close to retirement. Getting a strategy in place early gives your saving and investing habits longer to work.

Ready to start?

Our financial planning team works with people at every stage, from first savings account to retirement.

‍Book a free discovery call, or email enquiries@ledgersmith.com.au.

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This article contains general advice only. It doesn't take into account your objectives, financial situation or needs, so it may not be appropriate for you. Consider whether it suits your circumstances, and read any relevant Product Disclosure Statement, before acting on it.

Ledgersmith Wealth Pty Ltd (ABN 74 676 292 621) is a Corporate Authorised Representative (No. 001312228) of Spark Advisors Australia Pty Ltd (ABN 34 122 486 935, AFSL 380552).

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