The process we use to find the wealth potential in our client’s personal finances is a straight-forward exercise and an important step for building their wealth while reducing their debt.
For all Australian’s earning an income, a percentage should be put toward acquiring income-producing assets. It is a practice followed by the wealthy and is rewarded with significant tax benefits.
It comes as no surprise to many of our clients when they learn the top 20% of Australia’s wealthy owns 80% of the wealth in property and shares and 60% of all superannuation wealth, especially after they learn the many government incentives available with the right financial structure…
(Source: Inequality in Australia (2015) by the Australian Council of Social Service)
What does come as a surprise to our clients is discovering the potential in their own personal finances to build wealth in the same way.
Comparison of Australia’s Distribution of wealth by Assets
Firstly, it is important to see how the assets of Australia’s wealthiest 20% are distributed…
Source: Inequality in Australia (2015) by the Australian Council of Social Service
Observation #1 – The wealthiest 20% of Australians have 59% of their wealth distributed between income producing assets (investment real estate + shares + super) and only 35% of their wealth invested in their own home.
Observation #2 – The middle 20% have 56% of their wealth invested in their own home which is not income producing.
How do your finances compare?
Download my wealth distribution chart, I have included percentages of the wealthiest 20% for side-by-side comparison with your personal finances.
The importance of investing
Income producing assets (investments) grow in value and earn an income in a way that is disconnected from your 9 – 5 income, meaning the income generated from your investments is not a result of you working harder or longer hours. This is an important realisation, and one that separates wealthy finances from healthy finances.
For many a realignment of financial focus can achieve this change.
Considering household wealth for the majority of Australians is held in their family home, reducing debt and acquiring investments is achievable through careful redistribution of wealth.
One way to identify wealth potential…
The following is just one way our wealth planning team introduce affordable levels of good debt to acquiring income-producing assets to our clients personal finances.
Most banks are prepared to lend up to 80% of the value of your home – if you home is worth $500,000 the bank may lend you $400,000, once you subtract the mortgage of $300,000 for example you are left with $100,000 of available equity.
If you have sought professional lending advice from the Nexus Private team this may have already been achieved.
When your equity is used to invest in income-producing assets such as property or shares, income earned on these investments can be offset against the interest you pay on the debt.
Investing in this way will also ensure you are reducing the amount of income tax payable each financial year, which helps to improve cash flow.
With good asset selection and structuring to maximise tax deductions your investments can produce a positive cash flow even if you have borrowed 100% of your initial investment.
[See an example of negative gearing with a positive cash flow in Strategy #1 – Negative Gearing of the Top 5 Wealth Creation Strategies eBook]
When tax savings and investment income is put toward paying down bad debt levels, you start to free up further equity for investing in more income producing assets – putting you on the path to wealthy finances.
If there is equity available in your home and you are looking to do more with your finances, transferring non-income producing assets into income producing assets could be an option.
I recommend seeking financial advice first…
The reason for this will become evident in my next post about investment selection.
Investment selection plays an important role in the transfer of bad debt to good debt. When choosing assets the right balance between yield and growth driven investments will depend on your individual financial circumstances.
If you want to know how, jump to Investment Selection and the impact on debt reduction and wealth accumulation … [Click here to continue]