The good old strategy of working hard for your money might see you do well, but it’s making your money work hard for you that the truly wealthy have mastered. Done right, and on a large enough scale, can bring financial independence. Here are a few key tips…
Budget, don’t fudge it
This one might sound obvious, but budgeting can be the most important way to alter the way you handle your money. Other than your income, your budget is the best tool you have to building wealth and avoiding debt.
Basic budgeting involves assessing how much you have each pay cycle, ensuring you’re always spending less than you earn, and categorising your spending. But the most successful budgeters will re-assess their budget – probably monthly, at least to begin with. By assessing and prioritising your expenditure, you can start to make changes to help make progress on your goals. You might quickly realise that daily coffee treat costs you around $1825 a year, which might be better spent elsewhere (or saved, or invested).
Earn interest rather than pay it
The problem with debt is all the interest you have to pay – which can make it hard to move forward towards your money goals. The wealthy earn interest, rather than pay it. An exception to this might be a home loan, where the intention would be that the long term capital gains and other financial benefits outweigh interest costs.
If you don’t have any high interest short term debt, and have some spare cash, it’s worth considering how to maximise interest earnt on it. Even if money is ear marked for a future spend, you can use the in between period to earn a little extra cash – you might be able to set up your mortgage so any money is offsetting some interest, or use a high interest savings account or term deposit. If you’re saving for a trip to Paris, the extra earnings might shout you a spot of shopping and some buttery snails!
Save and invest
Saving your money for a rainy day might sound like the sort of conservative thing your Dad might talk about. But the truth is an emergency savings account could save you from unfolding all that hard work you’ve been doing – and from debt if anything serious happens. It’s worth thinking about income protection insurance for anything disastrous which means you can no longer work.
If you have 3-6 months of emergency savings, maximise any leftover cash in the budget to invest. KiwiSaver might be a good start, but there’s plenty of ways to invest your money and (hopefully) turn your liquid cash into something profitable. Get in touch to speak to an Authorised Financial Adviser about investment options.
Maximise your home equity
If you already own a property, have been paying it off for a while and have seen some capital growth, chances are you’ve got some good equity under your belt. It could be worth making the most of your equity by purchasing an investment property – which would then bring in cashflow once the mortgage is paid off. Check out our article Investing in Property with Zero Cash.