BREAK THE CYCLE, CREATE A NEW WEALTH BLUEPRINT
If we don’t change, we don’t grow. Although many of us have been conditioned to believe that debt is bad and savings are the way to wealth. But, come to think of it, how many people have ever saved their way to financial freedom?
The reality is that saving money, in this day and age, will only get you so far – and it won’t get you far enough to become rich. What’s more, saved cash is getting less and less mileage these days.
In order to build wealth, you have to create a new money blueprint – one that matches up with the monetary reality we are finding ourselves in. It is time to do away with the old and embrace the new. Develop the right mindset, become informed about the global economy and use inflation and good debt to your advantage.
THE COMMON MONEY MINDSET IS BASED ON A FEW DETRIMENTAL MYTHS
Most Australians are brought up to believe the following myths about money:
1) Debt is bad and should be avoided.
2) We should concentrate on saving our money.
3) Getting into debt to invest is too risky.
While this advice may have helped our parents and grandparents buy their family home and provide for their family, it isn’t going to help us achieve financial freedom. In fact, if anything, it will prevent us from getting there.
If we want to build wealth, we need to bust those myths and develop a new money blueprint – one that will enable us to become rich, rather than remain poor.
MYTH-BUSTING OUR OLD MONEY BLUEPRINT
By examining the above-mentioned myths, it becomes clear that they have been wrought from horror stories of what could go wrong if you aren’t careful.
This is fine, however, just because there is some risk involved in a money making strategy, it doesn’t mean you should avoid it entirely and stay poor. It makes more sense to play your cards carefully by minimising risk and having several contingency plans at hand to back you up if something goes wrong.
MYTH #1 DEBT IS BAD AND SHOULD BE AVOIDED
While it is true that bad debt can be crippling and stick to you like a bad smell that you have to wear for your entire life, it is also true that not all debt is bad.
Good debt (ie. debt that has a value producing asset attached to it) can allow us to achieve greater wealth than we would have been able to by simply saving to invest.
Take an investment property, for example. How long would it take to save up the entire purchase price? Your whole life? By then, property prices would have gone up so much that you still would be unable to purchase it.
By borrowing money at a competitive interest rate, you can purchase the property at only 20 per cent of the (future) price and let rental income pay off interest repayments. As the property goes up in value, that’s equity you own, allowing you to invest in more. With time, rent will also go up, allowing to pay down debt when your interest only period expires.
While this is a very simple example, it shows how debt can allow us to generate wealth if we use it wisely. The power of financial leverage can make or break your financial aspirations depending on how you use it – which is why research, strategy and the right team of professionals are important tools to use.
MYTH #2 WE SHOULD CONCENTRATE ON SAVING OUR MONEY
Don’t get me wrong, I’m not saying that we shouldn’t save as much money as possible. At the start of my investing journey I lived a delayed gratification lifestyle. I drove crappy cars that cost next to nothing. I fed myself lunch for a dollar a day. I worked two full-time jobs. I saved my arse off to get my investing happening. Sometimes you need to be a tight arse, there’s no shame in it!
But I didn’t leave my savings in the bank. I funnelled them into property because I knew that income producing assets would bring me wealth – in comparison, money alone wouldn’t get me far at all.
Saving is good if you need to save for a deposit. It is also good for creating a buffer to protect yourself against unexpected costs.
As a stand-alone strategy for building wealth? It’s a waste of time.
MYTH #3 GETTING INTO DEBT TO INVEST IS TOO RISKY
Yes, there are risks involved in investing – and if you are using borrowed money to magnify your gains, then you will also be magnifying your risk.
Not using debt to invest carried more risk for me. The risk in me doing nothing meant I would be stuck working at a job for which I had no passion, day in, day out for my entire working life.
It meant I would be missing out on the opportunity to build wealth and live life on my terms.
EDUCATING YOURSELF HELPS TO CHANGE YOUR MINDSET
When I first started as an investor, I had friends and family members telling me about all of the things that could possibly go wrong.
Instead of backing away in fear, I decided to research the risks involved and develop a strategy around avoiding those risks while investing. I educated myself and trod careful, strategic steps on my journey – with several contingency plans at hand if things went wrong.
I didn’t freeze in the face of my fear like a deer in headlights. I faced my fears and found a way to manage them. I educated myself and changed my mindset to overcome my fear.
HOW TO CHANGE YOUR MINDSET
Here are four things you can do to develop a more positive mindset around money:
1) Read, research and pick the brains of people who know what they are talking about.
2) Become informed about the way the wider global economy works and how these factors can shape property investing.
3) Be open to what others say, while also using your discretion to ignore damaging comments from people who don’t know what they are talking about.
4) Surround yourself with positively minded people who want to achieve, or already have achieved, the same thing you want to achieve.
WHAT SIDE OF THE FENCE WILL YOU BE SITTING ON IN 20 YEAR’S TIME?
We have entered into a new monetary reality – one where debt will become irrelevant as inflation comes about at a quicker rate.
As interest rates around the world continue to drop, inflation is more likely to rise. If rates stay down over the long term, which they will in order to prevent a global recession, quicker cycles of inflation are quite likely to occur.
This means that savings will be worth nothing as the value of money rapidly erodes. Since interest rates are so low, savings accounts and term deposits will yield little or even no interest.
Meaning whatever money you have in a savings account will be at risk of becoming a depreciating asset.
At the same time, debt will become irrelevant as inflation causes property cycles to quicken and rent and income to rise quicker too.
Property debt will be in owed old world dollars, but repayments will be made in new world, inflated dollars. This will allow investors to pay down debt much quicker than ever before.
As “things” become increasingly expensive through inflation and money loses its buying power. Real wealth will reside in assets that both have capital value and pay an inflated income.
Property will offer an excellent opportunity for investors who are well informed about this transfer of wealth if they have the right mindset to take action.
If higher inflation does play out in this way, it will be those who succumb to the money mindset myths of old who will be on the wrong side of the fence. Those who own their own house and have one or two investments will be on the other side of the fence.
What about those well-informed investors who have taken action to hedge themselves against the plight of money by accumulating the right sort of assets?
They will be sitting on top of the fence, hopefully lending a hand to those who are stuck at the bottom.