So much is made about the initial stages of wealth creation. Just listen to any rap song on the theme and it’s about “getting’ rich”, “makin’ money”, “countin’ fat stacks” and “dolla dolla bills”. But you never hear anyone rapping about protecting their assets, or creating intergenerational wealth.
Sure, those things may not make very interesting lyrical topics, but the reality is that once you do make some money, you may not know what you need to do next.
Let’s look at the three stages of wealth.
Let’s use real estate as an example.
First up is the stage where you acquire your assets. You may have set a goal to have 10 investment properties that you can live off when you get older.
Here is where you hustle your money and save every penny to put towards a deposit, you make sacrifices so you can keep moving forward and you educate yourself and do hundreds of hours of due diligence to make sure you’re making the right investments.
If you’re smart as you go, you can use equity and rental increases to fast track your next purchases. And while you are doing so, you’re putting in place systems to help yu get to the consolidation phase of your wealth journey.
Once you’ve got your 10 properties, there are a couple of things you need to think about. First of all, you need a strategy to pay down your assets and safeguard your portfolio.
A lot of investors begin with interest only loans for example, which helps them in the accumulation phase as they are not being encumbered by paying down the principal value of their properties. The cash flow they receive from rental income can therefore be directed towards their next investment. Eventually, though, the principal needs to be paid down. So a strategy that might work is to spend five years gradually increasing the rent until it is high enough that you can start paying down the principal without having to put in any of your own money. The property remains positive cashflow and the debt is now being reduced, making your position safer and more lucrative.
The other thing to think about in this stage is that now you’ve hit your target, you might be tempted to get more ambitious. This is fine, but don’t forget what got you to where you are.
You’ve made some money in an unglamorous way, but there’s nothing wrong with that. You don’t have to start suddenly developing luxury properties or finding other ways to stray from what made you successful.
McDonalds didn’t begin selling $200 wagyu steaks when it became successful enough to do so, because its system of selling cheap burgers was what made it successful in the first place.
Once the wealth is yours and it’s unencumbered, as in paid off, what do you do then?
In Australia, where we have compulsory superannuation, a lot of people think that will be enough to sustain them in retirement. But as inflation kicks in, the nest egg seems less and less. That wealth still needs to be distributed.
People can get their super working for them through income producing investment assets and so on.
But if you have 10 unencumbered investment properties, all bringing in rental income, the world is your oyster. You don’t need to worry about whether your super is enough.
Your properties will continue to bring rental income that rises with inflation, while the value of the assets themselves should continue to increase with every property cycle they go through.
You can use that to invest further, or you can sit back and live off the passive income.
And the best part is that not only do you not have to worry about sustaining your own retirement, but you can create an intergenerational wealth asset that will benefit your kids, grandkids and future generations beyond that.
Want to know more?
To watch the full podcast episode on ‘What Comes After Wealth Creation’, click below.
What comes after wealth creation