10 Commandments of Wealth Creation
- Pay yourself first
So many people receive their pay packet, and then hand a portion of their money to the supermarket, the garage, the department store and so on. In the end, they discover there's nothing left for themselves. Remember, you worked for it!
- Apply the power of compound interest
Often people commence a savings program, and then quit after a few years because they think they're not making much headway. The idea behind compound interest is that each year you earn interest on the previous year's interest. Accordingly, your investment grows exponentially. Compound interest works, but it takes a little time to get started. The secret is, start now.
- Don't put all your eggs in one basket
Remember,not all investments perform well at the same time. A diversified portfolio with a balance of shares, property, cash, and fixed interest investments, will reduce volatility and smooth returns.
- Understand the risk/return trade-off
A general rule of investment is, the greater the risk, the greater the potential return. Greater risk may not mean the total loss of capital, but merely the volatility of returns over the investment period. Therefore, if you are prepared to invest for the longer term, you should be prepared for some volatility in expectation of higher returns. Remember, there's no such thing as a free lunch!
- Keep money aside for emergencies
You should always be careful that you have sufficient funds available to meet unforeseen circumstances. By doing so, you'll avoid being forced into selling an investment at the wrong time.
- Don't invest solely for tax benefits
Around tax time every year there will be a host of investments offering 100% (or more) tax deductibility. Remember, an investment should be judged on its overall growth potential, not solely its tax deductibility. If you were to lose ten or twenty thousand dollars, that tax deductibility would offer you little consolation.
- Don't try to time the market
Share traders are a lot like punters. They tend to overstate their winnings and understate their losses. If you are going to try and time the market (getting in and out at precisely the right moment), you are not investing - you are speculating. There's nothing inherently wrong with this, provided you speculate with money you can afford to lose. Serious investors who invest for the long-term understand that the secret is time, not timing.
- Beware of guarantees
You may be confronted by a friend or family member who has been knocked back on a loan, and asks you to go guarantor for them. This means if they can't pay the loan, you have to. Remember, there is an old saying in legal circles, 'There are no secrets kept, nor guarantees not called up'.
- Ensure you are insured
Insurance can cover everything from your life to your home and contents, your business, your car, and even your income. But remember, insurance should be bought, not sold, and should be tailored to your individual needs.
- Pay off non-deductible debt first
Your aim should be to reduce non-deductible debt, such as home loans, car loans and credit card debts. Leave deductible loans until last, since the Government is footing part of this bill.