Key to wealth rests simply in discipline 20th March 2002

Jocelyn Eastway - Australian Financial Review

Trying to build wealth can be like trying to run an obstacle course. Just as you feel you're making some progress, something gets in the way to slow you down.

Sometimes it's your own personality or money habits that stop you getting ahead. In other cases, major events - such as divorce, having children, or becoming seriously ill - are the stumbling blocks.

Any one of these "wealth killers" can make an enormous difference to how much you accumulate during your lifetime. That's why it's so important to identify the potential wealth busters in your life and learn how to plan around them.

Finance educator David Hartgill divides wealth killers into two broad categories: emotional killers; and physical, or event-driven, killers.

"The emotional things are the things you do because of your make-up, that inhibit your ability to create wealth for yourself," he says.

He says procrastination is the biggest emotional wealth killer of all.

He says the way to combat this one is to methodically construct a financial plan that considers all the relevant factors, such as your tolerance for risk, your family obligations, and your goals for the future. Then it's a matter of putting the plan into action, without trying to time investment markets.

"If you're wanting to build long-term wealth, the timing does not matter. It's actually being in the markets and doing things in a methodical manner that matters," Hartgill says.

Trite as it might sound, failing to save is one of the biggest wealth killers, according to Arun Abey, executive chairman of ipac.

"There is all this technical stuff on investment returns and so on and so forth, but to have something to invest, you have to save," he says.

"If you try and save without a plan or a budget, it will not happen. The most successful thing is to nominate upfront an amount of money. Say, for example, 'I am going to have 10 per cent of my salary going to a dedicated account and then live on the rest'. It's amazing how you can do that."


Abey says the way you invest your savings will certainly make a difference to the wealth you accumulate. "But most of it is the amount you have saved," he says.


Hartgill says one of the biggest impediments to saving is impulse buying, especially when it is done on credit or when consumer purchases are joined to a housing loan and paid off over a 25-year period.


"Think hard before you buy," he says. "Do your sums and just have a realistic look at your future. Weigh that against what you are getting now."

Abey says buying adult toys - such as fancy cars, boats, wave runners and holiday homes - can also be a huge wealth killer. He says people should consider hiring these things, instead of buying them.


"The one-off hit of renting is quite expensive, but nothing compared to the cost of owning these things," he says.


"We are not saying kill the joy. But become much more focused on exactly what it is that's going to give you pleasure, and how frequently you want to enjoy that experience.


"If the car thing is about prestige and showing off, that's fine, but bear in mind that it's a wealth killer. If the thing is about a driving experience, then get the experience on a race circuit, and do it two or three times a year."


The principal of Motivated Money, Peter Thornhill, says executives should also consider forgoing a company car, and taking more of their salary as cash.


"Running around in an older car may not do your ego any good, but it does your pocket the power of good," he says.


Similarly, riding out the short-term hiccups in investment markets can be stressful at the time. But in the long run, it will pay off, Hartgill says, assuming you have chosen quality investments.


He says short-term thinking, often driven by greed, can be one of the biggest emotion-driven wealth killers.


On the physical side, having children can seriously curtail your ability to build wealth. But Thornhill does not believe it's the kids themselves that are the major wealth killers.


"What puts a major hole in the budget is trying to satisfy your desire to live your own lives vicariously through your kids," he says.

Thornhill says education is often the main expense in raising kids. But if you start early enough with some careful budgeting and planning, the cost should not "leave you gasping".


"People should also look at schools that are non fee-paying, but that have good academic records," he says.


Thornhill says coping with potential wealth killers is also a matter of matching your expectations with your level of disposable income.


"If there are school fees on the horizon, forget about the Caribbean holiday for a while; put up with the fact that you are not going to be able to trade up your car every three years," he says.


"One of the global issues is getting your mind around what sort of lifestyle you want and what sort of lifestyle you can afford.

"Where people get into strife is living a lifestyle that they frankly can't afford."

Abey says parents should consider teaching their children the value of thrift - including buying sensibly - and saving. And they should introduce some discipline into their own spending habits, particularly where the children are concerned.


"It's not about leading an austere life. It's about having more savings, without giving up everything else," he says. "It's about practical planning as well."

When it comes to divorce - another major wealth killer - the practical planning usually happens after the event, rather than before.

Says Hartgill: "You have got to financially accept where you are after the event and then be prepared to plan again.

"Divorce is a very significant financial setback. It does not matter which way you look at it, no-one is going to do well out of it."

Apart from divorce, there are several other events that can stand in the way of wealth-building, such as having property lost or stolen, suffering a traumatic illness, becoming disabled, or dying an untimely death.

"If you die, the consequence may be that your family is left in a difficult situation," Hartgill says.

"It's vital, particularly for people with young families and high debts, to ensure that their families are protected from untimely death, particularly if there is only one breadwinner."

Says Thornhill: "There are huge wealth-creation repercussions in the event of death.

"All the future earnings of the partner that dies disappear. And that can be a huge amount of money."

Hartgill says people should also prepare for the potential loss of income that can arise if the breadwinner becomes seriously ill or disabled.

"There are insurance products that will cover off all these sorts of risks, providing income, or providing a lump sum," he says.

"It's the impact on family, yourself, and perhaps on your business involvement that needs to be considered."

Generally, owning a successful, growing business is a quicker way to build wealth than working as a salaried employee, Hartgill says.

It also gives you more flexibility with your tax planning.

But being a wage earner, instead of a business owner, need not be an impediment to building wealth, he says.

"You don't have the flexibility of a business owner, but by the same token, you have far more healthy regularity in your income, so you have the opportunity to build your wealth progressively over time," he says.


By contrast, the cash flow of a business owner is far less predictable, he says, and there is a lot more risk involved.

Thornhill says the other thing to remember is that not everyone is cut out to run their own business.

"It would be great if everyone could work for themselves, but I think the vast majority of people are not mentally set up for that sort of thing," he says.

"And just running your own business does not mean you are necessarily going to be a lot wealthier than a wage earner."

For those suited to running their own business, getting the whole thing started can be a very costly exercise.

But Thornhill says this cost should be seen as a long-term investment, rather than a wealth killer.

"Let's say a person borrows money to buy a business. If the business is successful, then it will increase in value over time," he says.

"The borrowed money is an immediate wealth killer. But our plan is for it to be a long-term investment, rather than a wealth killer," he says.


Back