(The Sun Herald)
Building wealth requires good decisions about the assets you invest in. But building wealth also happens against a context of time, which means you have to invest against where you are in your life, what you are capable of, and what you need: in other words, your life stage. How do you create a plan that fits your life stage? Here are some basics:
25-35 These are the years of high disposable income when you should be focused on eliminating credit card debt, saving money for a house deposit and ensuring your superannuation options are set to the ‘‘aggressive’’ end of the scale. This means you’re investing about 80 per cent in shares, with the remainder taken up by cash, fixed interest and listed property. You are young enough to weather the volatility of shares while reaping the larger yields. This gives you longer for the compound effect to work.
35-45 You should be paying off a mortgage and paying attention to the best interest rates and loan type; your growing equity gives you options should you want to refinance. This is a historically low interest rate environment, so use it to get ahead on the mortgage. Your super should still be at the growth end of the spectrum, between 65 and 80 per cent in shares. These are the years to be focused on proper insurance cover, especially if you own a business or have children.
45-55 If you haven’t yet seen a financial adviser, these are the years to do it. Develop a plan for ridding yourself of debt, start putting your own contributions into super and use tax-friendly salary sacrificing to boost your nest egg. You’ll be thinking more about a ‘‘balanced’’ investment portfolio with shares making up around half of your super and fixed interest around 20 per cent (fixed interest generally has a higher yield than cash and much less volatility than shares). If you already have an investment property – making you heavily weighted in property – you might move your super to a ‘‘moderate’’ portfolio where you only have 35 per cent in shares, and 35 per cent in fixed interest.
55-65 This is the era of your life when you’re leading into retirement. So many of your decisions will be focused on how large you need your nest egg to be, what tax benefits you can use, how to ‘‘transition’’ out of work and how to balance risk and stability. This is a really good time to have financial advice, to think about releasing equity from the family home and boosting your tax-friendly personal contributions to super. Most people in this life stage will be hoping to be debt-free and they’ll reduce their superannuation options to a split of 60 per cent fixed interest and 40 per cent cash – very stable, with low yields.
In the end, building wealth during your working years is really about providing for retirement. And in order to get where you want to go, you have to make your future goals fit your life stage.