Get rich slowly is the mantra of Warren Buffett, one of the world’s smartest and wealthiest investors. He’s a firm believer in a slow and steady approach to investing, despite the number of get-rich-quick schemes that are out there.
Buffett’s philosophy is consistent with the old saying that ‘if something sounds too good to be true, it probably is’. That saying certainly applies to investing. It’s very rare that you can get rich quick. The higher the potential investment return, the higher the risk, and vice versa.
How to get rich slowly
While getting rich slowly mightn’t sound very exciting, it’s much more realistic to achieve than getting rich quickly, and it sure beats the alternative of struggling to make ends meet all your life. It doesn’t matter when you achieve financial freedom, as long as you get there.
Here are 7 tips to help you get rich slowly.
Tip 1 Make saving a habit
Start getting into the habit of saving more than you earn as soon as possible. The earlier you develop that habit in life, the better, because it will give you funds to invest to create wealth.
Robert Kiyosaki, author of the best-selling ‘Rich Dad Poor Dad’ Series of books sums it up perfectly:
‘Most people fail to realise that in life, it’s not how much money you make, it’s how much money you keep.’
Tip 2 Develop a budget
Developing a budget of your income and expenses (and sticking to it) is a great way to help you save. Set yourself a savings goal each pay period and start by ‘paying yourself’ first. In other words, subtract your desired savings from your income first.
If you try and save what you have left over after your expenses, you’ll risk not saving anything, especially if you aren’t disciplined with your spending.
Then take care of your essential expenses, like accommodation and food. The amount you have left over should be for your non-essential expenses, like going out and entertainment.
You might need to make some short-term sacrifices with your non-essential expenses to achieve your savings goal. But those sacrifices will be worth it in the long run if you follow Tip 3.
Tip 3 Invest your savings to create wealth
The earlier you start investing your savings, the longer you’ll have for compounding to work its magic. Here’s an example to show you the power of compounding.
Imagine that you invest $50,000 and generate a 5% return that you keep reinvesting.
- In 10 years, your investment will be worth $82,350 (a return of $32,350)
- In 20 years it will be worth $135,632 (a return of $85,632)
- In 30 years it will be worth $223,387 (a return of $173,387).
Note how your returns are escalating over each ten-year period. That’s the power of compounding. And if you keep adding to your investment, it will be worth even more!
Ideally, you want to be investing in a combination of capital growth and income-producing assets, like:
- a quality investment property in a good location. It should increase in value over time and provide you with rental income from tenants, as well as tax benefits.
- blue-chip shares. These should also increase in value over time and provide you with franked dividends. A franked dividend provides you with a tax credit to reflect the company tax that’s already been paid on the dividend you receive.
Tip 4 Diversify your investments
There’s an old saying that ‘you shouldn’t put all your eggs in one basket’. That saying certainly applies to investing.
Diversifying your investments means investing in a mix of asset classes (property, shares and cash) to minimise your risk. For example, when the share market is performing strongly, the property market often isn’t, and vice versa.
Interest rates in Australia are also currently at record lows, making cash-based investments less attractive than other asset classes.
Tip 5 Understand the difference between good and bad debt
Debt isn’t necessarily bad, but it can be. It’s important to understand the difference between good and bad debt.
Good debt is money you borrow to create wealth. In other words, the money you borrow to invest in assets that increase in value, like property in good locations. If you’re borrowing for an investment property, the interest is also tax deductible. The Australian property market has a long-term trend of capital growth, even though there are inevitably periods in some markets when property prices stagnate or fall.
Bad debt is money you borrow for assets that depreciate in value (like cars) or for everyday expenses (like holidays or day-to-day expenses). This type of debt isn’t tax deductible and should be avoided. Credit cards are examples of bad debt, especially if you’re only making minimum repayments each month. The interest rate on credit cards can be three or four times higher than other types of finance.
Tip 6 Proactively review and manage your wealth
It’s important to regularly review your wealth creation and protection strategies. Both market conditions and your personal circumstances will inevitably change over time. For example, when you start a family or are planning to retire. Major events like these will require you to adjust your strategies to minimise your risk.
Tip 7 Protect your wealth
Protecting your wealth is just as important as generating and managing it. You can protect your wealth by:
- having appropriate insurance cover in place (such as life, total and permanent disablement, and income protection insurance).
- using estate planning strategies to transfer your assets to your dependants tax-effectively, such as setting up a trust.
- developing tax-effective investment strategies.
How we can help
At Qi Wealth, our team of experienced financial advisers can help you with wealth creation, management and protection.
We’ll take the time to understand your needs and goals so we can provide you with the best financial advice for your specific circumstances, including outlining appropriate investment options. We develop long-term, trusted relationships with our clients.
Contact us today to find out how we can help you!