The Anatomy of Wealth Creation

There are six basic concepts of wealth creation and is important to understand them and the way the way they interact.

1. Wealth demands discipline
Wealth is created through investing in assets that appreciate over time, and this requires capital. Unfortunately there are only two legitimate ways to accumulate capital - saving or borrowing.

The right decision at any stage of your life depends on your personal assets and liabilities, your goals and your position on the lifetime clock. Making the right decision (rather than hoping for the best) demands that you sit down and define a clear life goals and a plan that will help you achieve them. Once you have a goal and a plan, it becomes much easier to evaluate the pros and cons of a saving or spending decision.

2. Just having a plan makes you more likely to become wealthy.
One of the main differences between successful people and the rest is that they have personal goals that are important enough to strive for. If there is a price to be paid, they will pay it in order to reach their objective. At the same time, just wanting something badly enough will not make it happen. You also need a plan that will help you reach those goals.

An effective financial plan is like as a bridge that will take you from where you are now to where you want to be, except for one vital difference. Instead of being fixed and immobile like a real bridge,
a financial bridge has to be flexible. The reason for this is simple. When your life or the outside world changes, your goals change too. If they do, the plan has to be adjusted to take the changes into consideration.

3. Debt can make you wealthy
In Hamlet, one of William Shakespeare's most famous plays, fussy old Polonius advises his young son Laertes, ?Neither a borrower nor a lender be?. This could be good advice for an inexperienced young man leaving home to go to uni in another city, but if we all followed it many of us would end up a lot poorer.

Most of us would never own our home unless we borrowed a substantial amount of money from the bank to finance it. And since buying a home allows us to stop paying rent and start paying for an asset that will one day almost certainly be worth a lot more that we laid out in home loan repayments , it is obviously a good thing to do.

So if we agree that borrowing is not always a bad thing to do, the question is when is it good to borrow and when is it bad?
Bad debt is borrowing simply to spend, either on day to day things like clothes or cars i.e. things that lose value from the day you buy them. Neutral debt is when you borrow money to buy an appreciating asset, but are legally unable to claim any tax rebate on the interest you pay. Standard home mortgages fall into this category.

Positive debt is borrowing that can actually fuel personal wealth creation and is when you borrow to buy an appreciating asset such as land, real estate or shares. Not only is the asset you buy likely to increase in value over time, but the interest you pay on the loan is tax deductable. So depending on your income and your tax bracket, you could end up borrowing for investment virtually tax free.
Borrowing money to invest is just one answer to investing wisely. It is not the answer to every investor's prayers, but it can be a very rewarding strategy if it is done correctly.

4. Time, not timing, is everything.
?The great French Marshall Lyautey once asked his gardener to plant a tree. The gardener objected that the tree was slow growing and would not reach maturity for 100 years. The Marshall replied, 'In that case, there is no time to lose; plant it this afternoon!' John F. Kennedy

Our mantra is to buy quality assets and let time do the rest. A handy rule of thumb is the Rule of 72, which estimates how long it will take for an investment to double in value. Divide an investment's annual return into 72, and you will get a rough idea of the number of years necessary to double your money.

Let's say you were a 30-year-old with $10,000 at your disposal, an inheritance from your great uncle. If you apply the Rule of 72, placing the money in a fund that has historically produced an average return of 10 % will mean that you'll potentially double it in 7.2 years and build it into $174,000 by age 60, your reward for having the discipline to invest it and not spend it.

Being 30, you may decide that your windfall is there to be spent on the overseas trip you have been denying yourself for so long, but at the very least, applying the Rule of 72 forces you to think about the true long-term cost of doing so. It can persuade us to invest money early and leave it alone, and encourage us to behave with the long term in mind.

5. It's not effective unless it is tax effective
Because they are wealthier they not only pay more tax, but can also make a substantial difference to the tax free or after tax part of their income just by the way they organise their affairs. It is certainly true that the tax burden on wealthier Australians has eased considerably over the last decade, but it is still there and, in a tightening fiscal climate, it could rise again.

While it may be fair that those who have more pay more, there is no need to pay more than you have to. Seeing a financial adviser ensures you are fully aware of the tax implications before you make a decision.

6. It really does not matter much whether you buy shares or property
This sounds like a heresy, but in spite of the fact that you can Google 'real estate vs. shares? and come up with at least 50 web sites telling you to do one or the other, we at Moneytree Partners always tell our clients they are welcome to do either, because we believe that it does not make too much difference whether you invest in real estate or shares - if you pick the asset wisely, time will do the rest.
?
Conclusion: There Is No Miracle Cure For Poverty

Successful financial planning is always personal and individual. If we could achieve it just by applying certain proven principles, we could fire all our advisers and do it all on a computer.
Frank Paul, CEO, Moneytree Partners

?Good plans shape good decisions. That's why good planning helps to make elusive dreams come true.?
Lester R. Bittel

At the same time, you should appreciate that there is no standard prescription for wealth creation. Wealth creation is a bit like practicing medicine and has one or two of things in common. A successful outcome depends on accurate diagnosis and appropriate prescription and a cure cannot be effected without the cooperation of the patient. You can tell a heavy smoker he is courting death and advise a nicotine replacement therapy to help him quit, but you can't force him to follow your advice.

In the same way, a good financial adviser will take a careful case history, help you define and rank your personal goals and prescribe a plan or strategy that will enable you to achieve them, but none of this will be effective without your commitment to the goal and your determination to make the strategy work.