So, in the previous post, we discussed HENRY (High Income Earner Not Rich Yet) and talked about whether being HENRY was killing your financial future.
If you are a HENRY, then you’re going to love this post. We’re going to dive deeper into how to become a rich HENRY (or if you want to call it financially successful) while still enjoying the benefits of being a HENRY. As I say to most of my clients, the road to wealth or financial independence is pretty boring but the old tried and tested rules to building wealth have not changed.
You can decide to take the more exciting path into the unknown and you may do alright but chances are you will not. Take the boring path, slow and steady, tried and tested and you will reap the rewards without the stress. You’ll have the things that you value now while ensuring you continue to build on what’s important to you in the future.
Step 1: Priorities:- Before we start talking about strategies, you really need to look at your priorities and make a decision on whether you are going to be someone who will take an active approach to getting rich on purpose or whether you are just going to blow it all on having the best time ever. Now, I’m happy with that but don’t go complaining in 20 years time when you look back and have nothing to show for it. It’s all about making good choices.
Now, you can live a great life and still do all the things you want if you are able to implement a few habits that will set you up for life.
What do I mean by priorities? Do you want to be a slave to consumerism? Let me tell you the world we live in is against you, every trick in the book is being used to get your hard earned dollars whether you need it or not. I believe as a HENRY you need to consider your future first. Are you someone who wants it all? The expensive car, the expensive lifestyle, all the latest gadgets and the exclusive house in the exclusive suburb?
Or, are you someone who wants to live in a nice place with a very comfortable lifestyle while also creating wealth the right way, setting yourself up for the future while not sacrificing anything now? It all comes down to mindset and working out what you value the most, a great lifestyle with less stress about money or a great lifestyle where you are stressing about money? It’s your choice but I know which one I would be choosing….
Step 2: Structure:- This is another important step and an area most people get it wrong. That’s not your fault, the problem is that you likely haven’t been educated around money. Look around you, there are plenty of people earning really high incomes and look as though they are extremely successful, however, pop the bonnet and you’re likely to see something very different. It all comes down to a structure.
When I talk structure I mean automating where your money goes, ie pay your first account where you start to build wealth. Separate accounts to cover your necessities, luxuries, emergencies just to name a few. Every individual is different, but if you are earning a HENRY income you should also be looking to pay off your home in 10-15 years. You have the income, make good use of it. Don’t over extend without knowing the consequences.
You will also need to ensure your investments structures are the right ones for you based on the outcomes you are looking for along with keeping your tax to a minimum. There is a lot more to this, but I hope you get the picture.
Step 3: Cashflow:- Not the most exciting thing to be talking about, but let’s look at it in more detail. Most people call it a budget, I’d prefer to call it a spending plan (sounds a lot better doesn’t it?).
There are many schools of thought around how to manage this, however, what works for one does not necessarily work for the other.
I strongly believe no matter what you earn and what debts you have that you pay yourself first, that is before you pay your bills, you pay yourself somewhere between 10-20% of your income before anything else. Direct this automatically away from your everyday accounts before you see it. Get used to this and it will set you up for life, provided you don’t make silly investment decisions.
The reason I recommend this is that if it goes straight into your everyday accounts it is likely to be spent somewhere on something you don’t value. Make it a habit and over time you will see the value of this.
Why not allocate this to your mortgage? Well, this is something you can do, but what I find is that it ends up getting spent on something else and never really gets put on the mortgage. However, if you are very disciplined then, by all means, add this to your mortgage. Given the high income you have, you can always turn this into good debt later on. Will talk about that a little later.
The remainder can be used to cover your non-discretionary expenses or fixed expenses while incorporating luxury or fun expenses. Obviously, this will all depend on when you want to have your mortgage paid off but I think you get the picture.
The problem with most of us, we have never been taught to manage cashflow so it is foreign to us, we know how to spend but don’t know how to manage the other part of the equation.
Step 4: Lifestyle Contingency:- Jargon speak for risk insurance. We insure our car, house and contents yet very few of us insure our biggest asset, ourselves. Yes, I know, not the most exciting subject but you will thank me one day if you suffer from an illness, injury or trauma that stops you from being able to work or subsequently you die prematurely – Your family will thank me should you actually implement a plan. And guess what, if you never have to claim, bonus, you have your health, now that’s a win, win, right? If you happen to claim it will be the best return on your money that you will see.
Now I’m not going to get into too much detail, but give you the cut-down version of roughly how much should be spent and what you should be covering. You’ll need to seek advice on the specifics.
Whether you like it or not you are already putting away at least 9.5% of your income to cover your income post work, right. Yes, your employer may be paying this but it still your money. So, if you’re already putting away 9.5% for post work income, what’s 5% of your income to cover your Lifestyle Contingency or cover your income while you are working, not a lot, right? So, why aren’t you doing it?
To work out your numbers, you will need to work out if such an event were to occur, would you want to have a worse lifestyle, same lifestyle or better lifestyle post such an event. Once you know this it’s about filling in the gaps, what you have now and what you would need.
And one thing most people forget to do is review it on an ongoing basis. As you pay debts down and you start building assets your need for such cover will reduce over time. Oh, yeah and some of this stuff is tax deductible. And there are ways of reducing costs over time.
Step 5: Investments:- Given you income levels you will be maximising your contributions to super post the 1 July 2017 changes, therefore you will be looking for extra investments outside of super.
There is an array of investments along with the shiny looking salespeople, ones that are quick to take your money. The type of investments you use is an individual choice, some like direct property, some like direct shares. They all have their pros and cons.
When choosing, look for something that has the ability grow in value over time. To gain leverage you may consider using good debt and take advantage of the tax advantages. Never ever go into an investment for purely tax reasons, there has to be a long term growth element to it.
There is too much to cover to include everything here, however, seek advice and work out what is going to work best for you based on the amount of risk you are willing to take. Don’t forget, play the long game, building wealth takes time & Rome wasn’t built in a day!!!
Step 6: Estate Planning:- This is one that most put off, getting our estate plan in order. There are two certainties in life death and taxes, oh yeah you add super changes to that one now.
If you’re following the steps in this post, you’re on a good wicket, building wealth, have your contingency insurance in place, now you need to ensure it is all protected. Estate planning in a complex area and what you may think is a simple estate plan, is not necessarily the case.
You’ve got to think about how to transfer assets to the right family members at the right time through the right structures to reduce potential tax issues.
Go find someone who specialises in this space and get it sorted, once you have done that you can forget about it for a while.
The above steps are the foundation blocks in what I call the “Wealth Pyramid”. Just like a house, you need a good foundation to support all other areas of the house. Without this you have nothing. Get this right early and you are able to work your way up the “Wealth Pyramid” to financial independence.
I just wanted to touch on one more thing, Structures. Why?, because I think is important. If you’re a HENRY, then you are going to most probably accumulate significant assets over time and you need to ensure you have the right structures to ensure you pay the least amount of tax, so I am going to discuss a few here in general terms.
Family Trusts:- These types of trusts are generally used to allocate income to other family members or entities that have lower tax rates than you. They also provide a level of protection from creditors etc.
Tax Bonds:- With the recent changes in super, these structures will become more popular. They cap the tax rate that you pay at 30%, if you have a range of Australian share investments in them then this can be brought down to around 27% approx.
Although you have access to the funds in a Tax Bond there are a range of rules that apply. For instance, you can only add to them up to 125% of the previous year’s additions. If you break from one year, you need to start a new one.
If you withdraw in the first 10yrs there are various rules on what tax is paid, after 10yrs it is completely capital gains tax-free. Now this is going to work for a lot of HENRY’s however very few people know about them.
Company:- In a company you are taxed similarly to Tax Bonds although you would pay capital gains at the applicable rate. This structure allows greater flexibility in what investments you can use.
The point, before you start your investment journey, seek advice and get your structures in place first. This will save you a whole heap of grief late on down the track.
I hope this has given a structure to use to get wealthy being a “HENRY”. There is a lot more to it than what I have included here, however, I hope you get the picture, get the foundations right, know where you are heading and get your plan right and the rest will fall into place.
When it comes to getting financially fit and reach your desired lifestyle goals, you have two choices, you can go it alone and fumble your way through, or alternatively, you can take the fast lane.
If you’d like to fast track the process, feel free to reach out and I’ll share some of what I’ve learnt.
Until next time, make it a great week!
P.S Whenever you’re ready, here are 3 ways we can help optimise your financial affairs so you can go live life, sound good?
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Written by Glenn Doherty CFP – Financial Organiser
This information is of a general advice nature only, and has been prepared without taking into account your particular financial needs, circumstances or objectives. All information is based on Exelsuper Advice Pty Ltd’s understanding of current law as of 23th August 2017. While every effort has been made to ensure the accuracy of the information, it is not guaranteed. You should seek professional advice before acting on the information contained in this publication. Taxation considerations are general and based on present taxation laws, rulings and their interpretation as at 23th August 2017. You should seek independent professional tax advice before making any decision based on this information. Exelsuper Advice Pty Ltd ACN 080 419 holds an Australian Financial Services License 428272.