The process for building wealth can be split into three distinct methods: saving more, earning more, and investing. All three are readily accessible to most people, and each have their advantages and disadvantages. The question, then, is this:
Which of the three is the most efficient for Aussies seeking to grow their wealth and achieve financial freedom?
Depending on who you speak to, Australian lore has mixed beliefs about saving vs. earning vs. investing. For example, many people believe that saving hard to pay down a mortgage faster is one of the best ways to grow wealth. Now, this isn’t incorrect, however there are other more efficient ways to grow wealth at a faster pace. This is where the difference between saving, earning, and investing comes to light.
In this article, I’ll explore the idea of ‘wealth’ and three methods for creating it. And of course, I’ll explore property investment and how it fits into the wealth creation spectrum.
Wealth, at its core, is more than just having “money” or “possessions”. Sure, it involves having financial assets like cash, investments, and/or property. However, these are the precursors to wealth.
In a broader sense, wealth represents financial security and the freedom to make lifestyle choices without being restricted by money.
First, growing wealth by spending less is a strategy rooted in the principle of preserving capital. By spending less, and therefore saving more, you are increasing your net wealth.
This strategy seems effective because it’s immediate. Spending less today will impact your finances immediately, and doesn’t rely on external factors.
However, there are limitations to spending less:
- This approach isn’t scalable, because there’s only so much ‘pruning’ of expenses that you can possibly do. When there are no more costs to cut, this strategy is exhausted.
- This approach can reduce your quality of life, thus challenging the root of the reason you are trying to improve your wealth in the first place.
Second, earning more money is an effective method for increasing wealth, and can be achieved by:
- Getting a promotion or pay rise at work, to increase your income
- Starting an additional business (AKA “side hustle”) or secondary income stream
- Engaging in freelance or contract work alongside your current job
- Getting a second job
Unlike the ‘spending less’ strategy, earning more can provide a powerful opportunity for wealth creation. However, it has limitations and cannot usually be scaled without investing significant time and energy.
Third, investing is the process of buying an item with the expectation that it will increase in value, or provide another form of return (ie. an income stream). Examples of investments include:
- Mutual funds
- Rare metals
- Other rare objects (eg. stamps, collectible vehicles)
Investing is a wealth creation strategy that leverages:
- Compound Interest: Compound interest occurs where you earn interest on both your initial investment and also on the interest you have already accumulated.
- Capital Appreciation: Investments, particularly in stocks or real estate, have the potential to appreciate in value over time. This is an effect that saving or earning more money doesn’t natively provide.
- Passive Income: Investments can generate passive income, which can increase your wealth without demanding additional work or time. Examples of passive income include dividends or rental income.
Ultimately, a balanced wealth-building strategy should ideally combine all three aspects: saving, earning more, and investing. Each complements the other and helps build a robust and resilient financial future.
Investing in property is a well-established strategy for wealth creation. Real estate investment offers the dual benefits of potential capital growth and rental income, allowing investors to build wealth both in the short-term and long-term.
An important aspect to consider when investing in property is the concept of ‘gearing’. Gearing refers to the financial strategy of borrowing money to invest. If the income from the investment is less than the costs (including interest on the loan), the property is considered negatively geared. Conversely, if the income is more than the costs, the property is positively geared.
This is when the rental income from a property is less than the costs of owning it, including interest on the loan, maintenance, and other expenses.
Negative gearing can provide tax benefits, although investors must be able to cover the loan repayment shortfall out of their own pocket.
In this scenario, a property’s rental income exceeds the costs of owning and managing the property.
Positive gearing aids better cashflow and can increase investor serviceability for any future loans. However, any additional income the property makes may be susceptible to taxation, and positively geared properties are often less capable of providing capital growth.
This is similar to a positively geared property but after all costs and potential costs (like tax, vacancies, maintenance, and management fees) are taken into account.
The benefits of cashflow-positive properties are similar to positively geared properties.
OK, so property investing can be an impactful strategy. What about the current interest + property environment?
While saving and earning more are integral parts of wealth creation, investing—particularly a nuanced property investment strategy—can predictably accelerate wealth over time.
Property investing in our current environment, where interest rates are high and property prices are stable (and rising in some areas!), is challenging. An effective wealth-building strategy in this environment, using the concepts of saving vs. earning. vs investing, might look like:
- Increase personal income to pay down owner-occupier debt (this is the debt you have against your current home)
- Then use the extra income to invest in shares, commercial property, or residential property
Of course, every property investment strategy is different and depends on the unique characteristics of the investor and their journey.
Can We Help You Build Wealth Using Property?
If you’re looking for an expert team to help you build wealth using property, request request a 30-Minute Finance Strategy Session during which you will…
- Learn more about Canberra’s property market, and some possible options available to you (please note, we will refer you to an external property selection specialist)
- Get a better understanding of the lending options available to you, so you can buy or refinance with confidence
- Discover no-cost ways to save money on interest, fees, and charges
- Get an up-to-date picture of the lending landscape including rates, conditions, and how to structure loans
- Learn about our process to find you a better loan that could save you thousands.
This no-obligation session will be held with one of our experienced mortgage brokers.
Please be assured this will not be a thinly disguised sales presentation. On the contrary, you’ll receive our best strategic advice, specific to your situation, so you too can accumulate multiple properties without sacrificing your current lifestyle and accelerate your progress towards wealth.
Please note, the numbers and assumptions listed in this article are for educational purposes only. Individuals should seek specific advice pertaining to their unique situation and the real estate market before making any decisions.
Trilogy Funding Two is a corporate credit representative (Representative Number 506131) of BLSSA Pty Ltd, ACN 117 651 760 (Australian Credit Licence 391237)