I can see the puzzled looks on your faces as you read the headline. How could earning more not equate to greater financial success and wealth? It is simple arithmetic’s if you have more you can save more. This is the common misconception that we experience.
A financial planner recently described it well when looking at his new clients: “it is often the cleaner that has more assets at retirement than the doctor”. Yet that cleaner may have earnt 10-20% of what the doctor did each year.
There are a few reasons for this:
- The more you earn the more you spend – I look at what I could live off when I was a junior accountant to what I spend now and the difference is vast
- Often when you earn more it is human nature to become complacent as we feel we have more that there will be always enough. If you have ever travelled to a third world country and seen how they feed their family to make every portion of food available stretch compared to that of the western world. We are not conscious of how we could make it go further as for many there is not the need. It is those with less who value every cent they earn and ensure that they get value for what they have.
- Time – often the more you earn the more you are working so when this is happening something has to give and if financial management is not a priority it is always put on the back burner
- When you earn more you pay more for tax, health insurance, child care fees.
- As you earn more there is often the thought that you need the more expensive house, car etc. to show that you are earning more. These all cost money to maintain.
The challenge with the above is that it is okay if you are enjoying life along the way but what happens if your earning capacity reduces or you want to retire?
We work with many clients who reach their 60’s (note when I started as an accountant 20 years ago clients started this planning at 50) who decide that they want to reduce their work or retire. The challenge is if you don’t have a financial plan with your financial planner to have created assets to earn a passive income what are you going to live off? Your house is not considered an asset for Centrelink Asset Testing for the Age Pension (Provided you have less than 5 acres of land) then you may be living in a $1 million house with $30,000 Centrelink pension to live off. If this is the reality it often means you have to keep working longer than you would like and compromise on your lifestyle.
The good news is with planning you can have your cake and eat it to.
We find our successful clients work with us to create strategies to:
- Create additional profit in their businesses that can be invested
- Work with a financial planner to understand the numbers and what they need for retirement
- Start building passive income when they are young.
It is never too late to start. If you have had your head in the sand with your financial future make an appointment today. Once you have the plan it is as simple as following the bouncing ball to implement the plan which is often easier than the stress of wondering what will happen when you don’t have a plan.