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Has the rising tide that lifted all ships turned? Issues getting in the way of wealth creation.

Posted by Neal Durling on 13 June 2016
Has the rising tide that lifted all ships turned? Issues getting in the way of wealth creation.

No one wants to wait for anything anymore, or is that just me! We all expect lovely houses, smart cars, foreign holidays and the latest lifestyle accessories.

What's led to this? Over a period of time (the last 20 years), increasing incomes in real terms combined with an environment of high growth and increased asset prices, has made us all feel rich.

As a financial planning specialist, I believe there is a shift underway that we're moving away from an environment of high growth where market returns did most of the 'heavy lifting' for us. 

Over the past twenty years, we could rely on rising housing prices and investment returns to grow our wealth. During this time, "he who borrowed the most made the most". There are a lot of people who made a lot of money simply by borrowing money and "investing". It didn't really matter where!

Yet, in spite of lessons learned from the GFC, banks are still prepared to lend us lots of money. This makes it easy to spend more and, overtime, cultivate the wrong behaviours. When it comes to your own financial life, beware of this.

In today's environment, we see a number of issues getting in the way of wealth creation.

Debt is currently cheap due to low interest rates. However, because of this, there's a danger of overcommitting to lifestyle assets (such as cars, houses, etc.), limiting the opportunity to invest profits until a lot later and thereby losing the benefit of time.

It's very easy for overspending to become a wealth-destroying habit. This can be especially damaging when you consider the other financial demands facing medical specialists today, such as:

  • Having children later - this means high costs later in life
  • Higher schooling and university costs compared to the last generation
  • Higher housing costs and mortgages
  • The time it takes qualifying to be a doctor and the cost of this.

As discussed by my colleague Sean in the last post:

All the major economies are struggling with a lack of inflation and lower growth rates. And in a low-growth environment, people have to invest more to get the same results or invest for a longer period of time.

Keep in mind that our current historically low interest rates are set at levels by the Reserve Bank of Australia to stimulate demand. Interest rates are low because we are in a low-growth environment so it's not all good news.

The consequences of this are:  

  • Incomes are not likely to grow as they have in the past.
  • Debt is unlikely to be discounted by inflation as it has in the past.

Against this backdrop, can house prices really buck the trend and keep going up? I, for one, don't think so. And I would be cautious of excessive leverage with this.

What strategies are needed to achieve financial independence?

The upshot is if you are building wealth now you will likely need to do more of the 'heavy lifting' earlier on, by saving more, for longer, and you'll also need to have a strategy to repay debt rather than relying on inflation to discount it.

You will also need to be more selective about what you invest in, as the "rising tide that previously lifted all ships" may have turned, or become decidedly "choppy."

In this low-growth environment, in order to build wealth, you need to take a more methodical, considered approach to investment and debt.

With this in mind, in order to help you enhance your financial future for the long term, we advise you to:

1. Understand what your goals are and what they will cost.
2. Model different financial scenarios with realistic returns to see the bigger picture and assist with decision making.
3. Develop a financial strategy to get you where you want to be over time.

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If you are interested in reading more on this topic, why not download our white paper for medical specialists on helping people to make good decisions in order to build wealth.

Or for specialist financial planning, accounting and tax advice for medical professionals, please get in touch with our team by calling 07 3363 5800.

Author: Neal Durling
Tags: Wealth Creation Financial planning Planning Financial independence

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