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How to build wealth
07 Feb 2022
One in three Australians invested for the first time in 2021, according to research by Canstar. If building wealth is one of your goals for 2022, our money expert Effie Zahos gives her top five tips to help you get started.
Canstar’s Consumer Pulse Survey revealed that while a large number of people started their investing journey last year, only around two in five Australians (39%) responding to the survey said they thought they were on track to reach their retirement savings goal.
Of course, investing on its own may not be enough to help you build wealth. It’s just one of five steps Effie suggests for people who are keen to set up some good financial foundations on which they can grow their wealth.
- Get on top of your spending
- Build a cash cushion
- Start (or continue) investing
- Supercharge your super
- Get a helping hand from technology
1. Get on top of your spending
“It’s not what you earn that matters, it’s what you spend”. Effie says this is one of the money lessons that has stuck with her throughout her 25 years of working in finance.
“I’ve met people earning a ridiculously high income, and they don’t know where their money is going and they’re living from pay to pay,” she explains. “Then I’ve met others on a much more modest income, but because they manage their spending, not only are they putting food on the table, they’re putting their kids through school, they’re saving, they’ve bought an investment property.”
According to Effie, analysing your past spending can be a smart way of getting to grips with future outgoings.
“Have a look at what you did last year. Go through your bank statements and highlight the things that make you stop and think ‘I spent that amount on THAT?!’”
This exercise can help you identify the areas where you can cut back easily, Effie says. She also recommends trying to better understand your own money habits and behaviours as a way of getting on top of spending and your finances overall.
Creating a plan to pay down any debt you have, such as personal loans and credit cards, as quickly as possible could also be a helpful step at this stage.
2. Build a ‘cash cushion’
“While I hate the thought of leaving money sitting in the bank doing nothing, I keep a healthy amount in a cash account,” Effie says. “We saw what happened early in the pandemic when some people were withdrawing money from their super because they didn’t have a cash cushion.
“Having that cash cushion empowers me because I know if I lose my job tomorrow, I’m okay, I’ve got that money.”
Effie says it can still be wise to take an active approach here, by regularly reviewing where your emergency fund is parked.
“I move it around to chase the best rates, which are often introductory rates that only last about four months. Otherwise, it can just sit there not earning anything.”
Related: How much cash do you need in an emergency fund?
3. Start (or continue) investing
“Don’t expect money in the bank to make you rich,” Effie says. Instead she explains that investing and taking advantage of the potential for long-term compounding returns can be a key step towards building wealth.
Effie invests in a mixture of exchange traded funds (ETFs) and in individual companies’ shares, but says the approach that works best is different for everyone depending on their circumstances.
The important thing is to get into the habit of investing regularly over time, as this can be a powerful wealth-building strategy. To illustrate this, the chart below shows how much wealth a person could have built up by investing different amounts each week over the past 10, 15 and 20 years, based on the returns of the S&P/ASX 200 index (made up of the shares of Australia’s largest 200 public companies) over those time frames.
| Provider | Ownership model | Minimum buy trade amount | Fee for $5k trade | |
|---|---|---|---|---|
  |
 |
CHESS sponsored | $1 AUD | $3 AUD |
 |
|
Custodial | $10 USD | $2 USD (Foreign exchange fees apply) |
 |
|
CHESS sponsored | $500 AUD | $3 AUD |
 |
|
Custodial | $90 AUD | $8 AUD |
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|
CHESS sponsored | $500 AUD | $11 AUD |
View all Canstar rated Online Share Trading products. View Disclosures.
Investing regularly over time
Remember, though, that these past returns are not an indication of what future returns will be. Investing can be risky and the value of your investment could fall. It’s important to note, too, that there are other types of assets you can choose to invest in, not just shares and ETFs. If you’re unsure which approach will be best suited to you, consider speaking with a financial advisor.
Related: How to buy shares in Australia
4. Supercharge your super
“Super is the most effective wealth creation strategy as far as I’m concerned, because it forces you to save,” Effie says. “And let’s face it, most of us need to be forced to save.”
Super savings are also taxed differently to other forms of income and investments in many instances. This means that, depending on your situation, there can be advantages to investing within super, assuming you are prepared to wait until you can access the money.
But like your cash savings, super is not something that should be simply left to ‘do its thing’. Effie says it’s important to be aware of where your super is invested and, importantly, what fees your fund is charging, noting that a higher fee doesn’t necessarily mean better returns and vice versa.
The table below shows the difference that the fees you’re charged can make to how much super you have by retirement, based on a hypothetical example and all other factors being the same. Even what may seem like a modest difference in fees each year could add up to a potentially life-changing amount of money by the time you retire.
Difference 0.5% in super fees can have on retirement balance
| Person 1 | Person 2 | |
|---|---|---|
| Starting balance at 25 years old |
$25,096 | $25,096 |
| Fees level being charged | 1.5% | 1% |
| Account balance at retirement (67 years old) |
$634,520 | $729,932 |
| Extra super at retirement | - | $95,411 |
Source: www.canstar.com.au. Prepared on 24/01/2022. Scenario begins at the start of the 2021-22 financial year and is based on a 25-year-old with a starting balance of $25,096 (per APRA Annual Superannuation Bulletin), a starting gross annual income of $77,948 (per ABS Characteristics of Employment - median employee earnings), growing 2.5% annually (per RBA Target Inflation range), retiring at age 67. SG Contribution amounts are per Government-announced rates, and assumed to be paid into superannuation fund quarterly. Employer contributions are assumed to be taxed at 15%. Net investment returns assumed to be 6.52% p.a. based on the average annual 5-year return of balanced investment options available for a 25-year-old on Canstar's database (with returns effective to 30 Nov 2021). An average life and TPD insurance premium of $193.61, growing 2.5% annually (per the RBA’s Target Inflation range of 2% to 3%), is assumed charged at the end of each year based on products available for a 25-year-old on Canstar's database. End balance at retirement and total salary sacrifice amounts are shown in "today's dollars", i.e. they have been adjusted for inflation. Please note all information on income, annual superannuations fees and performance returns are used for illustrative purposes only. Actual returns and the value of your investment may fall as well as rise from year to year; this example does not take such variation into account. Past performance is not a reliable indicator of future performance.
Another way to potentially use super to build wealth is to make additional contributions if you have spare cash, either by salary sacrificing a portion of each paycheque, or through one-off lump sum contributions – your tax refund, for example. Here’s another table for you, this time showing the impact of making regular extra salary sacrifice contributions to your super. It can be a game changer. For this example we’ve assumed the hypothetical person is a bit older, to demonstrate that you don’t necessarily need to make changes at the very start of your earning life for them to make a big difference.
Impact of salary sacrificing extra contributions to super
| Starting age | 35 |
| Retirement age | 67 |
| Starting gross annual income | $77,984 |
| Starting balance | $61,247 |
| Annual salary sacrifice | Super balance at retirement |
| 0% | $738,760 |
| 1% | $783,100 |
| 2.5% | $849,610 |
| 5% | $960,460 |
| 7.5% | $1,071,310 |
| 10% | $1,182,160 |
Source: www.canstar.com.au. Prepared on 18/01/2022. Scenario begins at the start of the 2021-22 financial year and is based on a 35-year-old with a starting balance of $61,247 (per APRA Annual Superannuation Bulletin), starting gross annual income of $77,948 (per ABS Characteristics of Employment - median employee earnings), and retiring at age 67. Super guarantee contribution amounts are per Government-announced rates, and along with the salary sacrifice amounts, are assumed to be paid into superannuation fund quarterly. Employer contributions are assumed to be taxed at 15%. Net investment returns assumed to be 8.36% p.a. based on the average annual 5-year return of balanced default investment options available for a 35-year-old on Canstar's database (with returns effective to 30 Nov 2021). An average life and TPD insurance premium of $287.48 is assumed charged at the end of each year based on products available for a 35-year-old on Canstar's database. Annual income and insurance premiums are assumed to increase with inflation each year. Inflation is assumed to be 2.5% p.a., in line with the RBA’s Target Inflation range of 2% to 3%. End balance at retirement amounts are shown in "today's dollars", i.e. they have been adjusted for inflation. Please note all information on income and superannuation performance returns are used for illustrative purposes only. Actual returns and the value of your investment may fall as well as rise from year to year; this example does not take such variation into account. Past performance is not a reliable indicator of future performance.[/bs_citem]
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5. Get a helping hand from technology
While Effie admits she has an old-fashioned approach to managing some parts of her finances, she says using money apps can make it a lot easier, and in some cases can help you find opportunities to save that you mightn’t have thought of yourself.
Whether it’s to help you track your spending, save on fuel, cut your regular groceries bill, or invest, money apps can take a lot of the leg work out of looking after your money.
On the flip side, Effie says that deleting apps that are costing you money is just as important. Do you really need four different food-delivery apps tempting you to part with $20 for a burger, or could you prune your app collection and cook dinner for yourself?
After all, we’ve seen what that $20 could do to your wealth if you use it wisely and give it time.
This article was reviewed by our Sub Editor Tom Letts before it was updated, as part of our fact-checking process.
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