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Creating Wealth for the Future

If the concept of wealth creation is new to you, here are a few basic concepts to help you understand what it all means.

Starting with a budget and a savings plan, you can identify how much money you have to invest to create future wealth.

Step 1 Budgeting

Understand your living expenses, so that you can make adjustments for saving or investing.
Refer to budget planner link ( developed by the Australian Securities and Investment Commission – ASIC) for assistance on determining how to make necessary adjustments to your current lifestyle.

Step 2 Saving

Saving is putting aside some of your income to achieve a short-term goal such as a holiday or a car. This type of goal may require a lower risk/less volatile strategy, such as investing in cash or fixed interest, so your money will accumulate over the short to medium timeframe and will be there when you need it.

Saving in cash or fixed interest is generally inadequate for achieving long-term goals such as retirement assets or funds for future education expenses because over the long term, returns from cash and fixed interest can be eroded by inflation and taxation.

Step 3 Investing

Investing means putting your money to work for you. Over the long term this can be achieved by investing in a diversified portfolio. This means adopting an increased degree of risk, depending on your time horizon and your investment personality. Make an appointment with a MAP Financial Planner to discuss your investment requirements.

The four main building blocks for wealth creation are:

Cash

Cash (including bank bills, treasury notes, term deposits and cash management trusts which have exposure to credit but which can be converted to cash quickly) is generally considered a less volatile investment than shares and property and there is less chance of fluctuation in the value of your capital. It is often used to park money in the short term while you are deciding where to invest. The risk of remaining in cash for any length of time is the purchasing power of your money can be eroded by inflation. Returns can also be affected by fluctuations in interest rates.

Fixed Interest/Bonds

Bonds are issued by large corporations and governments to raise capital. When you invest in a bond, you are lending money to the issuer in return for regular interest payments and to have your capital returned to you at the end of the investment term. Although bonds are less volatile than shares and property, the capital can be eroded by inflation over the long term and they are sensitive to interest rate movements. If interest rates go down there is the potential for loss of capital.

Property

Investing in the property market means more than buying a residential property. You can also invest in commercial, industrial and retail buildings and land, either directly or through a managed property trust. Other investments could include power utilities, public infrastructure, rural businesses and tourist enterprises.

Investing in property may provide you with both capital growth and an income stream, and can protect you against inflation. Historically, it has performed better than cash and bonds over the long term. However, because of high initial outlays into directly held property, it is difficult to diversify across property sectors to reduce your risk. It may also be difficult to access your capital if you cannot find a suitable buyer at the right time. These disadvantages can be overcome by investing in managed property trusts.

When you buy shares in a company, you become a part owner of that company. You can invest in shares directly, indirectly or through a managed investment fund, such as the MAP Australian Equity Fund, which sells you units in a pool of share investments. You can buy shares on the Australian share market or invest in international shares through global share funds that give you investment exposure to large multinational companies.

Over the long term, shares have outperformed other asset classes and provide the best potential for capital growth. As well as potential for capital growth, in some cases you may receive dividends, which are a share of the profit the company makes. Other possible rewards of share market investing include dividend imputation, which may provide tax benefits,(depending on your marginal tax rate) and the ease with which shares can be bought and sold quickly on the open market.

In return for potentially higher returns on a diversified share portfolio, there are risks. If you are forced to sell when share markets are down you may realise a capital loss. Share markets can be volatile and affected by global events in addition to domestic economic and financial shocks. Income in the form of dividends is not always certain.

MAP's qualified Financial Planners can design a tailored investment plan providing you with access to each of the above asset classes and diversify your investments across them all.