I’ve had many people say to me, they think they can’t go to see a financial adviser because they don’t have $100,000 or more to invest.
My opinion is that you have to start somewhere.
We have clients who earn a lot, and we have clients who earn only a little. And what we often find is that it is the clients who earn less, that do a whole lot better.
“It’s not about what you earn. It’s what you do with what you earn, that matters.”
If you have a disciplined approach to money and a smart structure around how you manage your cash flow, what you earn doesn’t matter so much.
If you’re earning $500,000 a year, but spending $600,000, then you clearly aren’t going to be moving forward in terms of achieving your financial goals and accumulating wealth.
That’s why, right from the outset, it is vital to understand your spending habits – what’s coming in (gross income) and what’s going out (spending).
Beyond that simple rule of thumb, to spend less than what you earn, there are other things to consider that will have an impact on your wealth, regardless of your income:
- legally minimising your tax
- reducing your debt sooner so you pay less interest
- maintaining a comfortable lifestyle
We call those three things – tax, debt, and lifestyle – the “three way struggle”.
And that’s where what you do with what you earn, is important.
It starts with the basics of ensuring you live within your means. Then, you can create leverage through managing your cash flow more effectively.
Part of this simple strategy is to increase your level of net income, by legally reducing the level of tax you pay.
Your net expenditure is also important, because if you can widen the gap between what you spend and what you earn, then you create a surplus (big or small).
Then, you can use those extra funds to reduce your debt and accumulate assets (which can also produce additional passive income).
For example, if you’re paying $12,000 tax per year, and you can legally reduce that to $10,000 tax per year, then you can invest or pay down debt (maybe both) with the $2,000 difference.
While the numbers may seem small, when you repeat that over many years, it can make a big impact on reaching your financial goals.