Retirement simulator launched by AMP

Today AMP launched a new online tool called the “Retirement Simulator“. I’d like to congratulate them as it is a well constructed, flexible tool for estimating how much you may need to save to achieve your desired retirement lifestyle and for that lifestyle to last until at least your life expectancy.

By necessity the tool has been simplified so that it can be usable on the Internet by a broad range of people. The simplification is that it assumes that your only retirement saving is done through superannuation. For wise wealth creators, like the people who read this blog, you are likely to be creating wealth both inside and outside of superannuation. But the tool is still very useful in giving you a point in the general direction of the level of savings required.

I encourage you to read the “Assumptions & Methodology” section on the opening page of the retirement simulator as it provides some very interesting information from which you could learn a lot.

It is pleasing to see that some of the profits from investment administration and management are being reinvested in providing high quality educational tools – for free. Thanks AMP.

Check out the AMP Retirement Simulator now.

Superannuation in the showroom

“Buying a new car is exciting. There is so much choice, so many colors, body styles, engines and brands to choose from. Your budget helps narrow the choices substantially. Some brands will resonate; others will be a real turn off while practical stuff like four doors or two, work needs, number of children, hobbies and lifestyle will all have to be factored in.Then there are test drives and the haggling about price and options.

Make no mistake buying a new car is a serious financial decision – but it is also fun -even if you realise that the day you drive out the showroom door in your shiny new car you just took a depreciation hit the likes of which would you cause you sleepless nights if it happened to your investment portfolio.

If you have bought a new car in the recent past think about how much time you invested in the process.

Now think about how much time you would spend buying a new super fund.”

…the above is an excerpt from an interesting article by Robin Bowerman of Vanguard Investments (Australia). Continue reading here…

Robin makes an excellent observation. It’s a real paradox the amount of time that most of us spent taking care of growing our finances compared with spending them. (I’m also reminded a little of the way we are using our precious environmental resources like trees. But I digress…)

The challenge most of us face in sorting out our superannuation is in understanding it, and then knowing what to look for. If you are keen to crack the whip over your superannuation then I have written a book and e-course to help you do just that. Check out “Create Wealth with Super Choice” to learn how to easily add $100,000 to your superannuation balance.

How to not lose your life savings

Oh the tragedy! On the front cover of yesterday’s edition of The West Australian newspaper was a story about a single Dad who had lost his life savings in the recent collapse of the property developer, Australian Capital Reserve. Sadly when I read such stories the empathetic part of me is quickly overrun by frustration. Quite simply this should not be happening in 2007!

Yet this massive loss of life savings in a marginal investment still occurs with alarming regularity, so I feel compelled to dedicate an article to helping prevent its occurrence – especially to you.

It is taking a lot of restraint for me not to engage in a rebuke of the traditional finger pointing at product sales representatives and financial advisers. Irrespective of the potential presence of a slick, self-motivated sales representative no-one, I repeat, no-one should lose their life savings in a marginal investment. And certainly not if they take personal responsibility for protecting what they have worked hard to earn.

In this article I will share three tips for you to ensure that this never happens to you.

Spread the love

Struth, I thought most people had heard the old adage “don’t put your eggs in one basket”. Maybe they have heard it but have a momentary lapse of memory when they see a high return being promised.

You won’t lose your entire life savings in an investment if all of your life savings aren’t in that investment.

Especially in the case of high risk, marginal investment products only invest the amount you are prepared to lose if it all goes belly up. By that I mean, per product.

An Exception

The above does not strictly apply to superannuation accounts or investment wrap accounts since they are not investments. They are administration accounts that provide access to a broad basket of eggs (investments).

Think of administration accounts as being like a gym. Generally you only join one gym. But at the gym you have access to lots of different equipment you can use to boost your fitness and health. Use of the equipment boosts your health, not the gym.

I mention this exception since I have encountered many people who think that diversifying their investments means having lots of superannuation accounts. That is not the case. Like gyms, you generally have one superannuation account within which you use several investments to boost your wealth.

Guarantee Equals Red Flag

Whenever I see “guarantee” anywhere near investment related information a massive circle of red flags pops up around me. Those red flags tell me that I must dig deeper and find out:

  • Exactly what is being guaranteed?
  • The circumstances under which the guarantee is valid and when it is voided.
  • The cost of the guarantee
  • How is the guarantee being facilitated? (e.g. if a guaranteed income, where is that income being earned so that it can be paid to investors)
  • Who is providing the guarantee and how robust are they?
  • Is there any research available form a reputable, independent source?

Except for the last point, all of the above information must be included in a Product Disclosure Statement (PDS) and provided to retail investors. So if you want to avoid losing your life savings read Product Disclosure Statements before investing.

By law the Product Disclosure Statement is big because it is designed to ensure you have most if not all the information about the product to avoid making an investment that is inappropriate for you.

If you don’t know that you could lose all of your money (or some other undesirable outcome) and you don’t know because you didn’t read the Product Disclosure Statement in full then the main person to blame for the outcome is…..

If the product is not legally regulated and doesn’t have a Product Disclosure Statement then don’t invest.

Get a Third Opinion

If you feel you don’t understand the Product Disclosure Statement then pay for at least one expert and independent opinion from a licensed Financial Adviser.

If a doctor told you that you had a terminal illness would you seek a second opinion?

For many people losing their entire life savings could be terminal. So before committing yourself to a potential life sentence seek a second opinion from an expert.

And, if after reading this article and the Product Disclosure Statement you still want to invest your life savings in one product then seek three expert and licensed opinions.

For financial advice this is how this tip may work in practical terms:

  • Pay one adviser for comprehensive advice on the appropriateness of the product to your circumstances and goals
  • Pay at least one other adviser for a comprehensive review of the first adviser’s advice. Give them the original Statement of Advice and pay them a fixed fee to review the appropriateness of the advice to you.
  • Before acting ensure that you confirm any discrepancies or queries with the original adviser as there probably is a very good reason for the discrepancy.

Be open and upfront with all of the advisers about the process so they know where they stand and will deliver what you need from each of them. Aim to ultimately work with the original adviser unless any discrepancies are unable to be answered to your satisfaction.

Throw a Life Buoy

It should probably be me on the front cover of the newspaper with tears in my eyes – lamenting the crying shame that the financial literacy message is not getting through. Can you think of any of your loved ones who you don’t want to see lose their life savings? If so, please throw them a life buoy by forwarding this article to them. Even encourage them to subscribe so that they benefit from the fortnightly reminder of life saving behaviours.

Advanced Gearing Products

This sixth article in the series on accelerated wealth creation summarises some other products you may have heard help you get rich fast. For example you may have heard of options & warrants, internally geared funds and capital protected funds.

Leveraged products for pussycats and lions

As sure as the sun sets in the west there will always be new wealth creation products launched. Many are suitable for a certain niche, so the trick is to find out which products suit your niche of circumstances.

Today I’m going to cover three that I feel have a broad-ish appeal, namely:

  • Internally geared managed funds
  • Options and warrants
  • Capital protected funds

If you’re a bit of a pussycat who wants a piece of the leverage action then there’s something in this article for you. Kings of the gearing jungle, the lions who want even more leverage will also find some tasty morsels.

Internally Geared Managed Funds

In the last article I mentioned the use of margin loans to use other people’s money to invest using managed funds. Well, there are actually managed funds that borrow money to leverage the money contributed by their investors. So the fund itself is a geared managed fund.

Following are three ways to make use of these products:

  • If you only have a little bit to invest and can’t be bothered getting a margin loan then you can still gear your investments by investing in an internally geared managed fund.
  • Superannuation laws prohibit gearing. However the regulators have said that they are generally satisfied with people investing their superannuation in geared managed funds. So geared managed funds are a way to super-charge your super!
  • Margin lenders will actually allow you to gear into managed funds that are already internally geared. This is a strategy for the lions who like to leverage their leverage.

Options and Warrants

Originally options were created to manage the risk of physically owning something, and they are still used for doing so. For example they gave you the right, but not the obligation, to sell your physical asset at a set date in the future for a set price (perhaps the price you paid for it). So you could buy an option to protect you from losing lots of money if the price of the physical asset went down.

In essence warrants are the same as options. Practically warrants in Australia differ from options based on who issues them, and the terms under which they are issued. (I’m trying not to delve into the complexity of these products.)

Options and Warrants are known as “derivates” since their value derives from the value of a physical asset, such as a share in a company. Whilst they were originally created to manage risk financial folk realised they could make money trading the derivates without owning the physical asset. Because of the way derivates are priced any movement in the price of the physical asset is magnified in the price of the derivative, hence providing you with leverage.

Every week in the newspaper there are courses advertising the wealth creation wonder of derivatives like options and warrants. My personal view is that using them for leverage is a specialist field. If you want to do-it-yourself then you should invest lots of time and money learning. But then I’d say that’s a job as a professional trader, rather than an investment creating passive income.

On the flip side, options are a wonderful tool for managing risk, which leads me to the next product I will write about.

Capital protected funds

Capital protected funds have many different names, probably made up by marketing folk. So let’s focus on understanding the core of how they work. In essence a capital protected fund combines the features of the two previously discussed products: internal gearing and options.

In the marketing spiel for the product you will most often read a pledge that if you invest in the product until maturity (5 to 10 years), then they guarantee you will at least get your initial contribution back. (Albeit, it will have less buying power due to inflation.) If you want to sell before maturity then the guarantee usually is not valid.

How these products facilitate the guarantee is becoming more diverse and complex, making it hard to understand what you’re investing in at times. But one way is the use of options to give them the right to sell the assets at maturity for the same price they initially paid.

One upside of these products is that you get the opportunity to benefit from potentially higher returns from the internal gearing of the investments. The other upside is that you probably won’t lose your money (but you could be worse off in real terms.) The downside is that protection costs money – the guarantee costs you money. So whilst you can get higher returns, you will get less return than if you did not buy protection.

Pussycats may really like these products, once you can get your head around the detail of how they work, since they enable you to potentially get higher returns without that nasty thing that you fear – your money going negative.

Lions may also like these products since many lenders will allow you to borrow the entire amount, yes 100 percent, of your investment in the product. You will need to cover the interest each year. In that sense a lion may liken the cost of protection to the cost of lenders mortgage insurance when investing 100 percent in residential property.

Consider and Learn

As I wrap up this series on strategies and products for accelerating your wealth creation I would like to leave you with two over-arching thoughts.

Consider what is appropriate for you right now. Take into consideration your current circumstances and needs, plus your future goals, and also your level of interest in the nitty gritty detail that some of these strategies require.

Seek out greater knowledge about sexy wealth creation products you hear advertised – maybe with the outcome of eliminating them from your list. Or maybe they’ll be added to your “not right now” list which you use to focus your learning efforts. Continue learning because the knowledge will raise your awareness of the possibilities and also make you comfortable with implementing them.

Right now do something, not nothing; but do what is right for you right now. Plus continue learning to expand the horizon of what is right for you.

Margin Lending: An easy way to start gearing

This fifth article in the series on accelerated wealth creation introduces margin lending, which many may have heard of but not know how to use it to create wealth.

Margin Lending

Margin Lending is a term you may know but perhaps it feels a little bit foreign or even spooky. Perhaps you’re imagining it’s something different to gearing and home equity, which you’ve seen before. Or maybe you’ve heard that it is risky.

Well, if you’ve understood the gearing and home equity concepts discussed in the past few articles then be confident that you also understand margin lending.

That’s because margin lending IS gearing. The main difference to home equity gearing is the security for the loan. With margin lending the security for the loan is usually direct shares and managed funds. So really margin lending is a different name for essentially the same thing – gearing.

One difference is how much you can borrow against your security. For top quality shares and managed funds you can generally borrow up to 70 percent or even 75 percent of the value of the investments. The more speculative your investment the lower the gearing allowed.

Finding a margin loan is quite easy as many of Australia’s largest lenders also have margin lending products. In fact I know of at least one lender who offers a loan that will accept property, shares and managed funds as security, creating a very flexible loan.

Handy features of margin lending

One handy feature of margin lending is that you don’t need to already own a property or shares to start gearing. You just need a small amount of savings. So that makes it a very accessible way of accelerating your wealth creation.

And that leads to the second handy feature – you can start small. You can start some margin loans with as little as $1,000 in savings. The lender will then offer approximately $2,000 as a loan, enabling you to start with a $3,000 portfolio.

These two handy features mean that this is a very accessible strategy, even for people who have just started their first ever job. Read below for how younger people can use margin lending to buy their first home.

Things to be aware of with margin lending

With margin loans the most important distinction to understand is that of the “margin call”. In the interests of brevity I’ll just say that if a margin call occurs you are required to either repay part of the loan, or add more security to the loan. The purpose is to ensure that you have adequate security to keep the lender feeling comfortable.

From a theoretical perspective a margin call could happen with gearing for property investment. But you hear about them in relation to margin loans because the price of the loan security, shares and managed funds, is published on a daily basis.

Whilst over the long term you expect your investment to rise, in the short-term there may be a dip. During the dip you may experience a margin call.

Even if you have maximised your margin lending your investment needs to decrease by around 10 percent before a margin call. So it is not a show-stopping feature. Plus there are plenty of ways to minimise the likelihood of a margin call.

One other feature to be aware of is that the interest rate on margin loans is often a percentage point higher than a home equity loan. So if you have home equity you may like to consider using that first. Plus, with home equity there is less likelihood of a margin call. But on the flip side, if you sell your house you need to refinance the line of credit too.

Instalment gearing for your first home

Instalment gearing is a regular savings plan partnered with a margin loan. Each time you add some of your savings the lender adds some of their money.

You can start an instalment gearing plan with as little as $1,000 in savings and $100 per month contribution. The lender may then offer an initial $2,000 plus $200 per month.

When you are starting in the work force but not ready to buy your first home for 7 years or so, instalment gearing can be fantastic. Many young people I meet are concerned they will never save a deposit as fast as the property prices rise. Instalment gearing is a way to keep up and even fast-track the saving of your deposit.

Super charge your wealth creation

Now, you may be wondering if you can combine gearing with home equity and a margin loan. Well, yes you can and it is a way to super charge your wealth creation plus diversify your portfolio.

For example you could borrow $100,000 against your home and use that as the security for your margin loan. The margin lender may then offer you another $100,000. This gives you $200,000 to invest, none of which is your own. Plus, since your margin loan is only geared to 50 percent you have possibly given yourself a buffer against margin calls.

This strategy is called double gearing and is riskier than single gearing, as you may expect. So proceed with caution and wisdom before considering it.

Create wealth with your home

I hope that you had a wonderful Easter. This fourth article in the series on accelerated wealth creation discusses using the underutilised equity in your home to create wealth.

On reading the title of this newsletter some readers may have asked “hang on, I thought Matt said your home is not an investment asset. So how can I create wealth with my home?”  Well, your home is not the wealth but you can leverage the equity in your home to create wealth elsewhere.

Even if you don’t yet own your own home or have any equity in your home this is still valuable knowledge because one day you will have some equity. So it will be important for you to be prepared for how you can wisely use that equity to create wealth.

Home Equity

Equity is that part of something you own, not the bank. When you buy your first house you may start with a 5 percent or more deposit, and that is how much of your home that you own. That is your equity.

As you repay your home mortgage you own more of your house, and therefore your equity has grown. It is this equity that can potentially be your “underutilised equity” as discussed in the first article.

You can choose to use this equity to create wealth or to create immediate lifestyle.

Home equity funding your lifestyle

Our bank loves to send us suggestive letters about the many delightful things we could do if we went and borrowed more money from them against the equity in our home. So it is quite possible you are already aware of how to access your home equity.

In fact, most people have fully utilised the equity in their home to:

  • Upgrade to a newer, bigger, better located home
  • Fund their holidays
  • Upgrade their cars
  • Improve their current home with major renovations
  • Pay for children’s education

Do any of the above sound familiar?

They possibly do since the banks make it very easy for us through redraw facilities and lines of credit.

But when you use your home equity to fund your lifestyle the money still needs to be repaid, plus interest. So you could be living outside of your means – a champagne lifestyle on a beer budget. Living outside your means potentially sacrifices your future lifestyle rather than creating wealth that funds your future dreams.

Use home equity to create wealth

To get rich faster use your home equity to create wealth. You do this by borrowing against the equity and using the borrowed money to invest. This is called gearing, as discussed in the last article. Since you are borrowing money it is important that you invest in growth assets such as shares and property. That way you aim to earn more than you pay in loan interest.

This strategy helps you create wealth faster by enabling you to be investing even when you may have all of your income focussed on repaying the main part of your mortgage.

Many people think they need to have repaid their home fully before starting to invest. For people with a low tolerance of risk that may be appropriate. However, if you can manage the risk of gearing then using your home equity to invest will get you into wealth creation sooner. The sooner you get in, the longer you are in, and hopefully therefore the more you can earn.

How to access your home equity for investment

One of the most common ways to borrow against the equity in your home is to create a new line of credit loan that is secured against your home. So you will end up with your mortgage plus a separate line of credit.

A line of credit gives you flexibility to invest the amount wherever you like – the bank doesn’t really need to know. Plus, as you buy and sell investments you can withdraw from and repay the line of credit as you wish, much like a bank account.

Once you have established your line of credit it is important to obtain expert advice on the investments you will use. Expert advice is valuable in helping you achieve more return than you pay in loan interest.

Crank Up The Pace With Gearing

This third article in the series on accelerated wealth creation provides an overview of gearing as a wealth creation strategy. Gearing is a strategy that enables you to leverage your income and equity, which may currently be under utilised.

Gearing: You’ve heard of it, but what is it really?

As one attendee at the IPWEA conference noted a few weeks ago, it seems that everyone’s talking about gearing as the holy grail of wealth creation. So it is possible that you have heard of it. But based on questions I’m commonly asked it seems there is only partial understanding of gearing. So here is a quick overview.

Gearing is a term used in wealth creation for leveraging your money. If you’re not familiar with leverage then picture a “see saw”, that wonderful mainstay of children’s playgrounds. Using a “lever” is a way to get more output for the same or less input. Or, to say it another way, leverage helps you get more reward for less effort.

Gearing is using someone else’s money to generate more wealth for you. Usually someone else’s money is provided in the form of a loan from a bank. The security for the loan is often property, direct shares or managed funds.

How Gearing Works

Simplistically, this is how gearing works:

  • You start with some of your own money (e.g. $100,000)
  • The bank adds some of their money as a loan (e.g. another $100,000)
  • You invest the whole lot (e.g. $200,000)
  • Along the way you pay the bank interest on the loan
  • Presuming you’re a wise investor your annual investment return percentage is higher than the loan interest percentage
  • When you sell you repay the bank the amount you borrowed but keep all the investment returns for yourself
  • Your net wealth has grown a lot more than if you didn’t gear, so you are now wealthier.

The Good and the Bad of Gearing

The main advantage of gearing is that you get wealthier quicker. This presumes that your investments go well.

The main disadvantage results from the fact that the lever can go both ways; you can also get poorer quicker. That is the main risk you face for trying to use leverage to get more reward.

Other risks of gearing include:

  • Your investments go up but not as much as you paid in loan interest, meaning you are now not as wealthy as if you’d not geared.
  • You need to meet the regular loan repayments, so therefore need an alternate steady form of income (such as your salary).
  • Even though gearing is a long-term strategy in the short-term you can be asked to repay part of the loan if the lender gets nervous about a drop in your investment value.

On top of the above list of gearing risks you have all the other risks associated with investing. Gearing magnifies the consequences if the risk eventuates. (Your fingers could get burned quicker.)

Gearing Pre-requisites

Gearing should be used appropriately and with caution. Here are some pre-requisites before considering gearing as a strategy for you:

  • You need a very high tolerance of risk
  • You need to have time and patience. This strategy requires you to have at least a seven year horizon before needing the money; in fact at least ten years is best. This time horizon matches the average cycle of investment markets.
  • You should be able to afford to meet the loan repayments from your other income.
  • You are a wise investor or are willing to pay one (i.e. a professional expert)

Gearing Tips

  • Use growth oriented investments such as property and shares or managed funds that invest in those asset classes. These asset classes have a good likelihood of earning you more than you pay in loan interest.
  • Protect your financial situation from disaster that would result in you needing to access your geared portfolio earlier than planned.
  • The top priority for protecting your financial situation is protecting your income. This is two pronged: (1) Protect against injury or illness with income protection insurance; and (2) ensure your skills and knowledge make you very employable.
  • Ensure the rest of your long-term investments are also invested aggressively. It is counter-productive to have conservatively invested superannuation whilst gearing outside of superannuation.

Time to Crank Up the Gears

If you have under utilised equity and cashflow you can accelerate your wealth creation by cranking up with gearing, just like on your bicycle.

Next issue we’ll cover gearing your underutilised home equity and the following issue we’ll talk about margin lending. Margin lending includes a wonderful feature called “instalment gearing” that is a wonderful tool for underutilised income.

Increase your risk tolerance to accelerate like a tiger

My last article was the first in a series on accelerated wealth creation and introduced some ways to identify lazy wealth creation. Many of the ways to crack the whip over lazy wealth creation require a high tolerance of risk. Or to put it another way, you need to be more of a tiger than a pussycat. Today’s article shares some ways for you to increase your tolerance of risk.

Research of tens of thousands of Australians reveals that less than 7 percent have a high or “Aggressive” tolerance of risk.

Therefore, technically speaking this current article series on accelerated wealth creation is only appropriate for about 7 percent of you. But I’m writing it because one of my goals is to help you reap the rewards of increasing your tolerance of risk.

What is Risk Tolerance?

Risk Tolerance is a psychological measure of your willingness to accept uncertainty in your decisions; to handle volatility and the chance of loss.

To help in your understanding here are the definitions of a couple of other related terms that you may have heard.

Risk Capacity is your ability to absorb some downside, both in size of the loss and time available to recover.

Risk Profile is a combination of the above two placed in the context of the goal you are trying to achieve, such as the purpose (end use) and the time before the end use arrives.

Investment products also have a risk profile which is a description of the variability of the rewards from that investment over certain time frames. The investment risk profile is different to your personal risk profile. The process of choosing appropriate strategies and products for your needs includes matching your risk profile to that of the product or strategy.

Assessing your Risk Tolerance

Many of you may have seen the brief multiple choice questionnaires that are included in the Product Disclosure Statements (PDS) of superannuation and other investment products. They supposedly help you assess your risk profile but they are badly flawed as a scientific tool.

They are flawed for a number of reasons: too few questions (20-25 are needed), they are inconsistent and inaccurate, and the questions do not measure what they suggest they are measuring. Warning! Don’t rely on such questionnaires as the basis for your investment decision.

I have only seen three risk tolerance questionnaires that have been rigorously constructed by experts in psychological assessment. The most widely tested one of these is the FinaMetrica questionnaire, which is the one I use with my clients.

FinaMetrica also have a public website where you can assess you tolerance of risk and I recommend that you all complete the questionnaire. Visit

Increasing your Risk Tolerance

Since risk tolerance is a psychological measure increasing your tolerance of risk involves working on the way you think.

You can work on the way you think by:

  • Examining the information on which your beliefs are based
  • Examining the decisions you make based on your beliefs
  • Educating yourself so that you can make more informed decisions

For example, if you are concerned about a particular event occurring, ask yourself:

  • On what facts do I base the belief that the event could even occur?
  • What is the actual consequence if the event did occur?

A detailed example of working on the way you think

I’ve observed that many people state they are concerned about losing money (the event) and therefore they decide not to invest. When I dig deeper they are generally concerned about total loss of the invested amount.

The facts are that most mainstream investments are highly unlikely to suffer total loss. Plus, the longer the timeframe until you need to use the money to fund your lifestyle, the lower the likelihood you will suffer any loss.

Next you challenge yourself by asking “if my investment does decrease in value one year, so what?” What is the real consequence of it if you don’t plan to use the money for many years?

Then challenge yourself by asking “what are the consequences of not acting or of acting differently?”

If you haven’t yet acquired enough knowledge to make an informed analysis of the consequences and likelihood of the consequences then seek expert assistance in making the decision.

A Final Observation on Risk

Interestingly, in my experience many people are investing using high risk strategies and products without even knowing the risk they are taking. Not understanding what you are doing is the highest risk of them all. For example, many people borrow money to invest in residential property and tell me it is safe. Let me assure you that the facts suggest otherwise.

Just because the risk profile of your investments is high risk doesn’t mean you have a high tolerance of risk or a high risk capacity. Your world could come crumbling down more than you ever imagined if you don’t understand the risks and the consequences if the risk eventuates.

The best investment we can all make is in increasing our knowledge. We can do this both through education and experience.

So today I encourage you to:

  • Assess your tolerance of risk
  • Identify and challenge your existing beliefs about wealth creation
  • Continue your education
  • Forward this article to your loved ones to help them with their education

Is your wealth creation lazy?

Almost every day there is something in the news about the proposed takeover of Qantas by a consortium of private equity companies. This is one of a flurry of private equity bids in the past year. You may also have heard of bids related to Alinta, Coles, Channel Seven and Packer’s media assets.

Interestingly all offers are made quite a bit above the pre-bid share price. This indicates that the private equity companies are confident they can make a lot more money out of their target than the public can make. They are confident of this because they believe the way their target is currently managed is lazy.

When you look at the reasons for viewing a company as “lazy” there are a lot of similarities to personal wealth creation. This is the inspiration for today’s feature article, which is the first in a series of six articles on accelerated wealth creation.

If a private equity company ran their eye over your wealth creation strategy would they think your wealth was a bit lazy and in need of a makeover? Read on to find out.

Feature Article: Is Your Wealth Creation Lazy?

Listed below are some of the reasons your wealth creation may be lazy and in need of a makeover:

  1. Underutilised equity and cashflow
  2. Underperforming assets dragging you down
  3. Generating junkets rather than profits

If you’re dreaming of a lifestyle better than the one you are living now then one way to achieve that is to ensure your wealth creation is working hard. It’s time to crack the whip on maybe one or all of the above elements.

In this article you’ll learn how to identify where your wealth creation may be lazy. Then in the following five articles in the series you’ learn how to crack the whip.

1. Underutilised Equity and Cashflow

Equity and cashflow are two different things, and sometimes only one is underutilised. When both are underutilised you can use them together to accelerate your wealth creation.

Underutilised equity is found in assets you own that could be used to buy additional profit generating assets. One example of underutilised equity is that part of your house that you, not the bank, own.

Underutilised cashflow is surplus income you have that just accumulates in a bank account. It probably doesn’t earn much interest and often eventually gets spent on some lifestyle asset or experience.

2. Underperforming Assets

An underperforming asset is one which may be earning you some money but not enough. Some underperforming assets have great potential and just need you to shine a light on them and get them working harder. For example, maybe you are not charging market rate rent for your investment property.

Other underperforming assets have no hope and are perhaps better off being discarded.

To find out if your assets are underperforming you need to benchmark their performance against other similar assets and also against other alternatives for that money.

3. Generating junkets not profits

If you’ve worked in the corporate world or worked through the 1980s you may be familiar with the term “junket”. I think of a junket as a business event, such as a trip, where the main purpose is fun rather than generating positive outcomes for the business. If the money wasn’t spent by the business it would generate more profits. Private equity companies often seek to reduce their target’s operating expenses.

Related to your personal finances this may be where you are spending much more on lifestyle than perhaps you need to – your expenses are too high. If you reduced your expenses you would generate some (or more) surplus income (profits). Those profits could accumulate in a bank account and become underutilised cashflow. So ensure that in addition to controlling your expenses you also utilise the extra cashflow wisely.