How Do You Go About Building Wealth? Firstly, Realise That A High Income Does Not Guarantee Wealth
And recognise that building wealth is open to average income earners. And I'll demonstrate that with just one reason why, shortly.
Let’s talk about the belief that building real wealth is only for high-income earners. We all realise that income is great and we all wish we could earn more of it. It provides a good life-style and after-tax cash flow, and we work hard to get it.
Building wealth through property is about using your earned wage now to build wealth that will provide a high income over time.
Building wealth (not lifestyle), does not require a lot of cash, it reduces your tax payments and you don’t have to work any harder at your job to be able to do it.
The five catalysts of building wealth through property investment are:
1. Your money is multiplied through leveraged borrowing, and this multiplies capital growth
2. Rent and Tax deductions from your investment help to fund interest payments
3. Capital growth works for you 24 hours a day
4. You pay no tax on capital growth gains until you sell far into the future, but you can leverage these gains when every please
5. The Capital Gains Tax you pay at sale is a maximum 24.25%.
This process of building wealth with property does not need a high income. You only need to get some of your wage working for you, but a wise investor with a low wage can easily do better than an uninformed high-income earner.
Let’s look at two people:
• A & B, who have saving habits of 10% of their income
• They both have $30,000 equity in their homes to borrow against if they want to
Note:(The habit of saving 10% of your gross income from the start of your working life is recommended in the time-tested book “The Richest Man in Babylon”, and endorsed by many experts in the investment world.)
Person A earns a very good wage of $100,000 per year, growing at 3%.
Person B earns an average male wage of $44,000 per year, growing at 3%.
Person A saves 10% of their wage, about $200 per week, into a term bank account at 7.2% interest. This saving fund is not a capital growth investment and earns 7.2% for 10 years during a time of 3% inflation.
Person B also saves 10% of their wage, about $85, and uses some of this to fund an investment property. This is a capital growth
investment in the same inflationary environment as A.
Person B will only need to use about half of their savings to comfortably support one property bought for $300,000.
If the capital growth of this property is 7.2%, what is the financial status of A & B in 10 years?
Person A loses about 47.5% of the bank interest in tax every year because any income that they earn as interest is taxed at their marginal rate. They earn $8,254 in interest and pay -$3,921 in tax on it. Their saving plus interest after tax equals $118,972.
An impressive nest egg don’t you think?
Person B uses their home equity as security on a $300,000 interest-only loan to buy an investment property and it attracts capital growth of 7.2%.
I will discuss compound capital growth and the “Rule of 72” later.
However, this effect means that after ten years the property has a value of $600,000. During this time, tax deductions and rent have paid for almost all the interest. About $40 - $45 per week came from their savings initially; although this reduces as rent rises.
In this example, they become cash flow neutral over 7-10 years. This will vary due to many variables; see section 3 of my book.
After ten years they have saved about $39,200 after contributing to the loan. They still owe the bank $300,000, but they also have $300,000 in equity in their investment. If they sell and pay the maximum 24.25% Capital Gains Tax, they get $227,250 after tax profit (minus selling fees/commissions).
Their total savings are now $266,240, more than twice the nest egg of person A!
Divide 266k by 10yrs or 520 wks = $510 per week gain for their initial out-put (savings) of $45 week. This is building wealth and it is how to build WEALTH with property!
Effectively, this really is “beautiful debt”!
This means A earns $56,000 per year more than B, and saves almost 2.5 times as much as B. However in 10 years, B has a real wealth nest egg twice as big.
Both A & B have the same fantastic saving habits, but very different results.
A is really only left with the money that they have saved, after you discount the effects of 3% inflation on their money. If B doesn’t sell, they still have an asset that continues its merry ride of growth and outpaces the effects of inflation and begins paying a dividend from rent and tax deductions.
The point of this example is that B has used their money wisely and has begun the process of building real wealth faster than inflation, paying less tax and working no harder.
They understand the five catalysts of property investment.
In reality, B would be able to invest in more than one property as their equity and income grows over time.
This is the simple process of building real wealth for a self-funded retirement.
Return from Building Wealth (this page) to Your Deposit
Return from Building Wealth (this page) to Wealth with Property home page