Financial planner Luke Smith says wealth generation comes from respecting your earnings, being realistic, and rewarding yourself.
Understanding and improving your relationship with money is key for successful investing and sustainably generating wealth.
On Property Hub’s Get Invested podcast, Luke Smith, author of Smart Money Strategy, delved into the strategic foundations every investor needs to establish.
Money foundations: Don’t make assumptions on what is possible
Before embarking on this journey, Luke said investors need to eliminate any assumptions on what is possible, especially assumptions based on the advice of people outside the field.
“I think for me, that assumption of what you can and can’t do is people’s actual personal limitation they put on themselves for no reason at all. Because I’ll have people come in and say, ‘well, we were going to do this, but we can’t put that money into super. I was going to buy that, but I can’t buy that in that structure’. And I’ll say, ‘really? Why not?’ And they’ll go, ‘oh because Billy at work said that doesn’t work’. ‘Ok, what does Billy do? Billy’s a sparky’. And that’s the issue,” Luke said.
“And so I think that’s one of the biggest things people struggle with, is they have these preconceived idea of what’s possible. And when you actually sit down and say, well you could do that, or you could put that in here, or you could make a contribution here and that’ll save you this much in tax, they look at each other and they go so we should have been doing this like five or ten years ago.”
Instead, investors should be open to having conversations and exploring potential opportunities.
“If you go in with an open mind and consider things that you may not have even thought about, that can be a very positive and engaging conversation around what is possible as opposed to what is not possible. Because you don’t need massive money to start doing things, and the benefit of compounding in time can be very beneficial. So I think if people could get over that hurdle, then they’ll be in a much better position going forward. And they’ll be doing things sooner. Don’t leave it too late because it’s just too hard and you’re too ingrained in your behaviour, because you may have actually missed out on significant opportunities by just not knowing what’s possible,” Luke said.
Money foundations: Respect earnings and pay attention to spending
The first two foundational principles are to respect your earnings and pay attention to your spending.
“Respect your earnings is about your income and your ability to earn and save. Your ability to maximise your cash flow and generate income can fix a lot of problems. It can provide a lot of opportunities,” Luke said.
“Secondly, pay attention to you spending. Everyone comes into my office and they’ll hit me with, ‘can we retire?’ And I’ll go ‘well let’s see what we’re working with’, because your resources need to be able to generate that income. If you don’t want to work, understanding your net income position is very important. But also, where’s it going?
“Very few people walk in, sit down and go, ‘oh I’m going to retire in two years and we need $68,412 to live’, which to a large extent I think is impossible because the cost of living changes and life changes. But you need to have a general understanding of where your money’s going, because you do want to make super contributions, pay off an investment property, or buy something else, you need to know where it’s going and what you’re working with.” within sight. The cost of money is interest, you know? So if you’re using it both positively or negatively, it can be your friend or your foe.”
Money foundations: Be realistic
Investors need to be realistic about their strategy and goals, which may not align with others.
“This one for me really talks about staying in your lane. What you see people do on TikTok or YouTube may or may not be appropriate or even attainable for you. You need to consider things like your income, your risk profile and your age, because there’s a lot of people that are a little bit older in the community now that have lived through a time where the exponential change in the value of a property will probably never be replicated again. And what I mean by that is, you could buy a house for $100,000 in 1992 that now might be worth $1.2 or $2.2 or $3.3 million. But it’s highly unlikely that, over a 20 or 30 year period, you’re going to go and buy a $1.5 million house in a suburb, and in two decades it’s worth $4 million,” Luke explained.
“So you’ve seen that generational uplift in the value of especially property assets that this younger generation can be influenced by and think, well, I can do that too. 99% of people now don’t have the ammo to do that. So people come see me and I say, ‘I’m here to be your friend, but I’m also here to tell you the truth, and if you keep spending like that, there’s a very good chance that you’ll work until you’re 95’. So be realistic about what’s going on.”
Money foundations: Reward yourself
Finally, Luke emphasised there is nothing wrong with rewarding yourself when you’re achieving your goals. It will ensure you stay in a good mindset and remain motivated to continue working hard.
“I think too many people get stuck in, ‘I’m going to save this by 60, I’ll save this by 55’ etc. I actually break it down with my clients a lot differently and say, ‘right, what are we saving between January and March?’ And then let’s check it out. And if you’re exceeding your goals, then do whatever you like doing. You know, buy some shoes, have a weekend out, take your partner out for dinner, reward yourself for the hard work that you’ve completed so that you stay engaged,” he said.
“I find people becoming disenfranchised because they weren’t realistic to start with, but then they just ground themselves into the flow. You know, your finances are a short term goal that you execute, review and re-execute. I’ll use a sporting analogy, because that’s exactly what good teams do. Whether you like AFL, soccer or cricket, they go out, they play, then they’ll sit down as a team and review the footage and go, what happened here? Okay, now we’ll train all week on combating something or changing what we do to execute again on the weekend. And your financial journey is exactly the same. It’s not set and forget.
“It’s also not, look at the share price of something every day. Just buy good quality stuff, repeat it, save some money, set a goal, and if you achieve it, then reward yourself. It can be a massive reward. It could be a little reward. It just depends on what keeps you engaged and moving forward with a positive attitude to get a positive outcome.”