19 Apr Optimising Your Finances to Build Wealth
Have you structured your finances in such a way that they can assist you in building an investment portfolio? Most people fail to invest, not because they don’t have access to financial resources, but because they don’t understand the resources that they already have. These resources can be accessed through the optimisation of finances – in other words, changing the way you look at and structure your assets.
“I’ll start investing when I have more money.”
This is one of the most expensive phrases anyone will ever utter. You see, if you are on a standard salary and have the normal costs of living – food, electricity, expenses, taxes…then it is mathematically unlikely that you will ever have enough money to build an investment portfolio. When you think about it, it’s just common sense – even if you could save $30,000 every year, you still wouldn’t have enough to build a portfolio of substance. Therefore, you need to change the way you look at money and take action based on your existing, available and underutilised resources.
Consider the really big investment transactions that you hear about. That massive office tower being built, or an entire subdivision being created from nothing. These investments don’t happen because people with good ideas happen to have hundreds of millions of dollars lying around, they happen because of leverage. The developer attracts investors and borrows money from the bank. Much of this is secured against existing investments, essentially leveraging the value of those investments into something else that can make even more money.
The same rules apply to smaller investors. If you own a home and have had it for a few years, then you probably have a certain amount of equity in the property. Equity, is the difference between the value of the home and the amount of money that you owe on the mortgage, therefore if the value of your property has increased, then you likely have equity available. This type of equity is called, “latent equity,” because it serves no purpose. It is an amount that you have earned through purchasing and perhaps improving the property, but it cannot be used for anything. Also, the equity itself does not increase in value – it’s like having money put aside in a bank account that offers no interest. You may have also heard latent equity referred to as, “lazy equity,” or, “dormant equity.”
This equity can be reorganised, however. By borrowing against it and growing your investment portfolio, that latent equity can produce some financial outcomes. Not only is this a way to invest without needing to have money in the bank, it’s a far smarter option than using your available cash reserves. Why? Because if your cash is in the bank, at least it is earning interest – in other words, doing more than your equity is. That cash serves a purpose, and by leveraging your equity into something useful, you are reorganising your finances in such a way that a latent, lazy, or dormant resource is now valuable.
Of course, with every investment comes a certain amount of risk and any financial decision requires advice and consideration. Just make sure that you are not losing time through indecision, and that your current financial structure isn’t impacting on your ability to grow wealth.