Investing in ASX shares is one of the best things that Aussies can do with their finances. But there's more to money than that. There are a few rules to live by that can help give people a greater chance of achieving pleasing wealth.
I think it's a good idea not to make things complicated. The easier we make it to build wealth, the more likely we're going to be able to stick with the plan and the more likely it is that it'll work out.
The rules, or suggestions, I'm going to write about are simple but effective.
Grow your earnings
The first area of focus is increasing earnings, if possible. To spend money on essentials, and to invest, we need some money regularly hitting the bank account.
Earnings can come from a variety of different sources – a main salary, a second job, business earnings and so on.
One of the best things that can unlock more earnings is education, a course or extra learning of some nature. This can enable someone to be more knowledgeable (and valuable) in their profession, use a new tool or change to a higher-earning role.
Build strong foundations
If we think of building wealth as like building a house, it's important to have a strong base to work from.
Foundations are important for a house, and I think an emergency fund is important for Aussie adults.
We never know when a personal or economic emergency is going to happen. We don't want to fall down at the first sign of an issue.
Having a good emergency fund means we can replace a car or have enough money to live while finding a new job. If we have $0 set aside, then an emergency could lead to a major financial problem.
I'd advocate for a good emergency fund even if someone had a sizeable ASX share portfolio – you wouldn't want to have to sell shares during a bear market at cheap prices to access cash.
Spend less than you earn
If we spend more than we earn, then we're either eating into our bank balance or building up debt.
Spending less than we earn gives us the flexibility to do things like pay down debt, invest, build an emergency fund and so on.
Everyone's circumstances, earnings and locked-in expenditures are different, so I'm not going to suggest that people should save a particular dollar amount or percentage of earnings. But, even if we can save just 1% of our earnings then this puts us in a better financial position for the future.
Expenditure, and sometimes income, can be lumpy. So, keep in mind that annual expenses need to be accounted for, and put aside extra money when income is pleasingly higher-than-average (such as retailing before Christmas, or perhaps farming during years of favourable weather).
Invest for the long-term
I like to think of investing as a long-term effort. Picking a good asset with a compelling future (at a good price) gives us a good chance of making adequate returns over time.
Making numerous short-term moves with a portfolio can be costly when it comes to brokerage and taxation events. Besides, share prices (or other assets) could do anything over a week or a month.
Compounding is a very powerful financial tool. Albert Einstein said:
Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn't, pays it.
Be patient with wealth-building
Rome wasn't built in a day. Getting finances in order can take time, it's like setting off a domino effect. Getting each step right can take a bit of research, or take time to be successful.
At the age of 30, Warren Buffett had a net worth of $1 million with most of his current wealth coming after his mid-60s.
I think that if every investor didn't try to 'get rich quick' there wouldn't be as many bubbles, crashes or debt as we normally see.
I believe that, paradoxically, the more patient we are, the quicker that our financial targets will be reached.
