Who is wealthier?

The accumulation of wealth, and what people perceive as being wealthy, has fascinated me over the decades. Below I have provided you with 2 very stereotypical examples and as you read each one, I would like you to pick which person is the wealthier?

So lets start….

Jackson lives in a nice home in a suburb which is about 20km from the city.  He drives a european luxury car, and works in a management type role earning an income which is in excess of $100k per year.  Each year he takes regular holidays, and at least once a year travels overseas for a nice break.

Jackson is always well dressed and enjoys going out on the weekend socialising with friends, family and doing activities, There is never enough hours in the day for Jackson but in a quiet moment, he ponders about his financial position, and how it might track in the future, and whether it will be enough for retirement?

On the other side of town, Matthew lives in a modest home in an outer suburb i.e. outside the 20km bracket from the city.  He drives a locally made car, and works in a role which earns under $100k per year.

He tries to take a break at least once or twice a year with normally one being over Christmas. Most of his breaks are local, with an occasional trip overseas every couple of years.

His weekends are normally busy catching up with friends and family but generally does not spend a lot at these outings.  He is not too fussed about the latest fashions, but is always neatly dressed and presents well when he meets new people.

Over the Christmas break,  Matthew took time to reflect on the year that had been, and in a quiet moment, considered his financial position and what it might be like come retirement?  

Of these two examples, if you had to pick one, which one would you say is wealthier?

To assist you, here are a couple interesting insights which I have found over the time:

1. Income is not necessary the sole determinant of wealth.  

We meet people regularly who haven’t earned large sums, but with a strong robust investment strategy and a well thought out retirement plan, have subsequently built up a large amount of capital over time.  It is just being smart with what you have and putting it to work.

The other element is living costs. Sometimes a person who has a higher income also spends a lot more.  This places enormous pressure on the amount of capital which they might need in retirement.  Therefore, when reviewing one’s income, it is important to note that your capital base is actually linked more to your spending level than what you earn.

2. Nice cars and houses don’t necessarily indicate that you are wealthy.

Whilst fancy cars and houses are normally associated with wealth, but it isn’t necessarily the case. These days you can easily lease or finance a car, or rent a nice house thus not really owning these assets.  Advertisers and marketing people have done a wonderful job trying to confuse society on this very point.

We regard assets as having ownership or control in something that appreciates in value, or generates an income. 

When people think about wealth creation or retirement planning, they often think…. “If only I had an extra amount of income I could ….<fill in the gap>”

The reality is however both scenarios have the same chance to have a wonderful retirement and the ability to build wealth.  It is just a case of having a thoughtfully developed strategy rather than an rudderless approach to your financial position and what this position might look like tomorrow.

Like all great Financial Planning ideas, it is important to seek professional guidance and we would of course recommend the team at AJ Financial Planning.

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Downsizing – when is the right time?

Should I be thinking about downsizing the home prior to retirement or hold off and take advantage of any future potential increase in value?

For a lot of people the family home represents a large portion of the households wealth. However unlike a normal investment, this asset provides both financial benefits and also can hold strong emotional ties.

Sometimes making hard financial decisions with a valuable asset like this can often make the decision making process a little more difficult, and the emotions can also cloud one’s judgement.

We often come across pre and post retirees facing the dilemma of:

“Should they retain the family home so that they take advantage of any potential future increase in value…… or should they sell the family home and downsize to enable them to deploy the capital into super or an investment strategy that positions them for retirement?”

The answers to these decisions are never easy.

The family home unlike other asset classes is not unitised, in that you can’t simply cut off a room and cash it in if you are a bit short for funds.  So it really is a case of either selling it in its entirety or retaining it.  

When thinking about retirement, people often consider their capital growth.  For some, due to the size of the asset, they think of this growth in terms of a dollars rather than percentage based returns.  This can often cloud the judgement and decision making process as we believe it important to always bring back the financial return to a percentage based performance. This allows you to then accurately assess the performance in contrast to other asset classes.

For example, $100k growth on $1 million is 10% growth and $1k growth on $10,000 is also 10%.  It is important to notice the return is the same despite one of the asset sizes being a lot larger.  This can easily distort facts to the retiree whereby some would say that the $1 million dollar investment is better than the $10k, when in actual fact they performed the same as a percentage return. So it is really important not to loose focus on that core return – rather than just saying my property has gone up by $X amount of dollars.

Generally when we evaluate this type of decision with our clients, we not only try to think about what the asset has provided in terms of financial returns, but also what it might possibly do in the future. 

There are always a large number of variables which need to be considered too so seeking financial assistance in this difficult time is highly recommended. Once thoroughly thought through and the above steps followed,  it can be a positive life changing event.

Like all big decisions in life and in financial planning, it is important to seek professional guidance and we would of course recommend our expert team of advisers at AJ Financial Planning.