Have you ever wondered why the rich get richer and the poor get poorer? Quite often, it’s down to the wealthy understanding the basic rules of money management, whereas the less wealthy don’t. With that in mind, here’s a look at four ‘smart money’ moves that every investor could benefit from, no matter their financial situation.
Pay off credit card debt
There’s a saying that “rich people earn interest and poor people pay it,” and when it comes to getting your finances into shape, one of the first things a financial adviser will often suggest doing is paying off high interest rate credit card debt as soon as possible.
While a loan for a house or investment property can help generate wealth, credit card debt can be extremely detrimental to your financial position, due to the exorbitant interest rates charged. With interest rates on many credit cards hovering around 18-20% annually, it’s not rocket science to realise that credit card bills not paid off in full each month will quickly snowball. And with the long-term return from shares equal to around 9%-10% annually. it doesn’t make much sense to start investing until the debt is sorted.
Buy assets not liabilities
One of the smartest financial moves any individual can make and one that’s stressed heavily in Robert Kiyosaki’s best-selling financial book Rich Dad, Poor Dad is to buy assets and not liabilities. It’s a simple wealth building strategy that the rich understand and the poor often don’t.
Assets that increase in value or generate regular cash flows will most likely increase your wealth over time. A good example is an investment in a company that pays its shareholders a regular dividend. That investment is likely to boost your wealth over the long term with little to no work needed. By contrast, a sports car is a liability. Not only will the car require ongoing funds to run, but when it comes time to sell it, the sale price will most likely be a fraction of the purchase price.
The assets vs liabilities concept is an incredibly simple concept, yet it’s amazing how many people ignore it.
Pay less in investment fees
While investment fees can appear small, over the long term they can really erode your portfolio. For example, a £200,000 portfolio growing at 10% per year will grow to £1,345,500 over 20 years. However if that portfolio pays fees of just 1.5% per year, the portfolio will be worth only £1,022,409 in 20 years. That small 1.5% fee per year has ultimately reduced the size of the portfolio by £323,091.
Now could be a good time to examine the investment fees you pay and look to see if these can be reduced.
Pay less tax
Benjamin Franklin once said that the only certainties in life are “death and taxes.” While I’m not about to suggest this is untrue, there are definitely ways that taxes can be reduced, especially on your investments.
A Stocks and Shares ISA is a great place for UK investors to start as capital gains and income are tax-free within these investment vehicles. Every adult has a £15,240 allowance for the 2016/2017 financial year, so if you haven’t set one up already, now could be a good time to do so, because taxes, like fees, have the ability to significantly erode your hard-earned capital over the long term.
