Article:

The six levers of building your financial wealth

05 March 2020

Guy Taylor , Partner, Private Wealth |

There are six levers to consider when accumulating financial wealth. By thinking about these levers, and which ones you need to address, you have the power to cultivate a better financial position in your current stage of life, as well as take the steps towards your ideal retirement position.

Whether you are planning for your retirement, trying to reduce your debt, or taking proactive steps to get ahead financially, it can be difficult to know where or when to start. We have previously written about how much you need to retire and assessing your future financial health, and these articles provide a great base for thinking about your financial health and understanding your goals. But now it’s time to look at how you can reach your goals.

There are six levers to consider when accumulating financial wealth. By thinking about these levers, and which ones you need to address, you have the power to cultivate a better financial position in your current stage of life, as well as take the steps towards your ideal retirement position.

This article is the first in a series that will step through each lever so you can understand how to take action and gain more control over your financial situation through achievable steps and decisions that are applicable to people of all financial backgrounds and positions.

  1. Income

You may think that you don’t have control over your income; however, this is not entirely true. There are decisions you can make that can affect your level of income no matter what stage or type of career you are in. Working more hours or working smarter can help in generating more income. Depending on your circumstances, you can choose to specialise in something that will result in higher pay. Focusing on this lever is helpful when trying to decrease loans and reduce your debt.

  1. Expenses

Reducing your expenses to just the essentials is a more obvious example for reaching some financial goals. This method works well; however, there are limits, and it is common to find other ways to spend your money as additional cash becomes available.

  1. Risk/Return

What is your approach to investing? Do you focus on a low-risk strategy and repay your debts, or do you invest your money? If you invest, what assets do you invest in - defensive assets, for example, cash or fixed interest, or growth assets, which could be shares or property? By understanding your options, you can create a plan to use your returns effectively.

  1. Time

How long will you work for? How long before you get to peak earnings? When will you retire and begin drawing on your accumulated wealth to fund your retirement living? Conversely, you must also ask how long you need to rely on these assets, i.e. life expectancy. The key trade-off could be between retiring earlier or working longer to ensure your financial security throughout retirement.

  1. Structuring

How you structure your investments will impact the net return you achieve. By understanding which entity/ownerships your assets are held in means you can make decisions about these investments to increase their effectiveness. The compounding effort of your investments over a lifetime can be significant, and it’s important not to underestimate the power of long-term investments.

  1. Liquidity Event

This refers to an event where you are the beneficiary of a lump sum. This could be the sale of a business or other assets (property), receiving an inheritance, financial settlement or, a less likely, windfall such as winning the lottery.

Each of the above levers will impact the others and ultimately result in a different outcome. Taking control of your journey and knowing how to make the most of what applies to you will determine not only how much wealth you accumulate in your life but also what level of lifestyle you enjoy along the journey.

Remember it is all about balance; the BDO Private Wealth team can help you understand how to effectively use these levers to take more control over your financial position. Contact us today.