Passive income is derived from a wealth portfolio, with the objective to set you up for later in life and have a consistent income while you’re busy doing other things.
We spoke to an expert about what a wealth portfolio is, whether you should still start one in the midst of a pandemic, and some tips for inexperienced investors.
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What is a wealth portfolio?
A wealth portfolio is a collection of investments which can include stocks, property, exchange-traded funds (ETFs), bonds, and cash.
Leah Oliver, director of Minnik Chartered Accountants and wealth educator, told Savings.com.au a wealth portfolio could bring about financial security and fund your lifestyle.
“Your portfolio is made up of a combination of varied investments presenting capital growth. Then you have the added bonus of investment earnings and tax breaks,” Ms Oliver said.
“The primary focus of a wealth portfolio is capital growth. How it supports your overall outlook, is by providing you with a passive income.”
Ms Oliver said a wealth portfolio was typically a retirement plan but could ultimately stabilise you financially from a young age.
“People think that income comes from a ‘job’. We can’t expect to rely on employment income alone in order to be financially secure,” she said.
What do you need to do to start a wealth portfolio?
Ms Oliver said the first step to starting a wealth portfolio was understanding your personal income streams and what your expenses are.
“This starts with an accounting file on your personal life - which looks at cash in and cash out,” she said.
“Once we have this data we can do a number of things. We can assess your income streams, your spending habits and your ability to accumulate surplus (savings).
“From this info, we can multiply income streams, minimise spend and thereby maximise surplus.
“And from here we can predict how long it will take to pay off your home and debt on successive investments. This is wealth planning.”
Ms Oliver said planning your personal goals using this data was vital in successfully starting a wealth portfolio.
“It's all about having clarity and having the numbers in front of us to be able to plan our wealth decisions and avoid errors of judgement that can set you back years.”
Should you start a wealth portfolio in the COVID era?
There’s never a bad time to start planning wealth according to Ms Oliver, with COVID-19 presenting unique opportunities to savvy investors.
“Clever investors will be ahead of the game, analysing their numbers, and seeing the pandemic as an opportunity to shift, liquidate, and buy in. They are creatively taking advantage of economic changes,” she said.
“With COVID, if we have our numbers presenting reliably and are making informed decisions with a conservative approach, and we are maintaining strong investments that withstand a downturn, we are well placed to ride it through.”
She said the pandemic demonstrated the importance of having a passive income to fall back on in the event of a crisis.
“With the impact that COVID has had on the economy, our incomes, our lifestyles, now is the time to be nurturing cash flow.
“We need to be pulling right back on spend and turning to our numbers to reassess our position and plan ahead of time.”
When should you use debt?
Ms Oliver said debt in Australia was very accessible and warned often taking advantage of this would hold you back when trying to accumulate wealth.
“You will never get ahead of the game when you rely on debt funding for lifestyle.
“The only time we should be using debt is to acquire a modest home, and once paid out, we may use debt to add strong growth assets to our wealth portfolio. This is called 'stepping up'.”
She advised people to cut up their credit cards and take stock of their outgoing expenses in order to get a handle on any debt they may have built up.
“Your personal accounting file reveals all, your number demonstrate clearly the impact of overspending and debt addiction on the ability to achieve surplus and accumulate wealth.
“Once people can read the numbers they enter into a whole new level of awareness.”
Should you adjust your wealth strategy because of COVID?
In the current volatile economic landscape, Ms Oliver urged investors to be wary with their wealth strategy and adjust it with the times.
“People need to be taking less risks and being more conservative in the current economic environment. Everything in moderation. Not overextending.
“Be very mindful of spending on unnecessary things. Review your living costs and shave where you can. Nurture your cash flow.”
She said now was the time to remove all form of debt to whatever extent possible, with the goal of positive cashflow and surplus.
“Now is not the time to undertake debt funding, it is more appropriate to be minimising or eliminating debt as we move through this downturn,” she said.
“We recommend using debt only to fund assets that go up in value, i.e appreciate.
“All factors considered, it is important to assess your own personal circumstances, what you have and what is your strategy to move through the recession keeping your assets intact the best you can.”
Ten tips for building a wealth portfolio
Ms Oliver outlined the top ten things people should know about wealth portfolios if they’re new to investing:
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Make sure you understand your numbers, know where you’re at before you do anything.
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Reach out to your accountant/advisor before you sign anything, get professional advice. Ideally, your accountant/advisor will direct their Lending Specialist / Broker with regard to your lending requirements, in line with your overall financial strategy.
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Steer clear of advice provided by parties that are not qualified to advise - real estate and buyers agents, banking staff, mortgage brokers.
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Do your own research thoroughly rather than relying on “word on the street” or the opinions of others.
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Make your money on the way in. In other words, buy-in at a price that is not inflated or high premium. Shiny, brand new purchases often carry this tag.
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Be sensible when choosing your investments. Always focus on capital growth potential. Rental return secondary. And tax savings last.
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If looking into regional areas, consider industry, employment and infrastructure. Well established regional centres over remote areas.
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Advisors will say that it makes sense to diversify. To have a mix of investment types, shares and property, residential and commercial for example. The same applies no matters what the investment type. Select strong stable investments with capital growth potential.
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Let go of the idea of making a quick material buck. Investing is a long term exercise. The more clever your investment choices and the less buy and sell you undertake the better. The contents of your wealth portfolio are long term commitments.
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Consistently work on paying down debt with each addition to your portfolio. As each asset moves towards the positive, “step-up” with debt into your next purchase, and repeat the process of paying down. Ultimately you want to achieve a debt-free position and therefore positive passive income streams.
Savings.com.au’s two cents
It’s never too early to start planning for your retirement.
Passive income is a great way to gain financial stability for when you’re no longer working but is also likely to engrain positive financial practices in you for life.
Remember not to over-extend yourself and consider speaking to a financial professional where possible for advice.
Brooke Cooper
Alex Brewster
