Listen up: it's all gold

Prudence, foresight, coolness and a reality check are what you need to set you on your way to wealth creation.

Prudence, foresight, coolness and a reality check are what you need to set you on your way to wealth creation.

The summer holidays are a time to kick back and relax, but they are also a perfect opportunity to ponder the future and make some New Year's resolutions. If getting ahead financially is high on your wish-list, it's time to stop wishing and start doing.

Money has put together some golden rules that are guaranteed to make you wealthier and more secure by the time Christmas rolls around next year.

It's not what you earn but what you spend and save

"We tend to pay our bills and spend what's left over. The guaranteed secret of wealth is to make investing the first thing you do," a financial planner and Money contributor, Noel Whittaker, says.

That means setting up a direct debit today to put $200 a month into your super fund or a managed fund, reinvesting dividends or interest received from existing investments, or increasing your mortgage repayments.

After decades in the money business, Whittaker says that no matter how much people earn, they all think they need about 10 per cent more.

One client says that by the time he pays for school fees, his ex-wife and a ski trip to Aspen, he's got nothing left over. By comparison, Whittaker says quite poor people often save more than wealthy people, because they control their spending and save regularly.

Think long so you don't go short

Reducing tax and harnessing the power of compound interest are timeless wealth-creation tips and they come together in superannuation.

Despite dark mutterings about government tinkering, superannuation is still the lowest-tax structure for long-term savings and you can withdraw them tax free in retirement.

"It's not necessary to have all your wealth in super, but if most of it is then you will pay little tax in retirement," HLB Mann Judd financial adviser, Jonathan Philpot, says.

Now that the annual cap on concessional (pre-tax) superannuation contributions is limited to $25,000 for everyone, this Christmas break is a good time to fine-tune your long-term savings strategy. If you are squirrelling away less than $25,000, ask your boss about salary sacrifice or set up a monthly direct debit into your super fund. If you can afford to save more than $25,000, focus on non-concessional contributions that are limited to $150,000 a year.

Protect yourself

Warren Buffett famously stated his first law of investing is "don't lose money". No one likes losing money on an investment, but the biggest risks to wealth are often closer to home.

Your biggest financial asset is your ability to earn a living, followed by the family home. If you lost either due to ill health, redundancy, fire or flood, chances are your family would struggle to maintain their standard of living.

The best way to protect you and yours is to have adequate levels of life insurance, income protection, health, home and contents and car insurance. This holiday season, check your insurance policies to see if you have the right cover and use one of the many online comparison sites to see if you are getting value for money.

Most super funds offer default life insurance and income protection at cheap group rates, but coverage may be limited.

"Anyone with income over $80,000, where the 37 per cent marginal tax rate kicks in, should have income protection. It's tax deductible outside super, and it's not that expensive when you look at the future income you are protecting," Philpot says.

Curb that emotion

One of the biggest threats to wealth is letting emotion rule decision-making.

In the wake of the financial crisis, spooked investors piled out of shares at the low point and put their money in term deposits and in fixed interest investments. Now interest rates are below 5 per cent on bank term deposits, but bank shares are paying fully franked dividends of up to 10 per cent after tax.

The best way to avoid overreacting to volatile markets is to have an investment plan with clear long- and short-term goals and stick to it. There should be minor fine-tuning along the way, rather than wholesale capitulation.

Be alert, but not alarmed. You need enough in cash investments to cover short- to medium-term income needs, but the balance should be in a well diversified portfolio of investments designed to maximise returns for the rest of your life.

Acknowledge your limitations

Successful investors know what they know and, more crucially, what they don't know. At some point everyone can benefit from professional financial advice. The key thing is to be clear about what you want and what an adviser can reasonably deliver.

John Bogle, the legendary founder of index fund manager Vanguard, said recently the most valuable services an adviser can provide are in asset allocation, tax efficiency, risk management and retirement planning. They can also ensure you have the right, most cost-effective insurance and provide advice on integrating the age pension into your retirement income planning.

They should not be relied on to beat the market or to provide hot stock tips. Look for an independent adviser who charges on a fee-for-service basis and be prepared to shop around until you find someone you can communicate with.

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