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Is Your Wealth Creation Lazy?
The following is a reprint of an article published in our free newsletter "Own Your Financial Future" on 27th February 2007.
Hi
Almost every day there is something in the news about the proposed takeover of Qantas by a consortium of private equity companies. This is one of a flurry of private equity bids in the past year. You may also have heard of bids related to Alinta, Coles, Channel Seven and Packer’s media assets.
Interestingly all offers are made quite a bit above the pre-bid share price. This indicates that the private equity companies are confident they can make a lot more money out of their target than the public can make. They are confident of this because they believe the way their target is currently managed is lazy.
When you look at the reasons for viewing a company as “lazy” there are a lot of similarities to personal wealth creation. This is the inspiration for today’s feature article, which is the first in a series of six articles on accelerated wealth creation.
If a private equity company ran their eye over your wealth creation strategy would they think your wealth was a bit lazy and in need of a makeover? Read on to find out.
Feature Article: Is Your Wealth Creation Lazy?
Listed below are some of the reasons your wealth creation may be lazy and in need of a makeover:
- Underutilised equity and cashflow
- Underperforming assets dragging you down
- Generating junkets rather than profits
If you’re dreaming of a lifestyle better than the one you are living now then one way to achieve that is to ensure your wealth creation is working hard. It’s time to crack the whip on maybe one or all of the above elements.
In this article you’ll learn how to identify where your wealth creation may be lazy. Then in the following five articles in the series you’ learn how to crack the whip.
1. Underutilised Equity and Cashflow
Equity and cashflow are two different things, and sometimes only one is underutilised. When both are underutilised you can use them together to accelerate your wealth creation.
Underutilised equity is found in assets you own that could be used to buy additional profit generating assets. One example of underutilised equity is that part of your house that you, not the bank, own.
Underutilised cashflow is surplus income you have that just accumulates in a bank account. It probably doesn’t earn much interest and often eventually gets spent on some lifestyle asset or experience.
If you suspect this may apply to you then read this article here which includes some templates to help you identify underutilised equity and cashflow.
2. Underperforming Assets
An underperforming asset is one which may be earning you some money but not enough. Some underperforming assets have great potential and just need you to shine a light on them and get them working harder. For example, maybe you are not charging market rate rent for your investment property.
Other underperforming assets have no hope and are perhaps better off being discarded.
To find out if your assets are underperforming you need to benchmark their performance against other similar assets and also against other alternatives for that money.
To learn more about benchmarking your investments, including a benchmarking tool read this article here.
3. Generating junkets not profits
If you’ve worked in the corporate world or worked through the 1980s you may be familiar with the term “junket”. I think of a junket as a business event, such as a trip, where the main purpose is fun rather than generating positive outcomes for the business. If the money wasn’t spent by the business it would generate more profits. Private equity companies often seek to reduce their target’s operating expenses.
Related to your personal finances this may be where you are spending much more on lifestyle than perhaps you need to – your expenses are too high. If you reduced your expenses you would generate some (or more) surplus income (profits). Those profits could accumulate in a bank account and become underutilised cashflow. So ensure that in addition to controlling your expenses you also utilise the extra cashflow wisely.
One of the templates in this article referred to above in point one will help you identify expenses that may be like a junket.
- END ARTICLE -
Coming Up in the Series on Accelerated Wealth Creation
Here’s a sneak peak at some of what we’ll cover in future articles:
- Risk Tolerance – one way that private equity companies make more money is that they have a higher tolerance of risk than the average stock market. To accelerate your wealth creation you’ll need to be more of a tiger than a pussycat. Find out how.
- Overview of Gearing – gearing is one tool for underutilised equity and cashflow, but in my experience it is not well understood or used.
- How to utilise your home equity to wisely create wealth
- Margin Lending – a powerful tool that even people just starting out can use to supercharge their wealth creation, or even to help you save the deposit for your first home.
- Assets with built in leverage like warrants, options and hedge funds
Plus one bonus article on how you can identify the easiest path for you to accelerate your wealth creation.
Warm regards
Matt Hern
Certified Financial Planner
Continue with the series and read Article 2
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Matt Hern trades as FINDRE
(Empowered Wealth Pty Ltd t/as)
ABN: 21 592 525 720
Phone: 08 9467 7320, Fax: 08 9463 7848
PO Box 259, Bull Creek, Perth, Western Australia 6149, Australia
Website: www.MattHern.com.au
Blog: www.Money-Guide.com.au
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