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Bryce Holdaway Blog post by Bryce Holdaway

Four Essential Levers to Building Wealth

So, I previously spoke about the fact that it’s really important you know the number that you need to retire on. The actual income figure for you to live a comfortable retirement lifestyle and, therefore, the worth of an income-producing asset you will need outside of family home.

Today, I want to have an extension of this because once I know the number, the one I’m shooting for, I’m beginning with the end in mind. I need to find out what are the essential levers I need to adjust when it comes to building the wealth that I’m after. I really want to draw on the analogy of the bulldozer operator. If you think about it—the operator has to try and move the bucket in different directions using different levers. I want you to think about that same sort of analogy with building wealth. In this case, there’s actually four levers.

Time, target, income and expense.

The fact is: building wealth is not a “one size fits all” approach and is best reflected in the use of these levers. Because, in some cases, I might need a little bit more time. Sometimes, I’ll need to back off on my expenses. At other times, I’ll need a variation around my expenses; maybe my target is not realistic. So I want to talk about each of those 4 levers in turn.

The first one is income and that’s the obvious one.

It’s pretty easy to know how much I’m earning today; but I really need to project how much I am going to earn in the future. That’s the difficult part. It’s all about managing the cash flow between now and by the time you get to retirement. So a couple of things to think about is: what is my income going to look like over time? Is it going to increase steadily, or is it going to get big chunks like when I get a big pay rise because I get a significant increase in my education? What does that look like over time and, equally, is there going to be any time when the income actually stops? What If I’m planning on having children and take maternity leave? What if I want to stop working and go on a sabbatical, or go somewhere and take a year off? These are the sort of income fluctuations we need to be thinking about. But also; the fundamental one, is how secure is my job? Am I likely to be able to keep my job over the long term? These are all the things we are thinking about when we start to play with the income lever.

In terms of expense, we want to know what we are likely to spend our money on.

Not only now but into the future. Discretionary spend is the first one, and that’s, am I spending too much on lattes, can I cut back a little bit on my groceries, do I have to go out every single week? That’s the obvious one but what about the short, medium and long-term expenses that we need to plan for? Whether or not I’m having children, whether I want to upgrade the car, whether I want to renovate the kitchen. What about when I want to send my kids to public or private school? These are all the decisions that would impact cash flow and they are things that we need to be conscious of—spending more has a direct impact on the amount of wealth we will have when we get to retirement.

So that’s income and expense. What about time?

Do I have enough time between where I am now until when I want to retire? If I’m 30 and I want to retire at 60 then I have a long time. But what happens if I have this conversation when I’m a 50 or 55-year-old? In that case, the amount of time we’ve got is really quite short. It means other levers we’ve got; they need to work a little bit harder.

And the last one is target.

How much do I want to have in retirement? Do I want a $100,000 or do I want $50,000 or do I want $3,000 a week? That really depends on a combination of the other levers. How much are you earning, how much do you spend, and how much time do you have? These will determine your target.

So you can see that there are quite a few moving parts when it comes to building your wealth. And like the bulldozer driver who’s making little adjustments to get the bucket on that track, or that bulldozer to where it needs to be, we also need to be tailoring our unique circumstances to make sure we hit the goal we are looking for in retirement. If we do get the combination of those levers correct, it means that we can actually reverse-engineer what we are looking to do. And chances are, we’ll live a very good lifestyle in retirement.

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