How to build wealth in 2022
Nobody will blame you for loosening your grip slightly on savings during 2021. Here's three must-knows to help build back greater financial security in 2022: your goals, cash flow and risk appetite.
Imagine getting behind the wheel of your car and heading out of the driveway, then realising you have no idea where you're going. Imagine starting a business without any clue of what you want that business to become.
They're all relatively absurd situations. But just as absurd, says Chris Giaouris, Partner and Principal Wealth Adviser at Chronos Private Wealth in Melbourne, is the idea of making a financial plan without knowing your end goal.
Start at the end
"How are you meant to come up with a plan or a strategy if you don't know what the end goal is?" Giaouris asks, pointing out that clarifying those goals is especially important post-pandemic.
"People's outlooks have changed. It's very difficult to make sound financial decisions if you don't first consider how your end goal might have shifted. So the best thing you can do right now is sit down, have a think, write it down, do whatever you need to do to develop a clear picture of where you want your financial plan to take you."
Don't rush this process, Giaouris recommends. Give yourself plenty of time. People are only just popping their heads up for air after two very difficult years, so take all the time you need to figure out how things might now be different.
This clear vision of an end goal, he says, will shape every investment decision you make over the coming months and years.
How's your cash flow?
Next, it's important to get familiar with your cash flow.
"At the end of the day, if you're spending every cent you're earning, your options are extremely limited," Giaouris says.
"Cash flow is the life blood of any financial strategy. Your investment decisions will be dictated by your goals. But your ability to make those investments will be dictated by your cash flow."
The investment goal often acts as a driver to improve cash flow. Someone who wants to buy a house within the next two years, for example, is more likely to find ways to save rather than spend, compared to a person with no such goal.
"This is why your end goal is important," Giaouris says. "We start with that goal and work our way back to figure out what you need to do."
The end goal will also dictate the investment styles. For that same saver who wants to buy a house in the next two years, for example, investment in an asset that can be volatile over the short term, such as shares, might not be the best option.
"Do you pay down your mortgage fast? Do you borrow as much as you can in this incredibly low-interest environment to buy another property?" posits Giaouris. "The answer is different for everybody. It all depends on your end goal."
Know your risk appetite
Some people lose sleep over the way share values bounce around daily. Some are comfortable only checking in on their portfolio once or twice a year.
Once again, Giaouris says, everybody's goals are unique. It's important to figure out where you sit with risk.
"You have to accept risk, to a degree," he says. "A good return only comes with risk. That's why cash in the bank, which is guaranteed by government, will typically provide very modest returns when compared to other higher risk options, such as shares."
The more risk you take, Giaouris explains, the more return you can make. At the same time, that risk means you can also lose more.
"Diversification is one of the few things you can do to manage risk in your portfolio," he says. "But, once again, it all begins with your end goal. If you don't know where you want to end up, it's impossible to make any sort of plan to get you there."
So, step one: revisit your goals and decide whether they've changed, before examining your cash flow and considering your risk appetite.
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This information is of a general nature and does not comprise professional advice or product recommendations. Before making any decision about any investments, financial products and services, you should consult with your own independent legal, taxation and financial advisors, who can provide advice which takes into account your own personal circumstances, goals and objectives.
