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Saving Graces

Forget a high salary, the key to wealth is reining in spending. It sounds strange to the less well off but the rich stay wealthy by economising and saving.

William Randolph Hearst, the American media mogul, insisted his guests used paper towels, not linen napkins, when they dined at San Simeon, his hilltop mansion on the California coast - and successful property investors tend to be good savers, too.

In fact, the old rule of not spending more than you earn so you can invest what you save is a basic principle of financial management. But it's amazing how many people overstretch themselves or mismanage spending and income when they buy investment property.

Financial planners say even high-earning individuals have to be told that to get a nest egg, they first need to save. And that means making budget cuts, such as choosing a second-hand Toyota rather than the latest European coupe. Investors can fail to get the most out of negative gearing, too. Suzanne Haddan, the managing director of BFG Financial Services, says many first-time investors make large extra repayments into an investment loan while repaying the bare minimum required to service the loan on their own home. It should be the other way around, she says, because you save on tax and end up with more money in your pocket if you quickly pay down the non-tax-deductible debt on your principal place of residence, while snaring the tax benefits that come from the deductible debt on an investment loan.

Mortgage over-payments can sharply reduce the size of a loan on a family residence. It's a great way to save money, too. About 45 per cent of people who hold mortgages pay more than their minimum payments, despite concerns about their personal finances, new research from lenders mortgage insurer Genworth Financial shows. Australia has one of the highest proportions of people who elect to pay more off their home mortgage - second only to India in the Genworth survey, which drew responses from eight countries. The trend to mortgage over-payments has so far not been tempered by rising living costs. But more than four in five Australians said they were worried about how the rising cost of living would affect their finances, especially their ability to pay into their mortgage over the next 12 months.

If you have more than 50 per cent equity in your home and are saving consistently, you are in a strong position to borrow to invest. A saving ethos is crucial because research shows the road to wealth has far more to do with saving than with a high salary.

The 1996 book The Millionaire Next Door, by American academics William Danko and Thomas Stanley, shows the average American millionaire has become wealthy through saving.

Some people also become rich through sports or managing companies but Danko and Stanley found these successes were so rare, they made no difference to the overall numbers.

The average millionaire drives an older-model car, lives in a modest home and keeps his or her expenditure below income. The only area in which they spend big is on their children's education.

The book says that apart from a steady strategy of putting money into shares and property and leaving it, there is no pattern to the way millionaires invest. The key is keeping expenditure below income.

Self-help and get-rich books often pay scant attention to saving but astute investors know excessive spending always comes at a cost.

Source: The Age Domain