Every Financial Trap You'll Face As Your Wealth Grows

Every stage of building wealth has its own trap. And the thing that got you here is often the thing that stops you from going further. So, which one are you about to walk into? In this episode, Ed and Andrew map the traps at every stage, from your first $1,000 to $2.5 million in equity. You'll learn: The traps hiding at each stage of wealthWhy being too scared of debt can leave a million dollars doing nothingWhy you retire on cash flow, not capital growthThe lesson? Every trap is caused by what worked at the previous stage. Knowing what's coming is how you avoid it. Want to book a free session with one of our Financial Advisers, then just click here https://www.opespartners.co.nz/book-your-free-session-2?utm_campaign=nav-cta Let us know your thoughts by leaving us a voice message on the Property Academy Hotline⁠⁠⁠⁠⁠⁠⁠⁠ https://www.speakpipe.com/PropertyAcademy For more from Opes Partners: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Sign up for the weekly Private Property newsletter⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ https://www.opespartners.co.nz/newsletter-sign-up⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Instagram⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ https://www.instagram.com/opes_partners/⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠TikTok⁠⁠⁠⁠⁠ https://www.tiktok.com/@opespartners

• 0:08Speaker 00

  Hello and welcome along to the Property Academy Podcast. I'm your host, Andrew Knight.

• 0:11Speaker 01

  And I'm Andrew Nukem.

• 0:12Speaker 00

  And this is the show that helps Kiwis go from zero to five investment property. So you can be financially free and stick around for the next 15 minutes because you're going to learn every financial trap you'll face as your wealth grows. The traps that will get you when your net worth's a thousand bucks, 100K, 500K, all the way up to a million dollars' worth of wealth and the surgeon who's about to make a decision he knows is wrong. And that's because every stage of wealth building comes along with different traps. It's a bit like building a property portfolio or a business. The traps and the challenges you face when you're just starting your business are going to be very different from when you're Elon Musk and you've got a trillion dollars' worth of wealth and you're trying to list on the public markets, right?

• 0:53Speaker 00

  The challenges we face all throughout life change as we grow. And that is the same when it comes to your net worth. So Andrew, what is stage number one and what are the traps that people need to watch out for?

• 1:06Speaker 01

  So stage one is a thousand dollars and that's where actually most of the country is. So KiwiBank did a survey and found that a quarter of Kiwis couldn't cover an unexpected bill of $500. And ASB found that 40% don't even have a thousand dollars in their savings account. So a lot of people.

• 1:25Speaker 00

  So what sort of traps might you face if your net worth is a thousand dollars or less?

• 1:32Speaker 01

  I think it'd be anything around kind of the cash flow side of things. So track one would be buy now, pay later, credit card debt. So you don't have the money or a buffer. So then when you need something, when you have that unexpected $500 bill, the tyres for the car or the broken window or something like that, you're using credit cards to bridge that gap. And then of course you're paying high interest rate on that. And that kind of goes in line with, you know, using some of those payday loan facilities. So save my bank and I don't think they're around anymore, but those payday loan people who'll give you money and then take it out of your next paycheck. And for all those type of facilities, my understanding is if you use them once, there's a very high probability that you go back and use them time and time again.

• 2:13Speaker 00

  Can I tell you as well, just around all of this, it can be really seductive, this type of debt. I remember when I would have been about 19 or 20 years old, I went and caught up with my friend who had renovated their garage and they turned it into a bedroom and they had a really nice TV in there. And I was like, wow, how did you pay for all of this? He said, well, I put it on a credit card. You know, it's not as bad as people say because you're able to get the stuff now and then you pay for it later. And I remember as a 19 year old thinking, wow, maybe credit cards aren't as bad as everybody says that they are. So of course I went and got a credit card and started spending money on different things. And I thought, wow, if I'm smart and diligent, I'm going to be able to cheat the system

• 2:56Speaker 00

  because I effectively get one week's worth of spending for free because it's interest free. So I get my pay and blah, blah, blah. Anyway, it's all in, it's all full of BS. No, I was completely wrong because I ended up in debt and did it really, really financially tough for a while because I overspent and I thought there was a magic way to beat the banks or do something clever. There's not, there's, there's no way to do anything clever because human behaviour kicks in, you overspend, you overextend yourself. And actually, if I couldn't afford that, well, I never bought a TV.

• 3:31Speaker 01

  It was a UE boom.

• 3:32Speaker 00

  I did put a UE boom on my credit card and if I couldn't afford it, I just shouldn't have bought it. That's, that's like literally what it should. And now I sound like an old man, but I was not being clever. I was being absolutely dumb. And I'll tell you something, Andrew, that I don't think I've ever admitted on the podcast because I've been very embarrassed. At that time, I did use a payday lender to get me through when I was being paid monthly and it was quite difficult. I think it was twice I used it, but you really pay for it. If you borrow a hundred bucks, you might've paid back then about a hundred and $40 in total fees to them. I don't think they exist anymore because the government put a cap on interest rates. But it's a bit embarrassing to admit, but back then that's what I did because I thought

• 4:16Speaker 00

  I was being clever and I fell into this trap that we're literally talking about today. So learn from our experienced people, or my experience, I should say.

• 4:24Speaker 01

  The third trap is the savings dance. So you put money aside into your savings account, you're really diligent, you feel pretty proud of that. And then you go out to town and you think, maybe I'll get a few more drinks and you transfer money back across to your spending account and then spend it.

• 4:37Speaker 00

  Yeah. And that's where people say, oh, I save, I save 200 bucks a week. But if you're transferring it back and spending it, you're not saving 200 bucks a week. The other one that I chuck in here is not signing up for KiwiSaver. So again, if you're starting out, you might think, oh, I'm really clever. I'm just going to put money aside. I don't want money tied up in a government savings scheme. And then they do the savings dance and they think that they've got to put their money aside and then they withdraw it again. If we move to stage two, which is when your net worth is $50,000 to $100,000. I think that one of the big traps here is waiting until you feel ready to go and buy a house or start looking at buying your first home.

• 5:20Speaker 00

  And the reason I think that's a bit of a trap is a lot of first home buyers are really surprised when somebody says, oh, how much is in your KiwiSaver? 40 grand. Oh, you should go and look at the first home loan. You can use a 5% deposit. Oh, I thought it was a 20% deposit. Oh no, there are ways around it. In fact, half of first home buyers at the moment are purchasing with less than a 20% deposit. But waiting until you feel ready to go and start looking at houses. I know in my own situation, I got pushed by a friend to go and start looking at houses. And I said, how much is in your KiwiSaver? I told them, we went and looked at properties the next day and I signed a contract to buy what was my first property. And so I'm just saying that sometimes you need a bit of a push because you don't realise

• 6:04Speaker 00

  what is possible until somebody talks to you and you say, oh, oh, I could actually end up doing this. I think the second major trap is we start to get a bit more comfortable because if your net worth is 50 to $100,000, maybe you've bought your first home, maybe you've got quite a lot in KiwiSaver, maybe you're a really diligent saver. What often comes with that is earning more from your job. And when you earn more from your job, typically we get what's called lifestyle creep or lifestyle inflation, which is when you earn more, you spend more. And it's amazing that sometimes even really, really rich people, there was a study coming out of the US that showed that people who earned $300,000 to $500,000 per year were

• 6:48Speaker 00

  more likely to be living paycheck to paycheck than people earning less than that every year. So sometimes when you have a big salary, you start spending way more and way more and you're still living paycheck to paycheck. Two out of five people earning between $300,000 to $500,000 in the States are living paycheck to paycheck because their spending keeps on going up. And the other thing I'd just say is if you do decide to buy a rental property as your first property as opposed to a first home, just be aware that if you have the money available to go and buy that property, you can't use your KiwiSaver to go and buy your first home or the first home you're going to live in because you already own a property now. So your KiwiSaver is then locked in until you're 65.

• 7:33Speaker 01

  Stage three is the half million dollar mark. And this is probably a lot of people that might be listening to the show that have owned a property for a while. So your home, maybe you've got a rental property. And probably the first trap here is having all your equity tied up in your own home. Now, what I mean by that is it's all well and good to have your house and have it all paid off. But if you get to later on in life and you want to actually be able to enjoy some lifestyle things, you can't just rely on all of your money being tied up in your house. So that's probably a good reason to get your mortgage paid off and then invest in other things. And I think the trap number two kind of goes in line with that, which is focusing on paying down your mortgage without doing anything else in terms of other investing.

• 8:16Speaker 01

  Now, I remember one of my friend's parents coming to see me and they wanted to buy an investment property. This was like 20 years ago. And they'd just paid off their mortgage and they were in their 60s. And they thought that they had to have their mortgage entirely paid off before the bank would give them any money to buy a rental property. Now, that was a great position to be in, but because they started probably 20 years later than they ought to, they missed out on a whole lot of potential capital growth. And trap number three is selling too early. Now, this probably goes both ways. So right now, after four years of a pretty hard property market, there are investors that are thinking about selling their rental property and just, you know, looking at other types of investing.

• 8:59Speaker 01

  Now, if they do that and they've had a downturn in, in values, they're going to lose some money. And so you can understand where people sometimes get frustrated by the market and they think that it's never going to go up and so they sell and maybe make a potential loss. But I think this goes the other way as well. When the market goes up a little bit, I've seen lots of investors where property prices have gone up a hundred grand, they think, oh, Really do with that hundred grand. Now I'm going to sell that property and buy a boat. Now, if that wasn't your intention when you bought the rental property, hold on for the long term.

• 9:29Speaker 00

  It's a bit like if you start saving and you're saving for your, your future and your investing in managed funds or shares, then you've got 50 grand and you sell out to buy a jet ski. You think, but that wasn't the purpose. You weren't saving up for a jet ski. You was doing it for your long-term financial future. And so that's a bit like the savings starts where you've saved your $200 and then you take it out to spend on lifestyle. The real issue of selling too early is that you miss out on the long-term benefits of compounding growth. Because if you've got that $50,000 increase over the first couple of years, like that's really cool. But if you hold on for another 15 years, that 50K worth of equity might turn into 500K of equity, for example.

• 10:13Speaker 00

  And the way that I think about it though, when it comes to what you're talking about, Andrew, is if we think about somebody with $500,000 of net worth, I kind of think, would I rather one $500,000 house fully paid off? Or would I rather have two $500,000 houses with half a mil worth of debt? Now, the equity position, the net worth position is the same. It's half a million dollars, but one person's got two properties and the other person's got one. Now each of us are going to make our own judgment on which we'd rather be, right? If you're very conservative, you're like, no, I hate debt. You might prefer to be the first person that doesn't have any mortgage at all. If you're 65 or 70 and you're about to retire and you're like, I can't afford to have a $500,000 worth of debt,

• 10:58Speaker 00

  even if there's some rental income coming in to cover it, then you might say, I want to be the first person. For me, as a person in my 30s, wanting to build wealth for the future, I'm like, I want to be that second person. In fact, I want to be the person with two and a half million dollars worth of property and $2 million worth of debt. And being in that position, right? I want to load up, but that's my view, but it's going to be different for each of us, isn't it? Now, if we come up to having a million dollars of net worth and some of the traps you're going to face. If you're a property investor, one of the big ones is going to be what I call the one bank trap, where you have all of your mortgages with just a single lender. And this would be if you're a property investor, got a few properties with some mortgages in there.

• 11:42Speaker 00

  And the reason I think that this is a bit of a trap is that if one bank holds everything, then they control everything. And Andrew, I know you've, you've had a situation with some investors where they've fallen into that one bank trap.

• 11:56Speaker 01

  Yeah, I think we wrote about this in our book Wealth Plan, but these, these clients that I worked with for a number of years, they'd built up a property investment portfolio of, I think, three or four rental properties. And when they got to retirement, they wanted to downsize their house and basically keep the rentals for a number of years into retirement to continue to get capital growth. Now, when they downsized their house, because all of their lending on their rental properties was with the same bank as their house, the bank said, actually, you're retired now, you can't afford all this debt and took that $200,000 or whatever money they'd made from that downsize. And they paid off the investment debt. Now, what that meant is if they wanted to access that cash, they had to sell more properties.

• 12:38Speaker 01

  And that left them in a worse position than if they'd been able to hold them for a number more years.

• 12:42Speaker 00

  The other trap that I see at this stage is having properties, but no financial plan. And what I mean by that is once you've got some equity and even in fact, before you've got some equity and you're trying to build it. Kiwis love a DIY. We love to just, oh, just go buy some investments. I'll just use some sharesies and, and buy some managed funds. Now, that's all good stuff to do, right? I'm so, I'm very, very pro that. But when we're talking about hundreds of thousands of dollars of investments, I do think it's a good idea to get advice and talk to people who talk to people like you all day, every day, in order to be able to understand what traps you might fall into. And some of the things to help you avoid the similar traps that they've seen other people fall into, right?

• 13:27Speaker 00

  Like the one bank trap. And of course, at Andrew, my company, Opes Partners, we help property investors create financial plans. In fact, over the last two years, we created 4,381 of them for property investors. So if you are a property investor looking for a financial advisor, you might like to start with Opes Partners. I'll drop a link where you can book your free wealth plan down in the description. But there is another trap that people fall into around this stage as well.

• 13:52Speaker 01

  That's when you've got the wrong assets for the goal that you're actually trying to achieve. Now, this probably goes in line with, with having that financial plan. If you just go out and buy a bunch of rental properties or you invest in something without any real advice, you often do what is familiar to you, but not necessarily what the right thing is from what you're trying to achieve as an investment. So if you think about retirement, you want to be able to fund that. At that stage, the capital growth on a rental property, for example, that doesn't mean as much to you. The cash flow matters more. However, when you're building your wealth, typically the cash flow is less important, but you're wanting that capital growth to get you to your financial goal faster.

• 14:28Speaker 00

  Yeah, and I'll give you a good example of this. Stevie, one of my financial advisors was speaking to a surgeon the other day. Now, this guy's got two investment properties already and he's owned it for a little while, but at the moment, the rent's not covering all of the costs. I mean, it covers the mortgage, but not all of the costs, like the rates, maintenance, insurance. There's a bit of a top up there. So he was reviewing the numbers with his accountant and with rental properties, those losses start to accumulate. So his accountant says, well, you've got about $50,000 worth of accumulated losses here. Maybe you should buy a higher cash flow property to then start using those and you wouldn't have to pay tax on the profits. And so he starts, okay, righty, let's go off and see if we can find some cash flow properties.

• 15:13Speaker 00

  And as he's having this conversation with Stevie, she said, but here's the thing. If you go ahead and buy a high cash flow property, yield properties don't tend to go up in value as fast as growth properties, right? And so you could buy a high yield property that's got cash flow, get the benefits of those tax losses. The benefits of that would be for him about $16,000 or so worth of benefit. But over the 15 years that you hold those properties, the difference in capital growth, based on the research we've done, could be hundreds of thousands of dollars. So do you really want to go ahead and buy a property that's going to give you $16,000 worth of tax benefit?

• 15:55Speaker 00

  Or would you prefer to go for a property that's going to potentially add an additional six figures worth of wealth over the next 15, 20 years, since you're in your wealth building phase? And he said, look, I know you're right, but actually I still want to do it anyway, because I've got it in my head now and I quite like that idea.

• 16:15Speaker 01

  I can't believe the number of people that obsess over those tax losses.

• 16:19Speaker 00

  Well, the thing is you could get the benefit of it. The question is just at what point, right? And the time where you'd really want to get the benefit of your tax losses would be when you stop working and cash flow really starts to matter. And I suppose the thing here is not to say that people shouldn't buy high cash flow properties, right? It's that you want to think about what properties really suit your life stage right now. And obviously if you're a surgeon, you've got lots of cash flow, you're earning a big income. It's not cash flow that's really holding you back from getting ahead in life. So I think the trap is knowingly taking the wrong decision because you've got enough money that, oh, I think it's going to be okay. Now, having said that, if we move up to the traps you face when you've got two and a half million dollars of net worth,

• 17:05Speaker 00

  I mean, it's basically the opposite though, isn't it?

• 17:07Speaker 01

  Yeah, I think trap number one is being asset rich and, and cash poor. So you might have lots of assets, so you might have a really expensive house and some nice cars and things like that. But when it comes to actually being able to put your hands on some cash quickly, that could be quite challenging for you. And I, I do see this quite a bit, you know, people might have taken out a really massive mortgage and so they, they're living paycheck to paycheck, but they have that really expensive house. Trap number two is buying for growth when actually now you need cash flow. So this is the complete opposite of the surgeon. If you are now wanting to transition your portfolio into an income generating portfolio, that's when you've got to switch your mind away from what's got you to where you are now and now turn your profits into something that you can actually live on.

• 17:53Speaker 01

  Trap number three is panic selling in the downturn. So I know that this probably applies to property right now, but also shares as well. People you see if they're investing for the long term will experience some ups and downs in the market. You want to make sure that you weather the storm and you don't panic and then flip flop out of your investments, particularly when it's property, because it's a high transaction cost to sell a property. And trap number four is a big one that I don't think many people think about, and that's not having a will. And actually, to be fair, that probably applies to everyone from any stage, um, uh, from sort of $50,000 and above. Uh, but it particularly matters here. If you've got some significant assets, you want to make sure that you've appropriately documented what happens in the event of you dying.

• 18:38Speaker 00

  Now, the funny thing about looking at all of these traps is it's almost the opposite of the thing that came before you. And what I mean by that, right, is if you're at 50 to $100,000 worth of net worth and you've bought your first home, one of the things that's really going to help you is paying down that mortgage as quickly as possible. But once you get to, for example, $500,000 worth of net worth, it can start becoming the opposite. Okay, you've paid down your mortgage, you've really created some good wealth for you. Now it might be time to, to stop solely focusing on paying off the mortgage as fast as possible and investing in some other things, whether that's investment property or setting aside money for liquid investments like managed funds and shares.

• 19:20Speaker 00

  If we think about the million dollar trap, the trap is being overly focused on yield. However, the trap at the next stage, two and a half million is being overly focused on capital growth. And so the thing that gets you to the next stage may not be the thing that helps you get to the next stage beyond that. That can be the thing that we can apply to all parts of our lives when we're trying to move ahead. But it's really easy to say, but this worked in the past. Yes, it worked to help you get from stage two to three, but now you're trying to get from stage three to four. And what I want to know is what traps have you fallen into throughout your financial life? I want you to leave us some voice message on the Property Academy Podcast hotline.

• 20:01Speaker 00

  This is where you can ask us any question and we might answer it on the show. So tap on the link down in the show notes and leave us a voice message and let us know the financial trap that you've fallen into. Because over the past 15 minutes, you've learned every financial trap you face as your wealth grows. The different traps from whether your net worth is a thousand dollars, a hundred thousand dollars, $500,000 or more, and the surgeon who's about to make a decision he knows is wrong. Right, let's wrap it up there, but please don't forget to rate, review and subscribe to the podcast. Really does help us get the message out to more people.

• 20:38Speaker 00

  Thanks for listening to the Property Academy Podcast. I'm your host, Seb Aknight. We're going to be back here and talk with you with more daily strategies, tactics and insights to help you get the most out of the new selling property market. Until next time.