What does it take to be wealthy in Australia?

Inflation running hot. Rate hikes pushing up mortgage repayments. Pain at the petrol bowsers. Cutting back on the groceries. There are plenty of pressure points for Australians today, so what does wealth actually look like today and how do you get there?

If we just consider averages, Australians should be better off than ever – we actually rank 5^th in terms of average wealth per adult in UBS’ Global Wealth Report, but consumer sentiment has been pessimistic for some time and even business sentiment has been negative of late.

Are Australians just a bunch of whingers or is it much harder to feel wealthy? Perhaps a bit of both.

I looked at the numbers and spoke to Viridian Advisory’s Josef Jindra and Logical Financial Management’s Jackson Raddysh.

The costs of life and being wealthy

Wealth is a matter of perspective – you may not feel wealthy, but your neighbour might see your lifestyle as something to aspire to.

The Dacxi Survey found that Australians generally viewed wealth as meeting some or all of the following criteria:

• Annual after-tax income above $150,000
• Net-worth above $1 million
• Outright home ownership

For comparison, Morningstar reports that an annual income above $137,000 placed someone in the top 10% of earners in 2022.

So where do Australians actually fall?

According to the Grattan Institute, average annual pre-tax household income is $161,000 and the median is $127,000. After income tax, average household income is $129,000 and the median is $106,000. The figures are lower when adjusted for household size.

Then factor standard expenses into all of this.

Individual and household expenses vary. The healthcare figure of $10,037 per person is annual health-system spending, including spending by governments, insurers and individuals; it is not the average amount a person pays out of pocket. There’s no question life is expensive, and a wage that once seemed generous may now feel less comfortable.

It’s also worth bearing in mind that these are averages and medians – different parts of Australia may have higher or lower costs of living.

What is wealth?

Inflation and higher interest rates put pressure on household budgets, although wage growth can offset some of that pressure – and the effects vary between households.

Both Jindra and Raddysh believe investors should avoid generalised income levels to measure wealth but instead consider goals for financial independence and what income levels can sustain that – it’s about financial choice.

“Modern wealth needs to be viewed through cash flow, debt, investable assets and financial choice,” says Jindra. He notes that wealth on paper can look different from wealth in practice, and that it’s about more than income.

“A household earning $300,000 could also be carrying a mortgage over $1 million, childcare and private school costs, higher insurance and household expenses, investment debt, increasing food, transport and energy costs, along with lifestyle commitments,” he adds.

Raddysh is part of the FIRE movement (Financial Independence, Retire Early), though works with a wide variety of clients. He cautions that wealth has very different definitions – it could be the ability to fund expensive overseas trips or it could be a very simple lifestyle with enough money to fund it.

“Is there enough income coming through and to what degree does that allow them to focus on other aspects of their life that are more important?” Raddysh says.

He notes that $1 million is often used as a starting milestone for wealthier clients.

What does it take to become wealthy?

Raddysh points out that clients who are focused on FIRE haven’t necessarily been as hard hit by inflation changes because they tend to be highly disciplined towards set goals and fast to find other ways to optimise their finances and spending patterns.

Perhaps inflation and rising costs are prompting more people to adopt the careful spending habits associated with the FIRE movement.

“One of the biggest changes I am seeing is that clients are becoming much more deliberate about where each dollar goes,” Jindra says, highlighting that from an investment point of view, this looks like optimising superannuation, reducing inefficient debt, building investments outside the family home and creating multiple pools of wealth.

Inflation and interest rates are creating pressure, but there are still opportunities to build wealth for investors.

“You need to be disciplined and building wealth does involve sacrifice,” says Raddysh.

“Without following the rhetoric saying ‘kids today just spend everything’, we do need to acknowledge we have become comfortable with and require a certain level of lifestyle today and that can hamstring you financially. There are trade offs for other financial goals,” he adds, while noting that the full picture is complicated and there are aspects which are tougher.

“You might be able to have all you want, but not all at once.”

His clients are currently focusing on Australian equities, high quality private credit and fixed income in their portfolios to maximise yield.

Both Raddysh and Jindra believe building wealth starts with setting goals and making a plan as early as possible, then staying disciplined – with expert advice where needed.

Expert tips for building wealth

“Have an idea of where you are going, know what you are spending, know your income and track this consistently,” says Raddysh.

He advocates for having a clear plan so you can set goals along the way and actually measure whether you are achieving them – or adjust your plans if you need.

“Beyond having a clear plan, taking action is important, it can be hard when the available information is overwhelming,” he says.

Jindra similarly advocates knowing your cash flow and encourages clients to automate their wealth creation.

“Shift your thinking from ‘Income – spending = investing’ to ‘Income – investing = spending.’ This means automated transfers to your mortgage offset, investment portfolio and superannuation,” Jindra says.

He also encourages clients to understand the difference between good debt and bad debt as part of wealth creation, and appreciate how to use different investment structures to optimise your after-tax income. The rules of sensible portfolio management always apply – diversification, long-term thinking, use of compounding.

The idea of clear goals is one Jindra and Raddysh both share.

“Do not simply say ‘I want to be wealthy.’ Be specific: ‘I want my home paid off by 55’ or ‘I want my investments to provide $120,000 a year.’ Once wealth is translated into a measurable outcome, you can build a strategy around it,” Jindra says.

What does it take to be wealthy in Australia?

Whether you view being wealthy as having millions in the bank or not, a simple definition is the ability to pay the basic costs of living and have some disposable income left for emergencies or other lifestyle goals.

“True wealth is having sufficient assets, income and flexibility that your money begins buying back your time,” says Jindra.

Building and maintaining wealth requires discipline. High average wealth does not necessarily translate into a comfortable household budget, particularly when living costs and lifestyle expectations are also high.

Wealth is subjective and, with rate hikes coming and inflation entrenched, there will be plenty to continue to challenge our ideas and ability to sustain a desired lifestyle.