Financial Autonomy: Recent Episodes
Financial Independence through an Australian lens
Plenty of books, podcasts and blogs focus on building wealth – and that’s great, as far as it goes. But focusing just on wealth misses the point.
I believe what most of us actually want is to have choice.
Choice in how much time we give to income-producing activities. Choice about what those income-producing activities are. Choice about where we live. Choice about when we retire. Choice about the ways we use our money to produce happiness.
In the Financial Autonomy podcast, I explore the different ways you can gain choice - from investing in stocks to becoming self-employed, starting a side hustle, or buying an investment property. I share learnings I've gained working with clients for over 20 years as a Certified Financial Planner, and interview others with interesting insights or experiences in gaining choice in life.
A significant portion of the work that we do for clients entails financial modelling to help understand what is possible. Frequently, we arrive at the conclusion that the person’s long term outlook is very secure, and indeed they likely have wealth in excess of requirements.
Most commonly in this circumstance, people start to think about early inheritances, and perhaps spending a little bit more on lifestyle. But another path to be pursued, particularly for those without children, is to think about how you might support causes that you are passionate about.
Charitable giving not only has a profound impact on society but also brings a deep sense of personal fulfillment to those who give.
Our role as financial planners is to ensure that your charitable giving is done in a way that maximises its impact, considering elements such as tax efficiency, and long term sustainability.
Thanks for joining us for another episode of the Financial Autonomy podcast. Let's dive into this week's piece - Making a Difference, Smart Ways to Support Causes You Care About.
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Your home isn’t just where you live — it can also be a powerful asset in your long-term financial plan. In this episode, we look at how shifting your housing as your life changes can open up smart strategies to build wealth and strengthen your retirement outlook.
From understanding how property values tend to hold up in Australia, to making the most of tax-free gains and superannuation opportunities, you’ll learn how to turn a necessary life transition into a financial win. If you're thinking about your next move — whether it's upsizing, downsizing, or planning for the future — this one’s for you.
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This week, we're unpacking a real-world financial dilemma: one person's uneasy experience after being advised to move her super from a large industry fund into something she'd never heard of—a wrap account.
So… what exactly is a wrap? And when (if ever) should you consider one for your superannuation or investments?
Join me as I explain:
- What wrap accounts are and how they work
- The pros, cons, and costs compared to mainstream super funds
- When wraps make sense—and when they don’t
- How to spot potential conflicts of interest in financial advice
Whether you're nearing retirement or just trying to make sense of your investment options, this episode will give you the clarity to navigate wrap facilities with confidence.
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It’s one of the most common retirement questions—how much super is enough? In this episode, we explore how to estimate your retirement needs based on lifestyle, spending habits, and travel plans. You'll walk away with practical tips to start shaping a retirement plan that actually fits you.
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With interest rates starting to fall, is there an opportunity to utilise the equity in your home for investment purposes and accelerate your wealth creation? It's something we're certainly evaluating with several of our clients, so I thought I'd share with you today our current thinking.
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When we head off on vacation we don't barrel off down the highway, pull up at some random point hours or days down the road, and camp out for the next fortnight. When we depart for our holiday, we know our destination. Clarity on the location of our holiday is essential so that we know what to pack, whether it's affordable, and whether we're likely to be happy when we get there.
In a financial planning context, clarity as to your goals is the essential element for success. There are plenty of potential investment pathways that could be followed. Selecting the one that's right for you very much depends on the destination that you are hoping to arrive at. A suitable financial planning strategy for someone whose goal is to have the option of retirement at age 60 would look quite different to someone whose goal was to be able to work two days per week whilst their children were in primary school.
So, when it comes to financial planning, goals are essential. But goals alone are not enough. There is one extra step that is required for success.
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In this episode, we dive into the debate between active vs. passive management, exploring the claims made by fund managers during a recent teleconference. Is 2025 the year active management finally outperforms passive investments? With decades of data suggesting otherwise, we break down why the odds of success for active managers may not be in their favor—and why sticking with passive investments could still be the smarter choice for most investors. Tune in for insights into market trends, risk management, and the truth behind the numbers.
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Wanting to get your head around tax within the superannuation system makes total sense. Our savings accumulate in this regime, however there are restrictions on how we can access the money, and for the vast majority of us, we are forced to save into this vehicle. How does a government manage to force people to save? Sure they can legislate, but in a democratic society, that won't produce a lasting impact. The population needs to be on side, and simply being told it's for your own good isn't going to cut it. The carrot then, is tax concessions.
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Despite the current low rate of unemployment, there seems to be a mini wave of redundancies in the middle and senior ranks of many companies at present.
Experiencing redundancy can be a significant blow to your confidence. However, it's crucial to recognise that redundancy is rarely a reflection of your performance, skills, or dedication. More often than not, it results from shifts in the industry, changes within the company, or simply the natural structure of the workforce. Organizations evolve, and roles that were once essential may no longer fit within the new direction.
While redundancy can bring about financial and emotional stress, including concerns about maintaining your lifestyle and finding new employment, it also presents opportunities. This transition can be the perfect moment to re-evaluate your career path and explore new possibilities that may have been out of reach before. Whether it’s pursuing a different career, starting your own business, or finding greater work-life balance, redundancy can serve as a catalyst for positive change.
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With an awareness of the challenges of high house prices and resultant large mortgages, intergenerational wealth transfers - in the form of early inheritances - are happening more and more. So if you find yourself in the fortunate position of receiving an early inhertance, what are the smart moves to put you and your family on the path to financial security, and appropriately honour the hard work that went into the generation of the wealth?
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Bitcoin has got a fresh wave of energy since Donald Trump's election win, and we've had quite a few questions from our clients. We are all susceptible to FOMO. Hopefully sharing these thoughts will help you decide what makes sense for you.
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Australia's superannuation system is undeniably complex, yet it plays a pivotal role in our financial lives. With compulsory contributions mandated by law, the system is designed to ensure that the age pension serves as a safety net for basic living expenses, rather than the primary source of retirement income. To achieve a comfortable retirement, understanding the mechanics of superannuation contributions is essential.
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Stock market returns were phenomenal in 2024. But strong returns can plant the seed for an unexpected risk. This risk is known as recency bias. Holding an awareness of recency bias is the best way of ensuring you don’t fall victim to its draw, so this week, let’s take a look at this often overlooked risk factor.
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A few weeks back in the episode about the Superannuation Sweet Spot, I made reference to the transfer balance cap of $1.9 million. I've since had a few questions about how this operates, so this week I thought we'd dig into some extra detail on this particularly important piece of the superannuation rule book.
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The desire for passive income frequently comes up as a goal when I speak with new clients. The idea of earning money before we even get out of bed holds obvious appeal.
So this week in the podcast, I thought I'd cover all there is to know about passive income. Where it can be sourced, how you can create it, some of the challenges and misconceptions, tax considerations, and some tips for success.
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In this episode we take a look at the most important concept in finance to understand - compounding.
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Consistent with most developed nations, Australia provides incentives for people to save for their retirement. Being self-sufficient in retirement reduces the need for Age pensions and other forms of Social Security.
But saving for your retirement means sacrificing the here and now. Money socked away for your 70s and 80s, is money that you can't enjoy in your 20s and 30s. The opportunity cost is real, so the incentives need to be meaningful.
Fortunately our superannuation system does indeed provide meaningful incentives in the form of tax concessions. There are tax concessions throughout the entire life of your superannuation journey. But I find that sometimes the biggest tax concession of all is overlooked or underappreciated. This week I want to ensure that you understand exactly where the greatest opportunity exists so that you are making the most of the superannuation tax concessions.
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It's been a wonderful time to be an investor recently. As regular readers of our GainingCHOICE e-mail will know, the current one year numbers for the trio markets we track are all in double digits, with the US index over 30% up on the year, and the Australian and Emerging markets both up around 20%.
So where to from here? Do such large gains over the past year mean we're destined for a fall? Or is this the early days of a new boom?
General Advice Disclaimer
There’s lots of risk when it comes to investing and building wealth. Inflation risk, market risk, timing risk, concentration risk, liquidity risk, credit risk, legislative risk, reinvestment risk, currency risk, leverage risk, and plenty more.
Some risk we want to take – the ones that we can handle and will reward us with extra returns. Other risks provide no benefit to us and so should be avoided at all costs.
Longevity risk, the topic of this week’s episode, falls into this second bucket, though it’s solution involves the deliberate undertaking of other risk. It’s an interesting one for sure, so let’s dive in.
General Advice Disclaimer
We all want to build wealth and have financial security, have choices in life.
This week I wanted to explore the basic framework for how you can make that happen. Your home, your super, your investments, and the financial decisions that sit around those all play their part.
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Borrowing to invest he is unquestionably a frequent contributor to wealth accumulation. Few of us would buy a home without using a mortgage, and it is a rare business that is able to grow without some form of debt.
Borrowing to invest in the stock market has many positive attributes. Shares can be sold quickly, enabling you to reduce or clear your debt at short notice were your circumstances to change. Transaction costs are low. And diversification is easily obtained.
There are several ways in which you can borrow to invest in the stock market. Under a debt recycling approach, it is assumed you are using equity in your home.
Borrowing to invest magnifies an the outcome. If you invest $1000 and it increases in value by 10%, you have gained $100 in wealth. If instead you matched that $1000 with an equal amount of debt, and your now $2000 investment grew by the same10%, your wealth has increased by $200, double that of the original example. Now of course you need to back out the cost of the debt, but this simple example illustrates the impact.
Investments don't always go up however, so the magnification brought about through gearing works in both directions. If the value of your investment rises, gearing enhances your outcome. But if the value of your investment falls, gearing makes the situation worse.
For this reason, there's a few key criteria that you should tick-off before embarking on this strategy.
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Having now rolled into a new financial year, you might have seen league tables floating around showing the best and worst super fund performers for the 2023/24 financial year.
This year the large industry funds tended to lag their retail funds cousins. In this week's episode I wanted to explore why that had occurred, so you can determine whether you need to be taking any action.
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Welcome back to another episode of the What's Possible podcast where we examine the life of someone interesting and then discuss what we can learn from their story to help us live full and interesting lives.
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What's going on with interest rates? At the beginning of the year there was near unanimous agreement that interest rates would fall at some point in 2024, probably in the back half of the year. Yet here in Australia at least, talk is of the potential need to lift interest rates. As it stands, interest rates are already at their highest level in over a decade, and we need to go back to 2008 to see a time where they were at these levels for a sustained period.
This week I wanted to take a look at the change in thinking that is underway globally with respect to interest rate policy, and what that means for those of us with mortgages, and also those with investments.
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A huge welcome back to the Financial Autonomy podcast, our first episode in about 5 months.
The briefest glance at the market section in the GainingChoice e-mail will make it clear that investing in U.S. stocks has been by far the best strategy of the past several years.
The five and 10 year average returns on Australian shares, inclusive of dividends, has been about 8%. In comparison The US S&P 500 index has delivered a 10 year average return of about 13% including dividends. The return is even higher when measured over five years. Emerging markets, the other market sector that we follow in GainingChoice, has generated an average return of about 5% per year over both measurement periods.
So 13% versus either 8% or 5%. It's not hard to choose which one you’d prefer, if only we had the benefit of hindsight. But what do these percentage return differences mean in dollar terms?
$100,000 invested in the U.S. S&P500 index 10 years ago would be worth about $340,000 today, assuming all dividends were reinvested.
The same $100,000 invested in the Australian ASX 200 index would be worth about $216,000, again with all dividends reinvested. So whereas investing on the Australian Stock Exchange you did a little better than doubling your money, in comparison investing in U.S. stocks you more than tripled your money over the same time period.
Emerging markets fared even worse, with your $100,000 having grown to approximately $163,000.
The point here is that the differential is not small. It is meaningful, and it is impactful.
But that's backward looking. We can't jump in a DeLorean and travel back in time unfortunately.
The question then for us investors is how should we play things from here?
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Welcome to the What's Possible podcast our dive into the people who inspire us, how they achieved what they did, and what lessons we can all draw so that we can live the most interesting and full lives possible.
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I started this podcast in 2017 with the desire to put myself out there on what I felt was important in money management and wealth creation, gaining choice. My hope was that in putting that message out into the world, in time I'd attract people to our Financial Planning practice who shared this worldview. It took a while but I'm very pleased that this did indeed work.
Why am I taking a break now? There's a few factors.
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It's not uncommon I find, for people to arrive at the desire to achieve Financial Autonomy in their 40s or 50s. Particularly for those with kids, until this point in life it's largely just been survival mode. Money in equals money out. First it's saving a deposit for a home, then it's getting the mortgage under control. Usually either the first home isn't the forever home, or else renovations and improvements are required. Then you've got the costs of raising children.
Layer on top this is the potential for divorce, and it's not uncommon for me to have people reach out wanting to achieve financial security but worried that it's too late for them.
If you’re worried that it might be too late for you build wealth and achieve financial security, this episode is for you.
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In this episode, we talk with David Tuckwell of Global X about a few interesting potential satellite ETFs.
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I received a question recently for my Ask an Expert column where the reader was comparing the annual income they received from their investment property, against the growth in the value of this superannuation fund. Their conclusion, looking at the numbers, was that they should sell the investment property and shift all the money to super.
But their comparison was flawed on multiple levels. So in this week's podcast I thought I'd talk you through the differences across the main investment options to help you consider what the best path might be in your particular situation.
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Investing is all about risk and reward. In endeavoring to build our wealth and gain choice in life, we take on risk with the expectation that we will be rewarded for taking on that degree of uncertainty.
The Oxford Dictionary defines risk as the “possibility of something bad happening at some time in the future”. As investors that typically means a loss of our capital, either partially or in full.
We think a lot about the potential rewards and the long-term outcomes that derive from the gains made by our investments, but this week I wanted to spend a little bit of time digging into some detail on the risk side of the equation. I've identified 8 different types of risk that are relevant for us investors.
To be fair this list probably has more of a bias to stock market investors. I haven't included things like credit risk which would be relevant for bond investors, or risks that are unique to property investment.
I'm hoping that as I go through these eight types of investment risk you mentally tick them off against your portfolio and reflect on whether you were comfortable with the level of risk that you are sitting at.
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The starting point is to consider why you might choose to be a business owner. Certainly it's not the right option for a lot of people. There's risk, extra stress, and a requirement for a broad skill set. A great analogy I think is comparing a decathlete at the Olympics to an athlete in a single pursuit. A decathlete isn't good enough to be a gold medalist in any one single event. But they are better than average across a whole variety of events such that when they combine their results they produce an impressive outcome.
A business owner needs to be like a decathlete. They need to be able to understand marketing, the finances, people management, planning, pricing and operations.
If you are the Usain Bolt of you are field, then chances are you're better off as an employee than a business owner. As an employee you can just focus on doing what you're good at, and let others worry about all the other cogs in the machine. Pursuing the business ownership path is best suited to the all-rounder.
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Most of us, when we start investing, will buy Australian shares. We typically gravitate towards businesses that we recognize, perhaps one of the miners, a bank, or a retailer that we walk past at the local shopping centre. Before long we stumble across exchange traded funds, and most people tend to gradually invest more and more in these vehicles over time due to the lower level of mental energy required in making the investments, and their significantly lower level of volatility.
Having a home country bias within portfolios is not something unique to Australia. Almost every country in the world sees the same thing. In some cases the portfolio bias can take on a degree of patriotism.
My question though is whether as investors, aiming to grow our wealth and in so doing achieve the choice and flexibility that enables us to lead interesting lives, this bias makes sense? Or should we look overseas to international shares?
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Tax cuts are coming for anyone earning over $45,000 a year. For those earning between $120,000 and $200,000, the changes are particularly meaningful. This week I wanted to explore some strategy considerations you might wish to think about in the lead up to these very significant changes.
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Given this week's episode is our first for the new year, I thought I'd take a look at the typical areas to focus on with reference to your stage of life. Now of course there's a wide range of normal, so feel free to adapt these thoughts to your own situation. Hopefully, they can help to give you some direction as you make your plans for an amazing 2024.
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Recently I've had several planning discussions that centered around inheritances. Despite this common core, each discussion was very different. So in this week’s podcast I thought I'd share with you some of the things I'm seeing, and the discussions I'm having with clients. Perhaps they might help you in navigating this area, which can be challenging, with the emotional elements that are often a feature.
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It's summer and hopefully you're kicking back somewhere, recharging the batteries with plenty of blue sky and sunshine. It's at times like these, perhaps strolling along the beach with our partner, nothing urgent to be done and plenty of time to think, that the thought might pop into our head “wouldn't it be great to spend more time here. I wonder what it costs to buy a holiday house?”
Conveniently, real estate agents will have their windows brightly broadcasting all the various potentials to satisfy your desire. As a Financial Autonomy listener though, you are likely the prudent, perhaps even cautious, member of your little tribe, so perhaps your mind might turn to the factors that ought to be considered when contemplating a holiday home purchase.
Over the years I've worked with many clients who purchased holiday houses, so this week I thought I'd share with you a few of my observations.
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Today’s post is prompted by two separate discussions I had with new clients this week. In one case, there was a recent inheritance, in the other, the couple had recently paid off their mortgage. In both instances, multiple options existed. I heard about things like home renovations, private school for the kids, cutting back to four days a week, early retirement, buying an investment property, paying off an investment property, going on a big family holiday, topping up super. And on it went.
The problem in both cases wasn't not having any goals, but rather, the opposite. Complete overwhelm with too many goals, too many options, and an inability to be able to decide which to pursue.
So in this week's podcast, I thought I'd share how we overcome this very common problem.
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This week we’re lucky enough to have Ana Kresina, co-hosts of the Get Rich Slow Club podcast. Ana is also the Head of Content and Community at investment app Pearler, and a parent of two small children.
Today we are talking financial planning for parents and I’ve asked Ana to join me because she is the author of a book called Kids Ain’t Cheap: How to plan financially for parenthood and your family's future so she’s clearly well and truely across this topic.
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This week’s podcast is inspired by a question I got for my Ask an Expert column in the Fairfax press.
A reader asked whether it was worth adding extra money to super given the balance goes up and down. She can put $5000 in one day, only to see the balance drop by that amount the next, causing her to feel like those savings just got flushed down the toilet.
There are several different elements that are important to get your head around in thinking about this question, and the word count limit in the newspaper makes giving a complete answer challenging. The podcast format however offers far more flexibility, so let's take a few minutes to dig into this question, something that I know other people have had go through their mind over the years, and dispel a few misunderstandings.
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You've almost certainly heard of index investing, also sometimes called passive investing. Here investment portfolios are constructed to replicate I given a market. The weighting given to each individual stock is determined by the size of each company, its market capitalisation. So for instance in the Australian market, the largest allocation would be to BHP, then Commonwealth Bank, CSL, etc.
The main alternative to index or passive investment is active investment. Here fund managers deploy various strategies in an effort to outperform the market average.
Factor investing sits in between these two approaches. It's been around for a long time, with mixed results. ETF offerings adopting a factor investing methodology are expanding in the Australian market, so this is an investment approach that you are likely to hear more about.
Let’s get you up to speed.
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A cancer diagnosis (in the midst of COVID), a career change, and starting a new business. This week I speak with Suzanne Alexander from Mindful Finances about how she helps her clients and the challenging journey she’s been on to accumulate the wisdom she’s now able to impart.
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Owning your own home is the goal for most of us. The security that comes with owning the roof over your head is a massive stress relief. It’s also almost certainly a good financial move in the long run, as you accumulate wealth through the combination of capital appreciation in the value of your home, and progressively paying down the debt.
The challenge typically though, is getting on that first rung of the ladder. Often there isn’t a huge difference between mortgage repayments and rental payments, so cash flow wise, the move to home ownership is doable. The barrier however is the deposit.
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This week on the podcast I’m joined by Kate Toon, entrepreneur and digital marketing guru.
Regular listeners will know that there are 3 pathways to achieving Financial Autonomy - investing in shares, investing in property, and running a business.
This week's episode clearly fits into the running a business stream. Financial Autonomy is about having choices in life, and being your own boss can certainly enable that. But running a business is far from simple, which is why I’m very excited to chat with Kate, someone who has not only succeeded herself in building a sustainable business but also helped many others as well.
You can find Kate's book here: www.katetoon.com
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When does it make sense to move your superannuation savings into a Self Managed Super Fund? Is not shifting to an SMSF a wasted opportunity? Who should have a self-managed fund?
This week we're going to get you answers to all these questions. So if you've ever wondered whether a Self Managed Super Fund is right for you, hopefully this week's episode we'll set you straight.
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This week I’m excited to have Serina Bird join me on the podcast. You may have come across her podcast, The Joyful Frugalista.
Serina is here to talk about her new book - How to Pay off your mortgage in 10 years.
So if paying off your mortgage is on your to-do list, listen up for some great tips and insights.
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Annuities are a product most people have heard of but don't know exactly what they are or when to use them. With interest rates returning to more normal levels, annuities are coming out of the deep freeze. So this week I thought I’d take you through the basics of annuities so you have an appreciation for where they might have a use in your financial plan.
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This week we're talking with Bryan Mitchell on all things intergenerational wealth transfer, and looking particularly at the question of whether a gift or a loan is the best way to pass wealth on to the next generation whilst you are still alive.
Structuring the transfer of wealth as a loan might provide some level of asset protection in the event of a future divorce, but Bryan explains what is needed for such an arrangement to stand up in court.
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All of us will retire at some point, but with the pressures of mortgage repayments, school fees, and just living, it's common for people to give little thought to retirement planning until well into their 50s.
So this week I thought I'd take the opportunity to cover off on a few key fundamentals that we regularly discuss with clients. Hopefully several of these you can tick off as done, but perhaps there are a few you hadn't considered that you might be able to nudge up your to-do list.
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Jarrod McCabe is a director at Wakelin Property Advisory. Jarrod was on the podcast a couple of years back sharing his expertise. I’ve invited him back to get a read on the current property market. With interest rates looking like they may have peaked, it’s certainly an interesting time.
https://wakelin.com.au/about-us/
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In this episode, we will provide practical advice and techniques for professionals looking to tackle debt effectively, including debt consolidation, budgeting strategies, and tips for accelerating loan repayment.
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This week, we provide a step-by-step guide on how professionals can lay a strong foundation for building wealth, including budgeting, saving, investing, and planning for retirement.
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This week I chat with Katerina Peiros, estate planning lawyer from Hartwell Legal, about an interesting case that went through the courts recently. We’ll also have a broader discussion around what you need to be thinking about when making your estate planning arrangements.
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Which is better? A 50% return once, or an 8% return each year for 10 years? In this episode, we will go over this and the power of compounding.
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Within the financial independence community, the concept of passive income frequently gets a lot of attention. Sometimes though, I find that its overemphasis leads to poor strategy decisions. So this week I wanted to explore where a passive income goal has the potential to lead you awry.
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This week, we're talking about all things risk profiles. What they are, how they work, what to do when you and your partner's risk profiles conflict, and much more.
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This week I chat with Mitch Potter on his financial autonomy journey - travel, starting an apprenticeship in his 30s, investing, and having plenty of fun along the way.
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With mortgage rates having leapt up this past year, the effective return savers receive by parking their money in an offset account is looking increasingly attractive. This has led to a question we're being asked more and more. Should I invest or just leave my money in the offset account?
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Today I’m talking with Shannon Nutter, Head of Vanguard Super, about the findings from their recent study - How Australia Retires.
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For an investor trying to build wealth and achieve financial independence, a question they will inevitably face is whether they should be sending their savings into stock market investments, or paying off an investment property instead.
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In 2012 Gail, her husband, and their 4 young children set off from Melbourne for a 6-month long Australian adventure. In this week’s episode, I ask Gail how she made it possible, what have been the implications since, and what adventures they have planned next. This one is sure to inspire.
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Saving requires forgoing spending today for benefits in the future. Whilst it’s clear that financially, to live entirely in the present with no allowance for the future is unwise, there is the potential to go too far the other way. But how do you know what the right balance is?
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A while back I put a call out in the GainCHOICE email asking for readers to reach out if they had a story to share about taking a career break or making a career transition.
Several people came back to me, so over the next few months we’ll have a few interviews around this topic.
This week is the first of these. I’m chatting with Brenda today, who is in the early stages of a 6-9 month sabbatical.
We talk about her Financial independence journey and how she aligns that with her goal to visit every country on the planet. This is a wonderful discussion that I’m sure you will love.
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This week’s episode is another one inspired by a recent client question, one that we get asked multiple times each year.
Should I be topping up my super?
The primary motivation in seeking out an answer to this question is to determine whether you're on track to have enough retirement savings for a comfortable and enjoyable later phase of life.
But the other element is around tax.
There's a general awareness that there are tax savings to be had through using the superannuation system. The unsaid element to this question of topping up super, is whether potential tax savings are being squandered through not taking maximum advantage of the superannuation system.
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Redundancy.
With the Australian economy slowing as the impact of higher interest rates begins to bite, job cuts are likely to accelerate. Layer on top of this the potential impact that artificial intelligence might have on the white-collar workforce of the future, and it's easy to understand why many people are feeling anxious about their employment future.
I've found that when I'm feeling anxious, the best way to relieve stress is to identify what I would do if the thing that's keeping me awake at night, were to occur.
Worst-case scenario planning.
Once I'm clear on what I would do, even though it's somewhat unpalatable, I find the anxiety goes away.
So if the potential for redundancy is something causing you sleepless nights, this week’s episode might provide you with a way to take control and move forward with positivity.
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This week I have the pleasure of welcoming Michael Kemp onto the podcast. Michael's working life has bounced between dentistry and financial markets, sometimes doing both at the same time! For 9 years he was the chief investment analyst for Scott Pape’s newsletter.
Michael has recently released his third book - The Ulysses Contact - how to never worry about the share market again.
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I try my best to avoid financial jargon, but “mean reversion” is one piece of jargon well worth being acquainted with.
The “mean” is just a fancy way of saying the average. The concept of mean reversion then, is that investments and markets tend to want to pull back to their average over time.
This week we’re going to dig into what mean reversion is, and perhaps more importantly, its implications for you as a long term investor.
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This week we’re talking all things financial modeling with Jacob Kettler from Intelliflo.
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Often when I ask new clients when they would like to be able to retire the answer is “tomorrow”, with a smile and a chuckle.
Retiring as early as possible is seen by many as the pinnacle of financial success. This is interesting, because if you had someone who had been made redundant and was finding it difficult to get back into the workforce - early retirement but not at a time of their choosing - they're unlikely to be in a happy state.
This week I want to explore a few alternatives to retiring early, and some reasons why you might like to consider these as part of your plans. If early retirement is the choice in life that you’re shooting for, go for it, by all means. But if your deeper goal is to live a happy and healthy life, perhaps these alternatives might provide a viable way forward for you.
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This week we’re talking career change. For many of the clients that we work with, the choice being pursued is a career change, usually because the job they’re in is not making them happy. Sometimes it might be following a redundancy.
Now our area of expertise is around the finances, so our focus is on how to make the career change possible financially. But there’s a whole lot more to a successful career change than just the dollars.
I’m joined this week by Kate Richardson. Kate is an Executive Career Coach, who orchestrated her very own career change 4 years ago. Today she helps people like you and me succeed in their very own career transition.
Link: www.katerichardson.co
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I came across a great story recently that got me thinking. A successful woman in her 50s observed that several of her younger colleagues at work, all in their 20s, we're furnishing very expensive handbags. She realised that she'd never had a luxury item like that, and if these young folk could afford one, then surely after all these years of work, she could too. She mentioned this to a few friends, and they were all encouraging - splash out, enjoy yourself, you've earned it.
She had a look around and found a Chanel bag that was to her liking. Apparently she even needed to make an appointment to buy the bag. But when the time came to hand over the credit card and make the purchase, she pulled back. She couldn't bring herself to do it. Spending thousands of dollars on a status symbol just wasn't something that she could do.
In this week's episode I wanted to explore the idea of luxury, particularly as it pertains to financial autonomy. Once you've got yourself into a financially secure position, what use do you put that to?
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The focus of our podcast is to help you gain choice through the achievement of what I’ve called Financial Autonomy. A very close cousin of the idea of financial autonomy is Financial Independence. Financial independence is the concept of owning assets that produce income such that it is not necessary for you to engage in paid employment to produce the money you and your family need to live.
I'm sure most listeners are familiar with the FIRE acronym. As we've canvassed in past episodes, whilst this is a cool and catchy acronym, most advocates of this philosophy have come to the realisation that the RE portion, the retire early portion that is, is probably misguided. The financial independent piece though, the first half of the acronym is a valid pursuit, and that's certainly something that aligns well with us here at Financial Autonomy.
The bulk of the people we work with are in their 40s and 50s, and so that's why this week I thought I'd share with you the key strategy elements we use to help people like you achieve financial independence. I hope you find it useful.
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You'd have to have been living on a deserted island for the last 18 months to not know that interest rates have been on the rise. Central banks around the world are endeavouring to return rates to normal levels, following sharp cuts through the pandemic. Normalising rates is not without pain however, as many who bought homes two or three years ago are very well aware right now.
But higher interest rates have impacts for investors too. So this week I wanted to dig into four ways in which today's higher interest rates are impacting your share portfolio.
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If you've listened to a few of these podcasts, or read our weekly email, you will know that our core theme is helping you Gain Choice in life. Today's episode covers a few different systems which we can use to make better financial decisions.
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This week we're going to look at 6 core personal finance concepts. These are concepts that it's easy for those of us working in the space to assume everyone understands. It might also be that your understanding of what these terms mean differs from the industry definition. So let's run through these core concepts together and make sure we’re all on the same page.
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Given the large increases seen in property values in recent decades, combined with more and more of us living well into our 90s, the problem of being asset rich and cash poor is becoming increasingly common.
Another way to frame this problem is something an old neighbour said to me once, “Paul, you can't eat bricks”.
It's great to be financially secure and have significant assets behind you, but you need cash flow to pay the bills and put food on the table. That's easy enough whilst you are working, but once you retired you either need your assets to be throwing off income, or else liquidated to be available for spending.
In this week's episode we're going to look at a few ways that you, or perhaps an older family member you care for, might be able to solve the problem of being asset rich but cash poor.
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As a parent, providing your child with the best possible education is core business. This week I'm talking to Marie Van Asch of Futurity about education funding solutions. This was a great discussion, hope you enjoy it.
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It's not uncommon for our clients to want to assist their children to get into the property market. Particularly in our major capital cities, we all know that prices are at levels that make it very difficult to accumulate an appropriate deposit and be able to service the level of debt required.
Usually, parental assistance in the property market is achieved through a gift, or a lump sum of money to supercharge the deposit. Sometimes, parents might go guarantor on a loan, with all the risk this entails.
Recently I've been working with some clients who have a slightly different take on how they would like to help their kids. In the medium term, they do want to be able to assist their children to get into the property market. But in the short term, their priority is about helping them transition from living in the family home to becoming independent adults.
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This week to explore when you should be taking some time to look at your personal insurance.
Appropriate insurance is an essential financial safety net, but we want to have the right levels of cover - not too much, and not too little - because insurance costs money, and that’s money you can’t use for other things like growing your wealth.
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The Australian share market has gotten off to a great start this year. Indeed the last 12 months have been fantastic. If you've been following along via the gaining choice email you will know that over the last 12 months, investors in the Australian market have gained around 11% inclusive of dividends whilst those investing in the US market are down about 6.5%, again inclusive of dividends.
The ASX’s outperformance is a distinct break from what we've seen over the last decade or more. What's going on and will it continue? That's what we'll be discussing in today's episode.
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This week joining me on the podcast is Shelley Johnson, who, in addition to hosting the My Millenial Career podcast, recently co-authored a book with a friend of the podcast, Glen James from My Millenial Money. Their new book is called Sort Your Career Out.
This is a great fit with our goal of gaining choice, which very often relates to issues around our paid employment - a career change, going back to study, or perhaps taking a sabbatical and doing some travel. So I’m looking forward to having a great discussion with Shelly today.
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How can you find the right balance between enjoying life today, and having that wonderful lifestyle, versus the delayed gratification of saving and investing to achieve bigger, long-term goals?
That’s what we’ll explore in this week's Financial Autonomy podcast.
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One of the most common reasons for a new client joining us here at Guidance is due to the receipt of an inheritance, whether a traditional one upon the passing of a close family member, or increasingly frequently, an early inheritance where the family member has determined that they have assets in excess of their needs and wish to see their loved ones enjoy the gift during their lifetime.
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We're all familiar with traditional investments - stocks, property, term deposits. But there is a whole other universe of investments that get broadly bracketed together as "Alternative" investments. Alternatives could be classic cars, collectibles like guitars, stamps or coins, cryptos, futures funds, private equity, and precious metals.
The rationale is diversification, but even more important than diversification is correlation of returns, the idea being that alternative investments operate on different cycles to your other investments.
In this episode I chat with Maxwell Nee from UK based Oneo Group about investing in wine and whisky.
Important to highlight that our guest represents a company that is not registered or licensed in Australia. The information shared in this podcast is not advice and in no way should it be interpreted that Paul recommends or endorses this company.
Link to more details about Wine & Whisky Investing: https://lp.oenogroup.com/aus/
The new year has arrived, you’re re-charged, it’s time to release the hand brake and get moving!
Welcome back to another episode of the Financial Autonomy podcast, where our goal is to help you gain choice in life – perhaps that’s the choice to cut back to working 3 days per week, maybe it’s making a career change, or being able to retire at 60 and travel around Australia. Whatever the choice it is that you are seeking, this week’s episode should help ensure 2023 is a year where you make strong positive strides in the right direction.
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Taylor Riley is a young business dynamo having established multiple businesses already, and he hasn't even hit his mid 20's.
In this interview, we discuss content creation, the law of reciprocity, and control as a vehicle to gain choice. I'm sure you're going to love this one.
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This week's episode is inspired by a real life conundrum that my wife and I are currently facing. With reports of property prices falling we've been wondering whether there might be an opportunity to pick up an investment property at an attractive point in the cycle. The title of this week’s episode is precisely the issue we have been tossing around, namely what is a reasonable price to pay for an investment property?
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This week I chat with long time listener to the podcast and reader of the GainingCHOICE email, Dan McCutcheon. Dan reached out to me recently sharing his wealth creation journey. I thought it would make a great case study and he kindly agreed to come on and share his experience.
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Last week in one of our progress meetings I was asked by a client a very sensible question “why is record-low unemployment a bad thing?”
His question arose from a news report that was attempting to explain the economic challenges currently faced and the concerns for 2023 and beyond. One of the explanations offered by the journalist was this “problem” of record low unemployment. But as my client observed, surely everyone having a job is a good thing. A totally reasonable assumption to make. So what's going on?
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If we’re asked what sort of return should be expected from an investment over the long run the tendency is to rely on the long term average, or perhaps lean on the conservative side and round down a percent or two. The reality however is that from one year to the next there is a high level of variability in returns. Sure, given long enough they may well deliver that long term average that you see published, but in any given year your actual outcome can be vastly different, both positive and negative.
Sequencing risk recognises this natural variability in returns year by year.
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This week, we cover 3 different ways you could rapidly accelerate your wealth creation to help you to achieve financial independence.
For more from us, click here.
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Every major financial event is also a major psychological event. When you buy a home, change job or career, receive an inheritance, or retire. So this week I'm very excited to welcome psychologist Parris Davenport from Everyday Psychology onto the podcast to explore that intersection between psychology and money a little deeper.
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Links referenced in the episode:
Everyday Psychology
National Debt Helpline (1800 007 007)
Black Dog Institute
I’m sure you don’t need me to tell you that investment markets around the world have been experiencing challenging times over the past year. Shares, bonds, and property, everything is down and there have been few places to hide.
So this week I wanted to consider what we could learn from past market declines. What can we take away to help us not only get through this current period, but perhaps even take advantage of the opportunities that might present.
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Today I'm speaking with Victor Huang Principal and Head of Investment Solutions with Milliman Australia.
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In this episode, we discuss franking credits, their purpose, and how they benefit you.
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I'm joined today by Evan Lucas. Evan has just released a beautifully written book Mind Over Money. It makes a great companion piece for our focus here at Financial Autonomy around gaining choice.
In this episode we talk about the impact your personality has on the way that you interact with money, the role of expectations, cultural differences and their impact on money decisions, and plenty more.
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With markets down at the moment due to interest rate increases, this week I explore how to keep calm when markets aren't doing what we'd like, and how to ensure you don't miss out on any potential opportunities.
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We knew the rates of last year were temporary, but the speed with which they are snapping back has been surprising. Based on this, I wanted to talk this week about the different potential strategies and opportunities that will arise in a world with rising interest rates. [Disclaimer]
I'm joined today by author and buyers agent Steve Palise. Steve recently released his second book, Residential Property Investing Explained, to complement his first release Commercial Property Investing Explained.
But today we're not just talking property, Steve splits his time between Australia and the UK. He's achieved this through two of the three Financial Autonomy pathways that we focus on here. So let's dive in and learn how he's done it.
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For over 6 years now I've released weekly podcasts and emails exploring the idea of Financial Autonomy and gaining choice. The content is informed by the wonderful clients that we get to work with, many of whom are listeners.
I'm constantly learning, and sometimes what you learn contradicts what you thought you knew. This week I wanted to share 3 things I got wrong. There's probably plenty more, but let's start here anyhow.
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This week we're talking tax. Strategies to minimise tax are often high priorities for those seeking financial planning advice. In this episode, we'll take a look at some of the most common taxes that we as Australians face, pick apart some of the mechanics of how they work, and consider whether it's appropriate to change anything that you currently do to improve your tax outcome.
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This week I chat with Financial Autonomy community member Mark Hutchins on his journey to financial independence. We discuss minimalism, the related idea of "enough', job share, running a small business, semi-retirement, and Mark's unique Ice Cream FI approach.
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Your superannuation is likely to grow to be either your largest, or second largest asset, so it's worth making sure you understand how it works. In this week's episode I explore the different contribution types you can make into super, and they benefit you in the long run.
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This week, we're talking with accountant Shaun Farrugia about Family Trusts - who are they most useful for, what do they cost, how can they be used, when should they be closed, and plenty more.
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Optimised Accounting
Why do people worry about their financial future, and what simple ideas can you implement to alleviate at least some of that worry? That's our focus for today's episode, where we look at how to de-stress your personal finances.
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This week I chat with Glen James from My Millennial Money. He's just wrapping up an Australian roadshow travelling right across our wide brown expanse. So I'm keen to learn what he's hearing, what is on people's minds right now? From interest rates to investment timing and long-term goals, it's always fun to chat with Glen.
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My Millennial Money
Whether it's packing up the family and doing a road trip around Australia, taking some time off to focus on your postgraduate studies, or just recharging the batteries with a few months on the Greek Islands, some sort of mid-career sabbatical is on the agenda for many of the people that we work with.
In this week's episode, I want to explore some of the planning actions you can take to help make this goal achievable.
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We're all so caught up in being financially responsible and planning for a successful financial future, however, sometimes this can get in the way of living our lives. In this episode, we explore how we can strike a balance between being responsible with our money while also enjoying life throughout the process.
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It's easy to think about progress in terms of technological progress, but in this episode, I want to talk about the social progress we have made and how that has allowed us to go after our Financial Autonomy dreams.
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We didn't have a new episode this week, but, we thought you may enjoy this one from the vault which covers some of the steps you can take to help you move to self-employment.
We are joined today by Shaun Farrugia from Optimised Accounting and Finance to talk about the essential things you need when you move to self-employment.
In this episode we cover the challenges and knowledge Shaun shares about being self-employed:
- Getting the clarity of knowing why you need to move to self-employment.
- Keeping the proper financial record and the challenges encountered with record keeping.
- The capital and survival strategies whilst building your new business.
- Tax and accounting tips. Putting aside enough money for tax.
- Understanding your own break-even point.
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In this episode, Paul talks about how financial advice is regulated in Australia and what this means for Guidance in terms of the advice he provides.
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Today I'm chatting with David Foster who's a member of the Financial Autonomy community. He reached out to me after a podcast episode a little while back - 50% more weekend for 20% less pay. David emailed me to say he'd done exactly that and I asked if he'd be prepared to share his experience. Luckily for us, he said yes.
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In this episode, Paul delves into various strategies he uses with clients to enable them to afford private education for their children as well as offer how he and his wife achieved this goal.
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This week, Paul talks with David Scollon, author of the book Mission Possible. (Available here)
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You're likely paying for some life insurance in your super fund. Why have insurance, optimal ownership, and how you might reduce the costs? All that and more in this week's episode.
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This week it's our 5th birthday! I have a bit of a reflection on how the show has developed through the years and answer some listener questions.
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As the working world returns to normality one change I'm hearing about from several different clients is a decision to accept less pay in exchange for working four days a week. One client who made this change recently was telling me how wonderful it is to have about 6 hours in the middle of the day completely to herself. The house is quiet, nobody needs you, you just get peace. It’s had such a positive benefit on her mental health that she has now convinced her husband to make the same change.
Perhaps cutting back your working hours is something you've contemplated. In this week’s episode, I wanted to explore that a little, dig into some numbers, as best we can in an audio piece, and consider strategies to address the longer-term impacts of making this change.
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In this episode, I talk with buyer's agent Arjun Paliwal from the Property Nerds Podcast about all things property. What is the data telling us, what impact will rising interest rates have, and how will the change of government impact the market?
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Interest rates are on the rise. NZ, Canada, the UK, and the United States, have all started bringing rates back to more normal levels, whilst our Reserve Bank followed suit earlier this month.
For those with debt, we've all enjoyed the incredibly low interest rates of the past few years. But all good things must come to an end. And for those with savings, they are quite likely looking forward to getting more reasonable returns on their money.
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Most of us recognise that interest rates were unusually low for a time, to counter the economic effect of the COVID pandemic. We recognised that at some point they would return to normal. But what is normal, why are they going up now, and why has this got share and property markets so rattled? One word - inflation.
Inflation is all over the news at the moment. In financial markets, inflation has been the driving force for at least the past 6 months. So this week I thought we do a quick inflation 101 session to ensure you understand why it matters and perhaps consider whether there's anything you should be doing to stay ahead.
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This week I chat with Matt from the Aussie Firebug blog and podcast. We talk about financial independence, travel, lifestyle planning, and retirement.
Check out Matt's blog here:
Aussie Firebug | Financial Independence Retire Early
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Should I be putting my savings in an offset account, or paying it straight off the loan and accessing via a redraw if I need it? This is a question I get asked pretty regularly, so perhaps it’s on your mind too.
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Today I chat with Sydney based mortgage broker and former financial planner Chris Bates about all things property and how we can maximise our wealth through investing in property.
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Wealthful
This week's episode arises from a question I received from Daniel around uneven super balances between him and his spouse. Now I don't know Daniel’s full situation and a podcast isn't the place to provide detailed strategy recommendations, however, his question is an issue that many people face where one member of a couple has significantly more super than the other, so this week I thought we’d explore strategies you could use if this is a problem you face.
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This week I chat with Money Coach Hannah Richards about what Money Coaches do and how they help people in achieving their money goals.
Hannah Rose Richards Money Coaching
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More Australians than ever have become investors as the combination of anemic interest rates on bank savings, and reduced spending during COVID-induced lockdowns have presented an unprecedented opportunity. But as we've seen in the past couple of months, investment markets don't always go up, prompting some new investors to question their approach.
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How do we juggle the desire to save for the future, with the need to live life to the fullest today?
Is 6 months of backpacking around Europe in your 20’s more valuable than being able to buy a beach house in your 50s? Is pushing hard on the mortgage today the wisest course, or would you be better off easing up a bit and spending a little more on the family holidays?
This is the question we'll be tackling in today's episode of the Financial Autonomy Podcast
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This podcast is about gaining choice. Our guest today is a podcasting friend of mine who has gained choice through changing her career trajectory to get into an area of personal interest. Normally it's Nic doing the interviewing, so today we'll see how she goes in the role of podcast guest.
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There is always a degree of volatility on investment markets. But there are times when world events raise the level of worry and uncertainty, causing markets to seesaw, sometimes violently, from one day to the next.
As investors, this sort of activity doesn't put us in our happy place. A slow and steady upward climb is what we'd all like to see.
This week let’s take a look at some investing fundamentals and how they apply during periods of heightened volatility. I’m hoping they help dial back any anxiety you are currently feeling about your investments.
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Nearly every client I work with who has children give some thought to how they might help them out in adulthood. For those with young or teenage children, the thoughts are often around assisting them into the property market via a lump sum gift to bolster their potential deposit.
For clients whose children are beyond this milestone, considerations around early inheritances commonly crop up. Where parents perhaps in their 70s or beyond can see that they comfortably have their retirement needs met, they are often thinking about distributing some of their wealth amongst their family today rather than leaving it all for when they're gone.
But dealing with this intergenerational wealth transfer comes with some potential problems for both the giver and the recipient. In this episode, I'm going to share with you a few of those challenges that I've seen. Perhaps these examples will help you in navigating this potentially tricky area.
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In this week's episode, I break down how some of our clients have used the incredibly generous capital gains tax exemption for primary residences.
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One of the most common reasons clients engage us through the Financial Autonomy programme is a realisation that all their hard work is not translating into financial wealth and security. It generally seems to be that people in this predicament have put all their energy and focus into developing their careers and therefore just haven’t had the headspace to focus on their personal finances. I guess it’s similar to the carpenter who’s house is falling down or the mechanic who’s car chuggs along, smoke pumping out of the exhaust.
Now of course everyone’s circumstances are different, and therefore the plans that we develop are unique. However in this week’s episode I thought I might share with you some of the key things we recommend to help solve this problem for our clients. We want to ensure that their prime working years result in personal wealth, which provides financial security and therefore the choices in life that are of course the overall goal here at Financial Autonomy.
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This week I chat with Kerry Ware. Kerry and her husband Scott decided to separate when their boys were teenagers. They worked through an amicable separation of the family business and co-operated to ensure the boys lives suffered minimal disruption. Then tragically, Scott was killed in an accident. In this interview Kerry shares some of the challenges faced by women who find themselves single in middle life and how she coped with the tragedy that befell her family.
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In this episode, I discuss how the investment world has become safer in our modern era.
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You're busy with your career and personal life. You don't need your wealth creation plan to suck up hours of each week. So how can you best put your earnings capacity to work to secure choices for you down the road, without the plan adding to your already full schedule? This week I’m sharing 7 ideas to help you build wealth efficiently.
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The entire Financial Autonomy framework was built by reverse engineering how my most successful clients achieved their success.
In that vein, today I wanted to share with you two ways in which I've seen moderately wealthy people really take a step forward, with approaches that perhaps go against the conventional wisdom. Maybe you can't use them yourself right now, but an awareness of their application might still assist you as you develop your personal Financial Autonomy plan.
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This week I chat with Chris Panteli on his transition from fish and chip shop owner to blogger. Chris shares a tonne here on what he's learned, mistakes he's made, and blogging can make you money.
Check out Chris's blog at www.lifeupswing.com
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The financial world is full of acronyms. In today's episode we're going to decipher as many of these as we can find. What's TLA you ask? It stands from Three Letter Acronym and came out of an inside joke in my CBA days (Commonwealth Bank of Australia) pointing t the fact that every major initiative had to be quickly abbreviated to a TLA, causing internal communications to resemble some weird coded language with the odd English word included to give you a clue as to what was going on.
Anyhow, today is about helping you make sense of the financial world. Likely, most of these you already know, but I'm hoping that there's one or two in here that you go "huh, I'd always wondered what that meant".
Oh, and we're not restricting ourselves to only three-letter acronyms, despite the episode title, we got some two and some four-letter ones too. Hope you enjoy.
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This week I speak with Scott O'Neill, director from Rethink Investing, buyers agent for commercial property.
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When it comes to stock market investment, buying is easy, selling is hard. It's interesting how there's always so much talk about exciting new opportunities and yet rarely is the exit plan discussed. Well, let's address this common investment strategy oversight and help you decide when it's time to sell your shares.
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If you've been listening to this podcast for a while, and certainly if you've read my book, you'll be aware that we adhere to a framework in helping people gain choice. A core element of that framework is the three pathways. The entire Financial Autonomy framework, and in particular these three pathways, are the product of my 20 odd years as a practising financial planner. I've observed how hundreds of Australians have accumulated wealth, and the various ways in which they've used that wealth to impact their lives. The Financial Autonomy framework isn't some theoretical idea that popped out of the ether.
I sometimes refer to which of the pathways a particular podcast episode relates during the introduction. I do this in the foolish assumption that everyone listening has read the Financial Autonomy book or at least checked out our website and knows what it is I'm talking about. But of course there will be many listening who have only recently stumbled across the podcast, so let's take a moment in this episode to bring you up to speed on this foundational element of what we do here at Financial Autonomy.
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In this week's episode, Paul goes through the different asset classes and how they can be used to create an investment portfolio that is right for you.
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This week I chat with Deferit Co-founder Mat Blas. We discuss the start-up scene in Australia, and Mat's first-hand experience in getting a disruptive new business off the ground.
www.deferit.com
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No more "transitory", Will there be an Aussie Robinhood?, Could there be an upside to Omicron for markets?, and plenty more.
This week my co-host is Pat Garrett, CEO and co-founder of Six Park. As a former New York private equity guy, Pat certainly knows his way around markets.
General Advice Disclaimer
Receiving an inheritance can often come with plenty of baggage attached. The most obvious is that someone has had to die, usually someone very close to you, for you to be the beneficiary of this financial gift. But the challenges don’t end there.
Many of the clients I work with engage us following the receipt of an inheritance. We often have discussions around an awareness that a close relative worked hard to build this wealth and as the recipient, there’s a weight on the shoulders to not blow it, to not be frivolous.
For many people, an inheritance is the first time they have had to make decisions about what to do with large sums of money. Until now all they’ve had to do is manage their cash flow, pay off the mortgage, perhaps check their super statement once a year, and that’s about it.
Now they’re being asked to make decisions on hundreds of thousands of dollars. It’s not surprising that people often get stuck in a state of inertia. Whilst grateful for the gift they have received, the pressure to not screw it up can become overwhelming.
[Disclaimer]
This week Financial Autonomy community member Alessandro joined me to discuss all the investment market news that's worth talking about in the past week.
General Advice Disclaimer
In this episode, we talk with Emily Wallace about trends in the property market in Australia. She gives very useful insights into how we as investors, homeowners, or people looking to get into the market may want to position ourselves.
[Disclaimer]
This week Financial Autonomy community member Dash joins me to chew the fat on the market news of the week.
General Advice Warning
This week Financial Autonomy community member Andre joins me to chew the fat on the market news of the week.
General Advice Warning
After 10 consecutive months of gains, the Australian share market declined in September, heralding a period of volatility that continues today. There is never a single catalyst driving markets, instead, there's a confluence of views that tend to drive either positive or negative momentum. But in this most recent period of volatility, there has been one factor receiving the bulk of the finger-pointing, and that is the bond market. To be specific, it is rising yields and falling bond prices.
So this week I wanted to discuss why it is that bond markets can have such a strong influence on the stock market. What it is that drives bond market shifts. And do some crystal ball gazing as to how this relationship might unfold in the months and years ahead.
[Disclaimer]
This week Financial Autonomy community member Andre joins me to chew the fat on the market news of the week.
General Advice Warning
Ethan returns by popular demand to discuss the business and market news that caught our eye this past week.
In this episode, I chat with Jillian Johnsrud, host of the Every Day Courage podcast and author of a new book Fire the Haters. The focus of our discussion is the evolution of FIRE. Jillian and her husband retired early and Jillian shares her experiences.
Find Jillian on Twitter and Insta: @jillianjohnsrud
www.jillianjohnsrud.com/book
www.jillianjohnsrud.com/mini
[Disclaimer]
This week my good friend Andrew Dreischner of Mercury Wealth joins me to toss around the big issues floating around the business and investment universe.
General Advice Warning
A lot has changed in the investment universe over the past 5 years or so, and the SMSF landscape has been particularly impacted. In this episode, Paul discusses the usefulness of self-managed super funds in the current climate. When are they appropriate? When can they be less than ideal? Why are they becoming less common? All this and more will be covered.
[Disclaimer]
This week Ethan comes off the bench to fill Justin's shoes, chatting about the business and market news that caught our eye this past week.
General Advice Warning
This week Paul talks to Glen James of the My Millennial Money podcast. Glen has recently released a book - Sort Your Money Out & Get Invested (check it out here), a comprehensive guide to all things money management in Glen's uniquely engaging style.
We discuss the Investor vs Saver mindset
Glen's "Money House" concept
Money Hacks
and plenty more.
A great fun episode that you're sure to enjoy.
[Disclaimer]
Join Justin and I as we digest the most interesting stories in investment markets.
This podcast should never be considered advice. See our general advice warning here.
Check out Justin's YouTube channel.
In this episode, Paul reveals the steps needed to reach millionaire status. While perhaps not as massive as it used to be, reaching this milestone is still very impressive and worth celebrating. Through the strategies outlined, hopefully it is a status you will be able to achieve.
[Disclaimer]
Join Justin and I as we digest the most interesting stories in investment markets.
This podcast should never be considered advice. See our general advice warning here.
Check out Justin's YouTube channel.
In this episode, Paul talks to Chris Tate about all things trading. Chris is a very insightful, experienced trader so there's a lot to get out of this one. We hope you enjoy!
Chris Tate is from Trading Game: https://www.tradinggame.com.au/
[Disclaimer]
Join Justin and I as we digest the most interesting stories in investment markets.
This podcast should never be considered advice. See our general advice warning here.
Check out Justin's YouTube channel.
Today we're going to explore a strategy element that has application to both the stock and property pathways. We're talking here about gearing. Gearing means borrowing to invest. Gearing is a way to increase your risk, and we know that risk and reward are inextricably linked. We also know that there's no such thing as a free lunch, and higher risk, whilst helpful in providing the potential for higher returns, also comes with the potential for greater loss. So in this piece we will be looking at how you might manage the risk associated with gearing too.
[Disclaimer]
Join Justin and I as we digest the most interesting stories in investment markets.
This podcast should never be considered advice. See our general advice warning here.
Check out Justin's YouTube channel.
This week I chat with career transition expert Erin Devlin. Erin had a career with the Australian Ballet from an early age, but at age 21 needed to reinvent herself. Today she runs two different businesses help people succeed in making a job or career change.
In this interview Erin shares some fantastic hard-won advice on how you can succeed in your career.
Link: people2people | Recruit Top Talent across Australia Now
[Disclaimer]
Join Justin and I as we digest the most interesting stories in investment markets.
This podcast should never be considered advice. See our general advice warning here.
Check out Justin's YouTube channel.
Perhaps you’ve heard of ARK, or its founder Cathie Wood. They’re frequently mentioned in passing on stock market related podcasts or in press. Justin and I regularly mention both of them in Market Noise. But if you’re like me, you perhaps only know a little of the surface level story. So I thought I’d take the time to use this wonderous thing we call the internet to learn all that I could about ARK, it’s founder, and why they are relevant to us investors today. I hope you enjoy.
[Disclaimer]
Justin Baldori and I chat about the market news that caught our eye last week.
Nothing in this podcast should be considered advice. It is for information and entertainment purposes only. General Advice Warning.
The US Federal Reserve met last Friday for their annual Jackson Hole meeting. This is closely watched by markets for the future direction of US monetary policy and interest rates.
This week I download what was said and the impacts on us here in Australia with co-host of The BIP Show Podcast James Whelan.
General Advice Warning.
Join Justin and I as we digest the most interesting stories in investment markets.
This podcast should never be considered advice. See our general advice warning here.
Check out Justin's YouTube channel.
Most employers have discovered that having workers work from home can be just as productive as having them come into the office. At the same time, employees have discovered the benefits of more flexible work practices, and some of the challenges. This week I chat with Vanessa Marrama on how we can all get the most out of this massive shift in working life.
[Disclaimer]
Justin and I had a tonne of fun recording this weeks episode. We hope you love it too.
As always, please remember this podcast is for information and entertainment only - it is not advice. Full disclaimer.
Check out Justin's other work:
Justin Baldori
JB & Ind
Financial Autonomy, this podcast and blog, exists to help you gain choice in life. To succeed with this goal, we need to put ourselves into a position of financial strength – debt paid off, investments generating income, and superannuation well-funded for our latter years. And none of that happens if our income doesn’t exceed our expenses. This is the definition of savings – the portion of our income that we don’t spend. In this piece I provide 10 ideas to help you save more. They’ve all either worked for me, or I’ve seen them help clients that I’ve worked with. I hope you can find a few you can adopt.
[Disclaimer]
This week we talk about ARK Invest's robotics research, what do the current rush of huge share buybacks mean, the $600m crypto heist, Adidas jettisoning Reebok, and Benifer's new $85m pad.
My co-host is Justin Baldori. Check out his stuff on YouTube.
General Advice warning and disclaimer.
This week Paul talks to Danielle Ecuyer, author of Shareplicity - A simple approach to share investing and Shareplicity 2 - A guide to investing in US stock markets. In this episode, Danielle shares her expertise primarily in the area of investing in US stocks. Danielle has a lot of experience in this field and is certainly someone to listen to if you are interested in investing in the US - or even investing more locally in Australia.
[Disclaimer]
Australia’s wealth is disproportionately distributed to those over 60, with a sharp rise in property prices being the primary culprit. But whilst we’re all living longer, science hasn’t yet found a way to grant us eternal lives, and so eventually that wealth will be transferred down to subsequent generations.
Receiving an inheritance can be financially life-altering. Having helped clients manage their inheritances over many years, here are 10 essential things to consider upon receiving an inheritance.
[Disclaimer]
Justin Baldori and I chew the fat on investment market news from the past week.
Disclaimer
This week I'm chatting to Sarah Hawley, an entrepreneur in the remote working space. Remote working COULD be the one good thing to come out of the COVID pandemic for those seeking Financial Autonomy and gaining choice, so let's work out how to get the most out of it.
https://www.linkedin.com/in/sarahriegelhuth?trk=people-guest_people_search-card
https://twitter.com/sarahhawley__
https://sarahhawley.life/
https://www.growmyteam.com.au/
https://www.growmotely.com/
[Disclaimer]
Paul and Justin's weekly chat - what caught their eye in the past week on the business and market fronts?
Disclaimer
https://financialautonomy.com.au/general-advice-disclaimer
Justin Baldori
In this episode, Paul looks at why it can be so hard to stick to the investing principles we all know to generally be the best course of action. With the constant barrage of information, it can be hard to not be swept up in it all and use faulty investment strategies. How can we learn to stick to the principles we know to be in our best interest?
[Disclaimer]
This week, Paul talks with Chloe from Forager Asset Management about the strengths of active management and her role within Forager.
[Disclaimer]
This week we're going to explore the topic of moats. No this is not yet another weird acronym, though you do sometimes see it written all in upper case so if you’ve been confused by this you’re completely forgiven. The idea of a business moat is the same concept as a moat around a medieval castle. It is about protection and long-term survival. It's not hard to see how these characteristics might be attractive in an investment. So in this week's episode we'll explore where this moat concept came from, look at some examples, and then consider how you might apply it on your journey to gaining choice.
Disclaimer
Investment markets are in a fascinating place right now. There are more opportunities for investors than ever before. This week I talk with Adam Smith, CEO of Saxo Markets Australia, someone perhaps uniquely placed to help us navigate the current investment world.
[Disclaimer]
Pandora, the world’s largest jewellery manufacturer, will cease using mined diamonds. In future the only diamonds it will use will be those manufactured in a laboratory. The reason for the move is concern for the working conditions of diamond miners, primarily in Africa. This is an extension of previous commitments made by the company to only use recycled gold and silver, and have all operations carbon neutral by 2025.
Their share price also rose 160% in the past year.
What's going on?
[Disclaimer]
Entrepreneurial inspiration here. One of the Financial Autonomy pathways to gaining choice is starting a business or side hustle. This week I talk to Ashleigh Page from Adventure Travel Pro about her journey in creating this exciting new business and how past endeavours have shaped her latest adventure.
Adventure Travel Pro
[Disclaimer]
The end of the financial year is just a few weeks away. If you've had a successful year financially, perhaps you’re looking for ways to shave a little off your tax bill. We all know that paying taxes is important. It’s our contribution to a functioning society. But where rules and incentives exist that encourage you to reduce your contribution then it's only sensible for you make use of those provisions. This week, we'll look at an extremely impactful tax deduction that you may overlooked.
[Disclaimer]
This week's special episode, we will answer some of your burning questions ranging in topic from investing, to financial goals, to the all important question of what Paul can see out of his window!
[Disclaimer]
This week I speak with the host of the popular Property Investory podcast, Tyrone Shum. Tyrone is passionate about property as an investment vehicle, but he's thinking about things a little differently to the normal buy and hold a residential property plan. I know you'll get plenty out of this one.
[Disclaimer]
As regular listeners would know, here on the podcast we follow the framework set out in the Financial Autonomy book. One of the pathways in that framework is stocks and within that section, I explore the Core-Satellite strategy in some detail. It's a strategy we use a lot with clients and you've possibly heard me refer to it several times.
In this week's episode, we're going to dig in a bit to the satellite component of this strategy. What constitutes a satellite, why have satellites at all, and how much should you allocate to a satellite?
[Disclaimer]
Whether you're considering buying an apartment as an investor, or as an owner occupier, Amanda has some tips here that could save you thousands of dollars and a whole lot of heartache.
In this weeks episode we talk all things apartments and strata properties. My guest is Amanda Farmer, host of the Your Strata Property podcast, and a practising strata lawyer in Sydney.
[Disclaimer]
This week I'm joined by Caroline Bowler CEO of BTC Markets, Australia's largest cryptocurrency and digital asset exchange. We're talking blockchain, crypto-currencies, and the opportunities these technologies might present for our future.
[Disclaimer]
Couples can have a distinct advantage when it comes to building wealth and achieving financial autonomy provided they maximize the opportunities available to them.
Let's take a look at 5 opportunities you might be able to use.
[Disclaimer]
This week I chat with buyers agent Emily Wallace about the state of the property market around the country, where the opportunities are, and I also asked for some tips on what to look for at an open for inspection, what to do when making an offer, and some advice for sellers to help them maximise their sale price too.
Tonnes here to sink your teeth into.
Insta: emily_wallace_ba
[Disclaimer]
We are entering the Age of the Creator. The confluence of the internet, the tools it has produced, and blockchain technology is delivering us from the Industrial Age to the Creator Age at speed. And for anyone interested in the idea of Financial Autonomy and gaining choice, that’s a wonderful thing.
[Disclaimer]
Not only is Tess McCabe the genius behind the cover of my Financial Autonomy book, she's also a creative freelance extraordinaire! In this episode, we discuss the positive and negative elements of being a freelancer, her career journey and how she's moved between being an employee and being self-employed, and the outlook for creative people.
If moving to self-employment is on your to-do list, you might find our Entrepreneur You program helpful. You can check it out, along with our other online programs at www.financialautonomy.com.au/faa
Connect with Tess here:
IG @tessmccabe
FB /tessmccabegraphicdesigner
[Disclaimer]
Financial planning, money coaching, and financial counselling. These are all terms you've probably seen or come across, but the difference between the three roles and when they are applicable is often not obvious. So in this week's episode I’ll clarify what each of these roles do, and where perhaps they might be applicable in your life.
[Disclaimer]
This week I speak with Sean D'Souza, host of the Three Week Vacation podcast. Sean shares his journey from successful cartoonist to building an online business helping businesses succeed at marketing.
[Disclaimer]
Early this year I bought a small amount of Bitcoin. In this week's episode I share, why, how, and what I learned.
[Disclaimer]
Van Eck are an ETF provider with several interesting fund offerings that might fit in a portfolio as a satellite. So I've invited Damon Gosen, Director of Business Development at Van Eck onto the podcast to explain what the investment thesis is behind a few of their most interesting funds.
Shifting to self-employment can be a great way to gain choice. But it's not without its risks and drawbacks. Today we're going to explore both the positives and the negatives to help you decide whether self-employment might be the way forward for you.
Beyond the contents of this episode, we have several other tools that might help you if you're contemplating a move to self-employment. Firstly we have our pathways self-assessment tool , which can be found in the Financial Autonomy book and also on the front page of our website. This tool helps point you down the pathway most likely to fit with your circumstances and objectives. We also have our two Entrepreneur You courses. One is the full programme called Transition to Self-Employment Without Going Broke, then we also have an abridged version specifically for Side Hustles. Find out all the details at financialautonomy.com.au/FAA which is for Financial Autonomy Academy, the home of all our online course material.
[Disclaimer]
In this episode, Financial Autonomy listener Katrina shares how she reinvented her life, from a high-stress, inner-city role in the police force, to a new life in a regional town, with some internet dating success to stir into the mix. A fun and inspiring story that I'm sure you'll enjoy.
[Disclaimer]
This week we take a look at Listed Investment Companies, LIC’s. They’ve been around a long time on the stock market, and given the advancements made, especially in the Exchange Traded Fund (ETF) space, it's worthwhile to question whether LIC’s still have a reason to exist? Should we as investors have them on our radar?
[Disclaimer]
After only 9 months since launch this Youtuber is making over $2,000 per month from his YouTube channel. In this week's episode he shares how he's done it, from the equipment needed, growing an audience, and the time commitment involved.
[Disclaimer]
Recently a very small stock in the US made headlines in the investment community. Gamestop is a bricks and mortar retailer in the US, selling games and accessories for The PlayStation and Xbox. Despite being a dying business, in the space of 2 weeks in January, this stock rose from a little over $19.00 a share to over $145 a share. That's a 660% gain. By the time you are listening to this episode, who knows where it will be at.
One of the reasons for this growth is a phenomenon known as short covering. To make sense if this fascinating story, we need to have a good understanding of what short selling is and how it works. So let's bring you up to speed.
[Disclaimer]
From radio and publishing to hosting his own TV show, and today being self-employed in one of the industries hardest hit by the COVID pandemic - tourism - Adam Ford of the Big Bus Tour and Travel Guide shares with us his journey and how he's created the resiliency to succeed. An inspiring story that I'm sure you'll love.
Also mentioned: www.showmemelbourne.com.au
[Disclaimer]
In this episode I review two 2021 Outlook reports, one produced by Vanguard the second largest fund manager in the world , and one from VanEck . I've pulled out these two because they have some consistency in their views, but also some differences and I thought that might be useful to you guys in thinking about how you might approach your investment plans for 2021.
[Disclaimer]
Russell Investments recently released a research report - 2020 Value of an Adviser - where they explore where a financial advice relationship can add value for investors. Today I speak with Bronwyn Yates, Head of Client and Business Solutions at Russell Investments to share with us what they learned. We also discuss when in your life it might make sense to obtain professional advice.
[Disclaimer]
The Financial Autonomy podcast was recently added to Feedspot's Top 65 Early Retirement and Financial Independence Podcasts
If you're in a relationship that's been going for a little while, how do you manage your finances? Do you and your partner’s wages all go into a single joint account that you both then spend out of? Or do you keep your money separate, each paying for your own expenses and combining only when necessary?
There's no single right way for couples to manage finances but in this episode, we're going to explore some of the things you might like to consider, and I'll share with you some of the ways I've seen it done amongst different couples over my 20 years of helping people with their money.
[Disclaimer]
In the Financial Autonomy podcast, we normally talk about traditional investments - stocks and property.
But today I wanted to discuss another type of investment you can make which can help you hugely in achieving financial autonomy and gaining choice. That is investing in your career.
I'm joined by Emily and Shelly, career and recruitment experts from the My Millennial Career podcast to explore what employers are looking for right now, and where you might be able to make a savvy investment in your career.
There are some really actionable ideas here - namely how to get a pay rise and look out particularly for the T and I career framework that I thought made a lot of sense and was a great way to think about your career.
[Disclaimer]
In this week's episode, we look at the year just gone and pull back the curtain to reveal some of the things that have happened here at Financial Autonomy. Then we share with you what's coming up in 2021.
I hope you enjoy this episode. Thanks for your support and have a wonderful Christmas.
[Disclaimer]
Today I'm speaking with a Financial Autonomy community member. Jason emailed me to share a bit about his journey and it was so interesting I asked him to come on the podcast and share it with everyone - I think you'll find this one really inspirational.
[Disclaimer]
A Side Hustle can be a hugely significant stepping stone in you gaining financial freedom and choice. They’re a fantastic way to develop new skills and broaden your network, both of which help enormously in your income generating resiliency. In the end of course, they can have a financial payoff as well.
But like most things in life, valuable and easy don’t sit comfortably side by side. Whether it’s the challenge of getting started, or keeping all the plates in the air once you’ve gotten the ball rolling, succeeding at Side Hustles is tough. In this post, we’ll take a look at the various Side Hustle obstacles I’ve come across and offer some ideas as to how you might be able to overcome them.
[Disclaimer]
We've talked to several property investment experts recently, but what we haven't covered what you need to think about once you are a landlord.
In this episode, I speak with Jeremy Goldschmidt from property management disruptor RentBetter to learn the property investment essential beyond the initial purchase.
[RentBetter Website]
[Disclaimer]
ESG - Environmental, Sustainability, and Governance. Often known as ethical investing, using these factors to help construct portfolios has been a growing trend that has delivered great results for investors this past year.
In this week's podcast, I take a look at why.
[Disclaimer]
This week I have a bit of fun with Elephant in the Room co-host Veronica Morgan, a buyers agent and co-host of Foxtel's Location Location Location Australia.
I play devil's advocate, arguing against property as an investment, and Veronica explains why I'm wrong (or not in a few cases!).
Hope you enjoy this one.
[Disclaimer]
Learn more about Veronica here.
Home Buyer Academy
This week I jump on the line with New York based financial planner Amy Irvine to get a read on what's happening on Wall Street following the most significant US election ever. [Disclaimer]
Jarrod McCabe from Wakelin Property Advisory joins us today to provide an update on the property market. One not to be missed. Disclaimer
Regular listeners will know that I frequently refer to the 3 pathways to Financial Autonomy - investing in stocks, investing in property, and building a business or being self-employed.
But how to determine which pathway makes the most sense for you to pursue?
That's what we'll be exploring in this week's episode.
Disclaimer
Ryan wanted a change in his life. He wanted more flexibility, he wanted to gain choice. He thought about how he could make that happen and realised the starting point needed to be reducing his debts - they were a huge burden that locked him down and hugely limited his options.
Hear how he went about solving this challenge.
Another great IRL example of the Financial Autonomy journey, I hope you enjoy.
Disclaimer
Pete Wargent is a property investment expert. He is a buyer's advocate and does various bits and pieces within the property space. Pete's background is as a chartered accountant. The content he produces on property investment tends to be very analytical and data driven. So I've invited him along to get his insight as to what he is seeing in the data at the moment in the property space. He's got some unique insights here and some great tips that I think you'll get a lot out of.
Regular listeners will know we've got the Financial Autonomy framework which we go through in the Financial Autonomy book. There's the three pathways, there's investing in shares or stocks, investing in property and self-employment. The other element I really appreciated in Pete's story is his application of the three pathways to achieving Financial Autonomy. As a guest, I think he is a fantastic illustration of what I'm trying to explore through the Financial Autonomy podcast for almost three years now. We have really useful and practical information from someone who's done it, who's built wealth and who has gained choice.
Disclaimer
When investing in property, it's largely a given that you'll be borrowing as a core element of the transaction. Indeed often, you're borrowing the entire purchase cost. Borrowing to buy shares however is often approached with trepidation, despite the many advantages shares offer around the ease of altering the transaction size, diversification and the speed with which investments can be liquidated.
In today's episode, we'll take a look at the pros and cons of borrowing or gearing to invest in shares. Is now the time for a big move?
Before we dive in, it's important to remind you that this is general information. The appropriateness of gearing for you depends on a range of factors such as income security, savings capacity, debt levels and investment timeframe. Seek out professional investment advice before commencing a gearing strategy. Visit the Advice Page on our Financial Autonomy website to see how we can help.
Also, if you're fairly new here, you might not be aware of our Invest in Shares online course. This self-paced course is suitable for novice investors through to those with intermediate levels of experience. We take you through all the key concepts like dividend yield, PE ratios, investment selection, taxation considerations and plenty more. One of the bonus modules is specifically on gearing so if this topic is something that resonates with you and you're a DIY type, go to the Learn Page on our web site and click on courses.
Disclaimer
I met Alex Hont at a Financial Planning conference last year. Alex hosts the Masters of Finance podcast - so with both financial planning and podcasting in common, we had quite a bit to talk about!
I invited Alex onto the podcast to share how he went from being an employee to being a partner at his financial planning firm - how he planned for that move, how it unfolded, and what the change has meant for him.
Alex shares his journey, how he got into the practice in the first place, how he's been able to increase his share and become a partner in the business, and a little bit about his thoughts as to where it might lead to longer term.
It's a bit of a different story in terms of how to arrive at self-employment. We haven't covered this sort of approach before but it's something that I hope you guys will get a lot out of.
Disclaimer
Regular listeners will know my book Financial Autonomy - the money book that gives you choice, came out last month. In this week's episode, I explain why I wrote it and how it fits into my mission of helping more people gain choice.
During the various interviews I've done promoting the book one of the most frequent questions I get is how did I find the time to write it? So in this episode I also pull back the curtain a little to share how I got it done. Perhaps it might help you see a way to achieve one of your dreams.
I hope you enjoy this episode and get some valuable ideas.
Disclaimer
Really excited for this episode. I chat with Thomas Taw, the Head of Investment Strategies Asia Pacific for BlackRock. For those who are unfamiliar, BlackRock is the largest fund manager in the world. It's a wonderful opportunity to gain insight into how a business with the global resources they have at their disposal is seeing things - investment markets opportunities, economies, and the impact of COVID just to get us started.
Soak this one up.
Also, stay up to date with all things investments and financial autonomy via our weekly email - Gaining CHOICE.
Disclaimer
One of the most popular pathways to achieving financial autonomy is through investing in stocks. Stock market investing has a ton of advantages including ease of diversification, low transaction cost, ease of liquidity, and being highly regulated to guard against investor fraud.
A popular stock portfolio strategy is known as the core/satellite approach. In today's episode, Ill be taking you through how this approach might help you build a robust and successful share portfolio.
Disclaimer
Tim Duggan is the co-founder of Junkee Media, one of Australia's fastest growing media companies dedicated to improving the conversations about things that matter.
In today's interview, we talk about building communities around digital products and understanding the shift towards conscious consumerism. We also discuss his new book, Cult Status, which encourages thinking about business in a new way, finding your business purpose and what it means to be an "untrepreneur".
Tim gives his personal advice on how you can best gain choice in life.
Learn other pathways towards financial independence and gaining choice through my new book - Financial Autonomy: The money book that gives you choice.
Disclaimer
Self-employment is one of the 3 pathways to achieving Financial Autonomy.
What are the key 12 elements you need to cover off to succeed as a self-employed person?
We covered the first 6 elements last week and this week we'll cover the other 6.
Disclaimer
Self-employment is one of the 3 pathways to achieving Financial Autonomy.
What are the key 12 elements you need to cover off to succeed as a self-employed person?
That's what I'll be covering in this and next week's episode.
Grab the free toolkit: www.financialautonomy.com.au/159
Today Melissa Martin is a successful Melbourne photographer, but that's quite a way from where she started her career journey.
In this chat we explore:
- The challenges many women in particular face when they start a family and find that their previous career no longer works in their life.
- How Melissa went about finding a new path.
- Some of the clever things Melissa did to achieve success
- Plus plenty more!
Melissa's web site: https://www.melissamartinphotography.com/
Entrepreneur You program mentioned in the interview: https://find0101.lpages.co/entrepreneur-you/
The Financial Autonomy book is now available. Discover the full Financial Autonomy framework and build your own strategy to gain choice via the free downloadable companion workbook.
Free delivery within Australia if purchased direct. Visit www.financialautonomy.com.au/book_order
This weeks episode:
What is insider trading, why is it a crime, and why does Hollywood seem to love it so much?
That’s what we’ll be exploring in this episode.
Looking for an easy, low-cost way to getting started with investing? Ted Richards from Six Park might have your solution.
Learn more about Six Park - https://guidancefs.sixpark.com.au/
Grab the Financial Autonomy book - https://find0101.lpages.co/financial_autonomy_book/
Disclaimer
Modern Monetary Theory (MMT) sounds dry, I know, and in truth, and it is. But it's likely you're going to hear a whole lot more about it, and the idea of jobs guarantees, in the coming months and perhaps years.
Why?
Because MMT proposes an interesting solution to unemployment. And battling unemployment will be the number 1 agenda item around the country and the world over the next few years.
What's Aged Care have to do with financial autonomy and gaining choice? At some point, your parents are likely going to need age care and it might come down to you to solve it for them. An awareness of how the system works and some of the basics, is something I’m sure you will find valuable.
Financial adviser and age care expert Susan Cooper explains some of the jargon and we discuss the key considerations when you’re helping a loved one with a move into aged care.
SUBSCRIBE TO OUR WEEKLY EMAIL “GAINING CHOICE” TO KEEP UP WITH ALL THINGS FINANCIAL AUTONOMY
Disclaimer
When it comes to finances, singles can easily feel that the world is against them. Politicians constantly talk of the need to help “working families”. Yet what about those who through choice or the fall of the cards don’t fit that mould?
In our last episode we talked about Resiliency, having a budget approach that works for you, holding an emergency fund to protect you against events like losing your job and having appropriate insurance. We also covered Savings and Wealth Creation, setting goals, creating milestones, investing and developing your career.
Today, we talk about Housing, Estate Planning and Traps. Learn more about these aspects and why you should consider them when it comes to financial planning for singles.
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When it comes to finances, singles can easily feel that the world is against them. Politicians constantly talk of the need to help “working families”. Yet what about those who through choice or the fall of the cards don’t fit that mould?
Housing affordability is tougher for singles. Bills like insurance and council rates don’t get any lower with only one person in the house. And there’s no-one to back you up through a period of financial adversity like redundancy or illness.
Singledom however does offer some benefits – removing the need to compromise being at the top of the pyramid.
Learn about the 5 aspects you should consider when it comes to financial planning for singles.
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You might have come across Stuart Wemyss via his regular contributions in the Australian newspaper, or his excellent podcast Investopoly. Stuart is a fellow financial planner, and in this week's episode, we discuss his latest book Rules of the Lending Game. Whether you're an investor, a homeowner with an existing mortgage, or an aspiring first home buyer, there are tips in here that I'm sure you'll get a tonne of value out of.
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French born Western Australian Isabelle Lenglois shares her inspiring journey to Financial Autonomy in this week's episode. She prospered in an industry not especially welcoming of women - oil and gas drilling - through plenty of hard work and determination. She has then succeeded in transforming that income into wealth which provides her and her young family the independence she desired.
Very happy to be featuring Isabelle's story as our 150 episode milestone. I hope you get plenty out of it.
Check out the books mentioned here:
The Barefoot Investor
Rich Dad Poor Dad
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Volatility and share investing go together like honey and crumpets.
As a share investor, how can you use volatility to your advantage? And how can you ensure volatility doesn’t derail your strategy to build wealth and gain choice in life?
I’ve invested through the GFC, the Asian Currency Crisis, September 11, the Japanese tsunami, Brexit, numerous North Korean nuclear threats, and plenty more share market upsets. Here’s my top 7 tips for investing in shares through volatile times.
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Lachlan is a member of the Financial Autonomy community and responded to my call out for case study examples. I'm especially excited to chat with Lachlan because he's pursued all 3 of the FA pathways - shares, property, and self-employment.
You can get a hold of him through his email at Ellenjaycs@gmail.com
If self-employment is of interest to you, check out our new program Entrepreneur You - Transition to Self-employment without going broke
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So why consider moving to self-employment?
Our mission here at Financial Autonomy is helping you gain choice. Of the options available to gain choice, becoming self-employed offers the potential for you to achieve success quickly, without huge financial investment, and provides the greatest potential financial upside.
But transitioning from being an employee to becoming self-employed is a mine field. Let’s look at some of the challenges and what you can do to overcome them and achieve the success you deserve.
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In today's episode, I speak with Financial Autonomy community member Stewart Perry. Stewart shares his plans to gain choice and flexibility and how the multi-phase strategy really resonated for him as he works towards early retirement. He explains his investment journey, what he's doing and how he's going about it.
A fantastic element of Stewart’s story was his experience growing up when his parents (who were well ahead of the curve) achieving Financial Autonomy in their 40s. He shares how that happened and what it meant for them as a family in terms of family time, holidays, and travel.
It was very generous of Stewart to share his story. I hope you get some great inspiration from his story.
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Most office workers have quickly had to adjust to working from home in recent weeks. The pace at which businesses were able to make this happen has been quite extraordinary. Before COVID 19, if you’d told most companies they needed to transition to work from home arrangements, it would have been a 12-month plus planning process. Yet when needed, we all got it done in days.
Whilst most of us will return to the same old routine when things get back normal, the potential for permanent change certainly exists. So how might we grasp this opportunity in our quest to gain choice?
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A bit of a different episode for you today. This is a flip the switch kind of one because in this episode, I'm actually the person being interviewed. I'm being interviewed by Kate Campbell who hosts the How to Money podcast. You'll recall back in Episode 134, I interviewed her. So we did these couple of interviews on the same day.
In this one, Kate interviewed me for her podcast on how to make money investing in shares. It was a good discussion so I thought we'd share that with the Financial Autonomy community as well because I know plenty of you guys are interested in investing in shares.
We do have an online course called Invest in Shares with Confidence for people that are interested in investing in shares and making money in shares. So if that's something that is of interest to you, you can check that out at financialautonomy.com.au/shares.
Note, this interview was recorded in early 2020, before the COVID19 crisis.
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The 1 Page Marketing Plan book has been a publishing sensation, selling hundreds of thousands of copies and being one of the most successful self-published books ever. This week I speak with its author Allan Dib who shares some massive wisdom bombs on how to succeed in any sort of business, big or small.
If you have even the slightest entrepreneurial fibre in your body, this is one you will want to dive into.
From Allan:
• Free resource for your audience:
Download The 1-Page Marketing Plan Canvas for Free
Buy the Book
• If you want to acquire new leads and grow your business consistently, you need marketing. And if you're a small-to-medium-sized business with a limited budget, you need to be implementing direct response marketing. It's key to your business success.
• Allan’s LinkedIn
• Successwise Facebook
• Successwise Instagram
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You’ve probably heard the phrase “never waste a good crisis”. The origins of this quote aren’t clear, though some point to Winston Churchill. Regardless, its point is that in times of crisis, habits and practices are forced to change. When things are going well, it’s easy to just let things float along. Some changes need a shock to bring them about.
In this current period of turmoil and worry, a change that might be valuable in your financial life is improving resiliency – the ability to withstand adverse times. If you’ve been unfortunate enough to be put out of work, these might need to wait until we return to normal later in the year. But hopefully you can at least be planning now for how you will bounce back stronger than ever.
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Today's episode is a bit of a freewheeling one. I've got some dot points down and I'm just going to go off the top of my head here. I wanted to cover off on different questions that I've been getting from our clients and from you guys in the Financial Autonomy community because no doubt if it's a question for a couple of people then it's probably a question for quite a few people.
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I speak with Geoff Grist, real estate agent and author of the book Flip for Cash on the investment potential of buying and improving residential apartments and units in Australia.
Buy the book: Flip for Cash by Geoff Grist
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Today's episode is a bit different. I don't have a script and I don't have a guest.
I recently ran a community survey to everyone that gets the Gaining Choice email.
In this podcast I want to share with you what we learned and some of the ways this information will be used to shape what we produce for you in the future.
Thanks for being awesome.
Paul
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Hear how Anna built her side hustle whilst studying at uni, and how she now generates hundreds of dollars profit every month with only a few hours work.
Anna is a member of the Financial Autonomy community. Anna has been running a side hustle for several years and I was curious to learn how she had found it, what she'd learned, and her plans for the future - I thought what better way for me to get answers to all those questions than to interview her for the podcast so all you guys can learn about Anna's experience too.
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Part 2 of How to Start a Side Hustle in Australia - the first part was episode 135 so give that a listen before diving into this one.
I’ve interviewed numerous Side Hustlers over the past 3 years, including Side Hustle guru Nick Loper from the Side Hustle Show, and have conducted my own fair share of entrepreneurial experiments. The time has come therefore to provide the definitive guide to starting a Side Hustle in Australia.
A Side Hustle could be the way you earn some extra dollars to pay for an overseas trip. Perhaps it accelerates the repayment of your mortgage. Your ambitions might be grander, with the Side Hustle being your entrée into becoming your own boss and pursuing self-employment or a major career change.
Side Hustles can certainly provide choice, and of course that’s what we’re all about here at Financial Autonomy. So how can you get started with your Side Hustle here in Australia?
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Like me, Lacey Filipich is passionate about financial independence and gaining choice in life. She's recently written a book, Money School, so I've invited her on to tell us all about it.
Lacey shares her thoughts on how social trends, like conscious consumerism and sustainable lifestyle, have helped Financial Independence gain momentum, especially among younger people. We discuss how the trend towards the gig economy has made younger people interested in finding options to take away the stress of job uncertainty.
She talks about changing how people perceive early retirement and introduces the idea of becoming time-rich.
We also discuss the common fear of "I've left it too late".
I'm sure you'll get a tonne out of our chat.
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I’ve interviewed numerous Side Hustlers over the past 3 years, including Side Hustle guru Nick Loper from the Side Hustle Show, and have conducted my own fair share of entrepreneurial experiments. The time has come therefore to provide the definitive guide to starting a Side Hustle in Australia.
A Side Hustle could be the way you earn some extra dollars to pay for an overseas trip. Perhaps it accelerates the repayment of your mortgage. Your ambitions might be grander, with the Side Hustle being your entrée into becoming your own boss and pursuing self-employment or a major career change.
Side Hustles can certainly provide choice, and of course that’s what we’re all about here at Financial Autonomy. So how can you get started with your Side Hustle here in Australia?
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This week I chat with Kate Campbell, host of the popular podcast How to Money on how she's gone about setting her goals and developing a savings strategy to see them achieved. As you'll hear, she heads off to Europe soon for a 4 month trip, so clearly she's got some ideas that work. I'm sure there's some ideas in here that you can put to use.
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This is part two of the back to the future episodes that we did. Episode 131 is part one of it, if you haven't had a listen to that one yet maybe give that one a listen.
A lot of the information contained in these two episodes form the framework or the basis for the Invest in Shares with Confidence online course that we put together. For people that have an interest in building a share portfolio and getting started in terms of investing, we have got that course now which has been really popular. We've been getting some great feedback on it.
Check out our online course – Invest in Shares with Confidence.
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This week I chat with retirement coach Jon Glass. Jon talks about the emotional event that occurs when we retire. He explains his analogy of crossing a bridge from salary earning and quite fixed in our weekly activities to having freedom and flexibility. Jon helps people create a new phase of life.
Jon has found that most people like to get up in the morning and have some plans for the day. He talks about the different things he and his clients have gotten themselves involved in.
I hope you find it valuable.
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We've got a bit of a back to the future episode for you this week, “How to get started Investing in Shares”. The original version of this episode came out in late 2018. You can check out the full blog post here. This episode is a two-parter. There's a second part which is called “How to Build an Investment Portfolio” and that will be added in a couple of weeks’ time.
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2019 was a bumper year for investors, so can we expect more of the same in 2020? Or is a pullback inevitable?
I receive reports almost daily from fund managers and financial institutions. In the last few weeks they’ve tended to focus on the current state of the global economy and what that means for investment markets. So in this episode I’ll be distilling their various insights, and providing my take on a few of them too. I hope you enjoy.
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This week we talk all things Shares with Bryce & Ren from the Equity Mates podcast.
We talk investment strategies, the current state of share markets, leverage, our first investments, books we’ve found helpful, and plenty more.
I hope you love it!
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Living sustainably is an increasing focus for many of us. This week’s guest, Permaculture expert Kat Lavers, shares how growing your own food can not only help in reducing your environmental footprint, but save you money too.
In this episode, Kat shares:
- How she took on a modest inner suburban home in Melbourne and transformed it into an urban farm.
- What is permaculture.
- The amazing volume and variety of produce she has been able to produce, and the personal budget impact of that.
- How much work is involved.
- The health benefits, both physical and mental.
- The flexible life Kat has been able to achieve as a result of being so self-reliant for her food needs.
Oh, and a YouTube video showing her property has been viewed over 600,000 times! Take a look here: Incredibly Abundant Permaculture Garden in the City | The Plummery
I hope you love it.
And if you’re not already receiving our weekly Gaining Choice email, subscribe for free here.
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In this episode I review the wins and challenges faced during 2019 and look ahead to our plans for Financial Autonomy in 2020.
A bit of a pull back the curtain episode that I hope you enjoy.
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This week we talk making the move from employee to self-employment with Amy Irvine a fellow financial planner based in New York. We’ve each made the transition to self-employment, though Amy more recently than me. We share our experiences. The positives gained, as well as the challenges.
Moving to self-employment is definitely a pathway to gaining choice in life, so if it’s an option you are considering, I know you’ll get a tonne out of this episode.
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If you’re to achieve financial independence and gain the choice in life that is our goal here at Financial Autonomy, then it’s very helpful if some or perhaps all of your living costs can be met without you needing to put a finger to a keyboard, smile at a customer, or drill a hole to install something or other.
Passive Income sources are the key to arriving at this outcome.
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We're talking property this week. I recorded this interview a few months back with John Pidgeon, co-host of the popular podcast, My Millennial Money. John shares his property journey with us and provides some great ideas on creating wealth through property.
We discuss:
John’s first investment property in rural Victoria
His thoughts and approach to building wealth through property
How John has built a property portfolio to give he and his wife choice in life.
Where he thinks the opportunities are now
I think there's a tonne of wisdom and knowledge you can get out of this episode, so I really hope you enjoy it.
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If you’re to achieve financial independence and gain the choice in life that is our goal here at Financial Autonomy, then it’s very helpful if some or perhaps all of your living costs can be met without you needing to put a finger to a keyboard, smile at a customer, or drill a hole to install something or other.
Passive Income sources are the key to arriving at this outcome.
It’s important to recognise that in one way or another, passive income generation requires considerable work up front. So for instance, our third option – buying shares, produces wonderful passive income via dividends, but of course you’ve had to work and save in the first place in order to have the cash to buy those shares.
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This week’s guest went from high school science teacher to being self-employed providing digital marketing services. In the space of 12 months she has grown her business income to over $100,000, and now has 2 staff helping her out.
In this episode Brittany shares what sparked her change of career, her use of side hustles through her journey to self-employment, how she built the skills she needed for success, and what she’d do differently if she was starting over.
If a career change or move to self-employment is on your radar at some point in the future, this is an episode that you won’t want to miss.
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The cost of private health insurance in Australia keeps on rising. After housing, food and motor vehicle expenses, health insurance typically comes up as the next big ticket items in most households budgets. So it’s worth asking the question – do we need it?
Private Health insurance is likely to be worth having if:
- You are over age 65 – the statistics say you’re far more likely to need medical care as you get older.
- Your income is at a level where the Medicare surcharge will apply.
- You’re planning on starting a family and would like greater choice around care and hospital accommodation.
- You have significant ongoing medical issues that won’t be covered under the public system.
In Australia we all contribute to a form of health insurance – Medicare, which for the most part is very good. Given the existence of Medicare, why pay for a second layer of health insurance?
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This week’s guest rose to become the medical director - head of department as an anaesthesiologist at a large trauma hospital, within 10 years of graduation.
He was working really hard, and getting the success that hard work brings. But then:
“I remember one night in the middle of a horrible, horrible case. It was a level one trauma. I'm covered in blood. And all of a sudden I realised that I don't know if I could do this anymore. I was exhausted. It had been a 20 plus hour day. I'd been working straight, I was in charge of all the operations for the day. And I thought, man, I don’t know if I could do this. And I've painted myself in a corner.”
In this week’s episode, career coach and anonymous podcaster Doc of all Tradez shares how he reinvented his working life and how he helps others do the same.
If you’re looking for a better balance between work and family life, between earning money and pursuing what gives you joy, and between pursuing the standard script of career success vs playing the long game for your health and happiness, then this episode is for you.
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Between 1870 and 1970 our lifesplans more than doubled globally. For the thousands of years of human history prior to this massive leap forward in longevity, most humans did well to make it into their 40's. We lived long enough to reproduce, protect our children until they could fend for themselves, and then we were gone.
Yet today in Australia we have a life expectancy of 82.5 years. In wealthy countries like Australia life is lengthening by more than five hours a day, every day.
In this week’s episode we’re going to look at how the traditional picture of what retirement looks like could evolve to better suit the realities of modern day life in Australia.
For all things Financial Independence and gaining choice in life, be sure to visit www.financialautonomy.com.au . There’s our library of past posts, and over 40 free downloads to help you succeed.
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Early retirement via property investment is a key theme of this week's episode.
Brad Dantonio, host of the Man Overseas podcast and I, met in Washington earlier in the year and sat down to record this collaboration episode.
Brad shares how he's been able to use property investment to retire early. He now lives in a different city around the world every 30 days. We also discuss shares, happiness, NFL, and plenty more.
I hope you enjoy it!
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I'm hugely excited to share with you my interview with Nick Loper from the Side Hustle Show podcast. In our chat Nick shares:
- How a house painting gig over the summer holidays helped set him on a path to entrepreneurship.
- His first side hustle.
- How he transitioned from full-time employee to full-time self-employment and some the challenges he faced along the way, not least of which was a huge Google roadblock on day 1 of self-employment that took 3 months to solve.
- Common ingredients for a successful side hustle.
- Nick also shares with us some of the highlights from the hundreds of side hustlers and entrepreneurs that he's interviewed over the years.
Check out Nick and The Side Hustle show here: https://www.sidehustlenation.com/side-hustle-show/
And be sure to sign-up for our regular Gaining Choice email to set you on the path to Financial Independence.
February 12, 1999.
That was the date something never before seen, happened. The Central Bank of Japan, battling persistent recession, cut official interest rates to zero.
At the time other central bankers around the world criticised the move. Savers must be rewarded for savings. Borrowers must have to pay something to borrow. Without these basic financial assumptions, does the money world still make sense?
Many predicted inflation would result. You will recall back in episode 111 I explored the enormous damage out of control inflation can cause.
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You’ve probably stumbled across the FIRE acronym before – it stands for Financial Independence Retire Early. It came out of the US and has spawned countless books, podcasts, conferences, and even a movie. Reddit has huge discussion threads devoted to the idea, with the primary thrust seeming to be how young you can achieve early retirement.
Now I’m well on board with the first part of FIRE – Financial Independence. But it’s the second part – Retire Early, that I have a problem with (as indeed do many in the FIRE community themselves). Financial Independence grants you choice. Choice in how you spend your time, how much of your time you devote to income generating activities, and what sort of income generating activities you do. Having gained that choice, why on earth would you want to retire?
In this episode, I explain some alternatives that I've seen bring people happiness.
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What are the secrets to a fun and interesting working life?
Nepal, teaching, and pursuing your passion. That's what we discuss this week with Jim Smith who shares how he's been able to achieve this much-desired outcome.
These days Jim's focus is on building a tourism business that helps Australian's and especially students, experience life in Nepal, whilst also helping the local Nepalese people through paying fair wages for work done - such as guiding, and supporting several orphanages.
“And at that point in time, it was more a question about what you like doing and what you want to do with your life more than what's going to pay you the most money” – Jim Smith
Jim's website is www.Focustours.net
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How many thousands of dollars do you have parked on the street or in the garage losing money every day?
It’s a question I’ve been focused on for our household recently. My wife and I each have a car, plus there is a 12 seater minibus for my wife’s tourism business that we could use for a personal trip in a pinch.
I reckon we’ve got about $70,000 of vehicles sitting on the street, slowly degrading, and all the while costing us money in servicing, petrol, tyres, insurance, and registration.
Surely there’s a financially smarter way of getting around!
I want to share the research I’ve done on a few alternatives to owning a vehicle and a little about my journey with car ownership.
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We speak Vanessa Wiltshire, a Gen-X/Y ‘tree changer’, living in Heathcote, Victoria.
Three years ago, she and her husband made the leap from suburban Melbourne to Heathcote in rural Victoria. In our chat Vanessa explains:
- How to know if a "tree change" is right for you.
- Escaping a career that makes you unhappy and into something that makes you smile (and pays the bills)
- The top things to look out for (that most tree changers won’t tell you)
- Knowing where the GOOD jobs are and how to find them (tapping hidden job market).
Check out Vanessa's website: www.sparkrural.com.au
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Welcome back to another episode in our financial history series. We started with Tulip Mania and the madness of crowds. Then we reviewed the Great Depression and how the lessons learnt continue to have impacts today. One thread of the Great Depression story was the Gold Standard, which we explored in episode 109. An understanding of the Gold Standard is vital to anyone attempting to think through the potential global impacts of Crypto currencies.
This week we look at another moment in financial history – the hyperinflation experienced in Germany during, and especially after, the First World War. It was this experience that made countries so reticent to drop the Gold Standard during the Great Depression. We’re also going to explore why nations today could be planting the seeds for a repeat of this financial disaster.
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Peter Stanhope, co-founder of Gig Super shares some of the challenges faced by self-employed people in our financial system. If you are self-employed, or planning on making a move to self-employment – this one’s for you.
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Welcome back to the third episode in our financial history series. Last episode we looked at the Great Depression and why it still matters today. Before that we visited Amsterdam in the 1630’s to learn about Tulip Mania. Today we’re going to be exploring the Gold Standard, something that cropped up during the Great Depression piece. Indeed the Gold Standard is often pointed to as one of the key causes of the Great Depression, and certainly contributed to its depth and duration.
Like the previous episodes, we’ll be giving you the essential facts and narrative around this important historical period, but what I hope you’ll especially get value from is the exploration of how the concept of the Gold Standard is being re-imagined today in the Crypto Currency world.
So hold onto your 1920’s hats, and let’s dive into – The Gold Standard – What was it and what does it have to do Crypto currencies?
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Today we’re continuing to explore significant moments in financial history. In particular I’m aiming to arm you with a basic understanding of what the event was all about, and then importantly, why it’s of relevance today.
Last week we looked at Tulip Mania in the Netherlands in the 1600’s. Today we skip forward several centuries to the Great Depression of the late 1920’s and 1930’s.
The Great Depression remains the longest and most serve economic collapse in modern history. There is some variation across countries, but it is generally considered to have lasted 10 years, from 1929 to 1939, though for many countries directly impacted by World War2, their struggles were further prolonged.
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You know how sometimes in the media or perhaps in a social setting, a self-declared expert will make reference to some historical event that they know full well most of us know little about, but they say it in such a way as to imply you’d be an imbecile if you weren’t aware of this world altering event.
This is the first in a series of episodes in which we’re going to explore some of these often quoted financial events – the Great Depression, Hyperinflation in Germany, and this week’s episode – Tulip Mania. I’ll be keeping things short and sharp, as usual, but armed with the knowledge you’ve absorbed through these episodes, next time someone attempts to assert intellectual superiority, you can get right back in their face – “yes, I did know that”, you can say, “but actually the real tragedy was the way…”. Put them right back in their place.
From the early 1600’s to the 1720’s, the Netherlands was the wealthiest country in the world. This was largely the result of a fair judicial system which meant that merchants from other parts of Europe, who were regularly imposed upon by their Kings to fund egotistical wars, (with imprisonment the outcome of non-compliance), where attracted to Amsterdam as a place where they could focus on what they did best - making money - relatively unimpeded.
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It's so easy to just float along.
If it ain't broke don't fix it is not just a good approach to raising toddlers, it can be a whole of life game plan.
But there will come a day when you're sick of going sideways. When rinse and repeat just won't cut it anymore. Whether it be career progress, building wealth, or physical health and fitness, one day you'll wake up and decide it's time for a change - time to move forward.
Today's episode provides a simple 5 step road map for how to achieve progress in making the change that you seek. For an audio blog whose focus is all about gaining choice, I'm not sure how we made it to 106 episodes without exploring this already. Better late than never I guess.
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Not your usual Financial Autonomy podcast.
I was recently invited to co-host the Wheel of Sport podcast when they were working on the theme of Money in Sport. I had a ton of fun with this one – I hope you enjoy it too.
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In this week’s episode I speak with author Annie Raser-Rowland about her book The Art of Frugal Hedonism.
Annie shares her tips on living a life of maximum happiness and fulfilment, whilst side-stepping some of the limiting societal expectations that we all face.
Annie certainly embodies our theme of Gaining Choice, and I’m sure there are ideas here that you can draw plenty from.
Link: https://www.frugalhedonism.com/
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The great Australian dream of owning a home once drove a fairly predictable housing pattern - Aussies would rent for a little while, save for a deposit then dive into home ownership at the first opportunity.
Housing status spoke volumes. Homeowners were successful while renters were either young or couldn’t get it together financially.
How times have changed. Rising house prices and a need for lifestyle flexibility now have many questioning if they want a huge mortgage or if they’re simply better off as tenants.
Let’s take a look at how you might decide if renting or buying is the right option for you.
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Online freelancing platforms can help you obtain freelancing work, or hire people to do tasks where you either lack the expertise or the time.
In this interview, Sarah Tang from Freelancer.com shares the inside tips on how to get the most out of these hugely powerful tools.
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With technology changing our world so rapidly, the chances of us entering the paid workforce in one role, and that role then seeing us through until retirement 40+ years latter would seem quite remote.
And even if this were possible, is it what you would really want?
In this post we’re going to explore some key steps you could take to execute a successful career change.
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EPISODE 100!!!!
Thanks for joining us for another Financial Autonomy episode. We've got a bit of a change in the normal routine today, because today is Episode 100 and I don't want to pass through that milestone without doing something a little bit special.
I've asked our Gaining Choice subscribers for their top Financial Autonomy questions. I've picked out five and in today's episode I'll take you through the answers.
Let's jump into episode 100.
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Throughout most of human history, the only time you retired was when you died.
Retirement as we now experience it is a reasonably recent phenomenon. It's an invention of the 20th century and it's worthwhile questioning whether it will continue through the 21st century, at least in the format we currently think of.
When the retirement age of 65 was set, back in the early 1900’s, it was assumed you only had 2 or 3 more years left until you were in the grave.
But as we live longer and longer, will the current version of retirement continue to be feasible for the bulk of the population? Perhaps more importantly, will it be desirable?
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In this episode, we explore how the fantastic journey of Kim from being an employee to a self business starter
The experiences and knowledge Kim shares in this episode:
- How he turned a small side business into his full-time gig.
- Planning and Preparedness is important in transitioning from employee to self-employed
- Seeking mentorship for guidance and feedback to fast track your way to success.
- Sales is the lifeblood of any business.
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Writer David Rae, in a great article in Forbes magazine, identified the disconnect between the early retirement through extreme frugality crowd, and the mainstream of society who want to enjoy life without financial constraints.
He identified 8 levels of financial freedom. A ladder that we progress along to gain more and more choice and freedom.
Given this aligns so well with our Financial Autonomy mission, I thought they were worthy of exploration.
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The starting point must be clarity around your goals. Most importantly, your goals determine your investment time frame. They also dictate whether your investment should have as a priority growth, or income.
If your goal is having the option to retire in 15 years time, then you can invest in assets that experience high levels of volatility. You could also hold assets that are fairly illiquid – that is, not quickly sellable.
Some examples. On the volatility side, as I write this piece, the Asian Share index is the best performer over the past 5 years. It is however also more volatile than the developed markets such as the US and Australia. If you wanted maximum returns 5 years ago, you got the best result through buying the Asian share index. But you only enjoyed those gains if you stuck to your investment and rode out the significant ups and downs. Now with a 15 year time frame, you can do that. If your time frame was 3 years though, an investment in the Asian share index was likely to lead to a disappointing investment outcome.
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Freelancing offers flexibility. It’s a way to fit in the necessity of generating an income, with the other things you want to achieve in life.
Recently I heard someone reflect on the standard 9 to 5 working day. It came about in the industrial era to align with day light hours. The factories had little or poor lighting, and so they needed the workers to be there during the hours when the natural light streaming in through the windows was at its best.
Given the wonders of electricity mean that most of us are no longer tied to having to work when the sun shines, why persist with this ridged allocation of our daily hours?
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When it comes to gaining choice, there’s few more powerful enablers than increased skills. Financial Autonomy is about gaining control and choice over your life – not enduring a working life that is unfulfilling. It’s about getting the most out of the one precious life that we are allotted.
In this post, we’re going to look how an investment in your education, could help you gain that choice and control.
What brings each of us happiness differs, but what is consistent is that in the modern world, money is a necessity. And whilst in the long term it may be possible to generate the money you need from accumulated wealth – for example dividends and rent from tenants – for most of our adult lives, the money equation will be solved through us doing something that someone else values, and getting paid for it.
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For many people, thinking about superannuation is the go-to cure for insomnia. This isn’t all bad, in that so long as your superannuation foundations are set-up right, it is something that needs to be left alone to grow – too much fiddling around can be extremely costly.
But ignoring your superannuation savings completely is a mistake. Your superannuation savings are likely to be either your largest or second largest financial assets, depending on house price movements.
So let’s take a quick run through the things that are important to know about your super, to ensure this important asset is set to deliver you the best financial outcome possible.
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Have you ever surfed the internet and seen something like “don’t pay thousands of dollars to a dentist to fix that sore tooth, download my free ebook – do it yourself dentistry, for everything that you need to know”?
Or how about “people who tell you you need a qualified electrician to hook up your solar panels are just trying to steal your money. Take my 3 part mini course and do it yourself. I haven’t burnt down my house, and neither will you!”
Hopefully not, though on the internet, perhaps I’m being optimistic.
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In this episode, we explore how you can convert the knowledge you already possess into dollars in your pocket.
The experiences and knowledge Ronan shares in this episode:
- How mastermind group works
- Taking advantage of your Return of Intellect
- How to unleash your own Return of Intellect
- Turning your experiences into profit.
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As we’ve explored in past episodes, a Side Hustle can be the key that unlocks Financial Autonomy for you. That little side business that brings in some extra cash, turbo charges your learning, and has the potential to enable a total career reinvention.
An extra $10k earned through your Side Hustle and paid off your mortgage each year, could see you debt free years earlier than previously thought possible.
But how to get started, and I guess how to get started in a way that maximises your likelihood of success? Well, I’ve scoured the internet for various business plan templates, and thought about models I’ve used in the past. My experience is that a 40 page business plan is of no value to anyone, and is definitely not a good use of your Side Hustle creation time.
A useful business plan should be on a single page. I’ve created a template specifically for Side Hustles, which I’ll be stepping you through in today’s post.
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A key change in the working environment that has enabled greater choice, has been the explosion of the freelance economy and the rise of the solopreneur. But for all the positives that this change brings, primarily around flexibility, there is at least one potential downside – loneliness.
So in this post, we’re going to explore this issue and consider some ideas you might like to implement to combat the loneliness demon and ensure your freelancing, delivers a holistic, fulfilled life.
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A discussion on property is well overdue here at Financial Autonomy. So I've roped in Buyers Advocate Emily Wallace to share with us her expert tips and advice for buying a property in Australia.
She's lived in 23 properties in 25 years. Property investment is well and truly in her blood.
The experiences and knowledge Emily shares in this episode:
-How she became a buyers advocate (and what a buyers advocate does).
-Advice on how to purchase your first property.
-The sometimes hidden costs of buying a property.
-Potential mistakes of people make when buying a property - and how to avoid them.
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According to Forbes magazine “the world has changed dramatically in the past several decades with more and more of a company’s value attached not to factories, machines, or hard assets but rather the companies’ ideas, processes, and designs – their intellectual property.”
Intellectual property (IP) can take a range of forms – writing, music, design, inventions, or software are all examples.
The digitisation of the world has meant that the ability to convert these IP assets into money has exploded.
In this weeks episode, we explore how you could use intellectual property assets to achieve financial independence.
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My parents, like many of their peers, bought a caravan shortly after retiring. Each winter they escape a cold Melbourne, and head north, to explore the vastness of our nation and enjoy the agreeable climate on offer.
They’re onto their second caravan now, and whilst their preference has evolved to staying in the one spot for an extended period rather than travel around, the winter escape remains a permanent fixture in their yearly calendar.
This type of retirement, frequently referred to as the Grey Nomad lifestyle, is something of the default for Australians. Our superannuation and age pension system point us towards an income producing life that ends around 65 years of age, give or take a few years, followed by hopefully 20+ years of leisure.
And whilst this model brings happiness to many people, here at Financial Autonomy, our mission is to share with you potential alternatives. Surely there’s a way to live a full and interesting life now, not put things like travel and exploration off until our best years are behind us.
I can’t think of a single component of our complex lives where there is but one path. Certainly there might be one path that is the most popular, the most trodden. And it will be well lit to make those approaching it feel like they’d be crazy to do anything else. But there are always alternatives.
Always.
SUBSCRIBE TO OUR WEEKLY EMAIL “GAINING CHOICE” TO KEEP UP WITH ALL THINGS FINANCIAL AUTONOMY Debt is like the leg irons worn by convicts – it holds you back from gaining choice in life, from achieving Financial Autonomy.
Yet if we aspire to own a home, then in all likelihood we’re going to need to take out a very significant loan – a home loan.
So given the conflict between:
- Our goal here at Financial Autonomy is to help you gain choice in life, and
- The majority of you will at some point take on a home loan, which potentially limits your choices in life
it makes sense to spend some time exploring how you can get this debt off your back as soon as possible.
In this post we’ll run through the key strategies you can use to get that mortgage done and dusted.
It's a scenario many of us face - experiencing professional success in the corporate world, yet finding it's not making you happy in broader life.
In this episode, Fraser Cameron shares his journey. How he left the corporate environment and founded a coaching business helping others achieve their potential. Oh, and along the way he moved his family from New Zealand to Southern France.
The experiences and knowledge Fraser shares in this episode:
-Why he needed to escape corporate life, and his journey to self-employment and taking control of his life.
-Superpowers that will unlock your potential for opportunities.
-How Fraser's change has improved his relationships with his kids and his wife.
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Job security isn’t what it once was. The trend toward contracting, outsourcing and the gig economy, combined with technological automation and increasingly, artificial intelligence, means the need for us to be emotionally and financially resilient has never been higher.
Emotional resiliency isn’t something I’m qualified to speak on, but financial resiliency – financial independence - is of course what we’re all about here at Financial Autonomy. We’re going to look at what financial independence looks like in the modern economy, and consider whether there are any local peculiarities that make financial independence in Australia unique.
A centrepiece of workforce change over the past 20-30 years has been the rise of the independent contractor – the freelancer. It’s no coincidence that this rise has occurred in parallel to the global expansion and adoption of the internet. The internet has enabled people to work together, and find one another, whether they are in the same city, or the other side of the world.
Creatives such as graphic designers have long been the poster child of this workforce revolution, but scratch the surface and you’ll find an increasing variety of roles being performed within a freelancing framework - from consultant engineers, to article writing, video production and social media marketing.
So could freelancing be your ticket to Financial Autonomy? Let’s find out.
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Joanna Penn’s journey is a fascinating one. From consultant to business owner, to writer and entrepreneur, she's certainly packed plenty into her life.
Today she runs a multi six-figure company with multiple streams of income. This one episode you definitely won’t want to miss.
The experiences and knowledge Joanna shares in this episode:
- Her evolution from day job to being self-employed.
- Recognition of her financial vulnerability when she got laid off from work and all her income streams disappeared.
- How she took a side-hustle approach to develop her business.
- The current landscape for self-publishing authors.
Links mentioned in the show
The Creative Penn Podcast
Twitter: Joanna Penn
J.F.Penn (fiction)
www.thecreativepenn.com/blueprint
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If retirement is a decade or more away, it’s tempting to look at your parents and perhaps grandparents in retirement and figure, well, they seem to be getting along fine, I’ll just have what they’re having.
But there’s two key factors that have underpinned your parents retirement, that will look vastly different in your retirement – the Age Pension, and a huge increase in wealth due to rising property prices.
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In the last post - How to start an Investment Portfolio - we looked at the steps and mechanics involved in creating your first investment portfolio. So we covered - setting your Objectives, determining how much Risk you will take on, your investment Time Frame, and Opening a share trading account.
This week we'll progress from this set-up phase, to explore how you then build an investment portfolio.
We talk quite a lot about investments here at Financial Autonomy. That’s because our goal is to enable you to have choice in what it is that you do with your life, and if you have an investment pool that generates income, then some and potentially all of your living costs can be meet without you needing to trade your time for money. The freedom this provides is what can then enable you to spend your time writing your novel, learning a language, building a boat, or whatever it is that is your Financial Autonomy goal.
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This is the first of a two-part series. In this post we will explore what are the actual steps and mechanics involved in starting an investment portfolio? In the next post, I’ll explore how you should go about building your portfolio.
I’ve been building investment portfolios for clients for 20 odd years now. What I’m going to share with you are the actual steps we use to deliver successful outcomes for our clients.
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We are joined today by Shaun Farrugia from Optimised Accounting and Finance to talk about the essential things you need when you move to self-employment.
In this episode we cover the challenges and knowledge Shaun shares about being self-employed:
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Getting the clarity of knowing why you need to move to self-employment.
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Keeping the proper financial record and the challenges encountered with record keeping.
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The capital and survival strategies whilst building your new business.
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Tax and accounting tips. Putting aside enough money for tax.
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Understanding your own break-even point.
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One of the best ways to gain choice in life is to become self-employed, and a great way to bring that aspiration to life is by trying your hand at a Side Hustle. For the uninitiated, a Side Hustle is a business that you create as a second income to your primary source of making a living. It can be used to pay off some debt or build an investment, but it can also be a way to test out a business idea that could perhaps become your full time gig in the future.
But there’s a problem. How do we find the time? In today’s post I’m going to share with you 8 ideas I’ve found that might help you side step this obstacle.
Episode 75 – When investing, focus on what really matters
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I remember reading once the advice of someone who had achieved success in their field. Their key observation was, “in life, you will occasionally be faced with times where you have to make a choice. One path will be easy, and the other harder. I’ve been successful because whenever I faced those choices, I chose the harder path”.
Now I think there is great wisdom in these words in the broad journey of your life, but when it comes to investment success, they are plain stupid.
When investing, we want the simplest, most likely to succeed option that there is. And that means focusing on what really matters.
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Episode 74 – How to get your partner engaged in your Financial Autonomy goal
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A significant reason many people don’t achieve Financial Autonomy is because they get pigeonholed into a certain life. They define themselves in certain ways, and often this flows from the role they’ve developed in their marriage or significant relationship. Some people worry about how their partner will react if they want to choose a fork in the road and pursue significant change.
Yet I’ve found that when couples unite on a Financial Autonomy goal, it can really strengthen their relationship – they have a shared goal, something they can work on and achieve together.
So today I wanted to offer some suggestions as to how you might bring your significant other on board the Financial Autonomy train.
So you have a Financial Autonomy dream, but you’re hesitant to raise it with your partner. Perhaps they’ll think it’s stupid, or just want to shut down the idea altogether. Maybe you’re worried that they won’t understand why you’re dissatisfied with the way things are now.
We know that happiness comes from making progress on goals. It stands to reason then that goals set and worked on as a couple provide the opportunity for happiness as a couple. Psychologist Dr Barton Goldsmith goes so far as to say “goals are a relationship necessity”.
The first thing to recognise then is that whilst you might have some apprehension, there are some great potential gains to be enjoyed through sharing your Financial Autonomy dreams.
You might remember the discussion I had with Tim back in episode 55, where he made the jump from bank manager to primary school teacher. There’s no way Tim could have made the move without the involvement and support of his wife Maryanne, and without doubt that required Tim to share his thoughts, dreams and aspirations.
The outcome of having done so however is that he’s now in a career he loves, and Maryanne has gone on to make a career change herself, becoming a police officer.
How then to start the conversation? I found some great advice from Kathy Caprino, a career advisor for women.
She advised that you need to “find brave” - commit fiercely to being open, honest and compassionate. To saying the hard stuff, without allowing yourself to turn off or shut down, or become emotionally reactive.
I like that find brave idea, because deep down that really is what’s needed – put it out there. Bottling up your thoughts, perhaps your discontentment, is certainly not the path to happiness.
For me, there are two scenario’s that work for these type of conversations - in the car on a long drive, or out on a walk. You’re away from the distractions of televisions and kids wanting your attention. You can have unhurried and uninterrupted conversations.
Perhaps in this conversation you can paint a picture of what success looks like. For example if your goal is to cut back to 3 days per week paid employment, you can talk about the extra family time that will allow, or the reduction in stress levels in the household.
If your partner does have concerns, acknowledge them, and then try and find solutions together. There may be value in getting some financial modelling done so you can really see how things will look in a money sense if you pursue this goal.
I met a great couple recently who were about to have their first child. They wanted to know if it would be possible for the husband to quit his current job and become a tennis coach. He didn’t need it to be straight away, but wanted it to happen somewhere in the next 10 years.
We were able to perform the financial modelling for them, and provide a couple of ways he could achieve the choice that he sought. This was a great way for the two of them to really understand what was possible, and also what the costs were – in this case working longer before retirement.
I’ve had people tell me that getting their partner to listen to a Financial Autonomy podcast episode whilst they’re in the car has been really helpful in starting the conversation, which of course I’m super pleased about.
Once you and your partner have found common ground on the choices in life that you want, write those goals down and put them somewhere where you can both see them.
And finally, celebrate the wins. Identify some milestones on your journey to Financial Autonomy, and as you cross them off, pat one another on the back and acknowledge the shared journey that you’re both on.
We that’s it for this week, I hope you got some value out of my thoughts.
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Episode 73 - The pay yourself first strategy
Have trouble building up a nest egg? Struggling to build up enough cash to start investing? Hate the idea of a detailed budget?
If you answered yes to any of these questions, then the Pay Yourself First strategy could be for you.
The idea of Pay Yourself First is not new – Google tells me the term was first used all the way back in the 1920’s by an American publisher. But it’s even easier to apply today thanks to the advent of internet banking.
Let’s get straight to it. The idea with Pay Yourself First is that you set aside money in a separate bank account on the day you get paid, and then live off what’s left.
The opposite would be to save whatever is left in your bank account at the end of each fortnight.
It’s essentially the precursor to the bucket strategy, which is where you have separate bank accounts for bills, savings etc.
Pay Yourself First then is a form of budgeting, potentially without the need to do the detailed work on how much you spend on coffee or shoes.
You’re effectively hiding money from yourself.
Where this strategy has become really useable is through the use of automated transfers via internet banking. Automating the transfers to your seperate bank accounts is enormously powerful because it takes away any will-power issues.
So let’s work through the strategy in practice.
You have your normal bank account that your pay goes into, and that your living costs come out of.
Let’s say you get paid fortnightly on a Thursday.
You would set up your internet banking to automatically transfer a set amount out of your bank account every second Thursday, to correspond with your pay day, and put it into a separate bank account. Ideally, I’d suggest two bank accounts, one for bills and one for savings. So for instance you might have $500 go automatically across to your bills account, and $200 go across to your savings account.
Whatever is left in your account is what you have to live off until next pay day. If you get to the last day and your bank balance is 5 cents, then it’s Vegemite sandwiches for you.
Of course you can fine tune the amounts transferred so that you get a situation where you do have enough money to live off, and the bills account is getting enough money thrown in to actually cover the bills you need to pay. But this is where the beauty of modern day internet banking comes in – it’s easy to adjust your automatic transfers.
I can’t emphasise enough how important automation is to the success of this strategy. The central element of this strategy is that your savings happen first, then you spend. You’re purposefully putting your future well-being and security ahead of your immediate consumption. This is what the original instigator meant – you’re paying yourself, by putting money aside for savings, before paying everyone else for your food, clothing etc.
Australia’s superannuation system is a form of Pay Yourself First if you think about it. Money comes out of your pay without you having to do anything, and is set aside for your eventual retirement.
Another useful aspect of the Pay Yourself First strategy is that it can be a way to avoid lifestyle inflation as your income grows. It’s tempting as you progress the career ladder to feel that your increased importance demands a matching BMW, or spending $15 per day on lunch instead of bringing in leftovers from home. Instead, you could simply increase your automatic transfers, so that your new increased income flows to savings and ultimately investment. This accelerates your progress in gaining choice in life, which is of course what we’re all about here at Financial Autonomy.
Another practical way that you could apply Pay Yourself First is for households with two incomes – either a couple or someone with a side hustle.
Perhaps you could live off one income, and have all of the second income go to savings and investment.
Pay Yourself First is forcing some frugality on what you spend. But that frugality need not be extreme – what you set your automatic transfers to is of course entirely at your discretion.
It certainly provides a practical framework in which to manage your money and ensure that you are building your financial resources.
Well that’s it for this week. If you’re not already receiving our monthly email update Gaining Choice, be sure to visit financialautonomy.com.au and register for that – there’s a link at the bottom of every page. That will keep you informed of all the goings on in the Financial Autonomy world in one single monthly email.
Episode 72 - Net Worth – how and why
Remember back in your school days where every few weeks you’d have a test, then at the end of the year there would be an exam. I have kids in high school now and I can tell you the framework hasn’t changed.
So why all this measurement? It’s all about assessing progress.
If you get a test result back and it’s 8/20, you know you’ve got to pull your finger out before the year-end exam rolls around. In the absence of that test result you may have floated along thinking you had that topic well covered.
And the exam serves to confirm that you’ve learnt enough of the material to progress on to the next stage of learning. Without that assessment of progress, students could move up to concepts of higher complexity, without the foundational knowledge required for it to make sense.
The take away here is that if you want to improve on something you first need to know your starting position, then you measure at regular intervals to monitor progress. The feedback this monitoring provides is essential to enable you to know where to focus, and course correct as needed.
In a personal finance context, the way you do this by determining your Net Worth. So in this episode we’re going to look at how you get that done, and then how you can use this measurement to propel you towards Financial Autonomy and the choices in life that you deserve.
Let’s start with the how. It’s really pretty easy.
Step 1 – list all of your assets, with their dollar values next to them. So your car, money in the bank, retirement savings, home etc. I wouldn’t bother going down to things like furniture and jewellery, which are pretty hard to value and possibly unsellable anyhow.
Now add up the value of all of your assets.
Step 2 – do the same thing for all of your debts – credit cards, mortgage, car loan, etc.
Once again, add up the total.
Step 3 – Subtract the total debt number from your total asset number. The result is your Net Worth.
Net Worth calculation example:
| ASSETS | | Home | $825,000 | | Car | $13,000 | | Superannuation | $135,000 | | Money in bank | $6,800 | | Shares | $14,000 | | TOTAL ASSETS | $993,800 | | DEBTS | | Mortgage | $640,000 | | Credit card | $2,300 | | TOTAL DEBTS | $642,300 | | NET WORTH (ASSETS - DEBTS) | $351,500 |
The first thing to establish is that your Net Worth number is a positive one. This means you have more assets than debts. If you do come up with a negative number, then your goal becomes crystal clear – get that negative down, and move to a positive net worth position. This will mean getting debt paid down. A negative net worth means you’ve borrowed to spend, but that spending hasn’t produced any assets. So the money has gone on clothes or travel for instance.
For most people, you will get a positive Net Worth number. So what’s next? Well in isolation, it’s just an interesting number. But where the Net Worth calculation becomes useful, is in how it changes over time. There is no particular ideal number (so long as it’s positive). Happiness comes from achieving your particular goals and the financial requirements of your goals are unique.
(Just a slight aside, understanding the Net Worth you need to achieve your goals is determined through financial modelling. This is something we do for most of our clients, so if you need help with this bit, visit the Work with Paul page to find out more.)
So recalculate your Net Worth number at regular intervals – at least once a year, and then compare it to your previous results. You will be able to see in one clear and concise number the progress you’ve made in building your financial resources.
Monitoring this progress in your Net Worth can have several benefits.
I think the most important is providing you with feedback that you are making progress. Building wealth is a slog and it takes time. Often your main focus is paying down debt, which doesn’t come with a lot of fireworks type celebrations. But if you calculate your Net Worth number every 3 months, and can see it rising steadily, you’re getting the positive feedback, which will help you stick with your plan.
Monitoring progress will also allow for course corrections. Some people have home loan facilities where they put all of their living costs on a credit card, and all their wage goes onto their mortgage. Then once a month, the credit card is paid off via a deduction from the mortgage. Now the people that sell these packages can show how it delivers a great result over time through savings on interest on the home loan. But I’ve seen plenty of people who actually end up making no progress in building wealth, because there’s no brakes on their spending, the credit card just magically gets repaid, but what they miss is that their home loan doesn’t go down like it should. Sometimes it even goes up.
Now if you monitored your Net Worth every 3 or 6 months, you’d fairly quickly recognise that this scheme isn’t working for you. However most people don’t notice for years because they only get a home loan statement 6 monthly at best, and quite possibly don’t open it anyway.
You can also build milestones into your Net Worth monitoring. Let’s say your big goal was around retirement, and you’ve determined that in order to retire, you needed a Net Worth of $2million. Well breaking through the $1million mark is certainly a good reason for a celebration. And you could of course pick other points along the way to celebrate and recognise your progress.
Calculating your Net Worth on a regular basis is an essential foundation stone in achieving your financial autonomy goals. So get cracking!
Episode 71 – From fashion to true crime with Anna Priestland
Anna Priestland joins us in this episode and tells us her story about how she achieved choice and flexibility in her career while building a young family. She shares how she has made these career choices work in her life.
The experiences and knowledge Anna shares in this episode:
- An interesting walkthrough of her working life starting from a university.
- Working in the fashion industry for years in Australia and London.
- Experimenting in freelancing which gave her control of her life and time.
- How she built her career in writing.
- Her concerns about leaving her steady job and moving to a freelancing job.
- Tips from Anna on easing your way into your chosen career.
- Where does Anna see her future going?
Links mentioned in the show
Anna Priestland LinkedIn
The Twist - ABC
The Case Files
Episode 70 – Financial Anxiety - is it holding you back?
I’ve spoken in past episodes about the potential for overwhelm to lead to procrastination. Procrastination is evil because it results in no progress. You’re stuck in the cement.
But there’s another element to the no-progress problem, and that is financial anxiety or financial stress.
If you’ve never worried about money in your life, I’d say you are a very rare human being. For most of us, most of the time, money worries are a transient thing that we get through, and then move on to planning our next holiday or getting the kids to basketball practice.
But having worked with many, many people over the years, I’ve come to recognise that often, the reason we don’t make progress on the big, really important life and financial goals, is because of financial anxiety. So in today’s episode, we’re going to explore what are the most common causes of this financial stress, and some strategies you might be able to use to reduce or perhaps even remove this worry, letting you make clear and confident decisions to move forward on your financial autonomy path.
There are 3 main types of financial anxiety that I come across on a regular basis:
- Inherited
- Debt
- Longevity
Inherited financial anxiety is the most common and debilitating. It is experienced by those who have grown up in households where their parents regularly argued and fought about money. Money therefore becomes this stressful topic, and so the thought of sitting down and doing any sort of planning is about as attractive as volunteering to have a root canal done by a first year trainee dentist.
Those suffering inherited financial anxiety tend to follow one of two patterns. Either they put their head in the sand. They don’t open their superannuation statements, don’t budget, and certainly don’t discuss financial matters with their loved ones.
Alternatively they go to the other extreme, and micro analyse everything, to the point of complete paralysis. They’re convinced that whatever decision they make, it will be the wrong one.
The next type of financial anxiety that I see is that caused by debt. In 99 out of 100 cases of debt induced financial anxiety, credit cards will be a central element. And there is never just one. Often there’ll be a car loan and perhaps a mortgage, but credits cards certainly seem to be the gateway drug to debt related financial stress.
The final form of financial anxiety that I see I’ve somewhat imperfectly termed longevity. This manifests itself in being stressed about the normal ups and downs of investment markets – actually not so much the ups, but definitely the downs.
For people suffering this form of financial stress, they worry so much about market volatility, that they either buy and sell at the completely wrong time – selling when markets are down and buying when they are up – or they hold all their savings in cash or similar, and in so doing actually damage their long term financial well-being. (See Episode 48 – The 10 worst things you can do to prepare for retiring early).
So what can you do to prevent Financial Anxiety from holding you back?
The first thing to do is have a separate bank account for your bills and regular expenses, and have an automatic transfer from your everyday account every time you get paid, to top it up.
Go through your bank statements for the last 3 months and tally up all of your regular expenses – electricity, phone, insurance, etc. Whatever number you get, multiply it by 4 to get your approximate annual spend, and then divide that number by how many times you get paid in a year, so if you get paid fortnightly, divide it by 26. Whatever that number comes in at, round it up to the nearest $50, and set up your regular transfer. Ideally, you’d put an initial one or two thousand into this bills account to act as a bit of a float for the natural lumpiness of your bills.
With this system up and running, you will know that whenever a bill comes in, you have the money sitting there waiting to pay it. This means, a) no more stress, and b) no need to hit the credit card.
The next thing is to clear your unproductive debts. Determine which debt is the most expensive and focus all your attention on getting rid of it. Again, use automatic transfers as much as possible to avoid the risk of weakened willpower. Once that especially horrible credit card is paid off, you can move onto the next one. And whilst it won’t happen overnight, eventually you’ll get all these debts paid off and then the money you had been using to clear these could instead be put into savings, putting you on the path to financial autonomy.
Another useful way to alleviate financial anxiety is to have some projections done, so that you have a good sense what the long-term outlook is. You’ll find that your super fund website will have a projection tool so you can get an estimate of where your retirement savings will end, and site like the government’s Money Smart has some good calculators for this purpose too. If you want some help, we have our financial modeling service too.
Worst case planning can be another great way to reduce worry, and so would almost certainly help alleviate your financial anxiety. This is where you list out the biggest worries that you have, and then determine what action you’d take if those things actually occurred. The actions may not always be pleasant, but just knowing that you have a plan can remove that dark cloud floating around in the back of your brain, and enable you to move forward. I explored this strategy in detail in episode 59 – The Beauty of the Worst Case.
Finally, don’t be afraid to talk about your finances with your partner or other loved ones. Especially for couples, you’re a team, and chances are, if you’re worried about your finances but too afraid to discuss it, so is your partner. Don’t pass your inherited financial anxiety down to your kids.
I know there’s a bit in this episode, so I’ve put together another free downloadable toolkit to help you take action. It’s a bit of a bumper edition – I’ve summarised the strategies from today’s post, and also pulled in some of the tools from past episodes – the debt control template, a look at risk vs reward, and tips on how to avoid running out of money.
That’s it from me for this week, I hope you have a great week ahead and continue to make progress on your Financial Autonomy goals.
Important Information:
This information is of a general nature only and has been prepared without taking into account your particular financial needs, circumstances and objectives. While every effort has been made to ensure the accuracy of the information, it is not guaranteed. You should obtain professional advice before acting on the information contained in this publication.
Episode 69 – Money can’t buy happiness ... or can it?
In his thought provoking book The Geometry of Wealth, author Brian Portnoy observes “Does money buy happiness? The answer to that question can be summarised as Yes, Not really, It depends”.
Intuitively none of us like ambiguous answers like this, but here, it successfully illustrates the complexity inherent in the question. After all, what is happiness?
There are plenty of sayings we get brain-washed with, that actually don’t stand up to scrutiny. “What doesn’t kill you makes you stronger”. Really? If I lose a limb or suffer a stroke, I doubt I’m stronger. Or how about “slow and steady wins the race”. Doesn’t sound like a recipe for success that Usain Bolt applied.
Likewise, we all know the saying money can’t buy happiness. But I’m quite sure that if you’re on the pittance known as Newstart, some extra money would almost certainly add some happiness to your life.
If we really believe money can’t buy happiness, why do so many people buy lottery tickets? Indeed recently I observed a queue to buy a ticket in a lottery that had jackpotted to $100million. That lottery regularly has prizes of $20million. Your chances of picking the correct numbers are exactly the same, yet somehow, people who weren’t sufficiently motivated to buy a ticket for a potential $20million, were stampeding the counter for an extra $80million.
Money can definitely alleviate poverty. It can put a roof over your head, food on the table, warmth, clothing, and medical support.
Once our basic needs are meet, money’s impact on our happiness is progressively less impactful. If you’re a CEO on $1million, a 5% pay rise isn’t going to move the happiness dial for you enormously. Yet for someone on $45,000, to get that same additional $50,000 per year would almost certainly have a big impact. Their housing options would change, their ability to support children would be enhanced, they could afford better medical care, etc.
We find happiness in many things. Connection with our community, making progress towards and achieving goals, learning new things, enjoying exhilarating experiences, and watching others grow.
So how can we use money to help achieve these outcomes?
I believe the power of money as it pertains to achieving happiness is in gaining choice.
By paying off your mortgage, you gain the choice of working part time, or having a longer holiday. By putting money aside for your children’s future, you gain the choice of where they might go to school, or which extra circular activities they might undertake. By having savings rather than debt you reduce stress in relationships, often an enormous contributor to unhappiness.
Money won’t make you happy in isolation. As an illustration, we often see successful artists who earn huge amounts of money succumb to drug addiction. Money in this case is perhaps the enabler of self destructive behaviour.
Which is why a focus on using money to gain choice is where I believe the potential exists for happiness to flourish.
What else do we know about using money to give us happiness?
A paper from US academics titled “If money doesn’t make you happy then you probably aren’t spending it right1” offers some useful tips.
They observed “money is an opportunity for happiness, but it is an opportunity that people routinely squander because the things they think will make them happy often don’t”.
They found we tended to be pretty bad at predicting how happy a certain action or thing will make us. We consistently mis-predict what will make us happy, how happy we will be, and how long the feeling of happiness will last.
The authors identified 8 principles that could help us all make money decisions with a better chance of producing happiness.
Principle 1 – Buy experiences instead of things.
Two reasons were found to explain why experiences tend to produce greater happiness than things – the first is that we adapt to things quickly. We buy a new lounge suite and initially it makes us happy as we walk into the room and admire it, but pretty quickly it’s just somewhere to sit while we watch Netflix. This is known as adaption.
The second reason why experiences win is that often experiences are shared with other people, and other people are a key element of happiness.
Principle 2 – Help others instead of yourself
We humans are the most social creatures on our planet. Numerous studies have shown that improving our connection with others improves our happiness. In a money context this might mean supporting a charity or community group.
Principle 3 – Buy many small pleasures instead of few big ones
In principle 1, we observed the problem of adaptation. One way to counter this problem is to spend your money on frequent small pleasures, which are different every time. This constant change can produce sustained delight, producing more happiness than one big purchase, followed by nothing.
Principle 4 – Buy less insurance
The authors here specifically referred to extended warranties and generous return policies. They found that humans have a robust psychological immune system. When you buy the new 100 inch TV, it’s tempting to think an extended warranty makes sense because the happiness you are feeling at the time of purchase will be maintained for years to come. But the reality is that if that TV dies in 3 years’ time, you’ll only be modestly upset, and will pretty quickly move on to the potential happiness of upgrading to whatever the latest innovation is.
Principle 5 – Pay now and consume later
From instantly downloading music, to same day delivery from Amazon, and slapping down the credit card for a new pair of jeans, the modern world is constantly pushing us towards consuming now and paying later. But this is not the path to happiness. Rather, we get the short term adrenalin shot of happiness, followed by months or perhaps years of paying off a debt and/or not building any savings to provide future choices in life.
The other downfall of the consume now, pay later approach, is it removes the happiness element of anticipation. Think back to when you were a kid and you wrote your Christmas list to Santa. For weeks you’d lie in bed dreaming about that toy you just hoped Santa’s elves could come up with. The happiness delivered through that anticipation is worth at least as much, and quite possibly more, than the happiness derived when we ripped open the paper on Christmas day. Delayed gratification is a thing.
Principle 6 – Think about what you’re not thinking about
Happiness is often in the details. Buying a holiday house by the beach may well make you happy, but’s it’s easy to disregard the hassles of maintenance, damage and complaints from the neighbours due to AirBNB guests, and the long drive to and from. If you think through these issues, your choice of holiday house might be a lower cost option that leaves you with money to pay someone to maintain the garden, is closer to home, or doesn’t need to be rented out to make it financially viable. Alternatively, a pool in the back yard could be a better bet.
Principle 7 – Beware of Comparison Shopping
The internet makes research and comparison so easy. But does it lead us to spend our money in ways that makes us happier? The authors concluded that the answer was often no. They found that was because we tended to focus on the differences between one product and the next, which were actually fairly insignificant to the consumption experience. So we spend an extra $1,000 on car A rather than car B because car A has a sun roof, but actually we very rarely open the sun roof, and when we do we find the noise irritating.
Principle 8 – Follow the heard instead of your head
Several studies were pointed to which suggested that “the best way to predict how much we will enjoy an experience is to see how much someone else enjoyed it”.
I find this really counter intuitive, because in an investment context, the opposite is true. But when considering the spending of money to produce happiness, the researchers found that when for instance choosing which movie to see, greater happiness was derived by selecting the film rated highly by others of a similar age and gender, than by researching the plot, actors, directors, etc.
Happiness is about far more than money. But money, used well, can definitely contribute to your happiness. I hope this post helps you in pulling to two together.
Episode 68 – Financial Fundamentals – the 6 essential foundation stones for financial success
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Today’s episode flows from a meeting I had last week with one of you guys, a member of the Financial Autonomy community. For reasons of privacy, of course I won’t use her real name, so let’s call her Jenny. It was a first time meeting, and in it Jenny observed that she felt she just didn’t have the financial fundamentals right. As an example, Jenny pointed to having her employer continue to take out extra tax for a HECS debt, even though this debt had actually been repaid. Jenny did this so that she would get a large tax return, which she could then put to something meaningful. Essentially this was a savings strategy, but she realised it wasn’t the most efficient or profitable way to go – lending your money to the government for no interest is not ideal.
So it got me thinking about what are the key financial fundamentals that really set you up for success? I came up with 6, but I’d love to hear your thoughts – let me know on either our Facebook page or via email from the financialautonomy.com.au website.
1. Cash for emergencies
The number one source of financial pain I see is credit card debt. Now credit card debt can build up for a number of reasons – the search for happiness through a little retail therapy is common. But often it tips from manageable to a problem when a big unexpected expense comes in – the car breaking down, the fridge dying, or a big bill.
Without having some cash up the sleeve, the credit card becomes the only solution, and the downward spiral begins.
So the starting point in our financial fundamentals has to be having some cash saved to act as a cushion when life throws you the inevitable curve ball. Now if you have a mortgage, those savings could be in redraw or your offset account - it doesn’t need necessarily to be hived off in its own little bank account. But just having some cash available is essential.
How much? Well, of course, it depends on your circumstances. A family with 4 kids would need a larger stash of emergency cash than a single person. But as a starting point, think of getting $5,000 put aside. This will cover most things, like a new fridge, excess on insurance, car repairs, or a flight at short notice to see a sick relative.
2. Know what you spend
I’m well aware that budgeting is not a topic of fun and joy. But when you talk about financial fundamentals, having a handle on what you spend just has to be included.
Most people in the Financial Autonomy community are in their 30’s and 40’s, but at times I get people in who are about to retire, usually referred by other clients. In developing a retirement plan, one of the first question I have is, how much income do you need each year to fund the retirement you want?
I get a lot of blank stares.
So then I ask, okay, how much are you spending now?
More shrugs of the shoulder, looking at the partner, them looking blankly back – they simply don’t know.
Having had these sorts of discussions for about 19 years now, I can tell you that only about 5% of people actually have a detailed budget. Far more though have a less detailed plan that might look something like:
We pay $2,000 a month to the mortgage ($500 more than the minimum)
We put $1,000 a month into an account we use to pay bills
We put $500 each month into a savings account that we use for things like holidays
And we spend the rest on normal living
They haven’t broken it down into how much they spend on coffee or electricity but through trial and error, they’ve found what works.
This sort of money plan is totally fine, so if the idea of a detailed budget is about as hard to swallow as wasabi on a hotdog, put together a plan along this line. The important thing is to have a plan – know where your money is going. This is absolutely fundamental to financial success.
3. Protect
Another unsexy one, but having insurance in place is another basic financial fundamental.
Why?
Because unwanted things do happen from time to time, and we don’t know when or quite what they’ll be. That’s tough to plan for financially. Insurance premiums, however, can easily be planned for, and then all that uncertainty is someone else’s problem.
So if you’re a home owner you should have insurance in case the house burns down, rare though that is. Most people should have Income Protection insurance, since it’s your ability to earn an income that is the enabler of most of the other things in your life, from putting a roof over your head to food on the table, to clothes, gifts and holidays. Health insurance, car insurance, life insurance – everyone’s needs differ, but you should certainly give some thought to where financial disaster could hit you, and explore how you can pass that risk onto someone else via buying some insurance.
4. Eliminate debt
Now I should clarify here that not all debt is bad debt. Debt used to buy something that will increase in value is often a sensible way to build wealth. Not many of us could buy a house without taking on debt.
But from a financial fundamentals perspective, getting rid of unproductive debt should be a priority. So we’re talking here about credit card debt. We’re talking about debt for your car. A personal loan for a holiday or wedding. These must be at the top of the list as you get your financial fundamentals in place.
Start with the debt that has the highest interest rate, and once this is repaid, focus on the next one.
5. Save
Finally, we’re onto the more positive financial steps you should take. You’ve got your emergency cash, you’re in control of your spending, your insurances are in place so you’re not susceptible to a big financial disaster, and you’ve got rid of the unproductive debt that had been weighing you down.
Now it’s time to start putting some money aside to begin the move towards financial autonomy – having a choice in life.
My suggestion is to automate your saving as much as possible. On the day you get paid, have your savings automatically put into your savings account. This might be an offset account if you have a mortgage, or perhaps an online savings account that pays a bit better interest than a normal transaction account.
The main thing is, don’t take the approach of – “I’ll save whatever I have left over each fortnight”. This is a plan destined for failure. Save first, then spend what’s left.
It might also help to set some goals. “We want to have $10,000 in the offset account by the end of the year”, for instance, can be really motivating and helpful to you making progress.
6. Invest
And the final financial fundamental, and the one I think is the most fun – investing. Putting your money to work and having it earn more money, without you having to lift a finger.
There are of course all sorts of ways you can go here, and if you haven’t already downloaded our Investment Fundamentals toolkit, I’d strongly urge you to grab that from the web site.
Probably the most important thing to recognise in the step from saving to investing is that investing involves a time commitment. While you’re saving, your money’s typically in cash, available at any time. But when you start investing, you become exposed to market fluctuations, and that means you need to be prepared to leave your investment alone, to give it time to perform. The reward for this patience is growth and income. Ultimately this produces passive income that can support you in life.
So to summarise, my 6 financial fundamentals are:
- Cash for emergencies
- Know what you spend
- Protect
- Eliminate debt
- Save
- Invest
I hope they help you take some huge leaps forward in your pursuit of financial autonomy.
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Important Information:
This information is of a general nature only and has been prepared without taking into account your particular financial needs, circumstances and objectives. While every effort has been made to ensure the accuracy of the information, it is not guaranteed. You should obtain professional advice before acting on the information contained in this publication.
Episode 67 – Trent Taylor and the 3 33 333 plan - work 3 days per week, 33 weeks per year, and earn $333k
In this episode, we learn from Trent’s interesting story from being a pilot to building his business to gain choice and improve his family life.
In this interview we cover:
- His journey and transition from being a commercial pilot to changing his lifestyle by acquiring a franchise and then building his own business to give importance to being the father he wanted to be.
- Tips from Trent on how to handle your own business.
- The story of how he brought back a 3-day work week to his life and traveled around Australia with his family using his business model, and how he is teaching this to business owners.
- Common mistakes people make in their businesses.
- The process of the Clarity Plan and uncovering your “Why?”.
- Is being self-employed or running a business for everyone?
Links mentioned in the show
Teach It Forward
Trent Taylor LinkedIn
Episode 66 – The reality of negative returns - knowledge is power
Investment markets don’t always go up.
In fact they go down on a pretty regular basis.
Is that a shock to you? I suspect not.
Yet virtually none of the commentary on investing talks about negative returns – markets going down.
But when I speak with clients, especially new clients, usually somewhere in their top 3 issues is not wanting to lose money – hardly surprising!
So in today’s post, let’s bust open this taboo subject and talk openly about the reality of negative returns.
So you’re about to start investing. Your driver is the goal of growing your savings – building wealth, and with that comes the choices in life that is our central theme here at Financial Autonomy.
But you would be unusual if you didn’t worry about losing your money. Mountains of behavioural finance research tells us that we humans fell loses much more powerfully than we enjoy equivalent gains.
So let’s look at the realities. If you invest in a portfolio that is either 100% Australian shares, or 100% International shares, the data indicates you will experience a loss roughly 1 on every 4 years.
Now most people actually invest in a mix of assets – shares, both local and international, some property, and usually some conservative assets like cash and bonds.
For a typical Growth type investor, where the bulk of their assets are in shares and property, the likelihood of a negative return becomes around 1 in every 5 years.
A more conservative Balanced investor would be looking at closer to a negative return 1 in every 7 years.
Just a side note here – when I talk about a Balanced portfolio, I mean roughly 50% in growth assets like shares and property, and 50% in defensive assets like cash and bonds. You will find that some super funds offer a Balanced option, but when you look at the asset allocation it is far more heavily weighted to the growth assets – often it looks like a 70/30 split, which is more like a Growth allocation.
I just wanted to highlight that because it’s a real problem in the investment industry – mislabelling of products. Don’t assume that the Balanced option in your super fund has the 1 in 7 chance of a negative year. Take a look at how they invest your savings, and if it’s weighted towards the growth assets, recognise that your chance of a negative year is likely to be closer to 1 in 5.
Now most in the Financial Autonomy community are in the building wealth phase and retirement is not imminent, so I’m going to work from here on the assumption you’re going to invest in a Growth type mix of assets, and that means you should see a negative return about 1 in every 5 years.
Of course if you find that uncomfortable, you can invest more conservatively, and reduce that frequency. You might also want to take the risk level down a notch or two if your time frame is shorter – say 3 or 4 years.
But here’s the key takeaway for you today – for Growth investors, 4 out of every 5 years, the value of their investments will go up. And that is a totally fine outcome.
What you want is a good outcome over the medium to long term. Short-term ups and downs don’t matter, so long as you have structured things so you’re not forced to sell at a bad time.
To illustrate this, consider two investors. One can’t tolerate any years where there’s a loss. So the solution for them is to invest in cash. Now they find an online savings account that pays pretty good interest, so let’s say they earn 2%.
The other investor, whilst not a gambler, can tolerate a few ups and downs. So they invest in a typical Growth mix.
Now I’ve grabbed the data for the past 10 years – the year ending December 2008 to the year ending December 2017. Now the Growth mix sure enough had 2 years that were negative, 2008 and 2011. As investment experiences go, and investor that kicked off at the start of 2008 had about the worst start imaginable, with markets diving and so a return that year of negative 20% - a big fall in year 1 is the worst result you can get.
But even with this absolutely horrible start, the growth investor still did better than the Cash investor. After 10 years in fact, and based on an initial $50,000 investment, the Growth investor would be over $20,000 better off than the cash investor.
They’ve been paid $20,000 as compensation for putting up with occasional negative returns.
And that’s a hugely important concept for you to grasp. Provided your portfolio is appropriately diversified, you get paid to take on risk. The reason the Cash investor only gets 2% is because their only risk is the bank going broke – fortunately very improbable in Australia.
The Growth investor, by being prepared to tolerate the ups and downs of markets, comes out significantly ahead.
Now there will be some listening who will think “well, if my investments are going to experience negative return roughly one in every 5 years, I’ll try and pick the bad year, and pull out my investments. Then when things look better, I’ll go back in.
Tempting though this sounds, it is disastrous.
Do you know that professional fund managers in the US, who have nothing else to do all day but try and beat the market, succeed only about 15% after costs over 5 years? In our active managers have done a little better with about 33% succeeding.
If most investment professionals can’t get market timing right, what is that chances you will do better?
You might recall some other research that I quoted which found that whilst investors could have earned 7.2% over 20 years by simply buying and holding the US share market index, the average actual return for investors was 5.3%. Why did investors earn less on average? Trying to jump in and out of the market.
So to spell things out really simply, forget about trying to time the market – it will only cost you money.
In a similar vein, armed with the knowledge that, if you’re a Growth investor, you will inevitably have years where the value of your investments go down, recognise that the key during these periods is to not sell.
Sure, the value of your account might be lower, but you still have the same assets, and so long as you don’t sell, history tells us that prices will recover. This is what I’m referring to with the sub-headline – Knowledge is Power. By entering into your investment journey well aware that there will be years of market falls, you can (hopefully) withstand the urge to race to the exit at precisely the wrong time.
To wrap up just remember, positive returns 4 out of every 5 years is a totally acceptable and satisfactory outcome. Indeed, an acceptance of this will make you far wealthier than an investor who requires their investment to rise every single year.
If you’re keen to start investing, download our free toolkit – Investing – How to get started. It covers risk and reward, share market basics, the 12 most common investment mistakes, and tips on gearing to manage risk.
And of course if you’d like some help and support building an investment portfolio – well that’s what we do! So check out the Work with Paul page.
Here’s some other investment related posts that you might find of value:
Investment basics – Active vs Passive – what it’s about and our approach
Investment power-ups
Episode 65 – The challenges of investing for children
With the cost of housing continuing to climb, in addition to the rising cost of tertiary education, many parents and grandparents are worried about what the future holds for the young people in their lives.
Last week Michael contacted me. He has a young daughter and was thinking of starting an investment for her, where he’d perhaps tip in $25 per week, so that when she was a young adult, there’d be a pool of money to get her off and running.
He’d seen a lot written about ETF’s so he figured that must be the way to go. But his initial enquiries weren’t bearing much fruit and so he reached out to me, to establish whether there was something he was missing. Why is it so hard to start investments for children.
The first barrier Michael found was that he couldn’t actually establish an investment in his daughter’s name. I confirmed that there’s two reasons for this.
One is because, to establish an investment, whether that be buying shares through a broker, or into a managed fund, you are engaging in the world of contract law, and contracts can’t be enforced on minors.
Now it may be possible in some instances to transfer investments across to children whilst under age 18 after purchase, but that then brings us to the second reason why investments in your child’s names is problematic – Minor’s tax. This is a penalty tax regime designed to prevent wealthy parents from hiding assets in their children’s name to avoid tax.
Kids can earn investment income of $416 per year without a problem so basic bank interest is not an issue, but once they go over this threshold, they are taxed at an amazing 66 cents in the dollar! This drops to a not much better 45% when their income exceeds about $1,300.
So ownership wise, when investing for children, the investment will likely need to be in an adult’s name – usually one of the parents (could even be in both names). And the adult owner will need to include the investment income, and hopefully capital gains, on their tax return. Given this, it would be sensible to have the investment in the name of the parent likely to have the lowest income, since this will result in the lowest tax payable.
Most investments will allow you to put a designation on the account which is like a tag, so you might have “Jane’s investment”. These designations have no legal or tax impact, but they help in identifying investments.
If these tax consequences are a significant barrier, most likely because both parents earn incomes of over $80,000, then another solution to investing for children is to use Insurance Bonds, or a derivation of them, Child Advancement policies.
Insurance bonds are a little like super funds, but without the restrictions of access to your money. Insurance bonds pay tax within the bond (at 30%), so you don’t need to include them in your personal tax return.
If you hold them for 10 years or more, then when you withdraw the funds – to for instance gift to your daughter so she can buy her first home - there is no further tax to be paid. This is quite different to a regular investment in one of the parents’ names, where upon sale, Capital Gains tax will be payable (assuming there has been growth of course).
The investment options are quite wide within insurance bonds, so just like within super, you can choose the Growth or Balanced options, or individual asset classes like Australian shares or International Bonds.
If you are saving specifically for education purposes, Child Advancement policies, which are a version of an Insurance bond, can be very helpful. These enable you to claim back the 30% tax paid within the bond where you can demonstrate that withdrawals are being made to fund education expenses. You do this by providing the receipts when you withdraw the funds. Acceptable expenses are quite broad – school uniforms, books, fees, music lessons, and plenty more. And the expenses can relate to all levels of education, including tertiary education.
Products vary quite a bit in this space, so just be sure to have a good read of the product brochure so you understand exactly what you are getting.
Whichever ownership structure you decide is right for your child’s investment, one final note is that whilst ETF’s have many great applications, regular savings plans are not one of them. In Michael’s case he wanted to add to his investment on a regular basis. To do this with an ETF, you have to buy the shares in the ETF through a broker, and that means every time you want to add to the investment, you have to pay brokerage. That’s likely to be around $20 per trade, which will really add up if you want to add, say, each month.
You’re likely to be better off using a managed fund (or an insurance bond as per above), as these will typically have regular investment plans where you can instruct the fund to deduct a specific amount from your bank account each month and add it to your investment. I’ve not seen a fund charge a fee to do this.
The ongoing management fees within managed funds are usually higher than an ETF, so it could be that you switch money across to an ETF once it builds up to a significant sum. There are tax consequences to this though, so this is something worth getting some advice on.
Well I hope that has helped you move forward with your investment plans for your young one. The keys points when considering investing for children are:
- The investment will need to be in the name of an adult, probably a parent.
- If both parents are likely to earn a reasonable income, it might be worth exploring the use of an Insurance Bond.
- And if the purpose of your savings is to fund education expenses, then you should look into child advancement policies, which are a specific type of Insurance Bond.
Important Information:
This information is of a general nature only and has been prepared without taking into account your particular financial needs, circumstances and objectives. While every effort has been made to ensure the accuracy of the information, it is not guaranteed. You should obtain professional advice before acting on the information contained in this publication.
An edited version of this article originally appeared in Money Magazine.
Episode 64 – Money & happiness - Brian Portnoy - The Geometry of Wealth
I am joined by author Brian Portnoy in this episode as we talk about his book on money and happiness called The Geometry of Wealth.
In this interview we cover:
- What is “The Geometry of Wealth” about and what led and triggered him to write it.
- An elaboration of “Adaptive Simplicity”.
- The 4 C’s of the happiness element and how to practically apply it in our life.
- An explanation of the biggest definition of the book and the 3 symbols - circle, triangle and square.
- What are the ultimate drivers of success?
- Discussions on investments, asset allocations, building portfolios and diversification.
- Brian’s advice for investors.
- The importance of having a financial advisor.
- Do we really need to retire early?
Links mentioned in the show
Financial Autonomy Website
Brian Portnoy LinkedIn
Brian Portnoy Twitter
Shaping Wealth
Virtus
Episode 63 – Why do investment markets have bubbles?
If you’ve ever seen a graph of any share market, you will know that whilst over the long term it tends to go up, the graph isn’t a straight line. Markets will go up, up, up over several years, only to fall back for a year or two, before re-starting their upward climb.
Research on United States investors shows that whilst over 20 years to the end of 2017, the S&P500 share market index returned 7.2%, the average investor experienced a return of 5.29% per year. I don’t imagine Australian investors would be much different.
This under-performance of investors has been observed for many years, so what’s going on? And how does it relate to market bubbles?
Market bubbles, and their subsequent busts, reflect over-reaction. We bid up prices beyond that which makes sense, and then on the downward slope, we sell when we don’t need to, and prices go below what logic would dictate they should be.
These extremes have nothing to do with balance sheets and profit and loss statements, and everything to do with human behaviour.
In behavioural finance (for which one of the key founders, Richard Thaler, won a Nobel prize in 2017), the term used is herd behaviour. We sometimes also refer to it with the acronym FOMO – Fear Of Missing Out.
Market bubbles don’t occur because investors are stupid. They happen because we’re human. We’ve learnt through thousands of years of evolution that if a lot of people are running in one direction, it’s probably wise to do the same. The luxury of waiting to confirm for ourselves that there is indeed a danger worth fleeing from, may well lead to our death.
So when markets keep rising, as we’ve seen in Australia over the past decade with residential property for instance, or when they fall, like we experienced with global share markets through 2008, our inbuilt, human reflex, is to jump on the band wagon.
Another thing that is happening is a concept known as Recency Bias. This is the human trait of disproportionally considering things that have happened recently, and dismissing older information.
As an illustration of recency bias in action, if you make an initial foray into some shares, and in the first 6 months they rise 10%, then you're quite likely to put more money in. And if that also rises quite quickly, you start thinking about where you can borrow money from to invest some more. This positive feedback loop is how bubbles emerge.
Interestingly the two most famous share market bubbles of the twentieth century, the bubble in American stocks in the 1920s just before the Wall Street Crash of 1929, and the Dot-com bubble of the late 1990s, arose from optimism surrounding the development of new technologies. An amazing range of technological innovations including radio, automobiles, aviation and the deployment of electrical power grids arose during the 1920’s. The 1990s was the decade when Internet and e-commerce technologies emerged.
The potential long term impact of these new technologies is hard to evaluate, which leaves plenty of room company share prices to climb, even when they are losing money.
So why should you care about investment market bubbles?
The answer ties in with the Dalbar statistics I mentioned in the introduction. An investor in the US could have earnt 7.2% over 20 years simply holding onto a well-diversified portfolio that reflected the index. Yet the average investor in fact only experienced a return of 5.3% because they followed the madness of the crowd. They bought and sold when they should have just left things alone.
The selling is what does the real damage. There is no perfect time to buy, it’s only known with the benefit of hindsight. And the cost of waiting on the side lines can be significant. But the selling is something we can be smart about.
To start with, don’t sell when markets are in a panic. Recognise the herd mentality and step back to consider what is right for you. In 2008, as markets declined, I had clients in their 30’s and 40’s asking if they should get their superannuation out of shares. I had to point out that they can’t touch that money until at least age 60, so short term falls are certainly not a reason to change plans. Indeed for accumulators, markets falls have the silver lining that you are a buyer, and prices are cheap.
Also during that period I saw recency bias in action. People would say – “my balance has fallen x% this past year. If it keeps going like this for another 5 years, I won’t have enough to retire on”. But hang on, we know that the long term average return for growth type portfolio’s is around 8%. So why would you extrapolate last year’s down year and assume that’s what the future holds? Recency bias – applying disproportionate weight to recent returns.
Rebalancing portfolios can be a useful tool. That’s the process of periodically selling down investments in particular asset classes that have done well, and re-allocating the proceeds to the underperforming sectors. So for instance if the Global Share portion of your portfolio had a very good year, you would sell down some of this holding, and reallocate it to the weaker sector, perhaps Australian Bonds for instance. Considerable research has shown that this rebalancing process can add significant value. But it goes against the grain. It’s the opposite of what we naturally want to do, so it requires discipline.
To wrap up then, investment markets experience bubbles because humans make it so. And despite all the advancements in technology that we’ve seen in recent years, human behaviour hasn’t changed, so bubbles will continue to occur.
So what should you? Be a long term investor. Ensure your wealth strategy won’t force you to sell when markets drop. And if your strategy doesn’t already have a rebalancing process, explore how you might be able to change things to gain this valuable feature.
Other posts you might find useful:
Bike paths, Bitcoin, and Risk Budgets
Investing – How to get started
Important Information:
This information is of a general nature only and has been prepared without taking into account your particular financial needs, circumstances and objectives. While every effort has been made to ensure the accuracy of the information, it is not guaranteed. You should obtain professional advice before acting on the information contained in this publication.
Episode 62 – Putting the puzzle together – 4 essential elements to achieving your big life goals
Here at Financial Autonomy, our focus is typically on the money side of how you achieve your goals and gain the choice in life that you deserve. But of course, achieving big goals requires more than just a financial solution.
And so in today’s post we’re going to take a step back and consider things a bit more holistically.
- Start with Why
Executing a plan to achieve a particular goal rarely goes off without any set-backs or things out of left field that you hadn’t considered. Adaptation is therefore an essential requirement in achieving success. In start-up land they call it a pivot.
The risk when faced with the need to make changes, is knowing which path is the right path, and that’s where being clear on your ‘Why’ is so crucial. Your Why is your magnetic north. It guides you towards progress through the normal twists and turns of life.
Let’s consider an example. You want to move to self-employment so as to have the flexibility to work around kids school drop offs and getting them to their after school activities. You use your skills as a compliance manager, built up over 10 years of employment, and start your own one person business, providing compliance services for 3 medium sized businesses, mainly from your home office with occasional site visits as needed. You’re working around 20 hours per week. You’d like a few more hours, ideally about 30, but all things considered, you’re in a good place.
One of your clients buys another business and in the process roughly doubles in size. They approach you about working 1 day per week on site at the new business to help with the integration. They would require you to be in the office at 8.30am until 5pm and the office is 30 minutes’ drive from home.
Now without a clear Why, this opportunity would seem to be a good one. You wanted more hours - well here they are. But because you have a clear Why you can consider whether in fact this opportunity is one you should be taking. It doesn’t provide flexibility, and the hours plus the commute don’t allow you to do the things with your children that was the whole reason for moving to self-employment in the first place.
Knowing your ‘Why’ makes your decision process an easier one.
- Set your Goals
So you know why it is that you’re undertaking the change or challenge, the next step is to set some goals. There’s a few crucial elements in this phase.
To be useful the goals you set must be specific, not airy fairy and vague.
They must be attainable – unrealistic goals lead to disappointment and abandonment.
And very importantly you need milestones along the way to give you little boosts of positivity and confirmation that you’re making progress.
The SMART goals framework is very popular, you’ve almost certainly heard of it. The toolkit from episode 10 has some good information on how to use this framework to develop your goals, so if you haven’t already downloaded that one, you might want to grab it.
- Develop your plan
The next logical step is to develop your plan as to how you will make your goals become reality.
Now the content and structure of your plan will depend very much on the goal you’re trying to achieve – retiring from paid employment in 10 years will require a very different plan to starting your own business in 12 months’ time. But a common element of all successful plans is setting aside the time to make it happen.
So let’s say your goal is to start a business in a years’ time. You develop a plan to acquire the skills you need, get the necessary permits or licences, build your web site, and fund the whole project. Hopefully you set milestones as to when each piece of the puzzle will be completed.
Now go and block out time in your diary to actually get it done. Maybe you set aside Sunday morning’s, or perhaps it’s after dinner on Tuesday and Thursday nights. The important thing is that you have deliberately set aside time to take action on your plan. Planning’s great, but you’ll never achieve your goals without actually getting the work done.
- Take action – don’t procrastinate
You might recall back in episode 17 I devoted the entire post to the evil that is procrastination. Overwhelm is the primary cause, so if this is an issue for you, break your plan down into smaller chunks, and just focus on getting one piece done at a time.
Don’t be afraid to ask for help. None of us know everything, so if you get stuck whilst taking action on your plan, see if there’s someone you know that you could phone or email to help you move forward.
Another important element in the take action phase is to persevere. As mentioned at the start, things never go exactly to plan. If you quit at the first, or even the third hurdle, you’ll miss out on the benefits that achieving your goal would have delivered.
Now persevering is not the same as being oblivious to the outside world. If you launch a Side Hustle and you’re just not getting the customer response that you’d expected, you won’t get a trophy for stubbornly sticking at just to prove the world wrong. You need to be prepared to adapt as you learn more and as the external environment impacts on your plans. This takes us nicely back to our starting point – the importance of knowing your why. Armed with this guiding point, you can pivot as needed, and still keep moving towards the future that you seek.
So there you have it, the 4 essential elements to achieving your big life goals:
- Start with Why
- Set your Goals
- Develop your plan
- Take action – don’t procrastinate
I hope they help you gain the choices in life that you deserve.
Here’s some other previous posts that you may be interested in which relating to achieving your goals:
Change – essential considerations when making a Career or Life change
What’s your number?
Episode 61 – Have your 20's set you up for financial failure?
Habits.
Human brains love them!
Any time we can go on auto-pilot, we jump at it.
Author Samuel Johnson observed, “The chains of habit are too weak to be felt until they are too strong to be broken”.
I also like a quote from Agatha Christie on the subject “Curious things, habits. People themselves never knew they had them”.
In your financial life, many of your significant habits are formed in your 20’s. And often you don’t realise it until much later. So today’s post highlights some of the habits you might have inadvertently picked up, and suggests some ways that you can create new habits to put you in a stronger financial position into the future.
Whilst my 20’s are now quite a while back, they’re not so distant that I can’t recall the enormous transformation that occurred from the beginning of that decade in my life, until I came out at the other end.
Uni and work – I studied part-time at night over 6 years and worked during the day. From living at home with the parents, through a few share houses, to buying my first property.
And of course the normal relationship ups and downs, including an engagement that never made it to the big day. I also met the lady who is now my wife, and I must have done something right in my 20’s, because only a few weeks after turning 30, our first child was born.
What is clear when I think about my 20’s, and those of my friends, is that they were such an important decade, laying down many of the foundations for our lives. It’s a big call perhaps, but I wonder if your 20’s aren’t perhaps the most important in your life.
But that doesn’t mean the trajectory that you set for yourself in your 20’s is locked in for the remainder of your days. So let’s look at some potential bad habits that you may have picked up, and see if we can’t get you onto a better path.
The number 1 financial problem for Australian's is spending too much, which is most often facilitated by credit cards. Habits are tough to break. If you get used to just slapping everything on the credit card in your 20's, there's a good chance you'll continue with that approach in 30's and 40's.
And if you move from your 20's and into your 30's carrying unproductive debt such as credit cards and personal loans, you might never be able to break into the housing market, an important financial foundation for very many of us.
But if you find yourself in that position, it’s never too late to change.
The first step if you’ve gotten yourself into a spending induced hole is to stop digging! Take the credit card out of your purse or wallet, reduce the limit, and if you’ve got multiple cards, cancel all bar one.
Personal debt such as credit cards are a symptom of spending beyond your means. To solve this problem, you need a budget, and as mentioned in past episodes, with the advent of internet banking, it’s never been easier. I’ve spoken about creating a budget in several previous episodes, so I won’t go through it again, but if you’re interested in more info on budgeting, check out episode 27 – Attaining financial independence doesn’t need to be hard, and episode 16 – Getting your debt under control doesn’t need to be difficult.
So you’ve created your budget. When you get paid, you put money to debt reduction, some aside in your bills account, some savings, and what you have left is what’s available to live off until the next pay day. Once your debts are gone, more can go to savings, accelerating your journey to Financial Autonomy.
The savings piece is important if you’re going to break your overspending 20’s bad habits. Your initial goal should be to get some money in an emergency account - aim for $5,000 as a starting point. This is what will keep you from running up credit card debt when the car needs urgent repairs, or you find yourself between jobs for a month.
Now let’s not skip over this bit too quickly, because this is the major habit change that you need to make if you find yourself in financial stress in your 30’s or 40’s because of bad habits picked up early in life.
If you can change from spending more than you earn and accumulating debt, to having a budget and spending less than you earn, with money in an emergency account, funds set aside for bills, and over time some savings, you will have transformed your financial life.
With this foundation stone set in place, you can now move forward to invest, perhaps buy a home, and start thinking about your Financial Autonomy goals, like perhaps planning a mini-retirement or making the jump to self-employment.
So what else to think about now that you’re in your 30’s or 40’s (or perhaps even still in your 20’s and just ahead of the curve!)? Another core financial concept that will make a lot of difference to you over time, is to understand the power of compounding.
Compounding is the financial jargon term for earning interest on your interest. Compounding matters a lot, especially for investments that run over a long time period. Your superannuation is likely to be your longest investment. So don’t just ignore it - check what investment option it's in and ensure it is suitable for high long-term growth - short-term volatility doesn't matter - you can't access until at least 60 years of age anyhow!
But compounding isn’t only relevant for your super. Think about your other savings and investments. The sooner you get started, and the more time an investment has to benefit from compounding, the greater your wealth position will be, providing you with more options in life.
Check out the Risk vs Reward section in our Investing toolkit, and also episode 14 – How to avoid the most common financial mistakes
So let’s recap. If you’re in your 30’s or 40’s and your personal balance sheet isn’t where you’d like it to be, there’s a good chance that’s because of some bad habits you picked up in your 20’s.
Those bad habits are most likely:
- Spending more than you earn
- Using a credit card or other personal debt to enable this overspending
- Not having a budget
- Not having any savings or provision for emergencies and unexpected expenses.
Take a step back and reflect on whether any of these habits are your reality. If so, you can break these bad habits once you’ve identified them. Again, as highlighted by the Agatha Christie quote at the start – we all have habits that we don’t even recognise we have.
I hope today’s post provides the stepping off point for you to have a wonderful financial future in the years ahead, and gain the choice in life that you deserve.
I interview tax specialist Shaun Farrugia to explore the use of trusts in maximising your wealth.
Often associated with a sense of overwhelm, we look at how you can push through a procrastination barrier.
In this interview with Adam Murray of the hugely popular Subtle Disruptors podcast, hear how a personal crisis lead him to reinvent his life and in the process, gain choice and control.
Episode 60 – Mike Lewis - When to Jump
Today in the episode, we interview the author of When To Jump, Mike Lewis. The book is about career change or starting your own business.
In this interview we cover:
- Mike’s jump to being a professional sportsman
- His job and career before he became a sportsman
- Events that unfolded and didn’t go to plan when he left his career
- Framework: Jump Curves - 4 phases of taking a jump
- What made him decide to keep going
- Mike’s 2nd jump of writing the book When to Jump and how it unfolded
- How he strategized and made it happen
- When he started this idea
- Learnings from his jumps
- Details and overview about the book and its contents, including a sample case study
- Mike’s sense of things from the people he talks to
- The importance of planning in making a career change
- Mike’s plans for the next year or two.
Links mentioned in the show
When to Jump Podcast
When to Jump Instagram
When to Jump Facebook
When to Jump Twitter
Mike Lewis LinkedIn
Episode 59 – The Beauty of the Worst Case
Do you remember those Worst Case Scenario Survival Handbooks that were around everywhere about a decade ago? How to land a light aircraft if the pilot has a heart attack, or how to survive a bear attack. I don’t know if they extended to surviving a zombie apocalypse, but I wouldn’t be surprised if they did. They were good fun reads and made a great Christmas present.
In today’s episode we’re going to explore how planning for the worst case can be liberating. How it can melt the ice that has you trapped in your current state.
And the best bit? It’s not hard – just two easy steps.
Planning for the worst case is a key tool in enabling you to gain the choices in life that you deserve. So let’s dive into today’s Financial Autonomy episode – The Beauty of the Worst Case.
When investing, we know from history that the best investment returns come from growth assets – shares and property.
Why then don’t investors have all their money, 100%, in shares and property? Why diversify and hold things like bonds?
The answer is that whilst we always hope for the best, a wise person plans for the worst.
Planning for the worst case is something that’s common across government agencies and businesses. The Emergency Services for instance will plan out their response to a large bush fire or flood. A bank might develop a plan to handle a significant global disruption to financial markets. Or a pharmaceutical company might have a plan for dealing with an extortionist tampering with their products.
So how can you use this proven process to help you achieve your Financial Autonomy goals?
Step 1 is to acknowledge your fears and define them. If your Financial Autonomy dream it to make a career change, like we heard from Tim in episode 55, then perhaps your worst case scenario is that you quit your current job and can’t break into the new career that you dream of. That’s a totally reasonable fear. And for many of us, that fear is enough to stop us moving forward. It’s paralysing.
Now one solution to overcoming this paralysis would be to just try and push it out of your mind – the “be positive, it’ll never happen to me” approach. Having a positive mindset is certainly important in leading a happy and fulfilling life. But to achieve big changes, we need more.
So on a piece of paper, or my preferred method, a white board, write down your worst case. What’s your greatest fear in embarking on your Financial Autonomy goal? Perhaps there’s more than one.
There’s some relief in achieving this step alone, in acknowledging your fears.
But of course we’re only half done. Now that you’ve defined your worst case, in step 2 we need solutions. So it’s brain storming time! If you feel comfortable, perhaps you could invite others in to join you to get some fresh ideas.
Imagine what you would do if your worst case actually happened. Write down your solutions. Now this is not your preferred outcome, and it’s also not the most likely outcome either. So therefore your response are likely to be things you’d prefer not to have to do. But the point is they are things you could do if you had to.
If the career change didn’t work out, could you go back to your old career? If the new business you started just wasn’t delivering what you needed it to, could you get your old job back? What if you took a year off to travel with your partner, and half way through the trip decided you couldn’t stand one another and went your separate ways. Would you fly home, or continue the journey solo?
When I made my big jump from employee to self-employed in 2006, I had 8 months of income saved up. That was my runway. If it didn't work out, I had to go and find another job. That was how I dealt with my worst case scenario. And with that in mind, I ensured that before I left I did what I could to strengthen my professional networks, and I made sure I finished up on good terms, so that if I needed a reference or a simple connection in the future, people would answer my call.
I also considered where I was at professionally and how employable I’d be. I felt that given my experience at that point, and some of the successes that I’d had, I would be able to secure another employee role if it came to that.
Now fortunately it never did come to that. But acknowledging my greatest fear – what if this just doesn’t work out – and having a solution to that, was enormously powerful in providing me with the confidence to make the leap.
If you take nothing else away from this post, take this – planning for your worst case is enormously empowering.
I’ve found it so useful that I’m implementing it into more and more of what I do. When I develop my yearly business goals, I now also list some worst case scenarios and how I’d deal with them.
We’ll be introducing an affordable financial modelling solution in the near future so that you can get a robust answer to the “am I crazy to do this?” question. As part of that we typically explore two worst case scenarios – both involving adverse investment market outcomes, to see what impact that would have on your plans. Adding these worst case scenarios magnifies the usefulness of the work enormously.
Imagine your Financial Autonomy goal is to retire at 50. We build a financial model to show you how that looks over the long term, and the findings are that your goal is possible. Now we could stop there. But how much more powerful does the modelling exercise become if we also add in how it looks if you were unlucky enough to suffer a share market crash in the first year of your retirement? (Refer Ep 38 – Will my money run out? To see why this is a particularly bad outcome).
If the modelling shows that your goals remain viable – awesome! But if instead it highlights a potential problem, you can start planning solutions. Perhaps you change your asset allocation in those initial years so you don’t have too much share market exposure. Or you figure in picking up some part time work so you can give your savings time to re-build.
Whatever the solution, planning for the worst case enables you to move forward with greater confidence.
There will always be uncertainty in life. And for many of us, it’s this uncertainty that prevents us from taking the big steps that we’d like to make. Planning for the worst case could be the way for you leap over your uncertainty barrier.
When I started my career in investment markets almost 20 years ago all the investment options were what we’d now call Active. We didn’t call them that at the time, it was just the standard way that money was managed.
Passive investment had been around for some time, pushed primarily by John Boggle of Vanguard which first launched a passive index fund in 1975. But it took quite a while for enough data to come in, for investors to begin to appreciate why some hard questions needed to be asked about the focus on Active investment management.
In more recent times the trend has swung in favour of the passive approach, and variations of that process, with ETF’s (Exchange Traded Funds) driving broad adoption.
The increased acceptance and utilisation of passive investment strategies is almost certainly the biggest shift in investment strategy thinking since managed funds kicked off in Australia in 1955.
So in today’s episode I’ll be sharing with you the difference between these two approaches, and how we apply these alternatives when helping our financial planning clients.
As mentioned, Vanguard is the best known proponent of passive, or index investing, though interestingly Blackrock is bigger.
The idea of passive investment is that instead of trying to do research on different companies and identify winners, you simply buy the whole market. The thinking is that if you do this, you should get the average return of all investors. So let’s say you’re buying an index fund over the ASX200 – the index of Australia’s 200 largest companies. If the ASX200 grew by 5% one year, then that tells you that across all of the investors in that market, half did better and half did worse, and the average came in at 5%.
So if you invest in a passive index fund over the ASX200, you will get the average return, 5% in this example, less whatever fees the fund manager charges.
Now compare this to the Active manager. Their entire rationale is to beat the market. If the average is 5%, their entire rationale for existence is that by doing all sorts of research and analysis, they can identify insights others have missed, and so deliver superior performance compared to the rest of the market.
Now the astute Financial Autonomy audience will immediately identify that given the mathematical foundation of an average is that half of all results will be below, and half will be above, then clearly, not all active fund managers can be successful. Now it is fair to say that not all participants in investment markets are fund managers, there are of course mum and dad investors too, but by far the bulk of trade is conducted by the funds.
And so we arrive at the number one challenge when working with active fund managers – what if you choose one that under-performs?
But in actual fact, it gets even harder, because not only does the successful active fund manager need to beat the index, but they need to do it after their fees, or at least the difference in their fees versus a passive index alternative. And active fund managers tend to like to pay themselves a lot. So beating the average by say half a percent, won’t cut it if the fund charges 1% to manage the money in the first place.
So what do the numbers tell us? In data to the end of 2017 (SPIVA Statistics and Reports), when measured over 5 years, only 37% of active funds outperformed the benchmark, and in the US it was even worse with only 16% achieving what they’d set out to do.
To put it another way, if you have some money to invest and you’re trying to pick an active fund manager in Australia, there’s a 63% likelihood that you’ll pick the wrong fund and get under-performance. And in fact that number might be generous due to something called survivorship bias – funds that perform really badly close, and so they don’t register in the data.
Now to be fair, index managers underperform the benchmark too because of their fees. But because they don’t need to employ overpaid fund managers, their fees are really low. You can buy an index fund over the Australian share market for a cost of about 0.14%, and over the US market for an incredibly low 0.04%!
I thought this quote from Brian Portnoy author of The Geometry of Wealth summed things up well: “Beating the market. That’s a silly and fruitless game. It’s not tied to your real needs. It’s attached to your ego.”
Tying your investment decisions back to your needs, or goals is really important. You’ve got a goal, let’s say that’s to buy 5 acres out of town and grow your own food. To make that a reality you determine a dollar amount that you need to save up to enable the purchase. Now of course you could just chip away putting your savings in a bank account until it builds to the necessary amount, but it’s likely to be smarter to invest your savings and let compounding of returns do some of the work for you.
A lot of what we do for clients is financial modelling to ascertain how their goals can be met. So for instance we might find that, given your existing financial position and capacity to save, you could achieve your goal in 6 years, assuming your investment earn an average of 7%.
If you then embark on that journey, you want to have a high level of confidence that your investments will indeed earn 7%. A portfolio would be constructed to gain you adequate diversification and minimise risk. Now you could choose as part of the portfolio to employ active managers, in the hope they will do better than the market, and so, deliver to you higher returns than you’d assumed so that you reach your goal sooner. It’s certainly tempting.
But let’s revisit the data. 63% of Australian active funds and 84% of US active funds fail to beat the benchmark after fees. So is that a bet worth taking?
My preference would be to do whatever we possibly can ensure your goal is met, and that means having the highest confidence possible as to what the investment outcome will be. All investments involve risk, and returns are never guaranteed. But I know that if I invest in a passive index fund, I’ll get pretty close to the market return. And I know what on average that return will be, so that over a 6 year time frame, as is the case in this example, I can embark on the strategy with a high degree of confidence that in 6 years’ time I’ll have the funds needed to buy my little farmlet.
Now I should just pause here a moment and flag that I’m not totally of the view that all active management is a waste of money. We have many clients who’ve chosen to incorporate ethical considerations into their portfolio, and specialist fund managers, particularly with a focus on sustainability have delivered some great results that have indeed exceeded benchmarks on a consistent basis.
There has also been some evidence to indicate that in the Australian small company space, active management might add value. Here many of the participants are day traders and simple punters, and so there does seem to be profits available to investors by employing fund managers to go out and research less well known business, and then sifting the wheat from the chaff.
As the weight of money has moved from active management to passive over the years, active managers have responded, producing strategies to improve portfolio diversification and complement other passive holdings.
There’s another interesting wrinkle in this discussion of passive vs active investing, and that is investor behaviour.
There’s great data out of the US produced by Dalbar which compares the market return, which is what a passive index investment will deliver, to the return that the average investor actually experienced.
Over 20 years to the end of 2016 (the most recent data I could find). The S&P500 index returned 7.7%. However the average fund investor achieved returns of 4.8%, a difference of almost 3%. Over 20 years that is huge! To put some dollars around that, $100,000 invested at 7.7% grows to $440,000 in 20 years, whereas if you earn the lower 4.8%, your $100,000 gets to a much lower $255,000.
So what’s going on? The main answer is that investors jump in and out at the wrong time. They tend to get in after markets have had a few good years, and then they tend to get out when markets drop. To get the average market return therefore they needed to do 2 important things:
- Invest so that your money tracks the index, which is most easily done with an index fund
- Leave your investment alone – all the evidence suggests that investors who try and time the market fail, and as shown in the numbers just mentioned, the impact is not minor.
So armed with this knowledge, how do we tackle things at Guidance, my financial planning practice? We don’t have a one size fits all approach, however our starting point is to use index solutions such as ETF’s, and then add in active management only where there is a specific strategy requirement.
A solution that we use a lot is model portfolios built using entirely index funds, but with an overlay as to the allocation across the sectors, eg. Australian vs International shares vs Property. Once a year the model manager, a large US based global institution, conducts a detailed review of market and economic conditions, and rebalances the asset allocations within certain band limits to reflect what they see. They’ll never be all in Australian shares, or hold none at all, but depending on their assessment, they might tilt allocations 3 or 4% in one way or the other. They’ve been running models this way for over 30 years and their performance has been enough to cover fees and deliver a slight out-performance against the market benchmarks. Given our job is to help our clients achieve their goals, this is the outcome we want delivered. The more certain the outcome, the better.
Important Information:
This information is of a general nature only and has been prepared without taking into account your particular financial needs, circumstances and objectives. While every effort has been made to ensure the accuracy of the information, it is not guaranteed. You should obtain professional advice before acting on the information contained in this publication.
Episode 57 – 4 Hour Work Week – still relevant today?
Originally published in 2007, The 4 Hour Work Week by Tim Ferriss, made some huge waves upon its release. It also laid foundations for its author that continue to this day. Indeed anyone who’s ever browsed the iTunes podcast charts will have come across Tim Ferriss, whose self-named show is regularly towards the top.
As regular readers and listeners know, the reason Financial Autonomy exists is to explore how we can all gain choice in our lives. Without doubt The 4 Hour Work Week aims to deliver the same, albeit with a quite specific formula for success.
Now I have to confess that I didn’t pick up the book when it came out. I can’t recall exactly when I became aware of it, but it was a bit like a movie everyone was talking about – I kind of felt I knew all the best bits, and with all the hype, I just couldn’t find the enthusiasm.
11 years on and with the hype having faded, I thought it was time to right that wrong.
The first thing you need to know is that - despite the title, this book really isn’t about only working 4 hours per week. In fact nowhere in it does Tim say that’s all he does, and indeed I’ve read interviews with him where he fully acknowledges that he works more hours than that.
So don’t read this book if that is your sole goal.
The sub-title – Escape the 9-5, Live Anywhere, and Join the New Rich, is actually much more what The 4 Hour Work Week is all about.
The other thing, which is where I got the wrong impression when it was released, is that it’s not all about outsourcing everything to India. Sure, that’s an important element, but it’s not the whole book
I was really pleased to find that The 4 Hour Work Week is a really well written and engaging book. An extremely common frustration I find with many thought-leader type books is that the Big Idea could have been summarised in a 5 page essay, but since you can't make money with a 5 page essay, they've padded it out into a book.
That is certainly not the case here - the book is well structured, and the ideas are consistent throughout. I didn’t feel like there was any padding. There were elements in the middle where I felt he wasn’t talking my language, but I continued anyway and found value in latter chapters.
It’s probably worth explaining the basic structure of the book. There are 4 key elements, broken up into steps:
Definition
Elimination
Automation
Liberation
The first, Definition is where he explains his New Rich concept and challenges some common assumptions.
Elimination is essentially about productivity – getting more done in less time.
Automation explores how you might generate income with minimal personal effort – unquestionably the section I had the most difficulty with.
And finally Liberation – mini-retirement, travel, and flexibility – very much in our Financial Autonomy wheelhouse.
If you think in terms of a Venn diagram, you know, where there are the two circles that overlap in the middle, and one circle is the things Tim espouses in this book, and the other circle contains the ideas and dreams of the Financial Autonomy community, there is definitely significant overlap.
The idea of “wealth” not being defined purely by your balance sheet, but rather with reference to the life you can lead, certainly aligned.
Where 4 Hour Work Week didn’t resonate for me though was in 2 primary elements:
- It seemed a recipe for a single person. Success in the approach espoused equalled lots of living abroad, nomadic style.
Now I love to travel and am a keen learner, but as someone with kids, first I have an obligation to ensure they get a good education and upbringing. And whilst travel can be an important element of that, professional teachers laying solid foundations are irreplaceable.
I also take the view that there’s 15-20 years in my life where I get to enjoy their growing up, and hopefully provide a positive influence in their lives. Traveling to Buenos Aires to learn Latin dancing doesn’t fit into this picture. My kids want to catch-up with friends, play sport and engage in their other interests. The definition of success in 4 Hour Work Week didn’t really seem to allow for that. 2. The other element that jarred for me was that the suggested enabler was building a business that largely runs on auto-pilot with the use of outsourcing staff from India and the likes. If only building a successful business was that easy!
I know from the emails that I receive from you guys, that many of you are entrepreneurially inclined. I also know that finding that viable business idea and making it work is really hard. To then overlay on that the ability to outsource its operation, is something that I would think few could pull off successfully. It’s possible, no doubt about it, but as a template for others to follow, I’m just not convinced.
Indeed the very fact this concept has been around for so long, and yet so few people do it successfully, would seem to prove this point.
I also think it fails to recognise that many of us enjoy the income producing work that we do. Whether it’s working as part of a team, developing creative solutions, helping people live better lives, or the challenge of beating a competitor – our work provides purpose, satisfaction, and yes, enjoyment. Who hasn’t had a glass of wine or a beer at the end of big week and felt, “yeah, I kicked some goals this week”? This idea that all paid work is horrible is a falsehood.
So that’s the issues I had with 4 Hour Work Week. But did that mean reading this book was a waste of my time? Not at all.
Was it life changing? No.
But have I taken action as a result of reading it (since after all, if no action is taken, what’s the point)? Yes.
The immediate action I’ve taken is to better manage my emails which have been consuming a lot of my day, and getting unjustified priority at times. I’ve automated a lot of what happens with my incoming emails, and set-up a few templates to speed up some responses. I’m also experimenting with only actioning emails at certain times of day. I haven’t perfected things, but Tim’s book certainly caused me to pause, reflect, and make changes.
The version I bought was the expanded and updated edition published in 2009. The elements that I gather have been added are certainly good, and if you have the choice, I’d certainly encourage you to get this version over the original.
There’s a section towards the end titled “Living the 4 hour work week” - case studies, tips, and hacks which I thought was great. You may even want to read that first, then decide if you want to invest the time into consuming the whole book.
I also thought the blog post section contained some really useful thoughts.
I’m no fan-boy of Tim Ferriss, so I have no idea if he’s living a happy and fulfilled life. But the little I do know suggests he’s succeeded in gaining choice in his life, and so for that I admire him, and I thank him for writing The 4 Hour Work Week – I certainly think this book makes a positive contribution to the potential that exists for all of us in the 21st century.
I’m sure many in the Financial Autonomy community have read 4 Hour Work Week – what did you think? Let me know on the Financial Autonomy Facebook page, or via email from our web site.
Also, if you’re a Twitter user, my Twitter handle is @Paul_Benson11 so feel free to connect their.
Click here for the Mini Retirement Planning Checklist
Episode 56 – Are you playing offence or defence?
Today in the episode, we talk to Tim Lavrey’s career change story from being a bank manager to a preschool teacher.
All sports have elements of offensive and defensive play. And whether you play Netball, soccer, cricket or basketball, your team must constantly strike a balance between the two.
In pursuing your Financial Autonomy goal, you too must find a balance that will see your goals achieved in an acceptable time frame, whilst also enabling you to sleep at night, and not put you and your family at risk of living on the street.
But whilst in sport the distinction between offence and defence if fairly clear, in the financial world, it may be less so. So in today’s episode where going to explore your options, so that as you develop your Financial Autonomy strategy, you’re considering both offence and defence, and finding a balance that makes sense for you.
Offensive moves are typically attacking type moves. They’re trying to make something happen in your favour. They’re pro-active decisions or tactics that you are employing to make progress towards your goal.
Defensive moves are concerned with protecting what you’ve got, not going backwards or giving up ground.
Playing offence is often more glamorous, and for sporting spectators, more spectacular. But any coach will know that a solid defence is essential if your team is to experience sustained success.
Your strategy to achieve Financial Autonomy will require both offensive and defensive tactics. You need to take pro-active steps – offence – if your goals are to be met. But that doesn’t mean it’s wise to ignore the important defensive measures to protect on the downside. Without defence, all that you gain in offence could be given up.
Let’s start by considering what playing offence might look like in a financial sense.
A good starting point would be to have an emergency fund set-up to cover unexpected expenses like the fridge deciding it’s had enough, or unplanned medical expenses. For most people, having something like $5,000 stashed away would tick this box. The alternative, that leads all too many people towards financial peril, is that when these type of events crop up, they hit the credit card, with no plan on how this will be quickly cleared.
Your next offensive play is to educate yourself on investment and money. Now given you’re consuming this post right now, I appreciate I’m preaching to the converted here. You don’t need to become an expert, but having a basic understanding of investment options, from term deposits to shares, property and funds, and a sense of the risk in each, will arm you well when developing your strategy.
It sounds obvious and is perhaps a bit of a cliché, but a foundational offensive play in a financial autonomy context is to spend less than you earn. This requires management of your cash flow and knowledge of what is affordable. I’ve come across several instances in recent years where people have signed up to rent a home, without appreciating that once they pay that rent, they simply won’t have enough money left to live off. They just don’t seem to have done the numbers and realised that the rent is perhaps 50% of their take home pay, a level that would be unsustainable for pretty much anybody.
Let’s start to stretch the legs a bit now – it’s time to start building some wealth. We all need a roof over our head and food to eat. And since the days of living in a cave and hunting for your dinner are well behind us, you’re going to need money.
You’re currently earning money through your skills and knowledge, and whilst your ability to generate income is unquestionably of enormous value, it has its vulnerabilities and limitations – for one you have to get the work done in order to earn the income, but also there is the risk of your skills becoming obsolete or just less valued, you suffer an injury, or simply old age slowing you down to the point where income generation is no longer possible.
Owning a home and/or owning income generating assets is essential for you to achieve financial autonomy and gain the sort of life choices that you seek. And the starting point to building wealth is to save. You don’t wake up one morning and have $100,000 in your investment portfolio – it starts with that first $100 saved and invested. So play offence with your money and invest. It needn’t be huge amounts to being with, but make a start.
Improving your income generating skills is also a great offensive play. Deeping or widening your professional knowledge can see your income rise, enabling a higher rate of saving and investment to build wealth. Improved skills also make you more employable, enhancing your overall financial resiliency.
So think about what sort of training or experiences you could undertake that would increase your value to an employer, or if self-employed, enable you to increase your hourly rate.
And my final financial offensive move is to make an active choice as to how your superannuation is invested. I’m not talking about which super fund so much, but more which investment option. There will be a default, and that may well be the right option for you. But don’t just assume that it is. Look into it, consider your time frame to retirement, and your comfort with volatility. (A hint here, if retirement is a long way off, volatility is your friend).
Make an active choice that fits with your plans.
Now I do like the theory that the best form of defence is a good offence. But that doesn’t mean there’s not room for a couple of sound financial defensive tactics.
The first is to pay down debt. Debt is not a bad thing when used to buy assets that grow in value, but there’s no question that debt makes you vulnerable. Compare the scenario of two people who are made redundant. The first has a $500,000 mortgage over their home, whilst the other has paid off their home and owns it outright. Neither person is likely to be pleased about being made redundant, but it's a fair bet that the person with the mortgage is a lot more stressed than the person who owns their home.
Start with your most expensive debt and work your way down. Tax deductable debt, such as that used to buy an investment, may be the final debt that you tackle, but of course you’d need to run the numbers there.
When it comes to defensive moves, the other fundamental element is insurance.
Now I fully appreciate that it’s hard to get excited about paying an insurance premium for a benefit that you hope you’ll never need. But having your house destroyed in a fire, or generating no income for 12 months whilst you recover from chemo, are going to set you back a long way financially.
Insurance premiums are known and can be planned for. Having insurance in place ensures that the hard work that got you to where you are today, is not undone by one instance of bad luck.
Important Information:
This information is of a general nature only and has been prepared without taking into account your particular financial needs, circumstances and objectives. While every effort has been made to ensure the accuracy of the information, it is not guaranteed. You should obtain professional advice before acting on the information contained in this publication.
Episode 50 – Tim's big jump - from bank manager to primary school teacher
Today in the episode, we talk to Tim Lavrey’s career change story from being a bank manager to a preschool teacher
In this interview we cover:
- Tim’s love for football
- The story of Tim’s career change and how he made his move and decision to leave the bank and teach
- His redundancy and how it contributed to his career change
- Going through self-doubt during the process
- Their 6-month period of planning for his career shift, finances, income and budget and their 3-month trial period before the big change
- How Tim prepared for university and teaching and the struggles he went through
- Examples of how he created opportunities for himself while studying and after graduation
- His feelings about his new profession as a teacher
- His thoughts about the things he’d do differently
- How good planning, structure, and discipline can help with your financial stability
- The story of how Tim’s wife, Mary Anne, made a big change in her career recently
- How teamwork contributed to successfully making the changes in their lives
Links mentioned in the show
Mini Retirement Planning Checklist
Episode 54 – Pay off the mortgage or invest?
A shout out here to Christine Calnan who emailed me about this dilemma – whether it is best to put your savings towards extra mortgage repayments, or should you instead be investing?
This is one that does come up a lot when I’m working with clients, and it’s certainly not a question with a simple one size fits all answer. So let’s take a look at the factors you should consider to find the answer that’s right for you.
Christine observed that whilst the question of whether savings should be put to extra mortgage repayments or investment is something faced by plenty of people, there’s not a lot written about it when you do a bit of Googling. And there’s a good reason for that – the real answer is “it depends”, and no one likes to give, or receive that answer.
Arriving at the answer that’s right for you is very dependent on 2 key assumptions – what will future home loan interest rates be, and what will the return be on your investment.
Boil it down and the question is really, “will I earn more on an investment than I’ll pay on the mortgage?”
Mortgage rates are at historical lows at the moment, typically around 4.5%.
Both the US and Australian share markets have averaged returns of a little under 10% over the long term.
Now there is tax to pay on your share investment, and this is one key reason why there is no one size fits all answer – we live in a marginal tax world where different people pay different rates of tax.
To further complicate matters, Australian shares throw off franking credits, which offset some and potentially all of your tax liability on these holdings.
To lean on the conservative side, let’s assume that a third of your investment return goes to the tax man. Your 10% total return becomes 6.6%, still comfortably ahead of the mortgage rate.
So on this simple analysis, the preferred strategy would seem to be to priorities investment in shares over additional mortgage repayments.
The tricky bit though is considering whether current mortgage interest rates will continue into the future. If you send your savings to an investment, what happens if in 5 years’ time mortgage rates rise to 8%? At this sort of level it would be very tough for an investment to provide an after tax return that would exceed this.
Then there’s the question of share market returns and a topic I’ve raised before – sequencing risk.
It’s all very well to say the average share market return is 9 point something percent, but it varies a lot year to year. Will you actually experience the average return? So with the investment option, you have uncertainty as to the result you will get, whereas under the extra mortgage repayments scenario, you have certainty, you have definitely saved the home loan interest rate. The value of that certainty should not be under estimated. Paying off your home loan is effectively a guaranteed outcome.
To help address the uncertainty of your investment return, you should ensure that when planning your strategy, you’re thinking of a minimum time frame of 5 years, and ideally 10 years plus. The longer you invest for, the more likely it is that your outcome will come in at around the long term average
Perhaps it’s worth considering whether this mortgage vs invest question need be so binary. Could you do both?
At its simplest, if you can save $400 per month you could quite easily put half off that to your mortgage and invest the other half. Hedge your bets.
You could spice things up though. Maybe you direct your savings to investments, but then have all the income those investments produce paid off your home loan. Or maybe you even use some equity in your home to buy investments, potentially creating a negative gearing scenario. You’re savings go towards servicing this new investment loan, and once again the investment income is used to make extra mortgage repayments. Because you’ve borrowed to kick things off, your investment portfolio will be bigger, meaning your investment income will be larger, which means more money to pay off your home loan.
Another way you could go is to focus initially on paying down the home loan with all of your savings, and then once this is done, using the equity in your home to borrow and buy an investment portfolio. So a sequential, rather than parallel approach. The attraction of this is that you’ve achieved the certain saving of having paid off your mortgage, and then once you re-borrow to invest, the interest expense will be tax deductable given the investments will produce taxable income. And because you’re borrowing against your home, the interest rate will be low compared to the alternatives, which will help make the strategy profitable.
The only downside with this approach is the opportunity cost of having no market exposure during the loan repayment phase.
It’s worth addressing the fact that I’ve talked here about share market investments and not property investments. There’s a couple of reasons for this, but it mainly boils down to risk. A well-diversified portfolio of Australian and International shares is far less risky than a single residential investment property, relying on one tenant to pay on time and look after the place. There are also a lot more transaction costs associated with property – stamp duty, agent’s fees, maintenance costs, council rates, and on it goes. Plus, an investment property is a big chunky investment. You can’t do it for $200 a month, and you can’t quickly liquidate it if your circumstances change.
To answer Christine’s question, on balance, whilst interest rates remain at historic lows, it is likely that investment is a better option than additional mortgage repayments. But you would want a well diversified investment portfolio of 100% growth assets, and keep a close eye on the interest rate on your home loan. If it started to creep up, the answer might flip, at which point you could sell your shares and pay the proceeds off your mortgage in one lump sum. It’s also essential that you appreciate that there is some risk and a positive outcome cannot be guaranteed.
This is very general advice, and I’d strongly urge you to sit down with someone and run the numbers that are specific to you. Your tax circumstances, time frame, job security, and broader financial position are all relevant factors in determining what is right for you.
A reminder that there’s a free toolkit for you to download that provides a simple checklist of the things you should consider when evaluating whether you should be focused on paying down the mortgage or investing. So visit the financialautonomy.com.au web site to grab your copy.
I hope you’ve found today’s post interesting. If you’ve got a question that you think others in the Financial Autonomy community might also face, drop me an email, I’d love to hear from you.
My name’s Paul Benson and thanks for listening to the Financial Autonomy podcast, where we help you gain the choices that you seek. Until next week, bye for now.
Important Information:
This information is of a general nature only and has been prepared without taking into account your particular financial needs, circumstances and objectives. While every effort has been made to ensure the accuracy of the information, it is not guaranteed. You should obtain professional advice before acting on the information contained in this publication.
Episode 53 – Investment Power-Ups
I was binge watching a fictional Netflix series last week about a group of 4 guys who had made an app that had become a huge hit, Angry Birds style.
Each of the 4 guys had particular skills, and there was a scene where one of the guys was feeling pretty lost. He bemoaned to his friend how such and such was great at art, another coding, and the 3rd guy, the one he was speaking to, was great at game design. But he asked, what was he in the group for?
His friend considered this for a moment and said, “you know what you are in the team for? You’re the power-ups. When we were just about to run out of money, you went out and found more. When Johnny went off the rails, you brought him back. You hired some key people without whom, none of this success would have happened. And you made us all rich when you found a buyer willing buy our business. So, yeah, you’re the power-ups”.
It was a great scene and it really stuck with me. It also made me think about what the power-ups are in the investment world. What are those things that really accelerate your investment plans? Well, I believe there are 3, and that’s what we’ll be exploring in today’s episode.
A great way you can keep up with what’s happening here at Financial Autonomy is to sign up to our monthly email update “Gaining Choice”. You can do that by clicking on the Updates tab, which, depending on the device your using will be either at the bottom or right hand side of the page. As well as sharing the episodes released in the previous month, I share a Financial Autonomy experience or observation that’ve I’ve come across, news about what we’ve got coming up, and a podcast tip of the month. Importantly, it is only monthly, so we won’t be filling your in-box with more content than you could ever consume – as you will hopefully have noticed with these fairly short podcast episodes – quality over quantity is our mantra.
Wikipedia describes power-ups as “objects that instantly benefit or add extra abilities to the game character as a game mechanic.”
If you’re old enough to remember Pac-Man, the power-up of eating the power dots in the corners let you chase the ghosts, or in Sonic the Hedgehog, the most common power-up made you go much faster. From Super Mario Bros to modern day Clash of Clans, power-ups are an integral part of most video games.
Whilst all of these games can be played without the power-ups, the core objective of the game is either impossible or at least extremely difficult to achieve without using them.
And so when thinking about the achievement of your Financial Autonomy goal, whether that be a 6 month mini retirement at age 40, a career change next year, or a move to a regional town, what are the investment equivalents of a power-up, that can bring your goals within reach.
I have identified 3 investment power-ups. They are:
- Regular savings and dollar cost averaging
- Gearing
- Dividend reinvestment and compounding
Let’s take a look at each in some detail.
Regular savings and dollar cost averaging
If you want to build up wealth to gain the choices in life that you deserve, then you need to save. And there is no better way to save than to commit to a regular savings plan. By this, I mean you have an automated process whereby a certain amount of money is transferred out of your normal living bank account and into investments.
There are two reasons why this strategy brings success. For one, it bakes in discipline. The investment just happens. No chance for you to spend the money on some other non-essential item, or use the cash to book a flight to Hawaii. Part of the discipline benefit is also that it ensures you live to your budget – the money just comes straight out of your account, so you can only live off what remains. Savings discipline is far from an easy thing, so don’t under-estimate this benefit.
The second reason an automated regular savings plan works is because of dollar cost averaging. Now I realise this is a bit of jargon, which is something I usually try to avoid, but in this case it’s not a tough concept to get your head around.
Dollar cost averaging deals with the fact that there is never a perfect time to invest. It reminds me of something a keen fishing friend of mine once told me – “the best time to go fishing is whenever you can”.
So rather than picking one moment in time and hoping that it proves to be a great entry point for your investment, you invest regularly, typically monthly. The price that you pay for your investment will vary month to month. Some months you pay a little more, some a little less. But over time what you get is the average price. Sure you don’t get the lowest price, but you also don’t get the highest either.
A great example of how effective this process can be was seen during the 2008 period where share markets declined considerably. Many people who invest discretionarily, put things on hold during that period and sat on their cash. But for those with automated regular savings plans, they bought every month, and when markets recovered from 2009 onwards, the prices they paid for their investments during that period looked really attractive. There was no way to know during 2008 when the market would reach the bottom. So holding off and trying to pick that point is a mugs game. But through the discipline of investing regularly, you continue to buy during the dips, and you get the dollar cost average benefits of averaging out your purchase price.
In fact assuming you are an employee, you are already engaged in an automated savings plan that utilises dollar cost averaging – it’s your superannuation contributions.
Gearing
The second investment power-up is Gearing, and this is probably the most impactful.
Gearing means borrowing for investment purposes, and like gears in an engine, the purpose is to magnify outcomes. As a simple illustration, if you have $10,000 invested and it grew by 8%, at the end of the year you would have $10,800. But had you matched that $10,000 with another $10,000 or borrowed money, your total investment would have grown to $21,600. Once you paid back the $10,000 that you borrowed, you’d be left with $11,600, so double the gain, or growth of $1,600, compared to the original $800.
Now of course no-one will lend you the money for free, so you will need to pay some interest on the money that you borrowed, and that will reduce your gain. Indeed if the cost of borrowing were high enough you would reach a point where it would wipe out all of the gain. But the point is that for the same investment return, your gain is greater as a consequence of having geared.
Now of course when thinking about gearing it is always important to remember that gearing magnifies both positive and negative outcomes. So in the earlier example, had the original investment lost 8%, then under the geared scenario the outcome would have been even worse.
So gearing isn’t a free hit. It needs to be considered thoroughly. In particular your investment time frame is important. You need to be able to wait out an investment market downturn. In my work with clients I wouldn’t consider a gearing strategy unless the investor had a time frame of at least 5 years.
Property investment is perhaps the best known form of geared investment. There aren’t many people who pay cash for a property. Back in episode 25 I highlighted the significant impact that gearing had on my first property purchase, so if you haven’t already consumed that one, check it out Episode 25 – My 68% return. The power of gearing – how smart borrowing can accelerate your journey to financial autonomy.
Dividend reinvestment and compounding
I’ve written and spoken a lot about the power of compounding, most recently in the Settlers of Catan / Early Retirement episode, number 43. Sometimes described as the 8th wonder of the world, the idea of earning interest on your interest is compelling, and certainly qualifies as an investment power-up.
The best use of compounding is reinvesting dividends on share and ETF investments. I’ve had several clients over the years who bought Commonwealth Bank shares back when they floated all those years ago. They bought a few thousand dollars’ worth, and ticked the box to have the dividends reinvested. That means that each 6 months when a dividend is paid, instead of the investor receiving the cash, the money is used to buy more shares.
Roll forward 20+ years, they’re retired and are thinking about a new car or a big European holiday. Those CBA shares that they haven’t given much thought to are now worth $80,000, and they’ve got some great options. Sure, the share price has gone up, but that alone would have only gotten them to about $25,000. The rest of the growth is the power of compounding. And let’s face it, if they had have taken the cash with each dividend payment, it would have just got absorbed into the normal spending. A new pair of shoes, or the electricity bill. There’d be nothing to show for it now.
Again, your super fund will be doing a form of this. All the earnings go back into the fund to fuel further growth. It explains why, early on in your working life your balance doesn’t seem to grow a lot, but 20 years into your career you tend to see more rapid gains – this is your past earnings generating new earnings.
So there you have it, my 3 investment power-ups – Regular Savings and Dollar Cost Averaging, Gearing, and Dividend Reinvestment and Compounding.
Hopefully you can use some or all of these to power-up your journey to Financial Autonomy.
Until next week, bye for now.
Important Information:
This information is of a general nature only and has been prepared without taking into account your particular financial needs, circumstances and objectives. While every effort has been made to ensure the accuracy of the information, it is not guaranteed. You should obtain professional advice before acting on the information contained in this publication.
Episode 52 – Mini-retirements
In several previous posts we’ve looked at strategies to help you achieve early retirement. I’ve often spoken about the fact that early retirement in our Financial Autonomy context doesn’t mean spending all day sitting on the couch watching the Simpsons. Our objective is gaining the flexibility and choice to pursue the things that we’re interested in, and not have our life dictated by the need to earn money.
An alternate way to gain flexibility and choice is through the concept of mini-retirements. Rather than work, work, work until a particular age, and then give things away totally, the idea of mini-retirements is that during your working life you step away and take meaningful breaks, to refresh, recharge, and explore life and the world. A mini-retirement might be 3 months long or it might be 3 years, but the idea is that you will take this time, and then return back to the income generating world. Often people planning around this approach will target several mini-retirements in their working life. For instance I know of a person whose goal is to take 6 months off every 5 years.
I think the concept of mini-retirements aligns really well with Financial Autonomy and the idea of gaining choice. So let’s jump into today’s episode and explore how you might make mini-retirements a part of your life plan.
When researching for this post one of the first pieces that I read was by Ric Kelly – How a mini-retirement brought meaning to my life. Ric certainly didn’t mess around. He quit his job and spent the next 5 years, living across 10 different cities studying, researching, writing, and having the time of his life.
One particularly interesting observations that Ric made was to not think doors will close because you’ve had an employment gap. When he was ready to return to work, the first person to offer him a job was his old boss. With that in mind a great suggestion he had was to have some fun, but also set some goals. What will you do during your mini-retirement? What new skills will you learn? If travel is part of your plan, perhaps learning a new language is a piece of the puzzle. Maybe you have a go at an entrepreneurial idea that’s been rolling around in your head. Or perhaps you’ll master the piano.
One of my clients took time out to do a Masters in a topic totally unrelated to the work he had been doing, but in an area he had a passion for. He’s got 6 months to go, and the future certainly looks interesting for him. He’ll probably go back into project management, which is where he worked before the studies, but will use the cash flow from this work to develop an environmental project that he’s formulated as part of his Masters thesis.
Tim Ferriss in The 4 Hour Work Week also wrote about the concept of mini-retirements. Tim’s definition of a mini-retirement is closer to an unpaid vacation than Ric Kelly’s 5 year break, but the objective is the same – refresh, recharge, and grow as a person. One interesting way that Tim and others have brought this to life is through volunteering in a developing country.
When I was in Cambodia a few years back I came across several people doing exactly that. I met an Australian who worked in IT, who was volunteering at a school for orphans teaching them all sorts of computer skills, from basic typing and data entry, to graphic design and web site development. It’s these sort of skills that will enable Cambodians to participate in the global economy and raise living standards.
I also met an American couple who were volunteering with a program to build houses for people. The organisation provided labour and I believe contributed to the cost of materials. What a fantastic leg-up this must provide to the people they help.
I’ve met people who have worked in animal rescue shelters in the Amazon rain forests of Peru, and others who have volunteered at school camps in Ecuador. There are plenty of opportunities that you could explore, and the personal development that you could gain would be just immeasurable.
In many of the articles on mini-retirements it appears to be something of a single person’s game. Yet mini-retirements for families makes a huge amount of sense. Your kids grow up so fast, and your opportunity to participate in their growth is a specific window in your life.
So how would a mini-retirement look for someone with children?
Well I guess the first observation is that people, most often women, taking time out of the paid work force to raise children is not something new. But that’s a long way from “retirement”, so that certainly doesn’t count.
Increasingly common though is both parents working, and simultaneously parenting and doing all the exciting normal household stuff like cleaning and laundry. With this sort of load, mini-retirements for families are possibly an even greater need than for the kid-free set.
A popular mini-retirement for Australian families is the big road trip either around or through this huge country of ours. Whether it’s with caravan or tent, there’s plenty to be explored, you’ll capture memories that will never be forgotten, and the whole family will learn an enormous amount about our environment, history, and one another.
But why stop at Australia for this type of adventure? I know of Australians who have done much the same thing in the United States (though there it’s an “RV” rather than a caravan), and I’m sure it would be equally possible in Canada, Europe and Britain.
A popular way for families and individuals to make a mini-retirement possible is to rent out their home. Rent your Brisbane home out for 3 months while you live in Thailand, and the rental income will cover the bulk of your expenses in Thailand provided you don’t stay in a hotel or resort. The likes of Airbnb make this so viable now.
Mini-retirements in a family context, in comparison to an early retirement goal, also have the distinct advantage that you can better time the mini-retirement to the life stage that makes the most sense for your family. Often, when we do the maths on when people can achieve early retirement, it arrives too late – once the kids have flown the nest.
Before we wrap this one up, I think it’s also worth reflecting on a likely key difference between early retirement and mini-retirements. If you chose the mini-retirement path, it’s likely that you will be in the paid work force for longer than had you stuck with the traditional life path of retirement at somewhere between age 60 and 65. This is of course the opposite of the outcome sought by those with an early retirement goal.
So if you are going to adopt a mini-retirement plan, just give some thought to that. Will you still be able to work perhaps through until 70 or beyond? Now if you’re a desk worker like me, then the answer is hopefully yes. But if you work in a more physically demanding job, then perhaps this isn’t so realistic.
I guess the key here is just to really think things through and plan thoroughly. Get some financial modelling done to ensure you fully understand the long term impact of taking the next year off.
So could a mini-retirement form part of your future plans?
Episode 51 – Can you pass the financial literacy test
Want to minimise the chance of living off nothing but a meagre age pension in later life?
There’s a great proverb that I heard many years ago and have never forgotten “a fool and his money are easily separated”.
So how do you ensure you’re not the fool? The solution is to have at least a basic understanding of the financial world. We call this Financial Literacy. That doesn’t mean you need to become an expert – you can hire people for that. But you need to know enough to be able to sniff out a bad deal, and to avoid those big missteps. You need to be able to understand the risks you are taking, and gauge whether the likely return adequately compensates for that risk.
So, today’s post takes on a question and answer format. Let’s see how you fare when it comes to financial literacy.
Question 1
You log onto your internet banking and your credit card shows an available balance of $7,400 and an account balance of $2,600. Should you make any repayments on this account?
The answer is YES. The account balance is the key element here – this is what you owe, and if you don’t repay it, you will pay significant interest.
Many, many people look at the available balance and think in terms of “well I’ve got that much still to spend”. I very much suspect banks present this figure hoping you will do exactly that. This available balance mentality is what traps a lot of people when it comes to credit cards. Focus on what you owe, and get this down.
Question 2
Let’s stick with credit cards for a moment longer. Say you have a credit card where you owe $2,000, with an interest rate of 18% and you pay only the minimum repayments each month. Assuming you don’t spend any more on that card, how long will it take you to fully pay it off: less than 5 years, between 5 and 10 years, or more than 10 years?
The answer is that it will take you over 15 years to pay off your credit card if all that you do is make the minimum repayments each month. You’ll pay a fortune in interest too.
Just like with the available balance mind tricks, the banks requirement for a minimum repayment is not because they are your friend. They want you paying as much interest as possible for as long as possible.
Ideally you would repay your credit card every month in full so that you avoid paying any interest. If you aren’t able to do that, then certainly ensure you pay considerably more than the minimum suggested by your bank.
And of course if you find credit card debt to be a problem, have your limit reduced to minimise the potential damage. You could have the limit reduced to $1,000 for instance – enough capacity to buy some concert tickets online, or deal with a short term emergency, but not so much room that you could dig yourself into a really deep hole. You could go the whole hog and do without a credit card altogether, though in the modern online world I would certainly find that challenging.
Question 3
Your Gross salary last month was $6,000 and your Net salary was $4,500 - how much was paid into your bank account?
The answer is $4,500. I find a lot of people get confused between gross and net salary, and I guess they are quite jargon sounding terms.
Your gross salary is what you employer pays out. If you’re sitting down for a pay review and your boss talks about giving you a pay rise, they’ll be talking about your gross salary – how much they pay to have you on the team.
But what is more interesting to you is your Net salary – how much actually goes into your bank account. The difference between Gross and Net salary is mainly deductions for tax and superannuation, though you may have other deductions as well, which leads nicely into the next few questions on the most common other form of deduction from your gross income – Salary Sacrifice.
Question 4
You catch the train to work in your office job. You have a 3 year old car which you own debt free, and it’s meeting your needs. One lunch break you listen to a presentation about how you could salary sacrifice to buy a brand new car. They suggest you will save tax. Should you take up this opportunity?
Whilst there will be circumstances where salary sacrificing to buy a car might make sense, this is certainly not one of them. For starters, you don’t need another car! When you salary sacrifice to buy a car you are borrowing money to finance the deal, and then paying it back through your normal pay each fortnight. That means you’re paying interest on a loan – a cost to you. Also, because they always focus on new cars, the amount tends to be a lot, usually far more than you would spend if you were just going out to buy a car on the weekend. I’ve seen so many times where people buy a car via salary sacrifice for say $60,000, when if they were just out shopping for a car with their savings, they’d never spend that much.
Cars are really bad investments, in fact they’re not investments at all. They cost you money to keep, and they decline in value from the moment you take ownership.
Whatever marginal tax benefit you might get is well and truly swamped by the interest you’ve paid for a car that you didn’t need, and will be worth a fraction of what you paid for it in 5 years time.
Question 5
You work full time as a veterinary nurse, and have recently paid off your home loan resulting in you having some money available to save. You’re 50 years old and are wondering if you should work on adding to your super given you’d hope to retire in 10 years at age 60. Should you look into salary sacrificing into super?
The answer here is a clear Yes. Now superannuation in Australia is complex. There are limits as to how much you can contribute, limits on how much you can convert to a pension in retirement, and of course whatever money you put in their can’t be accessed until you satisfy a condition of release – typically over age 60 and retired.
So adding to your super is something to think through thoroughly, and I would suggest, get some professional advice on. But for many people, salary sacrificing to super in the scenario presented would be a great idea.
When you salary sacrifice, the money is coming out of your gross salary. So remember, this is the higher amount, before any tax has been deducted. Now it’s not a total tax free situation, because when your contribution hits your super fund it is taxed at 15%, and more if you earn over $250,000. But paying 15% is likely to be less than the tax you would have paid had you not salary sacrificed and simply taken the money as cash.
So salary sacrificing to super is typically a financially sensible thing, whereas salary sacrificing for a brand new car that you don’t need is typically not financially wise.
Question 6
Which of these is an investment asset? A new leather jacket, a new Mercedes SUV, an $8,000 carbon fibre road bike, or an ETF?
Whilst the first 3 options here may well give you pleasure, and of course that has value in its own right, none of these should be considered an investment asset. Only the ETF – Exchange Traded Fund is an investment asset.
So what is an investment asset and why should we care? The core distinction is that investments are expected to either increase in value over time, or produce income that you can use. Often investments will do both.
The jacket, the new car, and the bike will achieve neither of these. I find some people, especially when buying very expensive items like luxury cars, try and justify that it is an investment and not an expense. And whilst I’m sure there are some cars that are truly collectable and will rise in value over time, these are not the type of vehicle most people are talking about. They’re making a lifestyle purchase and trying to fool themselves into thinking it is financially sensible.
If you want the luxury car, fine. The goal isn’t to be the richest person in the cemetery, and so if that makes you happy, and you can afford it, go for it. But do recognise that you are buying something that is losing value all the time, and costs money in insurance, registration, fuel, and maintenance, during its life time.
In a financial literacy context, recognise the difference between an investment asset, and something that is really an expense.
Question 7
If you bought a share for $2.00 and it rose in value to $2.50, is it true to say it has risen 50%?
Sorry to stress your brain with a little maths here, but one of the most common ways that people get taken for a financial ride is that they don’t understand percentages. The answer here is no. The share has risen by 50cents, which given an initial purchase price of $2.00 means it has risen 25%.
We’ve all got calculators in our phone so there’s no need to be a maths wiz. If someone is putting a financial proposition to you in percentage terms, and you can’t easily turn that into dollars and cents in your head, then pull out the calculator and do the numbers.
Let’s say you were listing your home with a real estate agent and expected to get $700,000. One agent quotes you a flat $10,000 to sell your property and the other quotes 1.9%. Now the less financially literate will think “gee $10,000, that’s a lot of money. But only 1.9%, that’s not very much, I’ll go with that guy.” Yet actually the percentage option will result in a cost of $13,300, more than the flat fee.
So recognise that percentages can deceive and don’t hesitate to pull out the calculator if you’re unsure.
I think that’s enough of me being quiz master for today. Financial literacy can include a whole lot more – budgeting, being able to calculate your net worth, understanding compound interest, and having appropriate insurance in place to name a few. The Money Smart web site is a great resource and I’d highly recommend checking that out to further educate yourself on the basics of financial literacy.
Important Information:
This information is of a general nature only and has been prepared without taking into account your particular financial needs, circumstances and objectives. While every effort has been made to ensure the accuracy of the information, it is not guaranteed. You should obtain professional advice before acting on the information contained in this publication.
Episode 50 – Mini Retirements, 3 day work week, self employment and more - Stuart Barry's Financial Autonomy success
Today in the episode, we talk to Stuart Barry about his life story, his love for travel, his published book, his business and how he values his time.
In this interview we cover:
- Stuart’s 35-year career journey in the finance industry
- How he started his current career as a financial planner
- Countries and places he has worked in
- Breaks and adventures or “mini-retirements” that Stuart has done
- The fears he faced about taking mini retirements
- How he managed to bring himself to take a break and travel
- The reason why he didn’t need much financial preparation during his 1st break
- The 2nd break he took with his wife and their financial state at that time
- The experience he had coming back from his first break to finding a new job
- Advantages of maintaining a good relationship with your employers
- The things that drew him to owning his own business and why he says building a business isn’t for everyone
- Coping with living in Hobart and the challenges you may encounter with such a change
- The importance of having a job that suits your skillset and gives meaning to your life
- Things that surprised him about moving to a regional area
- How his weekly schedule looks like
- Valuing part-time work
- His published book - The Rich Greenie
- Prioritizing the time we give ourselves
Links mentioned in the show
The Rich Greenie
Episode 49 – Bike paths, Bitcoin, and Risk Budgets
I go for a bike ride most Sundays. Wherever I can, I ride on a bike path. Often there is a road running parallel to the bike path. Very often, cyclists are on the road when they could just as easily be on the bike path.
Now I understand why they do this. It’s because you can go faster on the road than on the bike path.
But the thing for me is, you don’t get killed on a bike path. No cars to get under the wheel of.
I know it doesn’t happen often on the road, but cyclist definitely get hit, and occasionally killed by cars.
So why would anyone choose to ride on the road when there is a perfectly good bike track option?
I ask because I often see the same thing with investing. People could use a low risk option and achieve their objectives. Yet they chase higher risk options.
So that’s what we’ll be exploring in today’s post - high risk and low risk investment options, and when it makes sense to use each. Because I suspect that when investing, some people ride on the road, not realising that there’s a perfectly safe bike path only meters away.
A good place to start is the concept of a Risk Budget. This is a term used by professional money managers, and can certainly have an application in investment planning for normal people like us too. Institutional investors have a myriad of analysis tools that allow them to optimise their portfolios for their risk budget, but for the rest of us, it’s enough to just understand the concept and reflect on whether we’re behaving logically in this context.
The idea is that a given investor has a certain amount of risk that they’re prepared to stomach. Most typically in this context risk is referring to the volatility of potential outcomes. So a low risk investment might say produce returns in the +9% to -3% range, while a higher risk investment might have a range of returns between +15% and -%10. So the higher risk option has a broader range of potential outcomes, and therefore greater uncertainty.
Let’s say that given your time frame and general temperament you’re after an investment in that low risk range. One way to approach your investment planning would be to think in terms of having a certain amount of risk that you’re prepared to take on – to spend if you like.
Now one extreme way you could spend your risk budget would be to use a small amount of investment money to buy lottery tickets, and leave the remainder as cash in the bank. Most likely the lottery tickets will prove worthless and so you’ll lose money there, but your bank deposits will earn a small amount of interest, and so in combination your outcome will be within an acceptable range.
Another way you might deploy the same risk budget is to put 30% of your investment amount into international shares, and the remaining 70% in term deposits. Or perhaps you put 20% into a really aggressive investment, perhaps that includes borrowings, and place the other 80% in a bond fund.
The point is, there are all sorts of ways that you could structure your portfolio whilst still retaining the same total amount of risk. This is the concept of a risk budget. You have a certain amount of risk to “spend”, and as an investor, you want to try and find the most efficient way to spend it – get the most bang for your buck I guess.
Generally, a key way investors try to optimise within a given risk budget (even if they’ve never heard of the concept) is to diversify. So in the examples I gave earlier, none of the potential solutions involved a single investment.
Diversification is really important when thinking about risk, because another important consideration when planning an investment portfolio in a risk budget context is that you are trying to find the most efficient use for that level of risk.
So if you’re prepared to take on a certain level of risk, what you don’t want to do is chose an investment option that delivers a lower likely return compared an alternative with the same level of risk.
Let’s say two investments were presented to you. Their range of returns each year was expected to be between +10% and -5%. But one option had an average expected return of 8%, whilst the other had 6%. Same level of risk for each, but one is likely to produce a higher return on average. Which one are you going to choose?
Pretty easy isn’t it – you’ll go for the one with the higher return.
Let’s flip it and consider instead two new investments. Both have an expected 5 year return of 8% per annum. Option A however has an expected range of returns year to year far more diverse than option B. So with option A, your yearly return might be +20%, followed by -12%, followed by +14%. Whereas option B is much more steady as she goes – 7% one year, 8.5% the next, etc.
So each investment has the same average return over a 5 year period, but option A has a more volatile path to get you there. Again, which investment would you choose?
There’s probably a few thrill seekers listening who would say option A, but hopefully most of you would say option B – they should both get the same result in 5 years’ time, but just in case your plans took an unexpected turn and you needed to get your money out in year 3, option B provides a surer bet.
So to summarise, a rational investor is either trying to get the highest return they can for a given level of risk, or, if their goal is to achieve a certain level of return, then do that whilst incurring the lowest amount of risk possible.
So why does someone invest in Bitcoin or one of the other crypto currencies? These are volatile investments, and so should certainly be considered high risk. I have clients with whom I’m working on long term financial plans, and who are on track to meet their objectives. Yet when Bitcoin mania was sweeping the planet a few months back, they were asking me if I thought they should buy some. I even had one lady in her 70’s who only ever invests in term deposits because the share market is too risky, give me a phone call to ask this question.
No question the trusty FOMO reflex is on display here – Fear Of Missing Out. But if your goal is say, to semi-retire at age 50, and we’ve determined that, given your savings rate, employer super contributions etc., you need to earn 7% per year, then why take on a high risk investment like Bitcoin, when you could get to your desired destination with a regular balanced portfolio? Circling back to my bike rider’s observation earlier, why ride on the road, where there’s the chance of getting squashed by a car, when you could ride on a bike path?
So what’s the equivalent of a bike path for Financial Autonomy investors? Well, diversification is really the focal point. You want to diversify across asset classes, currencies, sectors and perhaps investment approaches.
Exchange traded funds and managed funds are a good place to start. Sure, with these investments you won’t get the occasional excitement of an individual share doubling or quadrupling, but nor will you see them drop sharply in value overnight. It’s very much hare and tortoise, with the funds providing the slow and steady outcomes of our hard shelled friend.
You also want to think about your allocation to capital stable investments such as term deposits. If your goals can be achieved by earning say 5%, then there’s no point holding a large portion of your savings in volatile assets. Essentially, why take risk if you don’t need to? So for someone in this situation, perhaps they hold 40 or 50% of their portfolio in term deposits, and the remainder in assets with exposure to long term growth such as shares and property.
I hope you found that useful. If you’re a rider let me know what you chose on a typical outing – road or bike track.
Important Information:
This information is of a general nature only and has been prepared without taking into account your particular financial needs, circumstances and objectives. While every effort has been made to ensure the accuracy of the information, it is not guaranteed. You should obtain professional advice before acting on the information contained in this publication.
Episode 48 – the 10 worst things you can do to prepare for retiring early
So your financial autonomy goal is to retire early. For some that might mean retiring at age 35 and for others age 58. Often, especially for those looking to retire at the younger end of the spectrum, it will mean ceasing their current role, but still engaging in some income producing activities. So retiring early looks different for each of us.
We usually talk about what you should do to achieve your financial autonomy goal, but today I thought I’d flip it and instead look at what you should avoid.
Want to ensure your early retirement plans never come to fruition? A good place to start would be to have no handle on your cash flow. Achieving any sort of retirement goal is a dollars and cents equation. If you boil it down, you need to solve how you will have enough money to meet your living costs. Now if you don’t know what your living costs are, how can you possibly know whether retirement is possible, how much you need to save, and whether you have enough saved to last the rest of your life?
So to ensure failure, don’t have a budget, and don’t in any way monitor what you spend.
Next, since you aren’t paying any attention to what you spend, just put it all on the credit card. It’s easier now than ever before, just tap and go. Come on, you need those purple Converse runners. And why have last night’s left overs for lunch when you could have a burger bigger than your head, with fries on the side? Just keep slapping that credit card down and if the bank that gave it to you starts making life difficult by asking you to actually pay it off, well just go to the next bank and ask for another card – what could go wrong?
If only it was as easy to pay off a credit card as it was to build up a credit card debt!
The next thing you could do to help ensure your early retirement dream never becomes a reality is to not save. Spend every cent you earn. Saving? Isn’t that something my grandparents did?
So don’t put aside money in a bills account. Don’t put money aside for emergencies or a holiday. And certainly don’t even think about building up enough money to make any investments.
Which leads nicely into number 4 on the list of the worst things you can do to prepare for retiring early – don’t invest.
Compounding? That’s got something to do with chocolate hasn’t it? What a foolish idea it would be to have your money actually earn new money without you having to even get out of bed.
But let’s say you’ve overcome this mental barrier. The next thing you can do to help torpedo your chances of early retirement success would be to invest too conservatively. Just leave all of your savings in the bank, or maybe you really stretch yourself and take it up a notch with a term deposit.
To illustrate just how bad a decision that would be, if you had $20,000 saved and you left it in the bank at call earning 1.5% interest – which is actually a pretty good rate on at call money at the moment – in 20 years that $20,000 would grow to $26,937.
If instead you used that $20,000 to purchase a growth investment such as an exchange traded fund or managed fund, and it earned 8% per year, your $20,000 would become $93,219. So your decision to “play it safe”, cost you over $66,000.
Armed with this knowledge then another good way to lock in early retirement failure is to ignore your superannuation. Now it may be that in your mind super has nothing to do with early retirement because you can’t access it until you’re old anyway. If you think that way I can only assume you’re planning on dying before age 60. Because if your hope is to live long and prosper, then Australia’s superannuation system is too generous to ignore. Zero tax on earnings and drawings, plus enormous flexibility as to how much you take out, when you take it out, and how your savings are invested.
If you need convincing, click on the image below and download the Early Retirement for Australians – the multi-phase solution white paper that we’ve produced that maps out how superannuation fits into a viable early retirement plan.
An important part of ignoring your super relates back to investing too conservatively. If damaging your long term financial future is your aim, consider your time frame until age 60, and particularly if it’s more than 7 or 8 years away, don’t put it in the High Growth or Aggressive investment options. Who wants those extra returns anyway?
Having said that ignoring your super is a mistake, an alternate approach to sabotaging your financial well-being is to check your account balances every day or two. Even once a month is likely too frequent. This is because investment markets are volatile day to day, something often referred to as “noise”, like that static on a radio when it’s not quite on the channel. If you’re checking your balance too frequently you can get caught up in that noise and make knee jerk decisions that are not in your best interests in the long term. Most often this translates to selling investments when markets are down and buying only when markets are up – the exact opposite of what a sensible person would hope for.
The next thing you could do to help you never achieve early retirement is spend hours reading FIRE forums. For the uninitiated, the FIRE acronym stands for Financial Independence Retire Early. It’s an American idea and many Australians follow it too. The idea of FIRE is great, and certainly aligns with what we’re exploring here at Financial Autonomy. But these forums can be like stepping into an alternate universe.
Now don’t get me wrong, self education is a good thing, and these forums can provide some good ideas. But realistically, spend an hour reading one and you’ve got all you need. It’s just the same story on repeat, with one person simply echoing another with perhaps the only differentiator being that the next person takes it a little more to the extreme – what retire at 30, no way! I’m retiring at 24 years of age. $20,000 per year of income is all I’ll ever need – yeah right! The other problem is that a lot of the discussion is US specific, and their retirement system is very different to ours, plus housing costs vary really widely.
On the home stretch now, the 9th worst thing you can do to prepare for retiring early has nothing to do with money. If your dream upon reaching early retirement is to sit in your lounge room and look at the wall, then certainly what you want to in the lead up to retiring early is to have absolutely no hobbies or interests outside of your paid employment. When people ask you about yourself, you explain you’re a CIRUS technical expert, or whatever it is that you do to earn a dollar, and the conversation is complete. There’s nothing else in your life.
And along very similar lines, the final thing you could do to ensure your early retirement is a disaster is to focus so much on retiring as early as possible, that you ignore your important relationships. It’s no good saying I’m going to work 6 and a half days a week for the next 7 years so that I can then retire, if during that 7 years your kids grow up without you, or your partner divorces you. Maybe both! You need some balance. Your children only grow up once – don’t miss it. So you have to stay in your job an extra year or two. Being involved and engaged with the people you love is far far more important.
So let’s summaries my 10 worst things you can do to prepare to retire early:
- No budget or sense of cash flows
- Live on a credit card
- Not save
- Don’t invest
- Invest too conservatively
- Ignore your superannuation
- Check your account balance every few days
- Spend hours reading FIRE forums
- Have no hobbies or interests outside of work
- Focus so much on retiring as early as possible that you ignore your important relationships.
And of course if you need any help achieving your early retirement dreams – that’s what we do! So check out the Work With Me page to learn how that works.
In this episode, we interview Sean Callanan, a podcasting guru, and owner of Sports Geek.
After 15 years of working for IT, Sean started his company, Sports Geek, out of his passion for sports and his expertise for technology in 2009. He eventually started his own podcast in 2014 under the same brand.
In this interview we cover:
- Background on Sports Geek and the podcast
- The start of Sports Geek
- The mentality Sean took to make 9 months without income work for him
- Overcoming the imposter syndrome
- The case study on Collingwood Football Club doubling their following on Facebook
- Goal setting and how it has helped him achieve his plans
- Managing variability in income from being an employee to owning a business and how he managed to make it work especially with a family
- Handling income when he doesn’t hit his monthly targets
- Inventing different ways and motivation of hitting your goals and targets
- Looking back, what Sean would have done differently?
- How adding personnel has helped his business
- Sports Geek in 5 to 10 years
Links mentioned in the show
The Miracle Morning - Hal Elrol
Sports Geek
Linked In - Sports Geek
Whether it’s a stall at a local market selling hand knitted beanies for dogs, running an online store via Amazon selling rainbow coloured shoelaces, or designing the occasional band logo on 99 designs, I believe EVERYONE should have a Side Hustle.
We’re here after all to find ways for you to gain choice in your life – that’s what Financial Autonomy is all about. And if it’s choice that you want, there are few greater enablers than a Side Hustle.
So in today’s post, we’re going to explore the reasons why I believe everyone should have a Side Hustle in their life.
I’ve come up with 6 reasons why I believe we should all have a Side Hustle. I’m sure there’s many more, but hopefully these ones will give you the kick along needed to start something of your own.
1. The learning
As I mentioned at the top, a Side Hustle can take all sorts of forms, and the one that’s right for you needs to align with your personal interests and skills. But let’s take as an example a simple online store. Maybe you sell through Amazon, Ebay, Etsy, or whatever makes sense for you.
Hopefully it’s successful and you get the financial rewards that you are seeking. But there is so much more to be gained than just the financial benefits. You have to think about marketing. Will you promote on social media, or Google? Will you embark on a paid advertising strategy, or go for organic word of mouth? If it’s social media, which platform will you focus on, how will you source the images, and on and on. You’ll learn a tonne just working through that.
But of course if you’re running an online store there’s a lot more than just the marketing. Where will you source your product? How will you get it to customers? And how will you determine your price?
You’ve got book-keeping, tax, and all sorts.
Now I’m not trying to put you off here – far from it. You’ll be starting on a small scale, and because it’s not your full time source of income, you can take things at a pace that works for you. But I’m sure you can get a sense of just how many different things you’ll learn as a result of your Side Hustle adventure.
So how will that help you? Well imagine if you’re in a meeting at your day job a few months from now and a manager is bemoaning the fact that targets aren’t being met. Perhaps someone throws out an idea of a new approach, which meets with no enthusiasm within the room. But you pipe up and say something like, “I think that’s worth giving a shot. I could run a small campaign on Facebook to that target market, allocate $10 a day for 3 weeks, and we could see if there’s any interest”. Your colleagues all rock back in their set like a bomb just went off in the middle of the room, and you’re ranking on the internal totem pole just moved up several places in management’s eyes.
I could stop just here, because I believe the learning gained from giving a Side Hustle a crack is reason enough that everyone should have a Side Hustle. But I won’t stop here.
2. Resilience
Resilience is something we consider a lot when developing financial autonomy strategies for our clients. Life isn’t always chocolates and roses. Unexpected things happen, and often you wished they didn’t.
One of the biggest set-backs many of us could face is losing our job. But if you have been working away on a little Side Hustle, perhaps this set-back actually provides an opportunity to see where this little side project can go. Instead of spending 5 hours a week, now you can spend 40 or 50.
Maybe the business develops into something to replace your former wages. Or perhaps it gets to a size where it’s sellable, as happened with Sharon in episode 41.
Maybe, with what you’ve learned in your side hustle, you can apply for jobs that previously you would have dismissed because you lacked the pre-requisite knowledge or skills.
I know of someone who worked in the automotive industry and of course got made redundant. Now his skills from that old job weren’t especially useful once he’d left, and for the few jobs that could use those skills, there were hundreds of potential candidates to compete against.
But he’d always had an interest in automation, and whilst still working had done a course on security systems and the technical aspects behind these systems. When he left the car industry, it took him no time at all to get the necessary licenses and start working under someone installing sophisticated security systems. Now in this example his Side Hustle hadn’t developed into a money making proposition at the time he lost his job, but the mere fact that he was learning new skills meant that his resilience in a time of adversity was enormously enhanced.
3. The compounding effect of some extra cash
Albert Einstein apparently said “compound interest is the eighth wonder of the world. He who understands it, earns it… he who doesn’t, pays it”.
Let’s say you’ve got a $300,000 mortgage. And with the current repayments that you’re making, you’re on-track to have it repaid in a little under 19 years.
If your Side Hustle could generate enough so that you could increase your loan repayments by just $200 per month – only $200!, $50 dollars per week! , you’d cut 2 and a half years of your loan term and save almost $22,000 in interest.
If you’re Side Hustle enabled you to put an extra $500 a month into your loan, your loan is repaid 5 years quicker, and about $44,000 is saved in interest.
So your small little Side Hustle that only throws off $6,000 a year could save you $44,000 in interest – have I convinced you yet?
But wait, there’s more.
4. Expand your network
This podcast is my Side Hustle. I can’t quite recall how I came across it now, but I stumbled into a meet-up group of Melbourne podcasters, and through that I’ve gotten to know several people who I never would have met otherwise. Most interestingly, they’re from totally different walks of life.
The astute podcast listeners amongst you will have noticed that a little while back the disclaimer item that we play in each episode changed a little. The original version was recorded by my wife in our wardrobe – really high-tech stuff! The newer version though is by a friend I meet through the meet-up group who produces the Dating Upside Down podcast. She’s got all the gear and so could help out and give the newer version much better audio quality.
Expanding your network can have all sorts of benefits, from new job opportunities, friendships, and support.
5. More options
As mentioned at the beginning, we’re pursuing Financial Autonomy to gain choice. Closely linked to choice is having options, and a Side Hustle helps deliver you options. If you’ve got a commercially viable Side Hustle up and running you become empowered.
Current boss treating you poorly? Perhaps your Side Hustle gives you the financial safety net to wave him goodbye.
Full time hours not letting you be the parent that you want to be? Maybe your Side Hustle provides the extra income to make it viable to cut back to part time hours.
Bored in your current job and want to try something different? As already touched on, your Side Hustle could help facilitate your career change in all sorts of ways.
So yet another reason why everyone should have a Side Hustle is that it gives you so many options.
And my final reason why everyone, and especially you, should have a Side Hustle is…
6. Extra cash helps
Now I know, money doesn’t buy happiness, and we only need to look at the recent apparent breakdown of Jamie Packer, one of the richest Australian’s there is, to confirm that. But a lack of money certainly causes its own stresses and limitations, and this is where your Side Hustle might come to the rescue.
If there are 2 people, both facing the prospect of losing their job, and one has a Side Hustle earning $2,000 a month and the other doesn’t, which do you think is likely to be less stressed?
The school holidays are coming up. Your neighbour and her kids are staying home, but your Side Hustle has paid for a week interstate to see the sights. Lots of smiles all around.
Or maybe part of the way that you find time for your Side Hustle is that you pay someone else to clean your house - maybe that’s their Side Hustle even!
In summary, most of us could find some good uses for a little extra cash.
Well, there you have it, my 6 reasons why I believe everyone should have a Side Hustle – I hope I’ve convinced you.
If you’re interested in this topic, be sure to grab our 50 Side Hustle Opportunities for Australians free download.
No doubt you have many other great reasons why you’ve started your Side Hustle, or maybe you’re stuck on something that’s keeping you from making a start – jump on the Financial Autonomy Facebook page and let me know your thoughts.
Financial Autonomy is all about gaining choice, and very often, attainment of that choice goal results in a career or life change. In past posts we’ve explored numerous ways that you might be able to get yourself into a position to gain the choices that you deserve. In today's post I thought it might be worthwhile stepping through a brief checklist of the things you'd want to plan for immediately before you take the big step.
If making big changes in your life were easy, you’d have already done them. In fact I guess if they were easy, they wouldn’t be considered BIG changes. The parts that make these changes difficult, are precisely the reason why some good planning is essential.
This is not a post on what your career or life change will be. I'm going to assume here that you've done plenty of introspection and have decided what it is that you want in your future. I'm also assuming you've done all the training, networking etc, and you're now at the point of making your change.
So, let’s look at some key things that I’d suggest you turn your mind to before making the leap.
Define success
Often overlooked, but absolutely essential is the need to define what success looks like in your career or life change. Is the aim to get a better work/life balance, increase income, take on a new challenge, or be able to start a family?
This might be a bit old school, but for my big goals, I have them written on a piece of paper and bluetac’d to the inside my wardrobe. I don’t read them every day, but I certainly notice them enough to keep me from getting waylaid.
So take out a piece of paper and write “success =” and then write what your definition of success in this big change project of yours is. Then stick that somewhere prominent for you. This will become your North, your bearing point as you navigate your career or life change.
Identify obstacles
Significant changes are never simple, and so it is inevitable that you will have to overcome obstacles on your journey to the change you are after. Not all of these obstacles are foreseeable, but plenty are. So why not plan for them? Create a simple 2 column table – one column lists the obstacles that you can foresee, the other, what you might do in response.
So for instance let’s say your big change is that you’re quitting your current job to start a new business. You might have an expectation that it will take 3 months before any revenue starts coming in. But what if it takes 6 months? List this as an obstacle, and then note down a solution – perhaps you redraw on your home loan for instance. Maybe, in thinking this problem through you realise that it would be worth getting an extension on your home loan, so that if this problem arose, you would have funds available. The bank is likely to look much more favourably on you applying for an extension when you’re still in your current job, then after you’ve quit and things in your new business aren’t going quite to plan.
This process will also have the effect of reducing your stress levels. If you’ve thought through the most obvious obstacles in your path, and have solutions ready to deploy as needed, your stress levels will go way down.
Income
Whether you derive happiness from nice clothes and eating out, or living simply and frugally, you can’t get around the fact that it costs money to live.
Hopefully you will already have in place some form of Income Protection insurance. This cover replaces typically 75% of your normal income if you become unable to work due to illness or injury.
It would be well worth your time reviewing your cover before you make your change. As an example a friend and client of mine recently told me that he planned on resigning from his current job, and going in with 2 other guys to start a business. He’d continue doing the same type of work, but now for a business of which he was a part owner. As part of their business plan, none of the 3 were to take any wages for the first year of business operation.
Now he had Income Protection in place – I know because I arranged it. But it was a style of policy where the amount payable at claim time is determined by what you were earning immediately prior to you becoming unable to work. So I pointed out to my friend that at least during the initial 1 year period of the new business, his Income Protection cover was worthless.
We determined that this coverage was important in the broader context of his financial position, and so prior to him leaving his employer, we were able to get the policy changed to an Agreed Value type, which meant the payout amount was agreed in advance, irrespective of what he was earning at the time of claim.
Now most policies aren’t Agreed Value, certainly not those within super, but I suspect most people bounce along totally in the dark on this, only to be disappointed when the unexpected happens.
So I’d very much encourage you to review your Income Protection insurance, and perhaps all of your personal insurances, well in advance of you making you big career or life change.
You might also be interested in a past post – When bad luck strikes- how cancer impacted Jenny’s life and the financial lessons learned.
Superannuation
If your change is going to affect your income, then it will inevitably also impact on your retirement savings. Now if you’re embarking on a career change where your income drops for a year or two immediately upon the change, but then recovers and maybe even is higher than what you had been earning, then perhaps the impact here is not significant.
But in many other scenarios, the impact would be meaningful. So in pursuing this big change, how will you ensure that you won’t be living on beans and rice in your later years?
Perhaps you plan on making no or minimal contributions for 3 years whilst your new endeavour develops, but then make extra contributions from year 4 onwards to catch up. Or maybe the plan is to downsize your home upon retirement to free up cash that way.
The answer will of course be different for everyone but what’s important is that you’ve given this consideration
Budgeting
Finally, I know it’s not a fun word, but do you have a budget? Do you know that you can afford to make this change? I doubt anyone on the Financial Autonomy community would make this mistake, so I apologies for stating the obvious, but as observed earlier, it costs to live. Food, rent or mortgage payments, transport etc. Before you make you career or life change, work out what you spend now, and plan for how these expenses will be met after you’ve transitioned to the next phase of your life.
If you’re planning on starting a business, I’d encourage you to go all the way back to episode 1 – how to be financially ready to start a business.
Perhaps episode 5 – how to be financially ready to start a family might also be of interest to some of you.
Well, there you have my 5 things that I think are essential considerations when making a career or life change. I hope they help you in making your change and gaining the choices in life that you so very much deserve.
What a wonderful era that we live in where holidays and travel are a regular feature in our lives. I don’t imagine that through the bulk of human history there was enough surplus of time, food, and resources to allow you to just take time off to explore the world or relax, unless you were super rich. Even as recently as my grandparent’s era the only international travel done was to fight in World War 2.
So we’re in an incredibly privileged time, where a return flight to one of our Asian neighbours costs less than your annual car rego. For the adventurous or curious, opportunities certainly abound.
But there’s two key ingredients you need to truly satisfy that travel bug within you. One is money and the other is time. And that’s where financial autonomy becomes relevant because the choices it enables, can be the solution to both.
My hopefully fairly uncontroversial observation is that people who listen to podcasts and read blog posts are those who like to learn - they're hungry for knowledge. And for many people with that trait, a curiosity of the wider world fits hand in glove.
Many people that I speak to with ambitions to achieve financial autonomy have a goal of regular overseas travel. So what’s needed to make that happen? Well the first is the flexibility to be able to take the time to travel. If you’re an employee you’ll have your normal 4 weeks leave entitlement, but is that enough, especially if you’re in a role where at least 1 week of that is gobbled up with compulsory Christmas shutdowns?
The second requirement is of course money. Sure, there are parts of the world where you can travel quite cheaply. But you still need to get there, and cheap living doesn’t mean costless living – you still need money for food and shelter no matter where you are.
So what could you do to realise your travel bug dreams, and how could a financial autonomy mindset help you succeed? Well, here’s a few ideas for you.
- Rent out your place while traveling
Of course anyone with the slightest travel bug inclination will have considered using AirBnB to solve their accommodation needs when on the road. But have you thought of flipping the equation and using AirBnB (or one of their many competitors), to rent out your house while traveling? The income generated through renting your place out could cover many a night on foreign shores.
- Could a Side Hustle help?
Regular readers and listeners will know that very rarely can I get through a post without mentioning Side Hustles. So how could they help you achieve your travel goals?
Well, for one you could direct all earnings from your side hustle to your holiday account, so your normal day gig can continue to be devoted to things like paying off the mortgage or saving a deposit for a home.
Your side hustle could perhaps also provide you with the flexibility needed to travel. Imagine if you built up a drop-shipping internet business that generated $2,000 per month in income for you for instance. You could run that business whilst travelling, and while $2,000 a month would barely get a roof over your head in the capital cities of Australia, in much of the world it would be enough to live a frugal but totally satisfying and fun life.
If you haven’t already done so, download my 50 Side Hustle Opportunities for Australians pdf to find a Side Hustle with your name on it.
- Credit card points
Now I know credit cards are playing with fire, but we’re grown-ups here so I’m going to make the assumption that readers and listeners of Financial Autonomy are smart enough to manage a credit card without winding up bankrupt.
Maximising, or perhaps gaming credit card points schemes seems to be big in the US, but I'm sure it's possible in Australia too. Depending on whether your goal is domestic or international travel, find a credit card that provides Qantas points for instance, and then put all of your spending through that card. Just ensure you clear the debt each month, as the savings generated through using the points would be nowhere near enough to cover the interest the credit card company will charge if you run up a debt. Always remember, the bank giving you this card is not your friend.
- Delay your retirement
Now I’m using the word retirement here in a broad context. Your pursuit of financial autonomy might mean you aim to retire at age 45, so please don’t think I’m talking about working into your 80’s or something unless that’s something that you really want to do.
But let’s say it is an age 45 goal. Maybe to satisfy the travel bug gnawing away at you, you push that back a few years and do some travel in your 30’s and 40’s.
I read an interesting article recently from someone who had retired early, and he noted that his need for holidays reduced once he retired. When he was working he was stressed and under pressure. So some travel was an important and well looked forward to release valve. But once he’d escaped that corporate pressure, the need evaporated.
So maybe it’s worth considering whether you can chew gum and walk at the same time by building your savings for retirement, whilst at the same time diverting some of your savings capacity to allow for travel during your working years.
- Take fewer but longer trips
From Australia, just getting to your destination is expensive. We're lucky to get 4 weeks off a year, many in the world get less. But most people can't take that in a single go and so holidays for those under 60 are often 1-2 weeks. But for someone who's achieved financial autonomy - 1-2 months or even more might be possible. The important consequence of longer trips is that it brings the cost per day down, because your flight costs are spread over more days. It’s likely to also mean that you can visit neighbouring countries in the same trip. So for instance rather than flying to France one year for a holiday, and then a few years later flying to Italy, perhaps you could cover both destinations in a single trip and save on one lot of fights.
When you’re not so rushed, I’ve found you’re also more likely to book accommodation with facilities like kitchens and laundries. By self-catering, at least for breakfast, and doing your own laundry (an often overlooked necessity of travel), once again you’re bringing your costs down.
Longer trips also means you’re not trying to fit a million things into just a few days - who hasn't come back from a holiday and felt they needed another break to recover?
Well they’re my best ideas for how you could scratch your travel bug itch whilst pursuing financial autonomy. But I’m sure you’ve got other clever ideas, so jump on the Financial Autonomy Facebook page and fire them at me.
As a kid, family holidays meant board and card games. Canasta was very popular, as was Monopoly, Cluedo, Squatter, and various other games. As an adult my love of games has continued and fortunately I’ve been able to convince my home tribe to join me (and usually crush me). Of the various games that we play, Settlers of Catan has to be my favourite, and I know I’m not alone.
So today’s episode, is a bit of a nerdy self-indulgence, but I hope you’ll enjoy it. For those fellow Settlers of Catan lovers, hopefully these musings help bring your early retirement dreams closer to reality, and for those who’ve never had the pleasure of a great game of Catan, I hope this inspires you to put the word out amongst a few friends, and give it a go.
One of the hottest trends circulating around the globe at present is board and card games in cafes and bars. Perhaps we've started to reach a tipping point with social media and screen time, where the appeal of getting out of the house, not a screen in sight, holds enormous appeal. The opportunity to talk and have fun with actual people in the same room as you satisfies a deeply entrenched need for connectedness.
The game in a café also solves another potential social obstacle – what to do if we run out of things to talk about. I’m not in the dating phase of my life, but if I were, I think I’d go with a game in a café pretty early as a really low-stress ice breaker. You’d certainly get to know someone a whole lot better than sitting next to them at a movie.
Settlers of Catan, the German game released in 1995 has undoubtedly been an essential element of this rise in board game popularity. Some refer to Settlers of Catan as the modern day Monopoly, though whilst I enjoyed many hours playing Monopoly as a child, now that I've experienced Catan, Monopoly just wouldn't get a look in.
Reid Hoffman, LinkedIn's founder, Microsoft board member, and a board-game aficionado, says that Settlers of Catan is "the board game of entrepreneurship".
So how does Settlers of Catan help with your early retirement aspirations? I believe many of the game elements have parallels in the planning and investment process.
Let’s start with Settlements. To have success in Catan, you need a) to have settlements in good locations, and b) to have as many settlements (and cities) as possible. The order of those two factors is not by accident. Broadly speaking, the more settlements you have the better, but as with investing, quality matters.
For the uninitiated, Settlers of Catan requires players to gain resources in order to build or buy things. You gain resources either through the placement of your Settlements, or through trade. In some cases claiming a particular port that links to a resource you are well endowed with provides you with a solid path to victory.
So when thinking about planning your Early Retirement, before you make any investments, think about what your broader goal is, and as with the placement of your settlements, remember that quality, especially early on, is more important than quantity.
Another really important aspect of building wealth to enable early retirement is recognition of the importance of compounding returns. All of us, when we start investing, start small. And sometimes it can feel like progress is glacial because the incremental gains month to month are perhaps only in the single or low double digits. But reinvest those earnings, and you start to get earnings on those initial earnings, and like a snowball rolling down a hill, as time progresses your investments get larger and larger. The magic of compounding! It’s important therefore to not be put off by the early slow progress.
We see the parallel of this in Settlers of Catan. Early on we have only two settlements, and so the accumulation of resources can be a little slow. But as the game progresses, we eventually build extra settlements, and ultimately cities, and so we gain from the benefits of compounding – with each turn in the latter part of the game, we tend to get more and more resources.
You can’t win at Catan without trading, and that means you can’t win in isolation. If you are to realise your early retirement goal, you similarly need to involve others. The most obvious is your significant other if that is the circumstance you are in. It is extremely common, when I sit down with a couple for an initial meeting, to find that they’ve never discussed their long term plans with one another. One might be thinking that she’d like to retire as early as possible, whilst her partner might be worried about being bored, or losing the social interaction of being in the workplace, and want to work as long as possible.
Stepping outside your immediate household circumstance, a relationship with a trusted advisor is very likely to be wise. We can’t all be excellent at everything, so consider where your knowledge and interest gaps are, and find people who can plug those holes for you.
When investing, we often talk of the need to diversify. Never put all your eggs in the one basket is the common refrain, and it has a lot of wisdom. Different investments have their day in the sun at different times. They also have different income, growth and liquidity profiles. Therefore a sensible person, when working towards early retirement, will build up assets across a mix of areas, such as shares, property, bonds and cash.
The equivalent in Settlers of Catan is your resources. Have too much of a particular resource and you’ll become desperate for others to enable you to build and progress. That’s a recipe for some very lop-sided trades and falling a long way behind, especially in the early game.
As anyone who’s played Settlers of Catan knows, the robber is a frustrating yet essential element of the game. The robber tends to pull back on the leader of the game, enabling others to catch-up and in so doing, making the game much more enjoyable for all. Indeed the lack of a similar mechanism in Monopoly and other traditional games is a key reason for their declining popularity.
In the real world the robber essentially stands for bad luck. In life, things don’t always go your way, but there are actions you can take to recognise this potential and plan for it.
One tool is diversification as mentioned earlier. This means that if share markets experience a drop, your investment property is without a tenant for a while, or interest rates move in an unfavourable direction for you, your plans aren’t torpedoed.
Another is insurance. Ensuring your income is a good place to start. Home, car and health insurance likely all have a role to play. Insurance isn’t free, and you hope you’ll never need it, but the idea is that you can plan for the cost of insurance, whereas you can’t necessarily plan for an illness that means you can’t work for 8 months.
In Catan, you can buy insurance too. It’s called a Knight. Your knight can move that robber along when he’s troubling your citizens. Holding that insurance becomes very valuable, particularly later in the game if you find yourself in the lead, and with all of your opponents trying to slow you down. In Settlers of Catan your knight not only solves your robber problem, but it then inflicts that pain on one of your opponents. Fortunately this is not an element of modern day insurance.
Finally, when thinking about the parallels between early retirement and Settlers of Catan success, I think it’s worth reflecting on the time frame involved. Whilst Catan isn’t a long game, it’s certainly not one that can be won in a few moves. To succeed you need a plan, and you then need to be flexible enough to adjust the plan in response to the actions of your opponents, and the luck of the dice.
Succeeding with an early retirement goal requires much the same approach. Think long term, have a plan, but recognise that things happen that can’t be foreseen, and so be prepared to adapt and adjust your plan as needed.
Well, that’s it for my slightly self-indulgent Settlers of Catan / Early Retirement post. I hope you’ve enjoyed it. There’s no toolkit for this post, but if you haven’t already grabbed your copy, be sure to download our Early Retirement for Australians – the multi phase approach paper and learn how you could gain choice in your life.
On the off-chance that you’re one of the few people who read the information sent out by their superannuation fund, you might have noticed that in recent years they’ve added an Ethical Investment option. Now the exact labelling of that option will vary – it might be called Socially Responsible, Sustainable, or just Responsible, all of which are interchangeable terms for ethical investment options.
So given these options are popping up like mushrooms in a wet cow paddock, what do they mean, what’s happening under the hood that makes then different to other investment options, and bottom line – should you care?
Each year the Responsible Investment Association of Australasia (RIAA) produces a Benchmark Report which tracks the adoption of ethical investment options, and their performance. In their most recent report (2017) they found that funds adopting a “core” responsible investment approach outperformed their peers over the longer term, both in the Australian share and International share space. That superior performance doesn’t happen every year, but the RIAA data has found fairly consistently over the years that when measured over the medium to long term, an adoption of an ethical investment approach has delivered improved returns for investors.
And so it is for this reason primarily that ethical investment options, once an extremely niche offering that was expensive and little understood, has broken into the mainstream. In fact RIAA found that 44% of all of Australia’s assets under management are now being invested through some form of responsible investment strategy.
Now there’s two interesting paths to wander down at this point. The first is what does it mean to invest “responsibly”, and the second is, why is the adoption of this approach leading to improved returns.
What does Ethical Investment mean?
As you might guess from the number of inter-changeable terms used to describe this investment process, there is no single definition of what makes an investment an Ethical one. This is hardly surprising, since ethics is something formed by an individual, and whilst in society there is likely to be much commonality on what is “ethical”, there will also be considerable room for disagreement.
In a broad sense, ethical investment means considering “ESG” factors when contemplating an investment. ESG stands for Environmental, Social, and Governance. So in considering these factors, fund managers or investors are thinking about a business in a broader context than just the profit and loss statement and balance sheet.
The adoption of the consideration of ESG factors by professional investors has been where the bulk of the growth in this space has occurred. But of course, just because you’ve considered these factors, doesn’t necessarily mean that you won’t still decide to invest in a coal mine or a weapons manufacturer.
The next tier up is what RIAA defines as “Core” responsible investment funds. They define this subset as:
“Core responsible investment approaches apply at least one of the following primary strategies: negative, positive or norms-based screening; sustainability themed investing; impact investing, community finance; or corporate engagement.”
I’d suggest that if you’re someone who finds the idea of ethical investment interesting, then this definition and the fund managers that fall within it, are what you are seeking.
So let’s unpack that definition a little because there’s plenty of jargon in there. Negative screening means that the fund might have certain industries that they undertake never to invest in. The most common are fossil fuel mining, tobacco, and weapons manufacture.
Here’s an example from one of the more stringent local listed funds:
(Companies invested in) can’t be materially associated with a range of activities that could be deemed inconsistent with responsible or ethical investing. These activities include, among others, the production or financing of fossil fuels, gambling, junk food, tobacco, pornography, armaments, alcohol and animal cruelty.
So if you chose to invest your money with that fund manager, you can have confidence that your investment will never have holdings in those sectors.
Many ethical funds stop at that negative screen point.
Some go on to apply positive screens as well though, so they look especially favourably for example, on companies that develop medical solutions to improve people’s lives, or are creating solutions to improve the environment.
Other funds don’t use screens at all, but instead have an overarching investment philosophy around investing for the long term and considering sustainability as a primary factor when evaluating a business. There have been some global share funds that have adopted this approach that have generated outstanding returns for their investors in recent years.
You might also be interested in a short piece I wrote some time back “What do Ethical fund managers do?”.
Given the different “flavours” of ethical investment, there is a definite challenge around “green washing”. That is, the practice of promoting an investment as ethical, sustainable, or whatever, for the positive connotations that those words hint at, but then when you look under the hood at what they invest in, it’s little different to a standard investment fund. The worst case of this that I’ve seen was a fund created for the Australian share market that had the word “ethical” in its name. When you looked at the fund description, it informed investors that it would invest in companies in the ASX200 (an index of the top 200 companies on the Australian stock exchange), excluding those involved in the production of armaments and tobacco products.
The problem was, no companies in the ASX200 are involved in these industries! So in practice, the fund was no different to a regular, non-ethical investment. But they charged a higher fee!
Why the outperformance?
The next thing worth exploring is why has the research found that ethical investment tends to out-perform over the medium to longer term?
One simple explanation could be that the funds operating in this space tend to have more of a weighting to the mid-cap sector, ie. not the largest companies, and not the really small companies either. There is some research that points to this area being a bit of a sweet spot for investors – the companies in this space tend to have lots of room to grow, perhaps unlike some of the really large companies, and yet they’re not so small that they lack quality management and oversight.
Another explanation is that the adoption of considering factors beyond the financial statements has a strong basis in logic. Take a tobacco manufacturer for instance. The numbers might tell an analyst that this is a profitable business. But pulling your head out of the numbers, and thinking a bit more broadly, do you really want to be investing in a product known to kill people? Even if you don’t have a moral issue with that, do you want to be in a business where governments are working hard to dissuade people from buying your products, such as Australia’s very successful plain packaging legislation?
Mining companies are another sector often excluded by ethical investment funds, and in Australia, these businesses form a significant part of our investment universe. Ethical investment advocates would argue that these are not sustainable businesses – you can only dig the resource out of the ground once. On that basis alone, they make a poor investment. Add to that the damage done to the surrounding environment, and the knock effects of then using the extracted resource, such as the carbon dioxide released when burning fossil fuels, and many, myself included, would consider these companies to be unattractive investment options.
If enough people come to the same conclusion, then price appreciation of their shares won’t occur, or at least won’t occur to the same extent, and businesses may even become starved of capital.
Compare that to a business developing a vaccine for a common, serious disease. If they’re successful, governments around the world may buy or subsidise the sale of their product. In total contrast to the tobacco industry, governments and the community will put “wind in the sails” and propel the business towards success. Doesn’t that sound like an investment you’d want to be in?
So next time you’re considering investment options, whether in your super fund, or your ordinary savings, give some thought to whether an ethical investment option might be suitable for you. Just be sure to have a read of what they interpret that to mean and ensure it aligns with your expectations.
This may well be an area where some expert advice is warranted. A great resource is RIAA’s find a planner tool .
Another resource that you might find of value is a book recently published by a good friend of mine Stuart Barry called The Rich Greenie.
Important Information:
This information is of a general nature only and has been prepared without taking into account your particular financial needs, circumstances and objectives. While every effort has been made to ensure the accuracy of the information, it is not guaranteed. You should obtain professional advice before acting on the information contained in this publication.
Today I am joined by Sharon Gourlay from Digital Nomad Wannabe about how to gain financial independence through Blogging.
Sharon Gourlay is passionate about working online and helping others to follow in her footsteps. She left Australia with her young family at the end of 2014 determined to grow an online business. She succeeded and now supports her family of 5 to live their dream lifestyle.
In this interview we cover:
- Her blogging journey from a hobby to a full time blogging business
- How she was able to sell her travel blog, even with her name on it
- Whether it is still viable to have an online business now or is it too crowded
- The difference between a hobby blog and having a financially successful blog
- How to get started with a blogging strategy
- Traffic generation strategies she now focuses on to build successful niche and authority sites
- How affiliate marketing works
- Key skills when starting out to be a commercially successful blogger
- The importance of treating your blog like a business
- The small investment you need to make when starting your blog
- The biggest commitment to building a profitable blog is time
- The number 1 tip when starting out
- The importance of clear goals so you know what to chase
- Understand your traffic and what key metrics you need to measure
- The importance of rankings and SEO for building a successful blog
- Knowing the engagement of your readers and understanding what behaviours they do on your side
- What programs she uses to track your blog engagement and activities of her readers
- What would she do differently if starting out again and her changing definition of success
- How she balances her family and work life
- The non monetary benefits of what blogging can do for you
Links mentioned in the show
Digital Nomad Wannabe
DNW Facebook group!
Are you tired of the insecurity that comes from constant corporate restructures and the politics of a large work place? Way back in episode 11, I explored the Security Illusion. This looked at the idea that most of us are brainwashed into believing that financial security comes from working for a large corporate, or perhaps even a government body. In reality, these organisations are constantly the subject of restructures and redundancies. They are pyramids, with fewer and fewer roles the closer you get to the top, so people need to be constantly shed to make room for those below to progress.
So this post is for those who have reached the point of thinking about life beyond the corporate world, and what they see in their future is some form of self-employment.
I’m particularly excited to explore this topic, because this is a path that I’ve walked, and I know it’s been the experience of many in the Financial Autonomy community too.
So as I mentioned, transitioning from the corporate world to self-employment has been part of my life experience. I worked for one of Australia’s largest banks for 16 years. I’ve got plenty to be thankful for during that time. I learnt a heck of a lot, worked in several different areas to gain a diversity of skills, and got a start in financial planning. In hindsight I perhaps wish I’d tried to accelerate my path a bit, but that was really about my own lack of maturity rather than a fault of my employer.
As a foundation stone for my working life, I have no regrets about my time spent in the corporate world.
But I did reach a point back in 2006 where I’d found the thing I was passionate about – Financial Planning - I had another 20+ years of working life ahead of me, and I just couldn’t see my life plan aligning with that of my employer – I knew at some point I’d get shifted, or downsized, or worse, made a team leader, the ultimate kiss of death.
My story is far from unique, with perhaps the only wrinkle being that my banking career had lead me to a budding profession that I could continue with in the outside world.
Plan
So how could you successfully transition from the corporate world to self-employment? I’d suggest the first step is to develop a plan. Start with a 1 page business plan, of which there are plenty of templates available for free on the web. Whatever you will do next, if you’ve chosen the self-employment route it’s highly unlikely you’ll be managing a team of 100’s. So if you can’t explain your business plan on a single page, you’ve gone wrong somewhere.
Another step, which I didn’t do when I planned my transition, but I really wish I had, is to draw a diagram of your business model. Just on a piece of paper or a white board, show the various sources where your customers will come from, and how they will go through your funnel to become revenue generating.
Here’s an example for my financial planning business:
Just as with the 1 page business plan, your business model should also be 1 page and answer the core question, how will your business make money?
Cash flow
The next port of call is to think through how you will manage cash flow. Cash flow in your post corporate world life will be very different. No more approving the invoice and sending it to accounts for payment. Cash flow is king.
From personal experience I advocate developing a Survival Strategy and a Capital Strategy. The Survival Strategy addresses how you will survive financially whilst you get this business off the ground. The Capital Strategy then considers your new enterprise – how will you fund the start-up costs, marketing etc.
For a deeper dive on this, take a look at How to be financially ready to start a business.
It will also be helpful to you in making this transition a success, if you’re in a good financial position – that is you live within your means and you have minimal debt.
Also, whatever your business plan, assume things will go wrong. If you forecast initial cash flow coming in at month 3, have a plan for if first cash flow doesn’t arrive until month 6. Most business plans don’t survive their initial interaction with the real world, so always adopt the mantra – Hope for the best but plan for the worst.
Can you test?
Assuming you’re not leaving corporate unexpectedly as a result of a redundancy, as part of your planning for this transition think about whether there are ways that you can test your idea with minimum risk. Let’s say for example that your plan for the next phase in your life is to start up a florist in your local area. Could you run a stall at a local market to learn what types of flowers people like to buy, who are the most reliable suppliers, and even just if you like dealing with flowers.
The main thing you want to try and test is whether people will part with real money to purchase your product or service. You’ll have no shortage of friends and family giving encouraging words, but it’s not until total strangers put their hand in their pocket that you know you have something that’s viable.
The book Lean Start-Up explores this quite a bit. It focuses mainly on tech start-ups, so you might be best just reading a few summaries on-line rather than investing the time in the entire book. Like most business books, the key useful information could have been written in a 3-5 page essay, but as that’s not commercially viable they find a way to pad it out into a book.
It’s worth remembering here to ensure what you are testing isn’t in conflict with what you do for your current employer.
Buying a business
Another way you could consider making this transition is to buy an existing business. Like sports people, most business owners don’t get out at the top. Nearly every business that you look at will have had its best years a few years back. So look for a business where you have some expertise, and where you could apply some fresh ideas.
The great thing about buying a business is that you have cash flow and customers from day 1. Sure it won’t be exactly as you would have built it, but that can be changed in time. Just don’t rush the changes though. Sit in the business for a few months and get an understanding of why things are the way they are. Talk to your newly acquired customers and check that what they value from your business is what you thought.
As an example you might have bought a printing business, and thought that the most important thing to customers was fast turnaround. But once you get into the business and talk to your customers, you might learn that actually what they like is dealing with someone local so they can discuss their needs and fine tune their designs.
Had you jumped straight into implementation phase on your assumption that turnaround time was the key, you might have invested in a flash new web site so customers could just jump online and order with you. But by slowing down a bit and speaking to your customers, you learn that actually there’s plenty of printers already doing that, and many cheaper than you would be. You’d be better off investing the money in customer service functions instead to provide help and support.
Skills development
In making your transition to self-employment, think about what skills you’ll need to give you the greatest chance of success. Often in the corporate world there is opportunities for training. What courses could you do to help in the next phase of your life? Even if these courses need to be done outside of your current working life, if you can at least gain these skills while still bringing in a regular wage, you’re improving your chances of ultimate success.
The other way to build up skills while still being a productive employee is to put your hand up for special projects, or even promotions into areas of interest.
Nurture your network
Never before you will have so much need for the support of others than when you make the leap to self-employment. You’ll be moving from having lots of colleagues around to bounce ideas off, to possibly flying solo, or at best having only a few staff members.
No-one knows everything and starting a business can be lonely. You likely have an extensive business network, but perhaps you don’t give it a lot of thought. Reach out to people who you respect and cement those relationships. Connect on LinkedIn so you have a way to stay in touch after you leave, and if appropriate, grab a coffee or lunch with them sometime to dig a bit deeper into what drives them.
Knowing someone that you can call or email when you’re stuck on something is incredibly valuable. Of course relationships work in two directions, so make sure you support the people in your network too. Generous people get rewarded.
Paul Higgins, founder of the BLG community, a resource for people escaping the corporate world to start their own business observed “Escaping corporate is one of the most exhilarating experiences. You learn by doing, and having the right support group is essential”.
Leave well
And a final tip for planning your successful transition from the corporate world to self-employment is to leave on a good note. The financial services industry is huge in Australia, yet I still bump into people from when I worked at the bank. Burning bridges is definitely unwise, even if you’re moving to a completely different industry – who knows, some of your former colleagues could become your first customers.
Regular listeners and readers know by now that Financial Autonomy is about gaining choice. Maybe that choice is retiring early (eg. the FIRE goal that’s popular in the US), but it could just as easily be the choice to work in a different career, start your own business, work fewer hours or days, or the choice to take a job closer to home, even though that means taking a paying cut.
So whatever your Financial Autonomy goals is, what are the common strategy options that you could use to make progress from where you are today, to where you want to be in the future?
I should mention at the outset that there's no need to take mental or physical notes, you can grab that checklist by clicking on the image below.
If you are to gain choice in life, a prerequisite is that you not be under financial stress. The more easily you can meet your and your families living costs, the more options you have.
1 Pay down debt
A good strategy option to start with is to pay down debt, and avoid most new debt. Start with your most expensive debt – perhaps a credit card or a personal loan, and focus your energy on getting this cleared. Then move onto the next.
If you have a home loan, this is not likely to be something you can have paid off in a year or two. But if you have paid off your other debts, it does make a lot of sense to then focus on reducing this debt as quickly as you are able to. This will result in you building up equity in your home, which then gives you several options that will help in pursuing your Financial Autonomy goal.
For instance let’s say you want to re-train in a new career and need to go back to school for a year. If you’re well ahead on your mortgage repayments, you may be able to reduce repayments to the minimum for 12 months, or go interest only, to reduce your ongoing expenses. You may even have re-draw capacity that you could live off if need be.
Or what about if your Financial Autonomy goal is to start your own business? Through a focus on paying down your home loan, and building up equity in your home, you have financing options to get your new business off the ground.
2 Can you reduce your housing costs?
In most households, putting a roof over your head is the largest expense. Whether you are renting or paying off a mortgage, it’s not uncommon for 30% of income to go towards housing, and I’ve had people come into the office who spend over 50% of their income just on having somewhere to live. Given the size of this expense, even minor savings here are likely to be more impactful than many other savings measures that are more in the “penny pinching” realm.
With an awareness that housing is a major expense item, can you think of any way to bring this cost down?
When I bought my first home, a small 2 bedroom flat, I rented out the spare room. That rent was really helpful for me in being able to make the budget work, and it came with the bonus of having someone around to talk to.
I heard of someone just recently who was able to buy a fairly low cost house that was in need of some love. He spent a few months fixing it up, then moved into the smallest room and rented out the other 2 rooms. The rent he received from his two housemates was almost enough to cover his mortgage repayments, and so the cost of putting a roof over his head with close to zero. Plus he could share the utility bills with his housemates, further reducing his expenses.
If you’re renting, could you move to a lower cost option? Could you share with others?
3 Could you reduce your transport costs?
If housing is the biggest expense, transport costs often come in at number 2 or 3. The last car I bought was a year old and still had 4 years of warranty left on it. In comparison to buying the same car new, I saved a third, about $10,000, of the new car price. So as a starting point I’d suggest you never buy a brand new car.
Most of your transport expense is getting to and from work. Is there any ability to negotiate with your employer to work from home some times? I know that won’t work for a nurse and many other professions, but there are some roles where that is possible. Could you change to a role closer to home? Or if you’re renting or about to buy, is it possible to live closer to work? Maybe you could get close enough to walk or ride your bike to work and do away with a car altogether. For the annual cost of registration, insurance, fuel, maintenance, and depreciation, you could afford to pay for plenty of Uber trips.
4 Save and invest – generate passive income
The first three strategy options are I guess the foundations for you gaining Financial Autonomy. Now let’s assume you’ve done all that you can on those fronts, what next?
It’s time to build some passive income. Passive income is income to flows to you without you having to get out of bed. There are 3 typical sources – interest on your bank deposits, dividends from your shares, and rental income from an investment property.
Now it’d be great to have a bit of all 3, but I’d suggest initially you focus on the second option – share dividends, and then perhaps move to property investment as your financial position strengthens. I talked about my thoughts on shares vs property back in episode 35, so I won’t repeat myself here. Suffice to say property investment involves bigger numbers and bigger risk.
In order to invest you need savings and that’s where the first 3 strategy options are so important. The lower your living costs, the more potential that you have to save.
To explore this area more, I recommend you take a look at:
The Sharemarket – a beginner’s guide – ep 15
Early Retirement – the multi-phase approach – ep 23
I can’t buy a home, am I financially doomed? – ep 19
5 Develop a Side Hustle into something that can support you
So if one strategy option to achieve Financial Autonomy is to build up passive income through investment, an alternative way to go is to build up a business on the side that generates additional income in the first instance, and perhaps in the medium to long term delivers your Financial Autonomy dream.
For instance if your Financial Autonomy goal is to be able spend the bulk of you time involved in music, something that you are passionate about, then if you could start up a small side hustle business in this space, perhaps in time you could develop that into a full time gig that gives you the life you seek and deserve.
Even if that isn’t where your Side Hustle leads, it could produce the extra income to pay down debt or build passive income through investments, and it could be something that is saleable down the track to provide you with more options.
Check out episode 21 – The side Hustle – your ticket to Financial Autonomy? for a deeper look at this strategy option.
6 Re-train
Perhaps the choice in life that you seek requires a change in occupation. Think about what re-training you could do to position yourself for a new phase in your working life. In some cases there might be training with your current employer that you can undertake to make this possible. In other cases a clean break is needed.
I caught up with some friends last week who have both made significant career changes. Tony had worked in a bank in a 2IC type role for many years and was deeply unhappy. But with 3 children and a mortgage, simply pulling the pin wasn’t an option.
So he stuck at it until eventually an opportunity came to get a redundancy package. That redundancy money, in combination with his wife’s income, made it possible for him to go back to school and study to become a primary school teacher, a role he was perfect for.
He graduated last year and did some fill in work. This year he has his first permanent class, and whilst he’s finding it exhausting, he’s the happiest I’ve ever seen him.
Then I spoke to his wife, Jane, who, after seeing the change in her husband, decided she’d leave her role in the defence force and move into the police force instead. She’s currently going through all the basic training and starting right back as a junior – a big drop in pay. But they were able to do it because they’d done things like paying down debt in past years, and I’ve no doubt she’ll have an incredibly successful and impactful career in the police force in phase 2 of her working life.
Along these line, you might also be interested in episode 10 – Is your ladder against the wrong wall.
And before I wrap this one up, just a final thought – get clear on your goals. What prevents most people from achieving Financial Autonomy is buying the Jet Ski, the $300 pair of shoes, or the brand new car. If you have clarity around where you’re trying to get to in the medium to longer term, you can avoid these missteps and keep your eye on the prize.
Whether you’re planning for a traditional retirement at age 60+, or working towards an early retirement goal, thoughts of “will my money run out?” will no doubt have crossed your mind.
There is a lot written about safe withdrawal rates. This refers to the rate you can afford to draw down on your savings, so that there’s no risk of your savings being depleted during your life time. The most common rule of thumb guide here is 4%, and that’s certainly a useful starting point. The answer for you though will depend on how you invest your savings, and also at what age you retire. So for instance if you retire at 75, you could probably draw at 8% per year and face no real prospect of your money running out before you do. Whereas someone hoping to retire at 45 would need to be much more conservative with the draw down rate.
Similarly, if your preference is to invest very conservatively, mostly in cash and term deposits for instance, then your safe drawdown rate might need to be 2% for instance.
But today’s post isn’t about safe draw down rates. Instead, when thinking about the “will my money run out” question, a key determinant is a concept called Sequencing Risk. It’s a jargon sounding term I know, but understand this, and manage for it, and the chances of your money running out in retirement will be dramatically reduced.
In my role as a financial planner, clients often want me to find them the best return each year. But actually a far more important role for me to play is to manage their asset allocation so as to minimise the chance that their money runs out during their lifetime.
A key way we do this is to plan for sequencing risk. So what is sequencing risk? Well, it refers to the importance of the order in which your returns occur – the sequence.
So let’s say you typically invest in a Growth type asset allocation – so you’ve a good weighting towards shares and property, but still keep something like 20% of your savings in cash and bonds to smooth out volatility a little.
With this asset allocation it might be reasonable to assume the average return over 30 years will be 8% per year. Armed with this assumed return, you can then project forward what your savings will grow to, and when thinking about how much you can afford to draw down each year in retirement, you could work back and say for instance “well if I earn 8% and draw 5% each year, that leaves 3% to combat inflation – I’ll be sweet”.
The problem with this is that in almost no individual year will you actually earn 8%. Year 1 the return could be 11%, 2%, or even -6%. Year 2 the same and so forth.
So the average return number may well be correct, but that doesn’t mean that in the first 3 years of your retirement you don’t earn 1% or 12%. And it turns out, those returns in the early years matter a lot!
A good quote from commentator Michael Kitces sums the issue up well, “It’s not enough for returns to average out in the long run, if the portfolio could be completely depleted before the good returns finally show up.”
Another way to think of this is that an asset can only be sold once. If you are forced to sell a share at $10 because you needed the cash, the fact that 2 years down the track it rises to $20 is not at all helpful.
Interestingly, further analysis by Kitces found that a sharp drop, followed by a fairly rapid recovery, was actually less damaging than a protracted period of below average returns.
It’s worth highlighting here too that overspending in those early years is essentially the same as having a protracted period of below average returns. It dramatically increases the chances that your money will run out.
So what’s the plan?
Want to minimise the chance that your money will run out in your retirement? Here’s what you should do:
- Use conservative assumptions when running projections. So if you’ve structured your portfolio so it should average an 8% return over the long run, perhaps run your projections assuming 6%. If you build in a bit of fat here, then if returns are poor early, it only eats into that fat, and doesn’t torpedo your entire plans.
- Reduce the level of risk in your portfolio in the 2-3 years leading up to retirement, and keep that risk fairly low for the first 3-5 years of retirement. So this might mean, instead of being invested 80% in shares and property and 20% in cash and bonds, you drop that down to 50/50 3 years out from retirement. And leave it that way for at least the first 3 years of retirement. In this way your savings will be less exposed to any large drops in investment markets, reducing the likelihood of a negative or even just poor return.
Now of course there’s a cost here in that a 50/50 asset allocation will on average earn less than an 80/20 allocation. So this gets back to my earlier observation that sometimes, trying to get the highest return every year should not be priority number 1. The objective is to generate income for you for the rest of your life. Whilst maximising returns is important, an understanding of sequencing risk will enable you to recognise that in fact it’s not the most important consideration in the years immediately before and after you retire. 3. Have at least your first years drawing requirements, and ideally more, in cash, so that if investment markets drop, you are not forced to sell at depressed prices.
This is something I discuss with clients a lot. The price of an asset, be that a share or property (and perhaps even bonds), matters when you buy it, and matters when you sell it. But in between those two points, the price is at best mildly interesting.
So in managing for sequencing risk, what we’re trying to do is avoid having to sell assets when prices are down. That’s why, in developing your plans to minimise the risk of your money running out, you need to have at least your first years drawings, and ideally your first several years, sitting in cash or similar (for example a term deposit). Then, if you are unlucky enough to have share prices say, fall in the first year of your retirement, it’s okay, because you didn’t need to sell any shares then anyhow.
Well I hope you’ve found that useful in answering the question most of us have contemplated at some point – “Will my money run out?”.
In the Toolkit for this episode I’ve created a quick cheat sheet of those 3 strategy solutions to help you manage sequencing risk, so be sure to click below to download your copy.
Important Information:
This information is of a general nature only and has been prepared without taking into account your particular financial needs, circumstances and objectives. While every effort has been made to ensure the accuracy of the information, it is not guaranteed. You should obtain professional advice before acting on the information contained in this publication.
Today we have two interviews for the price-of-1 with sisters Tracey and Joanne from Sistermixin.
Their online business is about educating everyone (especially their own families) on exactly what they are eating, what is in your food and some of the harmful effects this can have on your health. And they have become sought after thought-leaders in living an additive-free lifestyle.
In this interview we cover:
- Why they started The Whole Circle podcast and how they now repurpose the content into their blog posts
- The impact over 100 podcasts episodes has had on their business and how it has positioned them as thought leaders in the additive-free industry
- How Sistermixin got started and its growth journey to now employing three family members as well as additional staff in their warehouse and offshore.
- The different income streams generated from their online business
- The importance of reinvesting any profits and revenue you have when starting out
- How they have built their business up without any capital investment or business loans
- What they are most proud of with their business success
- The hard work and self-belief needed when they first started out
- How they have successfully been able to work together as sisters/family members
- The point when you need a business coach and what you need to look for in the right coach for your business
- The importance of paying and rewarding yourself when starting out
- Tips for those thinking of starting an online business around their passion
- Why you shouldn't wait until its perfect as it never will be
- Being comfortable with the uncomfortable to move forward
- The importance of being yourself and to stop comparing yourself to others
- The future for Sistermixin including a major rebrand to Addictive Free Lifestyle
- Overcoming the struggling of losing their entire website without a backup in place
Links mentioned in the show
https://www.sistermixin.com
The Whole Circle podcast
The goal for many in the Financial Autonomy community is to retire early. Early retirement means different things to different people, but as I always talk about, Financial Autonomy is about gaining choice. So whether you’re early retirement consists of lying on the beach in Fiji at age 40, or traveling around Australia with your caravan when you’re 55 and picking up odd jobs as they crop up, this post is for you. I haven’t gone into a tonne of detail on any of these 6 ideas, because to my mind, a hack means a short cut, and so that’s what I’m delivering here today.
1. Work out your expenses
Start by determining what you spend now. The banks are coming up with good tools to help you in this area. There’s also a good tool at the MoneySmart web site.
Once you’ve figured that out, create a second version with what you would expect that to become once you retire. Will you travel more? Will you go down to one car in the household. Perhaps the kids will be off your hands and so food costs will decline. Maybe you’re planning on a tree change which will see your mortgage wiped out.
The point is, when they wanted to put a man on the moon, they didn’t just shot rockets up randomly and see what landed where. They had a clear goal and then they worked towards that. For you, your equivalent of the moon landing is being able to meet your expenses for the life that you want to lead. Unless you quantify what that number is, how can you possibly take steps that will deliver success?
For a more detailed look at this topic, check out episode 31 – What’s your number.
2. Figure out a debt plan
Sure, it may not be essential to be debt free when you retire, but in my mind, if you still have debt, then you can’t afford to retire yet. So the next early retirement hack is to figure out how you will be debt free by the time you pull the plug on your current day to day way of paying the bills?
That could be as simple as working to a schedule of paying money off each month until the debt is cleared. That’s the most typical way debt is paid after all.
If you’ve got high interest debt, such as credit card debt that you’re not clearing regularly, then perhaps your debt plan is to refinance that into a lower interest loan and then pay that off as quickly as possible.
Or perhaps your debt plan is a bit bolder. Maybe it is to sell the inner city home and buy something out of town for a fraction of the cost, with the difference between the 2 prices providing funds for debt clearance and maybe also income in retirement.
A tree or sea change may not even be necessary, perhaps you simply downsize. If you’re in a large family home, there’s likely a time in your life, when the kids are off on their own journeys, that a smaller home or unit might be better suited to your needs.
So there’s all sorts of ways you can be debt free at your early retirement – figure out your plan.
3. Invest aggressively
In bringing your early retirement aspiration to life, it’s highly likely that you will build up some investments that will provide passive income when you enter your early retirement phase. Now you could build up these investments in your bank account but you will have to do all of the heavy lifting through contributions. A better option is to invest in growth assets such as shares and property to gain the benefits of higher compounding returns. Now of course these assets have volatility and risk, as discussed in episode 35 Investing - how to get started, but that can be managed through appropriate time frames and asset allocation mixes.
As I explored way back in episode 7, if you wanted to build up savings of $500,000 and could afford to save $2,000 per month, you could deposit your savings in a bank account and it would take about 21 years to reach your goal. If instead you invested it in such a way that it earnt 7% each year, your goal would instead be reached in 14 years.
In short, you can retire earlier if you invest aggressively, by which I mean holding a mix of growth assets, not only investing in cash.
4. Don’t ignore your super
I know it’s tempting, when thinking about early retirement, to dismiss superannuation as something only people on the traditional work path need worry about. You want to retire EARLY, and Australia’s superannuation system isn’t built for that.
But that thinking is wrong headed. Regardless of what age you retire, you need to generate income to meet your expenses throughout your life. The less tax you pay on that income, the more money that is available to meet your expenses. Australia’s superannuation system provides a way for you to generate tax free income after age 60. Your early retirement plan needs to contemplate how your income needs will be meet after age 60, and I’d suggest you’d need your head read if you didn’t consider superannuation as at least part of this solution.
If you haven’t already downloaded it, grab our Early Retirement for Australians – the multi phase solution PDF where we have glide path diagrams illustrating how superannuation can be an integral element of your early retirement plans.
Click her to download the Early Retirement eBook
5. Plan other income sources
You’re working towards escaping your current cubicle captivity and so perhaps the thought of earning employment income in your early retirement appears to be an oxymoron. But earning income doing something because you have to is very different from earning income doing something that you want to do.
Let’s say you determined that for you to achieve early retirement you need to meet expenses of $50,000 per year. Now to do that through passive investment income alone, you’d need investment assets of something like $1.25million. For most of us, that’s going to take a long time to save.
But what if you could be a ski instructor 3 months of the year, something you love doing anyway, and pick up a handy $20k towards your expenses? It could be driving a school bus, doing some consulting, or serving on a company board.
If you could cover some of your expenditure from earnt income, you will be able to retire so much earlier. It may also make your life more fulfilling and purposeful.
6. Understand sequencing risk
This final early retirement hack is a bit technical, but it’s well worth a mention here. Typically, when you run projections thinking about how long your investments will last, you assume a certain rate of return. Maybe it’s 4% maybe 8% - it depends on how much risk you will take with your investments and how conservative you want to be with your projections.
But the often overlooked reality is that real life returns aren’t steady year to year. Your average estimate may well be right. It could even be conservative, but if the sequence of your returns is such that you have bad outcomes in the first few years of your retirement, those projections could be totally blown up, even if it ultimately proves that your long term estimates are right because there are high return later on that balance things up.
The problem here is that if you have to sell down investments to meet your expenses when valuations are down, the fact those values later rise doesn’t help you – you already sold.
Armed with an understanding of this risk, you can plan to hold enough cash or similar investments to get you through those early years of your early retirement. Perhaps, if share markets were having a really terrible time you could cut back your expenditure for a year or two. Maybe you could pick up some extra paid work. The key is, you want to be able to avoid having to sell down your investments at an unfavourable time.
Well there you have it, 6 powerful early retirement hacks for you. I’d love to hear your thoughts – leave a comment on the Financial Autonomy Facebook page, or contact me through the contact page.
Click her to download the Early Retirement eBook
Important Information:
This information is of a general nature only and has been prepared without taking into account your particular financial needs, circumstances and objectives. While every effort has been made to ensure the accuracy of the information, it is not guaranteed. You should obtain professional advice before acting on the information contained in this publication.
Research from the Australian Stock Exchange found that in 2014, 36% of adult Australians owned investments listed on the share market. Combined results from RP Data and Census data found 7.9% of the Australian population own an investment property. Now there would be some cross-over here with people holding both shares and investment property, but we can safely conclude that at least 55% of the adult Australian population holds no investments outside of their superannuation.
Click here to download the toolkit
Back in episode 27 we explored what was required to achieve financial independence. In a nut shell, determining what your living costs are for the lifestyle that you want, and then finding a way to generate that sum of money each year is the solution.
So let’s say you’ve done your numbers, and you know that for you to achieve financial independence, to gain the choice that is the goal of Financial Autonomy, you require X dollars per year. How do you then go about generating that?
Now of course regular listeners and readers will know of my passion for the Side Hustle as an important element in anyone’s financial independence aspiration, and so that may well provide part and perhaps all of the solution. Gig economy type freelancing work could also contribute. Or it could just be as simple as a regular employed role that you enjoy.
Another common way to meet income needs for those seeking financial independence is to build up income producing investments. That might be property that throws off rent to the owner, or it might be shares that generate dividends. Your investment income might meet some, or perhaps even all of your expense needs. Whilst the desired destination of achieving financial autonomy is not to be able to spend day upon day sitting on the couch in your underpants, if your expense needs are meet through investment income, this is at least an option for you from time to time. I’m a pretty driven person, but even I like the odd afternoon, remote control in hand and Netflix to burn.
So in today’s post, we’re going to explore how you might get started on your investment journey. It’s easier than you think!
Let’s start with the shares vs property question. It’s a bit like asking whether you’re a dog or a cat person, most people pick a camp and will explain to anyone who will listen that their chosen camp is the right one.
The truth is shares and property both work as a way to build wealth and generate income to enable you to achieve financial independence. Each have pro’s and con’s. But I need to nail my sail to the mast here at the outset and say I’m a shares guy. With my wife, we own both shares and a property other than our home (we have a cat and a dog too, so we’re obviously serial fence sitters). But my preference investment wise is shares, and I’d suggest that if you’re looking at getting started in investing, shares is where you should be looking too.
The great things about owning investment property is that you can borrow fairly easily, and that means returns are magnified via the power of gearing. Many people also like to invest in property because it’s a physical asset, something they can see and touch, and that gives them comfort.
But as anyone who’s owned or even simply lived in a property knows, properties wear out. They need maintenance. We own a small office in our super fund, and whilst commercial property is less involved that residential, even so we have to deal with body corporate issues, ongoing expenses like council rates and insurance, and tenants. Just yesterday I had the tenant tell me that there was an annoying vibration type sound coming through the roof, and so could I please get the air conditioner unit that sits up there serviced because maybe that’s the cause.
With shares, you never have these issues. Buy them, tell the registry where you want your dividends to go, and they require no further input from you.
Now I know that when I suggest that shares are a good investment option I always get someone email me and say that I didn’t talk about the huge risk associated with investing in shares. “What about the GFC” they say, “my neighbour lost everything”. So let’s tackle the shares are hugely risky myth head on.
As an investor, you want some risk. No risk means no investment return. Risk and return are opposite sides of the same coin. What you need to decide is what level of risk you are comfortable with. If you are only comfortable taking on the risk of not keeping pace with inflation, then cash in the bank is the investment for you. If you want to earn more like 5%, then you need to take on only a small amount of investments that have any volatility associated with them, but in the current interest rate climate at least, you do need to take on some risk. If you seek a 20% return, then you’re going to need to take on a whole heap of risk, probably including borrowing to leverage your outcome.
So risk is not bad, but understanding the level of risk and what you are comfortable with is very important.
Click here to download the toolkit
Next, what does “risk” actually mean? Technically it means volatility. To most people, risk means the chance of them losing their money. The more stable the value of an asset is, the less risky it is considered. An asset whose value changes a lot is considered more risky. This is because you may need to sell your investment, and if you’re unlucky enough to sell at a point when the price is down, you may have a bad outcome, perhaps even get back less than the amount you spent buying the asset in the first place.
Because shares are constantly bought and sold, prices are always known. They go up and down as a business’s fortunes rise and fall, and as external factors weigh on the price people are prepared to pay for the company’s shares. This leads to the view that shares are a volatile asset and therefore they are risky.
The thing is though, all the price is telling you is that, if you wanted to sell right now, here’s what you could get for your share. If you have no intention of selling, the price really doesn’t matter. Rather than being a negative, the fact that you could sell almost instantly if you wanted to should be viewed as a positive. Something unexpected comes up and you need cash fast. You could sell your shares and have your cash in the bank in 3 days. That’s faster than breaking the term on a low risk term deposit.
And so onto the “lose all my money” claim that always comes up, though it’s always the friend or neighbour this has happened to, never the person themselves.
Firstly, shares are cheap. Most quality shares cost between $10 and $50 each. So even if you only have a few thousand dollars to invest, you can afford to buy shares in a few different companies, ie diversify. Now I would suggest that you don’t even buy individual companies, but rather exchange traded funds that give you even more diversification, but that’s a discussion for another day. The point is, you never have your entire share investment in a single company. Now 10 years ago, in 2008, the period we now know as the GFC, the share price of most companies fell. But they didn’t go to zero. For an investor to have lost all their money, as the claim often goes, that’s what’s needed. But that is incredibly rare. And even if you’re unlucky enough to buy into a company that suffers that fate, you will have invested in several different companies, and they won’t all have succumbed to that fate.
Now if you were forced to sell when the price of your shares were down, you will get back less than what you originally invested. But almost everyone who suffers loses on their share market investment doesn’t sell because they actually have to, they sell because they feel they have to. I’ve seen it so many times and yet it still makes me feel sick in the stomach. The number of people who for instance don’t need their superannuation savings for 10 or 20 years, yet when share markets go down, they feel they have to sell. It just boggles the mind. Please, please, please Financial Autonomy listeners and readers, if you take absolutely nothing else from what we put out, please don’t sell your share market investments when prices are down just because of fear or panic. If your shares are in a good company that’s continuing to pay regular dividends, don’t give your shares away to some bargain hunter at a discount.
I could go on, but here’s the key things you need to be aware of when thinking about investment risk, and this applies to both shares and property:
- Time is your friend. Plan your investment strategy so if the price goes down, you don’t need to sell. You can wait it out.
- Some risk, or volatility, is good. It’s why you get a return better than cash. You want some investment risk.
- Diversify – it’s a well-worn cliché, but don’t put all of your eggs in one basket.
- Be wary when borrowing to invest. Borrowing magnifies outcomes, both positive and negative. I believe borrowing is essential for most people in achieving financial independence, but recognise that you are playing with fire and so it needs to be managed well.
Apologies, this post is supposed to be about getting started in investing and I’ve waffled on about risk. I hope you’ve found some value. So let’s get into the meat.
Gaining some experience and confidence is a really good place to start. Open up a share trading account online with one the reputable players. I suggest you buy 1 exchange traded fund (ETF). Check out the likes of the iShares and Vanguard websites for their Australian listed ETF’s and choose one that speaks to you.
Then also buy 2 or 3 individual stocks. Ideally companies that you recognise, maybe even that you’re a customer of. Don’t spend big, maybe as little as $500 to each of these investments.
Then see how they go for the next several months. Experience what it’s like when prices go up and down. Does it stress you? Early on you’ll probably check the prices everyday, but hopefully that will get boring quick, and you’ll move to only checking in every month or so. You’ll start to see some dividends come in, and a bit like barracking for your footy team, you might start to take a bit more notice when your companies are mentioned in the press, and cheer them on a bit.
This is the training wheel step. Hopefully the shares you buy rise in value with time, and also generate some dividends along the way, but the primary gain to made in this stage is just to de-mystify share market investing and overcome the shares are risky myth.
To help your investment portfolio grow, you’ll want to add to it. One simple way to do that is to have the dividend income reinvested back into more shares. Not all shares offer this, but where this is provided as an option, it could be a good way to go.
The next step is to add more of your surplus income, your savings, into your portfolio. Now perhaps that’s buying more shares at regular intervals, but just keep an eye on the brokerage costs, they could add up. It may be more cost effective to invest in a managed fund that makes sense to you, as these typically offer regular monthly savings plans at little or no cost. Like an ETF, managed funds offer you a one stop shop to have your money invested across usually hundreds of different company shares, so they’re a great way to diversify and manage risk. Managed funds have fees of course, (as do ETF’s for that matter), so just do some research to see that the one or ones you are choosing aren’t charging above market rates.
From here, it’s really about time. The longer you hold your investments, the greater the likely growth. This means:
- The sooner you get started the better.
- Don’t fool yourself into believing you can make money as a short term trader of shares. You won’t beat the computers. Buy and hold is the way to go. Think long term.
Click here to download the toolkit
Just before I wrap up I should also give a plug for my profession. What I’ve outlined here is the DIY way to get started in investing. At some point you will likely gain from some professional input. Even Roger Federer has a coach. Think about finding a financial planner that you can form a long term professional relationship with.
Today we chat with Co-founder and consultant with Tara Lucke from View Legal about the importance of Estate planning. Though it is not something we like to talk about, it is so important for protecting your assets and loved ones, no matter what stage of life you are at.
In this interview we cover: * Making sure your hard earned money goes to the right place with a good estate plan * What happens to your money if you don't have an estate plan * Why you need consider having a Power of Attorney no matter what your age * Why you may have more assets than you think * How to avoid lawyers taking advantage of your estate * The two important factors to consider in your estate planning once you have children * Case studies of poor estate planning situations * The problem of the "I love you" wills * Why you need to consider Testamentary Trusts as part of your estate planning for asset protection and tax benefits * The different roles of the Power of Attorney * Conversations you need to have with family members * Considerations for estate planning for Small Business owners
Links mentioned in the show
Tara - LinkedIn
Tara - Instagram
We all know that property prices in Australia have gone stupid in recent years. One significant consequence of that has been that first home buyers have found it increasingly difficult to enter the property market. Banks like to see at least a 10% deposit, and in the ideal world you’d have a 20% deposit to avoid mortgage insurance costs. But when a first home can often cost north of half a million dollars, saving a deposit of that size can be really challenging, especially if you have rent to pay, and perhaps a HECS-HELP debt that sucks away a portion of your income.
Fortunately there has been recognition of this problem by both sides of politics, and the solution that has been legislated in recent months is the First Home Super Saver Scheme.
So what is it, and should the First Home Super Saver Scheme be on your radar as a strategy to enter the housing market? In short, should you care about this new initiative?
Click here to get the toolkit
It’s always good to start at the beginning, so before we dive in, let’s just consider the objective of the First Home Super Saver Scheme. Home ownership is considered a good thing for the nation. Now as regular listeners and readers will recall, in episode 19 I looked at whether people who simply can’t enter the property market are financially doomed, and the conclusion that we found is certainly not.
However for those that do wish to own their own home, and that is most of us, the rationale is sound. Owning the roof over your head gives you long term financial security. Sure, you’ll have a mortgage to repay for many years, but one day this will be paid off, and so in your later years, you’ll have your housing needs covered for relatively little ongoing expense. This makes retirement that much more affordable, and also provides you with the security of knowing you can remain in your community without disruption.
Building equity in your home may also enable you to finance things like starting a business, and provide funds for Aged Care needs towards the end of your life if needed.
Home ownership also tends to align with a sense of equality. I enjoy reading about the period around the French Revolution, in the late 1700’s. In that era (and it was much the same throughout Europe and England), the wealthy few owned everything, and the vast majority eked out a living as best they could. In that type of society, the average person had little control over their life, and got blown about by the whims of the wealthy elite, with their wars and ridiculous extravagances.
Australians have always resisted a society like this. The concept of a fair go is ingrained in us. And whilst in recent years it feels like perhaps we’ve headed a bit more towards the wealth of the nation become concentrated in fewer hands, the ability to access home ownership for all Australians is a really important foundation stone of our society.
So the First Home Super Saver Scheme exists to help ensure that entry into the housing market remains possible.
So how does it work? Now I need to give a jargon alert here. I always try very hard to not use financial jargon when I write pieces for Financial Autonomy. But because the First Home Super Saver Scheme feeds into the superannuation system, and because Australia’s superannuation system is almost a language all of its own, I won’t be able to avoid having some jargon in this post. I’ll do my best to explain things in what I hope are easily understood terms, but if anything is unclear, don’t hesitate to drop me an email to clarify.
Click here to get the toolkit
The First Home Super Saver Scheme enables you to make extra contributions into your superannuation account, and then withdraw them, plus the earnings, for the purposes of a first home deposit. It’s rational because you are likely to save on tax, and typically the earnings on savings in a super fund will be better than what you would generate with a bank deposit.
From 1 July 2018 it is possible to apply to withdraw voluntary contributions made to super after 1 July 2017 for a first home deposit.
Voluntary contributions includes both pre-tax (salary sacrifice) and after tax contributions. Your normal superannuation contributions made by your employer are not relevant here – they remain preserved until your retirement. The First Home Super Saver Scheme only applies to extra contributions that you make.
The primary benefit exists for pre-tax contributions, so for the remainder of this post, I’m going to focus on these. Now the jargon term here is “concessional contributions”. They are concessional because these type of contributions receive special discounted tax rates. For most people, concessional contributions occur via salary sacrificing to super. That is, you arrange with your employer to have an amount taken out of your wage before tax is calculated, and that money is sent to your super fund, on top of the normal employer contribution that they would be making.
Now if you’re self-employed, it’s even easier, as it’s probable that any contribution to super that you make will be concessional. If your taxable income is quite low, this may not be the case, so get some advice here if that’s applicable.
Because the money you’re sending to super comes out before tax, you’ll find that the impact on your pay packet is less than you would expect. So for instance if you were on a wage of $70,000, and you salary sacrificed $500 to super, your take home pay would reduce by around $350, not the full $500 amount.
This points to why the First Home Super Saver Scheme makes sense. It’s all about the tax!
When your salary sacrifice contribution arrives at your super fund, it will be taxed at 15%. So taking the $500 example earlier, after tax is deducted $425 hits your super fund. But as mentioned earlier, had you instead taken this money as normal take home pay, you would have only got $350 in your pocket, so $425 going into your super fund is a good win.
Let’s look at some of the parameters around the scheme.
Firstly, the maximum that you can withdraw from the scheme is $30,000 plus the earnings on those funds.
The maximum amount that you can have released from a single years contributions is $15,000. So in other words, in order to get the maximum out, you’d need to contribute for at least 2 years.
Also, the normal superannuation contributions limits apply. The most anyone can contribute to super in pre-tax/concessional contributions is $25,000, and this includes what your employer puts in. So you might want to save $15,000 in a particular year into super to use in this new scheme, but if your employer already puts in more than $10,000, then you simply don’t have the head room within the contribution caps to be able to do this.
When you then withdraw these savings, they will be taxed at your marginal tax rate, less a 30% tax offset. This bit is confusing at first blush and will catch some people by surprise. It exists to provide equity in the scheme. Most people with access to this scheme will pay tax at around 30%, and so any tax applicable at withdrawal will be pretty minimal. But of course the scheme is open to anyone, even someone earnings several hundred thousand dollars a year, so this mechanism is designed to ensure that higher income earners don’t get a disproportionate benefit from the scheme.
I guess the takeaway is just to recognise that when you withdraw, it may be that some tax is deducted. Rest assured though that where this is the case, you will still have been better off than had you saved the equivalent amount outside of the scheme, assuming earnings rates were the same.
It’s also worth noting that you don’t need a new or separate super account for this scheme, nor do you need to tell your super fund that the contributions you are making are for this purpose.
The actual mechanism for withdrawing your funds is a little unclear at this point as it hasn’t happened yet. The tax office is responsible for approving the withdrawal. So either you will apply to the ATO to withdraw the funds, and then when they are satisfied that you are eligible, they will send instructions to your super fund to release the money, OR you will apply to your super fund, who will then go to the ATO for approval to release the money. The process will become clear later this year once it becomes relevant.
The contribution limits apply to an individual, so couples will be able to get twice the benefit if they have the capacity to contribute.
Also, it’s probably stating the obvious, but this scheme works by saving you tax. If you don’t pay any tax, or very little, then there’s likely to be little benefit in the First Home Super Saver Scheme for you. As a rough guide, I’d imagine it would only be relevant for those earning at least $30,000 per year.
So should you care about the First Home Super Saver Scheme? Well if you’re trying to save a deposit for a home, and earn more than $30,000 per year, then I would say yes. You will save on tax, relative to building up your savings in a normal bank account or investment, and that means more funds available for your first home deposit. The government estimates the scheme will cost the budget $250million in forgone tax revenue over 4 years. So for those who can use it, why not claim your fair share of that booty?
Click here to get the toolkit
In the toolkit for this episode, we’ve summarised the key elements of the First Home Super Saver Scheme and we have a link to a great calculator that will tell you the gain to be made depending on what your income is, and how much you salary sacrifice. It tells you the per year benefit and the result over 3 years of saving. It’s really easy to use and it’s great to really quantify the value of this strategy, so go to the financialautonomy.com.au web site, go to the toolkits page, and download that.
Important Information:
This information is of a general nature only and has been prepared without taking into account your particular financial needs, circumstances and objectives. While every effort has been made to ensure the accuracy of the information, it is not guaranteed. You should obtain professional advice before acting on the information contained in this publication.
Networking marketing has changed since the days of Tupperware and Amway. Today I am joined by Lloyd Ross who talks through how our online behaviours and advances in technology have revolutionised the world of network marketing, making it an easier side hustle than ever before.
In this episode we cover: * What network marketing is and why you need to consider this as a viable side hustle * How social media has evolved the industry * The skills and attributes to be a successful network marketer * The ease of getting started with just a few hundred dollars * How to fit in a Hour of Power for your side hustle while working full time * The evolution of network marketing due to changes in shopping habits, technology and online networking * How to find a product and company that aligns with you and your values
Links mentioned in this Episode Lloyd on Facebook
Lloyd on Linkedin
Lloyd on Instagram
The goal when working towards Financial Autonomy is to gain choice. Choice in how you support yourself and perhaps your family financially, be that the type of work you do, the hours you spend doing that work, or whether you earn that income as an employee, or as a self-employed person.
In developing an actionable plan to get you from where you are now, to your Financial Autonomy position, there are several foundational elements that you need to decide upon. Perhaps the most fundamental of these is how much income do you need to generate to support your lifestyle? What is your number?
In today’s episode, we’ll be exploring how you might go about determining what your number is. And with this nailed down, consider what’s next in your Financial Autonomy planning.
So you’ve recognised that the standard working life treadmill is not for you and you’ve decided to gain choice via a Financial Autonomy strategy.
You’ve probably got some ides as to how you could earn income once in Financial Autonomy, and perhaps some thoughts as to what steps you might take to get their – things like extra education or career development (check out episode 29 – the 5 most impactful ways to invest in yourself).
But to set time frames and make genuine progress, you will need to quantify your Financial Autonomy goal, and that means determining how much income you will need to make this a reality.
A good starting point is to determine how much you spend now.
If you’re someone with a detailed budget, that’s fantastic. But having worked with people on these goals for over 17 years now, my observation is that such people are as common as a sports person who retires at their peak – it happens occasionally, but it’s a long way from the norm.
So if you’re like the majority and can’t easily answer the question of how much you currently spend, one quick method I use a lot is just to work backwards.
Start with your gross yearly income. Subtract the tax. Then subtract any savings that you made over the past year – this may include extra repayments to your home loan if that’s the space that you’re in.
Whatever’s left must be what you spent.
Now it will come as no surprise to you that the lower your spending, the easier it is for you to achieve Financial Autonomy. Much of your expenses depend on your lifestyle, so you have plenty of levers that you can pull here.
Choices need to be made. Speaking for myself, I don’t want to live like a monk. I enjoy travel and want to be able to afford that. I also want to ensure my kids can participate in all sorts of sports and activities that interest them, and provide them with a good education.
So setting a spending goal of say $30,000 per year, isn’t where I want to be. That doesn’t deliver the life that I and my family want. Sure Financial Autonomy might be far more easily obtainable, but that’s a level of sacrifice that I’m not prepared to make.
But on the flip side, if you need $150,000 or $200,000 per year to live your life, then depending on your occupation, Financial Autonomy is likely to be some way off. Now maybe that’s okay – that’s your goal and we are all unique. But for many people, if the desire for Financial Autonomy is strong, they will consider how they might be able to reduce their expenditure, so that they can gain the choices that they seek sooner.
How might you get your expenses down? The cost to put a roof over your head is likely to be a significant element of your expenses. So maybe a key milestone in you achieving your Financial Autonomy goal is paying off your mortgage. If that’s not realistic in the time frame that you seek, perhaps you need to move to a cheaper area. I’ve worked with people who have moved out of town, often down along the coast somewhere. They’ve traded a large city mortgage to either become debt free with a lovely home, or if they still need a mortgage, it’s at least far smaller and more easily managed.
There are investment strategies that can be used to help pay down your mortgage too. It may be possible to use equity in your home to establish an investment portfolio, and then use the income from that portfolio, plus perhaps capital gains, to accelerate clearance of your home loan. We’ve used this strategy for several clients with great effect.
Beyond having a close look at your housing costs, the most common other way that people rein in their expenditure is to get a better handle on where their money is going. Many of the bank apps now offer some good tracking tools to help you in this regard.
We’ll also be rolling out a cash flow and budgeting solution within the next couple of months too which brings all your financial matters into a single app or web site – bank accounts, super, mortgage, cars, investments etc. For those of you that have used Xero or MYOB recently, our new package operates in a very similar way for personal finances – it gets data feeds and then categorises your items, so you can quickly see how much you’re spending on groceries, or eating out, or your car. It allows you to set goals too – gamification for the nerds amongst us – which can be really helpful in making progress towards financial goals. It just gets all of your financial matters into the one place. I’ve been trailing it for the past couple of month, as have my team, and we’ve found it really useful – one of my staff Lee, has got her 20 something sons using it too.
Hopefully you’re already on our mailing list to receive our regular monthly updates, but if not, visit the financialautonomy.com.au web site and there’s a tab on the right. When our new solution is up and running we’ll certainly get the details out to all of the Financial Autonomy community.
Okay, so you’ve determined your number. You’ve worked out what you’re spending now, you’ve thought about how that might change in the future, and you’ve determined how much income you would need to generate in order to achieve your Financial Autonomy goal. Maybe it’s $40,000, maybe it’s $90,000. The figure is less important than actually having a number, because from here we can work back to how we get you from today to Financial Autonomy.
Now of course the strategies to get you there are numerous, and I can’t give you a one size fits all solution here. Finding workable solutions is what we do with clients all the time.
But a useful starting point for you might be to think about the Early Retirement glide path diagrams that came out of episode 23. If you haven’t already downloaded this free document, be sure to visit our web site and grab a copy.
In the example used in that download, the person initially generated their Financial Autonomy number through some consulting work combined with income from an investment portfolio. A bit further on their life journey, the consulting work lessened, and they relied more on investment income as a rental property was paid off, and so the rental income was now available for expenditure. They also started to sell down some shares.
Then when they reached 60, their Financial Autonomy number was achieved through a combination of superannuation drawings, rental income, and selling down the remains of their share portfolio.
And much later in life, the rental property is sold, and those proceeds plus any remaining super, ensure you live out your life very comfortably.
Now this path to Financial Autonomy is not right for everyone, but it illustrates how your goal could become a reality.
But the starting point must be to know how much income you’ll need to generate. You need to know what your number is. I hope this post has helped you get there.
In this episode, I talk to Joanna Maxwell all about career change. Joanna has worked in a wide variety of jobs throughout her career and she helps a lot of other people change careers as well. She's now taken all that experience and recently gained a position with the Australian Human Rights Commission in the Age Discrimination Team.
Joanna is the author of the book Rethink Your Career in your 40s, 50s & 60s.
In this episode we cover: * Why Joanna has had a such a varied career * How her love of travel impacted career choices and led to her interest in career change * The challenges of identity with career change * How men & women deal with their sense of identity * How Joanna took her interests and satisfy those through her career choices * Planning financially when running your own business * Finding strategies to create a working life that is sustainable * How the book came about and what's included * Joanna's tips to make career choices work
Links mentioned in this Episode Joanna Maxwell's Website
Joanna on Linkedin
Rethink Your Career in your 40s, 50s & 60s
Right now you’re listening to this podcast, or reading the blog article. Why?
You’re curious, and have a thirst for knowledge. You want to learn new things. You want to improve yourself.
We usually think of investment as being a financial thing. But investing in yourself - your skills, knowledge, and health, can be just as important and impactful. And just like a financial investment, diversification pays.
Download the cheat sheet here
In past Financial Autonomy episodes we’ve looked at investing in the share market, buying or starting a business, getting debt under control, and various other topics that tend to have dollars and cents as a core element.
And whilst the money side of things is unquestionably important in you attaining Financial Autonomy, there are other essential ingredients required for you to achieve success. Motivation, health, happiness, self-awareness, creativity.
There is a lot on the net about self-improvement and investing in yourself – I’ve spent hours reading it to research for this article. So what I’m going to share with you today is the 5 ideas I’ve been able to identify that will have the greatest impact in you reaching your Financial Autonomy goals.
1. The starting point must be your health. It’s no good achieving Financial Autonomy at age 50 say, only to drop dead 6 months later.
There’s 2 elements to investing in your health – activity and food.
On the activity front, the important thing is to start. If you’re currently doing very little physical activity, start by taking regular walks. Build up the distance over time. Perhaps you could extend that to jogging. There are podcasts available based on the couch to 5k approach that I know people have found useful.
If you already have some level of fitness, think about setting yourself a new challenge. Last summer I set myself the challenge of completing a triathlon. Swimming has never been my thing, so I had to put quite a bit of time into training for that component of the event. The funny thing was, when the tri season ended and I focused back on running, I found my running had improved, even though I hadn’t given it much focus over the summer.
When thinking about the activity component of health, just remember the “R” in the SMART goals acronym – realistic. The surest way to side-step success in this area is to set some crazy high goal, that you quickly become discouraged by, and you defeat yourself before you make any progress. Start small.
The second component to investing in your health is food. As important as activity and exercise is, if you head down to KFC for a post work-out feast, you’re probably not going to maximise the health benefits of your exercise. I’m not a nutritionist, so I can’t give you any particular guidance on what you should and shouldn’t be eating, but just reflect on your eating habits and consider whether this is an area worthy of investing some of your time to research and improve.
2. Get your creative juices flowing! For many of us, creativity seems to die when we leave primary school. But it doesn’t have to. Indeed as technology like self-driving vehicles and AI eliminate many of the traditional jobs in our economy, the ability to think creatively takes on far more value and importance.
Pick up some blank paper and a grey lead pencil and have a go at drawing that tree in your back yard. Is there a musical instrument floating around the house that you could teach yourself to play. If there isn’t a YouTube video showing you how, I’ll eat my shoe.
How about expanding your cooking repertoire? There’s no shortage of cooking shows to give you ideas. Many years ago my wife and I made a new year’s pledge to cook something we’d never cooked before, once a week. We subscribed to one of the monthly cooking magazines, and so that was the main source of inspiration each week. There were 2 or 3 weeks during the year where we didn’t achieve our goal, mainly due to the very reasonable excuse of our first child being born. But there were several other weeks where we tried 2 new recipes, so over the course of the year we felt we’d ticked the goal well and truly off.
And it’s paid long term dividends. Once you learn basic cooking skills, and what goes with what, you gain the ability to ad-lib. Substitute what you have in the cupboard for what the recipe is asking for. Cooking skills can also help with your health goals, and be good for the household budget.
How about learning a new language? There are great podcasts around. I’m currently having a go (pretty unsuccessfully so far) at Coffee Break French, interestingly enough taught by two Scottish people.
Perhaps writing is your thing. Short stories, a novel, or poetry. Worst case, no one reads it but you. Make a start, have a go. Only good things can flow.
3. Expand your knowledge in an area you are already good at. Professionally we operate in a competitive world. I make my living providing financial planning advice. But there are many financial planners in the world. So just being competent isn’t enough. I need to be an expert. Over the 17 years that I’ve been providing advice to clients I’ve become an expert in Self Managed Super – I even wrote a text book on it. And in recent years I’ve pulled the treads together to become an expert on Financial Autonomy.
The reason I’m able to get articles published in quality brands like the Sydney Morning Herald and The Age, is because of that expertise. It’s also the reason I was nominated as 1 of the top 3 Certified Financial Planners in Australia this year.
So when we’re talking about the most impactful ways that you can invest in yourself, moving up the ladder from competent to an expert must to be right up the list.
So what professional development opportunities are there for you? If you’re an employee, many employers will have staff development budgets. Make sure you get your share. Is there a conference you could attend, any short courses you could enrol in, webinars or books to read? Maybe you even take it up a notch and go for a Masters or Phd, though this a significant investment not to be taken lightly.
How much could your income rise if you became the expert in your sector?
4. Build your team. I heard a great quote last week from Dr Susan Carland, most well-known as being the wife of TV host Waleed Aly, though unquestionably an intellectual powerhouse in her own right. She observed “you can do anything, but you can’t do everything”.
What are your key strengths? What are you really good at? How can you focus more of your time and energy on those things, and get others to do things that a) you’re not strong on, b) don’t especially enjoy, and c) someone else could do better or more quickly than you?
Whether it’s a business coach if you are self-employed, a personal trainer for a fitness goal, a cleaner or a gardener for your home, or a financial planner to maximise your financial opportunities.
Sure, you could try and do it all yourself, but is that really going to deliver the best result?
- Perhaps linked to building your team, is finding time for yourself.
Value your time. You’ll only live this day once. Your kids will only be this age once. Busy does not equal success.
Find time to read a book or listen to a podcast. And not just about topics in your professional life. Use your time to broaden your perspectives, get fresh ideas, and take on new knowledge.
Take a break and relax. Our mental health is so easy to overlook, yet so fundamental our well-being. Go for a walk, watch some TV, or go to the footy. You’re not slacking off – you’re achieving balance in your life that will enable you to be far more effective when you then devote your time and energy your income generating activities.
Finally try to incorporate some travel into your life. It could be as simple as a camping trip a few hours drive from home. Travel recharges your batteries, expands your perspective, and deepens your relationships with your travel companions. It provides life long memories that are impossible to attach a financial value to.
Well, that’s it for the top 5 most impactful ways to invest in yourself. Investing in yourself can definitely help you make progress in your Financial Autonomy goals. It can also make you happier – you’re more challenged, more fulfilled, and more connected with those around you.
Download the cheat sheet here
With Amazon now in Australia, we talk to John Candivish from FBA Frontiers on how to make a side hustle by becoming an Amazon seller.
Before starting his Amazon Europe journey, John had zero experience with running an online business. After university, he joined the corporate world in London but rapidly realized that it was not for him.
After launching his first Amazon brand in 2014, John was soon able to quit his job to travel the world and network with other successful Amazon sellers from around the globe. Today, he's generating 6 figures of revenue per month from over a dozen products in Europe. John's experience led him to develop a specific, step-by-step system to find success with every product launched.
John developed FBA Frontiers because so many sellers he met had great businesses on Amazon.com, but had completely dismissed Europe. He's since made it his mission to help sellers overcome the barriers to entry in the EU and find success by bringing their products into Europe.
In this episode we cover:
- What is Fulfillment by Amazon (FBS)?
- The territories in which Amazon operate and how the fees are calculated
- Getting started as an Amazon seller
- The low risk business model as an Amazon Seller
- How to find the right products
- The profit margin you need to
- The importance of having an ad spend on Amazon when launching
- How Amazon ranks products
- The lifecycle of the product
- The benefits of doing a niche product
- What you need to for branding when getting you
- The minimum quantities you need to get started
- Things to consider when FBA starts in Australia and the first mover advantage locals have
- What the future holds for Amazon
Links mentioned in this Episode
FBA Frontiers Course
Jungle Scout
In the interview I did with Adam Murray in episode 20, he spoke about how he reduced his expenses in a significant way when he worked through his employment transition and gap year. And you might recall, he found living on less made him more happy, not less.
Another key element in your financial independence plan is to have a financial buffer, an emergency fund, to get you through the unexpected. Perhaps you already have this, but if not, you want to build this up. Everyone’s needs are different, but you’re likely to need $2,000 to $10,000 in there to make you secure. This assumes you’ve got appropriate insurances in place.
Once you have that emergency fund in place, savings can go towards investment. We’re not going to get into potential investment strategies in this episode, but the key point here is that the goal is to build up some investments, so that in future they can generate passive income for you, to help cover your expenses. It might be rental property, shares, or if you’re real risk averse, term deposits. But the key is that whether it’s rent, dividends, or interest, they will all throw off income for you to use, without you having to lift a finger.
Envisage that you determine that you need $40,000 per year to cover expenses. If you could build up an investment that was capable of throwing off half that each year, then you only need to work in some form of paid employment to earn the other half - $20,000. You might be able to do that working a few days per week, or doing jobs in the gig economy. The key is, you’ve gained choice. You’ve gained financial autonomy at that point.
Expenses are one thing but income is the other side of the ledger. Your income earning capacity is crucial to achieving financial independence. In the previous example, where you needed to earn $20,000 to achieve your goal, if you are a well-qualified GP, you could probably earn that working once a fortnight. Whereas if you are in a low skilled job, you may need to work 3 days per week to get the same result.
So nurture your professional skills and invest in yourself. This will help you enormously in attaining financial independence.
Whilst thinking about income, is there anything else that you could do to boost your income? Push hard for a raise. A side hustle perhaps. Or chasing a job at a competitor that might pay more.
We’ve spoken about side hustles quite a bit in previous episodes (21 and 22 especially). This could potentially be a great path towards financial independence. You are generating income doing something you’re passionate about. And you can put in as much time and effort as works for you.
What other things might form part of your plan to reach financial independence? Avoiding credit card and other non-productive debt is likely to be wise. I’m not someone who believes credit cards are always evil. For those who can manage them, the consumer protection and rewards benefits they offer can be really valuable. But if you don’t pay them off each month, the interest you will pay will very quickly outweigh any of the other benefits. So think about whether your credit card is working for you, or whether you need a change of approach on that front.
Similarly, loans for holidays, furniture, and the like are likely to be costly, and drive you away from reaching financial independence. If you have these already, then an early focus of your plan might be to clear these debts.
How else could you trim your expenses to make your financial independence goal more attainable? Usually it’s about simplifying your life. Maybe changing some habits. Could you become a better cook so you eat out less? Would a housemate be a possibility? On a larger scale, could you downsize or make a tree change? Perhaps this would reduce your rent or mortgage. If you’ve got an inner city home with a mortgage, perhaps a move out of town might leave you with a debt free home even, which would make the achievement of financial independence for you that much more reachable. Episode 6 – Nish’s success story had an example along these lines.
It feels a bit harsh to say, but do you need new friends? If you surround yourself with people who spend money like it's water, it's going to be very tough to rein in your own spending and gain the flexibility and independence that you are trying to achieve. The type of car you feel the need to own is often a function of the social network that you're in. Our friendships and social networks are of course a foundation of our happiness, so I don’t raise this lightly. But it is certainly worth reflecting on whether you have certain friendships that are detrimental to you achieving your goals and dreams.
Well, I hope that’s given you a kicking off point on your goal to attaining financial independence. Determine your why, consciously own the goal and commit to it, and develop a plan to get you there over time.
Of course if you want help in developing your plan to achieve financial independence - that’s what I do every day for people. So visit the Work With Me page on the financialautonomy.com.au web site to learn how we can work together.
Attaining financial independence doesn’t need to be hard. But you need to take action. Hopefully today’s episode has started you on that journey.
Don’t forget to grab the free toolkit for this episode. We’ve got the Budget Tool in there to help you get across your cash flow, the Dream Planner template, 9 tips to combat procrastination, and a piece on how to use the SMART goals methodology.
Important Information:
This information is of a general nature only and has been prepared without taking into account your particular financial needs, circumstances and objectives. While every effort has been made to ensure the accuracy of the information, it is not guaranteed. You should obtain professional advice before acting on the information contained in this publication.
Following on from Episode 23 on Multi-Phase solutions for Retirement we are joined today by Shaun Farrugia from Optimised Accounting & Finance to talk all things Trusts.
Check out our free download Multi-Phase solution for Early Retirement
In this episode we cover: * The dummies guide to what exactly a Trust is * How it can work as a funnel and the tax flexibility that it allows * The two types of people that generally use Trust structures * What are franking credits * Three case studies of how Shaun clients are using Trust for tax flexibility
Case Studies as mentioned in this episode Scenario 1: Couple approaching retirement / early retirement. (Dramatically reduce tax)
- Distribute investment / business income to a 'bucket company'
- Allows for tax to be paid at the company tax rate - accrues as franking credits
- Funds pile up and are invested within the company
- Upon 'retirement' dividends can be streamed out with franking credits attached
- Draw down $13,000 each financial year to remain below the tax free threshold with a tax refund of $5,572 - effectively a zero tax rate
- Draw down $26,000 each financial year and receive a refund of around $6,800 back - 11% tax rate.
Scenario 2: Young Couple - DINKS / Side Business (flexibility)
- Couple both working full time on incomes > $90,000
- Have a side business and investments
- Currently there isn't much of a tax benefit however couple is looking at having kids in the medium term
- Wife will take a year off work, and then in the 2nd year the husband will take a year working part-time
- Trust allows the couple to distribute the income from the side business and investments to whichever member of the couple has the lowest income at the time.
Scenario 3: High Income Earner with a property
- Client is on the highest tax bracket
- Purchased a rental property at the coast
- Client is looking for a tax-break whilst being able to achieve capital growth
- Wife is entrepreneurial and keen to run an AirBNB
- Client is time poor and not interested in having a bar of it
- Property is leased at proper market level rates to a family trust setup by the wife
- Client receives rent as normal
- Wife runs business
- Kicker is adult son in Uni - profit from the Air BNB is effectively tax free.
Links mentioned in this Episode Optimised Accounting & Finance
Multi-Phase solution for Early Retirement
Way back in 1996 I bought my first home. It was a two bedroom flat in a very ugly brown brick building, probably built in the 70’s with nothing done since. It wasn’t flash but it was within my budget and in a good location close to town – Kew for the Melbournites. I paid $107,000.
Now I know that for those looking to buy their first home, $107,000 is probably pretty sickening right now, but 20 odd years ago that was the going rate.
4 years later and I’d meet my now wife, and it was time to move from a flat to a house. We were starting to think about having a family. So I sold the flat for $189,000.
Now those straight numbers - $107,000 purchase price, $189,000 sale price, look pretty good right? And they were. It equates to 15% per year growth. I wish I could say that I got that return due to a whole lot of research and planning, but the truth is it was pure luck. I bought when I could afford to buy, and I sold when I needed to sell.
But that 15% does not tell the true picture, and that’s what I want to explore in today’s episode. My actual return was just over 68% per annum. Yep you heard that right – 68%!
Gearing. Borrowing to invest. It’s about magnifying outcomes. Gears are used in engines and other mechanical devices so that one small turn over here can lead to a really big or fast turn somewhere else.
This magnification of outcomes may be the key to you reaching your financial autonomy goals in the time frame you want. It’s an accelerant. But as with all accelerants, gearing also has risks. It’s a tool you can definitely use to gain the choice you desire. But it’s one to use as part of a well thought out strategy, with the potential downsides considered and mitigated against where possible.
Property investment is the most common area where we see gearing, but it can just as easily be done with shares, exchange traded funds, or managed funds. Given the interest costs associated with borrowing, gearing only makes sense into investments that are likely to grow, and where the expected return after tax is greater than the interest cost. So for instance it wouldn’t make sense to gear into a term deposit investment – the return on the term deposit would be less than the interest expense.
So let’s get back to my 68% per annum return. I’d be disappointed if you weren’t a bit sceptical. The Financial Autonomy community is a savvy bunch and you know the old saying, if it sounds too good to be true, it probably is. But stick with me, in this instance it really did happen.
When I bought my first home, I put down a 10% deposit. So that meant I put in $10,700 and the bank funded the rest. Of course there was some stamp duty but it wasn’t a lot at that price point, and I had a friend help me with the conveyancing so that cost me next to nothing.
Over the 4 years that I owned it, for much of the time I had a flat mate in the spare room, and her rent helped with the loan repayments. I didn’t really make much of a dent on the loan during that 4 years, but it went down a little, and I had a roof over my head.
So I sold for $189,000. The first thing to happen was that the associated loan needed to be repaid. With that done I had around $93,000 in my bank account. Now of course I had to pay a real estate agent for the sale, and some legal costs. I can’t recall exactly how much they were, but being conservative, let’s say I was left with $87,000.
I bought my flat for $107,000, and sold it 4 years latter for $189,000, a gain of about 15% per year. But the real story here, the one relevant to me, is that I put down almost $11,000 of my savings, and 4 years later, that had become $87,000 – my savings had multiplied by a factor of 8!
Now as I said at the start, whilst I’d love to say that I got this amazing return because I was some sort of property investment genius, the truth is it was pure luck. But you make your own luck. I wasn’t to know the property value was going to increase that much, but by saving a deposit, finding something in my budget (even though it was a long way from my dream home), and making a start, I enabled that luck to happen.
And the power of gearing significantly magnified my outcome.
So how could you use gearing to magnify your investment outcomes and get to your Financial Autonomy goals quicker?
A popular strategy that we use with clients a lot is regular gearing. You might put $1,000 per month into an investment, and we arrange a lender to lend a matching $1,000 so that each month you are buying $2,000. Your investment exposure is therefore doubled, and by doing this monthly, you are averaging out your entry price – dollar cost averaging is the jargon, which serves to reduce risk.
There are also products that will allow you to buy a parcel of shares or funds, and put down a deposit in the same way you would buy a property. You then make monthly repayments on the loan in the usual way. This enables you to have a potentially large exposure to the market right from day 1.
There are also some offerings that have protection built into them, typically created via options contracts. With these, there will be a set term, say 5 years, and at the end of that term, if any of the shares are worth less than what you bought them for, you are not up for the loss. Now of course you have to pay for the protection, but some people appreciate the peace of mind.
And then of course there is the traditional investment gearing avenue – property. Banks have always been very comfortable lending against property, so your ability to magnify outcomes is quite high – in my example I only put down 10% and the bank provided the other 90%. The less you put in, and the more that is financed, the stronger is the gearing impact.
Now it’s appropriate at this point to talk about risk. All through this piece I’ve talked about magnifying outcomes. Outcomes can be good and bad. If the numbers in my flat example had gone the other way, and I had turned $87,000 of savings into less than $11,000 in 4 years, I’d have been a very unhappy person.
So gearing magnifies outcomes – both good, and bad. So what can you do to reduce the risk of a bad outcome?
The primary tool is time. The longer you hold the investment, the greater the chance of a positive outcome. Buy some shares or a property and sell it a year or two later, and the chances of a negative outcome are quite high. But hold those investments for 10 years, and the likelihood that the value of the asset will have declined since purchase, is fairly low.
As a rough rule of thumb I would suggest not going into a geared investment strategy unless you felt it was likely to be able to remain undisturbed for at least 5 years.
Of course in contemplating commencing a gearing strategy you need to have a good handle on your cash flow – can you afford the loan repayments? Should you fix the interest rate to provide greater certainty? If you’re investing in property, how would you go if there was no tenant for a few weeks or months?
It would also be wise to check that your Income Protection cover is adequate. Given the importance of investment time frame to your gearing strategy, you don’t want a period where you are off work due to illness or injury to force you to sell your investment at an unfavourable time.
If you are investing into property, things like landlords insurance may also be of value to reduce your risk.
Before I wrap this post up, I thought it was worth touching on a question I get quite a bit – what is negative gearing?
With any gearing strategy you have money going out – primarily the interest expense on the loan, but in the case of a property, also expenses like council rates and insurance. You also have money coming in – rent or dividends.
Negative gearing refers to a scenario where the money going out, is more than the money coming back in. So for instance an investment where there was $20,000 going out each year, and $15,000 coming in. There is a loss here each year of $5,000. This investment would be term negatively geared.
Were the scenario reversed and there $5,000 more coming in than going it, it would be called positively geared.
So a negatively geared investment is losing money each year in a cash flow sense. Yet negative gearing is usually described in the media as some sort of investment secret of the wealthy or well informed. What’s going on?
There’s two elements. One is that in the case of shares and property, the return isn’t just the income they produce. There is also the expected growth in the value of the investment over time.
The second element is that the loss amount in a negatively geared scenario can be tax deductable.
So an investor entering into a negatively geared strategy will be hoping that over time, the value of the tax deductions, plus the growth in the value of the investment, will make the whole exercise worthwhile.
It’s worth highlighting here that whilst the tax deductions are helpful, in isolation they aren’t enough to make a negative gearing strategy sensible. Growth in the value of the underlying investment is a must if this strategy to produce a successful outcome for you.
Well thanks very much for using some of your precious time to consume this post. I hope you got something useful from it. As always, we have a toolkit made up to help you take action. I’ve summarised the key ways to manage risk when embarking on a gearing strategy, which I hope will empower you to take action. I’ve got some other bonus items in their too so check it out.
Download the toolkit here
In this episode we are joined by ICT professional and cryptocurrency expert Ivan Jasenovic, who describes himself as having his head in the cloud, his soul on the Blockchain, and his heart in decentralized Healthcare.
In this interview we cover:
- The benefits of Blockchain technology and whether you truly need to understand how Blockchains
- The different types of cryptocurrency and examples of when you would look to use each one
- How bitcoin works and has the same value per unit no matter where you live
- Whether different cryptocurrency would merge together and their future specialised uses
- Why reputation is the most valuable thing in this space
- How cryptocurrency could be used in health and other industries
- A case studies of Shaun and Jimmy and their experience investing into blockchains
- How getting hacked increased their blockchain investment
- The concept of a wallet in the cryptocurrency world
- How you need to act like ‘the bank of you’
- The importance of back-ups and password security
- How a lost hard drive located in landfill is now worth millions
- The question of regulation and the future of Governments in cryptocurrency
- The battle between white and black hats
Links mentioned in the show
Email - ivan@sicoor.net
Sunshine Coast Blockchain Meetup
dhealthnetwork.io
The goal of early retirement is one many Australians aspire too. And certainly, when thinking about achieving Financial Autonomy, retiring early is very often baked into those goals.
But what is the best way to bring that goal to reality, given the uniqueness of our system – superannuation, franking credits, negative gearing, and means tested Aged Pensions, just to get you started.
The approach I’m going to take you through today is a multi-phase approach that I’ve built specifically for the Australian early retirement landscape. Its aim is to use the opportunities we have, such as franking credits and superannuation, to get you to early retirement as quickly as possible.
We’ve actually built a special PDF just for this post. I’ve put all of the diagrams in there for you. You know what they say – a picture tells a thousand words. And I certainly think visualising this approach is helpful. So ideally have that in front of you as you consume this episode, but if that’s not practical, then at least download it latter.
Early Retirement for Australians Download
Early retirement in Australia – an overview To survive in our modern world, you need income. Long gone are the days where we grew all our own food, hunted for our meat, and lived a subsistence life. So retiring early necessitates solving the problem of how will you generate the income you need to meet your expenses, if you cease being in your current paid employment role.
Let’s start with the helicopter high up in the air.
We all know that in Australia we have the superannuation system to assist in funding our retirement. Considerable tax concessions are provided to encourage us to build up saving within superannuation. And then when we retire, we are able to convert our superannuation savings into an income stream, and receive even more generous tax concessions.
Income drawn from superannuation is tax free from age 60 for the majority of people. Given the tax favoured status superannuation receives, you’d likely be wise to utilise this system to the maximum extent possible to generate your retirement income after you reach age 60.
But what do you do before age 60? Well if early retirement is your goal, you need to have built up other investments, likely shares and property. In this pre-60 early retirement phase, you can rely on the income these investments produce, and you perhaps also sell them down progressively to live of the gains and proceeds of the investments, remembering that when you hit 60, you gain access to a new pool of savings – your superannuation.
Okay, so that’s the overview – pre 60 you’re living off investment income, and perhaps also some employment income, and I use that term loosely – it could mean as an employee, but it’s just as likely to be some freelancing work, a short term contract, or as an advisor or consultant. Even if you’ve left your normal job, there’s a good chance that whatever you find to do with your time, you’ll pick up some income along the way.
Then after age 60, superannuation is the primary solution for your income needs.
The sub phases Let’s bring the helicopter down a bit lower now. Within these pre and post 60 phases, I believe you can break things down further. In the pre-60 phase, I’ve termed these two sub phases the Transition phase and the Investment Income phase. And in the post 60 phase, that can be split into the Active Retirement phase, and the Feet-up phase.
Imagine that perhaps in your 30’s you’ve decided that early retirement is something that you aspire to. You crunch your numbers and determine the amount of income that you’d need to afford the early retirement lifestyle that you want. You could wait until you have enough investments and superannuation that you can live a total life of luxury. But most people I work with prefer instead to retire earlier, but still earn some income. I call this the transition phase. Maybe you back off from 5 days per week to 3. Remember episode 20 where I interviewed Adam Murray. He’d cut back to 3 days per week as a paid employee, and actually spread those hours across 4 days. Then he had time to pursue other projects, and be the father that he wanted to be for his 2 boys.
So during the transition phase, you’re still earning some income, just less than pre-early retirement, and perhaps you’re also earning some investment income.
As you get closer to 60, your investments have grown. In particular it’s highly likely that you’ve used some borrowings to build the wealth, for example borrowing to buy an investment property, and hopefully somewhere in this pre-60 phase, the debt gets repaid, meaning the rent which was going to loan repayments is now freed up for you to live off.
So the second sub-phase in the pre-age 60 segment is the Investment Income phase.
In the Investment income phase you’ve scaled any paid employment right back, possibly given it away altogether. You’re primarily living off your dividend and rental income, and perhaps even selling down investments in the knowledge you’ll be turning on the superannuation tap come age 60.
Franking credits will keep your tax down here, and you can plan any capital gains tax events to get you the best possible outcome. Not anti tax
Now let’s look at the post age 60 sub phases – Active Retirement and Feet-up. The Active Retirement phase is likely to be from 60 to 70 or 75. During this phase you’ve slowed down a little but still remain active – traveling and participating fully in your recreation activities like golf or yoga. As a result your income needs are likely the same as pre 60.
Because you’ve turned age 60 and are retired from the work force, you can now access your super. And it’s likely that you will turn on an income stream from these savings, given this is the most tax advantageous element of the entire superannuation system.
Thus the bulk of your income in the Active Retirement phase will come from superannuation. But it’s likely you will still have some investment income coming in as a bit of a top-up. Perhaps this can pay for the annual overseas trip.
This Active Retirement phase could be an excellent time to realise any significant capital gains liabilities, for example selling a rental property, as your superannuation is a tax free income source so your total taxable income is likely negligible.
The final post age 6o phase is the feet-up phase. At some point later in life you’re going to have done all of your traveling, and the realities of getting older mean that you slow down. Expenses tend to reduce, and medical appointments rise.
During this phase the bulk of your investment have been used up, and you’re now living on your superannuation. Depending on your circumstances, an Age Pension may also come into the frame at some point, which will help in prolonging the life of your superannuation savings.
Early Retirement for Australians Download
An early retirement example So let’s play an early retirement scenario out, so that you can see the how your income need might be meet in each phase.
Imagine we first sit down and develop an early retirement plan for you when you are 34. We work to that plan, refining as we go along, and by age 45, you’ve built up enough assets to be able to quit the high pressure career that has got you to the position you are now in.
The first phase is the Transition phase. You’ve still got great contacts in your profession, and so whilst you want to step back from all the stress and travel of your corporate career, you’ve got an opportunity to do some consulting work for one client for a day a week, and another long-time professional friend has asked if you could do some overflow work for them as it comes up.
Your income in the transition phase is therefore generated perhaps 2/3rds from these employment type earnings, and 1/3rd from the dividends from your share portfolio, which until now had been reinvesting all its income.
You have an investment property too, but at the moment there is still debt on this, so the rental income goes entirely towards paying down this debt, and meeting the other bills like council rates and maintenance.
Further on into your early retirement now and you enter the Investment Income phase. The rental property has been paid off, freeing up the rental income to further meet your expenses. The 1 day per week consulting gig has finished, but you’re still getting occasional overflow work from your friend. Your income split perhaps now flips, to be 1/3rd or perhaps even less from employment type income, and the bulk of your income comes from investments – share dividends, rental property income, and the occasional share sale when a lump sum expense comes up.
You reach 60. You’re in the Active Retirement phase. You’ve told your friend you don’t wish to do any more overflow work – you don’t have the time! What with golf 2 days a week, volunteering as the treasurer of the local Rotary club, keeping up with the family, and regular holidays, you’ve got more than enough on your plate.
So now you turn on the superannuation income stream. You’ve sold down most of your share portfolio by now but you still have the rental property so you have income from that in addition to your super.
You have a great time during this phase, but by age 74, you’ve had a few health issues and are starting to slow down. You’re still playing seniors golf on a Friday, but you don’t fancy overseas travel any more and are happy to live a bit quieter life. You’re in the Feet-up phase.
Maybe you sell the investment property around now. The maintenance is getting a bit of a bother and it’d be nice to have the cash available.
Between the proceeds from the sale of the rental property, and your super, you see out your days without a financial worry in the world.
So what do you think? A plan you could work towards. Early Retirement in Australia is possible and I think many people could imagine living out a scenario something like what I’ve just gone through.
The reason most people don’t live that life though is because they never TAKE ACTION. Don’t let that be you.
Don’t forget to visit the financialautonomy.com.au web site to grab the toolkit for this episode, because the glide path diagrams I’ve put together I think will be super useful to you in seeing how you might be able to retire early in Australia.
Early Retirement for Australians Download
Important Information:
This information is of a general nature only and has been prepared without taking into account your particular financial needs, circumstances and objectives. While every effort has been made to ensure the accuracy of the information, it is not guaranteed. You should obtain professional advice before acting on the information contained in this publication.
In this next interview episode on the Financial Autonomy Podcast we chat to Ruby Lee the founder of The Careers Emporium and head of HR at Cogent.
In this interview we cover: * The benefits of a side hustle in achieving your financial goals * The 18 month journey Ruby when through when changing careers * Identifying your strengths and knowing when the time is right for a career change * How daily journaling helped Ruby gain clarity when dealing with financial and career issues * How she turned a new blog of helping people with their careers into a money making side hustle while on maternity leave * Why job seekers are now seeking personal branding help * The importance of understanding a position gets made redundant, not the person. Listen to Ep 2 Redundancy - What a Great Opportunity episode * Ruby’s tips for starting a blog and building an online community for your side hustle * How she juggles balancing her full time job, being a mother and building a successful side hustle. * How automation and programs such as Hootsuite help her build The Careers Emporium while working full time * How a business coach helped her to gain clarity and change her mindset amount monetising The Careers Emporium * Current trends in employment and the rise of the contractor/freelance and ‘gig’ economy * The rise of partnering between employers and employees * How employers are now understanding the need for employees to build personal brands and how that can help both parties.
Links mentioned in the podcast
- 50 Side Hustle Opportunities for Australians
- Ruby Lee LinkedIn profile
- The Careers Emporium
- Cogent
What do Apple, Nike, Under Armour, Instagram, and Groupon all have in common?
It’s not just that they’re hugely successful, multibillion dollar companies. They also share a common birth – they all started life as side projects of their founders.
I’ve been reading Nike founder Phil Knight’s autobiography Shoe Dog recently, and I highly recommend it – very readable and interesting. He was working as an accountant at Price Waterhouse whilst establishing what we now know as Nike, and when he needed to spend more time on the business, he switched to become an accounting professor at his local university. It was several years into the business before he quit his day job and devoted himself full time to his enterprise.
So if businesses as enormously successful as these can spring from a side hustle, perhaps you can attain your Financial Autonomy goal by using the same approach. Let’s take a look at what a side hustle is, and how you might be able to use this approach to gain the choices in life that you’re yearning for.
Download Side Hustle toolkit
NBN Co commissioned some research earlier in the year looking at how Australian’s were using the internet to generate additional income. The report found that the majority of Australians (80%) are looking to this as a way of finding fulfilment outside of work, and 1 in 4 are already earning additional income online. A similar study in the US found that 28% of those aged between 18 and 26 were working on their own, on the side. Of those almost all (96%) worked in the side hustle at least once per month, and 25% said they earned more the USD500 per month.
Certainly the increased comfort and normality of internet commerce is a key enabler in the rise of the side hustle trend around the world.
And whilst online businesses are perhaps the most popular of side hustle options, plenty of other opportunities exist too, from running a food stall at a local market, to teaching yoga classes of an evening, or pet sitting for people when they go on holidays.
Perhaps before we go too much further, let’s just define what a side hustle is to ensure everyone is on the same page. What we are talking about here is something that you do outside of your normal method of earning an income, that produces additional income. So in the Phil Knight example I mentioned earlier, by day he worked as an accountant, and then in the evening and on weekends, he built this little running shoe business.
Now in the Nike example this ultimately became his full time job, but that doesn’t have to be the objective. Maybe your side hustle is just a way to build up some savings, or pay down the mortgage quicker. There are all sorts of ways that you could use a side hustle to achieve your Financial Autonomy dream.
I used to work with a guy who hired out inflatable jumping castles for kids parties on the weekend. He ended up employing his daughter in the business full time.
Research undertaken by Manpower Group also highlighted how the side hustle concept linked to the idea of the “gig economy”, finding that 40% of Australian millennials preferred to work a number of part time jobs, rather a single, Monday to Friday, 9-5 job.
One aspect of the side hustle concept that I really like is that it enables you to give things a try, to experiment. To test ideas and see if real people are willing to part with their hard earned cash for your idea.
I’ve spoken in the past about the Lean Start Up methodology. A key concept in there is how many cycles can you go through of putting an idea out in the world, obtaining real customer feedback, tweaking your offer based on that feedback, and going back out to market again. The more times you can run through that cycle, the greater the likelihood you will find a sustainable business that you can grow. Working through those iterations as a side hustle can be fantastic, because you’re not relying on the new venture to put food on the table or a roof over your head. You can experiment and discover, and if those experiments don’t play out as you’d hope, you can live to fight another day.
A side hustle may also give you increased financial security. As I explored in The Security Illusion post (episode 11), being a full time employee feels like the low risk, secure option, but the reality can be the exact opposite. I was only listening to an interview with someone this morning who had worked as an architect at Mirvac in Brisbane, and in the space of 14 months that team went from 100 people to 4.
So having a side hustle might give you that safety net. A second source of income to help keep the household afloat until you find you next job. Or maybe it’s something you feel can be scaled up now that you have more time to devote to it. How great would it be to have a running start in this new chapter of your life – being self-employed?
So how might you get started on your side hustle journey? As you know, I’m a keen podcast consumer, so I’d suggest you check out the Side Hustle Nation show. He’s got over 250 episodes online, so scroll through and pick a few that jump out at you.
In the downloadable toolkit for this episode we’ve compiled a list of the 50 most popular side hustle ideas we’ve come across on the web. We’ve done the research leg-work for you here, so make sure you visit the financialautonomy.com.au website and grab yourself a copy of that.
Download Side Hustle toolkit
It seems to me there are two mostly likely paths you could go down to find a side hustle that works for you. One is to think about your hobbies and passions. Is there scope to turn a dollar doing something in that space?
The other avenue is to consider what skills you have, and weather you can monetise those skills outside of your regular job.
So on the hobbies front, let’s say you love playing the guitar. Could you pick up some work in a cover band on the weekend? Or do guitar lessons. Maybe you could create an online course on learning the guitar, or tuning a guitar, or whatever. Perhaps you could import guitars and sell them on Ebay or Amazon.
There’s a cliché that if you love what you do, you’ll never work a day in your life. And whilst it is a cliché, I think it does hold some truth. Earning some money in a space that you love and are passionate about might be fantastically liberating. Chances are you have a community already around you who share your interest, which could be an incredibly useful sounding board for your plans, and perhaps even customers one day.
Then what about turning your skills into some extra cash. This is perhaps where the internet has provided the most liberation. If you’ve got design skills for instance, you could pick up work at 99 designs, AirTasker, Freelancer and no doubt plenty more. Of course in the case of AirTasker and Freelancer, there are opportunities for those with plenty of other skills too – from cleaning to web site design, there will be an avenue for you turn those skills you’ve acquired into extra money in your pocket.
Perhaps your skills point to selling a particular product that you know a lot about. Market places like Amazon and Ebay can open up enormous opportunities. Fulfilment by Amazon is an opportunity of enormous magnitude. I know of someone who designed a bag to hold medical items for children, such as epi-pens for instance. These bags could then be put in their school bag, or wherever they needed to go, and the parent could be confident everything that was needed was there, and there were instructions for carers if required.
She gets these manufactured in China and ships them to the Amazon warehouse in the UK. She can then market the product throughout Europe on Amazon, over 300 million potential customers, and anytime someone orders, Amazon takes care of the process from that point forward – picking the item, packaging it, and getting it delivered. And she can manage the entire thing from her study at home in Melbourne. What an incredible age we live in!
So what else to consider when exploring the side hustle route? It might be wise to consider whether what you are planning to do could conflict with your current employment. Many employment contracts will have conflict-of-interest polices, so be sure to have a read of that and get expert advice if you’re in any doubt. Even if you don’t work under a contract with any restrictions, things like poaching clients from your day job, or being involved in something that could cause reputational damage, are not likely to be a wise moves.
It may be a good idea to simply ask your employer “do you see any problems with what I’m planning to do?” Who knows, they may even be able to flick some opportunities your way.
If your side shuttle starts generating some consistent earnings it would be worth also having a chat with your accountant. Once turnover reaches $75,000, you are required to register for GST, and in some circumstances there can be value in registering even before you reach this threshold. Software like Xero can make your book-keeping really pretty simple, so don’t let those sort of things get out of control.
Download Side Hustle toolkit
Well, that’s it for this episode, don’t forget to grab the toolkit for this episode that has a list of 50 side hustles you could try. Let’s get you another step closer to reaching your Financial Autonomy goals.
Also, we’ll have an interview episode out next week which will feature someone who has built a side hustle business in the past year. We’ll find out how she’s gone about it, and how she’s had to change and adapt as things have progressed. It’s a really energetic interview that I’m sure you’ll enjoy, so look out for that one.
In my next interview episode on the Financial Autonomy Podcast we chat to Adam Murray from the Subtle Disruptors Podcast.
In this interview we cover:
- How a difficult personal time highlighted the need for Adam to take some leave from his career and reevaluate his life
- How the Good Life Project gave him a framework to take a gap year
- How identifying four key priorities during that gap year has now impacted his life
- The power of being present in the moment
- The focus on his health and how it impacted on his four key priorities
- How he managed financially to take a gap year
- How living frugally changed him and how it helped to develop a better understanding of what makes him happy
- How structuring his work around 4 days a week has allowed him to retain focus on his priorities after going back to work
- His journey towards self employment and his desire to make an impact
- The importance of designing a life on your own terms and creating a true work life balance
- Why you can only sacrifice part of your life only for a period of limited time
- The guests that have made the biggest impact on him as a host of the Subtle Disruptors podcast
Links mentioned in the podcast
- Subtle Disruptors Podcast
- Roy Mint Co
- Cogent
- Adam Murray LinkedIn Profile
There’s a template that all Australian’s are meant to follow.
- Study,
- enter the workforce,
- buy a house,
- raise kids,
- pay off a mortgage,
- retire.
It’s served us pretty well for the past 100 years or so, so you know the saying about if it ain’t broke…
But for an increasing number of Australian’s this model is broken.
The original spark that started me on this Financial Autonomy journey was the realisation that the path from studying until around your early 20’s, then working in paid employment for the next 40 odd years, then retirement – the traditional path – was becoming less relevant, and a serious re-think was needed.
Home ownership is an unspoken overlay applied to that traditional life path. And whilst I certainly don’t believe that owning a home is a bad thing, in re-thinking how our life’s journey might unfold, I certainly think it’s worth questioning the place of home ownership as a core belief in one’s financial life.
And it’s not even just the core assumption that we will buy a house, it’s the assumption that this should happen in our 20’s, or perhaps early 30’s if you’ve been really wild. It’s really quite a rigid prescription for life.
So in today’s audio blog we’re going to explore alternatives to the traditional home ownership path. How can you achieve the Financial Autonomy goal of having choices in life, but chose the life path that makes sense for you.
Download the toolkit here
You’d have to have been living on Mars for the past decade to not be aware that house prices, especially in Melbourne and Sydney, have risen sharply. The combination of extremely low interest rates, a growing population, and in some cases a lack of supply of new homes, has resulted in existing home owners becoming wealthy, at least on paper, and those outside the home ownership club wondering how they will ever break in.
Reflecting this challenge, between 2002 and 2014, home ownership rates for 25 to 34-year-olds dropped nearly 10 points, to under 30 percent. HECS/HELP debts certainly don't help.
Now those facing this home ownership challenge could rail against the unfairness of it all, but in truth that’s likely to have as much impact as putting up an umbrella during a cyclone.
How about instead, focusing on a Plan B? Sure Plan A, the traditional path, worked for your parents, but so did smoking and Saturday afternoons at the TAB. Things change.
So how could you re-imagine your life journey, where the purchase of a home in your late 20’s or early 30’s, probably with a partner, is not in the plan?
For the purposes of this episode I'm going to assume you've already looked into moving further out of town, going smaller etc. You're at the point where buying a home is just not possible right now, or in the foreseeable future.
If we’re to find an alternate path that works for you, it might be useful to consider why buying a home has been seen as such a cornerstone of financial security. Home ownership is attractive because:
- It provides a guaranteed roof over our head – shelter is a basic human need, and if you own your home, no-one can kick you out.
- When you retire and have less income coming in, you have a roof over your head at little cost.
Let me know if you can think of other reasons.
So in finding an alternate path, we need to consider how we can solve for those two objectives.
If you don’t own your home, then you’re renting. And if you’re renting, then there is always the chance that the landlord could ask you to leave. Now, if you pay your rent on time, and look after the property well, this isn’t a risk with an enormous probability of arising. It does happen, but I think it’s a risk that is over estimated.
Put yourself in the landlord’s shoes. They’ve bought this property, and almost certainly borrowed to do so. They want nice regular rent and no headaches. They don’t want turnover of tenants, because then they have periods with no rent coming in, and they usually have to pay the managing agent to find a new tenant. Landlords are vulnerable. No rent coming in for a month, or damage to a property, and they’re likely to be hurting. Smart landlords value a good tenant.
So pay your rent on time and take care of the place, and the risk of you being asked to move becomes really quite small. Not zero, for sure, but not highly probable. Be the tenant a landlord wants to have in their property.
Longer term financial security is certainly the stronger argument for becoming a home owner. Finding money to pay rent when retired may well be a challenge unless it is well planned for. So if it is the case that buying in the area where you want to live isn’t feasible, it becomes really important that you build financial wealth in other areas.
So what might that look like?
To start with you need a savings capacity. If all your income goes back out the door in rent and living costs, then clearly there is no ability to build wealth and create a position of Financial Autonomy.
I worked with a client recently who will be a long term tenant. She was having trouble making the monthly finances work. We explored various ways to solve this, but what it really boiled down to was that she was just paying too much rent given her take home pay. We ascertained that rent was gobbling up 42% of her take home pay. And then when she paid other housing related bills such as gas and electricity, half her income was gone.
This wasn’t sustainable.
So as a starting point, aim to have your rent at no more 30% of your take home (ie. after tax) income. Of course the lower the better. That may require some compromise as to location, or size of the place you rent, but it’s absolutely critical.
With less than 30% of your income going towards putting a roof over your head, you will have enough money to live, and also have funds available to save and invest.
Okay, so now you have a savings capacity, a foundation stone to you gaining choice through Financial Autonomy. Initially that will build up in the bank, ideally in a separate account specifically for savings. But with interest rates of next to nothing, the growth of your savings will be limited to how much you can tip-in.
If you’re to really maximise your ability to build financial wealth, those savings need to be invested. You need to develop an investment strategy that works for you on all levels – risk, time frame, and ethics. Educate yourself and/or get professional help. Check out episode 15 – The sharemarket – a beginner’s guide, and also the 3 part series on Common investment mistakes – episodes 12 to 14, to get you started - episode 12; episode 13; episode 14.
You could set-up a strategy where you invest a regular amount every month, no different to paying a mortgage. Unlike a mortgage though, it’s changeable as your circumstances change.
Need to suspend contributions for a while whilst on maternity leave say? No problem. Get a pay rise and want to increase your contribution. Easy.
Over time your investment will grow to a very handy nest egg.
For the person perusing the alternate path of non-home ownership, superannuation is likely to take on increased importance. When (if?) you retire, either you will want to buy a home, or you’ll need sufficient income to continue to pay rent. Either way, your super can help.
A larger balance enables a large sustainable income to be withdrawn, covering rental costs. Or, perhaps you withdraw a lump sum from your super to buy a home.
Now of course the primary purpose of your superannuation savings is to provide income in retirement, so it’s no good taking out so much of your balance, such that the remainder won’t produce the sustainable income that you need. So this is certainly something you’d want to think through carefully, and I’d strongly urge you to get some expert help. But the key takeaway for now, is that your super definitely provides a potential solution to the challenge of having an affordable roof over your head in later life.
Share-houses are not a new concept. Co-working spaces are a rising trend. Whilst most of us like having some private space in our lives, going it alone in a housing sense is expensive. Is there scope to team up with others to solve your housing need?
This could play out two ways. One would be to buy a place with someone else if that was affordable. The traditional way is to do this with a life partner, but could you do it with friends or siblings? Maybe 3 or 4 of you could go in together to buy a property, whether it be something you live in, or something you rent out.
Alternatively you go for the share-house model whilst renting, as a way to bring down your housing costs and have more money available for savings and investment.
Earlier I mentioned the increased importance of building wealth if you are to achieve Financial Autonomy without owning the home that you live in. Just because it’s not viable to buy a home in the area that you wish to live, doesn’t mean you are prohibited from having a stake in the residential real estate market. Could you afford to buy a property in another more affordable city, and rent that property out? You may be able to use the negative gearing provisions to help with affordability. In brief, negative gearing means that, where the interest expense on your loan each month is more than the rental income that you receive, you can claim that difference - that loss, to reduce the tax you would have ordinarily paid.
Hopefully over time the value of the property grows, and perhaps you pay down the debt. One day, you’ll own a home that either produces income for you later in life, or is perhaps an option to retire into.
It’s not something that you want to build your life around, but receiving an inheritance from parents is a reality for many of us later in life. Indeed, the rising price of housing that may have priced you out of the market, may have an upside in also inflating the inheritance you one day receive.
Perhaps then the long term solution to your housing is that you rent until the inheritance occurs, and those funds provide you with the capital to buy something of your own.
As mentioned, I wouldn’t encourage this as your primary strategy. Your parents might spend all of their money, or simply chose to send their estate elsewhere. I also find it just a bit distasteful to absolve yourself of doing anything towards your own financial security and rely on the work of those before you to provide.
But with that caveat stated, when thinking through how you will achieve the security of owning a roof over your head in later life, perhaps an inheritance is an important component of the solution.
The solution that’s right for you may well be a combination of these different strategy options – perhaps you buy a rental property and negative gear in your 30’s and 40’s, contribute a bit extra into super throughout your working life, and when an inheritance comes through, sell the rental property and buy a home for yourself.
Regardless of the approach that’s right for you, I think a key change is that, if you do ultimately become a home owner one day, it will be later in life than may have once been assumed.
So rather than beating yourself up about not owning a home, or paying down a mortgage, perhaps there just needs to be an adjustment in time frame.
Perhaps it suits you to live inner city and rent during your peak earning years. Sure, properties cost more in Melbourne or Sydney, but wages are also higher than most other parts of the country, so there may well be a robust argument to be made that your long term financial position is improved through you renting in the vicinity of the highest paying work.
Then later in life you move out to a rural area, or a city where you can afford to buy. Maybe the goal should be to own a home by the time you're 60 say. The reality is that whilst in recent memory, Australian's have always worked to a formula of buy a home asap, that doesn't have to be the only way. You can achieve Financial Autonomy without buying a home in your 20’s or 30’s. With good planning, you won’t be financially doomed.
In this week’s toolkit I’ve created a document called “7 Strategy options for non-home owners”, which dot points the various strategy options I’ve mentioned here. There’s also the Budget tool, a piece on Risk vs Reward, and a summary of Sharemarket basics to get you started in learning about investments.
Download the toolkit here
In our first interview episode on the Financial Autonomy Podcast with talk with Felicity Loughrey. She shares her career transition journey from journalism to advertising that spanned across two continents.
In this interview we cover:
- How this Australian freelance journalist ended up working in New York
- Why she finds Americans are good to work with
- How she handled the transition away from the dying industry of journalism into writing advertising copy
- The interesting journey of getting better at her craft but getting paid less for the work
- The subculture of freelance creatives in the US
- The importance of consistency pitching for work to maintain constant cash flow
- Overcoming the hurdle of getting paid for your work as a creative
- The need to be constantly learning when entering a new industry
- Her time at VaynerMedia and what it is like working for digital thought leader Gary Vaynerchuk
- The role a Digital Creative
- Running an autonomously team in a HR focused digital agency
- Hiring from outside your industry to create a dynamic team
- The difference between the use of social media between the Australia and the US
- Advice for those currently working in declining industries
- Understanding your core skills and how you can adapt them into a new career and industry
Links mentioned in the podcast
- Head Ovary Heels podcast
- Confessions of an Advertising Man
- VaynerMedia
- Gary Vaynerchuk
How hard is it to get started? I’m sure we’ve all had things that either need to be done, or that we’d like to do, but we put them off – shift them to the bottom of the pile or check out our Facebook feed instead.
Procrastination is evil, and it afflicts us all at some point or another. When it comes to Financial Autonomy dreams, I think procrastination is quite possibly the number 1 impediment to you moving forward. So with this in mind, I’ve done some research on strategies to overcome procrastination woes, and today I’m going to share with you the key things I’ve learnt.
When it comes to achieving something great, something worthwhile, taking the first step is often the hardest part. Perhaps it’s not knowing where to begin. Or a sense of overwhelm – the goal feels like this huge inflatable ball – impossible to get your arms around and difficult to know where to grab it.
Procrastination does not equal lazy. It's likely driven more by fear of uncertainty or failure, or anxiety, which is often closely associated with overwhelm.
But if you’re to make progress on your Financial Autonomy goals, then making a start is essential
I've seen quotes and interviews from incredibly successful authors Stephen King and Jodi Piccoult, who both have routines that require them to just sit down and write. It can always be edited latter, but waiting for the inspiration lightning bolt to strike is not the way achieve anything - just make a start!
A common strategy deployed to overcome procrastination is to break down the thing – the goal, task or whatever - into smaller tasks, and then work through these small tasks one at a time. I find Trello really helpful for this so you might like to check that out – it’s free for individual users.
Create one column titled “Things to do” and create cards in there for all the components you can think of that need to be done to reach your goal. Then you create two other columns, one titled “Doing”, and the other “Done”. Work on one card at a time from the “things to do column, and progressively move them across into the “Done” column. It really helps clarify your thinking and overcome the sense of overwhelm, and also self reinforces as your see the “Done” column start to fill up – you feel like you’re making progress.
Tip 1 to overcoming procrastination – break the goal down into smaller components and deal with one of them at a time.
Making a start is hard, but let’s say you’ve taken action on the first tip and broken your goals into small actionable pieces. Another thing you might want to include is a time frame. When will you get these done? I personally wouldn’t set time frames for each small item you’ve identified, because before you start working on them, it’s tough to judge how long it will take – inevitably some tasks will take on the fraction of the time you would have guessed, whilst others are like an old woollen jumper your grandma made you – what starts of a as a single lose thread ends up going on and on the more you pull on it.
So don’t set time frames at the individual task level would be my advice, but I think there is value in setting yourself times frames to achieve broader milestones.
Let’s say your goal is to start up a side line business online. Something to generate some extra income, and potentially even develop into your primary source of income one day if it really took off.
So you break that down into lots of different things that you need to do – register a business name, buy the website address, get a logo designed, etc. It might be helpful to set yourself a deadline that by the 1st of March, I’ll have my idea to a point where I can start showing people and getting realistic feedback. A deadline like that provides flexibility around the individual components, but helps you stay the course, and push on when the energy levels flag a bit.
I should add here too that what you don’t want to do is set unrealistic deadlines. They will just create disappointment and frustration and potentially make you give up on your goal.
Tip 2 – is set realistic time frames to get things done.
Who hasn’t sat at the dinner table as a kids and seem something on the plate that made you want to run and hide – brussel sprouts, parsnip, fish – we’ve all got something. And what did our wise elder folk advise? Eat the things you don’t like first – don’t leave it to last.
The same can definitely apply here to you overcoming your procrastination. What is the ugliest bit that needs to get done if you are to make progress on your Financial Autonomy goals? Can you tackle that first?
I’ve certainly had instances, and I’d imagine you have too, where there’s some task you’ve been dreading, and so you’ve taken every opportunity to put it off. But the day comes where it just has to get done. So I grudgingly get started, and after 10 minutes realise, this isn’t nearly as ugly as I thought it would be.
And with that ugly bit out the way, it’s downhill from here. You’ve got momentum now.
Tip 3 – can you tackle the worst bit first?
Perfection. A good thing right? When it comes to overcoming procrastination, no. A statement I know is often used in software development, but has broader application, is that perfection is the enemy of progress.
We all want to produce the best that we can, but sometimes striving for perfection can mean nothing gets produced. Much better to do the best you can within a reasonable time frame, and then improve from their - it's certainly an approach I've taken with this podcast. I'm always thinking about how I can improve the audio quality, the structure of the program, how I speak - it goes on and on. The point is, if I didn't release a single episode until I thought I had these things perfect, there'd never be a Financial Autonomy podcast.
This train of thought aligns with the Lean Start Up methodology that I’ve mentioned in the past around Minimum Viable Product and the Build Measure Learn development cycle. Rather than procrastinate in not launching your idea because you’re worried it’s not perfect, think instead about how you can get your idea out into the world and test whether it works – then improve from there. Perfection is perhaps something to be achieved over time, or at least perhaps aspired to over time, rather than a hurdle that needs to be strided over before you can move forward.
And this can be applied quite broadly. We’re not just thinking about launching a new business idea here. Perhaps it’s doing your household budget, or planning for early retirement. Do the best you can, make a start, and then adjust and improve as you go.
Tip 4 – don’t let the aim of achieving perfection prevent you from making a start, rather, aim to adjust and perfect over time.
Ever write yourself up a to-do list either at the start of the day or the night before? Perhaps you’ve felt a bit frustrated that you didn’t achieve what you’d hope to achieve the day before and so you’ve given yourself a good taking to and today you’re going to kick some gaols.
As you achieve those things on your list, do you cross them out? I certainly do. It makes you feel good. You’re getting somewhere.
This is measuring progress and is a really helpful way to overcome procrastination and make progress on your goals.
Ticking off a list makes you feel good. It provides a positive feedback loop.
Tip 5 in overcoming your procrastination – measure progress.
Could your environment be holding you back? When you wre at school, studying for end of year exams, was it better to do it in a quiet place, like perhaps your bedroom, or in the family room with the TV going and people talking all around you?
When you’re looking to put off doing something – procrastinating - distractions are your enemy. Distractions are an enabler.
“I really need to get my paperwork together to lodge my tax return, but, hang on, what’s that coming up next on TV? The latest David Attenbourgh documentary of the life cycle of the African dung beetle?
Sounds like something important.
Perhaps I’ll just give that a watch and then I’ll do the tax stuff afterwards”.
If you spend a good portion of your day in front of a computer, this can be an enormous distraction source. Pop-ups that you’ve receive yet another spam email are not helpful – perhaps you could turn those notifications off. Is social media your Achilles heel. Maybe make a rule with yourself that you won’t check it between 9am and 5pm.
We’re all susceptible to distractions, so if this is a factor in your procrastination, think about how you could escape them.
Tip 6 – is your environment enabling your procrastination?
As I mentioned at the start, in preparing for this piece, I did quite a bit of research. One cause of procrastination that I’d never previously considered was the situation where you feel you need to ask someone else for their wisdom or help.
But you feel uncomfortable asking.
Perhaps you’re worried about interrupting them, and feeling like you’ll look stupid or weak in asking.
So you don’t ask, and that gives you the excuse to put it off – make no progress.
If this is your procrastination road block, then either you need to push past that concern and just ask, or, perhaps more helpfully, figure it out for yourself. If you get onto Youtube and type “how do I …”, chances are you’ll find 300 videos showing you step by step instructions on whatever it is that you need to know. If that doesn’t do it, then you could start Googling. Or perhaps there is someone else you could ask.
Tip 7 in overcoming procrastination is – figure it out for yourself.
If you’ve played a game on your smart phone recently, chances are that in the course of the game you will have been given some sort of badge, or token, or coin. These are valueless outside of the game, but game makers include them because we humans like rewards. We like recognition that we are making progress or we have achieved something.
So how about using that same approach to develop your procrastination beating strategy?
Recognise progress and reward yourself. So for instance, your motivating reward might be "if I can get 3 months in a row where I live within my budget and build up my savings account as planned, I'm going to have a weekend away down at the beach to celebrate”. Awesome.
Perhaps even you tell someone about the deal you’ve made with yourself, or maybe even invite them along – that would really up the ante. I’m pretty confident it would help you push past your procrastination barrier.
Tip 8 therefore is, recognise progress and reward yourself.
Finally, if procrastination is something that impacts you, do some self-reflection on what impact procrastination is having on your life, and the circumstances that often lead to procrastination. This insight might point to a strategy or combination of strategies that can enable you to move forward on your Financial Autonomy dream.
I think I’m more susceptible to procrastination in the afternoon than in the morning. I’m fresher in the morning, more energy, and therefore possess more of a willingness to push through.
So by having an awareness of this, when I know there’s something I need to work on that I think will be difficult, and where therefore there’s a chance I might be inclined to put it to the bottom of the pile for another day, I’ll make that the first thing I do in the morning. For me that’s a strategy that works.
I used to have a housemate who had a routine that whenever she got on the phone to have a chat to a friend, she’d light up a cigarette and sit on the back step. Like most smokers, she had a desire to quit smoking, but of course she procrastinated, in no small part no doubt due to the addictive qualities of nicotine. But when she did finally decide to quit, she realised that she needed to change her phone catch-up with friends routine.
Tip 9 – think about the circumstances that often lead to you procrastinating. What can you do to prevent those circumstances from disrupting forward progress?
Well, hopefully that gives you some good ideas to enable you to push through your procrastination barriers. As always I’ve put together a toolkit for this episode and in that I’ve included a simple list of the 9 tips shared here. I’ve also included the Dream Planner template, and listing of useful books that includes info on the Lean Start Up that I mentioned earlier, useful websites that includes a link to the Trello software that I also mentioned, and a piece on SMART goals. So be sure to download that. Our toolkits are free and hopefully really helpful in you taking impactful actions.
Here’s the 9 tips to help you overcome your procrastination demons:
- Break the goal down into smaller components and deal with one of them at a time
- Set realistic time frames to get things done
- Can you tackle the worst bit first?
- Don’t let the aim of achieving perfection prevent you from making a start. Rather, aim to adjust and perfect over time.
- Measure progress.
- Is your environment enabling your procrastination?
- Figure it out for yourself
- Recognise progress and reward yourself
- Think about the circumstances that often lead to you procrastinating. What can you do to prevent those circumstances from disrupting forward progress?
How good would life be if you were debt free? No mortgage payments, or car loans. No credit cards. Imagine the weight off your shoulders. The financial freedom you would gain. The financial autonomy. Of course many people, probably most people, achieve debt free status over their working life. This episode is not for those who have already achieved this milestone. This episode is for those of you on the journey. For whom debt obligations comprise a significant portion of your regular income. We’re going to look at some strategies you might be able to use to get to debt free status quicker. And that acceleration in clearing your debt brings you closer to whatever your financial autonomy goal is. For the purposes of this article, I’m going to assume you, the listener or reader has debt, and debt you’d love to see the back of. Given the title of this post, I’d imagine self-selection should deliver us this outcome. In the modern era, establishing yourself financially without taking on debt is near impossible. The only way I could imagine this happening is either if you were fortunate to be born into a wealthy family who bought you a home, or else you never owned anything, perhaps rented your whole life. Most people I meet will have a mortgage, or if not a mortgage, then at least a loan for a car, with the hope or intention of having a mortgage one day. Very often there are credit cards as well. Sometimes there are debts for whitegoods or a holiday. Debt is not evil. Borrowing to buy your house is likely to have been a smart investment. Over time the home’s value rises and you hopefully reduce your debt, so that you build up equity in your home. One day you will pay off the debt entirely and will have a roof over your head without having to find mortgage or rent payments each month – incredibly liberating. Debt to fund consumption on the other hand is not so wise, but who hasn’t done it? Financed the brand new car when a 2 or 3 year old vehicle would have been significantly cheaper and still done the job. Or come back from holidays with a credit card bill you couldn’t pole vault over. I’ve been there and I’m assuming you have too. So how can we get these debts under control and fast forward your journey towards financial autonomy? Let’s say you decided you needed to lose a few kilo’s. What’s the first thing you would do? Would you jump on the bathroom scales and weigh yourself? That would seem to be a sensible first step. You need to know your starting point to understand the task ahead – do you need to lose 5 kilograms or 20? You also want to measure progress. You want to know if the actions that you are taking, say increasing your exercise, is paying dividends. So in planning to get your debt under control the first step is to establish where you are now. I’ll put in the tool-kit for this episode a table you can fill in to help make sure you don’t miss anything. In putting this together, you’ll get an accurate picture of how much income you need to generate each month to cover your debt repayments, the different interest rates on each loan, and your total loan balance. It’s also helpful when putting together your list of debts, to establish whether they’re tax deductable or not. Later, we want to decide which debt to focus on clearing first. Typically you’d focus on the debt with the highest interest rate, but if it were tax deductable, that could alter the thinking, so it’s useful to know the tax status of each debt. If you have any debt that is tax deductable, you’ll probably already know about it, but to clarify, tax deductable debt arises when the thing you bought with the money you borrowed, generates taxable income. The most common example is an investment property. You borrow to buy the property, and the property then brings in rent. The rent is taxable, and the interest on the debt associated with buying the property is tax deductable. Tax deductable debt could just as easily be for buying shares, a business, and in some cases a vehicle where you use it to generate income. Something that comes up from time to time when ascertaining whether a debt is tax deductable, is which asset the debt is secured against, versus the thing you bought with the money from that debt. The debt on your home is not tax deductable – your home doesn’t generate any income. But what if you buy another home, and keep your old place as a rental. You will borrow against you previous home and use the money to buy the new home. Now people will often assume that given the debt is against the property that is now a rental, it would be tax deductable, but that is wrong. Tax deductibility has nothing to do with what asset is used as security. Tax deductibility is determined by how the money that you borrowed was used. In this case the money was used buy your new home, something that won’t generate any taxable income, and so the interest on that debt is not tax deductable. If you’ve got any uncertainty as to whether a debt is tax deductable or not, best to give your accountant a call to clarify. Anyhow, back to your list of debts and their details. You’ve now got your starting point. If you want, you could also write down a list of your assets and their values, and then subtract the total debt value from the total asset value to determine your Net Worth. For some people, tracking Net Worth can be an empowering way to reinforce the positive progression they are making towards financial independence. So which debt to focus on first? Well logic would dictate that you’d start with the most expensive debt. Let’s assume for the illustration that is a credit card debt. For the time being we’re going to leave the other debts as they are – just keep paying the repayments as you are. Our focus will be clearing this credit card. So the low hanging fruit is to pay more off this debt. A tax return, a bonus, pay rise or gift. Next, could this debt be refinanced at a lower interest rate? This is often termed debt consolidation. Now approach this with caution. Debt consolidation can certainly lower your debt costs. But some people simply use it as a way to take on more debt, so don’t head down this path unless you’re serious about getting your debt under control. The other potential trap with debt consolidation is the length of the new loan. Check out this example:
Loan amount for both is $20,000
Loan 1 is at an interest rate of 10%, with a repayment term of 3 years.
Loan 2 has a lower interest rate of 5%, and with a loan term of 10 years.
So which loan results in you paying the least interest?
Loan 1: $6,620 of interest paid by the time the loan is paid off in 3 years.
Loan 2: $12,577 of interest paid by the time the loan is paid off in 10 years.
So the key message here is consider debt consolidation, but be wary of solutions where the loan term is stretched out significantly. The banks or lenders aren’t your friend. They survive by making money from you, so if you’re considering debt consolidation, make sure you understand your numbers – get some outside help if you need it. With credit cards, something you could look for is deals where you can transfer your card from one provider to another where they offer an interest free period on balance transfers, often for 6 or 12 months. Now again, the credit card provider isn’t your friend. They’re offering this in the hope you don’t pay off this debt, and they’ll make lots of interest from you at the end of the interest free period. So be sure to really knuckle down on reducing the debt during the interest free period, and when that period ceases, look around to see if you could shift to another credit card provider with a similar deal. Okay, so you have your debts listed, and you’ve prioritised them from most expensive to least expensive. You’re keeping then all up to date, but focusing any extra repayments on the most expensive one first. Awesome. Progress too slow for you though? The steps so far have been fairly painless. But if you really want to make an impact on your debt, there’s one more thing you’d need to do. No lasting progress will be made unless you get your budget under control. The hard reality is that if your debt challenges relate to personal debts like credit cards and car loans, you're in debt because you’ve been spending more than you're earning. You need to recognise and acknowledge that, and then take steps to rectify the situation. What non-essential expenses can you cut? Subscriptions for magazines, pay TV, or software. Memberships to the gym or sporting club – would it be cheaper to just pay when you use the facilities? Clothing. Eating out. After housing, food is likely to be your next largest expense item. Reducing what you spend eating out is the most obvious way to reduce expenses - bring your lunch from home and just eat at home whenever you can. When buying your groceries, is there any branded products that could be replaced by no-name equivalents. Think of other ways to play it smart - you feel like some beef for dinner, but do you really need that Eye Fillet steak? Rump steak is about half the price and mince around a quarter. Whole chickens are much cheaper by the kilo than chicken pieces. Just watch a 3 minute video on Youtube on how to break down a chicken and you’re away. Think how you could save some extra dollars and then send that money towards your debt. The more you reduce your debt, the less interest you pay to the bank, which means even more of what you pay each month goes towards reducing the debt, and so your loan reduction strategy just snowballs until one day …. YOU’RE DEBT FREE!!!! I hope this content has been helpful in getting your debt under control. Be in touch if you need any assistance. As with all of the Financial Autonomy posts, there is a free toolkit for you to download to help you take action. In this one I’ve got the debt table that I mentioned earlier so you can get on top of things debt wise, our Budget Tool and also some useful books and web sites. Next episode we will be looking at Procrastination, so be sure to subscribe to the podcast to ensure you don’t miss out.
If you catch a snippet of the radio in the morning on your way to work, you’re likely to hear what happened to the Dow Jones overnight. If you read your news online or watch the news on TV it’s likely you’ll hear about the All Ords or maybe the ASX200. You might even come across acronyms like the NASDAQ and the FTSE. Probably, you know this is something to do with share markets. If you turn your mind to it a bit more, you probably know that the share market is where people buy and sell shares in companies like Telstra or BHP. Maybe you have in mind that the share market is risky and people lose their money sometimes. Well, if this is about the extent of your share market knowledge, you’re not alone, and this episode’s for you. I think it’s fair to assume that you have an interest in achieving financial independence. That is what we’re all about here. In working towards that goal, building wealth is likely to be an important feature. With wealth you can generate investment income with which you can then live on. Or perhaps you can use that wealth to buy a business, or invest in starting a new business if that’s where your Financial Autonomy goal points you. Or perhaps Financial Autonomy for you means remaining as an employee in a business with a team of people that you enjoy being around, but with the financial resources to resign if ever management changed or something else happened that meant you no longer enjoyed coming in each day. The goal of this audio blog is to provide you with choice in life, and that sort of goal is a common one I see with many of my clients. Being in a position to say no. It’s very empowering, and very liberating. One avenue towards financial independence is to build wealth via investment in the share market. I should make it clear here that what I’m talking about is investing, not trading. If you’ve listened to the common investment mistakes series you will recall I covered off on the dangers of trying to be a share market trader. In short, it’s an almost guaranteed way to get poorer. So we’re talking about investing. Buying shares that you intend to hold for at least a year, and profiting from both the dividend income, and growth in the value or price of the share over time. There are different ways you can gain exposure to the share market. Your super fund likely has at least some exposure right now. Later I’ll look at a couple of options for your non-superannuation money, but let’s start by explaining a few of the terms and elements you will come across when you take an interest in investing the share market. There a multiple markets We refer to the share market like it’s one thing, but that’s not true. All developed countries have their own share market, and some such as the US have multiple markets. There are 60 major stock markets around the world. There’s a good infographic on world share markets here. Technology is gradually bringing these markets together in a practical sense for investors, but for the moment at least, as an Australian, if you want to buy shares in Apple let’s say, it’s not easy. Why? Because Apple isn’t listed on the Australian share market, and it’s not straight forward for an Australian investor to invest in the US share market (where Apple is listed) directly. Our local market is called the ASX. The Australian Stock Exchange. Should be ASE really shouldn’t it, but presumably someone felt the X looked trendier. On the ASX you’ll find lots of companies you’re familiar with – the banks, the big miners, Woolworths, Telstra, etc. Of course there’s also plenty there you’ve never heard of too. About 2,000 companies all up I believe. In the United States the main market is the New York Stock Exchange. This is the largest share market in the world. On the NYSE you’ll find companies like Johnson & Johnson, Exxon Mobil, AT&T, VISA, and Pfizer. The second largest share market in the world is also in the US – the Nasdaq. This market tends to be more technology focused, so Apple, Amazon and Microsoft are listed here. There’s also the London Stock Exchange and on and on it goes – typically one per country. You’re buying a piece of a company The next thing to recognise is that when you buy a share, you are buying a small piece of a company. Let’s say you buy a share in JB HiFi. You are now a part owner of that business. If that business performs well, you will get a share of the profits. If it grows and becomes worth more, the value of what you own will also rise. Of course if things go badly – maybe Amazon enters Australia and JB HiFi loses a whole lot of customers, then the business might decline, and so the value of your little piece of the company will do the same. As a part owner you have the right to attend the company’s annual meeting and vote on issues like who should sit on the board of the company. I sometimes have clients tell me that they prefer property investment to share market investment because they can touch a property. It’s a physical thing. They don’t feel that with shares. Whilst I can understand that, if you think of the share you bought as a small piece of a company, then you can generally find something physical to attach to that. Walk into the JB HiFi store. You own a little bit of this. Blue chip If you start to take even a passing interest in share market investing you will soon come across the term “blue chip”. So what does it mean? A blue chip share is a large, high value company. The expression is usually meant to infer that it’s a company that is so big it will never go broke. In Australia, the big 4 banks, BHP, RIO, Telstra, Woolworths, Wesfarmers - these are all businesses that would typically be described as blue chip. There is no formal definition of a blue chip company, and you won’t see that as a descriptor on the ASX anywhere. Interestingly, the term blue chip apparently comes from poker, where the most valuable chip was traditionally blue. What to buy So let’s say you’ve decided to dip your toe in the water and buy some shares. How do you decide what to buy? Well of course you could come to us for advice, but perhaps initially you just want to have a small go yourself to gain some experience – a great idea. Some important numbers you might come across in your research are the dividend yield and the price earnings ratio. You’ll come across these numbers in the newspaper and on most share trading websites. So let’s take a quick look at what these mean. Dividend yield – this is the income rate of return from the share and can be compared against bank interest rates to make it meaningful. Resources companies such as BHP typically pay quite low dividend yields of around 2%, because they tend to pour a lot of their profits into expansion of the business, rather than paying out dividends. The banks on the other hand are more generous, usually paying 5-6%. And then there’s franking credits on top, but that’s for another day. Price Earnings ratio – Commonly abbreviated to the PE, this is a ratio of the price of the share, divided by the earnings per share. So if company XYZ was trading at $10, and in its last earnings notice it declared earnings of $1 per share, then the PE would be 10. That is, its price is 10 times its earnings. Most companies trade on PE’s of between 10 and 20 times. I find PE’s are most useful when comparing companies in the same industry, e.g. the banks, to see which banks the market is rating more highly than their peers. A high PE often reflects an expectation that earnings will grow strongly in the future. In contrast a PE under 10 typically suggests that the market anticipates earnings will decline in future. As an investor you can consider whether you believe the market assessment is correct. Importantly both these statistics relate to the share price on that day. If you already own the shares, and purchased them at some other price, it has no relevance, I guess unless you are thinking of selling. It is also important when considering both of these measures to remember that the earnings numbers they are working off are historical, backward looking – nothing is certain in the future. How else to get started with investing the share market So you’re keen to invest, but don’t really want to get into the nitty gritty of choosing and monitoring shares yourself. Or maybe you’ve done a bit of that already and decided it wasn’t for you. Fortunately for you, most investors who build wealth in the share market don’t personally do the research, buying and selling. As happens within your super fund, most people invest via a pooled fund where your money is combined with others and a process is used to spread your investment over many shares to reduce your risk. The most common way to achieve this is through either a Managed Fund or an Exchange Traded Fund (ETF). The difference between the two is that with a managed fund you apply to invest directly with the fund manager, quite possibly through an adviser. And when you want to take your money out, you similarly apply to the fund manager for a redemption. Exchange Traded Funds however are bought and sold on the stock exchange. This means you can buy and sell more quickly, but it also means you will need to pay some brokerage to your stock broker each time you do so. Another difference is that typically an Exchange Traded Fund is replicating a particular index, such as for instance the ASX200 – the largest 200 companies on the Australian Stock Exchange. The composition of the portfolio within an Exchange Traded Fund is therefore determined by some sort of mechanical, computerised type process. Whilst some Managed Funds have this investment style too, more often Managed Funds will have a team of people doing research, and making buy and sell decisions based on this research. Within the industry this is known as Active investing, whereas the approach used by most ETF’s is Passive investing. There is much debate within the investment industry as to whether Active or Passive approaches are best, and in my view each have their place. But an important thing for you to understand at this point is that ETF’s are usually cheaper than Managed Funds with respect to the management costs associated with running them, and this is because their process for selecting which shares to buy doesn’t require research and analysts. The ETF market is growing increasingly popular, leading to considerable new product development. Given ETF’s are usually cheaper than their managed fund counterparts, this development is likely to be a positive for share market investors.
Today’s episode is the 3rd and final look at the most common financial mistakes I come across when advising clients. Thanks for your comments and feedback on the previous 2 posts, it seems that many of you have battled with some of these issues yourselves, and there were a few other mistakes that you’ve managed to make that, whilst being proud of them is perhaps not quite right, they are certainly something good for a laugh well after the fact. I’ve got 5 more for you today, so let’s dive in and help you avoid the most common financial mistakes. In episode 9 we looked at Jenny’s story, where her husband suffered pancreatic cancer and was without any personal insurance. They had looked into obtaining personal insurance, and indeed Jenny had done so, but he took the “I’m tough as nails, it’ll never happen to me” attitude, to the detriment of their family. So the next common financial mistake I see is people not having appropriate personal insurance. There are 4 types of personal insurance, and I’ve got explanations for what they each do in the Toolkit for this episode, so be sure to go to the financial autonomy web site and download that. But in summary, the 4 types of insurance available are Life insurance, Total & Permanent Disability, Income Protection, and Trauma. Now if money was no object you would ideally have a package that includes all 4 of these. But for most people, there is a need to balance the ideal with the realities of their budget. The crucial thing though is to review your needs, and make a conscious decision as to what cover you will hold. Personal insurance is very customisable, so there is usually a solution available that can manage your risk, whilst also fitting within your budget. Too often, people get some default life cover within their super fund, and give no thought to whether it is actually fit for purpose. And they just never even look into Income Protection and Trauma cover. Personal insurance is applicable to us all during our working lives, but especially if you have a mortgage and children, it’s just so crucial that you sit down with someone and put together a package that makes sense for you and your family. Remember, as we saw in Jenny’s case, the implications of you not having insurance are far broader than just you. Another common financial mistake that I see is not having goals. In episode 10 – is your ladder against the wrong wall? , we looked at the popular SMART goals acronym as a process to flesh out your goals. Once again, I’ve included detail on this process in the free downloadable toolkit. Sir Edmund Hillary, the great Kiwi, didn’t get to the top of Everest with Tenzing Norgay by just going out for a stroll and happening to find himself at the summit. He set himself a goal, and then went about planning how he would achieve it. I really like this quote from him: You don't have to be a fantastic hero to do certain things -- to compete. You can be just an ordinary chap, sufficiently motivated to reach challenging goals. You don’t have to be a hero to reach your Financial Autonomy dreams either. You just need to set your goals, develop a plan that will get you there, and then get started. If you’re a home owner, you likely have equity in that home. This represents the portion of the asset that is yours, once the mortgage is cleared. So for instance if your home was worth $1 million, and you had a mortgage on it of $600,000, then your equity is $400,000. If the house was sold, and the debt paid off, you’d have $400,000 in your pocket in very simple terms. Over time, as you pay-off your mortgage, and as hopefully the value of your property rises, your level of equity rises. In a balance sheet sense, you are becoming wealthier. The end game is to eventually pay off your home loan entirely, and own your home outright. That way, later in life when you no longer have any wages coming in, you know you’ll always have a roof over your head, and you have an asset there that could potentially be sold, to get you into a retirement village or in some other way look after you in your final years. A common mistake I often come across is people viewing this equity as their personal piggy bank. Banks make this easy with things like re-draw and Lines of Credit, because there business is charging you interest on debt, and so they don’t really want you to pay your home off. This is where regular monitoring of progress towards achieving your goals is important. Is your debt going down from one year to the next? All too often I sit down with clients and we find that despite having made home loan repayments all year, their loan balance is about the same as it was when we last reviewed things 12 months ago. The culprit will usually be the family holiday or the new car. Now housing your savings in or against your mortgage may well be a very sensible strategy, but be really wary of taking back out not just what you’ve saved, but also the repayments that were intended to bring that debt down. Remember, by the end of your working life, and ideally much earlier, you need to own the roof over your head if you are to achieve financial independence and security. I think most Australians are aware that superannuation is important. But it’s also kind of boring. It’s easy therefore to pay it little attention, at least whilst in your 20’s and 30’s, and perhaps even into your 40’s. Hopefully by the time you get to your 50’s, retirement is close enough, and your superannuation balance large enough, that you’ve started to pay some interest. But ignoring your super in those early years is a mistake. Let’s talk about wonders of compounding for a moment. Let’s say you put $1,000 into an investment, and it earned 10%. At the end of the year, you’d have $1,100 – the original amount invested, plus the 10% interest you earned. Now if you left those earnings in the investment, the next year, instead of earning $100, it would earn $110, because not only have you earned 10% on your original $1,000 invested, but you also earned 10% on last years earnings. Go another year and you earn $121 and your balance is now $1,331. This is the principal of compounding in action – you are earning interest on the past interest that you were paid. For compounding to work, you need time. The longer your money is invested the greater impact compounding will have. To illustrate the impact, let’s say you wanted to have $1million when you retired, and that was 30 years away. You could figure 30 years is a long way away, I’ll worry about it closer to the time. Or, if you were able to get your hands on $132,000, and earn 7% a year over that 30 years, you could sip pina colda’s on the beach for the next 30 years because compounding will do your work for you. Now you might say, yeah, but where am I going to come up with $132,000. But if you’re figuring on retiring at age 65 say, then 30 years out is age 35, and you could very easily have that much in your super fund after 10-15 years of working and earning. The levers you can pull superannuation wise are how your money is invested. Investing conservatively might seem prudent, but it’s coming at a huge cost in what compounding can do for you. $10,000 invested and earning 5% over 10 years grows to $16,289. Had it earned 10% instead it would be almost $26,000. That’s a big difference. Fund costs are another lever you can pull. Is the insurance in their appropriate for your particular circumstances? Are the costs reasonable for what the fund is offering? The cheapest isn’t always the best, but it’s unlikely the most expensive is either. And then of course you can control any top-up contributions that you make. Your employer will put in the standard 9.5%, but could you put in a little more? Compounding is extraordinarily powerful, and it’s at its most potent for investments held for a long time. Your superannuation savings are therefore perfectly positioned to exploit this financial gift. And the final common financial mistake that I see people make is listening to the wrong people. Now I’ve left this one to last because, as someone who provides financial advice as a profession, I of course have a bias here – you should be listening to me clearly! But in all seriousness, the number of people I’ve come across over the years who go down a financial path because their uncle told them it was a winner, or someone on the radio said the world was coming to an end, would shock you. Just for a moment, let’s assume that the person giving you this advice does actually know what they’re talking about. You will have noticed that at the start of each episode we have a warning that the information we provide is general information only and you should seek advice that is specific to your circumstances. Now that’s there because legally it has to be, but it’s not just fluff, it’s a really, really important message. The uncle who tells you that property in woop woop is a really good buy may well be right in so far as he’s looking for an investment that provides a good income return. But perhaps that’s not what you want. Maybe what would be right for you is a negatively geared investment with strong capital growth. Perhaps you already have a lot of debt, and borrowing to buy another property would put you under significant strain. Maybe just paying off your mortgage or salary sacrificing to super would deliver a better outcome for you. Without understanding your complete financial position, these often well-meaning sages have the potential to steer you towards disaster. In 2008 when the share market halved during the GFC, there was no shortage of headline seekers happy to jump on the radio and profess that the world was broken and we’re staring into a bottomless chasm. This lead plenty of people to conclude that they had better change the way their superannuation savings were invested, moving out of shares and property, and across to cash and bonds. Now perhaps for some people who were quite close to retirement, this may have been prudent. But for people with plenty of years still to go, this was a terrible decision. Shares and listed property were cheap at the time, so buying in these sectors via your regular superannuation contributions was really smart and impactful on your balance. And whilst the value of your existing holdings went down, you weren’t selling so it didn’t matter. Your financial affairs can have such an enormous impact on your life. Get professional advice. And with web video calls so good now, you’re not restricted to only getting advice from whoever is local to you. I deal with clients all around Australia, and when we have a video call on Skype or Zoom, it’s like we’re in the same room. It’s the modern day equivalent of a home visit. So there you have it, the 12 most common financial mistakes that I see. Keep those comments coming – what mistakes have you made or come across? Don’t forget to download the free toolkit for this series of episodes – I’m keen to help you take action on the ideas that I share, and the toolkit is a really critical piece in delivering on that. As mentioned previously, I’ve put together something of a bumper toolkit, covering all 3 parts of this series on common financial mistakes. I have the 12 most common financial mistakes listed so you can tick them off as you’re confident you’ve worked through or around those. I’ve also included the Budget tool to help you get your cash flow under control, a piece on risk vs. reward, useful books, personal insurance options so you can cut through the jargon in this area, and a piece on SMART Goals. So there should be tonnes of useful info in there, so be sure to visit the financialautonomy.com.au website and grab your copy.
Welcome back. In the last episode we explored common investment mistakes people make. It’s not really essential that you listen to Part 1 before giving this one a listen, but if you haven’t listened to that one yet, perhaps make that the next episode you grab. Today we’re going to explore common cash flow mistakes that I see people make. I mentioned in the first episode that when I was first planning this post, I jotted down 12 ideas – financial mistakes I’d seen regularly over my 18 years as a financial planner. Last episode we covered the three that I grouped together as investment related – procrastination, being too conservative, and trying to be a share trader. In this episode I’m going to start with three more, that all have cash flow as a common theme. Hopefully you’ve listened to a few Financial Autonomy episodes by now, and if so you’ll know that a common pre-cursor to making progress on your Financial Autonomy goal is having a good handle on your household’s cash flow. How much comes in, and how much goes back out. In the Toolkit for the episode I’ll make sure that our Budget Tool is included. I know the “B” word strikes fear into many, which is why I typically focus on cash flow instead. The thing is, getting on top of your Cash Flow is much easier now than it used to be. That’s courtesy of internet banking. Our Budget Planner template has Expenditure first and income second, but if you want to get some quick progress, fill in the income figures as they’re the easiest to get. You want the after tax number here – how much actually goes into your bank. Now go back to the top and work through your expenses, referring to your bank statements in your internet banking to get the numbers. Focus on the bills first because they are easily identifiable. For things like your phone bill, they’re pretty stable month to month, so you should be able to just check a couple of months’ worth and then get a good estimate of what they will cost you over the year. Bills like Electricity and Gas can vary quite a bit between summer and winter, so you might need to go back and get the whole years figures for these ones. Once you’ve filled in the clearly defined expenses, then go back and perhaps focus in on 2 months’ worth of figures and tally up what you spend on food, clothes, and the like. Things that you will always spend money on, but for which it varies a bit, and drips out over the course of a month. I would print out the 2 months worth of bank statements and tick items off as I allocate them to a group such as food. Perhaps you could use a few different coloured highlighters – one for food, one for entertainment, etc. The end game is that once you’ve completed this exercise, everything you’ve spent money on in the past 2 months has been put into a category in your budget. So now you total up your expenses, compare that to your income, and hopefully you like the answer. If the answer is that you should be saving $x per year, reflect on whether that has been your actual experience over the past year. If not, why not? One key element of the exercise, probably the most important, is for you to see what you spend your money on, and whether that’s really bringing you the greatest happiness. Is the way you are currently running your finances bringing you closer to your Financial Autonomy goal? In know that money and finances can be a point of stress in some relationships too. Perhaps going through this exercise together might help you both have a deeper conversation about where you are currently going, and whether that is taking you to the destination you both want to arrive at. So not having an understanding of your cash flow is common financial mistake number 1 this episode. Very much related to this, common mistake number 2 is spending more than you earn. You don’t need the mental powers of Einstein to figure out that this can’t work, yet it is an easy trap to fall into. The most common ways I see this unfold is through credit cards, and the generosity of well-meaning but ill guided parents. Credit cards, and I guess general consumer debt like interest free periods on white-goods, is the most common way of spending more than you earn. If this is you, you’ll know it. So do the budget exercise mentioned earlier, understand why your expenses exceed your income, and devise a plan to do something about it. Perhaps you can come up with a way to increase income. Most likely there will need to be some strategy to reduce expenditure. As with the investment problem identified in part one of the post, the key is don’t procrastinate. Identify the problem and take steps to resolve. You may not come up with the perfect solution straight away, but make a start in changing things, and refine as you learn more. The less well recognised way that people fall into the habit of spending more that they earn is through the generosity of well-meaning parents. I’ve had retired clients over the years whose retirement savings have been drained by adult children constantly putting their hand out for financial help, or just where the parents say “oh well, poor Tina’s doing it a bit tough so we paid her credit card off for her”. These parents are well meaning, they love their kids. But by “helping” in this way, their children, who are adults, never get on top of things financially. They never get to the point of standing on their own two feet. I’ve dealt with one family where mum and dad provided the daughter with quite a bit of financial help in her 20’s, enabling her to drive a Mercedes and live a really high material standard of life. She met a lovely guy and they got married. Her expectations of what life should be like were really high though, and as a couple, that lifestyle just couldn’t be maintained. The husband felt like a failure because he couldn’t support his wife in the lifestyle she had become accustomed, and ultimately they separated. It was sad story because they are both lovely young people, but her parents, with the best intentions in the world, effectively sabotaged that marriage by not making their daughter at an early age understand the fundamental need to live within your means and spend less than you earn. Unrealistic expectation were baked in at an early age. In contrast to this, I saw an article recently that criticised the celebrity chef Gordon Ramsay for flying in first class, whilst his kids flew in economy. Now I have no idea if this story is true, or, if it is, what the back story was. But if his thinking was that he doesn’t want them to have an expectation that every time you fly in an aircraft, it will be in the first class section, then I think he’s doing his kids an enormous favour. If his kids enjoy success later in life and can buy their own ticket in first class, then good luck to them, they will have earnt it. But if dad just shells out and they think nothing of it, then surely, roll forward 5 or 10 years and you’ve got a train wreck of a life waiting to unfold. Continuing on with the cash flow type common financial mistakes that people make, feeling the need to keep up with the Jones is my third offering for you. Back in Episode 7 – How to retire early, I touched on the interesting findings from the authors of The Millionaire Next Door. You’ll recall the two authors studied households whose net-worth (ie. assets minus debts) exceeded one million US dollars. One really interesting finding was that millionaire households were disproportionately clustered in blue collar and middle class suburbs, and not in the higher income, white collar, more affluent suburbs that you would assume. Digging into why this was the case, the authors found that the higher income earners devoted more of their income to luxury items and status symbols, often funded with debt. These people tended to neglect savings and investment. This finding delivers the double whammy of linking the problem and the consequence. Feeling the need to keep up in a material sense with friends, neighbours, or whoever, results in you being less wealthy. And in the context of what we’re trying to achieve – your Financial Autonomy, your financial independence, gaining choices in life - less wealth directly pushes against you achieving your goals. Let’s finish off today’s episode with another financial mistake that I commonly see, and that is often really quite sad. That is the scenario where one member of a couple handles all the finances, and the other is totally ignorant of all things money in the household. I say it’s really sad, because I’ve seen this scenario unfold in a number of ways. One is where the person who controls the finances dies, and the surviving partner is completely ill-equipped to manage their affairs. Sometime they don’t even know what assets the couple owns. A variation on this is where a relationship ends in divorce. The person who took no interest in the finances (or perhaps wasn’t given an opportunity to be involved) is now rudderless. I can think of one instance where, post-divorce, the wife, who had previously just left everything to the husband, was utterly shocked when she did learn of the state of their finances and how money was being spent. On the flip side, I’ve had clients in total despair, because they are trying to manage the household finances, but their partner just whips out the credit card at a moment’s notice and buys something that they simply can’t afford. Sometimes the person in despair feels like a failure because they can’t support the lifestyle that their partner seems to feel is the norm. So if you’re in a relationship, I really encourage you to ensure that both of you have a working understanding of your finances. Sure, one of you might do more of the tracking – you’ve got to play to your strengths. But you need to be able to discuss things as a couple. Finances are a potential point of stress in any relationship. Openness is the best medicine. Well, I think that’s enough for this episode. That’s 4 more of my original 12 common financial mistakes that I see people make. I’ve got 5 left, so look out for part 3 in a fortnights time. A reminder too, don’t forget to download the free toolkit for this episode – I’m keen to help you take action on the ideas that I share, and the toolkit is a really critical piece in delivering on that. There’s no “fluff” here at Financial Autonomy. I’ve put together something of a bumper toolkit, covering all 3 parts of this series on common financial mistakes. I have the 12 most common financial mistakes listed so you tick them off as you’re confident you’ve worked through or around those. I’ve also included the Budget tool to help you get your cash flow under control, a piece on risk vs. reward, useful books, personal insurance options so you can cut through the jargon in this area, and a piece on SMART Goals. So hopefully tonnes of usefulness in there, so be sure to visit the financialautonomy.com.au website and grab your copy.
Enough people have hit their thumb with a hammer for you to know that it hurts quite a lot. You don’t need to do the experiment yourself. I’ve been helping people as a Financial Planner now for almost 18 years, and I’ve meet many, many wonderful people. Often people put off seeing a financial planner until they’re at some sort of cross roads – they’ve been made redundant, or retirement is rapidly looming, or they’ve separated from their partner. So prospective new clients often come in to see me with some baggage. Something that’s not working, or that they’ve put off dealing with, and that’s why they need our help. Of course over that time you see some common challenges that people face. Issues that repeat again and again. So today I’m going to share some of those with you, the product of my 18 years of helping people, so hopefully you can skip over these common financial mistakes, and reach your goals sooner. We’ve talked a lot so far in past episodes about strategies you can use to help get you to your goals and dreams. Getting a handle on your cash flow, the Survival and Capital strategy mix in moving to self employment, and things like side hustles. Equally helpful though in getting to whatever goal you’ve set, has to be avoiding financial mistakes that don’t need to be made. Now don’t get me wrong, there are some things we have a go at, and they don’t quite work out as planned. But we get really valuable learning from them. I think you can often learn a whole lot more from things that don’t work out as you’d expected, than when things do just fall into place. But what we’re talking about today are mistakes that have been made by people over and over again, and for which you can get the learning without having to repeat the exercise. As I said at the top, enough people have hit their thumb with a hammer for you to know that it hurts quite a lot without you needing to do the experiment yourself. When I started planning for this episode, I wrote down a simple dot point list of the common financial mistakes that I see, and I came up with 12. I’ll try to group them together a bit for ease of absorption. Let’s start with investing, because several of the most common financial mistakes fall into that broad category. Number one is Procrastination. Not starting. I appreciate this can be a broader life problem, but for now I just want to focus on procrastination in an investment context. Whatever your Financial Autonomy goals are, having some wealth behind you is likely to make it easier to succeed. The stronger your financial position, the more options you’re likely to have. Now building up some savings in a bank account is a really great start, and an essential foundation, but at some point those savings need to be put to work. The problem is we fear the unknown, and even more so when the unknown involves money that we’ve worked really hard to save. But at some point you need to invest. Buy some shares, or Exchange Traded Fund (ETF), or invest in a managed fund. It doesn’t need to be enormous amounts to start with, more important is the learning. An element of the initial discussions we have with new clients is to discuss their risk tolerance or risk profile. There is no exact science to this. We have a series of questions we often go through with clients, but sometimes we just have a discussion about their past experiences. The interesting thing is how people’s thoughts around risk vary depending on what they’ve experienced in the past. So for instance I spoke with a client recently who initially told me they were a fairly conservative investor. Now in a Financial Planning context, a text book conservative investor would have somewhere less than half of their investment portfolio in shares and property, and somewhere north of half the portfolio in low risk things like bonds and term deposits. So this guy tells me he’s a conservative investor, but we then get into how he has invested his super and it’s 95% in shares. So we have a discussion around that and he tells me that he just focuses on the dividends, he doesn’t worry much about the prices going up and down. So when he says conservative, he means he only invests in shares that pay nice steady dividends. To him, having a portfolio that is 95% in shares is conservative, whereas most people would consider that very aggressive. So why is he comfortable having such a large exposure to investments that fluctuate in value. Well it’s because he’s invested in shares for over 20 years. Has dabbled in things here and there. Some have worked out, and some haven’t. But over time he’s found what is comfortable for him, and what works for him. So when markets had a tough time through 2008, he didn’t love it, but he didn’t get particularly distressed, and importantly he didn’t sell anything. He could do that because he had experience investing, was familiar with the up and downs, and knew that his dividends wouldn’t change much, even if prices did. He’s a better investor now, because he has experience, and he has experience in investing because one day he made his first investment. He made a start. He got past procrastination. So common financial mistake number one is, avoid procrastination – make a start. Mistakes 2 and 3 are opposite sides of the same coin. Either investing too conservatively, or trying to be a share trader. Of the two, I’d say the share trader approach is the one with the potential for the most damage in the short term, whilst investing too conservatively is more of a slow burn. You don’t notice the damage initially, but 5 or 10 years out from retirement, you look at your super and realise it’s not going to get you to the lifestyle that you want. Let’s start with investing too conservatively. The mindset goes, I don’t want to lose any money. Therefore I can’t invest my money in risky things likes shares and property. I need to keep my money in term deposits, or the low risk options in my super fund. At the extreme end, maybe I keep it all in cash. Now whilst you think you’re protecting your capital from the potential for loss, in fact what you’re doing is baking in disappointment in the future. Some research done by annuity provider Challenger a few years back highlighted this really well. They focused on the risk that your savings will run out during your life time – ie. you run out of money. They used historical return data from 1900-2013, so it covered a wide variety of economic conditions. They then analysed portfolio’s with different compositions and considered the results based on drawing down at different rates. They found:
- If you planned on drawing down on your retirement savings at the rate of 5%pa. a level we would typically suggest, and you wanted your retirement savings to last 25 years (retire at 65, money lasts through to age 90), were you to invest in the “low risk” option of 100% bonds and cash (ie. no shares), there is only a 34% chance of success. That is, a 34% chance that your money will not run out during the 25 year period.
- If instead you were invested in a typical “Balanced” option, with 50% in growth assets such as shares, and 50% in defensive assets such as bonds and cash, the likelihood of success jumps to 69%.
- Still not certain enough? Move up to 75% growth assets and the success rate rises further to 90%. Interestingly though, move to 100% growth assets, and the success only increases 1% to 91%.
These figures illustrate really well that investing too conservatively, in the traditional sense of minimal exposure to shares and property, is actually the most risky option from the perspective of having your money last throughout your retirement. The same would apply to building assets to enable the achievement of your Financial Autonomy goals. In the downloadable Toolkit for this episode, I’ve include a piece on risk vs reward that I think you might find really useful, so be sure to visit the financialautonomy.com.au web site to grab that. But as mentioned, there is another side to this coin, and that is the day trader. If you bump into one of these people socially, run a mile. There are all sorts of books and bits of software that claim to teach you how to make your fortune trading shares, or sometimes things like foreign currencies or futures contracts. At the heart of this approach is a belief that you are smarter than the market as a whole (or can be taught some secret formula to make you smarter than the market), and so you can buy shares in the morning, sell then in the afternoon, and make money. Some people might hold their shares for multiple days, some even weeks. But the process is the same – they are not buying the share because they have a belief in the prospects for the company, but rather it’s just a trading item. What people who embark on this common financial mistake fail to appreciate is that every time they buy or sell, there is someone else on the other side of the transaction doing the opposite thing. So for you to win at this game, you need to know something that the person on the other side of the trade doesn’t know. And because every time you trade, you will have to pay some sort of transaction cost, usually brokerage but also the buy/sell spread, you need to be right a lot. By chance you’d hope to be right 50% of the time. To recover your transaction costs and make the whole enterprise financially sensible, you’d need to get that up to 60% as a minimum I would think. So who are the dummy’s on the other side of your trade? Well increasingly they are super-fast computers that identify opportunities to buy and sell in 100th’s of a second. Are you going to beat them consistently? If it’s not a computer on the other side of your trade, then the next most likely person on the other side will be a trader acting for a professional investor like a super fund. Here the fund manager has determined that the appropriate action is to buy or sell a particular stock, and then a professional trader is engaged to carry this out at the best possible price. Fancy beating that combination on a consistent basis? Amazingly, day traders think they can. When investing, get started, but don’t be too conservative, and don’t be duped into believing you can be a millionaire overnight by share trading. These are our first 3 common financial mistakes, and with that I think we’ll leave the investment bucket. In the 2nd part of How to avoid the most common financial mistakes, I’ll share with you another 4 common mistakes, focusing mainly cash flow mistakes people make. I’ve put together something of a bumper toolkit for this and the next 2 podcasts, covering all 3 parts of this series on common financial mistakes. I have the 12 most common financial mistakes listed so you can tick them off as you’re confident you’ve worked through or around them. I’ve also included the Budget tool to help you get your cash flow under control, a piece on risk vs. reward, useful books, personal insurance options so you can cut through the jargon in this area, and a piece on SMART Goals. So hopefully tonnes of usefulness in there. It’s the biggest toolkit I’ve ever produced. So be sure to visit the financialautonomy.com.au website and grab your copy. And finally, a quick note to let you know that from here on we’ll be getting new episodes out to you each fortnight. We’ve had an initial flurry since our launch – so many ideas I wanted to share with you, but I need to get a bit more disciplined and of course I don’t want to compromise on quality, so from here on, expect a new episode to drop into your podcast app every two weeks.
Having a job and a regular wage is comforting and secure, except if you lose that job. UK stats say that 45% of workers will be made redundant at least once in their working life. I’d expect the Australian numbers would be much the same. In that sense, being a full time employee is very binary. Very secure and reliable whilst you’re employed, but when you’re not, there’s nothing. If Financial Autonomy is about having choices in life, then how does that align with being fully reliant on an employer to provide you with the income that you need to keep all the balls in the air? Most of us do work for an employer, and that suits us very well, so how can we align the desire for financial independence, with the financial dependence associated with being a full time employee? I’ve called today’s episode The Security Illusion, because I think for many people, they overestimate the level of financial security provided by their employer. So what steps can you take to truly be financially secure? Well, that’s what we’ll be looking at today. Financial security. Who wouldn’t want that? I often talk about financial independence, using it fairly interchangeably with financial autonomy as I think the difference between the two is fairly minimal. Could financial security be another interchangeable term? To me, the difference is in the mindset. Someone whose goal is financial security is thinking about controlling the down side risk. The risk that things will go bad. And that’s no bad thing. The old “hope for the best, but plan for the worst” is certainly something we try to incorporate into our client’s financial plans. But can you really control poor management decisions made by your employer, or industry changes that render your area of expertise redundant? When I think about the goal of Financial Autonomy, I think of it as something more proactive. Unlike financial security, where the goal is to find somewhere safe, Financial Autonomy is about consciously building a situation where you have control, and where you’re not reliant on others. Financial security, in the form of full time employment alone, is I think an illusion. But that doesn’t mean that you can’t be a full time employee and achieve Financial Autonomy. Indeed that’s how most people would achieve their Financial Autonomy goal. So how can you transition from valuing your job for the illusion of financial security that it brings, to valuing it for the potential it provides you to achieve Financial Autonomy, a far more useful aspiration. Here’s a few ideas I’ve come up with. I’d welcome your feedback as to other options you can think of.
Broaden your skills – always learning To me the most obvious way to reduce the risk of being out of work for a sustained period is to have more strings to your bow. If your desirability to an employer is built around your skill with a particular software package for instance, then what happens when the industry moves on and a new software solution becomes the norm? This is an exercise in seeing the forest for the trees. You need to take a step back for your day to day activities and think about where your industry or profession is heading. Are you building the skills now that will be relevant in 5 or 10 years? Very often employers have budgets for staff development and training, so if you see an area where you think you should develop your skills, hit up the boss to support you. The other good thing about undertaking some learning is that it highlights to your management that you are someone with aspirations. You don’t plan on sitting in the current role forever. You want new challenges, and if they don’t find them for you, they run the risk of losing you to a competitor. It may be that you take that helicopter view of your industry or career path and find that the road ahead isn’t paved with gold. In fact what you need to do is plan for a shift altogether, to an area with better long term prospects. This is something we looked at in the last episode – Is Your Ladder Against the Wrong Wall? So check that one out if you haven’t already given it a listen.
The side hustle Another way you could improve your financial security is to be less reliant on that one employer. Is there a second gig you could be doing to earn a few extra dollars? I only came across the term side hustle in the past year, but I love it, and it’s certainly a viable way towards Financial Autonomy. Let’s say you have an office job Monday to Friday, but have always enjoyed photography. Perhaps you could develop a little business photographing weddings or children’s portraits after hours. That way, if ever you where to find yourself out of your regular work, you have some money coming in from the side gig, which you could potentially even ramp up some more with some spare time. A side hustle could be a good way to try out an idea you’ve had and see if you can find a market. If you get some traction it could even become your full time gig. I was listening to a pod cast this week where they interviewed the comedian Wil Anderson. He did 6 stand-up shows whilst working in a regular day job, before deciding to throw it in with the Herald Sun and devote himself full time to comedy. Creating an online course, app development, registering with Airtasker, building niche websites, an eBay store, pet sitting, freelancing on freelancer.com.au or fiverr.com , Uber driver – there’s just so many things you could potentially do on the side to reduce your dependence on a single employer. One good resource you might like to check out is the web site Side Hustle Nation, and their podcast The Side Hustle Show. There’s lots of good ideas and downloads there. Closer to home, Rock Star Empires would also be worth some of your time. The principal there, Troy Dean, speaks with great clarity and frankness. They’ve got a Facebook group that’s fairly active too.
Build wealth The stronger your financial position, the less reliant you are on your employer. If you’ve got debt up to your eye-balls, then a few weeks with no wages coming in and you’re in big trouble. But if instead you had little or no debt, and several thousand dollars in the bank, then the pressure’s off, at least for a while. One way you could frame this is financial resilience. How long could you support yourself and your family if you found yourself out of work? Hopefully your job gives you a sense of purpose and satisfaction. But even assuming that were so, I doubt you’d do it without getting paid. So the great thing about your job is that it throws off money. Now of course you need that money to live, but hopefully you can manage your budget so that you can also save. Your full time job then, provides you with the fuel to create financial independence – money. One path to escaping the insecurity of a full time job is to have a plan to build independent wealth, using the income your job throws off to do so. Now the strategy appropriate to achieve this differs for everyone, but the key is to have a plan. Pay down debts, build up assets, and in time you can put yourself in a financial position where if the boss stuffs up, the business declines, and you find yourself out of work, you can smile inwardly with the knowledge “you might be broke mate, but thanks to you, I’m in good shape, I’ll be fine, whatever happens”.
Become self employed I guess the ultimate way to escape the insecurity of full time employment is to not be employed, but instead run your own show. Now, as anyone who has ever run their own business will tell you, being self-employed is far from stress or risk free. Not everyone should run their own business. Most people who move from being an employee to being their own boss find they put in more hours, not less, and success is certainly not guaranteed. But having provided that important caveat, shifting to self-employment is certainly an option that you should weighed up. A successful business will have multiple clients, and perhaps multiple products or services, so your risk attached to any one party can be dramatically reduced. It could be that you can do a few different things, possibly even some as an employee. For instance if your background was in sales and marketing, perhaps you could consult to several different small to medium size businesses, whilst also having a regular 2 day per week job running the marketing arm of a small retail chain. If moving to self employment holds appeal to you, go back and listen to Episode 1 – how to be financially ready to start your own business. Perhaps true financial security comes from deriving your income from several sources, be they different clients, different things that you do, or investment assets that you own. One thing’s for sure though; whilst you can use your job to create financial security, without conscious effort and planning, your job won’t generously grant you that security. Indeed it may provide you with the false confidence to put you into an extremely insecure position. As always, we have a free toolkit to go with this episode so be sure to visit financialautonomy.com.au. In this episode’s toolkit we’ve got a few of the key messages from this post, plus our Budget Tool, Useful websites list – and I’ve included the links to a couple of sites I mentioned earlier, and also the Freelancing resource. I hope you’ve gotten some useful information out of today’s episode. Be in touch with any feedback. Important Information: This information is of a general nature only and has been prepared without taking into account your particular financial needs, circumstances and objectives. While every effort has been made to ensure the accuracy of the information, it is not guaranteed. You should obtain professional advice before acting on the information contained in this publication.
How long since you’ve taken a step back from your professional life and considered where it’s taking you? Is your current professional activity taking you to somewhere you want to be in 10 or 20 years? Is it leading you towards inner happiness? It’s easy with the pressures of mortgage repayments or rent, perhaps kids, and just the normal expenses of life, to push on, head down bum up. The problem is that can lead you to a destination when you are perhaps in your 40’s or 50’s and with plenty of working life ahead of you, of middle management restructures, possible redundancies, and industries changing. Or perhaps the outlook for your profession is good, but will it take you to your personal goals? How many people throw their whole life into their work, only to neglect their family and home life, and then one day find themselves divorced, or just distant from their kids and partner? So today we’re going to ask the question, “is your ladder against the wrong wall?”. So you’re climbing the corporate or professional ladder. There’s the normal politics and set-backs, but on balance, you’re progressing, you’re moving up. But have you paused and looked at what’s at the top of that ladder? Is it actually where you want to be in 10 or 20 years? And if you were at the top of that ladder, how’s the view? In reaching that pinnacle, are you living the life that you aspire to? The aim of today’s audio blog is to get you to take a step back and consider whether in fact you are on the right ladder. You’ve only got the one life. Let’s make sure you don’t look back in your old age and regret how you used it. The first step in determining whether your work life is taking you in the right direction is to develop your goals, and for this exercise, it’s the medium, and especially the long term goals that count. Where do you see yourself at 50, 60, or 70? Will you still be living in the same city? The same country even? Do you hope to have family around you, perhaps even later in life some grandkids? Or would you anticipate a life interacting within your particular communities, be they professional, cultural, or geographic? Setting out some long term goals is such an important foundation stone, not just in a financial planning context, but in a broader life planning context. A goal that my wife and I set several years ago is that once our youngest child completes secondary school, we’d like to be able to live in a foreign city for 2-3 months each year. We don’t want to be tourists. We want to continue working, just remotely, and experience what it’s like to really live in the city – to read the local news, to develop in your head a bit of a mental map of the area, to hopefully get to know a few locals, and just take in the little differences. Now it’s still 8 years away, but when I’m thinking about how I grow my business, or even if I grow my business, I’m in part thinking about it with a side thought as to “is this going to help me be able to work remotely for 2-3 months a year one day?” Similarly my wife works in tourism, and she determined that as a sector, it was where she wanted to be. But the employer that she had worked for was not where she wanted to remain. So in thinking through her next step, we again discussed, “well, how is whatever you do next going to help in us achieving our goal of being able to work remotely for 2-3 months a year?”. It was a factor in deciding that a good solution would be for her to buy a business in the tourism sector that she can develop, and build it over time so that working from the other side of the world for a few months each year would be possible. In developing your goals, a common framework to use is called SMART goals. This acronym stands for: Specific Measurable Achievable Realistic Time bound Regular listeners will know that with each Financial Autonomy audio blog there is a downloadable toolkit to help you in implementing the ideas in each episode. In the Toolkit for this episode I have a template for you to flesh out your SMART goals. We’ll also have in there our Dream Planner template, which helps you make progress on achieving the goals that you’ve set. Let’s take a quick look at how you might use the SMART goals framework to flesh out one of your goals. What if you had a goal that you wanted to own a house near the beach one day. It’s something that perhaps you would retire to later in life, but you’d like it to be a holiday house until then, just somewhere you and your family can escape to. So the first step is Specific. Where do you want to have the beach house? How many rooms would it need to have? Your goal might then become, I want to own a house near the beach, in the Inverloch region, that has at least 4 bedrooms and two bathrooms. The next step is Measurable. Do a little bit of internet research and determine what it’s likely to cost. Let’s say you determine that a suitable property is likely to cost around $400,000. On to Achievable and Realistic. Given your current financial position, and income, is there a genuine likelihood that you can get to this goal? You may not know the exact path, but you should have a sense of whether it’s likely to be possible. Then finally Time bound. So that might be, “by the time I’m 50”. So your original goal was to own a house near the beach one day. But your goal, re-expressed as a SMART goal becomes “By the time I’m 50, I want to own a house near the beach in the Inverloch region, which has at least 4 bedrooms and 2 bathrooms, and expect to need to spend around $400,000.” Your goal has gone from a one-day, maybe, proposition, to something that is quantified and really specific. With this nailed down, you can now work on a plan to get you there, whereas before, who would know if you were making progress? There’s a really good chance that with the original goal, you’d never get there, because there would always be other things that popped up and kept your goal, your dream, out of reach. Okay, so you’ve determined your goals. If you continue climbing the current corporate or professional ladder, will it get you there? If the answer is yes, fantastic, continue on as you are. You’ve now got some good quality goals, and a plan to get you there. But if the answer is no, it’s time to consider the alternatives. If you’re happy working in the industry that you’re in, but your current career trajectory isn’t going to see you achieve your personal goals, then you could look at how you can accelerate your career progression, or perhaps move sideways into a sector with more room to grow. Would some extra qualifications help? A Masters or an MBA for instance? It would certainly demonstrate to your employer that you’re keen to develop your career, and that you hold ambitions to grow and progress. Maybe it’s time to look around at what other employers are offering. Sometimes it’s possible to do a bit of leapfrogging on the corporate ladder by jumping from one employer to the next to broaden your knowledge and experience. Or maybe the industry that you’re in just won’t get you to where you want to go. What re-training do you need to make the transition? I went to Uni at night as a part-time student. One of my fellow students was an Engineer in the Oil & Gas sector but had determined that he had got as far as he was likely to go in that sector, and wanted to move across to finance. He’s now an analyst with a fund manager, looking at the resources sector. His prior Oil and Gas background gives him fantastic insight, and he’s been very very successful. So don’t think that changing industries midway through your working life necessarily means starting all over again. It’s very likely that the skills you’ve already learnt will be of use in your new career path, and those skills may actually make you a rare and therefore highly valuable commodity! What about a move out of town? In episode 6 we looked at Nish’s story, where he moved from inner Melbourne to a seaside town about an hour and half away. In the process he and his wife dramatically reduced the size of their mortgage, providing far more options around what they needed to do employment wise. If you haven’t already listened to this episode I encourage you to go back and do so. Perhaps you could start a business, or buy an existing one. Higher risk, but with higher risk comes the potential for higher reward. As with the example I gave earlier of a goal that my wife and I have to be able to live and work overseas for 2-3 months a year in the future, having the flexibility and control that self-employment provides is really important in enabling us to achieve that goal. So over to you now. Take some time over the coming days to think about what your goals are. If you have a partner, ideally discuss it together. It’s so easy to just float along with the current. Determine what you want out of life, and start taking deliberate steps to get you there. Make sure your ladder is against the right wall! Important Information: This information is of a general nature only and has been prepared without taking into account your particular financial needs, circumstances and objectives. While every effort has been made to ensure the accuracy of the information, it is not guaranteed. You should obtain professional advice before acting on the information contained in this publication.
When thinking about financial autonomy we are typically talking about medium to long term goals, and then developing strategies to get to those goals. The transition then is a planned one. What if your transition was thrust upon you? I met someone recently who faced this challenge, and with her permission, I thought it was worth sharing with you a little of her story and the learnings that we can all take. Financial autonomy is about standing on your own two feet and not being reliant on others. Having choice. Part of that should be having the capacity to withstand adversity. Having the financial resilience to not lose your house or be forced to ask family for hand-outs. Lets take a look at Jenny’s story, I think there are some great lessons we could all benefit from. I met Jenny at a social function a few weeks back. Through the course of our conversation I mentioned that I had made a podcast called “Financial Autonomy” and told her a little bit about what that was all about. She said, “That sounds exactly like the help that I could use,” and so started to tell me a little bit of her story. I had never come across something like it before and thought it would be a fantastic thing to share to my listeners and those in the community. So I have subsequently had a phone call with Jenny and got a little bit more detail and that’s what we will be sharing today. So I guess Jenny’s story started when her and her husband were in the process of separating and they were selling their house. The day that the sale went unconditional Tim, her ex husband, was diagnosed with pancreatic cancer. It happened really quickly, he was just feeling unwell and within a few weeks he had turned yellow. With this diagnoses, pretty soon after he went in to have some surgery. The surgery wasn’t particularly successful. The surgeons couldn’t get to where they needed to, and so the advice was that he had 6-12 months to live. 12 months if he goes on chemo, but going through chemo is pretty unpleasant, so there is a quality of life consideration. But he came back two weeks after the surgery for a checkup, and they found that the cancer had actually shrunk. The surgeons couldn’t really understand why, but I guess you just take it if you can get it. So that was some good news. Now in the process, Jenny and the kids decided to move back in with Tim to help care for him. He migrated from England and he didn’t have any family here so that was obviously a fantastic thing that she was able to do for him. So Jenny moved back in with Tim into a rental property, the house has been sold, and they each got their half of the money. Now that was in some ways fortunate because Tim had no insurance. Ironically Jenny did have insurance, and this had been a cause of a bit of tension before they were separated. I guess Tim, probably like a lot of males, assumed it would never happen to him, and didn’t want to spend the money on having insurance. Also Jenny was telling me it was a bit of a factor that he was self employed so things like Income Protection weren’t easy because the insurer required financials, and so it wasn’t an easy straight forward solution as if say he was a regular employee. Although he didn’t have any insurance, Tim at least had his equity from the house that had been sold. This was very fortunate, because if he didn’t have that money to support himself, all he would have had would have been Centerlink and that would have been a pretty grim outcome, resulting in most likely sharing a house with a stranger. Could you imagine going through chemo in that kind of scenario, just horrible. So any way, he was very lucky to have Jenny there to move back in with him to support him and they battled away. They went through the chemo and all the things you have to do. Fantastically, now about 6-12 months since treatment (I’m not sure of exactly how long) he seems to have made a recovery. He needs to go back in for some chemo for about 5 weeks coming up. Generally the prognosis on pancreatic cancer isn’t good, but in Tim’s case it looks like perhaps he has beaten it and the signs are pretty positive. Another consequence of going through this together is that Jenny and Tim have gotten back together as a couple, which is lovely too, especially for their kids. It’s funny how sometimes the dark times can produce some good things as well. But something that Jenny was telling me that is something that really stresses the both of them out is that, Jenny has been a property owner since her early twenties, and Tim similar. And here they are mid to late 40s and they don’t own a house. Usually the thing that is keeping people out of the property market is that they can’t save the deposit, but that’s not the case here. Tim didn’t go through all the money he got back from the sale of their previous home and of course Jenny has her share of it as well. So their issue is not the deposit, it is demonstrating that they can service a mortgage. Hopefully, Tim will get back to work after this next round of chemo. Probably not doing the same type of physical work that he was doing before, but as soon as he is well enough he will get back to work. The kids are at school now, so Jenny could get back to work as well. So the challenge that they now face is that they are shut out of the property market as of now. They have some money for a deposit but they can’t secure a loan. So she is paying rent every month and feeling pretty negative about it. Hopefully we can work with them in the future with regards to a financial autonomy strategy, to help resolve that challenge. But it’s just interesting that you would have never foreseen that (being shut out of the housing market) as a likely outcome of a serious illness. But that’s just how these things can sometimes unfold. So that’s Jenny and Tim’s story, and like I said I thought it was just such a unique story. Certainly something that I had never come across before. And so I thought that it might be of interests to others and give the opportunity for learning. So what can we all take from their experience? I guess the first thing is that, insurance is important. As a financial planner, I arrange insurance for people but I must say I am always mindful of not wanting to come across as the pushy insurance salesman, so I probably don’t push the insurance hard enough. If it hadn’t been for this particular story coming up, I certainly didn’t have it on my radar to do a podcast that had any mention of insurance. But when you hear a story like this it really makes you stop and think how different would it have been if Tim had some trauma insurance? Which is actually what Jenny took out. It could have just transformed their circumstance. We’ll go through shortly some of the main insurance options because they tend not to be widely known. But probably the starting point, as a male because I think its more of a male thing, is to have an awareness that you are not bullet proof, and things happen. And be aware that when things do happen, it’s not just you that suffers but often it can be your whole family. I was talking to someone who has a family member with MS. She gets some Centerlink benefits but the only way that she is able to make ends meet is that her parents help her out. She’s in her 50’s and I gather her parents must be retired so it must be a financial hit to them, and I would assume that as a 50 year old, she doesn’t like having to ask her parents for money. But this is the kind of circumstance that we can find ourselves in. While it is amazing that here in Australia we have Centerlink type support, its often just not enough. I guess when you are thinking about insurance and not wanting to pay for it, just think a bit more broadly and that it’s not just about you. So what are your personal insurance options? There are four main options: Life insurance, which is pretty basic, just pays a lump sum if you die. Often attached to that is one called Total and Permanent Disability (TPD), in order to qualify for this you need to be totally and permanently disabled. Fortunately this doesn’t occur too often, but the most common scenario for payout here is a stroke. You will often find through your superannuation that you will have some Life and TPD insurance cover. You need to give some thought to whether it’s the right amount of cover. The next one is, Income Protection (salary continuance.) This is replacing your income if you are unable to work due to illness or injury (not unemployment insurance.) The good thing about Income protection insurance if you have it outside of super, is that the premiums are tax deductible, so that helps. It’s also very customisable. There is always a waiting period, so this is the amount of time you have to look after yourself, before you start getting a benefit. You might have a bit of sick leave or annual leave. Usually you can get by for a little while. The default waiting period will be a month typically, though if it’s held in a super fund the default could be 90 days waiting period. During this period you need to look after yourself, and then if you are still unable to work after the waiting period has expired, you will start getting insurance benefits. There is quite a number of options on how you want to structure your income protection and it’s certainly worth getting a bit of advice. For our Financial Autonomy clients we can certainly work that through with you. Ordinarily income protection would help you all the way through to age 65 if you needed it. So the typical scenario would be someone who suffered a broken ankle and they can’t work for 6 months or something like that. But if if was something more serious and you couldn’t return to work ever, your Income Protection insurance would pay you a monthly benefit every month all the way through to age 65. So if you think of insurance as a financial safety net, then that income protection really achieves that, knowing that if anything did happen you would still be earning an income through until you were 65. Then the fourth type of insurance is, Trauma Insurance. With this one, it is outside super, they will have a list of conditions such as; heart attack, malignant cancer, stroke, multiple sclerosis, etc. If you suffer any one of these conditions, and you have Trauma insurance, you will receive a lump sum payout. You might apply for instance for $100,000 of trauma cover, and if you are later diagnosed with one of those conditions, you give the insurer a report from a specialist and one from your normal doctor, and within a few weeks typically, you will have your cheque for $100,000. And speaking to Jenny, that’s the one that actually she wished Tim had had. She said income protection was difficult because of the self employment and the fact it was hard to prove income. She said her trauma cover was $75,000 and if Tim would have had that as well then that would have made things so much more comfortable. They wouldn’t have had to use the equity from their house sale, and it would have put them in such a stronger position. Having dealt with quite a few claims for people, I can tell you that Trauma is great because it is just so black and white. So we have Life Insurance and TPD, often though not always, through your super. Outside super you have Income Protection, which is tax deductible and Trauma cover which is just a lump sum for significant events. So that is it for today, I hope you found it valuable. Like I said Jenny and Tim’s story is an unusual one that we can all learn from. As always there is a Financial Autonomy toolkit covering the key elements of this post, so be sure to download it here: Important Information: This information is of a general nature only and has been prepared without taking into account your particular financial needs, circumstances and objectives. While every effort has been made to ensure the accuracy of the information, it is not guaranteed. You should obtain professional advice before acting on the information contained in this publication.
Financial Autonomy is about managing and planning for major transitions in life. A transition that many of us face unfortunately is divorce. I understand researchers have found that going through a divorce can be one of the most stressful things you can experience in life. As a financial planner, I often work with clients who have been through or are going through a divorce, and assist them in the planning necessary to get them back on their feet financially. In this post I’ve broken down the things you need to be thinking about into 4 key strategy elements. If you can work through these, you’ll be in a position to get your financial life back on track, and with this stress removed, hopefully your life back on track too. Divorce is certainly no fun. But it does offer the opportunity to hit the reset button in your life. With some good financial planning, this next chapter in your life can be the best yet. Fortunately the days of couples sticking together in relationships that no longer work are behind us. Divorce provides the opportunity for a fresh start. But of course beyond the very significant emotional pain of getting through a divorce, the financial consequences are also very significant. There may be many reasons for getting divorced, but improving your financial position is rarely one of them. Whereas you and your partner once shared a roof over your head, there is now a need for separate housing. Often children are involved, so considerations of being local and having enough room for the kids can be a big challenge. It’s not an option to move half an hour or more away to find more affordable housing when you don’t want to turn the kids’ lives upside down. You typically also go from two incomes and sharing expenses as a couple, down to one income with little change in expenses, so budgeting becomes a real challenge. Often one of you will keep the family home so as to minimise disruption for the kids, but this may mean borrowing a significant amount so that your partner is able to move on with their life and get a new house of their own. How will you service this new debt? You may be required to pay child support, which, on top of new housing costs can be a real strain. And thinking longer term, retirement plans are often significantly disrupted. Often one member of the couple took time out of the paid workforce to help raise the children. This means their superannuation balance is typically considerably less than their former spouse who worked through. This difference is allowed for in your financial settlement, but the result is that you are both now facing a less generous retirement outlook than was once the case. So divorce has big financial impacts. But as I mentioned at the start, divorce also provides an opportunity for a fresh start. It provides you with an opportunity to steer your life in the direction that you want to head, possibly without the compromises that you needed to make when you were in your former relationship. You can set goals and work hard towards them without the potential for your former partner to decide they need a new car, or some other distraction. Financial Autonomy is about giving you choices, and managing key transitions in your life. Divorce is quite clearly a significant transition, and also an opportunity to gain choice. So let’s look at a few strategies that might help you get back on your feet. 1. Budgeting The starting point must be gaining clarity around how much you have coming in and how much you have going out. Following the divorce your household arrangements have changed, and possibly there is child support obligations and spousal maintenance to meet. Or perhaps in reverse, you have these support payments coming in and need to ensure they are used wisely and appropriately. You can create your budget in a spreadsheet. We also have a sample budget template in the toolkit for this post. There are also budgeting apps available. Gain a clear understanding of how much you have coming in and how much you have going out. Allow for the fact that bills are lumpy, and large expenses such as car servicing and council rates come up. I suggest having a separate bills account with your bank. If you determine that over the year your bills, including things like getting the car serviced, will be say $20,000, divide that by 26 (assuming you get paid fortnightly), and then arrange that amount, $769 in this instance, to be automatically transferred from the account that gets your income, across to your bills account each pay day. Ideally you would kick your bills account off with a few thousand dollars to allow for the fact that a big bill could come up 3 weeks after you started. You might even wish to put your mortgage or rent payments in here too. With this set-up, you know that all the bare necessities are covered, and what is left in your account is what you have to live off. You can start to move forward with confidence. 2. A roof over your head In Australia there is no tax on gains in the value of your home (primary residence). Also, given our growing population, historically the value of houses has risen over the medium to long term. For both these reasons, for most people, becoming a home owner as soon as possible will be an important element of recovering financially from a divorce. You may need to start smaller or less comfortable than what you once owned, but getting back into home ownership is likely to be a very important step. I recognise in this step that post-divorce there is usually a period where you are in limbo awaiting finalisation of the financial settlement. That can’t be avoided and buying a home will need to wait until this is concluded. Once again having a good understanding of your budget is crucial so you can be clear on what you can afford to pay in loan repayments. Run your numbers allowing for interest rates to increase by 2-3%. Ideally budget on making repayments of a little more than the banks minimum so that you get ahead on your loan and thus create a bit of a buffer for the future. If you simply can’t make the numbers stack up to buy a home, and it looks like that won’t be a reality in the medium term, consider increasing your contributions to superannuation instead. That way you’re still building your personal balance sheet and long term wealth, whilst also providing for some additional income in retirement that could be used to cover rent. Just keep in mind that the money you put into super is “preserved”. That means you can’t access it until you retire. 3. Review your insurances There are two elements here. The low hanging fruit is updating the beneficiaries on any policies to ensure any payout would be directed where you would want it to go post-divorce. The larger item is thinking through how you will establish a financial safety net to ensure you are totally self-reliant. Things like Income Protection and Trauma cover may become far more important than perhaps they were when you were part of a couple. Seek specialist advice here to get a customised package that fits your needs and budget. 4. Retirement planning I typically see two scenario’s after the divorce. One member of the couple keeps the house, most often the wife, and then has very little in superannuation savings. Or the person gives up the house, but retains their far larger superannuation balance – most often the husband. Whichever side you fall on, there are quite clearly long term retirement planning issues. If you have kept the house but now have minimal super, you need to plan for how you will support yourself in your later years. Perhaps downsizing the home will be possible (it’s certainly very tax effective). At some point though, increased contributions into super will be required, and the sooner this is affordable the better, due to the benefits of compounding. If you’re the partner who gave up the family home as part of the settlement, you may have a reasonable superannuation balance, but now you need to get a roof over your head. Mortgage repayments or rent will limit how much extra you can contribute to super. Compulsory employer contributions are not likely to be fully adequate to provide the quality of retirement that you would hope for. In whichever camp you are in, you need to develop a retirement plan, and the sooner you get onto it the better. Some other things to think about are whether your existing superannuation and wealth creation structures continue to make sense. For instance is an SMSF still a cost effective and appropriate vehicle for you? Do the numbers still work on that negatively geared property? Also, as with your insurance, check the beneficiary details on your super fund to ensure these are as you would want them to be. A new Will may also be relevant and should be discussed with your solicitor. Hopefully these 4 items get you thinking about bouncing back financially from divorce. It’s a tough time but many before you have done it, and you can succeed too. Finally, don’t procrastinate. The sooner you get your finances in order, the sooner you will start to move forward with your life. Need help in planning for your life post-divorce? Visit the “Work with me” page. Important Information: This information is of a general nature only and has been prepared without taking into account your particular financial needs, circumstances and objectives. While every effort has been made to ensure the accuracy of the information, it is not guaranteed. You should obtain professional advice before acting on the information contained in this publication.
Many people that I speak to seek freedom from the need to clock on and clock off. To not be answerable to a boss. To not having to devote time and energy to things that they’re not passionate about, just for the pay. The dream therefore becomes to retire early, and the sooner the better. In Australia superannuation is the primary vehicle that we use to save for retirement, and access to superannuation is available from age 60. So, when we’re talking about early retirement, we’re referring to retiring earlier than age 60. But what does being retired before the age of 60 actually mean? Does that mean sitting at home all day looking at the TV? I certainly hope not. Of the people I talk to with the ambition to retire early, I believe their goal is to have choice and freedom. To be able to say no to things they don’t want to do in a work sense. Early retirement links very strongly with financial independence, and that is where we will be focusing the attention of today’s podcast. So your dream of early retirement might be leaving the normal full time paid work force at age 40 and working as a fishing guide 6 months of the year in Northern Australia. Perhaps it’s leaving the paid workforce to help your daughter care for your grandkids. Or you want to become an independent film maker. The point is, early retirement isn’t about retiring from life, rather it’s escaping the captivity of the workforce and spending your time as you wish to. It’s recognising that we don’t have a limitless life span, and so the sooner we can pursue the things that make us happy, the better. If you are to retire early, you need to develop a plan to support yourself. I’ve come up with 5 things you could do to gain the financial independence that you need. They are:
- Understand your livings costs.
- Save
- Invest
- Minimise/avoid debt
- Downsize/tree change
Let’s take a look at each in a bit of detail:
- Understand your livings costs.
Is all of your spending really necessary? You need a budget and a cash flow management plan. For you to be in a position to quit your job, you need to know how much money you require to live. Is it $30,000 per year or $80,000 per year? Here’s some overly simplistic maths for you, just to illustrate: If you wanted to build up a portfolio of investments that would generate $30,000 per year for you to live off, rising with inflation, and with a high level of confidence that it won’t run out in your life time, you would need investments worth approximately $750,000. If, instead of $30,000, you needed $40,000 per year, that would rise to $1million. So to have just an extra $10,000 per year, you need to save an extra $250,000. (Note that I haven’t allowed for tax here, this is just a really simple illustration). So to flip that, if you could reduce your living expenses by $10,000 per year, then the amount you need to save to be financially independent and retire early is reduced by $250,000. How much sooner would that mean you could escape your current employment captivity? You may have heard of the book The Millionaire Next Door. It’s quite US focused, but it has some interesting insights none the less. The two authors studied households whose net-worth (ie. assets minus debts) exceeded one million US dollars. One really interesting finding was that millionaire households were disproportionately clustered in blue collar and middle class suburbs, and not in the higher income, white collar, more affluent suburbs that you would assume. Digging into why this was the case, the authors found that the higher income earners devoted more of their income to luxury items and status symbols, often funded with debt. These people tended to neglect savings and investment. In order to retire early you are going to need to build some wealth. It may not need to be millions, that depends on your goals, but owning a roof over your head is probably a minimum starting point. The authors of the The Millionaire Next Door to me missed the point about the purpose of money, which in my mind is to give you freedom and happiness. I’ve certainly met people who never spend a cent, and as a result would meet the criteria of having considerable net wealth. But they don’t seem to me to have lived happy lives. The beneficiaries of their estate are likely to be the happy ones! So I want to be quite clear that I don’t see the building up of a large pool of wealth as being the marker of a successful life. That may happen, and it’s no bad thing, but money is a tool which allows you to do the things that make you happy. So, with that caveat established, it is undeniable that if your goal is to retire early, you will need to build some wealth. And the findings of these authors does highlight the difference between those who do successfully build wealth and those that don’t. Very interestingly, having a high income is not a pre-requisite to building wealth and becoming financially independent. The lesson from TMND would seem to be, don’t lease the expensive car, don’t buy the $1,000 hand bag or the $300 pair of jeans. Avoid the status symbols and the debts often linked to them. A fulfilling life means different things to different people, but if you want to be financially independent, then feeling the need to keep up with the Jones is going to need to be jettisoned. 2 Save It’s one of the simplest financial rules around yet one so many of us struggle with it – you must, must, must, spend less than you earn. Know how much you have coming in, after tax. Check that against your expenses as identified in your budget. What is the surplus? Now put this to work. This is cash flow management. Savings could involve extra payments on your home loan, regularly investing in a managed fund, or building up cash in a bank account and then buying some shares whenever it gets to a certain sum. Strategies differ, but if you are to become financially independent, you need to save, and that means you need to spend less than you earn. Many people put off doing a budget because it seems too daunting, or they worry that then working to a budget will impinge too much on their life. In truth, you could sit in front of your computer one night for an hour max, glass of wine, beer, or chai latte in hand as is your preference, and between your online bank statements, and the budgeting tool we have provided, you could have a budget done. Even if you go no further than that, the insight you will gain as to where your money is going will be valuable. Hopefully though you do take things a bit further and think about whether the way you are using your money is really as you want it. Could you be happier if in fact you made some changes? Perhaps there is some spending that you could cut down on, which would enable you to save, so that you can start to see some real progress in achieving your goals. 3 Invest First you save, but then what to do with those savings? Sure you could leave it in the bank, but with minimal interest, and tax on that interest too, you’re going to have to do a lot of heavy lifting to get yourself to the point of financial independence and early retirement. Typically you would look to invest in assets that will grow in value over time, which usually means shares or property. There are all sorts of considerations here around investment time frame, the use of debt, and diversification, and so it is really important that you seek out professional impartial advice. But a key concept to grasp is that risk and reward are always linked. You can take no risk and leave your money in the bank. But if you had the capacity to save $2,000 a month and you wanted to build up $500,000 in savings to become financially independent, that would take you about 21 years. If instead you invested in a share portfolio that earned 7% per year on average, it would take less than 14 years to reach the same goal. So you are achieving your goal to retire early 7 years sooner by taking some risk. Or to flip it, if you want to take no risk, the price you pay is 7 years of your life. In the downloadable toolkit that accompanies this episode we’ve done some modeling on the impact of investment risk and return on the achievement of your goals, so be sure to check that out. It shows how long it would take to save $100,000 assuming different rates of return, so it should be really helpful for you. Just go to this post on our website, financialautonomy.com.au and you’ll see the button to download it. 4 Minimise/avoid debt To clarify straight up, not all debt is bad. Most of us could never buy a house in Australia without borrowing. And because any gains made on the increase in value of your home are tax free, usually borrowing to buy a home is a financially wise thing to do. Similarly sometimes debt to help fund good quality investments can make sense. But the debt to avoid is debt to fund consumption. Credit card debt to buy clothes or a holiday. A loan for a new car when maybe something a few years old would have done. As touched on earlier, if you are to retire early, you need to get your expenses down and your savings up. Loan repayments push against this objective. 5 Downsize/tree change I know of several people who have achieved financial independence by selling their inner city home and moving to a rural area or just a smaller home. As the NBN rolls out, there should be more and more scope for people to work outside of the big cities. I know I use Skype a lot for meetings, and with the Screen Share functionality, I’ve found you can have a really good meeting with someone that is far superior to a phone meeting and not miles away from meeting in the flesh. In some cases such a move resulted in them becoming debt free, which reduced their living costs and granted them considerably more freedom. Or perhaps there’s some money left over following the change which can be invested and provide some income to reduce the need to generate a wage. If you haven’t already done so, have a listen to episode 6, where an element of Nish’s success was this type of change, Mortgage repayments or rent tend to take up a large part of peoples budgets. And as highlighted in the first point earlier, the lower you can get your living costs, the easier it will be for you to get to the point where you can retire early. It follows then that if you can downsize or make a tree change, and get your housing costs down through the reduction or elimination of debt, or just lower rent, your goal of early retirement will be that much more attainable. As a final thought, consider what you will be doing in this early retirement of yours. Is there any chance that what you want to spend your time doing could earn you some money? Even if it’s a small amount. As shown in the example earlier, $10,000 of income needs something like $250,000 of investments to produce it on a sustainable long term basis. So if you can earn $10,000 in your early retirement, that’s $250,000 that you don’t have to save. That early retirement could be that bit earlier! As always, we have a downloadable toolkit for this episode. It’s really important to me that the content we provide to you is actionable. The toolkit contains checklists and templates to get you moving on your journey to financial automomy, so be sure to grab your free download. As I hope you can tell, I love to help people plan financially for significant transitions in life such as early retirement. While you’re at our website check out the Work with me page to learn how we can work together on a one on one basis to help you achieve your goals and dreams. Important Information: This information is of a general nature only and has been prepared without taking into account your particular financial needs, circumstances and objectives. While every effort has been made to ensure the accuracy of the information, it is not guaranteed. You should obtain professional advice before acting on the information contained in this publication.
I’ve known Nish for over 25 years. He was there when I started my first job out of school, and over the years our careers and lives intersected. These days, as well as being a friend, Nish and his family are also clients. For many years Nish was a financial planner, even running his own firm for a period. To have someone with that professional skill and background decide to engage me and my firm to act as their financial planner is to me, one of the greatest professional compliments you can receive. Today I’m really excited to share with you a little bit of Nish’s hugely successful transition from the corporate world to running his own photography business – Nish Photography. But it doesn’t just stop there. Because Nish and his incredibly supportive wife Janine made a second transition a few years later by making a sea-change. Leaving the big smoke with its big mortgage and hecticness, and moving the family to a small seaside community about an hour out of Melbourne. Nish and his family have never been happier. I asked Nish how these two major transitions came about, and I think there is absolute gold in what he was able to share. So let’s dive in and take a look at this real life example of someone who has achieved choices in life, true financial autonomy. So far in Financial Autonomy – the audio blog, we’ve looked at different transitions that you might make in your life – moving from being an employee to starting your own business, reinventing yourself after a redundancy, or rebuilding after a divorce. In future episodes we’ll be exploring many more, like planning financially for starting a family, making a career change, and retirement. Today though I’m really fortunate to be able share with you a real life experience of someone who has successfully achieved not one but two major transitions. In preparing for this piece I interviewed Nish to gain a better understanding of how his move from the corporate financial world to running a photography business unfolded, and then how he and his family subsequently made the transition from inner city life to a small seaside community. I started by asking why he decided to make the initial move from the finance world, where he had worked in various roles for around 20 years, into photography. He attributed the initial steps in that direction to a discussion he had with a psychologist who encouraged him to spend more time and energy doing the things he loved. His two great passions beyond his family were music and photography. So he took some singing lessons and picked up some small gigs playing his guitar and performing. Now that’s no small thing. First you need to acquire the skill of singing (he already knew how to play the guitar), then you need to have the courage to get up and perform in front of real people, and then you need to find venues and convince them to let you play, ideally with you receiving some money for the effort. He did it. Next came photography. Nish told me he’d essentially missed the transition in photography from film to digital, so as with the singing lessons in pursuing his musical interests, there was a financial and time investment to be made in bringing his skills and equipment up to the level required. He recognised that the singing wasn’t likely to be a viable alternative to his current career, but saw that photography presented the possibility of building a business and giving him an option to escape corporate cubicle captivity. So he launched his photography business as a side project, working on weekends. His initial focus was family portraits and weddings. He built his web site, and promoted himself through word of mouth. He gained valuable experience and knowledge. He operated this way, working his normal job, and developing his photography business on the side for roughly 12 months. This is a great strategy to progress towards a transition, and one you certainly should consider if this is your financial autonomy goal. Eventually, and after a significant nudge from Janine, his wife, he quit his job and devoted himself full time to his photography business. I asked Nish what steps they took financially to make this huge step possible. The key things were:
- Janine always monitored their family budget, and so had a good sense of how much income the household needed to keep afloat. She was therefore confident that they could manage on her wage alone for a period.
- They changed their mortgage to interest only to reduce the loan repayments.
- They approached the change as a 5 year plan, with the understanding that Janine’s income would be the primary income to the household during this period, and then at the end of that 5 year period, Janine could potentially pursue her own transition, perhaps working fewer hours, and Nish’s business would by then be at a level where his income could be the primary support for the household.
In addition to these financial planning steps, through Nish operating the business as a side project for a year, he had already identified that the relationship management skills he had learnt through his corporate career, were applicable to building his new business. He’d also started to get some corporate photography work, and shortly after moving into photography full time he pivoted the business entirely towards this corporate work, which has been a key to the success of his transition from employee to self-employed. So let’s break things down. Nish’s successful transition to self-employment entailed:
- A low risk trial for 12 months. Any money he made was reinvested back into the business. This period wasn’t about making a fortune. The gain here though was knowledge and experience, not least of which was finding that his initial target market was wrong – family portraits and weddings, and that he was better suited to corporate work. This is right out of the Lean Start-up approach of a minimum viable product. Put your idea out to market with the lowest investment possible, and then get market feedback as to whether your idea, your concept is right. Then use that feedback to change or improve your offering.
- They had a survival strategy, as I explained in episode 1, mapped out. They had a household budget and knew their numbers. They knew that with the mortgage repayment reduced to interest only, they could survive on Janine’s wage alone while Nish built up the business. This knowledge was empowering to them both. Without this knowledge, the stress levels would have been enormous.
- They were realistic about the time it would take to build this new business – a 5 year plan. Nish and Janine embarked on this adventure, not with the expectation that the new business was going to be an instant success, but with a realistic time frame that enabled Nish to develop his skills and the relationships essential for the business in a sustainable, long term way. Nish told me that it wasn’t until year 3 that he started to make a reasonable income. I wonder how many people in a similar position, with less planning, would have quit after 12 or 18 months?
As inspiring as that story is though, as mentioned in the intro, Nish and Janine didn’t stop there. About a year ago they made a second transition, moving from inner city Melbourne to a small seaside community about an hour out of Melbourne. Financial Autonomy is about gaining choice, and this move was in very large part, motivated by that desire. Nish and Janine had always wanted to live by the beach, and indeed when in Melbourne, they were within range of the beach. But beyond that, city property prices are expensive, and that means a big mortgage. They wanted to have more flexibility around when and how much they worked. Part of their 5 year plan was to be in a position where Janine could reduce her hours. This sea change was an important step in making that possible. Once again, Janine’s handle on the family budget empowered them to know what was possible. They were able to determine how much they could afford to spend in the new town, and then look around to see if the type of house this budget would allow, was suitable for their family. Pleasingly they found a home that fitted all their requirements, and Nish tells me that the whole family has just never been happier. Like all parents, he worried about the kids moving schools and making new friends. Well it took less than a day for his girls to settle in, and their happiness in this new seaside life has been a core ingredient on the overall success of the move. I finished up my discussion with Nish by asking what advice he would give others who dream of gaining choices in life. He offered four suggestions that I think are absolute gold:
- Love what you do. Pursue your passions. You’ll look back and think “why didn’t I make this change years ago?”
- Talk to your partner and approach your transition to Financial Autonomy as a team. Nish freely admits that there is no way he could have achieved what he has without the support of his wife Janine. She both gave him permission to have a go, and the nudge needed to take the plunge.
- Don’t listen to nay-sayers. For both the career change and the sea change, Nish had plenty of people tell him he’s crazy. He relayed the story of some friends who were absolutely convinced the sea change was a terrible idea, and that in a short period of time they would want to return to the inner city but would be priced out. Those friends recently sold their Melbourne home and bought a house not far from Nish and Janine.
- Follow your heart. Take a risk sometimes. It is scary, but it’s well worth it.
I hope you’ve taken something out of Nish’s story. I’m really grateful to him for allowing me to share it with you. Check out Nish’s work at the very easily remembered name of www.nishphotography.com.au There’s some absolutely stunning photo’s there so be sure to take a look. And if you need some photo’s done, be sure to give him a call.
Starting a family is a huge step in a great many of our lives. Bringing a new little human into the world. So much hope. Scary too! Completely life changing. Financial Autonomy is about you taking control of your finances, and not being controlled by your finances. The focus of this audio blog is to think through the financial implications of taking this big leap, and what you can do to prepare for this major transition in your life. Also, if you’re reading or listening to this during the pregnancy phase, and are anything like my household was prior to the birth of our first child, you’ve probably read enough books like What to Expect When Your Expecting, and Up the Duff. I promise there will be no references to what pregnancy will do to your body, or any of the seemingly infinite ways we can be a terrible parent and ruin our child’s life. My name’s Paul Benson, and thanks for listening to Financial Autonomy, the audio blog. Let’s dive into today’s episode, how to be financial ready to start a family. How to be financially ready to start a family could easily be rephrased as “How to survive on less income and with more expenses”. The stereotypical scenario is that dad continues to work full time after junior’s arrival, whilst mum stays at home and try’s to maintain her sanity. Of course there are all sorts of permutations and combinations of how different families make things work, but almost inevitably, there will be less money coming into the household than there used to be. On top of this, you now have an extra person in the household, who maybe doesn’t eat that much (yet!), but goes through nappies like it’s an Olympic event, and for whom every little cough is diagnosed by the new parents as likely bird-flu, requiring your next month’s wages to be donated to the local chemist. So financially, starting a family is a very big deal. But with some planning, it needn’t be stressful. Sleep deprivation will be stressful enough. So where to start? You need to understand your cash flow. How much money comes into the household, how much goes out, and where does it go? The cash coming in is fairly straight forward assuming you are an employee. Possibly less so if you are self-employed, though hopefully you have a good sense of the normal cycles of your business and can forecast your income with a reasonable level of certainty. If one of you runs a business and the other is currently an employee, there may be scope to split income after the baby arrives. It’s a bit of a curiosity with the tax system, but two people each earnings $40,000 will end up with more money in their pocket after tax, than a couple where one person earns $90,000 and the other nothing. This may also point you to a solution of each parent working reduced hours, instead of the more typical one at home and the other working full time. Something to consider at the very least. So in terms of being financially ready to start a family, you’ve got a clear picture of what the income piece will look like once bubs arrives. What about the expenses? Hopefully you’ve got a budget. If not, visit the resources page on the financialautonomy.com.au web site and download our template. Look up your bank statements via your internet banking, fill in the figures, and away you go. It is important to understand where your money is currently going and then think through how that will change once your family moves from 2 to 3 people (or maybe more if you’re really efficient!). Maybe public transport fares will drop. You may spend less on eating out. But of course you will now have the cost of nappies and all the other bits and pieces a new born demands. Once you have your head around the numbers, it may be valuable to adjust to living on one wage before the baby arrives, assuming your plan is the most typical scenario of one parent at home and the other in the workforce. If you can demonstrate that your household can manage on that one income, you can have a high confidence that you are indeed financially ready to start a family. Another approach that I have seen is where the couple assumes and focuses on mum staying at home for 1 year. The solution they are trying to find therefore is not necessarily the long term plan, but rather just a one year solution. Sometimes they approach it that way because planning further ahead is just too daunting. Alternatively that approach might be adopted to recognise that there is a lot of uncertainty in this phase of a couple’s life. Perhaps the member of the couple staying at home might hate it and want to return to the paid workforce full time as soon as possible, or at the other extreme, couldn’t imagine leaving bubs with a carer and wants to remain a full time stay at home parent beyond maternity leave. Options around returning to work part time are not always known 12+ months out too, so sometimes, just focusing on the one year makes a lot of sense. So if you are focusing in on a one year solution to being financially ready to start a family, items like any maternity leave and perhaps annual leave entitlements might provide a significant portion of the solution. I know of some couples who have arranged to take leave entitlements at half pay to extend the duration that they continue to have income coming into the household. The government’s Parental Leave scheme might also provide some very useful assistance. This is paid at $672.60 per week for 18 weeks. Eligibility is fairly generous. Check out the link to see all the criteria. And whilst the Baby Bonus is now gone, you may still be eligible for its replacement, the Newborn Payment. In developing your plan to be financially ready to start a family, on-going government payments may well be an important element. The primary form of government assistance for young families is the Family Tax Benefit and the Department of Social Services web site explains the support available like this: Family Tax Benefit (FTB) is a payment that helps eligible families with the cost of raising children. It is made up of two parts:
- FTB Part A – is paid per-child and the amount paid is based on the family’s circumstances.
- FTB Part B – is paid per-family and gives extra help to single parents and families with one main income.
Family Tax Benefit – Part A. If household income is less than $51,904, you will receive the maximum entitlement. Beyond that, your entitlement depends on the number of children that you have and their ages. As mentioned in the summary above, this is a payment paid per-child. For those about to have their first child, you would cease to be eligible for Family Tax Benefit - Part A once household income reaches approximately $100,000. The link provided shows a table to explain how this works. If you qualify for the maximum payment, for a new born you would receive $182.84 per fortnight currently (April 2017). This is certainly a handy amount and well worth incorporating into your cash flow plans. There is also a Family Tax Benefit – Part B. This is potentially another $155.54 per fortnight. As per the summary mentioned earlier, Part B is a per-family payment and focuses on households with one income. It is therefore often relevant for couples starting a family. Where one member of the couple is at home full time, you will receive the maximum Family Tax Benefit - Part B, if you’re working partner’s income is less than $100,000. There are also supplement payments added to both Part A & B at the end of the year in some cases, which can act as a handy lump sum. The various means of government support are certainly not easy to get your head around, but for those eligible they can be very helpful in making the household budget work, so take some time to look at the various links and aim to arrive at an estimate as to what you might receive. To summarise, there are 3 likely sources of recurring payments:
- Parental leave scheme – 18 weeks
- Family Tax Benefit Part A – a per child benefit
- Family Tax Benefit Part B – target at single income households
Child care is another likely new expense that may need to come into the family budget. Whether it’s to enable you to return to some paid employment, or just to get a sanity break and a few things done in peace, childcare is often a meaningful expense in a family’s household budget. The cost of child care is subsidised by the government via the Child Care Rebate. This will cover 50% of the cost of childcare up to certain limits. A day of childcare at a child care centre is likely to cost around $100 per day, or $50 after the child care rebate. This varies quite a bit depending on where you live though, and there are solutions like family day care that in some cases are cheaper. Whilst not something that you need to immediately factor into your household budget once bubs arrives, a final tip that has been really helpful for my household. When our first child arrived we put a few lumps of money into a managed fund with the intention that this would help towards his secondary education fees. We weren’t real sure where we would send him, but we felt is was likely he’d go to some sort of private or catholic type school. At the time I worked in a role where I got occasional lump sum bonuses, and these were the amounts we socked away. My wife and I went on to have a second child, and as the boys got older, and education plans firmed up, we weighed up the best use for those savings that we’d put aside. My youngest starts secondary school next year and so we’ve decided to use the education savings to assist us during the “overlap” years – the 3 years where we have both boys in secondary school. The amount put away all those years ago has grown to be enough to cover one boys fees for these 3 overlap years, so that effectively we will just be paying roughly the same amount of school fees that we have been up until now, from our normal cash flow. I have to tell you that this solution is enormously helpful for our household. So give some thought what you might be able to do around putting some money into a long term growth investment to help towards education costs down the track. Putting some money away early will enable the magic of compounding to do much of the heavy lifting for you. Preparing yourself to be financially ready to start a family is a very important and potentially challenging task. If you need help, we’re here. Go to the Work with Me page on the financialautonomy.com.au web site and book an appointment. Helping people do this sort of planning is what we do every day. Well I hope today’s audio blog has brought you a bit closer to being financially ready to start a family.
Important Information:
This information is of a general nature only and has been prepared without taking into account your particular financial needs, circumstances and objectives. While every effort has been made to ensure the accuracy of the information, it is not guaranteed. You should obtain professional advice before acting on the information contained in this publication.
One fantastic and I find often overlooked way to achieve financial autonomy is to buy an existing business. In comparison to starting your own business where cash flow starts at zero and you need to support yourself whilst the business becomes self-sustaining (refer episode 1), when you buy an existing business, you have cash flow and customers from day one. Buying a business is something I can talk about with quite a bit of experience. I’ve bought two businesses, and for a couple years I was a licensed Business Broker as a side line to my financial planning practice. The thinking at the time was that my business owner financial planning clients would need to sell their businesses when they retired, and so perhaps offering business broking services was a sensible expansion. I ended up concluding that the two services weren’t especially complementary, but I picked up some great learnings that make me a better advisor for my business owning financial planning clients, and for those seeking financial autonomy through buying a business. Just as an aside, something that I believe really strongly about business endeavours, but also life more broadly, is that we can’t be afraid to try. I heard someone trying to sell business coaching recently and their tag line was 98% of business fail within 10 years. What a ridiculous statement. I assume their definition of failure is that the business isn’t around 10 years from when it started. So? Does that equate to failure? I operated as a part time business broker for 2 years and then made the decision it wasn’t sensible for me to continue to devote time and effort into that area. At the end of that period I had $35,000 sitting in my Business Broking bank account, and had learned an enormous amount. In fact even if there was no money in the bank account from that business, I’d still say it was a success because I learnt so much. So if you hear people trying to convince you that your plan or idea will never work because most businesses fail – don’t believe it. People start businesses, and people wind up businesses. Their lives change, new opportunities come up, industries change. Sometimes people just come to the conclusions that they could make more money doing something else. That’s not failure – that’s having a go and then having the intelligence to reflect and chose a new path. In Silicon Valley jargon, that’s a “pivot”. Anyhow, sorry for the rant but that’s just something I feel strongly about – you can’t live your life being afraid to try. So when you look at buying a business, here’s the process: You search the various web sites such as businessforsale.com.au and find a business that looks interesting. You submit an enquiry to the broker. The broker will send you a Confidentiality Agreement which you need to sign and send back – most business owners that are selling want to keep it quiet. They don’t want their customers and staff to know that they are looking to exit. The broker will then send through to you an Information Memorandum (IM). The level of detail in here will vary depending on the scale of the business and it’s complexity, but the IM will give you some good information about the business, it’s history, and some figures around how revenue and profit have been tracking. Having read through the IM you should be able to determine whether this is a business you really want to look into in a serious way. Expect to look at quite a few IM’s in your hunt for a business. They cost you nothing and it’s always useful to see the figures for different businesses. So let’s say you’ve found a business that looks like it may fit your needs. The next step will be to get the detailed financials – at least 3 years worth. So what to look for? The Profit and Loss is the most important. First of all, is the business making a consistent profit? This will be the number at the bottom of the Profit and Loss. If it’s losing money it’s tough to see how it’s worth anything, so let’s assume it is showing a profit. Is that profit after the owner has received a wage? There should be a wages or salaries item in the Expenses section, and often in the financials there will be an explanation of what this is made up of. If it’s not completely clear, go back to the broker and ask for a breakdown of what the wage’s expenses are. It is very common in a small business for the owner not to take a wage, and just live off the profit. Consider this example. One business you look at shows a profit of $30,000 last year. The other a profit of $90,000. At first blush the second business looks more attractive. But you dig a bit deeper. You find in business one that in fact the business owner has paid himself a wage of $80,000, and also paid super of $25,000. In business two however, you learn that the business has paid nothing to the owner, and in fact in this case the husband works on the business 6 days a week and his wife does the book work one day a week. $90,000 rewards for all that effort is starting to sound less attractive. So you need to get an understanding of what is the actual return to the owner. It wouldn’t be unusual to find the business owner running his car through the business. I’ve seen instances where the entire families’ mobile phones all go through the business. So go through the expenses, ask lots of questions, and get to a point where you know how much the current owner is actually making out of this business. So as an example you might find a business that made: $30,000 profit $80,000 in owners wages $25,000 in owners super contributions $15,000 in owners vehicle expenses that aren’t essential to the operation of the business $5,000 in other expenses related to the owner. So add this all up and the total return to the owner for this business is $155,000. There may also be depreciation in the expenses. This is a non-cash item reflecting the value of equipment wearing out. You may want to add this amount to the return the owner receives as well. This is less clear cut because at some point that equipment will need to be replaced. If depreciation is a large amount, you’ll need to dig a bit deeper into this and it may be something to discuss with your accountant. However you decide to best treat depreciation, you will have arrived at a total return to the owner in the most recent year. Now run this same calculation across the previous year’s financials so you can see how stable this is. Was last years $155,000 earnings a typical year, or abnormally high or low? You won’t get it from the financials, but once you understand the total return to the owner, ask the broker how many hours the owner is putting into the business. Earning $155,000 might be acceptable to you if she’s putting in 40 hours per week, but perhaps, if to earn this, the owner is working 7 days a week and 12 hours a day, maybe that return isn’t so attractive. In reverse you might come across a business that only returns $30,000 to the owner each year, but if it only takes up 2 hours a week of the owners time, maybe that’s a really good business. Okay, so you’ve now got a good sense of what the current owner is making from this business, and how stable that is. The next thing I’d go to is trends. Start with the total revenue and total expenses items. I’d put them in a spreadsheet myself but it’s up to you. You’ve got 3, maybe more years of data. What is the trend? Now we’d all like to see a trend of rising revenue. In my experience though, business owners are just like elite sports people – rarely do they get out at the top. So don’t be surprised if you see declining our plateauing sales. Whatever the trend, you need to understand what is going on as this will definitely have an impact on whether you want to buy this business, and how much you would be prepared to pay. Often at the revenue level income will be broken up into several sub-categories – what is that telling you? Is one area of the business dying? Perhaps another is growing. Similarly at the expenses level. What is happening there? Have input costs or wages been rising faster than revenue? Having gone through the process you should have a whole bunch of really intelligent and insightful questions to ask the owner. You also have a good basis upon which to talk price. You could ask all your questions to the broker, but I would suggest you ask for a meeting with the owner at this point so you can get the answers straight from the horse’s mouth. A direct discussion is likely to give you far more detail, plus you can gain a lot in the non-verbal cues. On price, don’t be surprised if, having gone through the financials, you struggle to make sense of the price being asked. For many business owners their business represents their life’s work and in their mind it is a gold mine worth millions. Do your own numbers, determine what you as the owner could make out of this business, and from that what is a sensible price for you to pay. Typically that will be 1 to 3 times what the business will make for you each year depending on the trend of revenues and profits, and the industry. If you come up with a price that makes sense to you of say $300,000, and the owner is asking $900,000, don’t be afraid to tell the broker that based on the numbers and information provided, it only makes sense to you to pay $300,000. Don’t throw in a ridiculous low ball offer just to play games, because that will just piss people off, but if you say “look, from the numbers you’ve provided I think I’d make “x” per year, and so as a result it would make sense to me to pay “y” for this business, the broker will understand and the business owner will come around, or perhaps furnish you with additional information to show why the business is actually worth more. Very often the business owner’s expectations are way off the mark, and as much as the broker can try and advise them of that, it’s not until genuine offers start coming in that the reality hits. Also, keep in mind that most business owners, by the time they decide to sell, are well and truly ready to exit. They’re already thinking of the retirement holiday or what they will do next with their life. So make an offer that makes sense for you and be patient. If the owner won’t come around, there’ll be other businesses. Important Information: This information is of a general nature only and has been prepared without taking into account your particular financial needs, circumstances and objectives. While every effort has been made to ensure the accuracy of the information, it is not guaranteed. You should obtain professional advice before acting on the information contained in this publication.
I’ve named this podcast Financial Autonomy. So what is Financial Autonomy? What does it mean? Well that’s what we’re going to explore in today’s podcast I’ll give you a big hint – Financial Autonomy is about gaining choices in life. Buckle up – let’s dive in! Financial autonomy or financial independence if you prefer, is about being in a financial position to have CHOICE. In my role as a financial planner, every day I talk to people about their financial plans. In almost all cases, amongst their financial goals will be retirement plans. For the past 50+ years, most people in developed countries such as Australia have lived on an expectation that they will enter the work force in their late teens or early 20’s, and work through until somewhere in their 60’s, whereupon they will cease work entirely and live out their remaining days in “retirement”. This scenario is perhaps a bit male centric, as for many women, paid employment is often put on pause when children arrive. But none the less, in more recent times this is a rough sketch increasingly applicable to both the sexes. [caption id="attachment_13" align="aligncenter" width="919"] Financial independence[/caption] Whilst this trajectory remains applicable for many people, increasingly the feedback that I’m getting is that this is not how many people wish for their life to unfold. Instead they seek a path perhaps looking more like this: Financial autonomy, is about getting yourself in a position where you can move to yellow section above. Where you have CHOICES. Where you don’t have to work in a job you hate, or with a boss who is a moron, simply because that’s your lot in life until you reach 65. Financial autonomy might mean reducing your normal paid employment from 5 days per week to 3 or 4. And in those now freed up days, you might chose to study, do a different job, care for your kids or grandkids, or get involved in the local community. Financial autonomy might mean a career change. Initially the pay might be less, maybe even permanently so. But you spend a lot of your life at work. Do you really want to waste so much of the limited time you have on this earth in a job you hate? Financial autonomy might mean starting your own business. There will be many challenges and certainly risks. But you will have the flexibility to work when and how hard it suits you. Do something you are passionate about. Take holidays when it suits you. And if your son or daughter is getting presented with a student of the week certificate at assembly, you can go without having to ask the boss for a favour. Whilst financial independence in the extreme might mean not having to work again, for most people this is not what they want. Financial independence is about having choices in life. So where to start? First you need to clearly identify your goal or objective, and then you need to quantify it. Vague “one day I’d like to …” won’t get you anywhere. Let’s say that your goal is for a career change. You currently work as a company accountant but have lost the passion for this profession and are finding the stress too great. You would really like to re-train to become a primary school teacher, something you feel you were born to do. So what are the financial challenges associated with this change?
- To retrain you would need to take 2 years out of the paid workforce to attend uni and complete the on-the job training required.
- The pay for a teacher will be lower than you are currently on – approximately $30,000 per year less initially you estimate, though this will narrow a bit as you gain experience.
You and your husband own a house with a mortgage of $300,000. Your husband works full time, enjoys his job, and believes it is quite secure. As a household therefore you have confidence that during your training period, some money will be coming in from your husbands earnings. But what if any, is the shortfall? , ie. what is the difference between your husband’s take home pay and what it costs to keep your household afloat? You need to know what you are spending. We have a budgeting tool in the Resources page of our web site. I know household budgeting is no fun, but there is just no way you can gain choices in life through financial autonomy without knowing how much it costs you to live. So let’s say mortgage repayments are $2,100 per month, and from the budget tool you have determined that your living expenses average $2,600 per month, and bills average another $1,200 per month. So your household expenditure is $5,900 or $70,800 per year. You should allow some money for the unexpecteds, so let’s assume $75,000 is the current need. Note that we have not allowed for lavish holiday’s here, or a new car. This is just what the household needs to function. Your husband’s bring home income is $53,000. This is after tax and lease payments on a car. This is net income. So you have a shortfall of $22,000. To achieve your goal, this shortfall needs to be plugged, both during the initial 2 year training period, and then longer term. In our next post we’ll look at some potential strategies you might be able to deploy to plug this gap. Congratulations. You have taken the first definitive step towards achieving financial independence and being able to choose the life you want to lead. So let’s summarise. To begin your journey towards financial autonomy and gaining choices in your life, you need to: 1 – determine your goal or objective 2 – quantify - how much money do you need to make this a reality? Important Information: This information is of a general nature only and has been prepared without taking into account your particular financial needs, circumstances and objectives. While every effort has been made to ensure the accuracy of the information, it is not guaranteed. You should obtain professional advice before acting on the information contained in this publication.
Redundancy – not something most of us like to contemplate. Yet it is a reality for many of us in our working life. So rather than redundancy being seen as something negative, let’s flip it around - your redundancy could be the best thing that has ever happened to you. Financial autonomy is about building financial strategies to give you choices in life. And very often these choices present themselves at moments of transition. In this case, your transition is leaving the comfort of a work place you’ve been at for many years, maybe even decades, and moving onto the next chapter in your life. Today’s podcast will explore how you can make this transition a successful one. I’m Paul Benson and you’re listening to the Financial Autonomy audio blog. Let’s dive in! It’s not you, it’s them. Over the years I’ve dealt with many people who have been made redundant and so I know it can be a huge confidence sapper. But I want to tell you, if you are currently facing redundancy that you being made redundant is almost never about you – your performance, skills, or work ethic. You’ve been made redundant because the industry has changed, or the company you work for has changed. In some cases there is simply a natural pyramid structure with lots of workers needed at the customer facing coal face, but far less managers and senior people as you move up the pyramid, such that workers need to be shed over time to accommodate the new blood coming through. Being made redundant can be distressing – how will you keep a roof over your head and food on the table? Where will you find a new job? And there is also the loss of regular contact with your work colleagues. But there are positives too. Give some thought to the opportunities your redundancy presents. In a career sense, perhaps you can try something different. Maybe you could start your own business. Perhaps the payout you receive puts you in a stronger financial position so you can have more flexibility in your working life. Does it continue to be essential that you work 5 days per week? Financial autonomy is about building financial strategies to give you choices in life. And very often these choices present themselves at moments of transition. In this case, your transition is leaving the comfort of a work place you’ve been at for many years, maybe even decades, and moving onto the next chapter in your life. Be completely assured – you can make this transition a successful one, and we’re here to help you do just that. Before jumping down the first path that presents itself, let’s take a moment to consider the range of options you have available. I’ve come up with 8 – let me know if you can think of more: 1. Apply for a new job in the same field as you are currently working in. 2. Apply for a new job in a completely different industry, but which still draws on some of the skills you have built up in your old job. 3. Retrain to do something completely different. 4. Start a business to become self-employed. 5. Buy an existing business. 6. Freelance. 7. Work part time and pursue other passions 8. Retire Applying for a new job in the same industry that you were in probably doesn’t require a lot of planning. If you worked in a bank for instance, there is every chance that you will find work at another bank. For many, this is not an option due to industries winding down, or they’ve simply had enough of working in that sector. I’ve worked with a client who was on the production line at Holden, and is now working in the food manufacturing industry. He’s in a completely different industry, but it still utilises many of his skill in production line automation. Someone else I know worked at Kodak. When made redundant from that dying industry, he found work at the company that prints our bank notes – different industry but still using his skills. Take a step back – what other industries use the skills you have? This redundancy could be great opportunity to move from an industry in decline into one on a growth path. Retraining can present another great opportunity. Often we finish our formal education and then fall into a job – just go with the flow a bit. Before we know it we’ve got a mortgage and perhaps a family, and the thought of changing stream now is just unfathomable. But a redundancy might provide the perfect opportunity to make that change given you will receive some sort of payout to reflect years of service. With some good planning around managing your cash flows, this redundancy might give you the opportunity to finally pursue the thing you were born to do. What about starting a business? In episode 1 we looked at getting yourself into a financial position to start your own business. We made this our first episode because this is an ambition for a lot of the people we work with. Making it a reality is tough though because most businesses make little money in the first year. But your redundancy package may be just the thing you need to make that transition a reality. If you haven’t listened to or read episode 1, be sure to check it out. Sometimes with redundancies, you get some lead time. The automotive industry for instance, where we’ve seen a lot of redundancies here in Victoria, put their workers on notice over a year ahead. Whilst this doesn’t make for the most positive of work environments, it does provide you with the opportunity to start planning your next step in life. I had a client who started a test and tag business in his local area that he was just doing on weekends. He did the training, got some business cards printed, and went around to some local businesses and asked if they needed his solution. He picked up half a dozen customers, which as a side job was enough. But it meant that when he was made redundant almost 12 months later, he had something to develop. He knew what services customers were willing to pay for, what his pricing needed to be to make it attractive to customers but also worthwhile to him, and he had ideas around how he could best grow the business – in this case having customers geographically close together was essential to operate efficiently and profitably. Another option I’ve seen some people pursue is to buy a business. For a couple of years, in addition to being a licensed Financial Planner, I was also a licensed Business Broker. My thinking was that for many of our business owner financial planning clients, selling their business was an important aspect of their retirement plan. So I started researching how that process unfolded and ended up deciding to give it a go myself. I handled several sales, which was really valuable experience, however I decided to cease doing the business broking as my financial planning practice grew and I felt my time was better spent there. So I’ve got some good learnings to share with you on buying a business, and I plan to write several future posts on that topic. For now though, I suggest just putting the idea of buying a business on your radar as an option. I find it’s an option often overlooked. Sure you can start a business from scratch, but that is no easy road. If you can find a business operating in the area of your interest, perhaps you can buy it, run it as is for the first 6 or 12 months to understand why things are done the way they are, and then change things to make it your own. Offer new services to the customer base, or go out an attack a new customer segment that the previous owner had overlooked. At least you will start day one with some cash flow and some customers to talk to. Google “businesses for sale” – there are several web sites that advertise businesses that are on the market, just like real estate sites. Freelancing is another really interesting option, with the internet just opening this area up massively. Upwork, Airtasker, Uber, Fivrr, AirBnB. Just so many ways you can turn skills that you have into dollars. No boss. Work when it suits you, and work as much or as little as you like. Perhaps linked to this, after your redundancy, do you still need to work 5 days per week? Maybe part time work, or freelancing, will provide enough income to meet your needs, and in the time now freed up, you can pursue other interests, help family members, or do community work. Uber drivers often have interesting stories in this regard. I met one guy who did security at big sporting and music events, and Uber at other times. What worked especially well was turning on his Uber app when it was time to go home from a big event. Usually there’d be plenty of people looking for a ride, so he’d get paid to drive home. I met another lady doing Uber driving who worked in the first half of the day, when her husband was home, and then around the middle of the day, she knocked off, he headed off to his job, and between the two of them, the kids were looked after. The point is, work doesn’t have to be one employer, with you starting around 9am and finishing around 5pm. There are so many more options now for how you structure your working life, and this redundancy might just be the ticket that enables you to take advantage of these options. The final option that I came up with earlier was retirement. Perhaps the redundancy provides you with the chance you were looking for to retire early. I can recall helping one client who had young grandchildren and really wanted to help her daughter care for them. A redundancy package was the best thing that could have happened for her as we were able to set her up to not need to return to the paid work force. Something that I think you might find really helpful early on to alleviate the initial stress of being made redundant is to do a budget to understand what your expenses are. We sometimes find in working with clients that once you understand how much income you actually need to keep you and your family afloat, you start to see ways that this can be achieved. We have a budget template in our resources page that may help. Important Information: This information is of a general nature only and has been prepared without taking into account your particular financial needs, circumstances and objectives. While every effort has been made to ensure the accuracy of the information, it is not guaranteed. You should obtain professional advice before acting on the information contained in this publication.
So you’ve decided you’re ready to take the big plunge and start your own business. Congratulations. Having transitioned from being an employee to running my own business, I can tell you, you will be in for some challenges, but also many rewards, not least of which is flexibility in how you manage your time. I know of self employed people who like early morning, quiet, thinking time, and so choose to work for 2-3 hours from 6am, then take a break, do some exercise, have something to eat, and sit back down to continue working late morning. Others work better at night, hitting full stride at 10pm and working through until the early hours. Of course many businesses require you to be on deck during normal business hours to respond to customers, but even here you have flexibility, especially when you employ staff, to decide when you will be “at the coal face”.
So you’ve made your decision, but how to be financially ready to start your own business? You need a roof over your head and food on the table. Perhaps you have a family to support. Most often the thing holding people back from taking the plunge into self employment is the financial worry. But that is where good financial planning comes into play. I don’t know about you, but sometimes I have pieces of work that need doing, and I just really don’t want to do them, primarily because I don’t know where to start and so it’s daunting. So I keep pushing them aside thinking maybe I’ll feel in the mood to tackle that one tomorrow. Eventually I bite the bullet and my usual strategy is to make it the first thing I do in the day. So often, once I get cracking, I find it actually wasn’t nearly as big a deal as I had thought, and the piece of work I had been dreading is knocked over in half an hour. Now whilst a financial plan to get you ready to start your own business will certainly take more than half an hour, I think it is common for people to put off planning for the move because the thought of doing the planning is just too daunting. They just don’t know where to start. Well let’s solve that for you! None of us are getting any younger, so the sooner you transition into the thing you are passionate about, the more of your life can be devoted to that dream instead of clocking in doing something that is not totally fulfilling. There are two elements required for you to be financially ready to start your own business – a Survival Strategy, and a Capital Strategy. By Survival Strategy I mean how will you (and your family if relevant) survive financially whilst you get this business off the ground? How will you maintain a roof over your head and food on the table? The Capital Strategy concerns your new business – how will you fund the start up costs, marketing, perhaps fit-out costs and the like? Step 1 – the Survival Strategy The starting point in developing your survival strategy is for you to be clear on how much you spend. That means doing a household budget. Now I know that for most people doing a household budget is about as appealing as taking an ice bath in the middle of winter, but if you want to transition successfully from being an employee to running your own business, it just needs to be done. I would set-up a spread-sheet (I have created one you could use, which can be found in our Resources page here), but if you’re not comfortable with that, hand written on a piece of paper will work too. Set up something like this: Start with your housing costs – mortgage repayments or rent. These are likely to be your largest expense. Of course if you’re lucky enough to own your house without a mortgage, well done you, you can skip past this bit. Record expenses as either weekly, fortnightly, or monthly, and then tally that to a yearly figure (the sample spread-sheet will do this automatically for you.) So now you know how much it currently costs per year to live. Save that one, now create a second version with what is necessary to survive. Let’s be realistic – if you want to pursue your dream of starting your own business, some sacrifices will be required. Perhaps you will need to forgo an annual holiday. Maybe spending on clothing and eating out will need to be cut back for a while. Short term pain, long term gain! An option you may be able to explore if you have a mortgage is reducing your loan repayments down to the minimum required, as most of us, very wisely, pay more than the minimum. You could also explore having the loan structured as interest only. In both cases this is not intended to be a long term thing, but it may be helpful for a year or two as you get established in your new enterprise. Okay, so you’ve crunched your numbers and the minimum amount of money you need to survive is let’s say $42,000 per year. I would divide that by 12 to get a more meaningful number of $3,500 per month. Now of course bills are lumpy so some months it will be a little more and some a little less, so a bit of a buffer of cash in the bank is needed. But you now have a target to hit – for you to progress your dream of starting your own business, you need to be able to generate $3,500 per month as a minimum. The next step in devising your survival strategy is thinking about how many months it will be before you first start having enough revenue in your new business to begin drawing some income. This will vary greatly from business to business, but whatever period is your best guess, from my experience, double it. So you’ve done some basic business planning (a topic for another post), taken a best guess at what revenue you’re likely to raise and what your expenses will be, and determined that you would be in a position to start drawing some income from your business 4 months after commencement. This will be wrong. No matter how hard we try, these forecasts are just educated guesses. Which is why I say, whatever period you estimate, double it. So we need to assume in this example that you will have no income from your business for the first 8 months. So where is the $3,500 per month going to come from? When I left my employee role to start my own business, I had several months of accrued long service and annual leave that was paid out. This covered several months of expenses and was essential in enabling me to make the transition to self employment. Perhaps you have money available to redraw on your home loan. Maybe you need to find a part time job to bring in some income whilst you get your business going. Perhaps some freelancing via sites such as Upwork, Airtasker, or 99Designs. Think broadly, ask around for ideas. You may have a partner generating income which covers some or even all of this minimum income need. Every solution is unique, but develop your survival guide and you are well on the way to achieving your dream.
Step 2 – the Capital Strategy Okay, so you’ve got a solution to keep a roof over your head and you wont starve. Wow, you can taste it now can’t you? This transition to your own business might actually be able to become a reality. Now how will you fund your business? That’s where the Capital Strategy comes in. Spread-sheet time again! Many business these days are service businesses, and so start up costs are fairly low. Certainly when I set out to open my financial planning business, I needed a computer, a mobile phone, some stationary, and not a lot else. I was able to rent a serviced office which included furniture and an internet connection, and I joined a network that provided access to the research and planning software that I needed, and who waived their usual monthly fee for the first 6 months to give me a chance to get going. You might be able to work from home initially (maybe permanently although most people I speak to find this a bit lonely long term – we are social creatures, at least for parts of the day!). Once again, I have created a spread-sheet that you might want to use. It is in our Resources page, which can be found here. None of the cells are locked, so chop and change it as required. With this completed you will know how much cash you need to start your business, and then how much you need on a monthly basis to remain afloat. For many services businesses, the initial capital required is pretty low. You may be able to fund this out of savings, redrawing on your home loan, or perhaps a loan from a willing family member. If your business requires significant equipment, then typically the seller of that equipment will have a financing solution whereby you can lease it over several years. I suggest doing a little reading on the Lean Start-Up methodology. There’s plenty of article about it on the web. It may have some application for your business. The monthly requirement for the business to survive can hopefully be meet fairly quickly via your business revenue. Estimate what you expect your sales to be. Then reduce it by say 30% to be conservative. If you are providing products or services to other businesses, allow for the fact that most pay 30 days after receiving your invoice, and many drag out longer than that. Think about how you can get deposits or up front revenue to help with your funding. The most likely outcome is that you will have no or minimal revenue for the first few months, then it will progressively grow. Your Survival Strategy will cover your household expenditure needs until the business can start to distribute some income. Your Capital Strategy will need to resolve how to cover the initial outlays for equipment and the like, and also the running costs of your business. Perhaps you determine that 50% of the business running costs can be met by business revenue in month 4 say, increasing to 70% in month 5, and then by the 6th month, the business will be generating enough revenue to cover its overheads and start to be in a position to payout some income to you. So there you have it, a framework to get you financially ready to start your own business. If you have any questions please fire away below. Or if you’d like to find out how we can work together to develop a tailored solution for your transition to your own business click here. Important Information: This information is of a general nature only and has been prepared without taking into account your particular financial needs, circumstances and objectives. While every effort has been made to ensure the accuracy of the information, it is not guaranteed. You should obtain professional advice before acting on the information contained in this publication.