Sometimes not knowing if what you are doing is working, is hard and often frustrating. If we keep on doing the right things the results will definitely come, but we have to do the right things the right way, and in the right order. So much ‘right’ can be easily gotten with process.
I will talk about the mistakes I often see people make with their financial planning and suggest a few ways to get this right using a strategic process.The path to Financial Independency is really simple – Budget -> Clear Bad Debt -> Save -> Invest. You need to go from one stage to the other, people usually want to go backwards, sorry to say, IT DOES NOT WORK. If you cannot save, how can you invest? If you cannot clear your bad debt, how can you save? If you cannot budget, you may not be able to do any of the aforementioned efficiently.
Let’s start from the top:
Budget – This is a plan that enables you to apportion your money to the most pressing needs. You need to account for every dollar you spend. Of what importance is spending that $25 a week on the gym that you don’t go to anymore, when you have not adequately planned for your utility bills? Budgeting is for everyone, if you think you cannot budget, you need to get serious with your financial management. Ed Sheeran lives on 1k a month; this guy spends less than myself and there is no point commenting on how our earnings compare. Enough said, get budgeting, fix your biases in the process. A simple technique to start with is 60-20-15-5, if this makes things so tight for you, you can go 70-15-10-5. The largest numbers are your living expenses, I cannot tell you what to reduce but it needs to be within that range. If you are already coming up with excuses – fix your biases. This is your money, not mine or the person next door. The money will always be yours.
Debt – There is ‘good’ and ‘bad’ debt, just as the name implies we want to eliminate bad debt. A bad debt is a situation where an asset financed by a loan depreciates or loses market value more than the interest paid on the loan. For example, if you get a car of 50k with a loan for the same amount with interest of 10%, the car can depreciate as much as 30% within the first year. This means you are paying interest on a loan of 42k for an asset worth 35k. A car loan MIGHT be a good idea in other circumstances e.g. you need a car to go to work or it is part of your business (they are always a few exceptions, all I say is check your biases).
While a good debt might be investing 50k in Managed Fund with a debt of say 35k (usually the full amount is not given for Margin loans). After the first year, your shares are worth $54,710 (based on a 9.42% growth on a ‘Growth’ fund) and your loan is worth $37,485 (based on a 7.10% interest rate and assuming you capitalised the interest). Ignoring all the numbers above, you can say you made about $2k on your $15k you put in. Note this can magnify your losses as well, if your fund performs less than the Margin Loan Interest rate. This is just to explain how ‘good debt’ can work in your favour. With Good debt, the asset grows in value more than the interest on the loan – thereby maximising your gains. The point is, clear off your bad debt as soon as you can.
Save – This is where you are in a great position. Knowing you can put away a certain amount of money consistently for YOUR future while avoiding bad debt is a signal for healthy financial management.. This is where you have that 20% of your income for your long term goals, going in consistently and 5% for your short term goals. With savings, the main thing is being disciplined with it. You should not be spending your long term money for a short term holiday goal, for instance. You write down your goals and categorise them, so you don’t have a ‘short’ memory of which is which. Once you have funds in these accounts for the goals you planned for, you SPEND it with no ounce of guilt. You deserve it, and as earlier said, IT IS YOUR MONEY.
Invest – My favourite part of all. I will differentiate early on to make it simple and convenient. You will be one of two kinds of people. You like investing or your don’t. Even if you don’t, it doesn’t mean you should not do it. You just find a good fund manager to invest in, then the only thing you worry about is, how you can get your money out and in. The rest is left to the fund manager, so you must not know the alpha, beta, gama, theta of funds. You just need to trust your finance professional . A financial planner can help but I will write an article on how to get a good fund manager.
If you like investing and like the process, the ups and downs, the wait and analysing companies; then this is where you can choose stocks personally to invest in and do it yourself. Either way, you need to invest to at least make your money work harder for you. You have gone through a hard process of saving for your future, let your future have more.
I will talk about the mistakes I often see people make with their financial planning and suggest a few ways to get this right using a strategic process.The path to Financial Independency is really simple – Budget -> Clear Bad Debt -> Save -> Invest. You need to go from one stage to the other, people usually want to go backwards, sorry to say, IT DOES NOT WORK. If you cannot save, how can you invest? If you cannot clear your bad debt, how can you save? If you cannot budget, you may not be able to do any of the aforementioned efficiently.
Let’s start from the top:
Budget – This is a plan that enables you to apportion your money to the most pressing needs. You need to account for every dollar you spend. Of what importance is spending that $25 a week on the gym that you don’t go to anymore, when you have not adequately planned for your utility bills? Budgeting is for everyone, if you think you cannot budget, you need to get serious with your financial management. Ed Sheeran lives on 1k a month; this guy spends less than myself and there is no point commenting on how our earnings compare. Enough said, get budgeting, fix your biases in the process. A simple technique to start with is 60-20-15-5, if this makes things so tight for you, you can go 70-15-10-5. The largest numbers are your living expenses, I cannot tell you what to reduce but it needs to be within that range. If you are already coming up with excuses – fix your biases. This is your money, not mine or the person next door. The money will always be yours.
Debt – There is ‘good’ and ‘bad’ debt, just as the name implies we want to eliminate bad debt. A bad debt is a situation where an asset financed by a loan depreciates or loses market value more than the interest paid on the loan. For example, if you get a car of 50k with a loan for the same amount with interest of 10%, the car can depreciate as much as 30% within the first year. This means you are paying interest on a loan of 42k for an asset worth 35k. A car loan MIGHT be a good idea in other circumstances e.g. you need a car to go to work or it is part of your business (they are always a few exceptions, all I say is check your biases).
While a good debt might be investing 50k in Managed Fund with a debt of say 35k (usually the full amount is not given for Margin loans). After the first year, your shares are worth $54,710 (based on a 9.42% growth on a ‘Growth’ fund) and your loan is worth $37,485 (based on a 7.10% interest rate and assuming you capitalised the interest). Ignoring all the numbers above, you can say you made about $2k on your $15k you put in. Note this can magnify your losses as well, if your fund performs less than the Margin Loan Interest rate. This is just to explain how ‘good debt’ can work in your favour. With Good debt, the asset grows in value more than the interest on the loan – thereby maximising your gains. The point is, clear off your bad debt as soon as you can.
Save – This is where you are in a great position. Knowing you can put away a certain amount of money consistently for YOUR future while avoiding bad debt is a signal for healthy financial management.. This is where you have that 20% of your income for your long term goals, going in consistently and 5% for your short term goals. With savings, the main thing is being disciplined with it. You should not be spending your long term money for a short term holiday goal, for instance. You write down your goals and categorise them, so you don’t have a ‘short’ memory of which is which. Once you have funds in these accounts for the goals you planned for, you SPEND it with no ounce of guilt. You deserve it, and as earlier said, IT IS YOUR MONEY.
Invest – My favourite part of all. I will differentiate early on to make it simple and convenient. You will be one of two kinds of people. You like investing or your don’t. Even if you don’t, it doesn’t mean you should not do it. You just find a good fund manager to invest in, then the only thing you worry about is, how you can get your money out and in. The rest is left to the fund manager, so you must not know the alpha, beta, gama, theta of funds. You just need to trust your finance professional . A financial planner can help but I will write an article on how to get a good fund manager.
If you like investing and like the process, the ups and downs, the wait and analysing companies; then this is where you can choose stocks personally to invest in and do it yourself. Either way, you need to invest to at least make your money work harder for you. You have gone through a hard process of saving for your future, let your future have more.
STEPS TO FINANCIAL INDEPENDENCY
- Start with a good/realistic budget to get you to the 60-20-15-5 rule. You need to reduce your living expenses, the biggest item in the living expenses basket is usually rent or mortgage. This is a tip to reduce but I am sure there are other aspects that can be reduced instead of rent/mortgage.
- You should have your Short and Long term goal accounts not visible to you. You will get too tempted to spend it. Think of using accounts that are different from your main account. That is your 20 and 5% savings. Your 15% can be right next to your living expenses account – it is your play money, do whatever you want with it.
- Automate the process of savings. Doing it yourself is tedious. Simply automate it to help you achieve your goal.
- If you are in debt, look for ways to reduce the interest you are paying on it. Most importantly, you will need to use your long and short term savings to clear this off as soon as possible. Automate this as well – once you get paid – money goes to your saving – to your bad debt. There is no other way but to pay this off, if you are bad with credit cards, cut them up. The points are not worth much to you if you are paying interest. Find out from the debt institution how long it will take you to pay off all the debt based on the amount you are putting in. You might feel like you are not saving for a few months if you have lots of debt, but this is only for a short time. The longer you drag it or fail to do it, the longer it will take to pay it off.
- Start investing. Once all the debt is paid off, you can start investing the long term funds straight away. Most funds allow you invest with a small amount. If you are the DIY kind of person, you can invest in a stock with as little as a few cents. I have a process explained for DIY people on this platform – it gives you a concise 10 step process to value investing. If you are not a DIY person, find a good fund manager or use a financial planner to help with this. It is worth the money as long as you stick to the plan.
- Enjoy your funds starting with your discretionary funds, which you can enjoy straight away, the other funds will have some serious benefit in the future. Once this is done for a long time and compounding kicks in, you will only have more to enjoy your life. It all starts with a plan – budget -> pay off debt -> save -> invest.