Achieving Financial Independence is not just about investment returns

Our clients are generally seeking to attain financial independence and while there are certainly a number of ways we can help to achieve that, personal behaviours are just as important. Our experience tells us that these 15 personal finance rules are keys to success:

  1. Salary or income is not the same as savings. Your net worth – accumulated savings – is more important than how much money you make. Having a high salary does not automatically make you rich; many high income earners spend it all. Think of sportsmen driving Ferraris and travelling first class. What matters is how much you save out of your salary over time.
  2. Saving is equally if not more important than investing. The best investment decision you can make is setting a high and consistent savings rate because it ensures you will build wealth and gives you a huge margin of safety in life.
  3. Avoid high cost debt like credit card debt. Credit card debt is a great way to stop you getting ahead financially. Use credit cards but always pay off the balance each month.
  4. Ideally you should live below your means, not just within your means. The only way to get ahead financially is to spend less than you earn.
  5. If you want to understand your priorities look at where you spend money each month. You have to understand your spending habits if you ever wish to gain control of your finances. The goal is to spend money on things that are important to you but cut back everywhere else. And if you pay yourself first i.e. automatically directing funds into Super & investments, you don’t have to worry about budgeting, you just spend whatever’s left over.
  6. Get the big purchases right. Many people spend more time on researching a holiday than they do on buying an investment property, for example. While there are savings to be made by watching your spending on lunches and coffee, the most important purchases in terms of growing your wealth will be housing and big items like cars and overseas holidays. For parents, school fees can be a really big item so make sure you can afford the commitment you are making. Where appropriate, seek professional advice.
  7. Build up some readily available funds in a savings or mortgage offset account. It’s not really an emergency savings account because most of the time these “emergencies” are things you should plan on happening periodically e.g. house repairs. You have to have liquid assets to take care of things when life inevitably gets in the way.
  8. Cover your insurable needs, in particular your income which pays for your current lifestyle and enables you to build your wealth. Remember that insurance is about protecting lifestyle and wealth, not building it.
  9. Aim to increase your savings rates every time you get a raise so you’ll never even notice that you had more money to begin with. Avoiding lifestyle creep can be difficult, but that’s how you build wealth.
  10. Talk about money, particularly to your partner if you have one. Ask others for help. Don’t allow financial problems to linger and get worse.
  11. Be aware that material purchases won’t make you happier in the long-run. There’s no denying that many of us, particularly women, get a positive feeling through retail therapy but it always wears off pretty quickly. Buy things you need or really, really want but remember simply buying stuff won’t make you happier or it certainly won’t make you wealthier.
  12. Know where you stand financially. Everyone should have a back-of-the-envelope idea about where their net worth (assets – liabilities) stands. Before knowing where you want to go you have to know where you are.
  13. Taxes matter, both income tax and tax on investments you build up over time. Most of us finding preparing our tax returns complicated and boring but it is important you take advantage of as many tax breaks as you can so use a good accountant and take advice where appropriate.
  14. Don’t focus your financial thinking so much on retirement as gaining financial independence. The goal shouldn’t be about making it to a certain age so you can ride off into the sunset, but rather getting to the point where you don’t have to worry about money anymore.
  15. Make lists of goals or targets that you want to achieve so that you get focused and can keep track and measure progress (or total lack of it).

Are you paying too much on your Mortgage?

Banks aggressively chase new business but they often don’t offer the best deals to their existing customers. Recently I have identified a number of clients who were paying above current market rates on their mortgage and they have been able to obtain a significant reduction either by contacting their bank and asking them to review the rate or by refinancing through a mortgage broker. I can recommend a good mortgage broker if you need a referral.

Recent research reported by a Smartline broker indicated that 94% of Australians have no problem recalling their mobile number but a huge 85% have no idea what rate of interest they are currently paying on their home loan. If you are one of those that have little or no idea how much interest you are paying, it could be costing you thousands of dollars a year in additional payments that could be better used for other things, such as taking a holiday or paying off your home loan sooner. A reduction in the interest rate of 0.60% on a $500,000 30 year mortgage could equate to more than $60,000 over the life of the loan; that’s a big deal!

Chinese Military Installations in the South China Sea – should we be concerned?

In recent times there has been quite a bit of alarmist commentary on China building up military installations in the South China Sea. Some see this military build-up as a threat to China’s geographic neighbours and also to the movement of goods through this major trade thoroughfare. Another worry is that Australia might get drawn into a conflict between our leading trade partner, China, and our major defence ally, the United States. This article by Geopolitical Futures provides some interesting and reassuring commentary on this issue, suggesting it is not currently a major concern.

Marriage in the Computer Age

I think the following exchange regarding between a young lady and a Tech support team regarding marriage is both humorous and insightful.

“Dear Tech Support

Last year I upgraded from Boyfriend 5.0 to Husband 1.0 and noticed a distinct slowdown in overall system performance, particularly in the flower and jewellery applications, which operated flawlessly under Boyfriend 5.0.

In addition, Husband 1.0 uninstalled many other valuable programs, such as: Romance 9.5 and Personal Attention 6.5, and then installed undesirable programs such as: AFL 5.0, NRL 3.0 and Golf Clubs 4.1.   Conversation 8.0 no longer runs, and House cleaning 2.6 simply crashes the system.

Please note that I have tried running Nagging 5.3 to fix these problems, but to no avail.

What can I do?  Signed, Desperate”

“Dear Desperate,

“First keep in mind, Boyfriend 5.0 is an Entertainment Package, while Husband 1.0 is an operating system.
Please enter command: I thought you loved me.html and try to download Tears 6.2 and do not forget to install the Guilt 3.0 update.
If that application works as designed, Husband 1.0 should then automatically run the applications Jewellery 2.0 and Flowers 3.5.However, remember, overuse of the above application can cause Husband 1.0 to default to Grumpy Silence 2.5, Happy Hour 7.0 or Beer 6.1. Please note that Beer 6.1 is a very bad program that will download the Farting and Snoring Loudly Beta.
Whatever you do, DO NOT, under any circumstances, install Mother-In-Law 1.0 (it runs a virus in the background that will eventually seize control of all your system resources.)
In addition, please, do not attempt to re-install the Boyfriend 5.0 program. These are unsupported applications and will crash Husband 1.0.

In summary, Husband 1.0 is a great program, but it does have limited memory and cannot learn new applications quickly.
You might consider buying additional software to improve memory and performance. We recommend: Cooking 3.0 and Hot Lingerie 7.7.

Good Luck!”

This newsletter contains general advice. It does not take into account your individual objectives, financial situation or needs. You should consider talking to a financial adviser before making a financial decision.

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