I am really chuffed to share with you that last week I was announced as the winner of the AMP Advice Competition.
The competition was open to advisers across all of the AMP licensees and we had to submit our recommended strategies for a set client case study. Following is the feedback I received when the result was announced:
My daughter Sophie, who is in year one, has been learning about money at school. They’ve made money boxes that sit on their desks and they appear to be earning (plastic) money. I’ve heard talk that this money will be used for a princess ball – but I’m not sure what the class princes and knights will be doing. Minor detail!
Teaching children about money is essential. Recent Federal Governments have recognised this and financial literacy is finally being incorporated into the national curriculum.
Recently a journalist interviewed me about what parents can also do to teach their children about money.
In my view by far and away the most important thing you can do to teach your children about money is to be an excellent role model.
I’m not a parenting expert, but what I’ve learned from such experts is that a lot of the things my children will learn from me will be through imitation – including my bad habits.
In contemplating how to teach your kids about money the place to start is reflecting how competent you are in managing your money.
The most fundamental financial skill is managing your cash flow. The outcomes of good cash flow management include:
You consistently spend less than you earn
You have money for those things in life that really matter to you
You regularly save
Through modelling and mentoring show your children:
How to smooth out their lifestyle so that it’s not feast or famine based on what bills are due that month.
How to prioritise their wants so they get the biggest and most lasting enjoyment from their purchases.
How to save up for things they really want but can’t afford right now.
How to think ahead by planning for the predictable. (e.g. school holiday activities with mates, getting their licence, graduation ball, schoolies week.)
How bank accounts and interest works so they start to learn how to make their money work hard for them.
How to manage true emergencies without stress by having a pool of dedicated savings.
Teach kids to spend less than they earn
Since young children don’t have credit cards it may seem inbuilt and automatic that you are teaching them to spend less than they earn in pocket money.
Children do have access to spontaneous, large bonuses, which they typically earn through whining, guilt trips and other weapons in their arsenal.
Whenever we cave in they learn that not having the money is not a problem.
When they eventually do get a credit card it’ll become an extension of their income that is quickly soaked up. So, they’ll get another, then another…
Enter, Mummy & Daddy to save they day so that our kids don’t ruin their credit rating. And the pattern repeats – just on a grander scale.
Saying no now is teaching them a valuable habit.
When my 6 year old daughter, Sophie wants me to top up her saved pocket money so she can buy something I explain that I don’t want to spend my pocket money on that item. I explain that instead I have more important things I want to spend my pocket money on, and try to weave in a recent example. It’s early days but so far she seems to understand.
Teaching kids to save up
To teach children how to save up I suggest you:
Start with small amounts
Make the items tangible and meaningful to your child
Use non-essential, truly discretionary items so you won’t be tempted to give them an unearned bonus.
When we introduced Sophie to pocket money she naturally asked what she could spend it on. She loves having a lunch order at school but our rule is that she can have one per term – usually in the last week. I suggested that she may like to save her pocket money for an extra lunch order per term and then helped her count the weeks she would need to save.
For older children the important things they really want may cost more and take longer to save for. You can help them learn how to avoid painful disappointment by helping them predict then plan for the predictable.
For high school age students one year is probably a reasonable time frame for them to be able to look ahead. At least every three months do a rolling one year look ahead of the things they really want to do and own. For example:
School holiday activities with friends
The latest gadget. You may not know what it will be but sure as the sun rises in the east there will be a hot gadget arriving.
Graduation ball (think expensive outfit, limousine and after party)
First car (make them save for this rather than give it to them. It’s too good an opportunity for a valuable lesson.)
Of course the essential next step is to regularly set aside dedicated amounts to save up for each of the items.
Teaching kids to prioritise their wants
For older kids the one year look ahead will also help them prioritise their wants. Every time they want to spend their money on something more trivial remind them of the items on their one year plan and ask the open question “is this new item more important than these items?”
I believe the same can apply to younger children; you just need to shorten the time frame, which is what we’ve done at home.
Here’s one way I tried
To date Sophie hasn’t saved enough for a bonus lunch order. She keeps spending her pocket money on other items.
One early purchase she blew her money on (IMO) was a junk toy from one of those dispensers they have in shopping centres. (Those things had always been a firm no from Dad no matter the whining, so it was no surprise she indulged when given the chance.)
I think it was a matter of days before the toy was lost or forgotten.
A few weeks later a toy catalogue came home from school and Sophie really want a book she saw that was about a girl named Sophie. The problem was that she didn’t have enough pocket money left to buy the book.
It actually looked like an appropriate book to help her with literacy and I know how she loves to read and re-read her books. But I decided not to cave and give her a spontaneous bonus.
Instead I used the opportunity to remind her of where she had spent her pocket money and explain how that related to not being able to have this new item she really wanted.
Since then there has been a few other learning opportunities and I think (hope) she is catching on.
Involve them in the family budget
If they’re old enough to have a part-time job then I feel they’re old enough to see the whole family budget – warts and all.
Give them the opportunity to discover how much life really costs, including that roof over their head, the fully stocked pantry, funky fashions and their education.
Show them how you’re working out what amounts to set aside for future bills and for unforeseeable emergencies.
Explain to them how you decide what you can afford and what you can’t afford.
All of this is very hard to learn well if you are thrown into the deep end when you move out of home. Mistakes are easy to make and can be costly.
Give your kids a great start in life by giving them the gift of financial literacy while they are still young and at a home.
The best way you can do that is by being a great role model.
No amount of money tips will boost some people’s financial well-being. For them the underlying cause has to be treated. Over the years I have observed there seems to be three major contributors to great financial well-being. Underlying many money problems is a gap in one or more of the three.
No amount of money tips will boost some people’s financial well-being.
For them the underlying cause has to be treated.
The three keys
Over the years I have observed there seems to be three major contributors to great financial well-being.
How aware you are of alternate views, approaches and possibilities.
Plus how good you are at implementing that which you already know would improve your well-being.
Being engaged in “work” that fulfills you rather than drains you.
Have you noticed that people who like, even love, their jobs tend to get more opportunities and pay?
Your relationships with your life partner and your offspring are arguably the most important relationships. Being on (close to) the same page as your life partner is critical to your financial well-being.
It also helps you be positive financial role models for your children.
The key cause of money problems
Underlying many money problems is a gap in one or more of the above.
Compounding the problem is that when our well-being is down our human nature is to console ourselves impulsively buying shiny stuff that provides a rush of short term pleasure much like a sugar hit.
When financial advice is not enough
If after investing in financial planning advice you still don’t seem to be making enough progress in resolving financial problems then an investment in either of these three areas is money well spent.
Personal development including 1-on-1 life coaching to accelerate your journey.
Career coaching to help you become clear on your vocation as well as the career in which you decide to earn your primary income (Ideally the same, but sometimes not possible). Then continuing professional development.
In fact I’d go so far as to say cut spending on everything else to ensure you have the money to make such an investment. It’ll boost your overall well-being as well as your financial well-being.
For many people the word “budget” conjures feelings of restriction. (Just like the word “diet”.) However a good budget should be the exact opposite. It should facilitate you having enough money for the things that really matter so you need not feel restricted. In this article I reveal a better budgeting technique using the model “Pay Yourself First (in practice)”
Budget…is not a…dirty word! Budget…is not a…dirty word!
Once on live TV I was challenged to come up with a better word for a budget. The interviewer felt the word was too creepy.
The reality, as you can probably guess is that it has nothing to do with the word but the meaning we associate with it.
In fact the origin of the word “budget” is in the leather case or wallet that bureaucrats used to carry their financial plans.
Of course the problem is that for many people budget conjures feelings of restriction. (Just like the word “diet”.)
A good budget should be the exact opposite. It should facilitate you having enough money for the things that really matter so you need not feel restricted.
You achieve this this by following the wealth principle I call “saving for the significant and minimising the insignificant.”
Pay Yourself First (in practice)
It’s likely you’ve heard of the principle to pay yourself first.
Back when I was a graduate engineer I thought this principle meant to put a certain percentage of my income away for wealth creation. Then I wondered “what next? How do I manage the remainder?”
Now that I’ve had the benefit of working with lots of people on their cash flow I’ve created this model to help you create an effective budget that sets aside money for the significant things in your life plan.
To follow the principle of pay yourself first ideally you work from the top as you allocate your income into pots of savings.
However, if you find that you never have any savings and in fact spend more than you earn the top-down approach won’t feel possible – because it’s not yet. To extricate your butt from the spending fire first you need to get control. You do that by starting at categories 5 and 6 and working upwards as you increase your control.
In short if you are in stages 1 or 2 in the Six Stages of Wealth Creation you would start at the bottom and work upwards to improve your cash flow management. Everyone else can take the planning approach and go top-down.
Your pots of money
1. Financial Independence
The first pot you allocate is how much you need to regularly invest so you accumulate enough net wealth to “retire” – or make work optional – when and how you want it.
In addition you include the additional regular loan repayment s you need to make to ensure you are free of personal (non-investment) debt by your financial independence target date.
2. Pre-retirement Essentials
The second allocation is to all the big things you want and need to do, buy or experience between now and the point you achieve financial independence.
For example: car upgrades, major home maintenance, family holidays, replacing major household items, parental leave. (The list goes on.)
In my experience many people find these items either blow their savings or are funded by debt. Why borrow and pay interest on predictable expenses when instead you could be earning interest? Earning interest in advance actually reduces the true cost of the items and the amount you need to save.
3. Irregular Expenses
In this pot I include all expenses you pay at least every year but less frequently than monthly.
For example: clothing, utilities, insurance, gifts, parties, subscriptions.
Again from my experience it is often the irregular expenses that end up blowing the savings of otherwise consistent savers. The problem for them is that whilst they are saving, usually by automated pay deductions, they are not saving enough. Month-to-month they may have savings but not year-to-year.
Often when clients actually separate their irregular from their regular expenses they are shocked by how high a proportion are irregular expenses. That observation alone is an insight into why they may be spending too much.
The expenses may be out of sight but they should not be out of budget.
4. Existing regular commitments
This category is the allocation for repaying all of your existing debts as per the current minimum required repayment.
For many people this is the first line item they put in when working out their budget.
The reason loan repayments is item 4 is that when you take a planning approach you first allocate items 1 through 3 to work out how much you can afford to borrow.
The way many people actually work out how much to borrow is a combination of:
What the lender says they will lend them
Their income less the regular spending that comes to their mind (i.e. untracked)
5. Regular Essentials & Comforts
All the regular items you spend at least every month.
When you take the planning approach you get to this point and discover how much you can afford to spend on comforts. And some things you thought were essentials get re-categorised.
It’s at this point many people start prioritising between lifestyle now and future significant goals.
Which is more important to me?
If I don’t save up for that future goal, but still want it how will I create the money to afford it? (e.g. I’ll only be able to afford X if I get a promotion – so I’d better start investing in professional development.)
6. Impulses and Indulgences
The final category is a little allocation for spontaneity.
How much to allocate to each pot
If everyone were identical in situation and value-system then we could define a nice neat package of percentages to allocate to each pot.
But we’re not.
To create a budget that is meaningful and motivating to you it needs to relate to your goals for your money.
That’s not as hard as it may sound. You already know what you want – it’s in your head, you probably think about it regularly. Just get it out of your head and onto paper and then put a number and time frame next to it.
Automatic wealth creation
Once implemented good budgeting should also be as automatic as possible. That’s the next step of smart cash flow management.
If you’re interested in how to put this all into place talk to me about Cash Flow Coaching.
Two months ago my sister, Julia was the victim of identity fraud. Two thousand dollars quickly disappeared from her bank accounts before she detected it.
This week is National Identity Fraud Awareness Week (NIDFAW), so I encourage you to consider how you may be placing yourself at risk of identity fraud. Then act to prevent it.
NIDFAW spokesperson Peter Campbell noted that “potentially, all it could take is a combination of a few carelessly discarded pieces of information such as name, date of birth and bank account details for the fraudsters to have the information they need to attempt to commit identity fraud.”
How my sister was defrauded
Offender contacted her bank and changed her phone banking password.
Offender ordered a Visa Debit card linked to her savings account.
Offender stole the Visa Debit card and PIN from her letter box.
Offender withdrew the max $1,000 from ATM using Visa debit card.
Offender used phone banking to make a cash advance from her credit card to her savings account.
The next day the offender withdrew another $1,000 using the Visa Debit card.
That same day my sister detected the fraud and contacted her bank about the missing $2,000. The card was cancelled.
It could easily happen to you
Often we are very conscious of online identity fraud but paper based fraud is still the most common way for an identity to be stolen.
And 75% of Australians put themselves at risk of paper based identity fraud by throwing away highly sensitive information.
Lock away your mail
Needless to say Julia now has a lock on her letter box, as do we. I recommend that you do too.
In fact, some years ago after mail was stolen from the letter box at our old house we decided to get a post office box. If there is a post office convenient to you then a post office box can be a low cost way to help protect your sensitive mail.
A post office box also helps keep your home safe when you are away on holidays by preventing mail accumulating.
For legal reasons it is a good idea to retain copies of your tax returns and related financial statements for around seven years. These documents contain precisely the sensitive information that could enable your identity to be stolen.
To help protect your identity store these records in a lockable filing cabinet. And of course keep the cabinet locked with the key hidden away.
I know that we have so many locks these days that it can be considered inconvenient to lock things and hide the keys. So I was excited recently to find a very affordable small lockable key cabinet at my local hardware store. Yes it is more of a barrier than truly secure, but it is convenient and thieves do first need to find it. Plus it helps keep my young children out of places I don’t want them.
Today many of our statements and records may be received electronically and stored on our computers. This is convenient and low cost. But if your computer is stolen or simply accessed while you aren’t around you could be giving up sensitive information.
Protect yourself by:
Password protecting your computer.
Storing these sensitive records in an encrypted folder on your computer.
Automatically locking your smartphone when not in use.
Securely erasing disk drives before discarding of old computers and USB drives. (Ask a geeky friend or relative to point you in the right direction.)
Create passwords/PINS that are not easily associated with you and your details such as date of birth, phone number and age.
Only allow trusted close friends to EFT money directly into your bank account.
Encryption is easier than you may think. Most modern computer operating systems (e.g. Microsoft Windows) have an inbuilt encryption facility that enables you to selectively encrypt folders.
Many of us now have smartphones and use the apps to store documents and access websites that contain sensitive personal information. For convenience often these apps automatically remember your logins and passwords. So ensure that you lock your smartphone when it is not in use.
Update on 2nd April 2011: New research has shown that “over half of secondhand mobile phones retain important personal data of the original owner”. So ensure you format the phone’s memory and destroy your SIM card before discarding it.
Share birthday wishes privately not publically on Facebook, Twitter and other social media. Even just saying “happy birthday Matt” on Facebook gives away the day and month of my birth. Adding the personalisation of my age is a nice touch, especially on a milestone birthday, but it gives away my entire date of birth.
Shred before discarding
Documents containing the following sensitive information should be shredded before being placed in the rubbish bin:
Account details (of anything where money can change hands)
Dates of birth
Tax file, Centrelink and Medicare numbers
Personally I like to shred statements and letters referencing any account details for anything. This includes all bank, investment, superannuation and insurance products, plus utility bills.
Protect your identity and the environment
If like me you like to recycle paper then I recommend you buy a compost bin. I discovered recently that putting shredded paper into our composter helps to keep it balanced and healthy. Plus composting saves us money.
Other tips from NIDFAW
The partners in National Identity Fraud Awareness Week suggested these additional tips:
Check your account statements regularly and look for any unusual or unauthorised activity.
Subscribe to an ID theft protection/monitoring service such as Secure Identity that allows you to proactively monitor your credit file for fraudulent activity and be able to react swiftly should you become a target for ID theft.
Contact your credit card company and banking institution before departing for travel, or your travel may prompt a block on your account.
Have you been the victim of identity theft or know someone who has? If so, please share your extra tips for how to prevent what happened to you. You can do so in the comments below. (Share it anonymously if you prefer to protect your identity.)
Article sources include:
* National Identity Fraud Awareness Week (NIDFAW) media release.
* Fellowes (2010), Newspoll Survey, Australia – ID Fraud Awareness, conducted on a national online study with a sample of 1211 people aged 18-64 years.
Do you want to take more control over the management and investment of your money but are not sure what is right for you? If so, this DIY Wealth Creation course may be on the money for you.
Create your own wealth creation plan
This course will provide you with a detailed overview of the key things you need to know to make smart financial choices that are right for you. As well as discovering what you need to know you’ll also learn how to take action straight away.
As a result of completing the activities during this course you will:
Create a wealth creation plan to achieve your lifestyle goals
Identify how to plug any gaps in your financial foundations
Understand mainstream investment, superannuation and insurance structures
Understand the appropriate next steps you need to take in wisely managing your money
It will be hands on with activities for you to complete each week as you construct your personal financial plan.
I am presenting this seven week course as part of the regular Adult Community Education courses offered by the Challenger Institute of Technology (formerly called Challenger TAFE). It will be held at their Heathcote campus in Applecross, Perth.
A client just forwarded the following parable to me. Have a read and please let me know your reactions in the comments below. The original author is unknown.
Tax cuts in terms everyone can understand
Suppose that every day, ten men go out for dinner. The bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this:
The first four men (the poorest) would pay nothing.
The fifth would pay $1.
The sixth would pay $3.
The seventh $7.
The eighth $12.
The ninth $18.
The tenth man (the richest) would pay $59.
So, that’s what they decided to do. The ten men ate dinner in the restaurant every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve.
“Since you are all such good customers,” he said, “I’m going to reduce the cost of your daily meal by $20.”
So, now dinner for the ten only cost $80. The group still wanted to pay their bill the way we pay our taxes.
So, the first four men were unaffected. They would still eat for free. But what about the other six, the paying customers? How could they divvy up the $20 windfall so that everyone would get his ‘fair share’?
The six men realized that $20 divided by six is $3.33. But if they subtracted that from everybody’s share, then the fifth man and the sixth man would each end up being ‘PAID’ to eat their meal.
So, the restaurant owner suggested that it would be fair to reduce each man’s bill by roughly the same amount, and he proceeded to work out the amounts each should pay.
The fifth man, like the first four, now paid nothing (100% savings).
The sixth now paid $2 instead of $3 (33% savings).
The seventh now paid $5 instead of $7 (28% savings).
The eighth now paid $9 instead of $12 (25% savings).
The ninth now paid $14 instead of $18 (22% savings).
The tenth now paid $49 instead of $59 (16% savings).
Each of the six was better off than before. And the first four continued to eat for free. But once outside the restaurant, the men began to compare their savings.
“I only got a dollar out of the $20,” declared the sixth man. He pointed to the tenth man “but he got $10!”
“Yeah, that’s right,” exclaimed the fifth man. “I only saved a dollar, too. It’s unfair that he got ten times more than me!”
“That’s true!!” shouted the seventh man. “Why should he get $10 back when I got only $2? The wealthy get all the breaks!”
“Wait a minute,” yelled the first four men in unison. “We didn’t get anything at all. The system exploits the poor!”
The nine men surrounded the tenth and beat him up.
The next night the tenth man didn’t show up for dinner, so the nine sat down and ate without him. But when it came time to pay the bill, they discovered something important. They didn’t have enough money between all of them for even half of the bill!
And that, boys and girls, journalists and college professors, is how our tax system works.
The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up at the table anymore.
This parable is often circulated whenever tax cuts are being discussed and especially when the direction of those tax cuts is being politicised (that’s always isn’t it?).
You can get a sense of the value system of the original author through the parable. But I am interested to hear your view and reactions to the above – please share them in the comments below (you can do so using “Anon” as your name if you wish.)
If the Henry Tax Review in Australia results in cuts in personal tax rates how should they be applied?
Are you are goal setter? Do you like to be purposeful about the way you live, experience and achieve?
If so, then this e-book is brimming with ideas to help you kick start the new decade.
My article, “How To Have Enough Money For What You Want” is on page 17.
Most things in life require money to support them. My article shares a process to help you have enough money for those things in life that are most important to you. So if you are reviewing 2009 and setting new goals for 2010 my article is on the money about the money to support you achieving those goals.
On Thursday I conducted a webinar in which I addressed the top three types of financial decisions that are on your mind, as submitted in the recent survey.
Almost all respondants said that they think about these things daily or a few times a week. That is a lot of time and energy consumed on money matters instead of spent doing the things you really love. Better to resolve the issues and spend more time with family and friends, or pursuing your hobbies.
Most issues fell into these three broad categories: Planning, Saving and Investing. For example:
“How will I have enough money for…”
“How can I save more money for…”
“Where is the right place to invest my savings?”
For an insight into the process to resolve these issues watch the recording of the webinar below.
The recording is 45 minutes. A small time investment when you consider the time cost of repetitively thinking about financial issues without resolution.
For assistance to make more clear, confident financial decisions call me.
With two interest rate rises already under our belts more people are asking me if they should be fixing their rates. Read on to discover the pros and cons and if fixing your interest rates may be right for you.
With two interest rate rises already under our belts more people are asking me if they should be fixing their rates.
You give up flexibility for certainty plus you often pay more.
The initial attraction to fix rates is often primal – we hate to miss an opportunity to save money. With more rate rises forecast that’s precisely what people think they’ll be doing if they fix rates.
Most get it wrong
The reality is somewhat different for most. Research has shown that over half of people who fix their rates end up worse off financially. They pay more interest and repayments than if they’d left their loans variable.
For a personal illustration of that just ask anyone who fixed their rates two years ago when there was still talk of rates going higher. That crystal ball was clearly broken.
The Rate You’ll Be Paying
One belief is that you can fix your rate at the current variable rate, so as soon as rates go up you’re in front. That is not the case. Fixed rates are set taking into consideration the lender’s forecast of rates during the fixed period.
The following table summarises rates as at 7th November 2009 from the four biggest lenders:
Ponder This: If you fix your rates now how high do variable rates need to go before you break even overall?
For and Against
You can’t keep food on the table if your repayments go much higher
Your mindset is that certainty is a very high priority. (Any control freaks reading this article?)
You immediately pay a higher interest rate and higher repayments, which impacts your cash flow
You are very restricted on the amount of additional repayments you can make, meaning you can’t ahead as quickly as you may like.
There can be a break fee if you need to refinance during the fixed term (usually when your fixed rate is higher than the variable rate, like now.)
Things To Consider
What are your life plans over the next three or five years?
Your financial decisions today impact on the options you will have available to you tomorrow, next year and five years from now. If you’re not well informed some decisions you make can shut out important life choices you would like to make in coming years.
For example, let’s say you plan to upgrade your home in the next few years. If you have a fixed rate you may be liable for a large break cost. At the time the cost may be so high that you can’t afford it and end up not being able to move as desired.
Maybe you don’t plan to for certain, but maybe it’s an above fifty percent possibility. If so, wouldn’t you like to keep the option flexibly open to you?
Before fixing your rates write down all the things you think you may like to do in the coming years. Project out as far ahead as the period for which you are planning to fix your rates.
Right now you may not have the cash flow to make high additional repayments but keep in mind the pay rises and bonuses you may receive over the next two to three years. Wouldn’t you love to be able to use them to nail your mortgage?
Cash flow control
Remember that if your cash flow is hyper-sensitive to increased repayments then fixing rates will immediately increase your pressure. Instead, over the next few months redirect that same amount into getting some cash flow coaching. You’ll discover ways to save money that’ll actually decrease your sensitivity to rate rises.
Have you ever thought you are not getting as far ahead financially as you think you should, but are not sure why? Then maybe one or more of these three behaviours may be the cause.
Have you ever thought you are not getting as far ahead financially as you think you should, but are not sure why? Then maybe one or more of these three behaviours may be the cause.
Your current financial situation is the cumulative effect of all the financial and lifestyle choices you have made to date. Over time your possible lifestyle outcomes diverge greatly and not necessarily towards the outcome you most want (represented by the star on the diagram to the right).
The purpose of comprehensively planning your financial situation is to maximise the probability that you will meet or exceed your desired lifestyle.
Implicit in this is to minimise the impact of negative outcomes from your choices and from external events.
Why we don’t meet our financial goals
I believe there are three main categories of reasons we don’t meet our financial (and therefore lifestyle) goals:
Knowledge – we don’t find out the right things for us to do right now
Behaviour – we don’t do the things we already know we should be doing
Time – we take action too late (delay)
In this article let’s look at three financial behaviours that can prove fatal to the achievement of your goals and what you can do to overcome them.
There are other destructive behaviours. I have chosen these three because they eat away at your foundation and are counter-productive to your other efforts. Long term readers may notice they link to the three Cs of Money Mastery.
The Three Fatal Behaviours
1. No idea what you spend
The common impact of this behaviour is that you end up spending way too much money on insignificant things and don’t have enough for really important things. The longer term impact is that you will not be diverting enough savings to longer term wealth creation meaning you may never be able to retire on your terms.
A symptom of this behaviour is thinking “wow, where did all my money go?” Another symptom is having an ad-hoc important event creep up on you, like a wedding or milestone birthday and you not being able to afford to fully participate. A variant of that symptom is that whenever that happens you whack it on your credit card and spend months trying to repay it.
What to do
You know what to do to solve this one just like I know what to do to get fitter. If you exhibit this behaviour hire a personal trainer for your money to support you in getting financially fit.
We make haphazard investment decisions when we don’t really know what is the best option for us but we can’t be bothered spending the time and energy on the research. So we tend to do what others are doing and take emotional comfort in being part of the crowd. (For most people this will be sub-conscious.)
The impacts of this behaviour are many and include:
Mediocre returns – you may make money but probably nowhere near enough for the ‘risk’ you took, and also not as much as the rest of the market. So you miss your lifestyle target (the star).
Stress – you are not confident about the investment so you are stressed about what could or is going wrong. You saved time doing the research but traded it for emotional stress – what’s the point?
What to do
The solution here includes:
starting early (like right now) so time is on your side
starting simple with only what you currently understand
Taking incremental steps forward in your knowledge so you can increment forward in complexity of investments
Hiring a mentor to educate you and thereby increase your confidence and capability. (A good financial planner will not only advise but also educate you.)
3. Blind optimism
This behaviour is all about the impact of negative outcomes from your choices and from external events.
Optimism – you think it’ll never happen to you. You underestimate both the likelihood and the consequences of something going askew.
Blind – You don’t even bother to investigate, consider and evaluate what could go wrong and its impact.
What to do
“Sometimes maybe curiosity can kill the cat-astrophe before it actually happens. Ask questions, seek answers, find possibilities.” Wise words from one of my mentors, Glenn Capelli.
Next erect your safety nets so if you fall off the tight rope of life you bounce rather than splat.
You probably know this stuff already – I write about it all the time. But if you are not doing the positive things you are robbing yourself of riches. One day the party is going to end and you will wake up with a rude hangover (that could last decades).
Party responsibly and you can enjoy both today and tomorrow.
Just like health, if you need support and accountability to implement new financial behaviours hire a personal trainer and even buddy up.
To have enough money to live the life you’d love stop researching new trends (K), start doing the foundation actions (B) and do it now (T).
Today is Stress Down Day, to raise funds for Lifeline. As part of their promotion of Stress Down Day Lifeline conducted a Newspoll to discover what was stressing Australians.
The Newspoll found that two thirds of Australians are stressed about money, second only to being stressed about work. Does that include you?
The Lifeline poll reminded me of research published last year by Relationships Australia, which found that financial stress was the second largest contributor to relationship breakdown, affecting 35 percent of relationships.
This may be a stretch, but if we can work together to reduce our financial stress we may be able to lower the divorce rate and bring more joy into everyone’s lives.
Causes of financial stress
I started writing a list of what has caused financial stress among people I’ve met. Most of the causes fell into two broad categories:
Not enough money (to do, buy or retain)
Doing it for the money
In this article I’ll share some tips for reducing your stress caused by “not enough money”. Later, I’ll write about “doing it for the money”, but if you’re keen to learn how to earn money doing what you love then please call me now.
Stress about not enough money
Our stress seems to rise when we don’t have enough money for something that is really important to us. For example:
To join our close friends on a big interstate or overseas holiday (maybe to celebrate a milestone birthday)
To buy a bigger house when our family has well and truly outgrown the current shoebox
To keep our car and house when we lose our job and fall behind in the mortgage repayments
Our stress doesn’t appear to rise when we decide we can’t afford the $2 chocolate bar or $15 movie ticket. I believe that is because those things aren’t really that important to most of us.
Financially related decisions can also stress us, and I believe they fall into this broad category. Our stress level is affected by the materiality of the loss or by the consequence of a wrong decision. If we get the decision wrong it may mean we won’t be able to upgrade our shoebox house when we want to, so then we stress about the decision.
Save for the Significant. Minimise the Insignificant
To reduce your financial stress plan to have enough money for those things that are most important to you. This is a personal thing and is based on your values.
Once you have plans to be able to afford the most important things in your life you can spend the rest of your money on whatever you want, guilt free.
You need to move your thinking from “next pay” to “next year” and then onto “next decade”.
I believe it is through spending too much on daily insignificant things that we end up not having enough for the significant things. This is often because the significant experiences and achievements are lumpy and irregular, so they can sneak up on us.
Bring far away important things into focus
Here’s an exercise that you can do.
Get a blank piece of paper and place it in landscape orientation. Across the middle from left to right draw a thick line. The left represents now; the right represents your passing, say at age 100.
Divide this line representing the remainder of your life into bite size chunks. The length of each chunk is not fixed, just make it meaningful to you. You may like symmetry and therefore make each chunk an even five years. Or each chunk could be of different length representing different life stages you have in mind.
Next fill the rest of the page with all of those achievements and experiences that are really important for you in each of those meaningful chunks of life. For example:
Career transitions you’d like to make
Places you’d like to see in the world
Experiences you’d like to have with your family
Time out of the workforce to study, reflect or travel
Contributions you’d like to make to your community and world
For inspiration on what is really important reflect on your personal values.
Now implement plans
Implement a clear plan to manage your money so that you achieve and experience what is really important to you. Then you can happily spend the remainder on whatever insignificant pleasures you want, guilt free.
This is how you can achieve what I call financial fulfilment. And this exercise is part of the process that I call Fulfilment Financial Planning. To learn more call me on 1300 669 101. I take clients from all around Australia and would love to hear from you.
“Even if nothing happened in the financial markets that day there would still be a 60 page edition of The Australian Financial Review published the next day.” That was the view shared by one of my first lecturers in financial planning back in 2000. (I wish I could remember which lecturer so I could give him credit.)
Time proved that to be correct and over the past nine years I have progressively read less and less of the mass media and more specialist publications. Most of what is published in the mass media makes me quesy or irate – often both simultaneously. Too frequently I feel that mass media financial articles confuse the issue and are too superficial by not considering the real, valid depth.
I could rant on this topic for a long time, but I won’t. Have some fun instead and watch this enlightening video by Jon Stewart of The Daily Showin the USA. Stewart takes the so called experts of CNBC, the business show, to task over their forecasts and soft approach on CEOs.