Cash in your frequent flyer award points

In September 2001 I lost over 100,000 frequent flyer points when Ansett Australia collapsed. I had been accumulating reward points with the intent of funding an overseas flight. To that end I’d even paid for a domestic flight rather than use some of my points.

What a waste!

Back then it was a common complaint that reward seats were scarce and never when most people wanted to fly. Ten years on reward flights are easier to come by and you can even use points to partially fund a flight.

And there has been one other excellent development.

You can now cash in your frequent flyer points!

Woolworths $100 gift cardThe Qantas Frequent Flyer Store currently includes 214 gift vouchers. The vouchers that excite me the most are the ones for everyday essentials like groceries, fuel and clothes.

Myer Gift Card from the Qantas Frequent Flyer StoreThe best value gift voucher I have found is just 13,500 points for a $100 voucher. This rate applies for many of the retail stores, such as Big W, Myer and Adairs, and also for car hire, hotels and Qantas Holidays.

Most other gift vouchers for Woolworths Group stores cost 14,500 points for a $100 voucher. That means your points are worth about 0.69 cents each. (Yes, less than one cent per point.)

Flights or gift cards?

Yes, redeeming your points for a flight award may offer slightly better value depending on when you fly. However if you usually fly only on cheap fares and specials then you’ll probably find, as I have, that the savings are about the same.

By redeeming your points for vouchers you can reduce the impact of rising costs. And, if you’re on the ball, you should therefore be able to boost your cash savings.

Even better, if you direct those savings into additional mortgage repayments you will be able to own your home sooner. Awesome!

When weighing up whether to accrue your points for flights or redeem them for cash keep this in mind – you don’t earn interest on your frequent flyer points.

In fact it seems that even though flight prices haven’t increased much the amount of points required has increased. So the value of your award points is actually decreasing.

Getting started is easy

With just 3,750 points you can redeem a $25 gift card. So log on right now and start redeeming.

Automate it

Qantas Frequent Flyer has recently introduced Auto Rewards. You can elect to automatically redeem your points for a Woolworths gift card every three months.

The current maximum amount is a $20 gift card costing 3,000 points. (That’s a value of 0.66 cents per point.)

Worried about security?

Yes gift cards are cash-like so you are right to give some thought to security.

At the very least you should have a decent padlock on your mail box to help protect yourself from identity theft. That will also help against theft of your gift cards.

Alternatively use a post office box – either your own or where you work.

Take the pressure down this Christmas

There are gift vouchers that will cover most items that will hit your budget this Christmas, including gifts. From general retail stores to travel, auto, hardware, electronics, food and liquor.

You may even decide to just give the voucher to someone as a gift. Hmm, that gives me an idea. I might redeem some points for a Bunnings voucher for my father-in-law.

What to do if massive world change is coming

“Perhaps the developed world is about to experience massive structural change”, mused my mate as we discussed the global financial situation recently.

In truth no-one knows what will happen.

The great news is that the actions which prepare you to survive a massive change also position you to thrive if instead a boom arrives. So irrespective of your personal forecast it is worth implementing these suggestions.

“Perhaps the developed world is about to experience massive structural change”, mused my mate as we discussed the global financial situation recently.

In truth no-one knows what will happen.

The great news is that the actions which prepare you to survive a massive change also position you to thrive if instead a boom arrives. So irrespective of your personal forecast it is worth implementing these suggestions.

What could happen

If massive change arrives it probably won’t be pretty. You may experience some of the following:

  • You lose your income, maybe for an extended period.
  • Just to keep food on the table you have to sell assets, maybe including your home, cheaper than what you paid for them.
  • Your loved ones lose their income and assets and move in with you.
  • Your investment values go sideways or even down.

It’s all about cash flow

To keep food on the table and a roof over your head you need cash flow. Your best bet to keep money flowing in is to keep your job.

Even in the Great Depression seventy per cent of Australian men remained employed, so if you play your cards right there’s a good chance you’ll stay employed.

To protect your employment income you need to maintain expertise of value to your employer, your industry and to the country.

One way to achieve this is through ongoing professional development. Another way is by being more productive – work smarter, not longer.

For some people though, reskilling and reinvention will be necessary. This will likely apply to those working in retail and other consumer discretionary industries. Don’t despair – these days changing careers is the new black.

Contain your expenses

Borrowing to the max seemed normal while wages and asset prices grew steadily. But it’s now evident many financial houses were built on unsuitable foundations. To survive and thrive avoid over-committing to large debt repayments that are reliant upon two incomes.

Make like a squirrel

It’s time to make like a squirrel and save up your nuts for winter. Build a reserve of emergency funds you can use to fund your expenses if the worst happens.

The best emergency fund is cash you can access within about 1 to 2 days’ notice. The cash can take a number of forms including:

  • Actual cash in a high interest online bank account
  • Available redraw on your mortgage because you are way ahead in your repayments
  • Withdrawal capacity in a personal line of credit secured against your home

Don’t rely solely on your investments

You may be thinking your investments are your backup plan.

If massive world change arrives it may be the worst time to sell your investments. In fact for lumpy assets like property you may not even be able to find a buyer. I know people who during the Global Financial Crisis couldn’t find buyers even after cutting prices.

In a “crisis” companies may slash dividends to preserve cash, leaving you empty handed.

And if people start bunking together to save costs your investment property may be without tenants. Or you may have to slash rents just to get a tenant.

So don’t rely on living off your investments if you lose your job for an extended period.

When the sun shines

Of course doomsday may never arrive and instead we’ll re-enter years of prosperity.

In that case, having invested in your professional development you’ll be in demand and may experience significant pay increases.

As a diligent debt repayer you won’t care as much when interest rates go up (to curb inflation) because you’ll have much less, if any debt.

Couple the higher income with contained expenses and you’ll have plenty of surplus income to invest in funding your early and luxurious retirement.

Chill out

Follow this timeless, common sense approach and you can confidently keep a “she’ll be right mate” attitude no matter what happens.

Why are only 5% of Aussies millionaires?

“One day I want to be a millionaire!”

I recall that being an often expressed goal around the traps twenty years ago.

Back then the median gross annual income was just $17,056* so the millionaire goal was quite a stretch. It was also before the explosion of free information on the internet.

Since then there’s been an endless stream of information published to show you how to wisely manage your money and become rich. Most of the information is dirt cheap or even free.

So despite all of this information why still do only 5% of Australians have net wealth in the millions? (Excluding the value in their principal residence.)*

That is the question I often ask participants in my seminars and courses.

The common reasons they suggest are:

  • It’s easier to spend now than save. We don’t have the discipline.
  • We make bad decisions.
  • We don’t know what is the right or wrong decisions so we don’t make a decision.
  • We get sucked into glamorous marketing and don’t know how to evaluate if the investments are any good.

All of those reasons are spot on. What do you think? Are there any other reasons you’d add?

Choice overload is a big problem

We’ve had an explosion of choice but our ability to make wise choices has not kept pace. So we hit information and choice overload.

In such circumstances often we either:

  • Throw our hands in the air in exasperation and do nothing.
  • Grab at something close that gets our attention and seems easy and do it whilst hoping for the best.

The problem with that is delay is the greatest cost in wealth creation. And bad choices can be just as costly.

This applies to all lifestyle goals

You may not have the goal to be a millionaire but I bet you have other lifestyle goals like a dream house, holiday, car, children’s education or retirement lifestyle.

Money is one of the resources that helps fund your important life experiences.

If you’ve ever said “I’d really love to do that but I just can’t afford it” then this probably applies to you. I bet the reasons you didn’t have the money for what you really wanted when you wanted it include those reasons listed above.

What to do about it

The elusive delayed gratification

Applying discipline is tough.

In the financial context I suggest you:

  • Get clear on what matters most to you in life
  • Save for the significant
  • Automate as much as possible

Last Thursday one of my cash flow coaching clients said to me:
“I’d rather have lunch in Venice than buy lunch at work every day.”

She was getting clear on what was more important to her and then changing her habits to ensure she achieved her dream of lunching in Venice with the love of her life.

What about you? What experiences matter most to you in life?

Once you know what you really want next I suggest you harness recent technological advances to do the heavy lifting and protect you from your impulsive self. In the old days they used envelopes or jars and manually topped them up. Now you can have multiple online high interest bank accounts and set up automatic transfers to coincide with your pay cycle.

Learn how to make smart choices

You don’t need to know everything. You just need to know what you need to know.

You can save yourself a lot time, indecision headaches and stress if you learn how to filter the information overload.

The big time saver comes from learning how to quickly filter out things are not appropriate to you right now.

The big financial kick comes from knowing how to choose actions that are right for you and will boost your net wealth. You can avoid procrastination and inaction and get on with doing.

To have enough money for what you really want when you really want it I strongly recommend you invest time in learning how to make smart choices.

Stop scouring the internet and media for tips on the best shares, suburbs and other investments to buy into.

Rather than learning more about all the possible investments out there instead learn decision making models and frameworks you can use to filter every new thing you hear.

The knowledge of how to choose stays with you for life and can be frequently reused. Learning how to choose therefore pays you dividends for life.

You gain clarity from knowing how to identify what are right and wrong decisions. Therefore you’re much less likely to get overwhelmed and either do nothing or follow the next hot tip you hear.

Here’s the plug

My observation is that there are plenty of books telling you what you can do but not many teaching you how to choose.

So I created a course DIY Wealth Creation for Busy People that teaches you how to make the right choices for you right now. In the course I share many decision making models you can apply for the rest of your life.

They’re decision making models I’ve created so you can only get them from me.

If you want to learn how to make smart choices I recommend you check out my course DIY Wealth Creation for Busy People.

Interested but can’t make it?

If you’re interested in the course but the time or location does not suit you please e-mail me and let me know (including interstate folk). That will help me make smart choices about other formats for effectively sharing the knowledge.

 

Article sources:

  • ABS 1301.0 – Year Book Australia, 1991
  • ABS 6554.0 – Household Wealth and Wealth Distribution, Australia, 2005-06 (latest release)

Time for tax planning

Three days before the end of last financial year I received a call from a journalist from the Australian Financial Review. He was writing an article for publication the next day about tips for managing your tax that financial year.

With tongue firmly in my cheek I suggested my top tip was “to slap yourself in the face for leaving it that late.”

Fortunately he laughed, agreed with me, and also agreed not to quote me.

June is not the time to start thinking about how you will reduce your tax that financial year. Often it is too late to implement the most tax effective strategies.

June is the time for implementing the final tactics of the tax strategy you planned well in advance.

Right now is the time for tax planning

Most Australians are employees so they have reasonably predictable incomes, even when you include investment income and debt.

Therefore your tax position for the financial year can be estimated close enough to give you a good insight into key tax management factors including:

  • Your taxable income
  • Your marginal tax rate
  • Your tax payable
  • Your surplus income after lifestyle expenses

Knowing those factors you can review strategies to decide how you will manage and hopefully reduce your tax.

How to reduce your tax

Tax management should be considered in the broader context of how you manage your money.

The ultimate purpose of managing your money is to ensure you have enough for what you need when you need it.

Yes, reducing your overall tax will increase the money you have.

However many tax effective strategies have significant impacts on your cash flow. Some tax strategies can increase your investment risk way above your risk tolerance and risk capacity.

So tax should not be looked at in isolation. More importantly for most people tax reduction should not be your primary driver in selecting financial strategies. In my experience most people have much bigger financial fish to fry.

I have published a detailed introduction to key ways to reduce your tax. Read the article and consider the strategies that may be appropriate to you this financial year.

What you can do right now

My top tips for the tax effective financial strategies you can implement right now include:

  • Salary sacrifice a regular amount to superannuation based on what you have estimated you need to save in order to achieve your financial independence goal
  • Purchase an income protection insurance policy (if you don’t already have one)
  • Contribute a regular amount after-tax to superannuation related to your eligibility for the spouse contribution tax offset and/or the Government co-contribution.
  • Shift your cash savings into the name of the lowest income earner (or better still onto your home mortgage)
  • Submit a PAYG Variation form to your employer considering the expected net taxable income loss from your geared investments (e.g. property). This strategy is better for your cash flow and avoids giving a large loan to the Government.

What you do in June

In June you make tactical tweaks to your strategies. For example:

  • Advise your employer of how much of your anticipated annual bonus you want to salary sacrifice to superannuation.
  • Adjust the after-tax amount you contribute to superannuation that month now you can closely estimate your eligibility for the co-contribution and tax offset.
  • Pre-pay interest on investment loans
  • Self-employed people can make their annual deductible contribution to superannuation based on what they earned that year.
  • Extra charitable donations from your surplus

Guidance on which strategies are right for you

Not sure which tax effective strategies fit your situation and goals?

If you’re in Perth I recommend you attend my next DIY Wealth Creation for Busy People course. You’ll discover how you can strike a balance between spending, saving and tax.

If you’re outside Perth or can’t make the course then call me to discuss financial planning.

Is this a scam?

Smart scammers try to make themselves appear legitimate as a way to suck you in. Before doing anything check the ASIC list of companies you should not deal with.

Smart scammers try to make themselves appear legitimate as a way to suck you in. They’ll use official sounding names, even names that are very similar to real companies.

In fact I had some scammers copy my e-mail newsletter template to send their spam. So their message looked very legitimate.

The Australian regulator, ASIC have compiled a very useful list of companies you should not deal with. It includes a list of official sounding overseas investment regulators and exchanges that are actually fake.

If you’ve been contacted with an offer that seems attractive:

  1. Get all of their contact details including registered business name, website address, physical address and phone number.
  2. Ask them to post a hard copy of their Product Disclosure Statement (PDS) and Financial Services Guide (FSG). Don’t give them your e-mail address.
  3. Insist you will do nothing right now and instead will call them back after considering the offer.
  4. Check their business name  and ABN are legitimate using the ABN Lookup tool and ASIC registers
  5. Check the ASIC list of companies you should not deal with
  6. Report the scam to ASIC

Scammers will of course provide very serious resistance to steps 1 through 3 so that alone could be a big indicator to go no further.

I also recommend you read my article about protecting yourself from identity theft.

How much you should spend on your next house

The banks will tell you how much you can borrow. But how much should you really borrow? This article describes how to estimate the ideal maximum amount you should borrow and the true maximum affordable repayment. Follow this process so you can avoid over-extending yourself and find a harmony between lifestyle now and your future lifestyle.

These days I rarely read a non-fiction book cover-to-cover, instead I flick through to grab key ‘big ideas’ to evolve my thinking. In the past year one book I delightfully read in full was “Predictably Irrational” by behavioural economist Dan Ariely.

As I immersed myself in the insights there was one in particular, right at the very end that I read as a personal challenge. (page 285, 2009 revised edition, pbk)

Dan Ariely described how when he and his wife Sumi went to buy a house he asked some experts he knew “including a few finance professors from MIT and investment bankers” what seemed to him like a simple question.

It is a question you have probably considered too.

“How much should I spend on a house?”

Ariely describes how everyone told him the same thing – a way to calculate how much he could borrow based on his income and the interest rate. But that’s not the question he asked.

Ariely noted “when I tried to push for an answer, the experts told me that they had no way to help me figure out the ideal amount we should spend and borrow.”
(my emphasis)

Can you see why I read it as a challenge?

Well, I have the answer for you Mr Ariely (I hope one day I can call you Dan).

First, let me share Ariely’s behavioural conclusion from his experience:

“When we can’t figure out the right answer to the question facing us, we often figure out the answer to a slightly different question, and apply this answer to the original problem.”

Hopefully you can see the potential issues in that human decision making.

How much you should spend on your next house

The maximum price you should pay for your next house is the sum of:

  • Your saved deposit
  • Transaction costs
  • The maximum amount you should borrow

The maximum amount you should borrow is a function of:

  • the loan term
  • the average interest rate over the loan term
  • your maximum affordable regular repayment amount.

For definitions of the categories described in the formula below see my ‘Pay Yourself First (in practice)’ model I described in my recent article on better budgeting.

Maximum affordable loan repayment equals your net after-tax income, less allocations for:

  • Regular saving for your financial independence goal
  • Regular saving for pre-retirement essentials
  • Repayment commitments on other existing debts
  • Irregular expenses
  • Regular essential and comforts
  • Impulses and indulgences (presuming you’ll still want the occasional splurge)

Now you have estimated the ideal amount you should spend on repayments rather than some alternate rule-of-thumb like 30% of your income.

To estimate your maximum affordable loan amount you then plug that repayment amount into the free borrowing calculators provided by the lenders. Or you can do it yourself in a spread sheet using the present value (PV) function.

You can download an example calculation here.

Extra tips

By the way, don’t use what the lender says you can afford to repay each period. Their calculation ignores your need to save for eventual retirement and often assumes you can live a lifestyle equivalent to the Henderson Poverty Index (in Australia).

In completing the affordability calculation I recommend you:

  • Choose your loan term to match the amount of years until your financial independence goal. That way your debt will be repaid by ‘retirement’.
  • Add an extra 1% to the lender’s current interest rate to give you a buffer.

When you actually apply for the loan you can apply for the typical home loan term of 30 years and just plan to make extra repayments in line with your calculation. This technique also builds your buffer for if misfortune strikes.

In practice

Life is a balance between doing something that brings us immediate fulfilment and doing something else that is an investment in future fulfilment.

Exercise, healthy eating and study are often investments in future fulfilment.

If the type of home you really want to buy costs more than the above estimate you then need to make an informed trade off.

Are you willing to cut other elements of your current lifestyle? Or are you willing to cut your expectations of future lifestyle like holidays, car upgrades and retirement?

Please share your thoughts

What do you think of my recommended approach to this common dilemma? Please share your reflections in the comments below as I’d really like to know. (You can share under a pseudonym to protect your privacy.)

Job change checklist

Changing jobs is often an exciting time of life. It can also be a busy time. Following is a checklist of important items to promptly address to ensure you keep your financial well-being on track.

Changing jobs is often an exciting time of life. It can also be a busy time.

Following is a checklist of important items to promptly address to ensure you keep your financial well-being on track.

Cash Flow

  • If your pay date will change then consider resetting the automatic transfers that support your smart budgeting techniques
  • Revisit your budget to accommodate changes in remuneration. If you’re going to be paid more also see the wealth creation tips below.

Use free online calculators, like those from the ATO, to help you work out your new net (after-tax) pay.

Wealth Creation

All pay rises are terrific opportunities to accelerate your wealth creation. I suggest you put at least half of your pay rise towards a combination of the following:

  • Higher loan repayments.
  • Increased allocation to long term investment. For example you could boost your salary sacrifice to superannuation, which will soften the tax blow on your pay rise whilst making you wealthier.

Plan in advance and be ready to adjust your automatic transfers as soon as you start your new job.

Employer share plans

Do you have an employer share loan you need to repay upon leaving employment? If so, a common way to repay the loan is to sell some or all of the shares. If you don’t have a broker then read this article to discover how to sell shares without a broker.

Superannuation Fund

Don’t:

  • Blindly nominate your previous employer’s fund to receive contributions ‘just to keep things easy’. Your new employer may have a cracking deal on offer.
  • Blindly accept the default fund offered by your new employer. It may be a shocker compared to your old fund.
  • Blindly roll your old fund into your new employer’s fund. When you rollover you automatically lose your insurance cover. “So what?“, you ask. Well almost all Australians don’t have enough cover, so odds are you probably need to keep what you already have.

Do:

  • Promptly investigate what happens to your balance and linked insurance when you leave your employer. Do this before your last day in your old job.
    • Is the balance automatically rolled to a new ‘holding’ fund within a certain number of days?
    • Is some or all of the insurance automatically cancelled? If so, can you apply to have it continued? (If a continuation option is available you usually have around 30 or 45 days to apply.)
  • Complete a comparison of your new employer’s fund to your previous fund to ascertain which is better for you. I recommend you also consider some off-the-shelf funds in that comparison.

Employer Funded Insurance

One great thing about employer group insurance policies such as group salary continuance is that you probably didn’t need to disclose anything about your health to get it. So you can potentially be a basket case and still be covered.
The older you get the more likely that is.

Keeping that cover is therefore a golden opportunity.

Group insurance policies often have continuation options that allow you to retain cover under a personally owned policy without medical underwriting. However you have to apply quickly – usually within 30 or 45 days of leaving your employer.

In my experience it helps to contact HR before your last day. They’ll usually refer you to the adviser appointed to the group policy who will then guide you through the process.

Call your adviser

If you have previously worked with a financial planner then a job change is one of those moments you should proactively contact them. Changes in income can trigger tweaking of your strategy. Also job changes sometimes occur as a result of the natural evolution of what you want in life. Your financial well-being strategy needs to evolve with you.

Your financial planner will be able to guide you through all of the above and alert you to anything else you should think of.

Better budgeting

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)”

Cue Skyhooks tune…

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.

(Download a PDF version of the model here)

Top-down or bottom-up?

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.

Be prepared to lose your job

Whilst there’s not as much doom and gloom around now as there was during the global financial crisis (GFC) of 2009 the world hasn’t returned to over-brimming confidence. Recent natural catastrophes plus instability in the Middle East have dented the return to confidence.

Don’t worry – I’m not dragging out my dusty crystal ball and predicting an imminent recession.

Which is why now is the perfect time to make plans for if you do lose your job at some time in the future.

Waiting until gloom is upon us often leaves not enough time to squirrel away your chestnuts.

That is what happened pre-GFC. People had been:

  • Borrowing up to their eyeballs expecting continuing pay rises and asset price increases to keep them cosy
  • Spending everything they earned and more

Then the GFC hit and many people were stressed about how they would survive if they were retrenched. Many who did lose their jobs struggled to survive and had to rely on selling assets and the generosity of others.

That kind of financial and personal stress wreaks havoc on your quality of life and relationships.

But it doesn’t need to be that way. When you have your financial affairs in order losing your job can be just a blip on the journey.

How to prepare for retrenchment season

Last night in my DIY Wealth Creation course we talked about risk management. Two ways to manage risks are to minimise the likelihood and to minimise the consequences.

Emergency savings minimise the financial consequences

If you have plenty of easily accessible savings then you can use these to keep food on the table and avoid the bank knocking on your door about missed mortgage repayments.

I recommend having at least three months’ worth of total expenses squirrelled away for emergencies. If in your line of work you think you could be out of work for longer before getting a job then put away more.
By total expenses I include everything: all loan repayments including credit card as well as your lifestyle expenses.

That recommendation assumes you know your expenses. So if you don’t know how much you spend then start working that out. The knowledge will both help you plan and also help you survive if misfortune strikes.

Keep the savings liquid

You need these savings easily accessible and cash is the most liquid. But if you have a home mortgage then your cash could work harder if it was reducing your loan interest. After all you don’t expect to use this amount – only if a true emergency arises.

So I recommend saving your three months’ worth of expenses and making an additional loan repayment. Then if misfortune strikes you can redraw that amount. Don’t see the available redraw and be tempted to use it for a holiday!

If you don’t have any personal debt then a high interest online savings account is a great spot. Have a separate account for emergencies than for your other savings (such as holidays).

Whilst shares and many managed funds are liquid the economic situation that may lead to your retrenchment may also be a time when you don’t want to be selling investments. So I suggest you don’t invest you emergency savings.

Professional development minimises the likelihood

You can minimise the risk of retrenchment by ensuring you are very employable.

You can do your best to ensure you are so valuable to your employer that you are one of the last to be let go.

But if your company or project closes then retrenchment may be unavoidable. In that case you want to be one of the first people snapped up by other employers.

Professional and personal development is essential in today’s world to ensure you continue to be very valuable to your employer and your industry. Is it time to brush up on your expertise or even expand it? Maybe your networking and relationship building could be polished? Those networks could help you get your next job.

Professional development also makes sense for wealth creation. It should help you increase your actively earned income, which you can then spread between increasing your lifestyle and your investment.

Don’t max yourself out

You can also minimise the consequence of losing your job by not maxing yourself out in the first place. Stress test your major lifestyle and investment decisions before committing to implement them.

For example: don’t borrow the maximum amount the banks will give you. Leave yourself a buffer both in interest rate increases and other costs.

Need help saving?

If you need help saving up for emergencies like this then talk to me about cash flow coaching.

How to make smart financial choices

A scan of the many surveys about New Year’s resolutions reveals that it is common for people to set a goal to improve their financial situation. This may include saving more, repaying more debt or even investing more wisely.

How do you choose what financial actions you take?

To achieve a goal of improving your financial situation means you will need to make even smarter financial decisions that you have in the past.

Some typical decision making types that I come across are described below. Do you recognise yourself in one or more?

Fashionista

Follows the glitz and glamour of the latest trend. They end up changing frequently with the fashion rather than sticking at things. You can pick them as they always have an engaging investment story to tell at the barbeque or in the office kitchen. On the surface they appear active and ‘with-it’ but zoom-out and their progress is minimal.

“Have you heard about…?”

Champion

The champion likes to stand atop the dais. They are persistently hunting for the approach with the potentially best return or fastest way to get rich but give minimal consideration to the effort and knowledge required to achieve it.

“I’ve heard you get better returns if you…”

Paralysed Analyser

Detail oriented lover of spread sheets who easily gets lost diving down yet another rabbit hole so ends up taking very little action.

“I’ve just got a few more calcs I want to do”

The Ostrich

Listening to all the options described by the Fashionista and Champion overwhelms the Ostrich. They find deciding a bit too hard so instead procrastinate and hope that it will all work out.

“Meh, I don’t think about money”

The Groupie

Like the Ostrich, the Groupie finds it hard to make a decision but still wants to take action. They comfort themselves by doing what they see everyone else doing and then hope for the best. Often that will be what they heard from the Fashionista or Champion – after all they seemed to know what they were talking about.

“Well that’s what everyone else was doing”

My guiding principles for making financial decisions

Back when I was a graduate engineer I was a blend of the Paralysed Analyser and the Groupie with my financial decisions. I eventually found it so overwhlemelming analysing direct shares that the first share I ever bought was on the recommendation of the Human Resources officer whose office was next to mine. (I used to hear him on the phone to his stock broker so assumed he knew what he was talking about.)

In the ten years since I changed careers from engineering to financial planning I have evolved some principles that guide my own financial decisions and the actions I recommend to clients. The principles are as strongly influenced by my (growing) knowledge of human behaviour as they are of my financial knowledge.

I share these guiding principles with you in brief and hope they will help you make the right financial choices for you right now.

Overall philosophy

Money management and wealth creation are not about the money. They are about the life experiences money helps facilitate.

Money is just one resource required to facilitate the experiences in a fulfiling life. You also need to nurture you mind, body and soul and prioritise your time.

In short money is one means to an end.

Further, most people have better things to do than labour over managing their money and creating wealth.

When to start

Take action now since delay is the greatest cost in wealth creation.

Inaction is more costly than steady progress.

That said inaction or “pause” is often better than ill-informed knee-jerk action. To start it doesn’t have to be the best it just has to be good.

For example, just because you don’t know the best way to create wealth for retirement doesn’t mean you can’t start today to put away an extra 10% of your gross income into a cash savings account.

Where to start

Start by learning about and fully understanding what you have already got. For example:

  • the different types of bank accounts for cash savings
  • credit cards, loans and the best way to get out of debt fast
  • superannuation

How to filter possible actions into the right next actions for you

1. First pursue the high impact low effort actions

I am ambitious by nature with lots I want to achieve. So I am constantly open to more efficient and effective ways to get things done. I am seeking the sweet spot of outcome for effort required.

In regards to money that often translates to finding the lowest effort way to get a good enough outcome. You just need enough money to facilitate the experiences that matter most, whilst ensuring you have time left for those experiences.

It’s like filtering your actions based on Pareto’s 80-20 rule.

I often ponder “is there a simpler to understand and easier to implement way of achieving a similar financial and lifestyle outcome?”

As an example of a high impact low effort strategy, rather than busily trying to scoop more money into your money pot first plug the leaks – leaks such as high loan interest and duplicate fees on multiple superannuation accounts.

2. Learn and evolve incrementally by shifting one dimension at a time

(This principle requires a full article to explain but here it is in overview)

Some of the dimensions for wealth creation are:

  1. The source of funds (yours, a lender’s, other people)
  2. The entity structure (your own name, partner’s name, trust, company, superannuation)
  3. Direct or indirect (e.g. direct ownership or via a managed fund)
  4. Asset class (equities, property, fixed interest, cash etc.)

When you start out with a simple route you may start by investing:

  • with your own money
  • within the superannuation entity structure
  • indirectly through a managed fund
  • that is invested in a diversified portfolio of asset classes

At each evolution of your strategy you can ease the amount of knowledge you need to acquire by incrementally changing one of those dimensions at a time.

For example let’s assume you started by understanding your existing superannuation. To evolve you could just change the entity structure from superannuation to investing in your own name. You would invest in the twin sibling managed fund to the one you chose in your superannuation account.

(If you are just starting out then I understand if that explanation lost you. Tackle the earlier principles first.)

Coming up

In future articles I will describe some more processes to help you laser in on the best place to start for you right now. You’ll assess where you are in the Six Stages of Wealth Creation.

I am very interested in your thoughts and reactions on my guiding principles. Please share them in the comments below.

An updated wealth creation rule of thumb

You may have heard the rule of thumb that you should save and invest about 10% of your income. I think it originated from the book “The Richest Man in Babylon” by George S. Clason.

I’m often asked if that is before or after tax saving.

More importantly, is it even close to right?

If it was close to being accurate then in Australia the 9% compulsory employer superannuation contributions should get people close enough. Sadly it is widly accepted that the 9% is nowhere near enough.

Last month the Financial Services Council released research by RiceWarner Actuaries that estimated the average retirement savings gap per person was about $88,000. That is the extra amount they need to have an adequate retirement lifestyle.

How much you need to save

If you are currently in your 20s or 30s RiceWarner estimated you’ll need to save and invest (for retirement) approximately an extra 11% per year of your after-tax income, in addition to the 9% employer superannuation.

If you’re already in your 40s you’ll need to save an extra 12% per year after-tax.

If you’re already in your 50s it’s about 15% extra per year.

So really the rule of thumb should actually be that you need to save a total of at least 20%-25% or more (not 10%) of your after-tax income over your entire working life to come close to an adequate retirement lifestyle.

(Note the actual figures in the research are split by gender and 5 year age brackets. For simplicity I have approximated an average. See table 3 on page 6 of the report if your brain wants greater precision.)

Important assumptions

Definition of an adequate retirement lifestyle

The model assumes that you can have an adequate retirement lifestyle if you receive about 62.5% of your gross pre-retirement income. This is estimated to enable you to have about 75% of your pre-retirement expenses. (Assuming you have no debts left in retirement.)

Most people I meet do not want to decrease their lifestyle in retirement. So if that includes you then you need to consider that you may need to:

  • Save a higher percentage;
  • Invest more aggressively;
  • Do a bit of both

If the prospect of saving that much and/or investing aggressively scares you then meet with a great financial planner who can guide on a smart wealth creation strategy that suits you.

You may live longer

One of the assumptions is that you need the retirement lifestyle under the average life expectancy. The reality is that half of the population live past that point. So if you rely on this updated rule of thumb be prepared to live on just the Age Pension past your life expectancy.

The better way to calculate how much you need to save

Rules of thumb can be nice short cuts but when it comes to money there is no substitute for proper planning and purposeful action.

The best way to work out how much you need to save is to:

  1. Define the lifestyle choices you’d like to have in retirement
  2. Estimate how much those choices would cost right now
  3. Define when you want to make work optional (“retire”)
  4. Define how long you want that lifestyle to last (age 83, 90, 100?)
  5. Calculate what lump-sum wealth you’d need at retirement to fund that lifestyle for that long
  6. Calculate the annual savings you need to make from now until retirement in order to accumulate that wealth

There are some calculators available for free on the internet to help you do this calculation yourself.  View a list here.

But if you are not naturally analytical then I recommend you partner with a financial planner to guide you on how much you need to save and the best way to invest that money.

Protect yourself from identity theft

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.

Store safely

Physically

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.

Electronically

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

National Identity Fraud Awareness Week promotional flyerDocuments 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.

For more information on how to protect yourself from identity fraud, and how to cope if you are a victim of ID fraud, visit the official campaign website www.stopIDtheft.com.au or www.crimestoppers.com.au for more information.

Got your own story or extra tips?

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.

Why you don’t need a SMSF

Self managed superannuation funds (SMSF) are often sold to people on the basis of getting greater control. That’s rubbish! Every time I hear it I roll my eyes and sigh heavily.

An off the shelf fund gives you great control

When you are thinking of getting more control over your superannuation, what control are you seeking? Is it more control over investment decisions?

Well, you already have plenty of that control in most off the shelf (retail) funds. For over a decade you’ve been able to choose the investment option within your current fund. And for nearly five years you’ve even been able to choose the superannuation fund (account) itself.

Are you seeking control over the money so you can spend it on yourself now? Think again – that’s technically illegal and scrutinised by the ATO.

What you can access and do in an off the shelf (retail) superannuation fund

  • Access an investment menu that includes hundreds of different managed funds from most investment sectors
  • Directly buy the top 200 (even 300) shares listed on the Australian Stock Exchange (ASX)
  • Invest in managed funds that include internal gearing
  • Buy some derivatives, such as some types of options and warrants

If you want all of those features you’ll pay a higher administration fee, but it’ll still probably be less than a SMSF would cost you.

If you don’t want any of those features you can find really low cost funds off the shelf (retail) that still give you control. The retail superannuation product market is so diverse you can probably find a product to suit your needs whilst also being value for money.

Do you really want to DIY your super?

Self managed superannuation funds may also often be known as DIY Super, which sounds attractive. But DIY is dangerous when you don’t know what you are doing.

Big penalties for non-compliance

Each member of a SMSF is also a trustee, which involves a lot of responsibility.

The SIS Act (Superannuation Industry Supervision Act) is huge and as trustee of your SMSF you are legally obliged to understand it and comply with it. If you don’t comply you could be stripped of your concessional tax status and pay the top tax rate. (i.e. no more 15% tax rate.) Ouch!

You can also be personally subject to a range of civil and criminal penalties for non-compliance.

Yes, you can outsource some of that compliance to a specialist financial adviser plus a compliance firm. But that costs money.

They’re costly

You also need to pay for annual financial accounts and audits. More money.

In a SMSF the costs can only be spread across four members, not thousands as with a retail superannuation fund. So your administration, investment and transaction costs can quickly add up to higher in percentage terms than in an off the shelf product. That’s why it’s best to wait until you have hundreds of thousands of dollars in superannuation before considering self managed superannuation.

When you may need a SMSF

There are some types of assets that retail superannuation funds generally don’t enable you to hold. If (big if) you need to hold these assets in superannuation then a SMSF may be appropriate for you. These assets include:

  • direct property
  • private business
  • collectibles (for investment only – no personal use allowed. And a recent announcement suggested these ‘exotic’ assets be banned.)
  • other direct investment assets. (e.g. that gold bar you just bought from the Perth Mint.)

In addition technically you can now ‘directly’ borrow to buy investment assets within superannuation. For example you can borrow to buy an investment property. If you want to implement that strategy you will need a SMSF (plus a nice sized deposit and good cash flow from contributions.)

Who definitely should NOT consider a SMSF

If you habitually ignore your superannuation, as evidenced by barely reading your annual statement, then a SMSF is not right for you.

Similarly if you don’t understand how superannuation works then don’t go near DIY Super. This may sound harsh, but if you have not understood this article then you’re probably not yet ready for a SMSF.

In summary the reasons a SMSF is not appropriate for most people include

  • you can get the desired level of control from a retail fund
  • you can access the desired type of investments from a retail fund
  • you’re not interested enough to learn to fulfil the trustee’s obligations
  • you want to minimise your costs
  • you don’t currently have a high enough balance

What do you think? Anything I’ve overlooked? Please share in the comments below (you can be anonymous)

Save your Easter eggs for success

In a study conducted at Stanford University children were left in a room, each with a marshmallow, and given a choice of eating it then or fifteen minutes later, when they were promised a marshmallow as an extra reward for waiting.

Imagine you are your five year old self – what would you do in that situation?

Two thirds of the children ate the marshmallow – some immediately, some after many minutes had passed.

The study is clearly an examination of the children’s ability to delay their gratification, which is a key trait in creating wealth.

The significance of the study was shown when the progress of the children was analysed over a decade later. The one third of the children who had held out the fifteen minutes to get their reward were assessed to have become more successful adults.

The study and its implications for success are discussed in the book “Don’t eat the marshmallow … yet!” by Joachim de Posada.

Watch Joachim de Posada briefly discussing the study in this video (6 mins). It’s worth it for the hilarity of watching the children resist eating the marshmallow. (It could be an entrant in “Funniest Home Videos”)

So, Easter Sunday may be the only day it is ok to eat chocolate for breakfast but do you have any eggs left today, just three days later?

To increase your ability to create and keep wealth start by saving some of your Easter eggs.

What do you think of the study and its thoughts on delayed gratification? Share your reactions inc the comments below.

The must read book for aspiring entrepreneurs

Over half the people I speak to professionally list “self-employment” as one of their life goals. If you too dream of going out on your own or starting a business then I strongly recommend that you read “The E-myth Revisited” by Michal E. Gerber before you quit your job. Preferably you need to read The E-myth before you succumb to what Gerber calls ‘the Entrepreneurial Seizure’. Read my full review of this essential book.

Over half the people I speak to professionally list “self-employment” as one of their life goals. This can take many forms including:

  • Tradespeople wanting to go out on their own
  • Professionals wanting to start their own consulting business
  • Those wanting to start a business to pursue their passions (e.g. to open a restaurant)
  • And those who believe that owning their own business is the only way to get rich.

If you too dream of going out on your own or starting a business then I strongly recommend that you read “The E-myth Revisited” by Michal E. Gerber before you quit your job.

Or if you know someone who has the self-employment goal then please do them a huge friendly favour and forward this article to them now.

Preferably you need to read The E-myth before you succumb to what Gerber calls ‘the Entrepreneurial Seizure’. That’s the point where something inside your head resoundingly declares “I could do this for myself’, and from that point on your world is not the same.

The E-myth

The ‘E-myth’ is the myth of the entrepreneur. Gerber describes it best:

At the heart of the e-myth is ‘the fatal assumption’ that if you understand the technical work of a business, you understand a business that does that technical work. And the reason it is fatal is that it just isn’t true.

But the technician who starts a business fails to see this.

The real tragedy is that when the technician falls prey to the Fatal Assumption, the business that was supposed to free him form the limitations of working for somebody else actually enslaves him.

Self-employment enslaves many rather than frees them.

Now it’s not my intention to turn you off going into business. I do agree that many of the wealthiest people achieved their wealth by concentrating their risk and investing in their own business.

I want you to embark on that part of your journey with your eyes as wide open as possible to the realities of being in business. That is what Gerber does in “The E-myth”.

Inside The E-myth Revisited

The E-myth Revisited is written with a blend of traditional non-fiction text and parable. Gerber illustrates his points through the story of his client Sarah and her business “All About Pies.” This is a master stroke in getting the message across as Sarah experiences and expresses many of the emotions and questions that you do as you read the text.

If you’ve come across The E-myth after starting your business then you will likely relate to Sarah’s predicament. No matter how raw it feels stick with it as I promise you that the books also brings hope.

Part One of the book is essential reading for the aspiring self-employed person as you get an overview of the phases of business and some of the essential roles. One important distinction to grasp is the difference between:

  • The Entrepreneur
  • The Manager
  • The Technician

And to realise that everyone who goes into business is actually the three roles in one. But the trap is that you start by operating too much in the technician role and neglect the important functions of the other two roles. Yet without completing the function of all three roles the technician becomes stressed and enslaved as mentioned earlier.

After reading part one pause for reflection and take a good hard look at your situation and motives.

Are you truly willing to do what it will take to be successful?

Your Primary Aim

You may have heard of self-employed people that their business is their life. The truth is that a successful business is not your life, though it can play a significantly important role in your life.

You need to decide what role that will be by considering what Gerber refers to as your primary aim. To me this chapter of the book is gold. In one sense you really should start here. But without having read the earlier sections you may be too dismissive and flippant in your answers.

To discover your primary aim Gerber suggests you ask yourself these questions:

  • What do I value most?
  • What kind of life do I want?
  • What do I want my life to look like, to feel like?
  • Who do I wish to be?

Those who have worked closely with me may not be surprised that I consider this chapter to be gold as it mirrors my approach to financial planning. The whole purpose of a business and of creating wealth is to facilitate the life that you want. So first you must start by defining what is most important to you.

If having reflected on your primary aim you decide your business aspirations are for the right reasons then read further into the book to learn what a successful business needs to look like.

Your Turn-key Operation – The Franchise Prototype

One of the big ideas in “The E-myth” is that every business can aim to be turn-key and operate in a methodical, repeatable way like the successful franchises such as McDonalds. Whilst many entrepreneurs may not ever plan to franchise they can still operate their business as if it were the prototype for a franchise.

The pay-off for creating a turn-key operation includes:

  • Creating a real exit strategy. A well-run business that will continue to operate smoothly and profitably after sale is very attractive to buyers.
  • More time for you in the other roles in your life. Plus your time in the business will be more enjoyable.

Enjoying being in business and then easily selling it for a bucket load of cash seems to be the aim of most aspiring entrepreneurs. So resist the temptation to dismiss this section just because you can’t imagine yourself as a McDonalds.

The essential business eye opener

Self-employment and a business can be extremely rewarding both personally and financially. Sadly for most it is not. Businesses can burn through your hard earned assets and strain your relationships to breaking point. You can end up in a place you never wanted to be and don’t know how to get out of. (Ask Sarah.)

Even if owning your own business is just a speck on the horizon I strongly recommend you promptly buy and read “The E-myth Revisited” by Michal E. Gerber.