Three keys to Financial Well-being

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.

  • Personal mastery
  • Vocational clarity
  • Relationship strength

Personal mastery

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.

Vocational clarity

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?

Relationship strength

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.

Invest in:

  • 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.
  • Relationship coaching

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.

 

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)

The source of financial stress

Two years ago I wrote about relieving financial stress for Stress Down Day.

Fellow financial educator Carl Richards of Behavior Gap just released a new diagram that summarises one key source well:Circle-Stress

One value of financial planning is in removing the uncertainty and replacing it with clarity of direction and the confidence to act.

So if you’re tired of constantly thinking about and even stressing about money related issue then I recommend you invest in professional financial planning advice.

P.S. Carl writes some insightful articles about how our behaviour impacts our financial situation. I recommend you consider subscribing to his newsletter.

Is now the time to fix interest rates?

Eighteen months ago when I first wrote about fixing interest rates there had been just two RBA rate rises and fixed rates were much higher than the variable interest rates. It was also still early in the recovery and for many it may have been too early to call. So a decision not to fix interest rates may have been easier to stomach.

Now fixed interest rates are similar, even lower than the variable rate as shown in the table below. And while the RBA has recently softened its talk future rate rises seem probably to many – especially those living in boom regions. So fixing rates may be starting to look attractive to some.

Source: Cannex (accessed 20th April 2011)

History

The real problem with fixing anything for a time period is that you need to be very confident in the accuracy of your crystal ball. The last boom seemed to last long enough to affect people’s memory and lull them into thinking it would go on for much longer.

Inflation was getting uncomfortable for the RBA so rates had been up going up. That lead many of the boom-believers to fix their interest rates in the hope of beating the rises – sometimes for 3 and 5 years.

What transpired was much gnashing of teeth when interest rates plummeted, as summarised in the graph below of the RBA cash rate.

The consequence of an error-prone crystal ball can be very costly.

So should you?

For a detailed examination of the considerations in fixing rates read my earlier article. There are some circumstances when you would fix interest rates.

Right now include the following when contemplating your decision:

  • The recovery is not certain. Rates may not move for some time. So if you fix your rate you may trade off flexibility for no benefit.
  • Another sharp down-turn is possible. How will you feel if you’re paying a higher rate than the variable rate?
  • The future gets increasingly uncertain the further out you project. Exercise greater caution when considering longer terms for fixing rates.

A personal observation

In my role as a financial planner I have seen how rapidly people’s life and goals change in just a few short years. For those who fixed their interest rates (before becoming clients) I’ve noted how the lack of flexibility has inhibited their money management and wealth creation.

Don’t underestimate how quickly life evolves.

If you’ve had some big changes in the last 3 years then maybe you also will in the next 3 years – it may just be the way you roll. So,  perhaps a 3 year fixed rate is not the best thing for you right now.