Monday, February 29, 2016

Money trees take work

We're two months into 2016.  This means that it is time to end all of the procrastination that comes with the holiday period.  It's time to look forward and start working towards our exit strategy from earned income (work) and make the move to passive income (from our investments).

So far, George Samuel Clason's "The Richest Man in Babylon" has taught us to pay ourselves 10% of our income, and live within our means on what remains.  So, what do we do with all this money that we are putting aside?

Lesson 3: Make the most of your money

The first thing to be done is to keep and maintain an emergency fund.  This can be anything from one to twelve months worth of income.  Where you sit depends on your occupation and skillset, employment situation, your family situation and what the economy is doing.  For example, a contractor in a specialised industry will be, arguably, more sensitive to a weak economy than an employee in a general administrative role. 

Using the example from Lesson 2 (Keeping up with the Jones', January 17, 2016), on a salary of $70,000, you are saving $5,430 a year and will therefore need a minimum of $4,177 in your emergency fund to cover one month of unemployment.  This may sound like a lot, but keep the big picture in mind.  Having this in place will mean that you won't need to liquidate your investments if you find yourself suddenly unemployed, under employed or just having a career inhibiting mid-life crisis.  

Once you have that sorted, you can concentrate on the fun stuff.  What to do with the money that you paid yourself?  Remembering that the idea is that these funds will provide a passive income, so your best move would be to invest it.  Where you invest the funds is something that you should consult a professional on (cough, cough).  There are many, many different investment vehicles out there and they are definitely not all created equal, nor are they all appropriate for everyone.

While you are still in the earned income phase of life, the income from your investment should be reinvested.  Take advantage of compounding and let time be your friend.  If we use the example from Lesson 2, and you are investing the $5,430, then over 10 years with a return of 7%, you will have $88,916 in your investment.  That's not too bad, and that's assuming that your income remains the same over the next ten years, so your 10% contribution also stays the same.

At this point, I can hear my Australian audience muttering about superannuation.  It is true that most employees in Australia will be putting away 9.5% into superannuation for when they retire.  Keep in mind, however, that there are age restrictions as to when you can access the funds.  Does this fit with your plan?  More importantly, have you ever even looked at where your superannuation is invested?  My guess is that most of you have not.

Finally, a special note to my non-resident friends working in Australia. I would recommend seeing a taxation specialist and a financial planner to work out what investment strategy will fit you best.  All the rules that apply to residents don't apply to yourselves, so you can forget all the tips that you hear over a few tinnies at the much beloved Australian BBQ.  If you listen to the conventional wisdom that floats around, you could end up paying 47% tax when you leave our shores and return to your Motherland.  Yes, you read that right...47% tax.  I don't make the rules, I just help you navigate them.

By Erin Wright B.Int Bus Dip. FS(FP), Accredited Aged Care Specialist
Find Erin at Achieveit Financial Planning or call for an appointment on 07 4638 5011

Tuesday, February 16, 2016

Keeping up with the Jones'

Spend within your means.  This is the second lesson of the 'Richest Man in Babylon' series.  It is something that the most lauded investor of our time (Warren Buffett) follows, and yet seems to be the most difficult for the general population to maintain.  One of my favourite Buffett quotes is "Do not save what is left after spending, but spend what is left after saving". 

Living within your means is not about making sacrifices, but investing in your future.  If you have started with Lesson 1, and are paying yourself 10% of your income, then you have 90% of your income to spend, so you are automatically living within your means.  It seems so simple, but the thing that a lot of people don't realise is that the road to financial security is relatively easy.  All that needs to happen is that you manage your expectations.

Let's look at a practical example; if you are earning $70,000 per year, this is what your savings/expenditure should look like:

$70,000 less tax $15,697 = Net income of $54,303 less savings $5,430 = Amount available to spend $48,873 per year, or $939 per week.

How you spend your $939 per week is a lifestyle choice.  There are a couple of things to keep in mind when developing your budget.  The first is to be realistic.  You cannot live a champagne lifestyle on this budget.  Managing your expectations is key here.  Set a budget, and then review it in three months’ time to see how you are tracking.  If you need assistance in setting a budget, then there are people such as myself.  For help tracking it, there are plenty of Apps and software to be downloaded.  But, at the end of the day, only you can make the decision as to what your life looks like, because you are the one who needs to live it.

Contrary to what Instagram tells you, you cannot have it all.  So please don't be tempted by credit.  As a Financial Planner, there is nothing worse than seeing a client whose cash flow is being eaten up by interest repayments.  These people are the Jones'.  You do not want to try and keep up with them, because, I can guarantee you, they stay awake at night trying to work out how they are going to pay for their children's school shoes without missing a mortgage payment.
By Erin Wright B.Int Bus Dip. FS(FP), Accredited Aged Care Specialist
Find Erin at Achieveit Financial Planning or call for an appointment on 07 4638 5011

Wednesday, February 3, 2016

90 years old and still going strong...

According to the great authority that is my Facebook newsfeed, 2016 is going to be a great year.  Much better than 2015...apparently.  Personally, I have always subscribed to the idea that your year is what you make of it and that there is an opportunity in each challenge and a lesson in each opportunity.  With this in mind, my first post of 2016 will focus on the positives going forward rather than lamenting the choices made in 2015 ( card anyone?).

Most of my clients, whether they realise it or not, are concerned about building their net worth without impacting their lifestyle.  What they are trying to articulate is that they would like to build passive income.  That is, gradually replace the income that they go to work everyday for with income from investments.  Do not confuse passive income with easy income, because creating passive income requires capital and you work hard to build it.  It is being sensible now and not trying to keep up with The Joneses, so that in 10 years’ time, your passive income is helping to pay off your mortgage, or putting your children through private school, or allowing you to cut back on your hours at work.  It is the hardest thing of all, balancing your current lifestyle so that you can be financially independent.

If you haven't read "The Richest Man in Babylon" by George Samuel Clason, then I highly recommend doing so.  It provides guidelines on how to achieve financial freedom, using common sense.  Unfortunately, it was written in the style of a biblical parable, in 1926, so it can be a bit on the dry side for those who aren't of a...literary nature.  There are eight lessons in total and, so that I don't overload you and cause you to fall asleep at your computer, I will be going over each of them one at a time.

Lesson number one: Pay ourselves first.

Clason suggests putting 10% of your earnings away in savings.  As in genuine savings...not the type of savings that were accidently used at Ikea on Boxing Day (although, my new curtains are pretty amazing), or the savings you plan to use for your holiday in Fiji next year.

Paying yourself is the first step to building your passive income.  Here is an example, if you earn $1,000 per week after tax and save $100 (10%), you will have $5,200 saved after year 1 to invest.  If you had started this 20 years ago, and left the money in a bank account, you would have deposited $104,100 and earned $55,354 in interest (based on an average Cash Rate of 7.5% less average inflation rate of 3.5%, Vanguard 2015 Index Chart).  A total of $159,454 in your pocket, earning a passive income.  Not too bad when you consider that most of us have 45 years in the workforce.

So, when considering your New Year’s resolutions, don't forget to start paying yourself, the long term gain is worth the short term pain.
By Erin Wright B.Int Bus Dip. FS(FP), Accredited Aged Care Specialist
Find Erin at Achieveit Financial Planning or call for an appointment on 07 4638 5011