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 (ahem...credit 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