Financial Autonomy

How good would life be if you were debt free? No mortgage payments, or car loans.  No credit cards.  Imagine the weight off your shoulders.  The financial freedom you would gain.  The financial autonomy. Of course many people, probably most people, achieve debt free status over their working life.  This episode is not for those who have already achieved this milestone. This episode is for those of you on the journey.  For whom debt obligations comprise a significant portion of your regular income. We’re going to look at some strategies you might be able to use to get to debt free status quicker.  And that acceleration in clearing your debt brings you closer to whatever your financial autonomy goal is. For the purposes of this article, I’m going to assume you, the listener or reader has debt, and debt you’d love to see the back of.  Given the title of this post, I’d imagine self-selection should deliver us this outcome. In the modern era, establishing yourself financially without taking on debt is near impossible.  The only way I could imagine this happening is either if you were fortunate to be born into a wealthy family who bought you a home, or else you never owned anything, perhaps rented your whole life. Most people I meet will have a mortgage, or if not a mortgage, then at least a loan for a car, with the hope or intention of having a mortgage one day.  Very often there are credit cards as well.  Sometimes there are debts for whitegoods or a holiday. Debt is not evil.  Borrowing to buy your house is likely to have been a smart investment.  Over time the home’s value rises and you hopefully reduce your debt, so that you build up equity in your home.  One day you will pay off the debt entirely and will have a roof over your head without having to find mortgage or rent payments each month – incredibly liberating. Debt to fund consumption on the other hand is not so wise, but who hasn’t done it?  Financed the brand new car when a 2 or 3 year old vehicle would have been significantly cheaper and still done the job.  Or come back from holidays with a credit card bill you couldn’t pole vault over.   I’ve been there and I’m assuming you have too. So how can we get these debts under control and fast forward your journey towards financial autonomy? Let’s say you decided you needed to lose a few kilo’s.  What’s the first thing you would do?  Would you jump on the bathroom scales and weigh yourself?  That would seem to be a sensible first step.  You need to know your starting point to understand the task ahead – do you need to lose 5 kilograms or 20?  You also want to measure progress.  You want to know if the actions that you are taking, say increasing your exercise, is paying dividends. So in planning to get your debt under control the first step is to establish where you are now.  I’ll put in the tool-kit for this episode a table you can fill in to help make sure you don’t miss anything. In putting this together, you’ll get an accurate picture of how much income you need to generate each month to cover your debt repayments, the different interest rates on each loan, and your total loan balance. It’s also helpful when putting together your list of debts, to establish whether they’re tax deductable or not.  Later, we want to decide which debt to focus on clearing first.  Typically you’d focus on the debt with the highest interest rate, but if it were tax deductable, that could alter the thinking, so it’s useful to know the tax status of each debt. If you have any debt that is tax deductable, you’ll probably already know about it, but to clarify, tax deductable debt arises when the thing you bought with the money you borrowed, generates taxable income.  The most common example is an investment property.  You borrow to buy the property, and the property then brings in rent.  The rent is taxable, and the interest on the debt associated with buying the property is tax deductable. Tax deductable debt could just as easily be for buying shares, a business, and in some cases a vehicle where you use it to generate income. Something that comes up from time to time when ascertaining whether a debt is tax deductable, is which asset the debt is secured against, versus the thing you bought with the money from that debt. The debt on your home is not tax deductable – your home doesn’t generate any income.  But what if you buy another home, and keep your old place as a rental.  You will borrow against you previous home and use the money to buy the new home.  Now people will often assume that given the debt is against the property that is now a rental, it would be tax deductable, but that is wrong.  Tax deductibility has nothing to do with what asset is used as security.  Tax deductibility is determined by how the money that you borrowed was used.  In this case the money was used buy your new home, something that won’t generate any taxable income, and so the interest on that debt is not tax deductable. If you’ve got any uncertainty as to whether a debt is tax deductable or not, best to give your accountant a call to clarify. Anyhow, back to your list of debts and their details.  You’ve now got your starting point.  If you want, you could also write down a list of your assets and their values, and then subtract the total debt value from the total asset value to determine your Net Worth.  For some people, tracking Net Worth can be an empowering way to reinforce the positive progression they are making towards financial independence. So which debt to focus on first?  Well logic would dictate that you’d start with the most expensive debt.  Let’s assume for the illustration that is a credit card debt. For the time being we’re going to leave the other debts as they are – just keep paying the repayments as you are.  Our focus will be clearing this credit card. So the low hanging fruit is to pay more off this debt.  A tax return, a bonus, pay rise or gift. Next, could this debt be refinanced at a lower interest rate?  This is often termed debt consolidation.  Now approach this with caution.  Debt consolidation can certainly lower your debt costs.  But some people simply use it as a way to take on more debt, so don’t head down this path unless you’re serious about getting your debt under control. The other potential trap with debt consolidation is the length of the new loan. Check out this example:

Loan amount for both is $20,000

Loan 1 is at an interest rate of 10%, with a repayment term of 3 years.

Loan 2 has a lower interest rate of 5%, and with a loan term of 10 years.

So which loan results in you paying the least interest?

Loan 1: $6,620 of interest paid by the time the loan is paid off in 3 years.

Loan 2: $12,577 of interest paid by the time the loan is paid off in 10 years.

So the key message here is consider debt consolidation, but be wary of solutions where the loan term is stretched out significantly.  The banks or lenders aren’t your friend.  They survive by making money from you, so if you’re considering debt consolidation, make sure you understand your numbers – get some outside help if you need it. With credit cards, something you could look for is deals where you can transfer your card from one provider to another where they offer an interest free period on balance transfers, often for 6 or 12 months.  Now again, the credit card provider isn’t your friend.  They’re offering this in the hope you don’t pay off this debt, and they’ll make lots of interest from you at the end of the interest free period.  So be sure to really knuckle down on reducing the debt during the interest free period, and when that period ceases, look around to see if you could shift to another credit card provider with a similar deal. Okay, so you have your debts listed, and you’ve prioritised them from most expensive to least expensive.  You’re keeping then all up to date, but focusing any extra repayments on the most expensive one first.  Awesome. Progress too slow for you though? The steps so far have been fairly painless.  But if you really want to make an impact on your debt, there’s one more thing you’d need to do. No lasting progress will be made unless you get your budget under control.  The hard reality is that if your debt challenges relate to personal debts like credit cards and car loans, you're in debt because you’ve been spending more than you're earning. You need to recognise and acknowledge that, and then take steps to rectify the situation.  What non-essential expenses can you cut?  Subscriptions for magazines, pay TV, or software.  Memberships to the gym or sporting club – would it be cheaper to just pay when you use the facilities?  Clothing.  Eating out. After housing, food is likely to be your next largest expense item.  Reducing what you spend eating out is the most obvious way to reduce expenses - bring your lunch from home and just eat at home whenever you can.  When buying your groceries, is there any branded products that could be replaced by no-name equivalents.  Think of other ways to play it smart - you feel like some beef for dinner, but do you really need that Eye Fillet steak?  Rump steak is about half the price and mince around a quarter.  Whole chickens are much cheaper by the kilo than chicken pieces.  Jus

If you catch a snippet of the radio in the morning on your way to work, you’re likely to hear what happened to the Dow Jones overnight. If you read your news online or watch the news on TV it’s likely you’ll hear about the All Ords or maybe the ASX200.  You might even come across acronyms like the NASDAQ and the FTSE. Probably, you know this is something to do with share markets. If you turn your mind to it a bit more, you probably know that the share market is where people buy and sell shares in companies like Telstra or BHP. Maybe you have in mind that the share market is risky and people lose their money sometimes. Well, if this is about the extent of your share market knowledge, you’re not alone, and this episode’s for you. I think it’s fair to assume that you have an interest in achieving financial independence.  That is what we’re all about here. In working towards that goal, building wealth is likely to be an important feature. With wealth you can generate investment income with which you can then live on. Or perhaps you can use that wealth to buy a business, or invest in starting a new business if that’s where your Financial Autonomy goal points you. Or perhaps Financial Autonomy for you means remaining as an employee in a business with a team of people that you enjoy being around, but with the financial resources to resign if ever management changed or something else happened that meant you no longer enjoyed coming in each day. The goal of this audio blog is to provide you with choice in life, and that sort of goal is a common one I see with many of my clients.  Being in a position to say no.  It’s very empowering, and very liberating. One avenue towards financial independence is to build wealth via investment in the share market.  I should make it clear here that what I’m talking about is investing, not trading.  If you’ve listened to the common investment mistakes series you will recall I covered off on the dangers of trying to be a share market trader.  In short, it’s an almost guaranteed way to get poorer. So we’re talking about investing.  Buying shares that you intend to hold for at least a year, and profiting from both the dividend income, and growth in the value or price of the share over time. There are different ways you can gain exposure to the share market.  Your super fund likely has at least some exposure right now.  Later I’ll look at a couple of options for your non-superannuation money, but let’s start by explaining a few of the terms and elements you will come across when you take an interest in investing the share market. There a multiple markets We refer to the share market like it’s one thing, but that’s not true.  All developed countries have their own share market, and some such as the US have multiple markets. There are 60 major stock markets around the world.  There’s a good infographic on world share markets here. Technology is gradually bringing these markets together in a practical sense for investors, but for the moment at least, as an Australian, if you want to buy shares in Apple let’s say, it’s not easy.  Why?  Because Apple isn’t listed on the Australian share market, and it’s not straight forward for an Australian investor to invest in the US share market (where Apple is listed) directly. Our local market is called the ASX. The Australian Stock Exchange.  Should be ASE really shouldn’t it, but presumably someone felt the X looked trendier. On the ASX you’ll find lots of companies you’re familiar with – the banks, the big miners, Woolworths, Telstra, etc.  Of course there’s also plenty there you’ve never heard of too.  About 2,000 companies all up I believe. In the United States the main market is the New York Stock Exchange.  This is the largest share market in the world. On the NYSE you’ll find companies like Johnson & Johnson, Exxon Mobil, AT&T, VISA, and Pfizer. The second largest share market in the world is also in the US – the Nasdaq.  This market tends to be more technology focused, so Apple, Amazon and Microsoft are listed here. There’s also the London Stock Exchange and on and on it goes – typically one per country. You’re buying a piece of a company The next thing to recognise is that when you buy a share, you are buying a small piece of a company. Let’s say you buy a share in JB HiFi.  You are now a part owner of that business. If that business performs well, you will get a share of the profits.  If it grows and becomes worth more, the value of what you own will also rise.  Of course if things go badly – maybe Amazon enters Australia and JB HiFi loses a whole lot of customers, then the business might decline, and so the value of your little piece of the company will do the same. As a part owner you have the right to attend the company’s annual meeting and vote on issues like who should sit on the board of the company. I sometimes have clients tell me that they prefer property investment to share market investment because they can touch a property.  It’s a physical thing.  They don’t feel that with shares. Whilst I can understand that, if you think of the share you bought as a small piece of a company, then you can generally find something physical to attach to that.  Walk into the JB HiFi store.  You own a little bit of this.   Blue chip If you start to take even a passing interest in share market investing you will soon come across the term “blue chip”.  So what does it mean? A blue chip share is a large, high value company.  The expression is usually meant to infer that it’s a company that is so big it will never go broke.  In Australia, the big 4 banks, BHP, RIO, Telstra, Woolworths, Wesfarmers - these are all businesses that would typically be described as blue chip. There is no formal definition of a blue chip company, and you won’t see that as a descriptor on the ASX anywhere. Interestingly, the term blue chip apparently comes from poker, where the most valuable chip was traditionally blue. What to buy So let’s say you’ve decided to dip your toe in the water and buy some shares.  How do you decide what to buy?  Well of course you could come to us for advice, but perhaps initially you just want to have a small go yourself to gain some experience – a great idea. Some important numbers you might come across in your research are the dividend yield and the price earnings ratio.  You’ll come across these numbers in the newspaper and on most share trading websites.  So let’s take a quick look at what these mean. Dividend yield – this is the income rate of return from the share and can be compared against bank interest rates to make it meaningful. Resources companies such as BHP typically pay quite low dividend yields of around 2%, because they tend to pour a lot of their profits into expansion of the business, rather than paying out dividends. The banks on the other hand are more generous, usually paying 5-6%. And then there’s franking credits on top, but that’s for another day. Price Earnings ratio – Commonly abbreviated to the PE, this is a ratio of the price of the share, divided by the earnings per share. So if company XYZ was trading at $10, and in its last earnings notice it declared earnings of $1 per share, then the PE would be 10. That is, its price is 10 times its earnings. Most companies trade on PE’s of between 10 and 20 times. I find PE’s are most useful when comparing companies in the same industry, e.g. the banks, to see which banks the market is rating more highly than their peers. A high PE often reflects an expectation that earnings will grow strongly in the future. In contrast a PE under 10 typically suggests that the market anticipates earnings will decline in future. As an investor you can consider whether you believe the market assessment is correct. Importantly both these statistics relate to the share price on that day. If you already own the shares, and purchased them at some other price, it has no relevance, I guess unless you are thinking of selling. It is also important when considering both of these measures to remember that the earnings numbers they are working off are historical, backward looking – nothing is certain in the future. How else to get started with investing the share market So you’re keen to invest, but don’t really want to get into the nitty gritty of choosing and monitoring shares yourself.  Or maybe you’ve done a bit of that already and decided it wasn’t for you. Fortunately for you, most investors who build wealth in the share market don’t personally do the research, buying and selling.  As happens within your super fund, most people invest via a pooled fund where your money is combined with others and a process is used to spread your investment over many shares to reduce your risk. The most common way to achieve this is through either a Managed Fund or an Exchange Traded Fund (ETF). The difference between the two is that with a managed fund you apply to invest directly with the fund manager, quite possibly through an adviser.  And when you want to take your money out, you similarly apply to the fund manager for a redemption. Exchange Traded Funds however are bought and sold on the stock exchange.  This means you can buy and sell more quickly, but it also means you will need to pay some brokerage to your stock broker each time you do so. Another difference is that typically an Exchange Traded Fund is replicating a particular index, such as for instance the ASX200 – the largest

Today’s episode is the 3^rd and final look at the most common financial mistakes I come across when advising clients.  Thanks for your comments and feedback on the previous 2 posts, it seems that many of you have battled with some of these issues yourselves, and there were a few other mistakes that you’ve managed to make that, whilst being proud of them is perhaps not quite right, they are certainly something good for a laugh well after the fact. I’ve got 5 more for you today, so let’s dive in and help you avoid the most common financial mistakes. In episode 9 we looked at Jenny’s story, where her husband suffered pancreatic cancer and was without any personal insurance.  They had looked into obtaining personal insurance, and indeed Jenny had done so, but he took the “I’m tough as nails, it’ll never happen to me” attitude, to the detriment of their family. So the next common financial mistake I see is people not having appropriate personal insurance.  There are 4 types of personal insurance, and I’ve got explanations for what they each do in the Toolkit for this episode, so be sure to go to the financial autonomy web site and download that. But in summary, the 4 types of insurance available are Life insurance, Total & Permanent Disability, Income Protection, and Trauma. Now if money was no object you would ideally have a package that includes all 4 of these.  But for most people, there is a need to balance the ideal with the realities of their budget.   The crucial thing though is to review your needs, and make a conscious decision as to what cover you will hold.   Personal insurance is very customisable, so there is usually a solution available that can manage your risk, whilst also fitting within your budget. Too often, people get some default life cover within their super fund, and give no thought to whether it is actually fit for purpose.  And they just never even look into Income Protection and Trauma cover. Personal insurance is applicable to us all during our working lives, but especially if you have a mortgage and children, it’s just so crucial that you sit down with someone and put together a package that makes sense for you and your family.  Remember, as we saw in Jenny’s case, the implications of you not having insurance are far broader than just you. Another common financial mistake that I see is not having goals.  In episode 10 – is your ladder against the wrong wall? , we looked at the popular SMART goals acronym as a process to flesh out your goals. Once again, I’ve included detail on this process in the free downloadable toolkit. Sir Edmund Hillary, the great Kiwi, didn’t get to the top of Everest with Tenzing Norgay by just going out for a stroll and happening to find himself at the summit. He set himself a goal, and then went about planning how he would achieve it.  I really like this quote from him: You don't have to be a fantastic hero to do certain things -- to compete. You can be just an ordinary chap, sufficiently motivated to reach challenging goals. You don’t have to be a hero to reach your Financial Autonomy dreams either.  You just need to set your goals, develop a plan that will get you there, and then get started. If you’re a home owner, you likely have equity in that home.  This represents the portion of the asset that is yours, once the mortgage is cleared.  So for instance if your home was worth $1 million, and you had a mortgage on it of $600,000, then your equity is $400,000.  If the house was sold, and the debt paid off, you’d have $400,000 in your pocket in very simple terms. Over time, as you pay-off your mortgage, and as hopefully the value of your property rises, your level of equity rises.  In a balance sheet sense, you are becoming wealthier.  The end game is to eventually pay off your home loan entirely, and own your home outright.  That way, later in life when you no longer have any wages coming in, you know you’ll always have a roof over your head, and you have an asset there that could potentially be sold, to get you into a retirement village or in some other way look after you in your final years. A common mistake I often come across is people viewing this equity as their personal piggy bank.  Banks make this easy with things like re-draw and Lines of Credit, because there business is charging you interest on debt, and so they don’t really want you to pay your home off. This is where regular monitoring of progress towards achieving your goals is important.  Is your debt going down from one year to the next?  All too often I sit down with clients and we find that despite having made home loan repayments all year, their loan balance is about the same as it was when we last reviewed things 12 months ago.  The culprit will usually be the family holiday or the new car. Now housing your savings in or against your mortgage may well be a very sensible strategy, but be really wary of taking back out not just what you’ve saved, but also the repayments that were intended to bring that debt down. Remember, by the end of your working life, and ideally much earlier, you need to own the roof over your head if you are to achieve financial independence and security. I think most Australians are aware that superannuation is important.  But it’s also kind of boring.  It’s easy therefore to pay it little attention, at least whilst in your 20’s and 30’s, and perhaps even into your 40’s.  Hopefully by the time you get to your 50’s, retirement is close enough, and your superannuation balance large enough, that you’ve started to pay some interest. But ignoring your super in those early years is a mistake.  Let’s talk about wonders of compounding for a moment. Let’s say you put $1,000 into an investment, and it earned 10%.  At the end of the year, you’d have $1,100 – the original amount invested, plus the 10% interest you earned.  Now if you left those earnings in the investment, the next year, instead of earning $100, it would earn $110, because not only have you earned 10% on your original $1,000 invested, but you also earned 10% on last years earnings. Go another year and you earn $121 and your balance is now $1,331. This is the principal of compounding in action – you are earning interest on the past interest that you were paid. For compounding to work, you need time.  The longer your money is invested the greater impact compounding will have.  To illustrate the impact, let’s say you wanted to have $1million when you retired, and that was 30 years away. You could figure 30 years is a long way away, I’ll worry about it closer to the time.  Or, if you were able to get your hands on $132,000, and earn 7% a year over that 30 years, you could sip pina colda’s on the beach for the next 30 years because compounding will do your work for you. Now you might say, yeah, but where am I going to come up with $132,000.  But if you’re figuring on retiring at age 65 say, then 30 years out is age 35, and you could very easily have that much in your super fund after 10-15 years of working and earning. The levers you can pull superannuation wise are how your money is invested.  Investing conservatively might seem prudent, but it’s coming at a huge cost in what compounding can do for you.  $10,000 invested and earning 5% over 10 years grows to $16,289.  Had it earned 10% instead it would be almost $26,000.  That’s a big difference. Fund costs are another lever you can pull.  Is the insurance in their appropriate for your particular circumstances?  Are the costs reasonable for what the fund is offering?  The cheapest isn’t always the best, but it’s unlikely the most expensive is either. And then of course you can control any top-up contributions that you make.  Your employer will put in the standard 9.5%, but could you put in a little more? Compounding is extraordinarily powerful, and it’s at its most potent for investments held for a long time.  Your superannuation savings are therefore perfectly positioned to exploit this financial gift. And the final common financial mistake that I see people make is listening to the wrong people.  Now I’ve left this one to last because, as someone who provides financial advice as a profession, I of course have a bias here – you should be listening to me clearly! But in all seriousness, the number of people I’ve come across over the years who go down a financial path because their uncle told them it was a winner, or someone on the radio said the world was coming to an end, would shock you. Just for a moment, let’s assume that the person giving you this advice does actually know what they’re talking about.  You will have noticed that at the start of each episode we have a warning that the information we provide is general information only and you should seek advice that is specific to your circumstances.  Now that’s there because legally it has to be, but it’s not just fluff, it’s a really, really important message. The uncle who tells you that property in woop woop is a really good buy may well be right in so far as he’s looking for an investment that provides a good income return.  But perhaps that’s not what yo

Welcome back.  In the last episode we explored common investment mistakes people make.  It’s not really essential that you listen to Part 1 before giving this one a listen, but if you haven’t listened to that one yet, perhaps make that the next episode you grab. Today we’re going to explore common cash flow mistakes that I see people make. I mentioned in the first episode that when I was first planning this post, I jotted down 12 ideas – financial mistakes I’d seen regularly over my 18 years as a financial planner.  Last episode we covered the three that I grouped together as investment related – procrastination, being too conservative, and trying to be a share trader.  In this episode I’m going to start with three more, that all have cash flow as a common theme. Hopefully you’ve listened to a few Financial Autonomy episodes by now, and if so you’ll know that a common pre-cursor to making progress on your Financial Autonomy goal is having a good handle on your household’s cash flow.  How much comes in, and how much goes back out.  In the Toolkit for the episode I’ll make sure that our Budget Tool is included.  I know the “B” word strikes fear into many, which is why I typically focus on cash flow instead. The thing is, getting on top of your Cash Flow is much easier now than it used to be.  That’s courtesy of internet banking. Our Budget Planner template has Expenditure first and income second, but if you want to get some quick progress, fill in the income figures as they’re the easiest to get.  You want the after tax number here – how much actually goes into your bank. Now go back to the top and work through your expenses, referring to your bank statements in your internet banking to get the numbers.  Focus on the bills first because they are easily identifiable.  For things like your phone bill, they’re pretty stable month to month, so you should be able to just check a couple of months’ worth and then get a good estimate of what they will cost you over the year. Bills like Electricity and Gas can vary quite a bit between summer and winter, so you might need to go back and get the whole years figures for these ones. Once you’ve filled in the clearly defined expenses, then go back and perhaps focus in on 2 months’ worth of figures and tally up what you spend on food, clothes, and the like.  Things that you will always spend money on, but for which it varies a bit, and drips out over the course of a month. I would print out the 2 months worth of bank statements and tick items off as I allocate them to a group such as food.  Perhaps you could use a few different coloured highlighters – one for food, one for entertainment, etc.  The end game is that once you’ve completed this exercise, everything you’ve spent money on in the past 2 months has been put into a category in your budget. So now you total up your expenses, compare that to your income, and hopefully you like the answer.  If the answer is that you should be saving $x per year, reflect on whether that has been your actual experience over the past year.  If not, why not? One key element of the exercise, probably the most important, is for you to see what you spend your money on, and whether that’s really bringing you the greatest happiness.  Is the way you are currently running your finances bringing you closer to your Financial Autonomy goal?  In know that money and finances can be a point of stress in some relationships too.  Perhaps going through this exercise together might help you both have a deeper conversation about where you are currently going, and whether that is taking you to the destination you both want to arrive at. So not having an understanding of your cash flow is common financial mistake number 1 this episode. Very much related to this, common mistake number 2 is spending more than you earn. You don’t need the mental powers of Einstein to figure out that this can’t work, yet it is an easy trap to fall into.  The most common ways I see this unfold is through credit cards, and the generosity of well-meaning but ill guided parents. Credit cards, and I guess general consumer debt like interest free periods on white-goods, is the most common way of spending more than you earn.  If this is you, you’ll know it.  So do the budget exercise mentioned earlier, understand why your expenses exceed your income, and devise a plan to do something about it.  Perhaps you can come up with a way to increase income.  Most likely there will need to be some strategy to reduce expenditure.  As with the investment problem identified in part one of the post, the key is don’t procrastinate.  Identify the problem and take steps to resolve.  You may not come up with the perfect solution straight away, but make a start in changing things, and refine as you learn more. The less well recognised way that people fall into the habit of spending more that they earn is through the generosity of well-meaning parents.  I’ve had retired clients over the years whose retirement savings have been drained by adult children constantly putting their hand out for financial help, or just where the parents say “oh well, poor Tina’s doing it a bit tough so we paid her credit card off for her”.  These parents are well meaning, they love their kids.  But by “helping” in this way, their children, who are adults, never get on top of things financially.  They never get to the point of standing on their own two feet. I’ve dealt with one family where mum and dad provided the daughter with quite a bit of financial help in her 20’s, enabling her to drive a Mercedes and live a really high material standard of life.  She met a lovely guy and they got married.  Her expectations of what life should be like were really high though, and as a couple, that lifestyle just couldn’t be maintained.  The husband felt like a failure because he couldn’t support his wife in the lifestyle she had become accustomed, and ultimately they separated.  It was sad story because they are both lovely young people, but her parents, with the best intentions in the world, effectively sabotaged that marriage by not making their daughter at an early age understand the fundamental need to live within your means and spend less than you earn.  Unrealistic expectation were baked in at an early age. In contrast to this, I saw an article recently that criticised the celebrity chef Gordon Ramsay for flying in first class, whilst his kids flew in economy.  Now I have no idea if this story is true, or, if it is, what the back story was.  But if his thinking was that he doesn’t want them to have an expectation that every time you fly in an aircraft, it will be in the first class section, then I think he’s doing his kids an enormous favour.  If his kids enjoy success later in life and can buy their own ticket in first class, then good luck to them, they will have earnt it.  But if dad just shells out and they think nothing of it, then surely, roll forward 5 or 10 years and you’ve got a train wreck of a life waiting to unfold. Continuing on with the cash flow type common financial mistakes that people make, feeling the need to keep up with the Jones is my third offering for you.  Back in Episode 7 – How to retire early, I touched on the interesting findings from the authors of The Millionaire Next Door.  You’ll recall the two authors studied households whose net-worth (ie. assets minus debts) exceeded one million US dollars.  One really interesting finding was that millionaire households were disproportionately clustered in blue collar and middle class suburbs, and not in the higher income, white collar, more affluent suburbs that you would assume.  Digging into why this was the case, the authors found that the higher income earners devoted more of their income to luxury items and status symbols, often funded with debt.  These people tended to neglect savings and investment. This finding delivers the double whammy of linking the problem and the consequence.  Feeling the need to keep up in a material sense with friends, neighbours, or whoever, results in you being less wealthy.  And in the context of what we’re trying to achieve – your Financial Autonomy, your financial independence, gaining choices in life - less wealth directly pushes against you achieving your goals. Let’s finish off today’s episode with another financial mistake that I commonly see, and that is often really quite sad.  That is the scenario where one member of a couple handles all the finances, and the other is totally ignorant of all things money in the household.  I say it’s really sad, because I’ve seen this scenario unfold in a number of ways. One is where the person who controls the finances dies, and the surviving partner is completely ill-equipped to manage their affairs.  Sometime they don’t even know what assets the couple owns. A variation on this is where a relationship ends in divorce.  The person who took no interest in the finances (or perhaps wasn’t given an opportunity to be involved) is now rudderless.  I can think of one instance where, post-divorce, the wife, who had previously just left everything to the husband, was utterly shocked when she did learn of the state of their finances and how money was being spent. On the flip side, I’ve had clients in total despair, because they are trying to manage the household finances, but their partner just whips out the credit card at a moment’s no

Enough people have hit their thumb with a hammer for you to know that it hurts quite a lot. You don’t need to do the experiment yourself. I’ve been helping people as a Financial Planner now for almost 18 years, and I’ve meet many, many wonderful people. Often people put off seeing a financial planner until they’re at some sort of cross roads – they’ve been made redundant, or retirement is rapidly looming, or they’ve separated from their partner. So prospective new clients often come in to see me with some baggage. Something that’s not working, or that they’ve put off dealing with, and that’s why they need our help. Of course over that time you see some common challenges that people face. Issues that repeat again and again. So today I’m going to share some of those with you, the product of my 18 years of helping people, so hopefully you can skip over these common financial mistakes, and reach your goals sooner. We’ve talked a lot so far in past episodes about strategies you can use to help get you to your goals and dreams. Getting a handle on your cash flow, the Survival and Capital strategy mix in moving to self employment, and things like side hustles. Equally helpful though in getting to whatever goal you’ve set, has to be avoiding financial mistakes that don’t need to be made.  Now don’t get me wrong, there are some things we have a go at, and they don’t quite work out as planned.  But we get really valuable learning from them.  I think you can often learn a whole lot more from things that don’t work out as you’d expected, than when things do just fall into place. But what we’re talking about today are mistakes that have been made by people over and over  again, and for which you can get the learning without having to repeat the exercise.   As I said at the top, enough people have hit their thumb with a hammer for you to know that it hurts quite a lot without you needing to do the experiment yourself. When I started planning for this episode, I wrote down a simple dot point list of the common financial mistakes that I see, and I came up with 12.  I’ll try to group them together a bit for ease of absorption. Let’s start with investing, because several of the most common financial mistakes fall into that broad category.  Number one is Procrastination.  Not starting.  I appreciate this can be a broader life problem, but for now I just want to focus on procrastination in an investment context. Whatever your Financial Autonomy goals are, having some wealth behind you is likely to make it easier to succeed.  The stronger your financial position, the more options you’re likely to have. Now building up some savings in a bank account is a really great start, and an essential foundation, but at some point those savings need to be put to work.  The problem is we fear the unknown, and even more so when the unknown involves money that we’ve worked really hard to save. But at some point you need to invest.  Buy some shares, or Exchange Traded Fund (ETF), or invest in a managed fund.  It doesn’t need to be enormous amounts to start with, more important is the learning. An element of the initial discussions we have with new clients is to discuss their risk tolerance or risk profile.  There is no exact science to this.  We have a series of questions we often go through with clients, but sometimes we just have a discussion about their past experiences.  The interesting thing is how people’s thoughts around risk vary depending on what they’ve experienced in the past. So for instance I spoke with a client recently who initially told me they were a fairly conservative investor.  Now in a Financial Planning context, a text book conservative investor would have somewhere less than half of their investment portfolio in shares and property, and somewhere north of half the portfolio in low risk things like bonds and term deposits. So this guy tells me he’s a conservative investor, but we then get into how he has invested his super and it’s 95% in shares.  So we have a discussion around that and he tells me that he just focuses on the dividends, he doesn’t worry much about the prices going up and down.  So when he says conservative, he means he only invests in shares that pay nice steady dividends.  To him, having a portfolio that is 95% in shares is conservative, whereas most people would consider that very aggressive. So why is he comfortable having such a large exposure to investments that fluctuate in value.  Well it’s because he’s invested in shares for over 20 years.  Has dabbled in things here and there.  Some have worked out, and some haven’t.  But over time he’s found what is comfortable for him, and what works for him.  So when markets had a tough time through 2008, he didn’t love it, but he didn’t get particularly distressed, and importantly he didn’t sell anything.  He could do that because he had experience investing, was familiar with the up and downs, and knew that his dividends wouldn’t change much, even if prices did. He’s a better investor now, because he has experience, and he has experience in investing because one day he made his first investment.  He made a start.  He got past procrastination.  So common financial mistake number one is, avoid procrastination – make a start. Mistakes 2 and 3 are opposite sides of the same coin.  Either investing too conservatively, or trying to be a share trader.  Of the two, I’d say the share trader approach is the one with the potential for the most damage in the short term, whilst investing too conservatively is more of a slow burn.  You don’t notice the damage initially, but 5 or 10 years out from retirement, you look at your super and realise it’s not going to get you to the lifestyle that you want. Let’s start with investing too conservatively.  The mindset goes, I don’t want to lose any money.  Therefore I can’t invest my money in risky things likes shares and property.  I need to keep my money in term deposits, or the low risk options in my super fund.  At the extreme end, maybe I keep it all in cash. Now whilst you think you’re protecting your capital from the potential for loss, in fact what you’re doing is baking in disappointment in the future. Some research done by annuity provider Challenger a few years back highlighted this really well. They focused on the risk that your savings will run out during your life time – ie. you run out of money.  They used historical return data from 1900-2013, so it covered a wide variety of economic conditions.  They then analysed portfolio’s with different compositions and considered the results based on drawing down at different rates.  They found:

• If you planned on drawing down on your retirement savings at the rate of 5%pa. a level we would typically suggest, and you wanted your retirement savings to last 25 years (retire at 65, money lasts through to age 90), were you to invest in the “low risk” option of 100% bonds and cash (ie. no shares), there is only a 34% chance of success.  That is, a 34% chance that your money will not run out during the 25 year period.
• If instead you were invested in a typical “Balanced” option, with 50% in growth assets such as shares, and 50% in defensive assets such as bonds and cash, the likelihood of success jumps to 69%.
• Still not certain enough?  Move up to 75% growth assets and the success rate rises further to 90%.  Interestingly though, move to 100% growth assets, and the success only increases 1% to 91%.

These figures illustrate really well that investing too conservatively, in the traditional sense of minimal exposure to shares and property, is actually the most risky option from the perspective of having your money last throughout your retirement.  The same would apply to building assets to enable the achievement of your Financial Autonomy goals. In the downloadable Toolkit for this episode, I’ve include a piece on risk vs reward that I think you might find really useful, so be sure to visit the financialautonomy.com.au web site to grab that. But as mentioned, there is another side to this coin, and that is the day trader.  If you bump into one of these people socially, run a mile.  There are all sorts of books and bits of software that claim to teach you how to make your fortune trading shares, or sometimes things like foreign currencies or futures contracts.  At the heart of this approach is a belief that you are smarter than the market as a whole (or can be taught some secret formula to make you smarter than the market), and so you can buy shares in the morning, sell then in the afternoon, and make money.  Some people might hold their shares for multiple days, some even weeks.  But the process is the same – they are not buying the share because they have a belief in the prospects for the company, but rather it’s just a trading item. What people who embark on this common financial mistake fail to appreciate is that every time they buy or sell, there is someone else on the other side of the transaction doing the opposite thing.  So for you to win at this game, you need to know something that the person on the other side of the trade doesn’t know.  And because every time you trade, you will have to pay some sort of transaction cost, usually brokerage but also the buy/sell spread, you need to be right a lot.  By chance you’d hope to be

Having a job and a regular wage is comforting and secure, except if you lose that job.   UK stats say that 45% of workers will be made redundant at least once in their working life.  I’d expect the Australian numbers would be much the same. In that sense, being a full time employee is very binary.  Very secure and reliable whilst you’re employed, but when you’re not, there’s nothing. If Financial Autonomy is about having choices in life, then how does that align with being fully reliant on an employer to provide you with the income that you need to keep all the balls in the air? Most of us do work for an employer, and that suits us very well, so how can we align the desire for financial independence, with the financial dependence associated with being a full time employee? I’ve called today’s episode The Security Illusion, because I think for many people, they overestimate the level of financial security provided by their employer.  So what steps can you take to truly be financially secure?  Well, that’s what we’ll be looking at today. Financial security.  Who wouldn’t want that?  I often talk about financial independence, using it fairly interchangeably with financial autonomy as I think the difference between the two is fairly minimal. Could financial security be another interchangeable term? To me, the difference is in the mindset.  Someone whose goal is financial security is thinking about controlling the down side risk.  The risk that things will go bad.  And that’s no bad thing.  The old “hope for the best, but plan for the worst” is certainly something we try to incorporate into our client’s financial plans. But can you really control poor management decisions made by your employer, or industry changes that render your area of expertise redundant? When I think about the goal of Financial Autonomy, I think of it as something more proactive.  Unlike financial security, where the goal is to find somewhere safe, Financial Autonomy is about consciously building a situation where you have control, and where you’re not reliant on others. Financial security, in the form of full time employment alone, is I think an illusion.  But that doesn’t mean that you can’t be a full time employee and achieve Financial Autonomy.  Indeed that’s how most people would achieve their Financial Autonomy goal. So how can you transition from valuing your job for the illusion of financial security that it brings, to valuing it for the potential it provides you to achieve Financial Autonomy, a far more useful aspiration. Here’s a few ideas I’ve come up with.  I’d welcome your feedback as to other options you can think of.

Broaden your skills – always learning

To me the most obvious way to reduce the risk of being out of work for a sustained period is to have more strings to your bow.  If your desirability to an employer is built around your skill with a particular software package for instance, then what happens when the industry moves on and a new software solution becomes the norm? This is an exercise in seeing the forest for the trees.  You need to take a step back for your day to day activities and think about where your industry or profession is heading.  Are you building the skills now that will be relevant in 5 or 10 years? Very often employers have budgets for staff development and training, so if you see an area where you think you should develop your skills, hit up the boss to support you. The other good thing about undertaking some learning is that it highlights to your management that you are someone with aspirations.  You don’t plan on sitting in the current role forever.  You want new challenges, and if they don’t find them for you, they run the risk of losing you to a competitor. It may be that you take that helicopter view of your industry or career path and find that the road ahead isn’t paved with gold.  In fact what you need to do is plan for a shift altogether, to an area with better long term prospects.  This is something we looked at in the last episode – Is Your Ladder Against the Wrong Wall?  So check that one out if you haven’t already given it a listen.

The side hustle

Another way you could improve your financial security is to be less reliant on that one employer.  Is there a second gig you could be doing to earn a few extra dollars?  I only came across the term side hustle in the past year, but I love it, and it’s certainly a viable way towards Financial Autonomy. Let’s say you have an office job Monday to Friday, but have always enjoyed photography.  Perhaps you could develop a little business photographing weddings or children’s portraits after hours.  That way, if ever you where to find yourself out of your regular work, you have some money coming in from the side gig, which you could potentially even ramp up some more with some spare time. A side hustle could be a good way to try out an idea you’ve had and see if you can find a market.  If you get some traction it could even become your full time gig.  I was listening to a pod cast this week where they interviewed the comedian Wil Anderson.  He did 6 stand-up shows whilst working in a regular day job, before deciding to throw it in with the Herald Sun and devote himself full time to comedy. Creating an online course, app development, registering with Airtasker, building niche websites, an eBay store, pet sitting, freelancing on freelancer.com.au or fiverr.com  , Uber driver – there’s just so many things you could potentially do on the side to reduce your dependence on a single employer. One good resource you might like to check out is the web site Side Hustle Nation, and their podcast The Side Hustle Show.  There’s lots of good ideas and downloads there. Closer to home, Rock Star Empires would also be worth some of your time.  The principal there, Troy Dean, speaks with great clarity and frankness.  They’ve got a Facebook group that’s fairly active too.

Build wealth

The stronger your financial position, the less reliant you are on your employer.  If you’ve got debt up to your eye-balls, then a few weeks with no wages coming in and you’re in big trouble.  But if instead you had little or no debt, and several thousand dollars in the bank, then the pressure’s off, at least for a while. One way you could frame this is financial resilience.  How long could you support yourself and your family if you found yourself out of work? Hopefully your job gives you a sense of purpose and satisfaction.  But even assuming that were so, I doubt you’d do it without getting paid. So the great thing about your job is that it throws off money.  Now of course you need that money to live, but hopefully you can manage your budget so that you can also save.  Your full time job then, provides you with the fuel to create financial independence – money. One path to escaping the insecurity of a full time job is to have a plan to build independent wealth, using the income your job throws off to do so.  Now the strategy appropriate to achieve this differs for everyone, but the key is to have a plan.  Pay down debts, build up assets, and in time you can put yourself in a financial position where if the boss stuffs up, the business declines, and you find yourself out of work, you can smile inwardly with the knowledge “you might be broke mate, but thanks to you, I’m in good shape, I’ll be fine, whatever happens”.

Become self employed

I guess the ultimate way to escape the insecurity of full time employment is to not be employed, but instead run your own show. Now, as anyone who has ever run their own business will tell you, being self-employed is far from stress or risk free.  Not everyone should run their own business.  Most people who move from being an employee to being their own boss find they put in more hours, not less, and success is certainly not guaranteed. But having provided that important caveat, shifting to self-employment is certainly an option that you should weighed up. A successful business will have multiple clients, and perhaps multiple products or services, so your risk attached to any one party can be dramatically reduced. It could be that you can do a few different things, possibly even some as an employee.  For instance if your background was in sales and marketing, perhaps you could consult to several different small to medium size businesses, whilst also having a regular 2 day per week job running the marketing arm of a small retail chain. If moving to self employment holds appeal to you, go back and listen to Episode 1 – how to be financially ready to start your own business. Perhaps true financial security comes from deriving your income from several sources, be they different clients, different things that you do, or investment assets that y

How long since you’ve taken a step back from your professional life and considered where it’s taking you?  Is your current professional activity taking you to somewhere you want to be in 10 or 20 years?  Is it leading you towards inner happiness? It’s easy with the pressures of mortgage repayments or rent, perhaps kids, and just the normal expenses of life, to push on, head down bum up.  The problem is that can lead you to a destination when you are perhaps in your 40’s or 50’s and with plenty of working life ahead of you, of middle management restructures, possible redundancies, and industries changing. Or perhaps the outlook for your profession is good, but will it take you to your personal goals?  How many people throw their whole life into their work, only to neglect their family and home life, and then one day find themselves divorced, or just distant from their kids and partner? So today we’re going to ask the question, “is your ladder against the wrong wall?”. So you’re climbing the corporate or professional ladder.  There’s the normal politics and set-backs, but on balance, you’re progressing, you’re moving up. But have you paused and looked at what’s at the top of that ladder?  Is it actually where you want to be in 10 or 20 years?  And if you were at the top of that ladder, how’s the view?  In reaching that pinnacle, are you living the life that you aspire to? The aim of today’s audio blog is to get you to take a step back and consider whether in fact you are on the right ladder.  You’ve only got the one life.  Let’s make sure you don’t look back in your old age and regret how you used it. The first step in determining whether your work life is taking you in the right direction is to develop your goals, and for this exercise, it’s the medium, and especially the long term goals that count.  Where do you see yourself at 50, 60, or 70?  Will you still be living in the same city?  The same country even? Do you hope to have family around you, perhaps even later in life some grandkids?  Or would you anticipate a life interacting within your particular communities, be they professional, cultural, or geographic? Setting out some long term goals is such an important foundation stone, not just in a financial planning context, but in a broader life planning context. A goal that my wife and I set several years ago is that once our youngest child completes secondary school, we’d like to be able to live in a foreign city for 2-3 months each year.  We don’t want to be tourists.  We want to continue working, just remotely, and experience what it’s like to really live in the city – to read the local news, to develop in your head a bit of a mental map of the area, to hopefully get to know a few locals, and just take in the little differences. Now it’s still 8 years away, but when I’m thinking about how I grow my business, or even if I grow my business, I’m in part thinking about it with a side thought as to “is this going to help me be able to work remotely for 2-3 months a year one day?” Similarly my wife works in tourism, and she determined that as a sector, it was where she wanted to be.  But the employer that she had worked for was not where she wanted to remain. So in thinking through her next step, we again discussed, “well, how is whatever you do next going to help in us achieving our goal of being able to work remotely for 2-3 months a year?”.  It was a factor in deciding that a good solution would be for her to buy a business in the tourism sector that she can develop, and build it over time so that working from the other side of the world for a few months each year would be possible. In developing your goals, a common framework to use is called SMART goals.  This acronym stands for: Specific Measurable Achievable Realistic Time bound Regular listeners will know that with each Financial Autonomy audio blog there is a downloadable toolkit to help you in implementing the ideas in each episode.  In the Toolkit for this episode I have a template for you to flesh out your SMART goals. We’ll also have in there our Dream Planner template, which helps you make progress on achieving the goals that you’ve set. Let’s take a quick look at how you might use the SMART goals framework to flesh out one of your goals. What if you had a goal that you wanted to own a house near the beach one day.  It’s something that perhaps you would retire to later in life, but you’d like it to be a holiday house until then, just somewhere you and your family can escape to. So the first step is Specific.  Where do you want to have the beach house?  How many rooms would it need to have?  Your goal might then become, I want to own a house near the beach, in the Inverloch region, that has at least 4 bedrooms and two bathrooms. The next step is Measurable.  Do a little bit of internet research and determine what it’s likely to cost.  Let’s say you determine that a suitable property is likely to cost around $400,000. On to Achievable and Realistic. Given your current financial position, and income, is there a genuine likelihood that you can get to this goal?  You may not know the exact path, but you should have a sense of whether it’s likely to be possible. Then finally Time bound.  So that might be, “by the time I’m 50”. So your original goal was to own a house near the beach one day.  But your goal, re-expressed as a SMART goal becomes “By the time I’m 50, I want to own a house near the beach in the Inverloch region, which has at least 4 bedrooms and 2 bathrooms, and expect to need to spend around $400,000.” Your goal has gone from a one-day, maybe, proposition, to something that is quantified and really specific.  With this nailed down, you can now work on a plan to get you there, whereas before, who would know if you were making progress?  There’s a really good chance that with the original goal, you’d never get there, because there would always be other things that popped up and kept your goal, your dream, out of reach. Okay, so you’ve determined your goals.  If you continue climbing the current corporate or professional ladder, will it get you there? If the answer is yes, fantastic, continue on as you are.  You’ve now got some good quality goals, and a plan to get you there. But if the answer is no, it’s time to consider the alternatives. If you’re happy working in the industry that you’re in, but your current career trajectory isn’t going to see you achieve your personal goals, then you could look at how you can accelerate your career progression, or perhaps move sideways into a sector with more room to grow. Would some extra qualifications help? A Masters or an MBA for instance? It would certainly demonstrate to your employer that you’re keen to develop your career, and that you hold ambitions to grow and progress. Maybe it’s time to look around at what other employers are offering.  Sometimes it’s possible to do a bit of leapfrogging on the corporate ladder by jumping from one employer to the next to broaden your knowledge and experience. Or maybe the industry that you’re in just won’t get you to where you want to go.  What re-training do you need to make the transition? I went to Uni at night as a part-time student.  One of my fellow students was an Engineer in the Oil & Gas sector but had determined that he had got as far as he was likely to go in that sector, and wanted to move across to finance.  He’s now an analyst with a fund manager, looking at the resources sector.  His prior Oil and Gas background gives him fantastic insight, and he’s been very very successful.  So don’t think that changing industries midway through your working life necessarily means starting all over again.  It’s very likely that the skills you’ve already learnt will be of use in your new career path, and those skills may actually make you a rare and therefore highly valuable commodity! What about a move out of town?  In episode 6 we looked at Nish’s story, where he moved from inner Melbourne to a seaside town about an hour and half away.  In the process he and his wife dramatically reduced the size of their mortgage, providing far more options around what they needed to do employment wise.  If you haven’t already listened to this episode I encourage you to go back and do so. Perhaps you could start a business, or buy an existing one.  Higher risk, but with higher risk comes the potential for higher reward.  As with the example I gave earlier of a goal that my wife and I have to be able to live and work overseas for 2-3 months a year in the future, having the flexibility and control that self-employment provides is really important in enabling us to achieve that goal. So over to you now. Take some time over the coming days to think about what your goals are.  If you have a partner, ideally discuss it together.  It’s so easy to just float along with the current.  Determine what you want out of life, and start taking deliberate steps to get you there.  Make sure your ladder is against the right wall!   Important Information: This information is of a general nature only and has been prepared without taking into account your particular financial needs,

When thinking about financial autonomy we are typically talking about medium to long term goals, and then developing strategies to get to those goals. The transition then is a planned one. What if your transition was thrust upon you? I met someone recently who faced this challenge, and with her permission, I thought it was worth sharing with you a little of her story and the learnings that we can all take. Financial autonomy is about standing on your own two feet and not being reliant on others. Having choice. Part of that should be having the capacity to withstand adversity. Having the financial resilience to not lose your house or be forced to ask family for hand-outs. Lets take a look at Jenny’s story, I think there are some great lessons we could all benefit from. I met Jenny at a social function a few weeks back. Through the course of our conversation I mentioned that I had made a podcast called “Financial Autonomy” and told her a little bit about what that was all about. She said, “That sounds exactly like the help that I could use,” and so started to tell me a little bit of her story. I had never come across something like it before and thought it would be a fantastic thing to share to my listeners and those in the community. So I have subsequently had a phone call with Jenny and got a little bit more detail and that’s what we will be sharing today. So I guess Jenny’s story started when her and her husband were in the process of separating and they were selling their house. The day that the sale went unconditional Tim, her ex husband, was diagnosed with pancreatic cancer. It happened really quickly, he was just feeling unwell and within a few weeks he had turned yellow. With this diagnoses, pretty soon after he went in to have some surgery. The surgery wasn’t particularly successful. The surgeons couldn’t get to where they needed to, and so the advice was that he had 6-12 months to live. 12 months if he goes on chemo, but going through chemo is pretty unpleasant, so there is a quality of life consideration. But he came back two weeks after the surgery for a checkup, and they found that the cancer had actually shrunk. The surgeons couldn’t really understand why, but I guess you just take it if you can get it. So that was some good news. Now in the process, Jenny and the kids decided to move back in with Tim to help care for him. He migrated from England and he didn’t have any family here so that was obviously a fantastic thing that she was able to do for him. So Jenny moved back in with Tim into a rental property, the house has been sold, and they each got their half of the money. Now that was in some ways fortunate because Tim had no insurance. Ironically Jenny did have insurance, and this had been a cause of a bit of tension before they were separated. I guess Tim, probably like a lot of males, assumed it would never happen to him, and didn’t want to spend the money on having insurance. Also Jenny was telling me it was a bit of a factor that he was self employed so things like Income Protection weren’t easy because the insurer required financials, and so it wasn’t an easy straight forward solution as if say he was a regular employee. Although he didn’t have any insurance, Tim at least had his equity from the house that had been sold. This was very fortunate, because if he didn’t have that money to support himself, all he would have had would have been Centerlink and that would have been a pretty grim outcome, resulting in most likely sharing a house with a stranger. Could you imagine going through chemo in that kind of scenario, just horrible. So any way, he was very lucky to have Jenny there to move back in with him to support him and they battled away. They went through the chemo and all the things you have to do. Fantastically, now about 6-12 months since treatment (I’m not sure of exactly how long) he seems to have made a recovery. He needs to go back in for some chemo for about 5 weeks coming up. Generally the prognosis on pancreatic cancer isn’t good, but in Tim’s case it looks like perhaps he has beaten it and the signs are pretty positive. Another consequence of going through this together is that Jenny and Tim have gotten back together as a couple, which is lovely too, especially for their kids. It’s funny how sometimes the dark times can produce some good things as well. But something that Jenny was telling me that is something that really stresses the both of them out is that, Jenny has been a property owner since her early twenties, and Tim similar. And here they are mid to late 40s and they don’t own a house. Usually the thing that is keeping people out of the property market is that they can’t save the deposit, but that’s not the case here. Tim didn’t go through all the money he got back from the sale of their previous home and of course Jenny has her share of it as well. So their issue is not the deposit, it is demonstrating that they can service a mortgage. Hopefully, Tim will get back to work after this next round of chemo. Probably not doing the same type of physical work that he was doing before, but as soon as he is well enough he will get back to work. The kids are at school now, so Jenny could get back to work as well. So the challenge that they now face is that they are shut out of the property market as of now. They have some money for a deposit but they can’t secure a loan. So she is paying rent every month and feeling pretty negative about it. Hopefully we can work with them in the future with regards to a financial autonomy strategy, to help resolve that challenge. But it’s just interesting that you would have never foreseen that (being shut out of the housing market) as a likely outcome of a serious illness. But that’s just how these things can sometimes unfold. So that’s Jenny and Tim’s story, and like I said I thought it was just such a unique story.  Certainly something that I had never come across before.  And so I thought that it might be of interests to others and give the opportunity for learning. So what can we all take from their experience? I guess the first thing is that, insurance is important. As a financial planner, I arrange insurance for people but I must say I am always mindful of not wanting to come across as the pushy insurance salesman, so I probably don’t push the insurance hard enough. If it hadn’t been for this particular story coming up, I certainly didn’t have it on my radar to do a podcast that had any mention of insurance. But when you hear a story like this it really makes you stop and think how different would it have been if Tim had some trauma insurance? Which is actually what Jenny took out. It could have just transformed their circumstance. We’ll go through shortly some of the main insurance options because they tend not to be widely known. But probably the starting point, as a male because I think its more of a male thing, is to have an awareness that you are not bullet proof, and things happen. And be aware that when things do happen, it’s not just you that suffers but often it can be your whole family. I was talking to someone who has a family member with MS. She gets some Centerlink benefits but the only way that she is able to make ends meet is that her parents help her out. She’s in her 50’s and I gather her parents must be retired so it must be a financial hit to them, and I would assume that as a 50 year old, she doesn’t like having to ask her parents for money. But this is the kind of circumstance that we can find ourselves in. While it is amazing that here in Australia we have Centerlink type support, its often just not enough. I guess when you are thinking about insurance and not wanting to pay for it, just think a bit more broadly and that it’s not just about you. So what are your personal insurance options?  There are four main options: Life insurance, which is pretty basic, just pays a lump sum if you die. Often attached to that is one called Total and Permanent Disability (TPD), in order to qualify for this you need to be totally and permanently disabled. Fortunately this doesn’t occur too often, but the most common scenario for payout here is a stroke. You will often find through your superannuation that you will have some Life and TPD insurance cover. You need to give some thought to whether it’s the right amount of cover. The next one is, Income Protection (salary continuance.) This is replacing your income if you are unable to work due to illness or injury (not unemployment insurance.) The good thing about Income protection insurance if you have it outside of super, is that the premiums are tax deductible, so that helps. It’s also very customisable. There is always a waiting period, so this is the amount of time you have to look after yourself, before you start getting a benefit. You might have a bit of sick leave or annual leave. Usually you can get by for a little while. The default waiting period will be a month typically, though if it’s held in a super fund the default could be 90 days waiting period. During this period you need to look after yourself, and then if you are still unable to work after the waiting period has expired, you will start getting insurance benefits. There is quite a number of options on how you want to structure your income protection and it’s certainly worth getting a bit of advice. For our Financial Autonomy clients we can certainly work that through

Financial Autonomy is about managing and planning for major transitions in life.  A transition that many of us face unfortunately is divorce.  I understand researchers have found that going through a divorce can be one of the most stressful things you can experience in life. As a financial planner, I often work with clients who have been through or are going through a divorce, and assist them in the planning necessary to get them back on their feet financially. In this post I’ve broken down the things you need to be thinking about into 4 key strategy elements.  If you can work through these, you’ll be in a position to get your financial life back on track, and with this stress removed, hopefully your life back on track too. Divorce is certainly no fun.  But it does offer the opportunity to hit the reset button in your life.  With some good financial planning, this next chapter in your life can be the best yet.   Fortunately the days of couples sticking together in relationships that no longer work are behind us.  Divorce provides the opportunity for a fresh start.  But of course beyond the very significant emotional pain of getting through a divorce, the financial consequences are also very significant.  There may be many reasons for getting divorced, but improving your financial position is rarely one of them. Whereas you and your partner once shared a roof over your head, there is now a need for separate housing.  Often children are involved, so considerations of being local and having enough room for the kids can be a big challenge.  It’s not an option to move half an hour or more away to find more affordable housing when you don’t want to turn the kids’ lives upside down. You typically also go from two incomes and sharing expenses as a couple, down to one income with little change in expenses, so budgeting becomes a real challenge.  Often one of you will keep the family home so as to minimise disruption for the kids, but this may mean borrowing a significant amount so that your partner is able to move on with their life and get a new house of their own.  How will you service this new debt?  You may be required to pay child support, which, on top of new housing costs can be a real strain. And thinking longer term, retirement plans are often significantly disrupted.  Often one member of the couple took time out of the paid workforce to help raise the children.  This means their superannuation balance is typically considerably less than their former spouse who worked through.  This difference is allowed for in your financial settlement, but the result is that you are both now facing a less generous retirement outlook than was once the case. So divorce has big financial impacts.  But as I mentioned at the start, divorce also provides an opportunity for a fresh start.  It provides you with an opportunity to steer your life in the direction that you want to head, possibly without the compromises that you needed to make when you were in your former relationship.  You can set goals and work hard towards them without the potential for your former partner to decide they need a new car, or some other distraction.  Financial Autonomy is about giving you choices, and managing key transitions in your life.  Divorce is quite clearly a significant transition, and also an opportunity to gain choice.  So let’s look at a few strategies that might help you get back on your feet. 1. Budgeting The starting point must be gaining clarity around how much you have coming in and how much you have going out.  Following the divorce your household arrangements have changed, and possibly there is child support obligations and spousal maintenance to meet.  Or perhaps in reverse, you have these support payments coming in and need to ensure they are used wisely and appropriately. You can create your budget in a spreadsheet.  We also have a sample budget template in the toolkit for this post.  There are also budgeting apps available. Gain a clear understanding of how much you have coming in and how much you have going out.  Allow for the fact that bills are lumpy, and large expenses such as car servicing and council rates come up.  I suggest having a separate bills account with your bank.  If you determine that over the year your bills, including things like getting the car serviced, will be say $20,000, divide that by 26 (assuming you get paid fortnightly), and then arrange that amount, $769 in this instance, to be automatically transferred from the account that gets your income, across to your bills account each pay day.  Ideally you would kick your bills account off with a few thousand dollars to allow for the fact that a big bill could come up 3 weeks after you started.  You might even wish to put your mortgage or rent payments in here too. With this set-up, you know that all the

Many people that I speak to seek freedom from the need to clock on and clock off.  To not be answerable to a boss. To not having to devote time and energy to things that they’re not passionate about, just for the pay. The dream therefore becomes to retire early, and the sooner the better. In Australia superannuation is the primary vehicle that we use to save for retirement, and access to superannuation is available from age 60.  So, when we’re talking about early retirement, we’re referring to retiring earlier than age 60. But what does being retired before the age of 60 actually mean?  Does that mean sitting at home all day looking at the TV?  I certainly hope not. Of the people I talk to with the ambition to retire early, I believe their goal is to have choice and freedom.  To be able to say no to things they don’t want to do in a work sense.  Early retirement links very strongly with financial independence, and that is where we will be focusing the attention of today’s podcast. So your dream of early retirement might be leaving the normal full time paid work force at age 40 and working as a fishing guide 6 months of the year in Northern Australia. Perhaps it’s leaving the paid workforce to help your daughter care for your grandkids.  Or you want to become an independent film maker. The point is, early retirement isn’t about retiring from life, rather it’s escaping the captivity of the workforce and spending your time as you wish to.  It’s recognising that we don’t have a limitless life span, and so the sooner we can pursue the things that make us happy, the better.   If you are to retire early, you need to develop a plan to support yourself.  I’ve come up with 5 things you could do to gain the financial independence that you need.  They are:

1. Understand your livings costs.
2. Save
3. Invest
4. Minimise/avoid debt
5. Downsize/tree change

Let’s take a look at each in a bit of detail:  

1. Understand your livings costs.

Is all of your spending really necessary?  You need a budget and a cash flow management plan.  For you to be in a position to quit your job, you need to know how much money you require to live.  Is it $30,000 per year or $80,000 per year?  Here’s some overly simplistic maths for you, just to illustrate: If you wanted to build up a portfolio of investments that would generate $30,000 per year for you to live off, rising with inflation, and with a high level of confidence that it won’t run out in your life time, you would need investments worth approximately $750,000. If, instead of $30,000, you needed $40,000 per year, that would rise to $1million.  So to have just an extra $10,000 per year, you need to save an extra $250,000.  (Note that I haven’t allowed for tax here, this is just a really simple illustration). So to flip that, if you could reduce your living expenses by $10,000 per year, then the amount you need to save to be financially independent and retire early is reduced by $250,000.  How much sooner would that mean you could escape your current employment captivity? You may have heard of the book The Millionaire Next Door.  It’s quite US focused, but it has some interesting insights none the less.  The two authors studied households whose net-worth (ie. assets minus debts) exceeded one million US dollars.  One really interesting finding was that millionaire households were disproportionately clustered in blue collar and middle class suburbs, and not in the higher income, white collar, more affluent suburbs that you would assume.  Digging into why this was the case, the authors found that the higher income earners devoted more of their income to luxury items and status symbols, often funded with debt.  These people tended to neglect savings and investment. In order to retire early you are going to need to build some wealth.  It may not need to be millions, that depends on your goals, but owning a roof over your head is probably a minimum starting point. The authors of the The Millionaire Next Door to me missed the point about the purpose of money, which in my mind is to give you freedom and happiness.   I’ve certainly met people who never spend a cent, and as a result would meet the criteria of having considerable net wealth. But they don’t seem to me to have lived happy lives.  The beneficiaries of their estate are likely to be the happy ones! So I want to be quite clear that I don’t see the building up of a large pool of wealth as being the marker of a successful life.  That may happen, and it’s no bad thing, but money is a tool which allows you to do the things that make you happy. So, with that caveat established, it is undeniable that if your goal is to retire early, you will need to build some wealth. And the findings of these authors does highlight the difference between those who do successfully build wealth and those that don’t.  Very interestingly, having a high income is not a pre-requisite to building wealth and becoming financially independent. The lesson from TMND would seem to be, don’t lease the expensive car, don’t buy the $1,000 hand bag or the $300 pair of jeans.  Avoid the status symbols and the debts often linked to them.  A fulfilling life means different things to different people, but if you want to be financially independent, then feeling the need to keep up with the Jones is going to need to be jettisoned. 2  Save It’s one of the simplest financial rules around yet one so many of us struggle with it – you must, must, must, spend less than you earn. Know how much you have coming in, after tax.  Check that against your expenses as identified in your budget.  What is the surplus?  Now put this to work.  This is cash flow management. Savings could involve extra payments on your home loan, regularly investing in a managed fund, or building up cash in a bank account and then buying some shares whenever it gets to a certain sum.  Strategies differ, but if you are to become financially independent, you need to save, and that means you need to spend less than you earn. Many people put off doing a budget because it seems too daunting, or they worry that then working to a budget will impinge too much on their life. In truth, you could sit in front of your computer one night for an hour max, glass of wine, beer, or chai latte in hand as is your preference, and between your online bank statements, and the budgeting tool we have provided, you could have a budget done. Even if you go no further than that, the insight you will gain as to where your money is going will be valuable.  Hopefully though you do take things a bit further and think about whether the way you are using your money is really as you want it.  Could you be happier if in fact you made some changes?  Perhaps there is some spending that you could cut down on, which would enable you to save, so that you can start to see some real progress in achieving your goals. 3  Invest First you save, but then what to do with those savings?  Sure you could leave it in the bank, but with minimal interest, and tax on that interest too, you’re going to have to do a lot of heavy lifting to get yourself to the point of financial independence and early retirement.  Typically you would look to invest in assets that will grow in value over time, which usually means shares or property.  There are all sorts of considerations here around investment time frame, the use of debt, and diversification, and so it is really important that you seek out professional impartial advice. But a key concept to grasp is that risk and reward are always linked.  You can take no risk and leave your money in the bank.  But if you had the capacity to save $2,000 a month and you wanted to build up $500,000 in savings to become financially independent, that would take you about 21 years. If instead you invested in a share portfolio that earned 7% per year on average, it would take less than 14 years to reach the same goal.  So you are achieving your goal to retire early 7 years sooner by taking some risk.  Or to flip it, if you want to take no risk, the price you pay is 7 years of your life. In the downloadable toolkit that accompanies this episode we’ve done some modeling on the impact of investment risk and return on the achievement of your goals, so be sure to check that out.  It shows how long it would take to save $100,000 assuming different rates of return, so it should be really helpful for you.  Just go to this post on our website, financialautonomy.com.au and you’ll see the button to download it.  4  Minimise/avoid debt To clarify straight up, not all debt is bad.  Most of us could never buy a house in Australia without borrowing.  And because any gains made on the increase in value of your home are tax free, usually borrowing to buy a home is a financially wise thing to do.  Similarly sometimes debt to help fund good quality investments can make sense. But the debt to avoid is debt to fund consumption.  Credit card debt to buy clothes or a holiday.  A loan for a new car when maybe something a few years old would have done. As touched on earlier, if you are to retire early, you need to get your expenses down and your savings up.  Loan repayments push against this objective.