My dad taught me one of the principles of financial strength when I was little. He taught me to save for the things I wanted. He agreed to pay for half of my first bicycle when I was 9 years old. I had to save for the rest. That was a lot of money for me. I did lots of odd jobs for neighbours and my parents. I also hunted for soft drink bottles and redeemed them for a few cents each. Gradually I saved the money required over a few months. That bike was such a great reward. I loved it. I rode it everywhere. It had a few repaints but I rode it for the next 8 years until I was 17 years old and attained my drivers license and access to my mum’s car.
Many people struggle with managing their finances. Surveys regularly report the number one issue for small business is managing cash flow. Over 50% of Australians live from pay to pay with little or no savings. Financial institutions in this country have largely failed us and have rightly earned our disrespect. There seems to be a lack of knowledge of the simple principles that enable financial strength.
Three reasons people are financially weak:
1. Some struggle with the mechanics of knowing what to do (maybe they did not enjoy maths at school and have a fear of numbers).
2. Many lack the consistency and daily discipline required to manage money well.
3. Others battle a feeling of overwhelm because they feel so out of control – perhaps due to a combination of both 1 and 2.
The good news
The foundation principles of financial health are very simple. If you learn and build by these simple principles, you can build financial strength into your life.
Financial wealth is rarely built overnight. Fortunes gained quickly are rare and often lost just as fast through mis-management. The best way and most common way to build wealth is little by little over time. This requires simple principles, planning and discipline.
10 Principles anyone can understand and implement:
1. Spend less than you earn – it is very simple. You do not need a huge salary or business to build financial security. You just need to live within your means.
2. Going into debt for every day expenses is bad. Living within your means requires you to resist all the advertising and social media induced FOMO and wait until you have the cash before you buy every day items.
Strategic debt can work for you to purchase an asset that will grow in value (like a house). Most other things should be bought from savings. NB. Be careful with cars. A new car loses $10000 (approx.) the minute you drive it out of the new car dealer’s lot. If you have the savings or it is tax effective for your business, you can get that new car. If not, a new car is a financial drain. It could be the difference between being well off and independent in retirement, or being poor, and dependent.
3. Learn delayed gratification – The reason people get into debt is they have been conditioned by the ‘buy now pay later’ mentality. This is the basis of credit and it has been slowly trapping people since 1970’s when credit cards were introduced. This is a huge trap. Beware! If you lack discipline you should cut up your credit cards today. Use a Debit card instead.
4. Reduce your debts – if you are in debt now, other than a manageable mortgage, your priority should be to pay down that debt. Get some advice and rationalise your loans into one larger low interest loan to pay them off as quickly as possible. It is exciting to watch the debt figure go down, and a great sense of freedom when you pay it off. It is good practice for saving too.
5. Create your money framework. Put money aside for important things each week, BEFORE you do anything else with it. This forms the basis for your spending plan – use the 10 | 10 | 80 rule (introduced in The Richest Man in Babylon by William Glasson). 10% saving, 10% giving and 80% to live on. Use this as a guide across your life and you will always have money.
6. Use several linked bank accounts – thank you ING for ‘no fees’ accounts. If you have all your money in one account, you will not be sure how much you have and must track it on a spreadsheet or accounting system. This system enables you to track how much you have in each of your accounts. It makes it much easier to stick to a spending plan.
a. You need at least 4 accounts:
i. everyday expenses (budgeted to a plan),
ii. spending (for night out, or special events),
iii. savings (for longer term plans), and
iv. emergency expenses (like a broken washing machine).
7. Be smart with your money –
a. E.g. Instead of a private health fund, my wife and I have set aside $50 p.w. for years and keep it at $5000 minimum. Recently I could afford to have minor surgery out of this fund. Any emergency surgery is well covered by Medicare in Australia. My recent experience with both my parents informs my view that the public health system is excellent for end of life options. (And they had private health cover all their lives but, in the end, did not get their money’s worth).
b. E.g. I have savings accounts for each of my grandchildren – $5 p.w. even at 2% compound interest grows to many thousands over 10 – 20 years
8. Automate your money framework. You can set up moving money from your main account into which you are paid each payday, so you do not have to think about it every time.
9. Do the same in your business – Create a GST and Tax savings and super account and transfer money across each day or each week. All your obligations are then taken care of and you can enjoy Quarterly BAS time. I like the feeling of knowing I get back $2K or $3K each quarter when I do my BAS.
10. Be generous and strategic about your giving – It is good to be generous in life and business. However, I like to be strategic with my generosity and seek to make an impact. See my article on ‘How to be generous’
If you are married, work out how you will make this work together with your spouse. Whichever one of you is more disciplined with finances should then be the one to implement your joint plan.
There is no need for anyone to be in financial difficulty for lack of knowledge. If you understand and implement these 10 simple principles, over time you will build financial strength for your family.
If your situation is a bit messy right now, google ‘financial counselling’ and seek out financial advice to create a plan that will help you get out of debt and take back control of your finances.
To help you build motivation you can read a book or other resources from The Barefoot Investor by Scott Pape for excellent readable advice on managing your finances well.