One good financial decision will have positive consequences. But five good decisions in a row will be life changing. It will create a lot more than five times the positive outcomes than one good decision will. That’s because good decisions are a compounding asset.
Our lives are a sum total of the choices we have made – Wayne Dyer.
When it comes to building wealth and fulfilling your lifestyles goals, true success comes when you master all six facets: (1) good cash flow management, (2) having a clear and efficient investment strategy, (3) invest in the right assets using the right methodologies, (4) optimising superannuation, (5) minimising tax and (6) protecting your assets for your family’s benefit.
We all know that to achieve a good level of health requires us to focus on optimising our diet, exercise regularly and get plenty of quality sleep. We also realise that we will not achieve our full potential (health wise) by just focusing on only one of these factors. Optimising your finances is the same – a holistic approach yields the best results, which takes several good decisions.
Here are some examples of some good financial decisions you can make.
(a) stop wasting your money
Money is wasted on things that don’t improve your standard of living. The key here is to make conscious financial decisions. If you aren’t conscious about your expenditure, your money will be wasted on things that you really don’t care about.
Holidays are a very good example of conscious expenditure. We tend to get a lot of happiness and satisfaction from holidays. They creates long-lasting memories. And if we stopped spending money on holidays, we’d really miss it.
However, buying takeaway coffee is a good example of unconscious expenditure. They are nice to have, but if you are able to make yourself a cup of coffee at work, you probably won’t miss it. These small expenses tend to add up to a surprising amount. Two takeaway coffees per day might end up costing you more than $10,000 per year! That is more than one investment property’s holding costs!
It is pretty simple to implement good cash flow practices, and it doesn’t have to be a painful process. The fact is that you won’t miss spending money in wasteful items. This blog last year walks you through a simple structure many of my clients use with great success.
(b) invest in the right assets
I believe investing is easy if you stick to sound fundamentals, only adopt evidence-based strategies and never watch the news or read newspapers. That is why I wrote Investopoly – to provide a set of rules, a framework, to guide people down the right path and avoid making financial mistakes.
What you invest in (the asset), and which methodology you chose to adopt, will determine your future returns. In a way, your destiny is determined when the initial decision is made . It only takes one decision to buy the right property or to seek advice. Once that decision is made, its merely a matter of waiting a decade or two for the results to materialise. These ‘decisions’ are incredibly important to get 100% right.
(c) ask for help
Two points. Firstly, you don’t know what you don’t know. Secondly, experience is far more important than knowledge. You can fast track knowledge, but there are no shortcuts with experience. Experience tells you how and when to apply knowledge – you need both to avoid making mistakes.
Therefore, the question is, do you want to make your own mistakes or pay someone that has already learnt how to avoid these often inconspicuous mistakes? The choice is yours. Seeking advice from someone with more experience than you is often the lowest-cost and most successful approach.
Please don’t tell my sons I said this, but I don’t know everything. Yes, it’s true. J For example, after my wife and I sold a commercial property last year I paid a tax expert for some specific advice. I probably could have worked it out myself, but I didn’t have enough experience. As it turned out, the advice saved us literally hundreds of thousands of dollars! Just because you might be able to work it out yourself, doesn’t mean you should. Don’t let your ego get in the way of asking for help. Risk comes from not knowing what you’re doing (Buffett quote).
Asking yourself (1) who can tell me what to do, not (2) what should I do, is a good decision. It’s a who question, not what question.
(d) resist the temptation to cut corners
It is tempting to find an “investment” like Tesla, Afterpay or Bitcoin to make a quick 10x return. But this isn’t a successful methodology because the likelihood of you finding the next unicorn is very low. And to do it consistently, year after year, without making a mistake is near on impossible. Even the ‘experts’ can’t do this.
Investing with the aim of achieving much better than average returns (I.e. way more than 10% p.a.) is a fool’s game. It’s a mere distraction. As soon as you say ‘yes’ to something, you inadvertently say ‘no’ to something else. So, as soon as you say ‘yes’ to trying to cut corners and make some quick profit, you say ‘no’ to implementing a far more predictable, repeatable and successful investment methodology.
Having the discipline to ignore the shiny objects isn’t always easy. In the short run, you’ll feel like you’ve missed out. That’s because the rewards from sound, evidence-based strategies may only be evident in the long run.
There’s only a handful of decisions you need to get right
It is your money. It is your life. And it is your prerogative about what decisions you make. But the reality is that there’s probably 5 or less financial decisions you need to perfect in your lifetime. If you can nail those financial decisions, you will enjoy financial security. Four simple decisions such as the ones listed below is a perfect example:
- We will track our discretionary expenditure;
- We will engage an independent financial advisor to develop and implement a plan for us;
- We will not invest in speculative assets or take silly risks; and
- We will always invest a set amount of cash flow each year.
If you are unhappy with your current financial position, I suggest you focus on improving the decisions you make.