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Have you ever met a tradesman that has many unfinished projects at home? They have all the knowledge, experience and tools to do this work themselves but fail to do so. Isn’t it ironic how these tradesmen will make improvements to a customer’s home but not their own? Why is it they put their customers before themselves in this regard (hint: it’s not just about getting paid).
The same can be said for many of our clients too. Almost all of our clients are white-collar professional that spend 40 plus hours per week (often many more hours than this) building someone’s business and very little on building their own wealth. There’s nothing wrong with this of course. Investing energy into your career and doing work that you are passionate and proud of is an often necessary prerequisite to feeling truly happy and fulfilled in life. However, it doesn’t mean that it should come at the cost of your own business (wealth)!
What do I mean by “your business”? You are in the business of ‘personal financial security’… or even ‘personal financial freedom’ if you take it to the next level. Your job, as CEO of this business, is to ensure that you take a portion of your income and invest it wisely so that when you want or have to stop working, you will be able to live a comfortable and secure life. If you approached this job in the same way you would approach a project at work, you would probably:
- Develop a strategy or plan
- Find the right team to help you execute the plan
- Seek professional and expert advice on any matters that were outside your expertise
- Produce regular reports on your progress to ensure you are on track to achieve your goal.
So how are you doing as your businesses CEO? Would you enthusiastically rehire yourself? Or are you the weakest link on your team?
What if you approach this job (the job of building personal financial security) with the same enthusiasm and drive that you do your job? If you are not doing this, ask yourself why? Why when the stakes are so high and it will have a major impact on the rest of your life? The 40 odd years we spend working have to fund 20 to 30 years in retirement… so don’t leave retirement planning to the last 5 to 10 years of your working life. If you do well you can get paid twice; now and again when you are retired because you invested so well.
It is the start that stops most…
Here are some common reasons I have heard from clients about why they didn’t start on their wealth accumulation journey sooner.
1. I don’t have the time right now. I’m so busy at work and home!
There is a misconception that taking control of your finances and ensuring you are regularly investing for the future takes a lot of your time. If it does, you are doing it wrong. Most of the clients we work with do not spend more than 3 to 5 hours a year on their personal finance – that’s equates to less than 6 minutes per week. There are over 10,000 minutes in each week so I’m sure you can find a spare 6!
Possibly the most time consuming aspect is finding an advisor and developing a plan with them. For most of the clients I work with, that takes 2 hours of a client’s time (i.e. two one hour meetings). I can develop a plan a lot quicker than you because I have been doing it for over 13 years. I know what questions to ask, what to think about, what possible options might suit (and the ones that don’t) and what possible future changes in circumstances we need to consider when developing a strategy (which is often overlooked).
A good strategy is simple, clear, based on proven fundamentals and low risk. Because of this, it is easy for you to understand and feels comfortable to proceed with. Avoid complexity wherever possible. It’s almost always unnecessary.
2. It’s not urgent
Author of A Random Walk Down Wall Street, Burton Malkiel uses a very powerful example in his book:
William and James are twin brothers who are 65 years old. 45 years ago (at the end of the year when he reached 20), William started a superannuation account and put $2k in the account at the end of each year. After 20 years of contributions, William stopped making new deposits but left the accumulated contributions in the superannuation fund. The fund produced returns of 10% per year. James started his own superannuation account when he reached the age of 40 (just after William quit) and contributed $2k per year for 25 years, making his last contribution today. James invested 25% more money in total than William. James also earned 10% on his investments. What are the values of William’s and James’s funds today? William has $1,365,227. James has $218,364. James invested 25% more than William, but through the magic of compounded returns, William’s fund is worth more than six times as much!
One of the necessary ingredients of a low-risk investment strategy is; time. The more time you have the less risk you have to take – but the reverse is true also. Developing your own retirement strategy might not feel urgent to you but it definitely should be.
Don’t ever try to convince yourself that you can make up for not saving for a few years by saving later. It will snowball and be harder to make up as your living expenses inevitably rise with growing family commitments and/or your desire for a better standard of living.
3. You fear making any compromises on your standard of living
There is no point living poor to die rich. Life is all about balance and moderation and you need to enjoy the nice things in life, regularly. Wealth accumulation is a marathon, not a race and that journey should be enjoyed. That said, spending everything you earn will not work out well for you in the long run. At some point, you will pay the price for this poor decision and that price becomes higher and higher the longer you leave it. I find that most clients can have their cake and eat it too i.e. invest and maintain an enjoyable standard of living. Of course, there are some people that truly do need help prioritising wealth accumulation over instant gratification. If you are one of these people then there are strategies that you can employ to make it easier – see this blog for more.
4. I’ll do it when the kids finish high school
Often we meet clients when their children are close to finishing high school, particularly if they are in private schools. In this situation the clients realise that very shortly their cash flow will improve (because school fees end) and that they can allocate some of this money towards their financial security.
Let me explain the problem with this approach by way of a real-life case study:
I have a client, Keith who purchased a 1 bed apartment in Mathoura Rd, Toorak for $327k in 2008. It is worth about $450k today and it’s a great property. Since he purchased this property he has started a family (2 kids), upgraded his home (higher mortgage) and has recently completed some renovations to their home (more borrowings). In the coming years they need to plan for private school fees too. Keith has admitted to me that if he hadn’t have bought the investment property back in 2008, he probably wouldn’t be contemplating doing it now. His Mathoura Rd apartment should (conservatively) be worth around $1.15 million by the time Keith’s kids are close to finishing secondary school. At this time, Keith will have more than $850k equity in this property. So if, back in 2008, Keith had have procrastinated and not invested in a property, that mistake would have cost him $850k! Well done Keith on following our advice.
Probably two of the most common tightest cash flow situations in life are; 1) when you start a family and 2) when kids are in private school. If you can invest before these events occur, you will be duly rewarded.
5. I’ll wait for [insert possible change here] to see what happens first
If there is one thing that is constant in our world today, it’s change. New governments, new laws, interest rates, tax rules, domestic and world stock markets yo-yo around and so on. Over the last decade plus I have heard clients tell me that they aren’t ready to begin investing because they are concerned about short term market movement. These issues are meaningless for long term investors because there’s always going to be “changes”. Far more important than “timing” the market is actually investing and making a start – probably more important by a factor of 100.
Smart investors live with a level of uncertainty and understand that they cannot worry about things they cannot control. I cannot control or predict markets – no one can. The best thing is to focus on the two most important things that you do have full control over; 1) how much and how often you invest and 2) the quality of the assets you invest in. If you spend all your time focusing on investing regularly in quality assets, you will generate more wealth than 95%+ people. It is truly that simple.
6. I planned to get started in 2015 but…
Did you set some personal goals in January this year and taking control of your financial security was one of them? But you still haven’t gotten around to getting started yet? I understand. I feel like the first 9 months of this year have just flown by. I read this article is week which provides 8 simple strategies to avoid procrastination. The one thing that works best for me is that I write down all my (personal, professional and financial) goals and stick them up in the shower to force me to read them every day. I review and update my goals every 4 to 6 months. And I achieve at least 90% of my goals each year.
Do you have enough investments and super to fund retirement?
Use our free Excel calculator to work out of you have enough investments and super to fund a comfortable retirement. If you don’t, this calculator will show you two potential solutions:
- How much you need to start investing monthly into the share market. I would recommend investing in a low-cost index fund as a start (click here for last month’s blog about why these investments are best).
- How much you need to borrow to invest in an investment-grade property. Borrowing to invest essentially allows you to bring forward the next 10, 20 or 30 years of cash flow and invest it today. Then, over the next 10, 20 or 30 years you can direct your surplus cash flow towards repaying (actually offsetting) the debt.
