Written by Managing Director – Juanita Wrenn
|If you already have a mindset of paying yourself first, you are more than half way to giving your future self the lifestyle you want. If you don’t think of your income in that way, I am here to challenge you and to get you to look at your future self as the most important person that you pay, before you ‘pay’ anyone else for the month.
The first step to creating wealth is to know what income you have to work with and to work out a budget, or at least ascertain what you can afford to put away each month to contribute to your future. Awareness of where you’ve spent your money in the past and more importantly how much and where you should spend your money in the future is the first step. Thinking of my own financial goals at the start of this year made me realise all over again, how very important it is to spend less than you earn and be mindful about putting some money away each month in order to live your best life in the future. A valued client reminded me this week of the book, The Richest Man in Babylon, “gold cometh gladly and in increasing quantity to any man who will put no less than one-tenth of his earnings to create an estate for his future and that of his family”. It’s been a long time since I read this book, but the lessons are timeless.
Spend less than you earn and you’ll have a surplus, spend more and you’ll increase your debt. The quiet achievers of net wealth involve surplus income, compounding interest/investments and time.
Managing cash flow is one of the simplest and most effective ways of accruing wealth and everyone can do it. You need to establish a budget, or at the very least, establish spending boundaries, in order to be able to save and invest for the future. Working out forward projections of cash flow and putting a strategy in place for surplus cash flow, ensures that you are maximising your earnings.
A budget allows you to look at the things you need versus the things you simply like to have or want. If you need to trim, trim wants BUT not entirely, as that is unrealistic. A modest daily purchase for a ‘two a day’ coffee habit could cost nearly $3,000 (2 x $4×365). If $3,000 is invested each year instead over 20 years, assuming an earnings rate of 5%, the compounding effect would see you with extra savings of $103,778. ASIC have a moneysmart website at www.moneysmart.gov.au which has some useful calculators.
Hudson can help you maximise your financial results by running different scenarios of your cash flow management through our sophisticated software. This shows us the different results certain savings/investments may make you, and the difference in saving $5,000 a year as opposed to $20,000 a year, and many other scenarios. This is offered as part of a financial plan that Hudson call the Path Ahead. The Path Ahead will match your strategy to your lifestyle goals and objectives, as well as working within your risk profile. The fee involved in creating your individualised Path Ahead will need to be discussed with your adviser as it will depend on the complexity of the plan involved.
By being aware of income versus expenditure, needs versus wants, and trying to obtain this with the 50/30/20 (50% needs, 30% wants, 20% financial goals) will set you on the path to wherever it is that you want to be to enjoy your non-working years. Some people don’t budget, per say, but they do a forward projection of income, work out surplus income, establish a figure to ‘pay themselves first’ each month (this figure is used for investing in their future) and they then spend 80% on living. This is good for people who feel unhappy and restrained with a budget, but still allows them to provide for their future.
The right financial strategy should allow you to still enjoy some of the things you love now, while balancing your need and wants for the future. BUT the strategy will be hard to manage if you don’t truly believe in the mindset of paying your future self first. The wealthiest clients we have all share this belief and believe it or not, a lot of them have made their wealth by consistently spending less than they earn, buying and holding both property and shares and NEVER selling anything. It has been uneventful and fruitful. Get your mindset right and the rest will fall into place.
If you wish to discuss the current status of your cash flow and budgeting plan or create an entirely new plan, please book an appointment with your Hudson adviser first to discuss your options by calling 1800 804 296 or enquire online.