By Lacey Filipich, BEng(Hons), MAICD
Setting financial goals can be exciting for some, nauseating for others and downright offensive for a few amongst us. As with most things in life, setting goals is an important first step in getting what you want. The goal is only the first step – you then have to go out and make that goal a reality through work – but without the goal you’re at risk of waking up one day and finding you’re not happy with your circumstances. Regardless of how you feel about money it’s worth having a goal in mind… even if that goal is to never think about money.
How you manage your money is heavily values-based. If you prefer to avoid risk and you value your independence, you’ll have a completely different approach from a person who’s happy to take a lot of risk with someone else’s money if the potential rewards are great enough. There are no hard and fast rules… actually I lie. There’s one rule: don’t spend more than you earn. Everything else is negotiable. So, where to start?
If the idea of a blank page entitled ‘Financial Goals’ is freaking you out, consider four options below as your starting point. You could pick one, or a few, or all of them if you want. None are mutually exclusive. I am drawing from my personal list of financial aims here, and they’ve all worked harmoniously for me so far.
Let’s start with that single rule I mentioned…
1. Spend less than you earn
‘Annual income twenty pounds, annual expenditure nineteen six, result happiness.
Annual income twenty pounds, annual expenditure twenty pound ought and six, result misery.’
Charles Dickens (1812 – 1870), David Copperfield, 1849
Not sure what those numbers mean? If we were to use our monetary terminology but not bother converting to today’s dollars, Dickens’ quote would become something like:
Annual income $20, annual expenditure $19.50, result happiness.
Annual income $20, annual expenditure $20.50, result misery.
The bottom line: if you spend more than you earn, you will eventually be unhappy about it. Why? Because of debt and its relentless pursuit of your soul.
This is the number one, non-negotiable rule of money. No matter what you earn, if you spend more than your income you will end up in debt. If you do this consistently, you will wind up bankrupt as your debts escalate. Want to spend more? Earn more. Simple. No, I never said it would be easy.
Commit to not spend more than you earn. Each week or month, work out how much money you have in your pocket/bank account. Keep your spending within this amount. You can still use a credit card – just don’t buy more than the value of your income.
2. Invest for sound sleep
‘The only thing money gives you
is the freedom of not worrying about money.’
You can buy a comfy bed, top-of-the-range pillow, black-out curtains, ocean soundtracks and sessions with a psychologist to help you deal with your demons. You can’t buy sound sleep. You will still be awake sweating bullets if you’re deeply worried. Don’t let money become such a problem that you lose sleep over it.
For me, this means:
- I can service all my debts without having to sacrifice quality of life.
- If all my income disappeared tomorrow, I’d be able to live and service those debts for at least a year because I have a cash buffer for just such an event.
- I don’t have any cash that I need to live on in high-risk investments.
- I am insured against major loss and damage to my properties.
Everything I do in the financial sense has to satisfy these four points. If I’m considering doing something new, I first run through this list. If the new action would contravene my guidelines, I don’t do it because I know I’ll be too worried about the outcome to relax. It’s. Not. Worth. It. I know – I found out the hard way.
If you currently lose sleep over money, what exactly is the cause of your concern? Are your debts too high? Are you investing all your savings in high-risk ventures? Are you unable to pay your bills this month? Whatever the problem is, spend time solving it. In my humble opinion, it’s worth being a little less aggressive if it means you’ll rest easier.
3. Save as much as you can
‘If you would be wealthy,
think of saving as well as getting.’
Benjamin Franklin (1706 – 1790)
It’s a wonderful idea to set aside your savings before you allocate your remaining cash to expenses. Too often, saving is the last step in the process of allocating funds and that means there’s nothing left to save. It’s a curious thing, money. Our lifestyles expand to consume as much as we have available. So, trick yourself. Take the savings away first and spend the remainder.
But how much to save?
I like the idea of being aggressive on your savings target. You can always dip back into your savings if you’ve overshot one month. Next month you’ll know better and save slightly less. This is in preference to setting a soft target, like 5 or 10% and always finding it easy to hit. We can cope with less. When I think back to my student days, I was healthy and happy while living on less than $250 a week. I don’t really need Brie cheese and eye fillet steak every week. Sure, I want it… but I don’t need it.
We live in a consumer society. We all buy things we don’t need. We all waste our cash occasionally. Imagine if you reduced your wasteful spending and instead channeled that money into a term deposit? Your savings are the seed and fertilizer of your metaphorical money tree. Divert more cash into savings for investment and growth, and you’ll find your money tree is healthier and bigger.
Challenge yourself: set aside half of your after-tax income next month as savings and see if you can live on the remaining half. There’s no shame in dipping in to grab a few hundred back if you find you don’t have enough for food or rent, but don’t dip in if it’s for something non-essential. You just might surprise yourself.
4. Set a $ target.
The three goals above (spend less than you earn, invest for sound sleep, save as much as you can) are all good aims to have. But how much money do you want? ‘A lot’ is a common answer. ‘Enough to be financially secure’ is also popular. I advocate for being much more specific: I want to know what your number is. How many after-tax dollars do you need each year to be happy?
Perhaps even more important than the absolute dollars is the source. Do you want your cash to come from work – a salaried job, sales commissions, dividends from a business you run? Or do you want it come to you passively – from rent, interest and dividends? Either is fine, so long as you’re clear on what’s required to get those dollars.
To give you a working example, let’s look at my number:
It’s $100k. That’s right, one hundred thousand buckeroos will keep me and mine happy and healthy. That’s enough to cover all our living expenses while still allowing for some overseas travel, a decent entertainment budget and private school if our daughter and any hypothetical future children are keen. As much as possible, I want that $100k to be passive income. I prefer passive because it’s independent of my employment and it means I don’t have to commit time each week to earning money. I can spend that time however I like. Sound like a pipe dream to you?
$100k after tax is about $140k before income tax. Here are a few scenarios that could achieve that:
- $2.8m in a term deposit paying 5% per annum (p.a.)
- $1.75m in blue chip stocks returning dividends of 8% p.a.
- $2.5m in property returning $2,700 a week rent or 5.5% yield p.a.
Or how about this diversified option:
- $800k in term deposit ($40k p.a.)
- $625k in stocks ($50k p.a.)
- $1m in property ($50k p.a.)
No matter which way you look at it, you still need to own two to two-and-a-half million dollars worth of assets. This is more than some people earn in several decades. So how does it happen?
First, understand that you don’t have to actually earn the full two point five million as wages. As you invest and get some growth, your money compounds. It’s effectively breeding. This is a good thing. You just need to get it started with some savings and continue to ‘fertilise’ it with more cash as time goes on.
It may surprise you to learn that I already have $1m in property earning $50k a year. In fact, my portfolio reached that point when I was 26 years old. I certainly didn’t have a million in capital to buy the three properties that make up this section of my portfolio. I still owe around half the million bucks so I’m not getting $50k a year in my pocket yet… but I’m getting there. As the mortgages come down and the rents go up, I’m getting an income from these properties. They will be mine outright in the next ten to fifteen years. Fortunately, rents tend to increase with inflation so I’m not losing value on those rental dollars as time goes on. Even better, my tenants effectively pay for these properties for me after the first five to seven years as the rent catches up with the mortgage so none of my cash flow is consumed with servicing the debt. Thank you, tenants.
As for the term deposit: we hold about a third of my above target in our offset account against our mortgage on our principal place of residence. So while it’s not delivering an income in the form of interest payments, it’s offsetting the interest on the loan on our home. Why keep it in an offset instead of paying down the loan? So we can access the cash if we need it in emergency, or if we spot a great investment opportunity. When the mortgage is paid off, we can start diverting cash to term deposits.
I am perhaps the laziest stock investor you’ve ever met – I’ll buy and hold for decades if I’m getting reasonable yields and growth. Right now, I’m greatly lacking in stocks. But I have a strategy – next I will buy shares that allow dividend reinvestment and I’m going to learn to sell calls against them to produce a small cash flow. I will split my future savings between this and the offset account.
You might be thinking: what about your superannuation, Lacey? Good pick-up. Can’t sneak anything past you can I…
I have superannuation. I don’t manage it myself. I’m far too lazy to meet all the requirements for a self managed super fund (SMSF) and I’m too stingy to pay someone to do it for me, so I stick with a standard option that my first employer nominated. I still work out where I think it’s best allocated – at times I’ve had it in 100% cash. Usually it’s a combination of low, medium and high Australian and international portfolios that I tweak the proportions of intermittently. I just don’t include it in my cash flow calculations because I’ll have to wait till I’m old to access it. It’s kind of like an insurance policy that I know will pay out eventually, but I’m not waiting around for that day. Whatever I get from my super will be a bonus and will enhance an already wonderful lifestyle I’m sure.
So that’s my number and me. Your number might be higher, or maybe it’s lower. Perhaps you’re happy to work for all your income, or you could be interested in having some come from passive sources. Setting goals around that number and how you want it to come to you will direct where you invest your time and money. Start with a specific goal so you have a clear direction.
You guessed it: it’s your turn.
- Already have financial goals? Great! Now might be a good time to revisit them and tweak them if needed.
- Not there yet? Time to get started. What do you want when it comes to money? You can have as few or as many goals as you like, but you’ve gotta start somewhere.
- Do you have them displayed somewhere so you can see them regularly? Perhaps not tattooed on your forehead, but a sticky note on the fridge or next to your computer is a quick and easy option.
- Got a good short-term goal and worried you don’t have the discipline to stick to it? Register your goal on stickk.com and allow yourself to be publicly ridiculed if you fail. Sometimes the stick is better motivation than the carrot…
Now you have the goals. You know where you want to go. It’s time to work out how to get there. Tune in next week for a quick guide to working out the roadmap to achieve your goals.
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Got another financial goal you think is worthy of this list? Leave it in the comments below – we’d love to hear it! I might even steal it for myself…
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