What’s your number? Episode 31

The goal when working towards Financial Autonomy is to gain choice.  Choice in how you support yourself and perhaps your family financially, be that the type of work you do, the hours you spend doing that work, or whether you earn that income as an employee, or as a self-employed person.

In developing an actionable plan to get you from where you are now, to your Financial Autonomy position, there are several foundational elements that you need to decide upon.  Perhaps the most fundamental of these is how much income do you need to generate to support your lifestyle?  What is your number?

In today’s episode, we’ll be exploring how you might go about determining what your number is.  And with this nailed down, consider what’s next in your Financial Autonomy planning.

So you’ve recognised that the standard working life treadmill is not for you and you’ve decided to gain choice via a Financial Autonomy strategy.

You’ve probably got some ides as to how you could earn income once in Financial Autonomy, and perhaps some thoughts as to what steps you might take to get their – things like extra education or career development (check out episode 29 – the 5 most impactful ways to invest in yourself).

But to set time frames and make genuine progress, you will need to quantify your Financial Autonomy goal, and that means determining how much income you will need to make this a reality.

A good starting point is to determine how much you spend now.

If you’re someone with a detailed budget, that’s fantastic.  But having worked with people on these goals for over 17 years now, my observation is that such people are as common as a sports person who retires at their peak – it happens occasionally, but it’s a long way from the norm.

So if you’re like the majority and can’t easily answer the question of how much you currently spend, one quick method I use a lot is just to work backwards.

Start with your gross yearly income.  Subtract the tax.  Then subtract any savings that you made over the past year – this may include extra repayments to your home loan if that’s the space that you’re in.

Whatever’s left must be what you spent.

Now it will come as no surprise to you that the lower your spending, the easier it is for you to achieve Financial Autonomy.  Much of your expenses depend on your lifestyle, so you have plenty of levers that you can pull here.

Choices need to be made.  Speaking for myself, I don’t want to live like a monk.  I enjoy travel and want to be able to afford that.  I also want to ensure my kids can participate in all sorts of sports and activities that interest them, and provide them with a good education.

So setting a spending goal of say $30,000 per year, isn’t where I want to be.  That doesn’t deliver the life that I and my family want.  Sure Financial Autonomy might be far more easily obtainable, but that’s a level of sacrifice that I’m not prepared to make.

But on the flip side, if you need $150,000 or $200,000 per year to live your life, then depending on your occupation, Financial Autonomy is likely to be some way off.  Now maybe that’s okay – that’s your goal and we are all unique.  But for many people, if the desire for Financial Autonomy is strong, they will consider how they might be able to reduce their expenditure, so that they can gain the choices that they seek sooner.

How might you get your expenses down?  The cost to put a roof over your head is likely to be a significant element of your expenses.  So maybe a key milestone in you achieving your Financial Autonomy goal is paying off your mortgage.  If that’s not realistic in the time frame that you seek, perhaps you need to move to a cheaper area.  I’ve worked with people who have moved out of town, often down along the coast somewhere.  They’ve traded a large city mortgage to either become debt free with a lovely home, or if they still need a mortgage, it’s at least far smaller and more easily managed.

There are investment strategies that can be used to help pay down your mortgage too.  It may be possible to use equity in your home to establish an investment portfolio, and then use the income from that portfolio, plus perhaps capital gains, to accelerate clearance of your home loan.  We’ve used this strategy for several clients with great effect.

Beyond having a close look at your housing costs, the most common other way that people rein in their expenditure is to get a better handle on where their money is going.  Many of the bank apps now offer some good tracking tools to help you in this regard.

We’ll also be rolling out a cash flow and budgeting solution within the next couple of months too which brings all your financial matters into a single app or web site – bank accounts, super, mortgage, cars, investments etc.  For those of you that have used Xero or MYOB recently, our new package operates in a  very similar way for personal finances – it gets data feeds and then categorises your items, so you can quickly see how much you’re spending on groceries, or eating out, or your car.  It allows you to set goals too – gamification for the nerds amongst us – which can be really helpful in making progress towards financial goals.  It just gets all of your financial matters into the one place.  I’ve been trailing it for the past couple of month, as have my team, and we’ve found it really useful – one of my staff Lee, has got her 20 something sons using it too.

Hopefully you’re already on our mailing list to receive our regular monthly updates, but if not, there’s a tab on the right.  When our new solution is up and running we’ll certainly get the details out to all of the Financial Autonomy community.

Okay, so you’ve determined your number.  You’ve worked out what you’re spending now, you’ve thought about how that might change in the future, and you’ve determined how much income you would need to generate in order to achieve your Financial Autonomy goal.  Maybe it’s $40,000, maybe it’s $90,000.  The figure is less important than actually having a number, because from here we can work back to how we get you from today to Financial Autonomy.

Now of course the strategies to get you there are numerous, and I can’t give you a one size fits all solution here.  Finding workable solutions is what we do with clients all the time.

But a useful starting point for you might be to think about the Early Retirement glide path diagrams that came out of episode 23.  If you haven’t already downloaded this free document, click here.

In the example used in that download, the person initially generated their Financial Autonomy number through some consulting work combined with income from an investment portfolio.  A bit further on their life journey, the consulting work lessened, and they relied more on investment income as a rental property was paid off, and so the rental income was now available for expenditure.  They also started to sell down some shares.

Then when they reached 60, their Financial Autonomy number was achieved through a combination of superannuation drawings, rental income, and selling down the remains of their share portfolio.

And much later in life, the rental property is sold, and those proceeds plus any remaining super, ensure you live out your life very comfortably.

Now this path to Financial Autonomy is not right for everyone, but it illustrates how your goal could become a reality.

But the starting point must be to know how much income you’ll need to generate.  You need to know what your number is.  I hope this post has helped you get there.

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