When bad luck strikes – how cancer impacted Jenny’s life and the financial lessons learned – Episode 9



When thinking about financial autonomy we are typically talking about medium to long term goals, and then developing strategies to get to those goals. The transition then is a planned one.

What if your transition was thrust upon you?

I met someone recently who faced this challenge, and with her permission, I thought it was worth sharing with you a little of her story and the learnings that we can all take. Financial autonomy is about standing on your own two feet and not being reliant on others. Having choice. Part of that should be having the capacity to withstand adversity. Having the financial resilience to not lose your house or be forced to ask family for hand-outs.

Lets take a look at Jenny’s story, I think there are some great lessons we could all benefit from.

I met Jenny at a social function a few weeks back. Through the course of our conversation I mentioned that I had made a podcast called “Financial Autonomy” and told her a little bit about what that was all about. She said, “That sounds exactly like the help that I could use,” and so started to tell me a little bit of her story. I had never come across something like it before and thought it would be a fantastic thing to share to my listeners and those in the community. So I have subsequently had a phone call with Jenny and got a little bit more detail and that’s what we will be sharing today.

So I guess Jenny’s story started when her and her husband were in the process of separating and they were selling their house. The day that the sale went unconditional Tim, her ex husband, was diagnosed with pancreatic cancer. It happened really quickly, he was just feeling unwell and within a few weeks he had turned yellow.

With this diagnoses, pretty soon after he went in to have some surgery. The surgery wasn’t particularly successful. The surgeons couldn’t get to where they needed to, and so the advice was that he had 6-12 months to live. 12 months if he goes on chemo, but going through chemo is pretty unpleasant, so there is a quality of life consideration.

But he came back two weeks after the surgery for a checkup, and they found that the cancer had actually shrunk. The surgeons couldn’t really understand why, but I guess you just take it if you can get it.

So that was some good news. Now in the process, Jenny and the kids decided to move back in with Tim to help care for him. He migrated from England and he didn’t have any family here so that was obviously a fantastic thing that she was able to do for him.

So Jenny moved back in with Tim into a rental property, the house has been sold, and they each got their half of the money. Now that was in some ways fortunate because Tim had no insurance.

Ironically Jenny did have insurance, and this had been a cause of a bit of tension before they were separated. I guess Tim, probably like a lot of males, assumed it would never happen to him, and didn’t want to spend the money on having insurance. Also Jenny was telling me it was a bit of a factor that he was self employed so things like Income Protection weren’t easy because the insurer required financials, and so it wasn’t an easy straight forward solution as if say he was a regular employee.

Although he didn’t have any insurance, Tim at least had his equity from the house that had been sold. This was very fortunate, because if he didn’t have that money to support himself, all he would have had would have been Centerlink and that would have been a pretty grim outcome, resulting in most likely sharing a house with a stranger.

Could you imagine going through chemo in that kind of scenario, just horrible.

So any way, he was very lucky to have Jenny there to move back in with him to support him and they battled away. They went through the chemo and all the things you have to do.

Fantastically, now about 6-12 months since treatment (I’m not sure of exactly how long) he seems to have made a recovery. He needs to go back in for some chemo for about 5 weeks coming up. Generally the prognosis on pancreatic cancer isn’t good, but in Tim’s case it looks like perhaps he has beaten it and the signs are pretty positive.

Another consequence of going through this together is that Jenny and Tim have gotten back together as a couple, which is lovely too, especially for their kids. It’s funny how sometimes the dark times can produce some good things as well.

But something that Jenny was telling me that is something that really stresses the both of them out is that, Jenny has been a property owner since her early twenties, and Tim similar. And here they are mid to late 40s and they don’t own a house.

Usually the thing that is keeping people out of the property market is that they can’t save the deposit, but that’s not the case here. Tim didn’t go through all the money he got back from the sale of their previous home and of course Jenny has her share of it as well. So their issue is not the deposit, it is demonstrating that they can service a mortgage.

Hopefully, Tim will get back to work after this next round of chemo. Probably not doing the same type of physical work that he was doing before, but as soon as he is well enough he will get back to work. The kids are at school now, so Jenny could get back to work as well. So the challenge that they now face is that they are shut out of the property market as of now. They have some money for a deposit but they can’t secure a loan. So she is paying rent every month and feeling pretty negative about it.

Hopefully we can work with them in the future with regards to a financial autonomy strategy, to help resolve that challenge. But it’s just interesting that you would have never foreseen that (being shut out of the housing market) as a likely outcome of a serious illness. But that’s just how these things can sometimes unfold.

So that’s Jenny and Tim’s story, and like I said I thought it was just such a unique story.  Certainly something that I had never come across before.  And so I thought that it might be of interests to others and give the opportunity for learning.

So what can we all take from their experience?

I guess the first thing is that, insurance is important. As a financial planner, I arrange insurance for people but I must say I am always mindful of not wanting to come across as the pushy insurance salesman, so I probably don’t push the insurance hard enough. If it hadn’t been for this particular story coming up, I certainly didn’t have it on my radar to do a podcast that had any mention of insurance. But when you hear a story like this it really makes you stop and think how different would it have been if Tim had some trauma insurance? Which is actually what Jenny took out. It could have just transformed their circumstance.

We’ll go through shortly some of the main insurance options because they tend not to be widely known. But probably the starting point, as a male because I think its more of a male thing, is to have an awareness that you are not bullet proof, and things happen. And be aware that when things do happen, it’s not just you that suffers but often it can be your whole family.

I was talking to someone who has a family member with MS. She gets some Centerlink benefits but the only way that she is able to make ends meet is that her parents help her out. She’s in her 50’s and I gather her parents must be retired so it must be a financial hit to them, and I would assume that as a 50 year old, she doesn’t like having to ask her parents for money. But this is the kind of circumstance that we can find ourselves in. While it is amazing that here in Australia we have Centerlink type support, its often just not enough.

I guess when you are thinking about insurance and not wanting to pay for it, just think a bit more broadly and that it’s not just about you.

So what are your personal insurance options?  There are four main options:

Life insurance, which is pretty basic, just pays a lump sum if you die. Often attached to that is one called Total and Permanent Disability (TPD), in order to qualify for this you need to be totally and permanently disabled. Fortunately this doesn’t occur too often, but the most common scenario for payout here is a stroke. You will often find through your superannuation that you will have some Life and TPD insurance cover. You need to give some thought to whether it’s the right amount of cover.

The next one is, Income Protection (salary continuance.) This is replacing your income if you are unable to work due to illness or injury (not unemployment insurance.) The good thing about Income protection insurance if you have it outside of super, is that the premiums are tax deductible, so that helps.

It’s also very customisable. There is always a waiting period, so this is the amount of time you have to look after yourself, before you start getting a benefit. You might have a bit of sick leave or annual leave. Usually you can get by for a little while. The default waiting period will be a month typically, though if it’s held in a super fund the default could be 90 days waiting period.

During this period you need to look after yourself, and then if you are still unable to work after the waiting period has expired, you will start getting insurance benefits.

There is quite a number of options on how you want to structure your income protection and it’s certainly worth getting a bit of advice. For our Financial Autonomy clients we can certainly work that through with you.

Ordinarily income protection would help you all the way through to age 65 if you needed it. So the typical scenario would be someone who suffered a broken ankle and they can’t work for 6 months or something like that. But if if was something more serious and you couldn’t return to work ever, your Income Protection insurance would pay you a monthly benefit every month all the way through to age 65.

So if you think of insurance as a financial safety net, then that income protection really achieves that, knowing that if anything did happen you would still be earning an income through until you were 65.

Then the fourth type of insurance is, Trauma Insurance. With this one, it is outside super, they will have a list of conditions such as; heart attack, malignant cancer, stroke, multiple sclerosis, etc. If you suffer any one of these conditions, and you have Trauma insurance, you will receive a lump sum payout.

You might apply for instance for $100,000 of trauma cover, and if you are later diagnosed with one of those conditions, you give the insurer a report from a specialist and one from your normal doctor, and within a few weeks typically, you will have your cheque for $100,000.

And speaking to Jenny, that’s the one that actually she wished Tim had had. She said income protection was difficult because of the self employment and the fact it was hard to prove income. She said her trauma cover was $75,000 and if Tim would have had that as well then that would have made things so much more comfortable. They wouldn’t have had to use the equity from their house sale, and it would have put them in such a stronger position.

Having dealt with quite a few claims for people, I can tell you that Trauma is great because it is just so black and white.

So we have Life Insurance and TPD, often though not always, through your super. Outside super you have Income Protection, which is tax deductible and Trauma cover which is just a lump sum for significant events.

So that is it for today, I hope you found it valuable. Like I said Jenny and Tim’s story is an unusual one that we can all learn from.

As always there is a Financial Autonomy toolkit covering the key elements of this post, so be sure to download it here:

 

Important Information:
This information is of a general nature only and has been prepared without taking into account your particular financial needs, circumstances and objectives. While every effort has been made to ensure the accuracy of the information, it is not guaranteed. You should obtain professional advice before acting on the information contained in this publication.

Divorce – how to bounce back financially – Episode 8



Financial Autonomy is about managing and planning for major transitions in life.  A transition that many of us face unfortunately is divorce.  I understand researchers have found that going through a divorce can be one of the most stressful things you can experience in life.

As a financial planner, I often work with clients who have been through or are going through a divorce, and assist them in the planning necessary to get them back on their feet financially.

In this post I’ve broken down the things you need to be thinking about into 4 key strategy elements.  If you can work through these, you’ll be in a position to get your financial life back on track, and with this stress removed, hopefully your life back on track too.

Divorce is certainly no fun.  But it does offer the opportunity to hit the reset button in your life.  With some good financial planning, this next chapter in your life can be the best yet.

 

Fortunately the days of couples sticking together in relationships that no longer work are behind us.  Divorce provides the opportunity for a fresh start.  But of course beyond the very significant emotional pain of getting through a divorce, the financial consequences are also very significant.  There may be many reasons for getting divorced, but improving your financial position is rarely one of them.

Whereas you and your partner once shared a roof over your head, there is now a need for separate housing.  Often children are involved, so considerations of being local and having enough room for the kids can be a big challenge.  It’s not an option to move half an hour or more away to find more affordable housing when you don’t want to turn the kids’ lives upside down.

You typically also go from two incomes and sharing expenses as a couple, down to one income with little change in expenses, so budgeting becomes a real challenge.  Often one of you will keep the family home so as to minimise disruption for the kids, but this may mean borrowing a significant amount so that your partner is able to move on with their life and get a new house of their own.  How will you service this new debt?  You may be required to pay child support, which, on top of new housing costs can be a real strain.

And thinking longer term, retirement plans are often significantly disrupted.  Often one member of the couple took time out of the paid workforce to help raise the children.  This means their superannuation balance is typically considerably less than their former spouse who worked through.  This difference is allowed for in your financial settlement, but the result is that you are both now facing a less generous retirement outlook than was once the case.

So divorce has big financial impacts.  But as I mentioned at the start, divorce also provides an opportunity for a fresh start.  It provides you with an opportunity to steer your life in the direction that you want to head, possibly without the compromises that you needed to make when you were in your former relationship.  You can set goals and work hard towards them without the potential for your former partner to decide they need a new car, or some other distraction. 

Financial Autonomy is about giving you choices, and managing key transitions in your life.  Divorce is quite clearly a significant transition, and also an opportunity to gain choice.  So let’s look at a few strategies that might help you get back on your feet.

1. Budgeting

The starting point must be gaining clarity around how much you have coming in and how much you have going out.  Following the divorce your household arrangements have changed, and possibly there is child support obligations and spousal maintenance to meet.  Or perhaps in reverse, you have these support payments coming in and need to ensure they are used wisely and appropriately.

You can create your budget in a spreadsheet.  We also have a sample budget template in the toolkit for this post.  There are also budgeting apps available.

Gain a clear understanding of how much you have coming in and how much you have going out.  Allow for the fact that bills are lumpy, and large expenses such as car servicing and council rates come up.  I suggest having a separate bills account with your bank.  If you determine that over the year your bills, including things like getting the car serviced, will be say $20,000, divide that by 26 (assuming you get paid fortnightly), and then arrange that amount, $769 in this instance, to be automatically transferred from the account that gets your income, across to your bills account each pay day.  Ideally you would kick your bills account off with a few thousand dollars to allow for the fact that a big bill could come up 3 weeks after you started.  You might even wish to put your mortgage or rent payments in here too.

With this set-up, you know that all the bare necessities are covered, and what is left in your account is what you have to live off.  You can start to move forward with confidence.

 

2. A roof over your head

In Australia there is no tax on gains in the value of your home (primary residence).  Also, given our growing population, historically the value of houses has risen over the medium to long term.  For both these reasons, for most people, becoming a home owner as soon as possible will be an important element of recovering financially from a divorce.  You may need to start smaller or less comfortable than what you once owned, but getting back into home ownership is likely to be a very important step.

I recognise in this step that post-divorce there is usually a period where you are in limbo awaiting finalisation of the financial settlement.  That can’t be avoided and buying a home will need to wait until this is concluded.

Once again having a good understanding of your budget is crucial so you can be clear on what you can afford to pay in loan repayments.  Run your numbers allowing for interest rates to increase by 2-3%.  Ideally budget on making repayments of a little more than the banks minimum so that you get ahead on your loan and thus create a bit of a buffer for the future.

If you simply can’t make the numbers stack up to buy a home, and it looks like that won’t be a reality in the medium term, consider increasing your contributions to superannuation instead.  That way you’re still building your personal balance sheet and long term wealth, whilst also providing for some additional income in retirement that could be used to cover rent.  Just keep in mind that the money you put into super is “preserved”.  That means you can’t access it until you retire.

3. Review your insurances

There are two elements here.  The low hanging fruit is updating the beneficiaries on any policies to ensure any payout would be directed where you would want it to go post-divorce.

The larger item is thinking through how you will establish a financial safety net to ensure you are totally self-reliant.  Things like Income Protection and Trauma cover may become far more important than perhaps they were when you were part of a couple.  Seek specialist advice here to get a customised package that fits your needs and budget.

 

4. Retirement planning

I typically see two scenario’s after the divorce.  One member of the couple keeps the house, most often the wife, and then has very little in superannuation savings.  Or the person gives up the house, but retains their far larger superannuation balance – most often the husband.  Whichever side you fall on, there are quite clearly long term retirement planning issues.

If you have kept the house but now have minimal super, you need to plan for how you will support yourself in your later years.  Perhaps downsizing the home will be possible (it’s certainly very tax effective).  At some point though, increased contributions into super will be required, and the sooner this is affordable the better, due to the benefits of compounding.

If you’re the partner who gave up the family home as part of the settlement, you may have a reasonable superannuation balance, but now you need to get a roof over your head.  Mortgage repayments or rent will limit how much extra you can contribute to super.  Compulsory employer contributions are not likely to be fully adequate to provide the quality of retirement that you would hope for.

In whichever camp you are in, you need to develop a retirement plan, and the sooner you get onto it the better.

Some other things to think about are whether your existing superannuation and wealth creation structures continue to make sense.  For instance is an SMSF still a cost effective and appropriate vehicle for you?  Do the numbers still work on that negatively geared property?

Also, as with your insurance, check the beneficiary details on your super fund to ensure these are as you would want them to be.  A new Will may also be relevant and should be discussed with your solicitor.

 

Hopefully these 4 items get you thinking about bouncing back financially from divorce.  It’s a tough time but many before you have done it, and you can succeed too.

Finally, don’t procrastinate.  The sooner you get your finances in order, the sooner you will start to move forward with your life.

 

Need help in planning for your life post-divorce?  Visit the “Work with me” page.

 

Important Information:

This information is of a general nature only and has been prepared without taking into account your particular financial needs, circumstances and objectives. While every effort has been made to ensure the accuracy of the information, it is not guaranteed. You should obtain professional advice before acting on the information contained in this publication.

 

How to retire early – 5 things you could do to gain financial independence – Episode 7



Many people that I speak to seek freedom from the need to clock on and clock off.  To not be answerable to a boss. To not having to devote time and energy to things that they’re not passionate about, just for the pay.

The dream therefore becomes to retire early, and the sooner the better.

In Australia superannuation is the primary vehicle that we use to save for retirement, and access to superannuation is available from age 60.  So, when we’re talking about early retirement, we’re referring to retiring earlier than age 60.

But what does being retired before the age of 60 actually mean?  Does that mean sitting at home all day looking at the TV?  I certainly hope not.

Of the people I talk to with the ambition to retire early, I believe their goal is to have choice and freedom.  To be able to say no to things they don’t want to do in a work sense.  Early retirement links very strongly with financial independence, and that is where we will be focusing the attention of today’s podcast.

So your dream of early retirement might be leaving the normal full time paid work force at age 40 and working as a fishing guide 6 months of the year in Northern Australia.

Perhaps it’s leaving the paid workforce to help your daughter care for your grandkids.  Or you want to become an independent film maker.

The point is, early retirement isn’t about retiring from life, rather it’s escaping the captivity of the workforce and spending your time as you wish to.  It’s recognising that we don’t have a limitless life span, and so the sooner we can pursue the things that make us happy, the better.

 

If you are to retire early, you need to develop a plan to support yourself.  I’ve come up with 5 things you could do to gain the financial independence that you need.  They are:

  1. Understand your livings costs.
  2. Save
  3. Invest
  4. Minimise/avoid debt
  5. Downsize/tree change

Let’s take a look at each in a bit of detail:

 

  1. Understand your livings costs.

Is all of your spending really necessary?  You need a budget and a cash flow management plan.  For you to be in a position to quit your job, you need to know how much money you require to live.  Is it $30,000 per year or $80,000 per year?  Here’s some overly simplistic maths for you, just to illustrate:

If you wanted to build up a portfolio of investments that would generate $30,000 per year for you to live off, rising with inflation, and with a high level of confidence that it won’t run out in your life time, you would need investments worth approximately $750,000.

If, instead of $30,000, you needed $40,000 per year, that would rise to $1million.  So to have just an extra $10,000 per year, you need to save an extra $250,000.  (Note that I haven’t allowed for tax here, this is just a really simple illustration).

So to flip that, if you could reduce your living expenses by $10,000 per year, then the amount you need to save to be financially independent and retire early is reduced by $250,000.  How much sooner would that mean you could escape your current employment captivity?

You may have heard of the book The Millionaire Next Door.  It’s quite US focused, but it has some interesting insights none the less.  The two authors studied households whose net-worth (ie. assets minus debts) exceeded one million US dollars.  One really interesting finding was that millionaire households were disproportionately clustered in blue collar and middle class suburbs, and not in the higher income, white collar, more affluent suburbs that you would assume.  Digging into why this was the case, the authors found that the higher income earners devoted more of their income to luxury items and status symbols, often funded with debt.  These people tended to neglect savings and investment.

In order to retire early you are going to need to build some wealth.  It may not need to be millions, that depends on your goals, but owning a roof over your head is probably a minimum starting point.

The authors of the The Millionaire Next Door to me missed the point about the purpose of money, which in my mind is to give you freedom and happiness.   I’ve certainly met people who never spend a cent, and as a result would meet the criteria of having considerable net wealth. But they don’t seem to me to have lived happy lives.  The beneficiaries of their estate are likely to be the happy ones!

So I want to be quite clear that I don’t see the building up of a large pool of wealth as being the marker of a successful life.  That may happen, and it’s no bad thing, but money is a tool which allows you to do the things that make you happy.

So, with that caveat established, it is undeniable that if your goal is to retire early, you will need to build some wealth. And the findings of these authors does highlight the difference between those who do successfully build wealth and those that don’t.  Very interestingly, having a high income is not a pre-requisite to building wealth and becoming financially independent.

The lesson from TMND would seem to be, don’t lease the expensive car, don’t buy the $1,000 hand bag or the $300 pair of jeans.  Avoid the status symbols and the debts often linked to them.  A fulfilling life means different things to different people, but if you want to be financially independent, then feeling the need to keep up with the Jones is going to need to be jettisoned.

2  Save

It’s one of the simplest financial rules around yet one so many of us struggle with it – you must, must, must, spend less than you earn.

Know how much you have coming in, after tax.  Check that against your expenses as identified in your budget.  What is the surplus?  Now put this to work.  This is cash flow management.

Savings could involve extra payments on your home loan, regularly investing in a managed fund, or building up cash in a bank account and then buying some shares whenever it gets to a certain sum.  Strategies differ, but if you are to become financially independent, you need to save, and that means you need to spend less than you earn.

Many people put off doing a budget because it seems too daunting, or they worry that then working to a budget will impinge too much on their life.

In truth, you could sit in front of your computer one night for an hour max, glass of wine, beer, or chai latte in hand as is your preference, and between your online bank statements, and the budgeting tool we have provided, you could have a budget done.

Even if you go no further than that, the insight you will gain as to where your money is going will be valuable.  Hopefully though you do take things a bit further and think about whether the way you are using your money is really as you want it.  Could you be happier if in fact you made some changes?  Perhaps there is some spending that you could cut down on, which would enable you to save, so that you can start to see some real progress in achieving your goals.

3  Invest

First you save, but then what to do with those savings?  Sure you could leave it in the bank, but with minimal interest, and tax on that interest too, you’re going to have to do a lot of heavy lifting to get yourself to the point of financial independence and early retirement.  Typically you would look to invest in assets that will grow in value over time, which usually means shares or property.  There are all sorts of considerations here around investment time frame, the use of debt, and diversification, and so it is really important that you seek out professional impartial advice.

But a key concept to grasp is that risk and reward are always linked.  You can take no risk and leave your money in the bank.  But if you had the capacity to save $2,000 a month and you wanted to build up $500,000 in savings to become financially independent, that would take you about 21 years.

If instead you invested in a share portfolio that earned 7% per year on average, it would take less than 14 years to reach the same goal.  So you are achieving your goal to retire early 7 years sooner by taking some risk.  Or to flip it, if you want to take no risk, the price you pay is 7 years of your life.

In the downloadable toolkit that accompanies this episode we’ve done some modeling on the impact of investment risk and return on the achievement of your goals, so be sure to check that out.  It shows how long it would take to save $100,000 assuming different rates of return, so it should be really helpful for you.  Just go to this post on our website, financialautonomy.com.au and you’ll see the button to download it.


 4  Minimise/avoid debt

To clarify straight up, not all debt is bad.  Most of us could never buy a house in Australia without borrowing.  And because any gains made on the increase in value of your home are tax free, usually borrowing to buy a home is a financially wise thing to do.  Similarly sometimes debt to help fund good quality investments can make sense.

But the debt to avoid is debt to fund consumption.  Credit card debt to buy clothes or a holiday.  A loan for a new car when maybe something a few years old would have done.

As touched on earlier, if you are to retire early, you need to get your expenses down and your savings up.  Loan repayments push against this objective.

5  Downsize/tree change

I know of several people who have achieved financial independence by selling their inner city home and moving to a rural area or just a smaller home.  As the NBN rolls out, there should be more and more scope for people to work outside of the big cities.  I know I use Skype a lot for meetings, and with the Screen Share functionality, I’ve found you can have a really good meeting with someone that is far superior to a phone meeting and not miles away from meeting in the flesh.

In some cases such a move resulted in them becoming debt free, which reduced their living costs and granted them considerably more freedom.  Or perhaps there’s some money left over following the change which can be invested and provide some income to reduce the need to generate a wage.

If you haven’t already done so, have a listen to episode 6, where an element of Nish’s success was this type of change,

Mortgage repayments or rent tend to take up a large part of peoples budgets.  And as highlighted in the first point earlier, the lower you can get your living costs, the easier it will be for you to get to the point where you can retire early.

It follows then that if you can downsize or make a tree change, and get your housing costs down through the reduction or elimination of debt, or just lower rent, your goal of early retirement will be that much more attainable.

 

As a final thought, consider what you will be doing in this early retirement of yours.  Is there any chance that what you want to spend your time doing could earn you some money?  Even if it’s a small amount.

As shown in the example earlier, $10,000 of income needs something like $250,000 of investments to produce it on a sustainable long term basis.  So if you can earn $10,000 in your early retirement, that’s $250,000 that you don’t have to save.  That early retirement could be that bit earlier!

 

As always, we have a downloadable toolkit for this episode.  It’s really important to me that the content we provide to you is actionable.  The toolkit contains checklists and templates to get you moving on your journey to financial automomy, so be sure to grab your free download.

As I hope you can tell, I love to help people plan financially for significant transitions in life such as early retirement.  While you’re at our website check out the Work with me page to learn how we can work together on a one on one basis to help you achieve your goals and dreams.

 

Important Information:

This information is of a general nature only and has been prepared without taking into account your particular financial needs, circumstances and objectives. While every effort has been made to ensure the accuracy of the information, it is not guaranteed. You should obtain professional advice before acting on the information contained in this publication.

Financial Autonomy success story – how Nish escaped the corporate world and pursued his passion – Episode 6



I’ve known Nish for over 25 years.  He was there when I started my first job out of school, and over the years our careers and lives intersected. These days, as well as being a friend, Nish and his family are also clients.  For many years Nish was a financial planner, even running his own firm for a period.  To have someone with that professional skill and background decide to engage me and my firm to act as their financial planner is to me, one of the greatest professional compliments you can receive.

Today I’m really excited to share with you a little bit of Nish’s hugely successful transition from the corporate world to running his own photography business – Nish Photography.  But it doesn’t just stop there.  Because Nish and his incredibly supportive wife Janine made a second transition a few years later by making a sea-change.  Leaving the big smoke with its big mortgage and hecticness, and moving the family to a small seaside community about an hour out of Melbourne.  Nish and his family have never been happier.  I asked Nish how these two major transitions came about, and I think there is absolute gold in what he was able to share.  So let’s dive in and take a look at this real life example of someone who has achieved choices in life, true financial autonomy.

So far in Financial Autonomy – the audio blog, we’ve looked at different transitions that you might make in your life – moving from being an employee to starting your own business, reinventing yourself after a redundancy, or rebuilding after a divorce.  In future episodes we’ll be exploring many more, like planning financially for starting a family, making a career change, and retirement.

Today though I’m really fortunate to be able share with you a real life experience of someone who has successfully achieved not one but two major transitions.

In preparing for this piece I interviewed Nish to gain a better understanding of how his move from the corporate financial world to running a photography business unfolded, and then how he and his family subsequently made the transition from inner city life to a small seaside community.

I started by asking why he decided to make the initial move from the finance world, where he had worked in various roles for around 20 years, into photography.

He attributed the initial steps in that direction to a discussion he had with a psychologist who encouraged him to spend more time and energy doing the things he loved.  His two great passions beyond his family were music and photography.

So he took some singing lessons and picked up some small gigs playing his guitar and performing.  Now that’s no small thing.  First you need to acquire the skill of singing (he already knew how to play the guitar), then you need to have the courage to get up and perform in front of real people, and then you need to find venues and convince them to let you play, ideally with you receiving some money for the effort.

He did it.

Next came photography.  Nish told me he’d essentially missed the transition in photography from film to digital, so as with the singing lessons in pursuing his musical interests, there was a financial and time investment to be made in bringing his skills and equipment up to the level required.

 

He recognised that the singing wasn’t likely to be a viable alternative to his current career, but saw that photography presented the possibility of building a business and giving him an option to escape corporate cubicle captivity.

So he launched his photography business as a side project, working on weekends.  His initial focus was family portraits and weddings.  He built his web site, and promoted himself through word of mouth.  He gained valuable experience and knowledge.  He operated this way, working his normal job, and developing his photography business on the side for roughly 12 months.  This is a great strategy to progress towards a transition, and one you certainly should consider if this is your financial autonomy goal.

Eventually, and after a significant nudge from Janine, his wife, he quit his job and devoted himself full time to his photography business.  I asked Nish what steps they took financially to make this huge step possible.  The key things were:

  1. Janine always monitored their family budget, and so had a good sense of how much income the household needed to keep afloat. She was therefore confident that they could manage on her wage alone for a period.
  2. They changed their mortgage to interest only to reduce the loan repayments.
  3. They approached the change as a 5 year plan, with the understanding that Janine’s income would be the primary income to the household during this period, and then at the end of that 5 year period, Janine could potentially pursue her own transition, perhaps working fewer hours, and Nish’s business would by then be at a level where his income could be the primary support for the household.

In addition to these financial planning steps, through Nish operating the business as a side project for a year, he had already identified that the relationship management skills he had learnt through his corporate career, were applicable to building his new business.

He’d also started to get some corporate photography work, and shortly after moving into photography full time he pivoted the business entirely towards this corporate work, which has been a key to the success of his transition from employee to self-employed.

So let’s break things down.  Nish’s successful transition to self-employment entailed:

  1. A low risk trial for 12 months. Any money he made was reinvested back into the business.  This period wasn’t about making a fortune. The gain here though was knowledge and experience, not least of which was finding that his initial target market was wrong – family portraits and weddings, and that he was better suited to corporate work.  This is right out of the Lean Start-up approach of a minimum viable product.  Put your idea out to market with the lowest investment possible, and then get market feedback as to whether your idea, your concept is right.  Then use that feedback to change or improve your offering.
  2. They had a survival strategy, as I explained in episode 1, mapped out. They had a household budget and knew their numbers.  They knew that with the mortgage repayment reduced to interest only, they could survive on Janine’s wage alone while Nish built up the business.  This knowledge was empowering to them both.  Without this knowledge, the stress levels would have been enormous.
  3. They were realistic about the time it would take to build this new business – a 5 year plan. Nish and Janine embarked on this adventure, not with the expectation that the new business was going to be an instant success, but with a realistic time frame that enabled Nish to develop his skills and the relationships essential for the business in a sustainable, long term way.  Nish told me that it wasn’t until year 3 that he started to make a reasonable income.  I wonder how many people in a similar position, with less planning, would have quit after 12 or 18 months?

As inspiring as that story is though, as mentioned in the intro, Nish and Janine didn’t stop there.  About a year ago they made a second transition, moving from inner city Melbourne to a small seaside community about an hour out of Melbourne.

Financial Autonomy is about gaining choice, and this move was in very large part, motivated by that desire.  Nish and Janine had always wanted to live by the beach, and indeed when in Melbourne, they were within range of the beach.  But beyond that, city property prices are expensive, and that means a big mortgage.  They wanted to have more flexibility around when and how much they worked.  Part of their 5 year plan was to be in a position where Janine could reduce her hours.  This sea change was an important step in making that possible.

Once again, Janine’s handle on the family budget empowered them to know what was possible.  They were able to determine how much they could afford to spend in the new town, and then look around to see if the type of house this budget would allow, was suitable for their family.

Pleasingly they found a home that fitted all their requirements, and Nish tells me that the whole family has just never been happier.  Like all parents, he worried about the kids moving schools and making new friends.  Well it took less than a day for his girls to settle in, and their happiness in this new seaside life has been a core ingredient on the overall success of the move.

 

I finished up my discussion with Nish by asking what advice he would give others who dream of gaining choices in life.  He offered four suggestions that I think are absolute gold:

  1. Love what you do. Pursue your passions.  You’ll look back and think “why didn’t I make this change years ago?”
  2. Talk to your partner and approach your transition to Financial Autonomy as a team. Nish freely admits that there is no way he could have achieved what he has without the support of his wife Janine.  She both gave him permission to have a go, and the nudge needed to take the plunge.
  3. Don’t listen to nay-sayers. For both the career change and the sea change, Nish had plenty of people tell him he’s crazy. He relayed the story of some friends who were absolutely convinced the sea change was a terrible idea, and that in a short period of time they would want to return to the inner city but would be priced out.  Those friends recently sold their Melbourne home and bought a house not far from Nish and Janine.
  4. Follow your heart. Take a risk sometimes.  It is scary, but it’s well worth it.

I hope you’ve taken something out of Nish’s story.  I’m really grateful to him for allowing me to share it with you.  Check out Nish’s work at the very easily remembered name of www.nishphotography.com.au There’s some absolutely stunning photo’s there so be sure to take a look.  And if you need some photo’s done, be sure to give him a call.

 

 

 

How to be financially ready to start a family – Episode 5



Starting a family is a huge step in a great many of our lives.  Bringing a new little human into the world.   So much hope.  Scary too!  Completely life changing.

Financial Autonomy is about you taking control of your finances, and not being controlled by your finances.  The focus of this audio blog is to think through the financial implications of taking this big leap, and what you can do to prepare for this major transition in your life.

Also, if you’re reading or listening to this during the pregnancy phase, and are anything like my household was prior to the birth of our first child, you’ve probably read enough books like What to Expect When Your Expecting, and Up the Duff.  I promise there will be no references to what pregnancy will do to your body, or any of the seemingly infinite ways we can be a terrible parent and ruin our child’s life.

My name’s Paul Benson, and thanks for listening to Financial Autonomy, the audio blog.  Let’s dive into today’s episode, how to be financial ready to start a family.

How to be financially ready to start a family could easily be rephrased as “How to survive on less income and with more expenses”.

The stereotypical scenario is that dad continues to work full time after junior’s arrival, whilst mum stays at home and try’s to maintain her sanity.  Of course there are all sorts of permutations and combinations of how different families make things work, but almost inevitably, there will be less money coming into the household than there used to be.  On top of this, you now have an extra person in the household, who maybe doesn’t eat that much (yet!), but goes through nappies like it’s an Olympic event, and for whom every little cough is diagnosed by the new parents as likely bird-flu, requiring your next month’s wages to be donated to the local chemist.

So financially, starting a family is a very big deal.  But with some planning, it needn’t be stressful.  Sleep deprivation will be stressful enough.

So where to start?  You need to understand your cash flow.  How much money comes into the household, how much goes out, and where does it go?

The cash coming in is fairly straight forward assuming you are an employee.  Possibly less so if you are self-employed, though hopefully you have a good sense of the normal cycles of your business and can forecast your income with a reasonable level of certainty.  If one of you runs a business and the other is currently an employee, there may be scope to split income after the baby arrives.  It’s a bit of a curiosity with the tax system, but two people each earnings $40,000 will end up with more money in their pocket after tax, than a couple where one person earns $90,000 and the other nothing.  This may also point you to a solution of each parent working reduced hours, instead of the more typical one at home and the other working full time.  Something to consider at the very least.

So in terms of being financially ready to start a family, you’ve got a clear picture of what the income piece will look like once bubs arrives.  What about the expenses?

Hopefully you’ve got a budget.  If not, visit the resources page on the financialautonomy.com.au web site and download our template.  Look up your bank statements via your internet banking, fill in the figures, and away you go.

It is important to understand where your money is currently going and then think through how that will change once your family moves from 2 to 3 people (or maybe more if you’re really efficient!).  Maybe public transport fares will drop.  You may spend less on eating out.  But of course you will now have the cost of nappies and all the other bits and pieces a new born demands.

Once you have your head around the numbers, it may be valuable to adjust to living on one wage before the baby arrives, assuming your plan is the most typical scenario of one parent at home and the other in the workforce.  If you can demonstrate that your household can manage on that one income, you can have a high confidence that you are indeed financially ready to start a family.

Another approach that I have seen is where the couple assumes and focuses on mum staying at home for 1 year.  The solution they are trying to find therefore is not necessarily the long term plan, but rather just a one year solution.  Sometimes they approach it that way because planning further ahead is just too daunting.  Alternatively that approach might be adopted to recognise that there is a lot of uncertainty in this phase of a couple’s life.  Perhaps the member of the couple staying at home might hate it and want to return to the paid workforce full time as soon as possible, or at the other extreme, couldn’t imagine leaving bubs with a carer and wants to remain a full time stay at home parent beyond maternity leave.  Options around returning to work part time are not always known 12+ months out too, so sometimes, just focusing on the one year makes a lot of sense.

So if you are focusing in on a one year solution to being financially ready to start a family, items like any maternity leave and perhaps annual leave entitlements might provide a significant portion of the solution.  I know of some couples who have arranged to take leave entitlements at half pay to extend the duration that they continue to have income coming into the household.

The government’s Parental Leave scheme might also provide some very useful assistance.  This is paid at $672.60 per week for 18 weeks.  Eligibility is fairly generous.  Check out the link to see all the criteria.

And whilst the Baby Bonus is now gone, you may still be eligible for its replacement, the Newborn Payment.

In developing your plan to be financially ready to start a family, on-going government payments may well be an important element.

The primary form of government assistance for young families is the Family Tax Benefit and the Department of Social Services web site explains the support available like this:

Family Tax Benefit (FTB) is a payment that helps eligible families with the cost of raising children. It is made up of two parts:

  • FTB Part A – is paid per-child and the amount paid is based on the family’s circumstances.
  • FTB Part B – is paid per-family and gives extra help to single parents and families with one main income.

Family Tax Benefit – Part A. If household income is less than $51,904, you will receive the maximum entitlement.  Beyond that, your entitlement depends on the number of children that you have and their ages. As mentioned in the summary above, this is a payment paid per-child.

For those about to have their first child, you would cease to be eligible for Family Tax Benefit – Part A once household income reaches approximately $100,000.  The link provided shows a table to explain how this works.

If you qualify for the maximum payment, for a new born you would receive $182.84 per fortnight currently (April 2017).  This is certainly a handy amount and well worth incorporating into your cash flow plans.

There is also a Family Tax Benefit – Part B. This is potentially another $155.54 per fortnight.  As per the summary mentioned earlier, Part B is a per-family payment and focuses on households with one income.  It is therefore often relevant for couples starting a family.   Where one member of the couple is at home full time, you will receive the maximum Family Tax Benefit – Part B, if you’re working partner’s income is less than $100,000.

There are also supplement payments added to both Part A & B at the end of the year in some cases, which can act as a handy lump sum.

The various means of government support are certainly not easy to get your head around, but for those eligible they can be very helpful in making the household budget work, so take some time to look at the various links and aim to arrive at an estimate as to what you might receive.  To summarise, there are 3 likely sources of recurring payments:

  • Parental leave scheme – 18 weeks
  • Family Tax Benefit Part A – a per child benefit
  • Family Tax Benefit Part B – target at single income households

 

Child care is another likely new expense that may need to come into the family budget.  Whether it’s to enable you to return to some paid employment, or just to get a sanity break and a few things done in peace, childcare is often a meaningful expense in a family’s household budget.

The cost of child care is subsidised by the government via the Child Care Rebate.  This will cover 50% of the cost of childcare up to certain limits.  A day of childcare at a child care centre is likely to cost around $100 per day, or $50 after the child care rebate.  This varies quite a bit depending on where you live though, and there are solutions like family day care that in some cases are cheaper.

 

Whilst not something that you need to immediately factor into your household budget once bubs arrives, a final tip that has been really helpful for my household.  When our first child arrived we put a few lumps of money into a managed fund with the intention that this would help towards his secondary education fees.  We weren’t real sure where we would send him, but we felt is was likely he’d go to some sort of private or catholic type school.  At the time I worked in a role where I got occasional lump sum bonuses, and these were the amounts we socked away.

My wife and I went on to have a second child, and as the boys got older, and education plans firmed up, we weighed up the best use for those savings that we’d put aside.  My youngest starts secondary school next year and so we’ve decided to use the education savings to assist us during the “overlap” years – the 3 years where we have both boys in secondary school.  The amount put away all those years ago has grown to be enough to cover one boys fees for these 3 overlap years, so that effectively we will just be paying roughly the same amount of school fees that we have been up until now, from our normal cash flow.  I have to tell you that this solution is enormously helpful for our household.  So give some thought what you might be able to do around putting some money into a long term growth investment to help towards education costs down the track.  Putting some money away early will enable the magic of compounding to do much of the heavy lifting for you.

 

Preparing yourself to be financially ready to start a family is a very important and potentially challenging task.  If you need help, we’re here.  Go to the Work with Me page on the financialautonomy.com.au web site and book an appointment.  Helping people do this sort of planning is what we do every day.

 

Well I hope today’s audio blog has brought you a bit closer to being financially ready to start a family.

 

Important Information:

This information is of a general nature only and has been prepared without taking into account your particular financial needs, circumstances and objectives. While every effort has been made to ensure the accuracy of the information, it is not guaranteed. You should obtain professional advice before acting on the information contained in this publication.

 

How to analyse the financials when buying a business – Episode 4



One fantastic and I find often overlooked way to achieve financial autonomy is to buy an existing business.  In comparison to starting your own business where cash flow starts at zero and you need to support yourself whilst the business becomes self-sustaining (refer episode 1), when you buy an existing business, you have cash flow and customers from day one.

Buying a business is something I can talk about with quite a bit of experience.  I’ve bought two businesses, and for a couple years I was a licensed Business Broker as a side line to my financial planning practice.  The thinking at the time was that my business owner financial planning clients would need to sell their businesses when they retired, and so perhaps offering business broking services was a sensible expansion.  I ended up concluding that the two services weren’t especially complementary, but I picked up some great learnings that make me a better advisor for my business owning financial planning clients, and for those seeking financial autonomy through buying a business.

Just as an aside, something that I believe really strongly about business endeavours, but also life more broadly, is that we can’t be afraid to try.  I heard someone trying to sell business coaching recently and their tag line was 98% of business fail within 10 years.

What a ridiculous statement.

I assume their definition of failure is that the business isn’t around 10 years from when it started.

So?

Does that equate to failure?

I operated as a part time business broker for 2 years and then made the decision it wasn’t sensible for me to continue to devote time and effort into that area.  At the end of that period I had $35,000 sitting in my Business Broking bank account, and had learned an enormous amount.  In fact even if there was no money in the bank account from that business, I’d still say it was a success because I learnt so much.

So if you hear people trying to convince you that your plan or idea will never work because most businesses fail – don’t believe it.

People start businesses, and people wind up businesses.  Their lives change, new opportunities come up, industries change.  Sometimes people just come to the conclusions that they could make more money doing something else.

That’s not failure – that’s having a go and then having the intelligence to reflect and chose a new path.  In Silicon Valley jargon, that’s a “pivot”.

Anyhow, sorry for the rant but that’s just something I feel strongly about – you can’t live your life being afraid to try.

 

So when you look at buying a business, here’s the process:

You search the various web sites such as businessforsale.com.au and find a business that looks interesting.  You submit an enquiry to the broker.  The broker will send you a Confidentiality Agreement which you need to sign and send back – most business owners that are selling want to keep it quiet.  They don’t want their customers and staff to know that they are looking to exit.

The broker will then send through to you an Information Memorandum (IM).  The level of detail in here will vary depending on the scale of the business and it’s complexity, but the IM will give you some good information about the business, it’s history, and some figures around how revenue and profit have been tracking.

Having read through the IM you should be able to determine whether this is a business you really want to look into in a serious way.  Expect to look at quite a few IM’s in your hunt for a business.  They cost you nothing and it’s always useful to see the figures for different businesses.

So let’s say you’ve found a business that looks like it may fit your needs.  The next step will be to get the detailed financials – at least 3 years worth.  So what to look for?

The Profit and Loss is the most important.

First of all, is the business making a consistent profit?  This will be the number at the bottom of the Profit and Loss.  If it’s losing money it’s tough to see how it’s worth anything, so let’s assume it is showing a profit.

Is that profit after the owner has received a wage?

There should be a wages or salaries item in the Expenses section, and often in the financials there will be an explanation of what this is made up of.  If it’s not completely clear, go back to the broker and ask for a breakdown of what the wage’s expenses are.

It is very common in a small business for the owner not to take a wage, and just live off the profit.

Consider this example.  One business you look at shows a profit of $30,000 last year.  The other a profit of $90,000.  At first blush the second business looks more attractive.  But you dig a bit deeper.  You find in business one that in fact the business owner has paid himself a wage of $80,000, and also paid super of $25,000.  In business two however, you learn that the business has paid nothing to the owner, and in fact in this case the husband works on the business 6 days a week and his wife does the book work one day a week.  $90,000 rewards for all that effort is starting to sound less attractive.

So you need to get an understanding of what is the actual return to the owner.

It wouldn’t be unusual to find the business owner running his car through the business.  I’ve seen instances where the entire families’ mobile phones all go through the business.  So go through the expenses, ask lots of questions, and get to a point where you know how much the current owner is actually making out of this business.

So as an example you might find a business that made:

$30,000 profit

$80,000 in owners wages

$25,000 in owners super contributions

$15,000 in owners vehicle expenses that aren’t essential to the operation of the business

$5,000 in other expenses related to the owner.

So add this all up and the total return to the owner for this business is $155,000.

There may also be depreciation in the expenses.  This is a non-cash item reflecting the value of equipment wearing out.  You may want to add this amount to the return the owner receives as well.

This is less clear cut because at some point that equipment will need to be replaced.  If depreciation is a large amount, you’ll need to dig a bit deeper into this and it may be something to discuss with your accountant.

However you decide to best treat depreciation, you will have arrived at a total return to the owner in the most recent year.

Now run this same calculation across the previous year’s financials so you can see how stable this is.  Was last years $155,000 earnings a typical year, or abnormally high or low?

You won’t get it from the financials, but once you understand the total return to the owner, ask the broker how many hours the owner is putting into the business.  Earning $155,000 might be acceptable to you if she’s putting in 40 hours per week, but perhaps, if to earn this, the owner is working 7 days a week and 12 hours a day, maybe that return isn’t so attractive.  In reverse you might come across a business that only returns $30,000 to the owner each year, but if it only takes up 2 hours a week of the owners time, maybe that’s a really good business.

Okay, so you’ve now got a good sense of what the current owner is making from this business, and how stable that is.  The next thing I’d go to is trends.

Start with the total revenue and total expenses items.  I’d put them in a spreadsheet myself but it’s up to you.  You’ve got 3, maybe more years of data.  What is the trend?  Now we’d all like to see a trend of rising revenue.  In my experience though, business owners are just like elite sports people – rarely do they get out at the top.  So don’t be surprised if you see declining our plateauing sales.  Whatever the trend, you need to understand what is going on as this will definitely have an impact on whether you want to buy this business, and how much you would be prepared to pay.

Often at the revenue level income will be broken up into several sub-categories – what is that telling you?  Is one area of the business dying?  Perhaps another is growing.

Similarly at the expenses level.  What is happening there?  Have input costs or wages been rising faster than revenue?

Having gone through the process you should have a whole bunch of really intelligent and insightful questions to ask the owner.  You also have a good basis upon which to talk price.

You could ask all your questions to the broker, but I would suggest you ask for a meeting with the owner at this point so you can get the answers straight from the horse’s mouth.  A direct discussion is likely to give you far more detail, plus you can gain a lot in the non-verbal cues.

On price, don’t be surprised if, having gone through the financials, you struggle to make sense of the price being asked.  For many business owners their business represents their life’s work and in their mind it is a gold mine worth millions.  Do your own numbers, determine what you as the owner could make out of this business, and from that what is a sensible price for you to pay.  Typically that will be 1 to 3 times what the business will make for you each year depending on the trend of revenues and profits, and the industry.  If you come up with a price that makes sense to you of say $300,000, and the owner is asking $900,000, don’t be afraid to tell the broker that based on the numbers and information provided, it only makes sense to you to pay $300,000.  Don’t throw in a ridiculous low ball offer just to play games, because that will just piss people off, but if you say “look, from the numbers you’ve provided I think I’d make “x” per year, and so as a result it would make sense to me to pay “y” for this business, the broker will understand and the business owner will come around, or perhaps furnish you with additional information to show why the business is actually worth more.

Very often the business owner’s expectations are way off the mark, and as much as the broker can try and advise them of that, it’s not until genuine offers start coming in that the reality hits.

Also, keep in mind that most business owners, by the time they decide to sell, are well and truly ready to exit.  They’re already thinking of the retirement holiday or what they will do next with their life.  So make an offer that makes sense for you and be patient.  If the owner won’t come around, there’ll be other businesses.

 

Important Information:

This information is of a general nature only and has been prepared without taking into account your particular financial needs, circumstances and objectives. While every effort has been made to ensure the accuracy of the information, it is not guaranteed. You should obtain professional advice before acting on the information contained in this publication.

What is financial autonomy and how to begin the journey towards financial independence – Episode 3



I’ve named this podcast Financial Autonomy.

So what is Financial Autonomy?

What does it mean?

Well that’s what we’re going to explore in today’s podcast

I’ll give you a big hint – Financial Autonomy is about gaining choices in life.

Buckle up – let’s dive in!

Financial autonomy or financial independence if you prefer, is about being in a financial position to have CHOICE.

In my role as a financial planner, every day I talk to people about their financial plans.  In almost all cases, amongst their financial goals will be retirement plans.  For the past 50+ years, most people in developed countries such as Australia have lived on an expectation that they will enter the work force in their late teens or early 20’s, and work through until somewhere in their 60’s, whereupon they will cease work entirely and live out their remaining days in “retirement”.

This scenario is perhaps a bit male centric, as for many women, paid employment is often put on pause when children arrive.  But none the less, in more recent times this is a rough sketch increasingly applicable to both the sexes.

Financial independence

Whilst this trajectory remains applicable for many people, increasingly the feedback that I’m getting is that this is not how many people wish for their life to unfold.  Instead they seek a path perhaps looking more like this:

Financial independence

Financial autonomy, is about getting yourself in a position where you can move to yellow section above.

Where you have CHOICES.

Where you don’t have to work in a job you hate, or with a boss who is a moron, simply because that’s your lot in life until you reach 65.

Financial autonomy might mean reducing your normal paid employment from 5 days per week to 3 or 4.  And in those now freed up days, you might chose to study, do a different job, care for your kids or grandkids, or get involved in the local community.

Financial autonomy might mean a career change.  Initially the pay might be less, maybe even permanently so.  But you spend a lot of your life at work.  Do you really want to waste so much of the limited time you have on this earth in a job you hate?

Financial autonomy might mean starting your own business.  There will be many challenges and certainly risks.  But you will have the flexibility to work when and how hard it suits you. Do something you are passionate about.  Take holidays when it suits you.  And if your son or daughter is getting presented with a student of the week certificate at assembly, you can go without having to ask the boss for a favour.

Whilst financial independence in the extreme might mean not having to work again, for most people this is not what they want.  Financial independence is about having choices in life.

So where to start?

First you need to clearly identify your goal or objective, and then you need to quantify it.

Vague “one day I’d like to …” won’t get you anywhere.

Let’s say that your goal is for a career change.  You currently work as a company accountant but have lost the passion for this profession and are finding the stress too great.  You would really like to re-train to become a primary school teacher, something you feel you were born to do.  So what are the financial challenges associated with this change?

  1. To retrain you would need to take 2 years out of the paid workforce to attend uni and  complete the on-the job training required.
  2. The pay for a teacher will be lower than you are currently on – approximately $30,000 per year less initially you estimate, though this will narrow a bit as you gain experience.

You and your husband own a house with a mortgage of $300,000.  Your husband works full time, enjoys his job, and believes it is quite secure.  As a household therefore you have confidence that during your training period, some money will be coming in from your husbands earnings.

But what if any, is the shortfall?  , ie. what is the difference between your husband’s take home pay and what it costs to keep your household afloat?

You need to know what you are spending.

We have a budgeting tool in the Resources page of our web site.  I know household budgeting is no fun, but there is just no way you can gain choices in life through financial autonomy without knowing how much it costs you to live.

So let’s say mortgage repayments are $2,100 per month, and from the budget tool you have determined that your living expenses average $2,600 per month, and bills average another $1,200 per month.  So your household expenditure is $5,900 or $70,800 per year.

You should allow some money for the unexpecteds, so let’s assume $75,000 is the current need.

Note that we have not allowed for lavish holiday’s here, or a new car.  This is just what the household needs to function.

Your husband’s bring home income is $53,000.  This is after tax and lease payments on a car. This is net income.

So you have a shortfall of $22,000. To achieve your goal, this shortfall needs to be plugged, both during the initial 2 year training period, and then longer term.  In our next post we’ll look at some potential strategies you might be able to deploy to plug this gap.

Congratulations.  You have taken the first definitive step towards achieving financial independence and being able to choose the life you want to lead.

 

So let’s summarise.  To begin your journey towards financial autonomy and gaining choices in your life, you need to:

1 – determine your goal or objective

2 – quantify – how much money do you need to make this a reality?

 

Important Information:

This information is of a general nature only and has been prepared without taking into account your particular financial needs, circumstances and objectives. While every effort has been made to ensure the accuracy of the information, it is not guaranteed. You should obtain professional advice before acting on the information contained in this publication.

Redundancy – what a great opportunity – Episode 2



Redundancy – not something most of us like to contemplate. Yet it is a reality for many of us in our working life. So rather than redundancy being seen as something negative, let’s flip it around – your redundancy could be the best thing that has ever happened to you.

Financial autonomy is about building financial strategies to give you choices in life. And very often these choices present themselves at moments of transition. In this case, your transition is leaving the comfort of a work place you’ve been at for many years, maybe even decades, and moving onto the next chapter in your life. Today’s podcast will explore how you can make this transition a successful one.

I’m Paul Benson and you’re listening to the Financial Autonomy audio blog. Let’s dive in!

 

It’s not you, it’s them. Over the years I’ve dealt with many people who have been made redundant and so I know it can be a huge confidence sapper. But I want to tell you, if you are currently facing redundancy that you being made redundant is almost never about you – your performance, skills, or work ethic. You’ve been made redundant because the industry has changed, or the company you work for has changed. In some cases there is simply a natural pyramid structure with lots of workers needed at the customer facing coal face, but far less managers and senior people as you move up the pyramid, such that workers need to be shed over time to accommodate the new blood coming through.

Being made redundant can be distressing – how will you keep a roof over your head and food on the table? Where will you find a new job? And there is also the loss of regular contact with your work colleagues. But there are positives too. Give some thought to the opportunities your redundancy presents. In a career sense, perhaps you can try something different. Maybe you could start your own business. Perhaps the payout you receive puts you in a stronger financial position so you can have more flexibility in your working life. Does it continue to be essential that you work 5 days per week?

Financial autonomy is about building financial strategies to give you choices in life. And very often these choices present themselves at moments of transition. In this case, your transition is leaving the comfort of a work place you’ve been at for many years, maybe even decades, and moving onto the next chapter in your life. Be completely assured – you can make this transition a successful one, and we’re here to help you do just that.

Before jumping down the first path that presents itself, let’s take a moment to consider the range of options you have available. I’ve come up with 8 – let me know if you can think of more:

1. Apply for a new job in the same field as you are currently working in.
2. Apply for a new job in a completely different industry, but which still draws on some of the skills you have built up in your old job.
3. Retrain to do something completely different.
4. Start a business to become self-employed.
5. Buy an existing business.
6. Freelance.
7. Work part time and pursue other passions
8. Retire

Applying for a new job in the same industry that you were in probably doesn’t require a lot of planning. If you worked in a bank for instance, there is every chance that you will find work at another bank.

For many, this is not an option due to industries winding down, or they’ve simply had enough of working in that sector.

I’ve worked with a client who was on the production line at Holden, and is now working in the food manufacturing industry. He’s in a completely different industry, but it still utilises many of his skill in production line automation. Someone else I know worked at Kodak. When made redundant from that dying industry, he found work at the company that prints our bank notes – different industry but still using his skills.

Take a step back – what other industries use the skills you have? This redundancy could be great opportunity to move from an industry in decline into one on a growth path.

Retraining can present another great opportunity. Often we finish our formal education and then fall into a job – just go with the flow a bit. Before we know it we’ve got a mortgage and perhaps a family, and the thought of changing stream now is just unfathomable. But a redundancy might provide the perfect opportunity to make that change given you will receive some sort of payout to reflect years of service. With some good planning around managing your cash flows, this redundancy might give you the opportunity to finally pursue the thing you were born to do.

What about starting a business? In episode 1 we looked at getting yourself into a financial position to start your own business. We made this our first episode because this is an ambition for a lot of the people we work with. Making it a reality is tough though because most businesses make little money in the first year. But your redundancy package may be just the thing you need to make that transition a reality. If you haven’t listened to or read episode 1, be sure to check it out.

Sometimes with redundancies, you get some lead time. The automotive industry for instance, where we’ve seen a lot of redundancies here in Victoria, put their workers on notice over a year ahead. Whilst this doesn’t make for the most positive of work environments, it does provide you with the opportunity to start planning your next step in life. I had a client who started a test and tag business in his local area that he was just doing on weekends. He did the training, got some business cards printed, and went around to some local businesses and asked if they needed his solution. He picked up half a dozen customers, which as a side job was enough. But it meant that when he was made redundant almost 12 months later, he had something to develop. He knew what services customers were willing to pay for, what his pricing needed to be to make it attractive to customers but also worthwhile to him, and he had ideas around how he could best grow the business – in this case having customers geographically close together was essential to operate efficiently and profitably.

Another option I’ve seen some people pursue is to buy a business. For a couple of years, in addition to being a licensed Financial Planner, I was also a licensed Business Broker. My thinking was that for many of our business owner financial planning clients, selling their business was an important aspect of their retirement plan. So I started researching how that process unfolded and ended up deciding to give it a go myself. I handled several sales, which was really valuable experience, however I decided to cease doing the business broking as my financial planning practice grew and I felt my time was better spent there.

So I’ve got some good learnings to share with you on buying a business, and I plan to write several future posts on that topic. For now though, I suggest just putting the idea of buying a business on your radar as an option. I find it’s an option often overlooked. Sure you can start a business from scratch, but that is no easy road. If you can find a business operating in the area of your interest, perhaps you can buy it, run it as is for the first 6 or 12 months to understand why things are done the way they are, and then change things to make it your own. Offer new services to the customer base, or go out an attack a new customer segment that the previous owner had overlooked. At least you will start day one with some cash flow and some customers to talk to. Google “businesses for sale” – there are several web sites that advertise businesses that are on the market, just like real estate sites.

Freelancing is another really interesting option, with the internet just opening this area up massively. Upwork, Airtasker, Uber, Fivrr, AirBnB. Just so many ways you can turn skills that you have into dollars.
No boss. Work when it suits you, and work as much or as little as you like.
Perhaps linked to this, after your redundancy, do you still need to work 5 days per week? Maybe part time work, or freelancing, will provide enough income to meet your needs, and in the time now freed up, you can pursue other interests, help family members, or do community work. Uber drivers often have interesting stories in this regard. I met one guy who did security at big sporting and music events, and Uber at other times. What worked especially well was turning on his Uber app when it was time to go home from a big event. Usually there’d be plenty of people looking for a ride, so he’d get paid to drive home.

I met another lady doing Uber driving who worked in the first half of the day, when her husband was home, and then around the middle of the day, she knocked off, he headed off to his job, and between the two of them, the kids were looked after.

The point is, work doesn’t have to be one employer, with you starting around 9am and finishing around 5pm. There are so many more options now for how you structure your working life, and this redundancy might just be the ticket that enables you to take advantage of these options.

The final option that I came up with earlier was retirement. Perhaps the redundancy provides you with the chance you were looking for to retire early. I can recall helping one client who had young grandchildren and really wanted to help her daughter care for them. A redundancy package was the best thing that could have happened for her as we were able to set her up to not need to return to the paid work force.

Something that I think you might find really helpful early on to alleviate the initial stress of being made redundant is to do a budget to understand what your expenses are. We sometimes find in working with clients that once you understand how much income you actually need to keep you and your family afloat, you start to see ways that this can be achieved. We have a budget template in our resources page that may help.

Important Information:
This information is of a general nature only and has been prepared without taking into account your particular financial needs, circumstances and objectives. While every effort has been made to ensure the accuracy of the information, it is not guaranteed. You should obtain professional advice before acting on the information contained in this publication.

How to be financially ready to start a business – Episode 1



So you’ve decided you’re ready to take the big plunge and start your own business.  Congratulations.  Having transitioned from being an employee to running my own business, I can tell you, you will be in for some challenges, but also many rewards, not least of which is flexibility in how you manage your time.  I know of self employed people who like early morning, quiet, thinking time, and so choose to work for 2-3 hours from 6am, then take a break, do some exercise, have something to eat, and sit back down to continue working late morning.  Others work better at night, hitting full stride at 10pm and working through until the early hours.  Of course many businesses require you to be on deck during normal business hours to respond to customers, but even here you have flexibility, especially when you employ staff, to decide when you will be “at the coal face”.

So you’ve made your decision, but how to be financially ready to start your own business?  You need a roof over your head and food on the table.  Perhaps you have a family to support.  Most often the thing holding people back from taking the plunge into self employment is the financial worry.  But that is where good financial planning comes into play.  I don’t know about you, but sometimes I have pieces of work that need doing, and I just really don’t want to do them, primarily because I don’t know where to start and so it’s daunting.  So I keep pushing them aside thinking maybe I’ll feel in the mood to tackle that one tomorrow.  Eventually I bite the bullet and my usual strategy is to make it the first thing I do in the day.  So often, once I get cracking, I find it actually wasn’t nearly as big a deal as I had thought, and the piece of work I had been dreading is knocked over in half an hour.  Now whilst a financial plan to get you ready to start your own business will certainly take more than half an hour, I think it is common for people to put off planning for the move because the thought of doing the planning is just too daunting.  They just don’t know where to start.  Well let’s solve that for you!  None of us are getting any younger, so the sooner you transition into the thing you are passionate about, the more of your life can be devoted to that dream instead of clocking in doing something that is not totally fulfilling.

There are two elements required for you to be financially ready to start your own business – a Survival Strategy, and a Capital Strategy.  By Survival Strategy I mean how will you (and your family if relevant) survive financially whilst you get this business off the ground?  How will you maintain a roof over your head and food on the table?  The Capital Strategy concerns your new business – how will you fund the start up costs, marketing, perhaps fit-out costs and the like?

Step 1 – the Survival Strategy

The starting point in developing your survival strategy is for you to be clear on how much you spend.  That means doing a household budget.  Now I know that for most people doing a household budget is about as appealing as taking an ice bath in the middle of winter, but if you want to transition successfully from being an employee to running your own business, it just needs to be done.

I would set-up a spread-sheet (I have created one you could use, which can be found in our Resources page here), but if you’re not comfortable with that, hand written on a piece of paper will work too.  Set up something like this:

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Start with your housing costs – mortgage repayments or rent.  These are likely to be your largest expense.  Of course if you’re lucky enough to own your house without a mortgage, well done you, you can skip past this bit.  Record expenses as either weekly, fortnightly, or monthly, and then tally that to a yearly figure (the sample spread-sheet will do this automatically for you.)

So now you know how much it currently costs per year to live.  Save that one, now create a second version with what is necessary to survive.  Let’s be realistic – if you want to pursue your dream of starting your own business, some sacrifices will be required.  Perhaps you will need to forgo an annual holiday.  Maybe spending on clothing and eating out will need to be cut back for a while.  Short term pain, long term gain!

An option you may be able to explore if you have a mortgage is reducing your loan repayments down to the minimum required, as most of us, very wisely, pay more than the minimum.  You could also explore having the loan structured as interest only.  In both cases this is not intended to be a long term thing, but it may be helpful for a year or two as you get established in your new enterprise.

Okay, so you’ve crunched your numbers and the minimum amount of money you need to survive is let’s say $42,000 per year.  I would divide that by 12 to get a more meaningful number of $3,500 per month.  Now of course bills are lumpy so some months it will be a little more and some a little less, so a bit of a buffer of cash in the bank is needed.  But you now have a target to hit – for you to progress your dream of starting your own business, you need to be able to generate $3,500 per month as a minimum.

The next step in devising your survival strategy is thinking about how many months it will be before you first start having enough revenue in your new business to begin drawing some income.  This will vary greatly from business to business, but whatever period is your best guess, from my experience, double it.  So you’ve done some basic business planning (a topic for another post), taken a best guess at what revenue you’re likely to raise and what your expenses will be, and determined that you would be in a position to start drawing some income from your business 4 months after commencement.  This will be wrong.  No matter how hard we try, these forecasts are just educated guesses.  Which is why I say, whatever period you estimate, double it.

So we need to assume in this example that you will have no income from your business for the first 8 months.  So where is the $3,500 per month going to come from?  When I left my employee role to start my own business, I had several months of accrued long service and annual leave that was paid out.  This covered several months of expenses and was essential in enabling me to make the transition to self employment.  Perhaps you have money available to redraw on your home loan.  Maybe you need to find a part time job to bring in some income whilst you get your business going.  Perhaps some freelancing via sites such as Upwork, Airtasker, or 99Designs.  Think broadly, ask around for ideas.  You may have a partner generating income which covers some or even all of this minimum income need.  Every solution is unique, but develop your survival guide and you are well on the way to achieving your dream.

Step 2 – the Capital Strategy

Okay, so you’ve got a solution to keep a roof over your head and you wont starve.  Wow, you can taste it now can’t you?  This transition to your own business might actually be able to become a reality.

Now how will you fund your business?  That’s where the Capital Strategy comes in.  Spread-sheet time again!

Many business these days are service businesses, and so start up costs are fairly low.  Certainly when I set out to open my financial planning business, I needed a computer, a mobile phone, some stationary, and not a lot else.  I was able to rent a serviced office which included furniture and an internet connection, and I joined a network that provided access to the research and planning software that I needed, and who waived their usual monthly fee for the first 6 months to give me a chance to get going.  You might be able to work from home initially (maybe permanently although most people I speak to find this a bit lonely long term – we are social creatures, at least for parts of the day!).

Once again, I have created a spread-sheet that you might want to use.  It is in our Resources page, which can be found here.  None of the cells are locked, so chop and change it as required.

With this completed you will know how much cash you need to start your business, and then how much you need on a monthly basis to remain afloat.  For many services businesses, the initial capital required is pretty low.  You may be able to fund this out of savings, redrawing on your home loan, or perhaps a loan from a willing family member.  If your business requires significant equipment, then typically the seller of that equipment will have a financing solution whereby you can lease it over several years.

I suggest doing a little reading on the Lean Start-Up methodology.  There’s plenty of article about it on the web.  It may have some application for your business.

The monthly requirement for the business to survive can hopefully be meet fairly quickly via your business revenue.  Estimate what you expect your sales to be.  Then reduce it by say 30% to be conservative.  If you are providing products or services to other businesses, allow for the fact that most pay 30 days after receiving your invoice, and many drag out longer than that. Think about how you can get deposits or up front revenue to help with your funding.

The most likely outcome is that you will have no or minimal revenue for the first few months, then it will progressively grow.  Your Survival Strategy will cover your household expenditure needs until the business can start to distribute some income.

Your Capital Strategy will need to resolve how to cover the initial outlays for equipment and the like, and also the running costs of your business. Perhaps you determine that 50% of the business running costs can be met by business revenue in month 4 say, increasing to 70% in month 5, and then by the 6th month, the business will be generating enough revenue to cover its overheads and start to be in a position to payout some income to you.

So there you have it, a framework to get you financially ready to start your own business.  If you have any questions please fire away below.  Or if you’d like to find out how we can work together to develop a tailored solution for your transition to your own business click here.

Important Information:

This information is of a general nature only and has been prepared without taking into account your particular financial needs, circumstances and objectives. While every effort has been made to ensure the accuracy of the information, it is not guaranteed. You should obtain professional advice before acting on the information contained in this publication.