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All sports have elements of offensive and defensive play. And whether you play Netball, soccer, cricket or basketball, your team must constantly strike a balance between the two.
In pursuing your Financial Autonomy goal, you too must find a balance that will see your goals achieved in an acceptable time frame, whilst also enabling you to sleep at night, and not put you and your family at risk of living on the street.
But whilst in sport the distinction between offence and defence if fairly clear, in the financial world, it may be less so. So in today’s episode where going to explore your options, so that as you develop your Financial Autonomy strategy, you’re considering both offence and defence, and finding a balance that makes sense for you.
Offensive moves are typically attacking type moves. They’re trying to make something happen in your favour. They’re pro-active decisions or tactics that you are employing to make progress towards your goal.
Defensive moves are concerned with protecting what you’ve got, not going backwards or giving up ground.
Playing offence is often more glamorous, and for sporting spectators, more spectacular. But any coach will know that a solid defence is essential if your team is to experience sustained success.
Your strategy to achieve Financial Autonomy will require both offensive and defensive tactics. You need to take pro-active steps – offence – if your goals are to be met. But that doesn’t mean it’s wise to ignore the important defensive measures to protect on the downside. Without defence, all that you gain in offence could be given up.
Let’s start by considering what playing offence might look like in a financial sense.
A good starting point would be to have an emergency fund set-up to cover unexpected expenses like the fridge deciding it’s had enough, or unplanned medical expenses. For most people, having something like $5,000 stashed away would tick this box. The alternative, that leads all too many people towards financial peril, is that when these type of events crop up, they hit the credit card, with no plan on how this will be quickly cleared.
Your next offensive play is to educate yourself on investment and money. Now given you’re consuming this post right now, I appreciate I’m preaching to the converted here. You don’t need to become an expert, but having a basic understanding of investment options, from term deposits to shares, property and funds, and a sense of the risk in each, will arm you well when developing your strategy.
It sounds obvious and is perhaps a bit of a cliché, but a foundational offensive play in a financial autonomy context is to spend less than you earn. This requires management of your cash flow and knowledge of what is affordable. I’ve come across several instances in recent years where people have signed up to rent a home, without appreciating that once they pay that rent, they simply won’t have enough money left to live off. They just don’t seem to have done the numbers and realised that the rent is perhaps 50% of their take home pay, a level that would be unsustainable for pretty much anybody.
Let’s start to stretch the legs a bit now – it’s time to start building some wealth. We all need a roof over our head and food to eat. And since the days of living in a cave and hunting for your dinner are well behind us, you’re going to need money.
You’re currently earning money through your skills and knowledge, and whilst your ability to generate income is unquestionably of enormous value, it has its vulnerabilities and limitations – for one you have to get the work done in order to earn the income, but also there is the risk of your skills becoming obsolete or just less valued, you suffer an injury, or simply old age slowing you down to the point where income generation is no longer possible.
Owning a home and/or owning income generating assets is essential for you to achieve financial autonomy and gain the sort of life choices that you seek. And the starting point to building wealth is to save. You don’t wake up one morning and have $100,000 in your investment portfolio – it starts with that first $100 saved and invested. So play offence with your money and invest. It needn’t be huge amounts to being with, but make a start.
Improving your income generating skills is also a great offensive play. Deeping or widening your professional knowledge can see your income rise, enabling a higher rate of saving and investment to build wealth. Improved skills also make you more employable, enhancing your overall financial resiliency.
So think about what sort of training or experiences you could undertake that would increase your value to an employer, or if self-employed, enable you to increase your hourly rate.
And my final financial offensive move is to make an active choice as to how your superannuation is invested. I’m not talking about which super fund so much, but more which investment option. There will be a default, and that may well be the right option for you. But don’t just assume that it is. Look into it, consider your time frame to retirement, and your comfort with volatility. (A hint here, if retirement is a long way off, volatility is your friend).
Make an active choice that fits with your plans.
Now I do like the theory that the best form of defence is a good offence. But that doesn’t mean there’s not room for a couple of sound financial defensive tactics.
The first is to pay down debt. Debt is not a bad thing when used to buy assets that grow in value, but there’s no question that debt makes you vulnerable. Compare the scenario of two people who are made redundant. The first has a $500,000 mortgage over their home, whilst the other has paid off their home and owns it outright. Neither person is likely to be pleased about being made redundant, but it’s a fair bet that the person with the mortgage is a lot more stressed than the person who owns their home.
Start with your most expensive debt and work your way down. Tax deductable debt, such as that used to buy an investment, may be the final debt that you tackle, but of course you’d need to run the numbers there.
When it comes to defensive moves, the other fundamental element is insurance.
Now I fully appreciate that it’s hard to get excited about paying an insurance premium for a benefit that you hope you’ll never need. But having your house destroyed in a fire, or generating no income for 12 months whilst you recover from chemo, are going to set you back a long way financially.
Insurance premiums are known and can be planned for. Having insurance in place ensures that the hard work that got you to where you are today, is not undone by one instance of bad luck.
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