Financial Fundamentals – the 6 essential foundation stones for financial success – Episode 68

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Financial Fundamentals – the 6 essential foundation stones for financial success – Episode 68

Today’s episode flows from a meeting I had last week with one of you guys, a member of the Financial Autonomy community. For reasons of privacy, of course I won’t use her real name, so let’s call her Jenny. It was a first time meeting, and in it Jenny observed that she felt she just didn’t have the financial fundamentals right. As an example, Jenny pointed to having her employer continue to take out extra tax for a HECS debt, even though this debt had actually been repaid. Jenny did this so that she would get a large tax return, which she could then put to something meaningful. Essentially this was a savings strategy, but she realised it wasn’t the most efficient or profitable way to go – lending your money to the government for no interest is not ideal.
So it got me thinking about what are the key financial fundamentals that really set you up for success? I came up with 6, but I’d love to hear your thoughts – let me know on either our Facebook page or via email from the website.

1. Cash for emergencies
The number one source of financial pain I see is credit card debt. Now credit card debt can build up for a number of reasons – the search for happiness through a little retail therapy is common. But often it tips from manageable to a problem when a big unexpected expense comes in – the car breaking down, the fridge dying, or a big bill.
Without having some cash up the sleeve, the credit card becomes the only solution, and the downward spiral begins.
So the starting point in our financial fundamentals has to be having some cash saved to act as a cushion when life throws you the inevitable curve ball. Now if you have a mortgage, those savings could be in redraw or your offset account – it doesn’t need necessarily to be hived off in its own little bank account. But just having some cash available is essential.
How much? Well, of course, it depends on your circumstances. A family with 4 kids would need a larger stash of emergency cash than a single person. But as a starting point, think of getting $5,000 put aside. This will cover most things, like a new fridge, excess on insurance, car repairs, or a flight at short notice to see a sick relative.

2. Know what you spend
I’m well aware that budgeting is not a topic of fun and joy. But when you talk about financial fundamentals, having a handle on what you spend just has to be included.
Most people in the Financial Autonomy community are in their 30’s and 40’s, but at times I get people in who are about to retire, usually referred by other clients. In developing a retirement plan, one of the first question I have is, how much income do you need each year to fund the retirement you want?
I get a lot of blank stares.
So then I ask, okay, how much are you spending now?
More shrugs of the shoulder, looking at the partner, them looking blankly back – they simply don’t know.
Having had these sorts of discussions for about 19 years now, I can tell you that only about 5% of people actually have a detailed budget. Far more though have a less detailed plan that might look something like:
We pay $2,000 a month to the mortgage ($500 more than the minimum)
We put $1,000 a month into an account we use to pay bills
We put $500 each month into a savings account that we use for things like holidays
And we spend the rest on normal living
They haven’t broken it down into how much they spend on coffee or electricity but through trial and error, they’ve found what works.
This sort of money plan is totally fine, so if the idea of a detailed budget is about as hard to swallow as wasabi on a hotdog, put together a plan along this line. The important thing is to have a plan – know where your money is going. This is absolutely fundamental to financial success.

3. Protect
Another unsexy one, but having insurance in place is another basic financial fundamental.
Because unwanted things do happen from time to time, and we don’t know when or quite what they’ll be. That’s tough to plan for financially. Insurance premiums, however, can easily be planned for, and then all that uncertainty is someone else’s problem.
So if you’re a home owner you should have insurance in case the house burns down, rare though that is. Most people should have Income Protection insurance, since it’s your ability to earn an income that is the enabler of most of the other things in your life, from putting a roof over your head to food on the table, to clothes, gifts and holidays. Health insurance, car insurance, life insurance – everyone’s needs differ, but you should certainly give some thought to where financial disaster could hit you, and explore how you can pass that risk onto someone else via buying some insurance.

4. Eliminate debt
Now I should clarify here that not all debt is bad debt. Debt used to buy something that will increase in value is often a sensible way to build wealth. Not many of us could buy a house without taking on debt.
But from a financial fundamentals perspective, getting rid of unproductive debt should be a priority. So we’re talking here about credit card debt. We’re talking about debt for your car. A personal loan for a holiday or wedding. These must be at the top of the list as you get your financial fundamentals in place.
Start with the debt that has the highest interest rate, and once this is repaid, focus on the next one.

5. Save
Finally, we’re onto the more positive financial steps you should take. You’ve got your emergency cash, you’re in control of your spending, your insurances are in place so you’re not susceptible to a big financial disaster, and you’ve got rid of the unproductive debt that had been weighing you down.
Now it’s time to start putting some money aside to begin the move towards financial autonomy – having a choice in life.
My suggestion is to automate your saving as much as possible. On the day you get paid, have your savings automatically put into your savings account. This might be an offset account if you have a mortgage, or perhaps an online savings account that pays a bit better interest than a normal transaction account.
The main thing is, don’t take the approach of – “I’ll save whatever I have left over each fortnight”. This is a plan destined for failure. Save first, then spend what’s left.
It might also help to set some goals. “We want to have $10,000 in the offset account by the end of the year”, for instance, can be really motivating and helpful to you making progress.

6. Invest
And the final financial fundamental, and the one I think is the most fun – investing. Putting your money to work and having it earn more money, without you having to lift a finger.
There are of course all sorts of ways you can go here, and if you haven’t already downloaded our Investment Fundamentals toolkit, I’d strongly urge you to grab that from the web site.
Probably the most important thing to recognise in the step from saving to investing is that investing involves a time commitment. While you’re saving, your money’s typically in cash, available at any time. But when you start investing, you become exposed to market fluctuations, and that means you need to be prepared to leave your investment alone, to give it time to perform. The reward for this patience is growth and income. Ultimately this produces passive income that can support you in life.

So to summarise, my 6 financial fundamentals are:

  1. Cash for emergencies
  2. Know what you spend
  3. Protect
  4. Eliminate debt
  5. Save
  6. Invest

I hope they help you take some huge leaps forward in your pursuit of financial autonomy.

Interested in achieving Financial Independence? Our Invest in Shares with Confidence online course could provide the tools and framework to enable you to succeed. Learn more here.

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