As regular listeners would know, professionally I am a financial planner and own a business called Guidance Financial Services. Our stated purpose as a financial planning business is to eliminate worry for our clients about their financial future. That begs the question, why do people worry about their financial future, and what simple ideas can you implement to alleviate at least some of that worry?
What causes financial worry?
There are four issues that I believe contribute to the stress around personal finances:
- The need to be self sufficient
- No one to talk to
Let’s unpick these.
Australia’s financial system is complex. Take superannuation as a starting point. You’ve got concessional and non-concessional contributions, transfer balance caps, account based pensions, binding death nominations, and plenty more. Even for someone like me who looks at this stuff everyday, there’s a lot to keep abreast of. And that’s just one thread of your financial life. Layer on top of that your mortgage, savings, investments, and perhaps inheritances. It’s a lot. With all that going on it’s hardly surprising that for many people they arrive at a sense of overwhelm, the classic cause of anxiety.
Jargon forms a part of this complexity with those superannuation examples that I’ve just given a prime example. The finance industry thrives on unique terms and indecipherable acronyms that seemed designed to exclude rather than help. It’s something I’m very mindful of in the podcast and gaining choice email, the need to explain things in ways that people who work outside of the financial services industry can understand.
Another feature of Australia’s financial system is the need to self fund your retirement. In most European countries and in the past here in Australia, retirement is funded through government pensions, something largely taken care of for you. But today the age pension is increasingly a safety net type payment with most retirees needing extra sources of income to live a comfortable life. Whilst this system provides great flexibility for us as individuals, there are many people out there who find this responsibility a significant weight to bear.
The final source of worry in personal finances is the not unreasonable inclination towards privacy. Discussing money with your friends and extended family can cause problems. It might be envy. Likely your friend earning $100,000 a year doesn’t want to hear about the challenges you face earning $250,000 a year.
I have clients for whom financial stress is created by family members demanding gifts and handouts on the basis that they perceive our client to be rich in inverted commas, a status that’s entirely relative.
So we keep our finances private, with the resultant problem being that we can’t talk through issues in a full and frank way. Outside the financial sphere, how often have you talked through a problem with a friend, partner, perhaps work colleague, and even if they say nothing at all, just the act of explaining your issue out loud can lead you to clarity. For most people the ability to have these sort of discussions when it comes to personal finances is just impossible.
What are some simple ideas to help eliminate of these worries?
So what are some things you can do to reduce the mental energy drained through financial worry?
The fundamentals of good personal financial management are pretty simple:
- Spend less than you earn
- Save your surplus and invest it (which could include paying off your home loan)
- Have a safety net in place – cash buffer, insurance
- Never go “all in” on anything financial
The key to spending less than you earn is having a cash flow strategy. If you’ve read my Financial Autonomy book you will know that I canvas six different cashflow strategies, having recognised over the years that it’s a complete fallacy to suggest that there is one optimal approach that works for everyone. Tracking every dollar you spend is not sustainable for almost all of us, but having some sort of way to ensure that you have the money necessary to pay your bills, groceries, and other expenses essential to life whilst also building financial security over time, is a must.
Meshing with your cash flow strategy should be opportunities to automate wherever possible. So for example if your cash flow strategy is the bucket approach, then you would automate to have fixed dollar amounts go into your bills account and perhaps your holiday or savings accounts each time you get paid. This removes the need to think about how much should go to each and helps avoid the temptation to overspend. Repayments on loans, and investments can all be automated. You may even want to get some of your bills on direct debit to further de-stress your life.
Along similar lines, if you receive income that’s a bit lumpy, for instance annual or quarterly bonuses or commission payments, think about creating a rule for yourself to avoid having to reconsider what to do with these funds each time they come in. So for instance it could be that your particular rule upon receiving a bonus is that half gets paid off the mortgage, a quarter goes to your holiday account, and the rest is kept for a bit of a splurge. Having a rule like this in place means that the decision you made in the first place to cut up your bonus in this way eliminates the need for decisions in the future. Your life has been simplified.
You can make similar rules around your investments. Let’s say you add $2000 a month to your investment portfolio. If every time you do this you have to decide which shares you were going to buy, you’re setting the groundwork for ongoing mental stress, and also likely building in inefficiency, with the natural human inclination to pause buying new investments when markets are down, despite the mathematically obvious reality that buying when prices are down is exactly what you want to do to maximise your long term returns. Instead use your investment platform to automatically allocate new money to your chosen investments. Make a decision once, and then don’t have to think about it again.
Sometime back I shared on the podcast a strategy I found really helpful to reduce stress and that is to think through worst case scenarios. Let’s say a source of financial stress for you is concerns about losing your job. By acknowledging this risk and then thinking about how you would respond should it come to pass, you can often remove that source of stress. So for instance it could be that you decide to boost your cash reserves, hold some shares that could be sold if the cash reserves ran low, and undertake a short course now to ensure your skills remain relevant and therefore your prospects for finding a new job strong.
With this plan in place you can put that issue to bed and move forward with confidence.
A final tip to help you de-stress your personal finances is to avoid the trap of feeling that you need to optimise for everything. Changing banks so as to get half a percent more on your savings account, something that might add up to perhaps $50 a year, is quite frankly not worth the effort and energy. Likewise with your superannuation. If you’re in one of the large funds then likely your fees are quite competitive. Shifting to another fund for a small cost saving is quite possibly more trouble than it’s worth. Particularly when there’s every chance that the fund you’ve just left will cut their fees in six or 12 months anyhow. Layer on top of this the reality that inevitably, we get what we pay for. Switching insurance companies to save $200 a year might seem clever but why is that new insurance policy cheaper than what you had? What is not covered with that new policy that had been covered under the old?
Now of course this doesn’t mean that you should never change providers, but if you’re looking for opportunities to destress your financial life, research things once, make changes as necessary, and then leave it alone for at least five years if not longer.
If you’re new to the podcast you may not be aware that in addition to a podcast episode coming out every Wednesday, we also have an email going out first thing Friday morning each week called Gaining Choice. In it we look at current investment market data, the latest podcast and blog releases, a brain food section of web articles that caught my eye, and anything else going on that we think may interest the financial autonomy community.
To add your name to the list simply go to financialautonomy.com.AU/gainingchoice. It’s free to join and if you find it’s not your cup of tea, easy to unsubscribe.
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