Setting your goals is also about discovering possibilities. You can turn your daily cup of coffee into $70,000. But first, you need to decide what you want from your money.
Have people been telling you for as long as you can remember that you need to set goals?
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Your parents might have been among the first and your teachers were almost certainly next. There was probably a sports coach or two, then you finally entered the workforce and your boss – or better still, an outside consultant – ran sessions on goal-setting.
They probably said they had to bee S.M.A.R.T. goals too if they were to be effective: Specific. Measurable. Achievable. Realistic. Time-bound. Of course, in many cases that did not happen and the goals became meaningless.
All of these important people in your life meant well and no doubt were passing on the lessons they had been taught: “If you don’t have a goal, how can you achieve it?”
It’s a fair point, but a vital step is missing. How do you know which is achievable? Who helped you imagine a whole world of possibilities before trying to lock you down to choices that were obvious, probably too easy (because you didn’t want to fail) and like everyone else’s goals?
Most people tackle goal-setting in a way that excludes a lot of possibilities due to the way our society (and family) has conditioned us. Australia hasn’t been a society that celebrates dreamers, inventors or entrepreneurs, but maybe that’s starting to change as we go through the digital revolution.
So what about you and your long-term dreams? Has anyone ever spent time with you to explore your own possibilities? It is an incredibly difficult task to be fully honest with yourself, and your partner, to explore your hopes and dreams in a meaningful way. In my experience, it nearly always takes a trusted person to peel back the layers to help reveal the real drivers and motivations that sit inside us.
Friends sometimes fulfill this role, but what they usually aren’t so good at is then putting you on the pathway to achieving the possibilities – or keeping you there. One aspect to consider is how to fund the possibilities you imagine. Simply, can you afford to do that?
“That” could be taking a year off work to study, the trip of a lifetime, reducing your working hours or moving to a job with less pay (and fewer pressures). Or maybe it’s to build an investment portfolio that “only rich people have” and that you always thought was out of reach. Maybe it’s to help your children enter the housing market.
Financial advisers do this for a living. They can take you through a journey of discovering what might be achievable for you, and I don’t just mean financially.
Depending on their style, they often start from helping people define what matters most to themselves, even discovering their “why” or driving motivation in life. They help people verbalise their ambitions and dreams, then help to show them the possibilities to create outcomes beyond what they imagine were achievable.
Great financial advice doesn’t limit you. But it often unshackles you to achieve things that would never have been a S.M.A.R.T goal, because you didn’t know they were possible.
Brad Fox | CEO, AFA
Reaching your goals doesn’t have to be about depressing denial. By deferring spending now, you’ll enjoy rewards you can look forward to for many years to come.
Stop for a moment and think how much you have earned in your working life. It’s probably a fair chunk of money. What do you have to show for it?
Don’t despair if the answer is, not much. The problem may be nothing more than a lack of “future focus”. Here’s the “eureka” moment you need – anything you are able to save now, you will be able to spend later. This means there will be something left to spend later, when you are no longer working and still playing.
It’s about deferred spending rather than depressing denial. And you’ll enjoy rewards you look forward to more anyway. Delicious anticipation!
But, as I always say, you need strong motivation to resist instant gratification. Shiny, yummy, consumer temptations come at us every day and if we are able to walk blithely on by, most of us need a very good reason.
Before we get into that, it’s vital you realise the damage you could be doing with seemingly innocent spending. A dollar here, a fiver there… they’re called micropayments, but before you know it, they can add up to major spending.
Indeed, these could be what’s breaking the bank – and derailing your future.
Previous generations had it right when they coined the phrase “take care of the pennies and the pounds will take care of themselves”. Today, the average person can easily spend $1,200 on coffee a year, perhaps $700 on a snack to go with it, a possible $500 more on, say, impulse buys at the register and another $500 or so on movie rentals, song downloads, apps and games. That gives us a grand, scary total of nearly $3,000 a year.
But you probably have no concept of how much this is actually setting you back. Here’s what that money could do for you instead.
If you saved just the money you might spend on coffee – $100 a month – in an account earning six percent interest (a long-term average), in 25 years you would have close to $70,000. Better still, only $30,000 will have come from you; the rest will be the courtesy of the bank.
But wait ten years before you start and, to reach that same balance, you’ll need to save $240 a month – so you have to cut out far more than just coffee. You’ll have to scrounge $43,000 of your eventual $70,000 yourself. Delay another decade and you’ll need to find an eye-watering $1,000 a month to stash away $60,000 of your $70,000 cash.
NO DAILY COFFEE
SAVINGS A MONTH
SAVINGS IN 25 YEARS
This is your new best friend, compounding – the sheer magic earning interest on interest – in action. It means the sooner you start squirrelling away money, even small amounts, the easier it is to amass a lot! Also, it means you will need to rely less on big returns and the extra risks they demand.
While micropayments are doing nothing but holding you back, micro-deposits significantly advance your progress towards your hopes and dreams.
So in the immortal world of the Spice Girls, tell me what you want, what you really, really want. You’ll need very clear short, medium and long-term goals to overcome the temptation to simply spend what you earn when you earn it. And whatever timeframe, repaying debt puts you in the realm of financial geniuses. When you’re in the red and paying interest, compounding is working against you. Ditching debt gives you a risk-free, tax-free effective return equal to your interest rate (more about that in a moment).
Here are some ideas to get your big life goals underway:
IN THE SHORT TERM:
1 – 2 YEARS
Think fun! A holiday in Thailand next year…or a more expensive, longer sojourn the following year. A new couch. Maybe even a new kitchen. These are the sort of goals you should focus on in this period – the relatively instant pay-offs. These are beautiful money targets, because they make you feel like you are really achieving something. (Whatever you do, never use credit for something experiential, for which you’ll have nothing to show afterwards but photos.) Also, cast your mind towards the future: pay off a credit card without forking out a fortune in interest, or clear that car loan years early.
IN THE MEDIUM TERM:
In this period, your car might need replacing. Plan this far ahead and – rather than automatically borrowing for what is one of the worst investments – you could pay cash. Put aside $140 a fortnight and in five years with a top savings account, you’ll have $20,000 to buy a car upfront, then paying about $27,000 including interest for it over five years, or $205 a fortnight. In this timeframe you might also like a new kitchen. Same deal.
IN THE LONGER TERM:
5 YEARS PLUS
The ultimate goal for all of us should be to retire with no personal, or non-investment debt. The other holy grail of retirement is a big-enough asset base – super, a separate share portfolio or property for example – to generate an income adequate to replace your salary (or the recommended two-thirds of it).
Let’s talk a little more about your potential debt freedom. Make this a priority and you will be laughing all the way to the bank (or usually far cheaper home lender, the non-bank).
If you have an average $350,000 mortgage debt at a five per cent interest rate and stick to the banks’ 25-year repayment schedule, interest means you’ll fork out an extra $264,000. But if you can manage to throw just $100 more a month at your mortgage, you will save more than $26,000 and clear your debt three years early. If you are able to repay an additional $500 a month, the savings leap to $93,000 and nine years.
It’s also possible to make these same savings free. Those non-bank lenders I mentioned earlier typically offer mortgage interest rates at least one percentage point cheaper than the big guys. By simply switching your loan to them and keeping your repayments the same, you slash your interest bill twice: through under-cutting and over-paying.
All of a sudden, you’re putting in nearly $200 more a month and it’s not costing you a cent above what you’re used to paying. This pain-free strategy slashes your interest bill by almost $100,000 and brings your debt-freedom date forward by five-years. You can find your own potential time and money savings on my free Mortgage Freedom Date calculator.
Beyond all these savings, when your mortgage is repaid you will also have possibly $2,000 extra each and every month with which to achieve everything else that you want.
“Hang on,” I hear you say. “Isn’t super supposed to be taking care of my retirement for me?”
It’s crucial you realise that mandatory 9.5 per cent super contributions are unlikely to sustain you for the whole of your sunset-years. The industry body that calculates these things, the Association of Superannuation Funds of Australia (ASFA), says a couple needs an annual income of $59,000 to fund a “comfortable” retirement. Comfortable is defined as including some leisure and recreational activities, occasional clothes and other shopping, private health insurance, and a bit of travel. It’s far from lavish. ASFA also assumes in its calculations that you own your own home.
Debate is ranging about what kind of super stockpile you need to generate this kind of money. A million dollars is a figure often bandied about, although some pundits are disputing whether this is enough at current rock-bottom rates. Certainly, you’d need an annual investment return of six per cent for $1 million to yield the ASFA income estimate. But that assumes you never touch your fund itself and simply live off the income, so in reality you could get by with far less.
My advice is to be alert but not alarmed – and simply target your biggest possible balance. There’s a great calculator by the regulator that lets you project your super balance and the huge benefit of additional before and after-tax contributions. Again, it’s all about compounding, so start early. And watch like a hawk that your fund’s returns are high and it’s fees low. You want to make this as easy as possible on yourself.
Now you’re in the know, be sure to include repaying your mortgage and building a nice little nest egg in the list of your personal money goals (below). Write beside each one the date you’d like to achieve it. Then put an estimate of what the goal will cost and how many pays until your target date (so if the target date is five years away and you are paid fortnightly, multiply five x 26). The moment of reckoning is to divide the cost by this number of pays to find the amount to put aside from each one.
SHORT-TERM GOALS 1 – 2 YEARS
|Goal||Target Date||Cost||Number of Pays||Savings per pay|
MEDIUM-TERM GOALS 3-5 YEARS
|Goal||Target Date||Cost||Number of Pays||Savings per pay|
LONG-TERM GOALS 5 YEARS+
|Goal||Target Date||Cost||Number of Pays||Savings per pay|
THE QUESTION IS, CAN YOU AFFORD ALL THIS?
Your personal financial situation, otherwise known as your budget, basically comprises four elements – your income, fixed costs, discretionary spending and saving. You can look at your payslips and bank accounts to see how much income you receive after tax each pay period, remembering to add in any that come in cash. And don’t forget, this should grow as you strive to get in control of your of your finances. You can also use many strategies to cut your fixed costs and discretionary spending.
Get wise. Using credit to continually spend more than you earn has the greatest potential to sabotage your future. To be a financial success, you don’t have to be particularly clued up, but you can’t be clueless either.
What of micropayments, the guilty little pleasures that can inflict seriously big financial pain? I am not suggesting you abstain completely, because this is the stuff that makes life a little bit more fun. The key is to figure out what you are spending and how much you can actually afford to spend. Then make this amount – and this amount only – your designated fritter fund.
A good trick is to count down this cash – or virtual cash. If you have an available $40 a fortnight, keep track of what’s left either on a bit of paper or online.
When there’s no more money for incidentals, there’s much you can do to sweeten your days that’s always free. Think picnics in the park, home cinema…and your waistline might also benefit from treat relief.
If you still can’t afford everything you want, you may have to push back the target dates of some goals. Bear in mind, it’s advisable to put at least 50 per cent of your available money towards goals that are going to increase your net worth. That means, if you carry over any credit card debt from month-to-month, have a personal loan or have a mortgage, paying these off should be at the very top of your priority list.
They should be in that order, too, assuming the interest rate is highest on your credit card and lowest on your mortgage. But the decision is yours whether to use your full 50 per cent to pay all your debts off first, then start channelling the freed-up money into super and investments, or whether to – from beginning – pay down your debt and invest at the same time. The right choice for you will come down to your tolerance for risk.
No one should want money for money’s sake. You should want it for the options and opportunities it brings to secure you and your family the life you dream about.
Surely that’s the motivation to get a handle on your future?
WORDS OF WISDOM
“To avoid fraud, never write cheques payable to your adviser if the money will be used for investments. Make the cheque payable to the product provider instead.”
NICOLE PEDERSEN – McKINNON
THE REALLY SIMPLE GUIDE TO MONEY | OCTOBER 2015
The information provided in this page is general in nature and does not constitute personal financial advice. The information has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any information you should consider the appropriateness of the information with regard to your objectives, financial situation and needs. You should seek independent advice from your financial adviser before making any decisions.
AUSTRALIAN MORTGAGE AND FINANCIAL ADVISERS (AMAFA)
Phone: 07 3378 2056
Fax: 07 3378 2069