5 Simple levers that create financial success

What you can do to have financial security, easily and without high cost!

Bookstores are full of authors and their books on getting rich. Many preach complex and radical change to get there. The financial planning industry offer ‘what to do’ in paternalistic, narrow and often expensive, convoluted terms. Brokers, bankers and accountants are similar. All are well intentioned but the problem is that for most people, these options aren’t all that palatable.

So what do you do? Most people end up purchasing products from institutions and making investments across several unrelated decisions. Rarely are they considered together and scant regard is paid to the risks taken each time. We tend to follow what our parents did (as if the future for us will be the same); we accept off the cuff advice from others and are influenced by TV much more than we care to admit. Oh yes, don’t forget that new source of wisdom….the internet.

The fact is there are just a few key “financial levers’’ that nearly all of us have at our fingertips which can make a massive difference to our future wellbeing. These are not complex or expensive; spending money and time on purchasing sophisticated investments or amazing property deals isn’t required. You will have to be content doing other things in life, instead of playing with your money. Here they are:

Lever 1: Spend less now. Yep what our parents always told us is true. The key, is not a budget that you won’t end up following, nor going without the things you really enjoy (even if your partner thinks they’re a waste of money). Just modify what you do. For example, you may like new European cars, so put up with the shape of the headlights for an extra two years (no one else will care) and purchase one near-new (no one else will know). Repeat for the next 30 years and you will add a huge amount of funding for extra living and fun that will last decades down the line.

Lever 2: Spend less later: Really? After years of slogging it out this is what I will have to do? Effective but when less later means less for at least 20 years, it’s not so great. Those over 45 can expect at least 20 years not working but will still be healthy and active. Those under are likely faced with periods of unemployment and several careers as the world changes. Treasury predicts that over 80% of couples won’t have enough money for this time in life. Instead they will be depending on their children and welfare for basic needs, let alone the things they enjoy. Not fun, but sadly most will end up here. For people who live an affluent life-style now, they will have to get used to turning right (not left) into the plane and on a budget airline. Holidaying in van parks or with relatives sound good? International Roast instant coffee is your new form of cappuccino!

Lever 3: Make my money work harder. Not me, just my money. This means learning from 50 years of history and sitting on your hands. And yes do it cheaply! It also means understanding that the key to enjoying plenty of cash income in the future is mostly about how you allocate what you have now, across the available areas of investment; then sticking to it like religion for a very long time. This is not something fund managers, stock brokers or real estate people readily acknowledge. They make money by making you believe that the key is to buy and sell many times. With their approach come higher costs, hassle, angst and more risk. No factual evidence exists to support their claims. But even if there was, why take a riskier road to the same destination? Be warned though, passive rebalanced asset allocation is dull and boring and requires you to turn off TV when things look glum.

Lever 4: Make your money work smarter. This is all about financial engineering but not ‘over engineering’ by being too clever. Consider tax, inflation and legal structures. Protect your assets from creditors. Manage cash flow well. Keep costs of financial products to a minimum. Beware of the maxim “Pay off your mortgage first!” Not always so. Aged under 45? Check this out carefully, as often a mix between paying down your mortgage combined with before tax contributions from your salary to your Superfund, produces a better end result.

Lever 5: Work longer. Hands up for this one. No takers? An extra 2 years working often adds 5+ years to a decent income after working life has ended. Get the other 4 levers right and the only work you will be doing longer is pursuing that interest you really wanted to do for years, but never could because it paid so little. But for most Australians working longer will be the only option they have in their later years.

It’s no mistake that the two most powerful levers are at the beginning and end. The first is the most positive and easy to do once you get into the swing of finding money by modifying how you live at the edges. Lever 5 is a last resort but also equally powerful. Try not to mess up the other four so that you are not forced to rely on this one. Number 3 packs a strong punch too when done properly. Four is just sensible stuff we should all do.

Above all, stop thinking that a complex investment, particular property or borrowing money through things like SMSFs is the solution. It’s not. It is for those supplying them, but for their future, not yours. Likewise it’s not how much you earn or have that creates long term financial security, there are just as many high income earning future paupers as those on low incomes. It’s what you do with it that counts and your attitude towards money. Focus on this plus the 5 levers and you can’t go wrong.