By Michal Bodi
When was the last time you challenged your beliefs? You know, the ones you grew up with...especially when it comes to using money. Because I think it's really easy NOT to manage your money differently to people around you. Instead, just simply do what everyone else is doing.
The majority of people behave like everyone else. Consequently, most people around you can't help you - they've done more money mistakes in their lives they would ever admit to...
But you don’t have to copy what they do.
When you’re young, living at home, you have less commitments and more flexibility. If you don’t want to waste your early years, learn your good money habits early, your life will be full of options later on. Options like doing what you love (owning your own business, living closer to your work, going on holidays, being home early every night so you can read your kids a book before they go to bed). Isn’t that what you want to remember, spending memorable moments with your loved ones?
In order to get there, you need to stop living for today only.
Although it sounds exciting and hippy, it will only create late start and feeling of regret down the track.
Instead, start looking at your life in ten-year blocks. This means looking at a consequence of every decision you make with your money - what will it be in ten years’ time?
For example – How much do you spend on coffees, lunches, dinners, drinks, parties, clothes every week? Let’s make assumptions, but be fairly conservative, shall we?
One coffee a day ($4)
Three lunches a week including weekends ($60)
Trendy café brunch on Saturday ($20)
Poached egg and smashed avocado - some say eating this is the reason you can't buy a house...
One dinner a week ($40)
Drinks on the weekend ($100)
One new lifestyle expense (clothing, shoes, new gadget, holidays) per month ($150).
The assumed expenditure totals at staggering $282 per week! Once that $282 leaves your wallet, it’s gone forever. The opportunity you had is lost.
Now, let’s imagine you’ll keep doing most of those things, but only spend $132 per week – meaning you save, deduct and invest $150 every week.
Starting at zero, investing in any share index fund, in ten years you would end up with a portfolio worth over $145,000!
Yes, I used moderate assumptions and averages. But don’t get distracted. Please notice the critical difference in what happened – you took action.
You didn’t over-analyse when and how, the marginal differences between products, portfolio construction and all the hundreds of variables outside your control.
Someone has influenced you to the extent that you simply took action.
The automatic direct debit which was implemented and kept being debited to fund your portfolio has created the options most people around you don’t have.
Many young people say that it’s hard to buy a home in Sydney. It can be, if you do what everyone else around you is doing. But if you start this exercise at 18, you’ll have some options available to you at 28, right?
Or you may not want to buy a home, but you can invest this money for income and have a perpetual passive income portfolio generating over $7,000 per year (whilst still fully preserving the capital). Sounds like a great way to fund a ski-trip to me. There’s no extra work required. Ever.
Everything you’ve just read is simple and easy to understand. But is it easy to do? Theoretically yes, but practically no way!
Three main reasons:
- We procrastinate – it can take years between us thinking about something and actually doing it.
- We get lost in details – looking for the best time to invest, the best investments, the best performance.
- We stop - even simple concepts can be hard to do consistently for a long time – patience and discipline play huge roles and require constant encouragement
All predictable and I would argue also avoidable. If you hire objective, third party advice and coaching professional.
What are you planning to do with your opportunity? One thing is clear – it’s never too late to start.
Will you overthink it?
Michal Bodi is a Senior Financial Planner at Sydney Financial Planning based in the Sydney CBD