This might sound harsh but it is true.
If during a typical 40 year working career, you have been unable to build the habits and process to be financially responsible it is almost a certainty that you will continue to be this way during your retirement.
Retirement should involve you spending your golden years doing the things you have always wanted to do and the things you love to do. It should not involve you suddenly hitting age 70 and realising that you have run out of money and your lifestyle is now completely dependent on the aged pension.
Building sound financial habits is the foundation for wealth accumulation over your lifetime.
Most of the advice I provide in the space is simply, things that most people instinctively understand but go out of their way to avoid. It is a classic case of self-sabotage.
Much like how I know that eating an entire meat lovers pizza, garlic bread and a bottle of coke is going to ruin my diet but I do it anyway after a tough day at work.
The essence of financial responsibility is to live within your means, pay down debt as fast as possible and invest your excess cashflow into a diverse portfolio of assets to build your wealth over time.
Living Within Your Means
Just because you can afford the payments on a luxury car or the bank has approved you for a personal loan to go on an overseas holiday (or at least pre-covid), it does not mean that it is a smart long term decision for you to do so.
Often the wealthiest clients have one thing in common; looking at them y
ou would not be able to tell their level of wealth accumulation. It is not uncommon for these clients to drive a 10 year old car, have paid their home off early through only purchasing a home which they could afford to make additionally repayments and they almost never borrow money to buy anything other than appreciating assets.
Paying Down Debt
Struggling with debt can be downfall of not only individuals but also some of the now former, largest companies in the world. As mentioned above, not only is it essential
for you to only borrow money for assets but crucially it is essential to ensure that you are able to repay this loan and the interest as soon as possible.
For an individual making $80,000 a year who has a $10,000 credit card debt, they don’t need to make $10,000 to repay this debt. They would actually have to make closer to $12,200 to repay this debt once income tax is taken into consideration. This is with out taking into account any interest payments or capitalisation on this debt!
As Warren Buffett has famously stated on debt “If you buy things you do not need, soon you will have to sell things you need” and “You can’t borrow money at 18 or 20% and come out ahead.”
Invest A Diverse Portfolio Of Assets
The typical Australian holds their wealth in 2 main assets, the family home and their superannuation. Now the family home is
the family home and is almost impossible to diversify away risk but within your superannuation you are able to do.
There are no free lunches in investing but in the field of finance it has been well established that holding a portfolio of diverse assets with low relationships to each other will provide you lower volatility (ups and down) and help protect your capital over the long term.
How to become more financially responsible today
The first step is to have a clear picture of your income and expenses. This means understanding where every dollar is going and coming from. A quality budget is the building block which financial responsibility is born from. Governments, global companies through to small businesses understand the importance of a budget and you should do the same. This is essentially critical if you are a small business owner.
While having a plan for where your capital is to be allocated is essential, it is also crucial that you remember to allocate money for the fun things in life. Whether it is holidays, great restaurants or fishing, it doesn’t matter, the important thing is that you are spending on your hobbies from money that you have designed for these purposes.
The best time to start becoming more financially responsible is today
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