5 Realistic Steps To Win Financially

Many people would say there are more than five steps. Others would say just one or two things could get you on top financially. Both could be argued, but after reading many blogs, living out all of the five to some degree, and doing a lot of thinking, I have come up with my five realistic steps to get on top, stay on top, and win financially. To set the ground work I just want to say that by “on top” and “win” I mean not having to worry about money. I am not talking top 1% or 0.1%, I am talking financial stability to a level where you don’t have to worry about money to live a comfortable life.

Reading the blogs articles and books to come up with these five was easy. Almost everyone can read – I encourage you to read as much as you can as you will learn a lot, although you sort of already are given you are reading this. Living out some of the lessons is a bit harder, and sets the bar higher. You have to want to make changes and find the will power to start and continue. But it is the thinking and reasoning about why certain ideas or thoughts work that I like to do. After all, life without thinking is boring! So after all that thinking I give you my five realistic steps to win financially:

1) Education & Job(s) – Getting Money In

Whether you look at government stats, news websites or even cool infographics, it is easy to find a link between better education and a better job (well better in the sense of earning more money at least). I hope this information does not take you by surprise. It is for this reason that the number one step on my list is getting a good education and a good job. You can save 100% of your income, but if you aren’t earning much it will take a long time to build a large nest egg.

If you want to save $50k in a year (as of 2016 in Australia) which of the following options sounds easiest (ignoring any special salary sacrifice or other tax mumbo jumbo)?

• Saving 25% of a $200k net income ($334k gross)
• Saving 33% of a $150k net income ($236k gross)
• Saving 50% of a $100k net income ($145k gross)
• Saving 75% of a $67k net income ($90k gross)
• Saving 85% of a $59k net income ($77k gross, which is the national average)
• Saving 100% of a $50k net income ($64k gross)
• Saving 132% of a $38k net income ($45k gross, a common lower end office support salary)

I know people keep talking about student loan debt, and I know that some job salaries vs education cost are not as good as others. However I believe there is no denying the link between a good (which does not have to mean expensive) education and earning potential.

My number one step: get a good education and a good job.

2) Saving, Budgeting – Keeping Money In

So, now that you have an education and a good job, the number one mistake people make is thinking “I’ve made it”. In reality, you are only one fifth of the way there. I could do another table or graph about income vs expense but everyone knows if you spend more than you earn you go backwards irrespective of how much you earn! That is why my second step to getting on top financially is to save.

For many people, saving starts with a budget. I would love to give you some ground breaking advice around setting and sticking to a budget. Unfortunately I am not good at talking about what I have little knowledge about. I’m sorry to say that I have never made a budget. Not one. Actually I went to a couple of finance seminars that forced me to create a budget. It lasted all of about one day before it became yet another piece of paper sitting under a pile on my desk waiting for the day it would once again feel the warm glow of sunlight shining down on its weary grid-lines.

Amazingly I have always had the mindset of “save as much as you can” and “buy only what you need” (occasionally replacing “need” with “can justify”). As I talk about in my how we made our first million accidentally post, I have been a saver from a very young age. I will talk more about saving from a young age at a later time. For now, I thought I would just direct you over to two budgeting sites that I have found interesting and filled with what seem like good sensible grounded ideas around budgeting. Head on over, had a read, and I hope their budgeting advice helps (I am sure it will more than I can):

• Control Your Money (https://controlyormoney.wordpress.com/)
  • An Australian blog written by an accountant with over 25 years providing a budget methodology that does not require recording of every expense. Sounds like a good start to me. Not too many posts, but seemed to be more about the budgeting than having a trendy internet blog.
• Canadian Budget Binder (http://canadianbudgetbinder.com/)
  • This blog is about much more than just budgeting (there is even a recipes index on the site!), but also seems to contain a wealth about living within your means. This makes it a perfect place for step number two.

My number two step: be a disciplined saver with a good budget if required.

3) Location – Setting The Bar

When I talk about location, I am talking about the suburb, city, town, state, district and/or country that you live in. The cost of living in some countries is extremely expensive, while in others it is absurdly cheep. I went out for dinner with a few friends a few nights ago and the bill came to about half of the gross national income per capita for Togo. This was a single meal for six people, or to look at it another way, one week of dinners for myself. At that rate I would blow through an average annual Togo salary in less than two weeks.

The point I am trying to make here is relative costs not just expensive cities. If you have to pay $5 for a Coke in Australia when that same Coke costs $1 (equivalent or less) in Togo then it is easy to feel like you are being ripped off. But when you consider that you can buy 570 Cokes with a years Togo salary at their price vs well over 10,000 with an average Australian salary even though the cost is five times more, the relative cost (to income) is much less! This was the realisation that made my mind starts to whir into motion.

Think about that for a while. You will realise that if an Australian bought the same quantity of soft drink cans as a Togo resident who spent 100% of their income on soft drink, that Australian would still have about 95% of their income left!

This is what I am talking about with using location to set the bar. If you live in an expensive city you have more opportunities to be frugal, more opportunities to earn more, and more money that can be allocated to discretionary spending, or hopefully to investing. It doesn’t matter is an item costs twice as much in an expensive location if you are earning ten times more!

What makes this even better is that not everything will cost more. Houses will cost more, anything that involves human labour will cost, more, but importing something from overseas won’t. Buying a car may be a little different, but will still be a favourable ratio when compared to your income. The cost of a car is not going to double in price between cities, even if average house prices do. If they did people would just buy one in a different city and drive it back.

How about an example to finish. In Sydney, Sarah earns about $160,000 (about $2,100 per week after tax) where the current median house price is around $1,000,000 (weekly 80% LVR loan payment of about $870). About 100km west in Katooma is Kate. She earns only $80,000 (about $1,170 per week after tax), but benefits from a median house price of around $500,000 (weekly 80% LVR loan payment of about $440). Initially Kate would look to be in a better position when buying a house. She would only spend 38% of her income on loan payments where as Sarah would be spending 41%.

When you start to add in expenses that don’t change based on city (like the cost of a new Toyota Prius, $40,000 or $179/week, and a Mazda CX-5, $35,000 or $157/week) the percentage of income spent on payments swaps around. Sarah is now paying 57% of her income each week, where as Kate is now up to 66%! The specifics can be manipulated easily, but the idea is there around increased income along with only some increased costs.

I think I have rambled enough on this one. I hope you get the idea that not everything in an expensive city goes up the same percentage amount, but if your income does then you are in the money!

My number three step: live in an expensive city to supercharge your wealth creation.

4) Have A Game Plan – Growing The Money

These last two are areas that I am still working on. Growing your money is an important one and there are two main ways that I plan to grow my money. You may have already guessed them, and you may already be doing them – if you are then we’ll done, keep it up.

4a) Investing

While a simple idea there are many ways to invest your money. Too many to cover here and now. Currently my game plan involves investing in the following main areas: high interest savings, dividend paying shares, index funds, and rental property. As my research continues I may branch out further into bonds, term deposits and P2P lending.

The idea here is to make my existing money produce the highest return possible within my accepted risk profile. Developing your risk profile is not always easy. I have found the best two ways are trial and error, and considering different scenarios. Make sure you are honest about how you wold feel if the scenarios occurred. Converting this thinking into actions and investments is something I don’t have a good methodology for. I will let you know when I do.

4b) Additional Income (aka Side Hustle)

The term “side hustle” is one I had not come across until I started reading finance blogs. I like it. But whatever you call it, the idea is the same. Take on some extra work (ideally adding diversity to your income stream) to earn some extra money. The average 40hr work week leaves a lot of free time. Take some of that time and turn it into money. Or better yet, turn it into a product so that you don’t have to turn time into money (a topic for another day).

Some of my current (and previous) side hustles are:

• Wedding photography
• Handyman work
• Tutoring high school and university students
• News paper delivery (although technically my only job at the time, it was in addition to high school)

I am sure there are some additional things that you could be doing to earn some extra money without taking too much time. If you are able to decouple the work required from the income produced with your side hustle, then even better. Bring on the passive income! You will find many other suggestions out there, so go looking and try. The only true failure is not trying.

My number four step: grow your money with investing and a side hustle.

5) Learning & Education – Constant Improvement

Yes, more education! However this time I am not talking about formal education. This time I am talking about learning from the outcomes of your game plan, followed by tweaking and improving it. As you grow older your risk profile will change. As you learn more about finance and investment options your plans will change. As you have children, renovations, different side hustles take off or fail, you start a business, sell a business, or get married – your plans will change.

This all sounds like common sense – improve as you learn. However in practice it can be one of the hardest things to do. When a plan you had fails or goes bad, it can be very hard to admin it. The whole idea of sunk costs touches on this. People will often make decisions based on how much they have invested already. Whereas decisions should really be made on future outlook and costs. “Sunk costs should not affect the rational decision-maker’s best choice”, however that can require admitting a mistake, a failure, or even an inability. Not always the easiest thing to do.

One way I have seen this, is when I correct or change something that I myself have said or done in the past. Being confronted with a decision you now disagree with can be hard. So when someone comes to you asking why you are changing your mind, and the change is because you now know more – say that.

My number five step: keep learning and improving.

Well, I hope you learnt something from this. I know writing it helped me to crystallise some of my thoughts and ideas. Then again, I plan to keep on learning. So come back in a while and we will see if my thoughts around this area have changed (if I can admit it)!