By Patrik Shore
Imagine hitting the gym in your 20s and 30s and never having to lift a single weight ever again, but still having a bodybuilder’s physique in your 60s. Would you do it?
This is exactly how future financial planning works, and it is the only thing I can think of where you can front load your efforts and reap the rewards later. Imagine being financially free at 55, 60 or 65, simply by putting effort in now.
The sad reality is though, most people don’t have a financial plan. Their ‘plan’ is to ignore it for now and hope for the best. They think that when they earn more later on it will make up for their indifference now. I know that’s what people think, because that’s what I thought! But that’s not how it works.
If you don’t know anything about personal finances, if you don’t have a plan, a guide, targets or try to learn now, then years will go past without you doing anything about it. Then, when you realise you have to act, it will probably be too late. The only thing we have on our side to build real wealth for ourselves and our family, is time.
Where to start?
The first thing that comes to mind when people think about financial independence is investing, or winning the lotto. The first step, however, is becoming financially literate. That is, to learn slowly but surely how to manage your money in the best possible way. The younger you start the better, but it is never too late.
When it comes to financial literacy, Google is your friend and I recommend you start with ‘Personal Financial Health’. Once you know what your financial health looks like you can start making a financial plan. Make it as simple as you possibly can.
First, write down a few financial goals you have for the future: like saving money for a house, a dream wedding, a worldwide trip or a specific retirement age. Quick tip: one of your goals should be to have 3-6 months worth of expenses saved. You know, just in case! The second step is to take a month and track your cash flow. All your money coming in and all your money going out – this provides you with a baseline.
Armed with the above and a little bit of math, you will be able to calculate how long it will take you to hit your goals. Whether it’s a 20% downpayment on a house worth $400,000, or using William Bengen’s four percent rule to calculate how much you need in order to retire comfortably, a good financial plan will provide you with an exact roadmap as to how, and when, you will achieve your targets.
If you’re making a financial plan yourself, remember to keep it SMART. Specific, Measurable, Achievable, Realistic, and Timely.
Once you get going you’ll learn quickly how to build your financial plan and re-work it to hit new goals and targets as life changes. Along the way you’ll also see that you start gaining financial literacy and that it is easier for you to make the right financial decisions. Like if you should get a 15 year or 30 year mortgage?
Despite what we’ve been taught and raised to believe, talking about our finances isn’t taboo. It’s not a bad thing. You shouldn’t care if someone knows how much you make, or how little you save each month. Equally, you don’t need to be embarrassed that you’re paying off bad debt or have a negative net worth. The only thing you need to know is that if you don’t take charge of your financial situation, no-one else will. So make a plan.
Patrik is a Tenzing Pacific risk and financial planner and specialises in helping clients with their financial literacy, as well as setting and achieving future financial goals.
