When discussing objectives with clients as part of their financial planning, a word keeps coming up – ‘Stable’. We want financial stability. We want stable investments with stable income. So let’s have a look at 10 simple rules for achieving stability.
- DON’T: take on excess debt, ever (well, except for the cases discussed in point 2).
Debt is the cocaine of personal finance. Debt that you take on as an individual, like personal loans or, worst of all – credit card debt – has very high interest rates and fines for late payments that can make small shortfalls balloon into massive overhangs. Even individuals who have reasonable incomes can wreck their finances by going into debt, while others who have very low wages can stay safe as long as they don’t get into it in the first place. Fortunately, by now, many people have understood the risks of personal debt. But if you’re still tempted not to pay off your credit card in full at the end of the month, chop it up and throw it out now.
- DO: only (and I repeat – only) take on debt to make investments which provide returns higher than the interest rate on the debt.
Student loans, business loans and mortgages are all types of debt which can make sense in certain situations. What do they have in common? In all cases you are using the money to make an investment which will yield a return. If you take out a student loan to get an MBA which increases your wages so that the increment you can pay off the debt and interest in a few years, that is good. If you take out a mortgage at a 2% interest rate in order to buy a property with a 4% rental yield, that is good too. But always make sure you have considered various scenarios and have your numbers straight. If necessary, talk to an independent advisor first. Even good debt can be risky.
- DO: save as much of your income as you can.
We’re often asked how much is an ‘ideal’ savings rate. In practice, though, the exact rate isn’t even that important, because most people don’t save nearly enough. Even if they do save now, they might not have saved enough in the past, or might not be able to save enough in the future. Even if they do save ‘too much’, there are hardly any downsides. All it means is that they will have a bigger war-chest for future expenses and will be able to afford to retire earlier, or at a higher standard of living. If in doubt, save!
- DON’T: leave your money idle.
Some people ‘nail’ the savings part, but then simply leave their cash sitting in a bank account. Interest rates are at all-time lows, which means that low-risk investments such as bank accounts will grow very slowly, and if inflation is taken into account, may even shrink! So make sure you actually put that money to work, whether in investment funds, property or even a side business.
- DO: plan your finances and retirement.
It’s hard to get anywhere if you don’t know where you are going. Desiring ‘financial stability’, in abstract, is a good start. But having a numeric target of net worth and financial income, against which you can measure how you are doing, is much better.
- DON’T: get yourself into deals from which you can’t walk away.
Donald Trump, the controversial real-estate billionaire running for the American presidency, often touts this maxim. Regardless of his politics, this advice does have merit, not least because it is very broad and reinforces some of the previous points. In practice it translates to always having enough savings that you can survive losing your job (or even quitting yourself if you feel things aren’t right). It means not getting trapped underneath a pile of debt. It means not investing in assets you won’t be able to sell.
- DO: have adequate life and health insurance.
All the previous points are true. But what if you are simply at a moment in life when you haven’t managed to build up your assets yet? Maybe you’re just starting your career, are newly married and have had a child. What if, on top of that, something very bad happens? Say you get seriously ill or even pass away? What happens to your loved ones? Insurance is ready-to-go financial stability for bad situations, and you should have plenty unless you already have more than enough assets to keep your family safe in those cases.
- DON’T: be a cash-cow for banks, pension managers and the taxman.
As the saying goes, if you’re at a poker table and don’t know who the sucker is – it’s you. Banks and managers are out to make a profit, and the government is keen on its revenues too. So if you don’t actively protect yourself, they will take more money from you. When your bank manager calls you up trying to sell a new product, you can bet it has a great margin for them. So always do your own research and seek independent advice on how to organize your finances in your own best interest.
- DO: build stable, passive, income.
Passive income is income you earn while sleeping or sipping drinks on the beach. It includes interest on investments, rents on property and profits from businesses that don’t depend on your work. With enough stable passive income, you could quit your job and do anything you wanted to, every single day. So focus on building it. Keep your eyes open for opportunities and be clear about how much of that income is a result of your time and work vs. how much is truly passive.
- DO: have a professional financial advisor.
Personal finances aren’t rocket science, and with a little research you can certainly be in a position to manage your money quite sensibly. But, as we’ve covered in detail in a separate article, professional advisors really do make a difference. (link to new article on ‘why you need a financial advisor’).
To conclude, you may have noticed our list actually has more Dos than Don’ts. That’s intentional. Financial stability is something that you have to actively work towards – you have to ‘Do’. Business-as-usual and just avoiding mistakes is not enough. It requires effort, but is incredibly rewarding.