#1. Set realistic objectives
Where do you want to be, financially and personally, in 1 year? In 5 years? 20 years? What about the very long term – when you are well into retirement?
It’s hard to get somewhere if you don’t know where you’re going. And if you’re like most people, by now you just let out a little groan. Because although those questions and that statement are repeated to exhaustion, they make most of us uncomfortable every single time.That’s because they ask us to be realistic about our current and future lives, our difficulties, our limitations, and even past mistakes that put some dreams out of reach. Yes, it’s unpleasant.
Vague generalities, or even outright daydreams are much more enjoyable: ‘What would it be like if I made partner at the firm?’, ‘I’m young, living abroad, and life is short – the world is my oyster’, ‘I’ll eventually start my own business. It’ll be great I won’t have a boss, and I’ll be financially independent…’, ‘Who knows where life will take me’. But, it’s those unpleasant and somewhat clichéd questions that are most effective in terms of making you richer.
Once you’ve tied those objectives in with a realistic plan for saving and investment and written all that down, do you know what you have? Yep, a Personal Financial Plan.
#2. Spend after saving, rather than saving after spending.
One of the paradoxes of personal finances is that there is one part of people’s finances that gets worse as their income grows – budgeting.
That’s because if you have a high-paying job, odds are you can just go about your normal life without having to track every expense and without sending your bank account into the red. There’s always a little left over, right?
The problem is that it’s not enough just to spend less than you earn. Depending on your age, current net worth and life plans, you should be saving anywhere between 10 and 50% of your monthly income (as you will find once you’ve gone through step one). And that is much harder to do if you just spend at will and put away the remainder. So turn things around – calculate how much you should be saving. Invest it, and spend only what is left over after that. In fact, you can go as far as fully automating your savings – which we discuss here .
#3. Eat the free lunch!
Governments are worried that people don’t save enough. They are so worried, in fact, that they sometimes even refrain from one of their favourite pass times – taxing – to help people save. They do that by providing special tax benefits for savers who use certain structures, eg pensions.
Use every one of these opportunities to the fullest possible extent. If you can, add to your pension right up to your allowance, especially if your employer matches contributions. If you work overseas, see if you are eligible for tax-advantaged investment structures such as QROPS (Qualifying Regulated Overseas Pension Scheme) or a PPB (Personal Portfolio Bond).
#4. Make your money work as hard as you do.
Even if you’re not a full-on workaholic, odds are you work hard and worry about your career, right? You wouldn’t turn down an opportunity for advancement ‘just because’, would you? So it’s not fair on you to let your money (and the banks who hold it for you) freeload on the back of your hard work.
Don’t leave your money in low-yielding bank accounts or low-performance, high-fee funds. Spend some time putting together an appropriate portfolio for your personal needs, and looking for the most attractive investment options with appropriate fees. If you need help for all that, hire a financial advisor. Make sure that while you are off at work, your money is also doing its part to grow on its own!
#5. Rinse, repeat.
There really isn’t much more to it than that: realistic objectives and coherent plan, saving according to plan and making the most of tax and investment opportunities.
So why 5 steps and not 4? Because building wealth is a long-term endeavour. Very long-term – as in ‘You have to do this for the rest your entire life’. Daunting, right? And as with any habit, it’s easy to fall off the wagon. You must pro-actively keep yourself motivated and on-track. Have a picture of the house you are looking to buy, or of the places you’d like to visit when you retire. At least once a year review your finances.
Do the important stuff – like reviewing your returns and making any necessary adjustments. But also take a moment to just enjoy the satisfaction of seeing how your net worth has grown, how you are richer than you were last year, and how you will be even richer next year!