Ten steps to financial happiness
Managing your personal finances doesn’t require a high IQ or the ability to predict the future, explains Jason Butler. All you need is to be clear about your goals, develop a sound framework, follow some basic principles and regularly review your situation.
Here are some timeless tips that I’ve learned over nearly 25 years as a professional financial adviser, which should help you to achieve financial happiness.
1. Always hold a least six months’ expenditure in an accessible savings account – so you are never forced to sell risky investments when they are experiencing a temporary fall in value.
2. Save at least 20 per cent of your income each year and start early – a little over a long time is easier than a lot over a short time.
3. Repay debt as quickly as possible – interest costs are at historic lows but they are still, in effect, a negative return. Repaying debt represents a risk free return equal to the gross of tax interest you avoid from debt repayment. Use current low rates to enable you to repay your debts as quickly as possible.
4. Spend less than you (or your portfolio) earn – no matter how much you make, if you spend all of it (or more) you’ll always be poor.
5. If it looks too good to be true it probably is – when an investment is offering 10 per cent risk-free returns, you know there must be a catch.
6. Risk and reward are related – there are no low-risk, high-return investments.
7. Price volatility is not the same as risk – liquid investments fluctuate in value, based on supply and demand. In general terms stockmarkets are falling one third of the time, recovering one third of the time and breaking new heights for the remainder. Don’t turn a temporary fall in value into a permanent loss of capital by bailing out when things look bad.
8. The news is not your friend – next time you hear ‘billions wiped off share values’ remember that eventually there will be ‘billions added to share values’.
9. Put your faith in business – owning a part share in world class companies like Apple is likely to provide the highest inflation adjusted returns over twenty years or more, compared with low or negative real returns from fixed income or cash deposits.
10. Keep it simple – if you don’t understand something then don’t do it. If something needs a 50-page explanation memorandum or booklet then it’s probably far too complex for most people to understand.