How to Achieve Financial Freedom
The key to achieving financial freedom is simple; plan, monitor, review & protect. But first, let me introduce you to your wealth journey
Welcome to your wealth journey. The journey that will see you through the good times and the bad, through the different stages of life and have a major impact on what you do, where you go and to an extent, who you are. For most, the destination is financial freedom but unfortunately, the reality is most of us will not reach this destination.
What is financial freedom? Financial freedom can be described as having enough wealth or passive income to cover your day to day expenses and lifestyle without having to actively participate in work. Where financial freedom differs from one person to the next is what that “lifestyle” looks like. For some, financial freedom is simply paying off their mortgage before retirement and living a comfortable existence off Kiwisaver and the pension. For others, it’s being able to stop work at 65 and spend the rest of their days travelling the world and playing golf. One study shows that 89% of New Zealanders rely on the pension as their main source of income. At an average of $340/week to cover the cost of running a household, rates, food and all the extras, do you think 89% of New Zealanders have achieved financial freedom?
To start, let’s take a look at the wealth graph which generalises the 5 key stages of our wealth over our lifetime. The curve generally doesn’t follow a nice upwards sloping trajectory but rather a rocky path full of peaks and troughs along the way. It all starts in your 20’s…
“Wealth is a journey, plan for it, know where you want to end up and you’ll be sure to get there”
Stage 1. Your 20’s
The Living and Learning stage. Unless you are a child Youtube sensation, your wealth curve typically only starts making tracks in your 20’s. Here, wealth is generally of no great concern, we are studying, exploring the world, meeting new people, partying (for some more than others) and often working to support our lifestyle. Our net wealth is usually negative with large student loans and not a lot of emphasis towards saving. This is not necessarily a bad thing, this is what your 20’s are all about right? If you don’t do it then, it will only be a whole lot more difficult later on.
Stage 2. Your 30’s
The How Far, How Fast stage. Once all the exploration, education, partying and rebellion is out of your system, your 30’s is often when a lot of traction is made in your wealth journey. Salaries take large jumps through promotions and new jobs, you meet your significant other combining incomes, you purchase your first home, get married, have kids, reduce back down to one income etc. The “how far, how fast” your wealth grows during this stage is dependent on some key life events which often fall into this exciting decade in our lives.
Stage 3. Your 40’s
The Key Decisions stage. As wealth continues to accumulate through your 30’s, you enter your 40’s where key financial decisions are often made. These key decisions can have polarising effects on your wealth. In one camp, the kids might be becoming more independent, you’re back to two incomes, you’ve worked hard to get to where you are so why not enjoy life a bit… so you splash out on the overseas holidays, new cars, boat, bach, pay for private or tertiary education, finally getting around to those house renovations... The list goes on and more often than not, it’s a trip to the bank for a top up that allows you to enjoy this fruitful time in life. In the other camp, there are those that are increasing borrowing to buy an investment property or moving away from corporate life and buying into business, the small minority who are focused on paying down their mortgage and unfortunately a larger majority whose wealth halves overnight through divorce. Our 40’s is a big decade where often important decisions are made that can have a significant longer term impact on our wealth.
Stage 4. Your 50’s
The Celebrate or Panic stage. You guessed it, it’s the key decisions that we make in our 40’s that will decide whether we are celebrating or panicking in our 50’s. You’ve either suddenly realised there’s only 15 years to retirement, you have a 30 year mortgage and credit cards maxed up to the limits, or you’re sitting blissfully in your near mortgage free home deciding whether to retire at 60 or 65. Unfortunately, it’s the former for a lot of people out there. Perhaps you’re somewhere in between and are on track to paying off your mortgage by 65 but know you’re reliant on the pension and Kiwisaver wondering what kind of retirement you will have. Unless you plan to work until you’re 75, which most people have resigned themselves to, imagine how great it'd be if you knew you had the “choice” about whether or not you had to work?
Stage 5. Your 60’s & Beyond
The Options stage. Your 60’s are no longer about winding down as you wait for your final calling. We are living longer, our body and minds are more active and for most of us, we have at least another two decades of living ahead of us. Wouldn’t it be great to reach this stage and have options? The option of whether to continue to work or not, the option of whether to follow your passions or travel the world, or simply the option to stay in your home, live the lifestyle you want and enjoy life and your family. The reality is a lot of New Zealanders are asset rich, cash poor, reliant on the pension to cover the ever increasing costs of running a household. Some take the tack they never plan to stop working and if you love what you do, great, but for others, working into their 60’s and 70’s is a necessity to survive. Although the pension is around today, will it be in 10 years, 20 years or 30 years and how much will it be?
No matter where you are on your wealth journey, it’s never too late to get yourself back on track to achieving financial freedom. Where are you on your wealth journey? Are you where you want to be?
Four Steps to Achieving Financial Freedom
Step 1. Plan
We plan for the evening meal and we plan for next year’s holiday, but seldom do we plan for how we are going to reach financial freedom and the things we really want in life. Your plan doesn’t need to be complicated, simply make a list of what goals you want to achieve, by when and how much money you will need to achieve each one.
If you have a mortgage, your first goal will be to ensure you are able to repay your mortgage and reduce your interest costs as much as possible. See how to repay your mortgage faster.
If you have high interest short term debt, you will want to focus on paying this off first.
Don’t have an emergency fund? One of your first goals should be to save the equivalent of at least 3 months of living expenses and rent or mortgage. In the event anything unexpected happens such as you lose your job or get sick, your emergency fund will allow you time to think about your next steps without having to make any drastic life changes.
Use the below questions to help you come up with your own personalised financial plan:
How much do you think you’ll need in order to live the lifestyle you want when you retire? The average cost to run a household is approx. $250–300 per person per week assuming no debt. This doesn’t include the extra’s such as eating out and holidays etc. Sorted have a handy retirement planner to help work out how much you’ll need to save from now until retirement, see here.
- What would you like to be able to achieve financially over the next 10 years? Some common examples include: reducing debt, holidays, car upgrades, first home purchase (see first home buyers guide), home upgrade, investment property purchase, renovations, children’s education. Assign a date, value and frequency to each goal.
- Is there anything you would like to do that you can’t afford to do now?
- What age would you like to retire? The current retirement age in NZ is 65 but this could increase over time as people are living longer.
5 Tips to Effective Financial Planning
- Record. Be sure to write down your goals with specifics on when, what frequency and how much.
- Income & expense tracker. Create a simple income and expense spreadsheet to work out how much you are capable of saving each time you are paid. Work off your last 3 months bank statements to get an accurate picture of what you spend. Have a miscellaneous section for those one-off or random expenses. It’s best the tracker overestimates your actual spending rather than underestimate it.
- Identify your surplus. Deduct your expenses from your income to identify your surplus. Be it weekly, fortnightly or monthly, this is your new savings target. Cross reference this with your actual savings (if any). Your surplus figure should be as accurate as possible for the plan to work. If your surplus is higher than actual, add more miscellaneous expenses into your plan. It’s best to start low and increase it from there as you adjust to your new expense plan.
- Make it happen. Set up an automatic transfer to take your surplus from your income account into your savings account every time you get paid. This will guarantee you stay on track with your savings plan since once it’s set up, you don’t need to do anything. Of course, the hardest part will be ensuring you don’t dip into your savings. If you think you might be tempted, de-link your savings account from your EFTPOS card or hide the account from view on your online banking.
- Revisit your goals. Once you know how much you are saving per week, fortnight or month, work backwards to calculate how far away you are from achieving your first goal. If it’s further away than you’d like, you’ll either need to reduce your expenditure (start by reviewing the non-essential or variable expenses such as eating out, lunches, coffees, entertainment etc.) or if it is an option, look at ways to increase your income (extra shifts, boarders, home stay students all help to increase your net income).
By following these 5 simple steps, you’ll be well on your way to achieving your goals without too much effort. The next steps of monitoring and reviewing, though, are just as crucial for staying on track.
Step 3. Monitor
Having a plan that isn’t monitored is like setting off to sail without a compass, the chances of arriving at your destination in the required time frame are slim.
Your plan must be monitored on a regular basis, ideally once every month or two to ensure you are on track with where you want to be and where you are heading.
How do I monitor my plan? Setting up an automatic savings transfer is a fool proof way to know whether you are on track or not. If you’ve dipped into your savings then you’re obviously off track. If you find you are doing this regularly, your expense plan is unrealistic. Find out where you are blowing out and update your plan accordingly. If you haven’t needed to touch your savings, you’re on target and can safely assume you are well on track to achieving your goals.
Step 4. Review
What are the odds your goals, income and expenses will be exactly the same today as they were 12 months ago? Chances are they won’t, which is why reviewing your plan on at least a yearly basis is key, this will ensure your plan is always up to date as circumstances change and you’ll be able to continually work towards achieving your next goals.
Step 5. Protect
So you now have a great plan in place which is being monitored and reviewed on a regular basis and you’re on track to achieving all your dreams, but what happens if something unexpected happens to your health and you can’t work? With no income, how will you pay your mortgage, your bills, your day to day expenses? What if you have an accident, or worse, you die? What’s going to happen to your plan, your dreams, your family?
You need a plan to protect the plan. If you or your family are reliant on your income, or you have debt or dependents, you can minimise the impact an unexpected health event would have on you and those reliant on you by having the proper insurances in place.
Just like your plan, your insurance should be reviewed on a regular basis to ensure they meet your needs and changing circumstances.
For a free, no obligation review of your insurances to ensure you have the right cover in place and are getting the best deal, click here.
“Financial freedom is the end goal, a good plan will encompass what your financial freedom looks like as well as what you want to achieve along the way”
Jiji is passionate about helping everyday Kiwis achieve financial freedom, offering a free service to help people with mortgages plan and track their journey to financial freedom and achieve their financial goals. All while ensuring they are protecting themselves and their families from financial disaster. Contact Jiji to help you come up with your own plan to reaching financial freedom.