If you’re resolving to improve your financial position next year then this article will help you get the most impact for your effort.
Though my experience as a financial planner it became evident that the journey to financial independence is similar to the journey to physical independence.
First babies roll, then crawl, then pull themselves up onto furniture, walk and eventually run. The gross motor skills are the foundation for developing fine motor skills, which enable little humans to independently feed themselves and move around.
Similarly there are financial capabilities and habits that are the foundation of taking our next step toward financial independence.
I define financial independence as the ability to quit work on our terms, with the lifestyle we desire.
Six Stages of Wealth Creation
The journey to financial independence is illustrated below in what I call the Six Stages of Wealth Creation.
Use the outlook column in the Six Stages to identify your stage in the journey based on your current financial behaviours. A secondary indicator of where you are in the journey is the amount of savings you have outside of your home and superannuation, captured in the target column.
“More than one quarter (26%) of Australians feel they are not living within their means ie. they spend more than they earn, don’t save regularly and don’t limit their debts.”, according to the recent Canstar 2019 Consumer Pulse Report.
Canstar also reported that $25,000 was the median amount that people had saved outside the family home and superannuation.
Combined these statistics imply that around half of Australians are in the bottom three stages, with one-quarter of Australians in either stage 1 or 2.
Where to start
Controlling your cash flow is the foundation skill to creating wealth and achieving financial independence.
Investment won’t solve a spending problem.
If you are in stages 1 or 2 the most effective focus for you in 2020 is to develop a habit of saving enough.
If you are firmly in stages 3 or 4 of the Six Stages of Wealth Creation then focus on plugging any gaps you have in the 3 Cs of Money Mastery:
- Cash flow: Ensure you save enough to achieve financial independence on your terms
- Capital: Ensure your savings including superannuation, are invested effectively
- Contingencies: Ensure you have erected safety nets under your your lifestyle
For those in stages 3 and above, consult with a specialist financial planner who can help you plug gaps in your investment and contingencies.
I’d be delighted to collaborate with you in building a habit of saving enough in 2020. Contact me to discuss how.