How to Build a Sustainable Financial Future

4 Simple Steps You Can Follow to Secure Your Financial Future

Mastering your finances can appear to be an overwhelming task.

All those differing opinions on how you should go about it. And then you have the struggle to implement whatever ideas make sense for you. I get it — the struggle is real.

But it doesn’t have to be that hard. With guidance, you can build a workable plan to improve your finances — starting today.

How much improvement? That will depend on these factors –

· Your discipline

· The length of time you have to work the plan

· Your current position and

· The resources you have to work with.

But, whatever “improvement” means for you, I can guarantee your future self will thank you for acting now.

Every day you delay acting is a reduction in the possible improvement. A wasted opportunity.

How many wasted opportunities have you let slip through your fingers while you wait to act?

People fail to act because they don’t care or don’t believe improvement is possible (but that’s obviously not you!), or they think it’s too hard or complicated.

The good news is that the principles are simple, and implementation does not have to be complicated.

Principle 1 — Spend less than you earn.

This is the most important step you can take to improve your financial future. Everything else flows from the results of this skill.

The simple analogy is that if water flows into a bucket faster than it is leaking out, it will eventually overflow.

I accept that the bucket will never overflow for people in extremely dire circumstances.

But, for most of us, saving even $1 per day is possible. And saving $5 per week is an improvement in your financial position.

Setting a goal to increase the savings rate would be desirable. But making a start and sticking to it will develop the discipline of saving and form a solid foundation for the future as you increase the savings rate.

Principle 2 — Establish an emergency fund

Set aside an emergency fund to cover your expenses should an emergency arise. This fund will reduce the natural tendency for you to stress about the “what ifs” of life (most of which never happen, but we worry anyway).

And, when deciding how big the fund needs to be, your stress level is key to that question.

Most commentators recommend an emergency fund to cover 6 months of your expenses. But some people may need up to 9 months to provide the security that this fund makes possible.

But what is an emergency?

This is a crucial question and is often misunderstood.

An emergency is an event that you did not expect to happen.

· The car needs to be serviced — you knew that would happen.

· The house insurance is due — that was expected.

· You are sick and can’t work for a month — now we’re in emergency land.

· A hail storm destroys the roof, and you need to cover expenses the insurance company won’t — again, that is an emergency.

· Your mother is seriously ill, and you need to fly across the country — hell yes!

You should avoid using the emergency fund as a “leveller” for large, infrequent (but expected) payments as this can quickly get out of hand.

And how do you build your emergency fund? Using the savings from Principle 1. Once you have your emergency fund in place, apply those savings to . . .

Principle 3 — Get rid of and stay out of debt

Debt is the ball & chain around the neck of your financial future.

Sorry, is that too strong? Try this . . .

Debt will kill your financial future!

It is that serious.

Even if you believe that you can manage your debts, you are walking on a slippery slope. One minor hiccup can send you straight to the bottom.

The peace of mind that comes from being debt-free cannot be explained successfully. You must experience it for yourself.

And while you are imagining how different your life would be if you had no debt, expand the vision to being able to walk up to the car dealership and buy a car with no debt.

We are all quick to complain about inflation increasing the cost of goods and services. But if you pay for those goods and services with a credit card and do not pay it off on time and in full, you are volunteering to add even more to the final cost.

I am often asked which debts should be paid off first.

Because I am a numbers person, my answer is always “the one with the highest interest rate”. To me, the logic of getting rid of the most expensive debt first is always a winner.

But, if you need early wins for inspiration, start with the smallest one and work your way up to the larger debts.

Whichever approach works for you, you need discipline to ensure that, as you pay off each debt, the total payments you were making on the extinguished debt plus the regular repayments for the “next” debt are paid off the new target.

As you work through the process, the extra payments snowball, and the repayment rate gets exciting.

Are you feeling the improvement in your financial position yet? What’s next?

Principle 4 — Invest those excess funds

You now have your regular savings plus all the cash you allocated to debt repayments.

You are now in a position where you can start making your money work for you. This is like hitting the accelerator on your financial improvement process.

Now you have more important decisions to make (as if you haven’t made enough already!)

But a word of warning here — investing is not gambling. Some investors decide to “have a go” at investing with the same philosophy they would apply to a horse race. You have worked too hard for your money to gamble with your financial future.

Further, I’m not making any recommendations here. You need to do what’s right for you, with or without professional advice. I am just listing some of the options available to you.

So, what sort of investor do you want to be? This topic can (and has) filled books, but, in summary, here are your options.

1. Do you want to be an active or passive investor?

As the name suggests, an active investor is actively involved in researching investment opportunities, making the investing decision (timing and amount to invest), and the decision to sell the investment.

A passive investor is prepared to leave all those decisions to someone else — either a fund manager or an index investment.

Of course, it is possible to have part of your funds invested passively and keep the rest for active investments if that suits you. Initially, it is unlikely that you will have sufficient funds to split (unless you have an inheritance or won the lottery), so a strategy of investing passively while you learn how to be an active investor. You then gradually add an active component when you have justifiable confidence in your investing ability.

2. What assets do you want to invest in?

Whatever type of investor you want to be, you also need to decide which assets to invest in. There are many possibilities — domestic equities, international equities, residential property, commercial property, bonds, cryptocurrencies, art and other collectables (like classic cars, sneakers and NFTs — if you don’t know what NFTs are, they probably aren’t for you).

All these assets have different levels of risk and different income/growth profiles, so you need to understand what you are signing up for, particularly if you are not considering the mainstream assets (equities, property or bonds).

3. How long will the funds be invested?

This is termed your investment horizon.

Particularly when making asset choices, the investment horizon may affect your choice.

For example, if you are a 20-year-old looking to retire at 40, the 20-year investment horizon would make most asset classes suitable. But, if the same 20-year-old is investing to buy a residential property in 5 years, the asset choice decision would be different.

Let’s wrap this up

If Principle 4 sounds a bit scary, don’t worry about it now — there is much to learn.

Focus on the first 3 principles and set a goal to become more knowledgeable about investing as you proceed through the process.

Until you have mastered saving, emergency funds and debt elimination, investing is a financial future that is beyond you. Controlling what you can control right now will make a massive difference in any case.

I’ll be publishing more articles like this to help you on this journey so you can follow me to keep up.