I’ve been talking to a bunch of people recently that are struggling to understand their best next step to make their money work harder for them. And I get that it’s confusing. You want to make smart money choices so you can grow your savings and investments, but there are so many options it causes information overload and ultimately inaction. But it’s possible to break through.
When I was at university I worked a bunch of really shitty jobs. I mean bad. I wanted some extra cash to pay for travel in the uni holidays so I started working for a temp agency. I’d only ever work these jobs for a couple of days a week or maybe a week or two on uni holidays, so I always came in as the new guy doing the most mind-numbingly boring tasks nobody else wanted to do. The jobs normally paid pretty well so I was happy enough, knowing every mundane task I completed was an extra few bucks in my travel fund. So I pushed on.
One of the most valuable things I learnt through doing this work is that almost everything in life can be broken down into a process. When working these jobs I’d amuse myself by thinking through the easiest and most efficient way I could complete these tasks. With some of the jobs I’d even time myself and then push to complete the tasks in faster times, often finding new ways to save time and finish faster. The people I was working for loved it and often commented how enthusiastic I was about the work. In reality this was the only way I could entertain myself and make this ultra boring work a little more bearable.
This focus on the steps involved in a process that sits behind getting a certain result is something that has stuck with me. I actually enjoy mucking around with this stuff. My girlfriend thinks I’m insane. But for me there’s something I find extremely satisfying about stripping back a process into the steps and then looking at the best way they can come together to deliver an outcome. Don’t judge me.
Having now helped a bunch of people plan to get great results from their money, I’ve found this process fits squarely into the category of projects that can be broken down into individual steps. I’ve detailed these steps below and what you need to look out for at each stage. If you want to set your money up in a way that gives you the outcomes you want, get your money working harder for you, and make smart decisions, you should know it won’t just magically happen. You need a plan of attack. This five step process is the exact same one we follow when helping our clients, so if you follow this process you’ll end up with a clear and easy to follow path from where you are today to the money and lifestyle outcomes you want for the future. It will be rock solid. I wanted to share this process so you could see how this works in practice and what you can do to get started.
The five steps are; Clarify, Strategy, Plan, Automate, Refine. I want to take you through each of these so you know what’s involved. The steps need to be followed sequentially and in order to get the right outcomes – you can’t cut corners here, as each step builds on the last. If you jump in at the middle or try to start at the end, you’ll be shortchanging yourself and you won’t get the same results.
Step 1 – Clarify
At this stage you need to get clear on where you’re at now, what’s possible, and what you really want to get out of your money and the lifestyle you want to work toward. The biggest part of this step involves clarifying your spending and savings. You need to know what’s coming in and what’s going out, and what’s leftover. For young professionals, your saving and spending is the one area that will be the biggest driver of the options available to you and the possible outcomes you can get from your money.
Here you should also think about what’s important to you when it comes to your money. Think through questions to establish the things that are going to be important to give you a strategy you’re truly satisfied is giving you the right combination of money outcomes as well as personal outcomes, i.e. sleep at night factor, reduction of stress around money, etc. How important is flexibility to you? What about risk? You always have to face some risk, but how much risk are you prepared to take with your strategy and investments? Do you hate shares? Do you hate property? Do you hate insurance? Or are these things important for you to include in your plan. This will help you figure out the right tools (investments and strategies) that can give you the things you want. This will shape the options you’ll consider including in your strategy.
When clarifying your situation on top of your spending and saving, and goals or targets, you need to get crystal clear on where your money is at now, your investments, superannuation, property, or any other assets. You need to confirm debt balances and interest rates, details of any personal insurance like income replacement or life insurance.
Here you also need to think ahead. You have to consider how your situation is going to change over time. Are you planning any time out of the workforce, such as for children, changing jobs or careers, launching a business? Is your income likely to change? Do you have any big expenses coming up, i.e. large travel expenses, new car, wedding, etc. These things will all drive how your financial position will change over time and some of the other options you should be thinking about or decisions you should make.
You then need to think through your goals and targets – the things you’d ideally like to get out of your money. When it comes to thinking about the things you want your money to give you, don’t let this be a roadblock. This sounds a little unscientific, but sometimes you just need a starting point. As discussed in the previous chapter, a big part of goal setting is using it as a feedback loop as part of your planning. To set effective goals you first need to understand what’s possible. It’s important you understand your initial goals aren’t necessarily going to be the goals that end up in your strategy. Once you test whether your initial goals are possible, they are likely to change slightly (in some cases radically) before they end up in your strategy. First set some initial goals as a starting point so you can test and adjust from there.
This means that you can’t use the excuse that you need to take some time to figure out what you want before you start putting a plan together. I don’t want to hear it. You’re better than that. Many people think that motivation causes action, but I think it’s mostly the other way around. When you start taking action, you create motivation which gives you the drive to keep pushing forward. Don’t let not being crystal clear on what you want stop you from moving forward. Set some rough goals and know these will be reviewed and refined in the next step below.
This is a big step, but one of the most important. This is the foundation of your money plan so you can’t rush this process or cut corners. If you get this right, you’ll know you have a solid base for the strategy and planning that will come next. If you miss things or take shortcuts, you can run into trouble at later stages because you’ve missed important things that need to be considered.
Step 2 – Strategy
This stage is also a big one, because in the strategy stage you’re going to look at the options available to get you the things you want, choose a pathway or combination of strategies you’re going to follow to get the outcomes you want for your money and lifestyle.
Because you’ve taken the time to fully clarify your situation in the step above, you’re now clear on your exact starting point. Now you can start to look forward and figure out how you can get your current savings, investments, and extra income (regular savings) working hardest to get you to the things you want. Think about the options you have available and consider their impact. The most common (and in my opinion most effective) options are as follows; save money in a cash savings account, set up an investment account with an initial and/or regular investment, invest into your retirement fund, or buy property. Note there are more options available, you can invest in almond plantations, timber mills, currency, commodities, prize bull semen, I’ve seen them all. These things can sound really sexy (apart from maybe the bull semen, that’s just weird…) but these sort of investments can be highly risky, and when you have heaps of time on your side I think they normally involve more risk than you need to take to get the results you want. The exception to this is if you’re an expert with specialist knowledge in these areas, and even then it’s pretty risky. When it comes to investing it’s normally a good idea to start with the proven, tried and tested strategies and build from there.
Consider the impact of those different options. As a starting point, look at how your situation will progress over time if you just saved all your money into a cash savings account. This is the ‘do nothing’ scenario, and one you’re unlikely to follow. But it will give you some insight into your saving and spending over time and how quickly your savings will build after allowing for any upcoming expenses you’re planning for. Once you’ve set this benchmark scenario, you can start to look at other options and see how they fit with your situation over time. Note that when it comes to property, this process gets a little complex because you need to think through how much to spend, borrow, how to fund your deposit, and where to buy as an investment or your own home.
As we discussed above, you may need to revisit your goals and refine them after going through this process. Once you’ve confirmed what’s realistic and achievable you might need or want to revisit your goals and targets. If you’re massively overshooting the things you want and the planning you’ve done shows you’re making progress at a much faster rate than you expected, you might be able to take your foot off the pedal a little and enjoy your lifestyle more. If you’re like most people and the things you want aren’t all achievable in the timeframe you want, you might need to prioritise which things are most important and what timeframes you want them in. In either case, before you finalise your strategy review your goals to confirm before finalising them.
This process of looking foward will also allow you to manage risk in your strategy. Because you can see the impact of the options you’re considering and get a feel for the sort of outcomes you can expect, you can put risk management strategies in place. You can include an extra allowance for unexpected expenses and ensure your savings balance doesn’t fall below a certain level. If you’re investing, you can make sure the money you’re directing to your investment account isn’t going to be needed to cover other expenses which will give you confidence the money will be invested for long enough to get the market returns. If you’re buying property, you can look at what your purchase would look like when borrowing rates are higher to give you confidence you’ll be able to afford the payments. This step of managing your risk is critical to setting up a solid strategy that gives you confidence in the direction you’re heading.
#ProTip: Here at the very minimum you’ll need a good spreadsheet. Probably better for this would be access to financial modelling software, or the help of a good Financial Adviser. If you’re only looking very short term, you might be able to get away with a spreadsheet, but the further into the future you want to look, the more difficult this will be because there will be more variables that can change. A word of warning if you’re a DIY sort of person, if you want to build a spreadsheet yourself, you have to think about wage growth, inflation, taxation, investment return assumptions, property costs and taxes, and a raft of other variables that will have a significant impact on the outcomes you’ll get from your strategy. Financial modelling software like that used by Financial Advisers automatically incorporates all of these variables (and more) so you know everything is covered and you’re not missing something that will cause you problems down the road. In my opinion if you’re looking at setting up an overall plan, the outcome you want is not only that clear and easy to follow path from where you are now to the money and lifestyle outcomes you want, but also true and complete confidence in your strategy and the direction you are heading. This confidence comes from knowing your strategy is rock solid and that everything has been considered, and I think it’s very difficult to get this confidence when you’ve just knocked up a spreadsheet yourself. That being said, if you’re an engineer, actuary, investment banker, or just have a deep and twisted love of spreadsheets you might be ok doing this yourself. Otherwise, consider making the investment in getting some good help and I guarantee this will pay for itself many times over, both in the money outcomes you get as well as the confidence and peace of mind you’ll get from knowing your money is sorted.
I know I keep saying it, but once more – the outcome you’re going for here is a great strategy that gives you confidence. So the final step in getting comfortable with your strategy is to educate yourself about the strategies, options, and investments that are going into your plan. It’s no good just having a great plan if you don’t understand the why behind it, because you won’t get the confidence you want. You need to understand the strategies available, their benefits and risks, and their impact so you can ensure they are right for you. This is a little bit of a chicken and egg situation because you need to know enough about the strategies/options/investments so you can decide if they go in your plan, but you also need to understand the financial impact of these areas so you know whether they are worth considering at all.
Wrap your strategy and education together and you’ll get a much better result from your planning process. A note on this also, that educating yourself is another area a good Financial Adviser can help. We’ve already spoken about the hidden traps of information overload and paralysis that are so common, and I’ve found from experience that for most people doing all this research themselves is a difficult process and one that’s tough going. A good Adviser will help you cut through the noise so you can understand your options and educate you at the same time so you can push through this step and get the right results from your planning process.
Step 3 – Plan
Once you’ve done the work in the two steps above, this step should flow pretty easily. The most important things to do at the planning stage are to set your clear pathway, then break down your strategy into smaller, shorter term, actionable steps. Then, you need to choose the investments or product solutions that will underpin your strategy.
It’s important to chunk down your longer term strategy into bite size portions. For example, saving $50,000 in three years can sound like a big number and a scary undertaking. But, when you break it down you only need to save $320 per week, or $45 per day. Not so difficult, right? It’s much more difficult to see if you’re on track to hit a bigger goal without knowing what you need to do short term to get there. Set short term targets so you know exactly what you need to do right away and make it easy to track your progress. Having short term targets will also let you know if you’re off track if you’re not hitting them.
Another big step you need to work through at this stage of your planning is choosing the investments, structures, and products that will support your strategy. This includes your everyday bank accounts, cash savings account, any personal investments, personal or mortgage debt, property investments, retirement account/superannuation fund, personal insurance, or any other products. It’s critical you have the right products to support your strategy or you’ll struggle to get the results you want.
Because you’ve educated yourself about what’s important in the key areas that you’re including in your strategy, you should have a good idea of the strategy you want to follow with any investments. You then need to find the solutions. When it comes to your banking, investments, debt, and superannuation you should focus on quality and ease of use over cost,. Using the very lowest cost solutions that are difficult to use, time consuming, or lower quality will mean it’s more difficult for you to get the results you want. If it’s too difficult or time consuming, it’s likely you will either give up, or spend much more time than you should managing your money. A good strategy should support your plan and make it easy for your strategy to flow without requiring heaps of your time to manage. Focus also on products that make it easy for you to automate your strategy (more on this below).
Step 4 – Automate
Once you have a great strategy, your next goal should be to make it as easy as possible for you to manage on a daily basis. You should look to automate everything possible. This will remove you from the decision making and free up your mental capacity and decision making energy to focus on other areas. It will also reduce your ability to stuff things up and get off track.
You should be able to entirely automate your everyday banking and saving, an investment plan, debt reduction, or superannuation contributions so they just automatically happen. By doing this you’ll know that unless you change something you’ll get the results you’ve planned for. Humans have an inbuilt tendency to stick to our default settings, so automating your strategy is going to give you a much higher chance of success. Your time is valuable, and the only thing you can’t get back once it’s spent, so do automate everything you can to free up your time and make it easier to get the results you want from your money.
Step 5 – Refine
Once you’ve successfully completed the steps above, your plan is set and you’re ready to start getting results. But as we’ve already discussed, your planning is only a process that helps you get the outcomes you want from your money. So once your plan is set you need to review and refine your strategy over time, so you not only have a great plan, but GET GREAT OUTCOMES.There are two parts to this process. Firstly, you need to make sure you are tracking to the plan or strategy you’ve set. The second is updating your plan as your situation and what you want changes over time.
Once you’ve set your short term targets, have a clear timeline for checking in on yourself or sitting down with your accountability partner to review your progress. I’ve found monthly is a good timeframe this, because you shouldn’t be able to get too far off track in a month. A monthly check in also helps keeps you thinking about your money and the strategy you’ve set. Setting and reviewing your targets doesn’t have to be a difficult or time consuming undertaking. You simply need to know where everything is supposed to be up to, and then confirm that it is. By now you should have a good system for managing your money and good products to support your strategy so it shouldn’t take long to check in. If something has gone wrong, you need to explore what that thing is, how it happened, and what you need to do so it doesn’t happen again.
In the early stages of your planning you might run into some things that were unexpected. If this happens you should think about whether this is just a short term issue, or if you need to tweak your strategy. Sometimes things get missed and that’s ok, you don’t have to have it perfect the first time, in particular if you’re doing this all yourself. But you do need to adjust. There’s no point pushing through a strategy that isn’t working just because it’s the one you set out in the first place. That being said, in many cases when things get off track it’s because you haven’t yet adjusted your behaviour to fit your new strategy, and in this case you just need to do the work and make it happen.
The second element of this step is that you need to update your strategy over time when your situation changes. I would suggest doing this at an absolute minimum on an annual basis, or when your situation or what you want changes significantly. If there aren’t any big changes in the time since you set up your strategy or last reviewed it that’s ok. You will still benefit from refreshing your strategy. This will help you to refocus, reward you for the progress made to date, and motivate you for what you’re going to do in the year ahead. For most of the people I’ve helped with this, I’ve found that what’s important to them changes quite significantly over time, and so refreshing their strategy is important.
For both the regular check in, and the refresh of your strategy set a date and put it in your calendar so it’s set in stone. Treat this as any other appointment which is fixed so you stick to it. A plan that’s not regularly reviewed will fall apart quickly and you’ll end up back to where you started before setting up your strategy.
The planning process is a powerful tool. Get it right and it will allow you to set up a clear and easy to follow path from where you are today to the money and lifestyle outcomes you want. Importantly it will give you real confidence in the direction you’re heading and reduce money stress or concern. I don’t need to tell you how important financial success is to your security and wellbeing over time, and your ability to live the lifestyle you want.
When setting up your strategy, don’t cut corners or you won’t get the outcomes you’re planning for. This is a journey and takes some work, but it should be motivating, empowering, and ultimately liberating. When you follow this process correctly, you are in control of your financial future and the lifestyle your money will provide. You are in the driver’s seat. You are in control. You get out what you put in, so do this right and you’ll benefit for years to come.