Don’t let someone else, or society, decide what your financial goals “should be.” There is no such thing as “common goals.” You must be able to articulate and write your very own unique financial goals in your own handwriting, not simply check off a list of possible goals that someone has suggested to you.
Why? This concept has been proven by study after study and we have all experienced it and know it to be true. You might not have recognized the significance of this simple concept to lifestyle and financial planning, but… have you ever gone to the grocery store without a list? Have you tried shopping when you were hungry? Have you gone to the store with a couple items in your mind to buy, then gotten home and realized you had forgotten one. I called my husband from inside the store once and asked what else we needed besides salad. When I got home, guess what I had forgotten to buy?
If this simple idea of writing out a shopping list has such vivid results, can you imagine how much more effective you could be if you started with a handwritten list of goals? Now, in reality, it can be quite difficult to put something on paper that you don’t have and don’t really know how you’re ever going to get. That is a key reason why ongoing support and additional resources are so necessary: to provide support that bridges the gap so it’s not so fearful, painful or unbelievable
Are you sabotaging your own success? Yes. Seriously. Everyone wants to, and should be, rewarded for their efforts. When it comes to money, you work hard for it and want to make sure you are making wise decisions that will provide you with rewards that give you a sense of accomplishment and well-being. Unfortunately, what happens is that throughout our life we make decisions, have experiences and learn ways to make decisions that might not be supportive of positive results. If you have lost money, for example, you likely learn to be more cautious or sceptical, perhaps even fearful in your future decisions. Your justification would be that you don’t want to get hurt again. This same process can happen if you have ever lost a job and your sense of self-worth is injured. Throughout life, we all have experiences that either reinforce a positive outcome, fearful intimidation, or scepticism. These attitudes affect the way we interact with our money and with other people. Ultimately, your attitudes are shaped, and how you think determines what you say, what you do, and therefore the results you get.
Because we are talking about how you think, we are really talking about what you believe. So, the questions you have to slowly become aware of are about what limitations you are putting on your decisions. Are you saying things like, “that’s not realistic”, or “I can’t”, or “if I had…”.
When you look at your situation, do you think it is impossible or will take a miracle to turn things around? If so, then will you do things, learn things, talk to people, ask questions, etc. to create a miracle? Or, will you let impossible determine your results. These small decisions do not have to be complicated, they can be as simple as deciding to consolidate your investments so you have a portfolio rather than a collection of individual investments; or securing a line of credit with the equity in your home to enable you to purchase other investments; or increasing your monthly cost of insurance so your family’s assets are protected while you start a new business; or maybe it is deciding that investing in a vacation with your spouse using a credit card is a good investment in your marriage even though it will then require six months to pay for afterwards.
We are not saying go into debt, max out your credit, or spend and invest frivolously. We are saying become aware of what you want, why and, at the same time, recognize that what you believe is what will eventually become your reality. Then take steps to work with your professional team to implement a plan to experience the best, not sacrifice for the least!! Your financial professional can do much more than simply recommend products and strategies, they can help you implement plans to get you results you didn’t otherwise think were possible – but – you have to first believe there are ways to overcome impossible situations and experience miracles.
You take charge of your financial future by asking questions and documenting the answers you receive, the plans you make, and the actions you follow. It is easier to sit back and be a passive participant in life by accepting your wage; carefully setting aside your pennies into safe, secure savings; avoiding spending money, and settling into a life of modest means. Along with this comes the acceptance of the advice you are given. Hopefully, it all goes well because if it doesn’t, you are not at fault because you just did what you were told. This is a way of life that can financially destroy people with only the unscrupulous people or ‘the system’ to blame for the outcome.
When you are an active participant in your financial decisions, you get better results because you take responsibility for the outcome. This means doing your own due diligence by reading the materials you are provided; by asking questions and understanding the advice you are receiving to the point that you can communicate it to someone else; and taking the time to learn underlying basics affecting the financial side of your life. You get better results because you are more confident in your decisions and you know what results you are looking for so will only accept options that will provide you those results.
Many times, we require advice or recommendations from others in order to make a decision on some aspect of our life. We receive opinions based on others’ expertise and experience in order to help us decide a course of action. On many occasions, the person we ask advice from has professional expertise and a formal education, which then qualifies them to provide us with the advice. This is the case with personal finance as it is with our professions such as medicine. When accepting professional advice, a challenge is having a foundation of knowledge that provides enough data to process the information necessary to make a decision that is right for you and your unique situation, goals and priorities. This requires education, which is the general knowledge necessary for reasoning and judging, and for understanding the implications, pros, cons and consequences of a decision.
Why is it important to understand the difference? Because financial education was not formally taught to people who are already established financially today. We developed our knowledge on the job and, therefore, in many cases actually lack the foundation of knowledge necessary to confidently make a financial decision. Worse, however, is that most people who are established financially are not even aware that they don’t know what they don’t know. This means that the uncertainty and intimidation that creates skepticism from financial advice is really a clue that there is a knowledge gap. This is not necessarily in the product or service or advice being inappropriate, fraudulent or unrealistic. It is important to be aware that the financial marketplace has become more complicated and, therefore, requires more knowledge. Fear, uncertainty and doubt are good indicators that perhaps there are additional questions that need to be asked, not necessarily that the advice isn’t good for you.
There is a business phrase that says, “You can’t manage what you can’t measure.” When it comes to finance, this is particularly critical. Whether it is activities or actual results, if you don’t have a way to measure your progress, you won’t be able to effectively manage your progress against your expected results. In fact, you might not even be able to determine if your results have been reached if you haven’t previously articulated what form of measurement you will use. Managing financial results means you have to determine what specific results you are looking for and in what time frame. These can be a dollar figure, or a series of regular activities that you expect will provide you with your pre-determined result. For this to be effective, you will need to have a way to track your progress so you can also analyze your data to effectively manage your progress. Rarely will tracking only single figures provide you with adequate data to make informed decisions. This means that if your only form of tracking your financial state is to look at the bank or investment balance, you might be able to chart out your ups and downs, but that doesn’t put you in a position of control, or provide you with much information to manage ongoing decisions.
What do you need to track to effectively manage your financial progress? In business, financial statements are produced to show income, expenses, assets and liabilities and how these change over time. With this information, you are able to pull various figures to perform analysis to show how well current income and assets are being used to effectively grow the business. To effectively manage household finances, you need to be able to analyze your financial data like a business. This means you have to collect the data then understand what various financial ratios will tell you. This is not simply measuring how well you stuck to a budget. This is cash flow analysis and net worth monitoring. This is debt to equity, income to assets, interest coverage, working capital, etc. When you start with your personal finances, you can then apply the measurements of a business to create and analyze your progress the way a business does. This will help you understand the value of information and what it conveys to help you make, not only personal financial decisions, but also business and investment decisions from more detailed and advanced financial statements.
There are different ways of earning money from investments besides buying low and selling high. In fact, an investment that produces immediate income, rather than increasing in value is an example of a sideways view of the market, and an investment that made money in a dropping market is an example of a decreasing view.
Where could you find out more? You don’t have to jump into every opportunity you hear about. In fact, you don’t have to invest in any of them, but you can start to ask different advisors from different backgrounds in different industries about possibilities for alternative or creative investing. For example, securities options, futures, commodities, foreign exchange, derivatives, initial public offerings, private companies, etc. are all more creative investments. There are different types of returns and different types of risks. When you have a proper financial foundation including knowledge and skills these types of investments can be appropriate. Without a proper foundation, they might look attractive and sound appealing and to some people these are low risk investments. When everything else is in place – have fun – there is great diversity, wonderful opportunities to make great returns, and make a difference while you’re at it.
Risk means different things to different people. We most commonly refer to it as the probability of loss. It is important to know ahead of time what your ability to withstand loss is. For example, no one is going to realistically invest money with the possibility of losing everything. Instead, they will invest with a percentage of assets they feel comfortable risking.
How do you know how much to risk? If $10,000 was invested, you might decide you could reasonably withstand a $1,000 loss, therefore you would have a ten percent risk. This then becomes the foundation of your exit plan. If you are close to losing ten percent of your money, you have already decided this is the point when you leave that particular investment. This concept is the same for investments that increase in price as well. If you have a nice gain on paper, you simply apply the same percentage to the price increase. If your original $10,000 investment increases to $20,000, your new amount of money at risk would likely be $2,000 or ten percent of the new price. There are other factors to consider such as the overall value of an investment relative to your total investments and whether you have already recaptured your original investment capital in a previous transaction, but the concept is that you establish the exit parameters ahead of time and you pre-determine how much of an investment is at risk at any given time.
Are you focused on your net worth or your income and expenses? If you are focused on income producing assets, your net worth will take care of itself if you also keep an eye on expenses. Your plan is to develop assets that provide income; to leverage any debt to increase your income producing assets; to maintain control over your expenses so you can build these income-producing assets. Your plan is not to build a net worth that needs to be supported by your income. Your plan is not to focus on the difference between your income and expenses. Your plan is to build a net worth that produces ongoing income.
Why? Increasing your income will increase your net worth, which will increase your income, which will increase your net worth, etc. Income and net worth are connected and if you miss this connection, then there will be a disconnect between current spending and overall financial well-being and between accumulated assets, net worth and day-to-day living.
To focus on accumulating a large sum of money so you can withdraw it later will create stress. A more effective and empowering focus is to consider the purpose of the accumulated funds. For example, if you are working to set aside a sum of money (say $1 million) to support yourself when you leave work (i.e. when you retire) this number is not a number most people relate to. If you instead, focus on creating $5000 per month so you can leave work, it’s a more relatable, everyday number.
How do you figure out what this number is? Start with your ideal budget for your ideal lifestyle then work backwards from that figure. Stay focused on that monthly income number, rather than the bigger, off-in-the-distance number that doesn’t relate to day-to-day financial activities.
Does money stuff bore you?
Understanding the technical aspects of financial planning, financial products, financial markets, economic indicators and taxes, while part of financial literacy, is not where you start your financial education. If you are not interested in financial matters, or do not have the time to learn them, you do not need to know these things in order to be in control and realize financial success.
What do you need to know? What do you have? When does it need your attention? How are you going to monitor it? Why do you have it? Where will you monitor it? When and how will you get rid of it? And remember to relate all the information you get back to your personal values and goals. These types of questions will be more valuable than trying to cram the technical knowledge of your advisor into a short education on the product