Five steps to financial freedom

Arguably money can’t buy you happiness, but understanding your finances and a bit of planning certainly reduces a lot of people’s financial stress. In fact our recent National Savings & Debt Barometer survey found that nearly 60% of people who are uncomfortable with their finances find financial planning daunting.

Straight talking is what we are all about, so we teamed up with guest writer Nigel Bowen to come up with some plain speaking insights that can help ‘de-daunt’ financial planning:

Achieving financial freedom might not be easy, but it can be remarkably straightforward.

With Barbados – the permanent or temporary home of some of the world’s most high-profile financially independent individuals – celebrating its Independence Day on November 30, it seems like an auspicious time to list the five steps you can take to achieve financial freedom.

1. Spend less than you earn

Granted, this one is obvious, but given that one in seven Australian households still aren’t doing it (and the proportion was significantly higher before the GFC), it bears reiteration. So remember that you will never attain financial independence if your expenses consistently outstrip your revenue.

2. Put as much money aside as possible to invest

Once again, this isn’t rocket science, yet somehow fails to register with the vast majority of the population. It’s estimated that 80 per cent of American millionaires started off with no significant financial resources. So why did they end up being able to retire in comfort several decades earlier than their friends, siblings and ex-work colleagues? Simply because, at some point, they twigged to the end result of devoting a sizeable chunk of their income to acquire income-generating assets. If you can’t find a way to set aside at least 30 per cent of your income to invest, don’t count on joining the ranks of the financially independent any time soon.

3. Get rich slow

It’s by no means impossible to achieve stellar returns on investments. For example, if you’d bought a median-priced Sydney house in 1996 and sold it 2004, you would have, on average, made a 160 per cent profit. The only catch is you couldn’t have predicted that was going to happen and would have been unwise to bank on it doing so. High-return investments are almost always high-risk ones as well. You’re more likely to come out ahead over the long term with safer investments, such as blue chip stocks, that offer unspectacular but solid returns.

4. Diversify

If you don’t have a lot of capital, it can be tempting to put all your eggs in the one basket in the hope they’ll turn golden. If, for example, you’d bought an investment property in Sydney in 2004 hoping to sell it for a 160 per cent profit in 2012, you would have been very disappointed. You would have likely done much better had you spread the money you used for the deposit on the property across a range of investments.

5. Keep quiet

We now live in a ‘If you’ve got it, flaunt it’ culture, but historically the well off have understood that it’s sensible to be discreet. If for no other reason than to avoid being treated like a walking ATM by friends and family members, avoid the temptation to boast about beating the market and keep your financial affairs as private as possible.

The take-home message of every classic money management book from Napoleon Hill’s Think and Grow Rich through to Robert Kiyosaki’s Rich Dad, Poor Dad is that today’s frugality is the foundation stone of tomorrow’s bounty. The key to future financial freedom lies in the self-discipline to defer gratification.