How do I start my journey to financial independence?

Welcome to Finance and Fury, The Say What Wednesday Edition

Series to cover a number of questions asked – FAQ on stages of life

1. Hard to get through all questions – from questions compiled – put together run through of steps
   1. Go through 3 or 4 – stages of life – cover the process from start to finish – considerations to take, give an outline
   2. Process – Stage, typical situation, goals, focus, and tips – priorities and strategies – pros and cons
2. Get the planning books – access through the member’s section – https://financeandfury.com.au/member/
   1. Investing in yourself episodes at the start of the year as well – purpose careers

Today – First part – Starting out – run through the basic stage of setting the foundations –

1. The first part is very important –
   1. even if feel like you have gone through it, know someone who this can benefit – please share to help them
   2. This part, not really age/situation-specific – regardless of ages/circumstances finances can be difference from decisions

What does the Starting stage look like?

– either before full-time job (at uni/working part-time) or stating your first job, or well into your work life but want to better financial position

1. Different for everyone – different ages, amounts, etc – don’t want to beat around the bush – earlier the better
   1. But never too late – more effort can be needed to catch up – where is the fun in something not challenging?
2. Generally – to build something start with base/foundation – most foundations work off a basic framework – weight/loads
   1. Engineering – square-cube law – as you double the size the volumes/mass cubed  
      1. Example – cube with 1 mass – double the size and mass 8 – double again (4x4x4) and mass 64
      2. Limits all design – planes with wing sizes, tall buildings (taper in) –
      3. Limits nature – trees, animals – reason blue whale biggest creature – max under this law of what
   2. No different in personal finances and becoming financially independent – design a foundation around governing principles
      1. Example – Winning $200m – make you FI – but what if financially illiterate with a gambling habit? Remain FI?
      2. What makes a good gambler? They aren’t technically gambling – not slot machines, but poker –
         1. Game of probability – beyond counting cards (chance of cards being in play) – chip stack management – a line of the song ‘when to hold ’em and fold em’
3. Just like a professional poker player – playing smart in life with your finances are the core – Some Principles of personal finances – probably 100 more – but good starting place
   1. Prioritise around the economic problem – Finite resources (money) – so where is it best put?
      1. Setting out your own goals/needs – building a plan based around where to put each dollar to meet goals
      2. Make your own target ratio – budgeting to pay yourself first – why prioritising helps – sets clear goals
      3. Compounding – the rule of 72 –
   2. Invest in yourself – continue to gain experience and knowledge –

Prioritise – While each individual will have different needs, situations, etc – initial stage of financial journey is the clean-up phase –  before transition into working on the foundations – like going for a road trip and forgetting your mix tape and to fuel up the car

4. Goals – Planning with the End Goal in mind – Never too early to start
   1. Where to invest? What to invest in? How to access?
   2. Something that is well-diversified for lower investment funds and doesn’t cost you a lot in transaction costs
5. Budgeting – Cashflow is king – method of accumulating wealth – a common practice – work, get the deposit (minus tax) into account, transfer to pay other people (or companies/online) –
   1. First step – How much do you earn and what are you spending money on?
   2. Next – Categorise – musts (essentials), nice things (discretionary), and surplus (savings)
   3. Are you happy with how it looks? How much do you need?
6. Compounding – pretty self-explanatory – Investing into growth and reinvesting income compounds over time
   7. Rule of 72 – rule of thumb – 10% doubles every 7.2 y, or 7.2% every 10 years doubles –
      43. $10k at 10% p.a. – $20, $40, $80, $160, $320, $640 – 43.2y – but $320k less than 36y –
      44. Make it to 50y – just under $1.3m
   8. Golden ratios – Works in conjunction really with goals and compounding (next) – but having a plan/outline and goals around
      1. Planning and setting targets of how much you need to have invested and by when – times in life you won’t be able to invest – cash flow being used for debt, family, life
   9. Important not to forget about is super – hidden beneficiary of compounding – as cant access till 60 –
      1. Example – 4 super accounts with $2k each – admin $78 + 0.1% p.a. insurance of $2.9p.w.– Returns 8% p.a. = $0 in 16y
         1. Gets rolled into lost super now before this happens – but still, suffer in performances – 10y 5.7% for ones like Ausfund
      2. Roll all into one account – $8k with same admin and returns = 40 years is just under $110k
      3. If you are around 20 now and have a number of accounts – might be worthwhile to look into if consolidating is an option – not advice – a general statement of obvious

Investing in yourself – Experience and knowledge

7. Practice investing in yourself – Sounds like a weird concept but you invest to gain something – income, growth, etc.
   1. Investing in yourself – with the aim of gaining something – growing as a person and reducing financial stress –
      1. Discussed a bit of this in investing in yourself series – purpose/vision statement – part of it is finances – way of funding it
   2. Tangible Benefits – Ways of increasing your income-producing ability and financial stability
      1. Earning more in your career – formal or informal learning to increase value to get paid more
      2. Growing wealth and increase passive income – investment income gains over time
   3. Intangible benefits – Less stress –
      1. What can cause stress? Not knowing what you are doing, or if it is through right thing, or procrastinating putting it off – even if it is just because it is new –
      2. Knowing that you are financially secure is good –
   4. The knowledge needed is very easy to get – with very little cost –
      1. Informal – consuming more career-specific content, books, audiobooks, podcasts, internet courses – All in your spare time around work –
8. This is where Experience comes in – practical side to knowledge – plenty to learn and now have a track record
   1. I think the best form of education is a practical application of skills over theoretical testing – happens in personal finances – Can know a lot about shares – doesn’t mean that you will benefit from that knowledge –
      1. Afraid of buying shares? – start small – normally sooner rather than later
         1. I was sweating purchasing first shares – was 16 and just about to go into year 12 –
         2. Once you are invested – daily events will occur and it will go up or down –
            1. If it goes up – reinforcing factor that you are correct – nothing more to know
            2. If it goes down – reinforcing factor that investments are risky and to avoid, or that there is a lesson here and to try again – but in a different approach
         3. Compounding losses – don’t just offset future CGT – but
      2. Learn as much as you can to keep improving your ability – finance is a second language in a way – learning a language is easier when younger – brain pathways still forming – if you are young – forming good financial habit now benefits in life
      3. Professional/formal – go to uni, degrees etc. or outsource to other professionals who can help
   2. The more mistakes you make – the more experience you get with areas of personal finance – the easier it becomes – you don’t even have to think or worry about it – helps to build certainty
      1. If you haven’t made any investing mistakes – start small –
   3. Hard to get tricked in investing – mind field with scams, losses, etc.
      1. Sometimes you just don’t know enough to see that something is off – almost like how a really smelly cheese might just be assumed to be 6 years past expiry and throw it out – I would find it hard to tell – like a small bit of Roquefort cheese versus a mouldy cheddar – if you don’t know much about cheese then can be tricked
      2. Sometimes it is really well hidden – Choice architecture in economics =
         1. Super forms and choice of super – why a lot of people end up with 3 funds (me too)
         2. Supermarkets – perishables at the front with sales as you walk in (100% traffic) – behavioural trait of ‘invariant right’ – most people will turn right when entering a store – structure the layouts to lead to spend longer in store
      3. Watch out for path of least resistance – apathy can cost and is manipulated – financial/behavioural psychology

You can have goals, priorities, knowledge – foundation

– Process starts when your income-producing/investing capacity increases – When things really pick up – when your income-producing capacity starts –

1. Part-time at school/uni – or First Full-time job out of school or after graduating uni – doesn’t matter where it comes from
   1. The question through life – where should Income Capacity be redirected? – Goals – solve the problem of what to do with your finite resources  
2. Your goals will change through life – but the template to achieve them is the same

Initial Template – questions that need to be answered – based around what is appropriate –

1. Deciding what to do with larger disposable income? Where should it go? Planning and what the first stages are –
   3. Example – earning $80,000 per annum and expect to work for another 25 years, receiving average wage growth of 3.5% per annum, that is worth slightly under $2.2 million in present value (after 2.5% inflation)
2. Structure for goals –
   1. How much by when – budget – Goals like deposit
   2. Aim to stay out of personal debts – CC or car loans – focus cash flow to repay
   3. Surplus funds use
3. Investments and supers
   1. Basics – super account – mandatory – make sure consolidated
      1. Things to look at: investment option, insurances, costs ($ & %)
   2. Goal of wealth accumulation –
      1. Ongoing investment plan – ad hoc investments
   3. Other Foundations in place – things to account for
      1. Place to accumulate wealth – platform/broker
      2. Protection – Income-producing potentials

Next week – Start looking at events that tend to occur over time – First home, mortgage, starting a family –

Mostly defined by debt or expenses – can mean limited room for wealth accumulation which is why these first stages are important –

Either way – It doesn’t matter how much income you earn if you don’t use it diversify your wealth and other income sources

What is one of the more important things is that at least some of your lifetime’s earnings are put towards things that will inevitably replace it 

Thank you for listening, if you want to ask a question you can do so at the contact page here.