In this series I’ve written up the rules I follow for a life free of money stress. It’s really easy!!
To live happily you need to have your finances sorted takes and little bit of thought, some good habits and a touch of self control. All you need to do is make sure you live within your means while also having long term goals that you are working towards. Then make sure you are organising the money that comes in and tracking your spending, and doing this all simply.
When I was 21 I sat down and developed a long term plan for our money. I had seen my father stop working at age 52 due to health issues and I realized that we needed to be financially secure so that work was optional in our middle years. I developed a plan that would allow us to replace one of our salaries with investment income. Once we both agreed on it we started to put it into effect. That plan was real estate based and over the next six years we built up a portfolio of five rental properties.
Our day to day spending decisions were then set by the long term plan. Because we had to cover vacancies and urgent maintenance from our income we didn’t go on overseas holidays or buy expensive fittings. The need to keep our cash flow clear meant we bought a modest house, rather than buying the most expensive house we could afford. For the same reason we drove one, older but reliable car.
By the time I was 27 we had our financial base established. We were then able to do some of the things we put off. We traveled and lived overseas for a few years, with the rental properties happily chugging away in the background, paying down their mortgages and building up equity as the market rose. When we came back home we were able to purchase a nice cottage to live in and when our kids came along we dropped one income with no stress at all so that there could be one full time caregiver at home. In our 30s work became largely optional and funds lifestyle options, as opposed to being necessary to keep a roof over our heads.
A long term money plan
Having a long term money plan early gave us lifestyle options in the years ahead. Do you want to stop work and spend time with your newborn and toddler? Do you want to travel the world? Do you want to retire early and mainly do community work?
A long term plan is really simple – it’s the plan that makes sure most of the money you bring in is working for you. It only has three ingredients:
- Your goal
If you don’t have something to aim for you will not achieve anything. I set goals in 10 year chunks. My first plan was made when I was 21 and forecast it out 30 years. I revised the plan heavily when I was in my early 30s and kids came along. Now I’m 40 and over the last few months I have sat down and re-planned the next 10 years until age 50.
I find it takes me around three months to fully develop a long term plan. I mull options, think a lot about what life might be like in 10 years time and weigh options for our overall strategy. Once the plan starts to form I talk to as many people as possible to find the holes in how the plan in developing.
Finally, I write a year by year plan that forecasts the investment cost to me, likely balances over time and provides spending and saving targets. Over the 10 year duration of each of my plans nothing has worked smoothly. Markets go up and down, and drama happens daily – but the general plan is there.
- Your strategy to reach that goal
There are three main long term strategies to mix and match from. See this series on Your First Million for more on effective long term wealth building techniques.
- The discipline to put the plan into action and stick to it
Your plan must be written down and it must be shared with someone. Choose this person wisely, if you chose the wrong person they will tell you you can’t do it, rather than helping you achieve it. You want to find someone who understand show money really works. In my experience lots of people seem to struggle thinking about what things might be like in the future. A lot people live paycheck to paycheck and don’t spend time looking beyond the next few months. The good news is, if you can find the right person, they will help you shape the plan and see the problems that might come up before they arise.