Lesson type: Think like an investor
Don’t give up, you’ve got this
This article from Anne is included in our Reinvention is the new Retirement eBook. Download the full eBook for free here.
To spend or to save? It's the eternal question. While we might want to live for today, tomorrow is just around the corner. It's amazing what time can do for your money, writes Anne Graham.
There’s a constant barrage of messages from the wealth industry espousing the need to save millions of dollars to have a comfortable retirement. Now you probably look at the numbers on TV or online and think they’re massive and completely out of reach, leading you to give up as the task seems hopeless. After all, you’ve got kids to educate, mortgages to pay, a career to build, and sights to see.
When you’re faced with these conflicting goals and day-to-day demands it’s easy to feel overwhelmed and just give up. After all, what difference does it really make if you pay a bit extra off the loan or put a bit more into super? There’s also the possibility of receiving an inheritance, but even if it’s say, $110,000 that won’t make a difference either – or will it?
If you do receive an inheritance or windfall, the $110,000 question is: would you spend it or save it?
The implications of your decision will affect the rest of your life and that of your family’s, and the decision you do end up making will be heavily influenced by your mindset and habits. Acting on your decision may require a change in behaviour and some discipline.
Back to the magic $110,000. For some people, it represents a new car, a holiday for the family (or a helping hand to kids), and maybe an updated kitchen. I’ve worked with people who’ve received an inheritance or windfall and the conversation goes something like this: “It’s only a small amount really, and it makes no difference if I spend it. I’ve worked hard and deserve some little luxuries. Anyway, I might not be around that much longer.”
However, rather than spend the windfall and have nothing to show for it other than a clean benchtop or new car, investing it for 20 years could turn $110,000 into over $450,000. Now that will definitely make a difference when it comes to your retirement options. You could retire sooner, have a higher income in retirement or be able to stay in your home and not have to move in with your kids.
The “spend it now” approach is typical and is based on a mindset of short termism, instant gratification and denial to some extent. It’s also symptomatic of not taking responsibility for your own actions and decisions, which can also stem from a feeling of helplessness. We can see that the shift in approach from short-term to long-term results in a significantly better outcome.
Starting early and changing habits little by little can have a profound impact on your financial future and that of your family. Being self-sufficient and not relying on a windfall is the sensible approach to financial security and when it comes to saving, starting early makes a massive difference as seen in the table below:
The same amount has been invested earning the same return but the impact of starting early is over $220,000, or 58 per cent better. This is the magic of compounding!
Taking responsibility for your own financial future is the first step to taking control. Being disciplined and sticking to the long-term goal can be difficult at first so following the three tips below will help:
- Know why you want to take control – put some real numbers and timeframes around the outcome you want. E.g. “to have $598,000 in 20 years’ time so I can enjoy retirement.” Retirement to you might mean regular holidays, maintaining your holiday home, staying in your family home, retaining club memberships.
- Know where your money goes – record every dollar you spend for the next month or so and then review. If you know where your money’s going you can take control and make changes if necessary. You can start changing bad habits and start introducing good habits.
- Know your numbers – regularly check your progress against your plan. When you see the little wins you’ll gain renewed confidence to continue with your plan. In fact, as that home loan reduces and your investment portfolio increases you’ll become even more of an advocate of long-term goal setting and planning.
Taking control and responsibility for your finances can seem daunting and pointless. Understanding the importance of making changes to your habits and mindset will go a long way to a comfortable retirement for you and your family, giving you choices and control of your future.
 Moneysmart.gov.au calculator $110,000 invested 20 years @ 7.5% monthly compound earnings.here.