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All high earners should be working towards financial independence. Some want to retire in the medium term and retire early. Others aim to be FI by age 65, or older. We all likely have more financial goals than money to allocate, particularly in our early careers.
Any truly worthwhile goal feels insurmountable at the startAussie Doc Freedom
Initial responses to personal finance information are either:
- What a load of BS, I can’t afford anything or have any control over my destiny
- OMG! I can earn money even without working? Why didn’t anyone tell me about this? I have to read everything on Earth related to this.
Anyone in between? I am certainly a number 2. I have friends and relatives I’ve provided copies of books to help after they confess severe financial stress but often turn out to be number 1 responders, with no control over their situation. I’m not sure if there are in-betweeners.
I am going to assume that you, the reader, are a lot more like number 2 than 1.
This early enthusiasm often leads to a look of spending on books (guilty) and excel spreadsheet obsessing.
Sooner or later almost everyone will reach a point of disappointment or despair when they realise
- They are not on track to financial independence
- They are not sure it is possible to reach all their financial goals
Even for those that seem to have a viable financial plan at the start (I suspect it’s unusual), sooner or later, unexpected financial challenges arise.
Sometimes, each month brings unexpected bills and it feels like we are making no progress. It’s easy to lose heart. Many will give up.
But those that keep plodding along, tightening the belt (even more!) or taking on extra work to get through the tough months, are likely to reach our goals. Even if it feels almost impossible at the time.
Why Hardly Anyone is on Track to Hit Goals Initially
When you sit down to set your goals and make a financial plan, it may seem you have too many goals. Too many options for your savings, and never enough income to meet all your goals.
Some common goals include:
- A new car
- A house deposit
- A special holiday (YOLO!)
- Parental leave
- Children’s education (secondary private, university?)
What if you need to save for all of the above?!
And you have a few hundred dollars a month spare (which is a good start!).
It can feel hopeless and very demotivating.
Income and Expenditure over a Lifetime
Income and expenditure are not evenly distributed over your lifetime. Of course, everyone has an individual life journey. But here I examine a “typical” financial lifecycle to examine why your 20’s and 30’s are so tough!
In your 20’s, most have below-average incomes. Many will rent for a few years, trying to save that first home deposit and possibly purchase a car. You may need to move (several times) to further your career, producing more expense.
If you purchase your first home in your 20s or 30s, you are now responsible for repayments, property maintenance and rates. Those hoping to expand their family may want to renovate or upgrade to a home better suited to a young family.
The average Australian woman has her first child at 31 years of age. High-income earners tend to have children later than the average. If your household decides to start a family in their 30’s, household income decreases whilst expenses increase.
DINKs (double income no kids) naturally have a lot more disposable income.
Below is the 2017 ABS data on household income. It peaks (on average) between ages 35-54 years. The orange line represents “average” Australian household expenditure, which I couldn’t find broken down by age group. Obviously, households will try to reduce expenditure when income is lower (in their 20s and early 30s) and increase expenditure as income increases.
But with so many expenses to pay for in your 20s and 30s it’s no surprise it feels really tough to make much financial progress.
Once income reaches close to peak (for doctors post-fellowship), it becomes much easier to catch up and get on track to all your goals.
Unexpected Life Events
Once you start working towards your financial plan, unexpected money challenges will inevitably occur. Your car breaks down and a wisdom tooth requires expensive surgery. The next month the council rates are due. And then your dog ruptures his ACL and needs vetinary surgery.
It can feel like the universe is trying to stop you from following your plan!
No one is immune to these unexpected life events. Having cash on hand as an emergency fund make these expenses an irritation rather than a full blown crisis.
Advice from the Other Side
After an unknown amount of time spending less than you earn, making unpopular car decisions, saving and investing you reach the “other side”.
So many times over these years, it feels like no progress is occurring. Bills seem to invent themselves each month just to turn your one step forwards into two steps backwards.
But eventually, you realise you are on the other side. You have accumulated significant wealth, and the bills don’t seem such a big deal anymore. Earnings from investments become more significant, eventually, earning more than you save. This comes long before financial independence, but means you are really on your way now.
Repeated small actions produce exponential if you stick with it. Unexpected opportunities come along and may result in significantly faster progress than expected. For us, it was lowered interest rates. For others it could be a property boom, an inheritance or something else.
Most will also build their financial plan based on conservative predictions of returns. It is only sensible to do so, as you want to make sure there is a good likelihood you will reach your goal by following the plan. Actual returns may exceed your conservative predictions, speeding your journey to your goals.
This wealth snowball starts to build when you start regularly contributing to investments. You just won’t notice it starting to roll.
Success Post Income Peak Depends on Self Control in the Early Hard Years
If you can afford to invest before those peak income years, go ahead. But if there are just too many demands for your savings in your 20s and 30s, it’s ok to wait.
But don’t assume that because you’re expecting a big income peak in your late 30s or early 40s you can spend recklessly and sort it out later.
If you enter your income peak with a load of consumer debts on credit cards and car loans, you will yet further delay your wealth accumulation. Time is the most powerful factor in wealth accumulation. If you have already waited to start accumulating, you have no more time to waste paying off expensive loans.
There are a few huge factors you can use to make sure you reach your income peak in reasonable shape
- Avoid bad debt – avoid car loans if at all possible and pay off your credit card every month without fail.
- Buy a reasonably priced car and keep it for 10-15 years
- Buy a house you can actually afford (ideally in an area with good capital growth potential)
- If you choose to rent, invest the extra you would have paid in mortgage payments, maintenance and rates
- Salary sacrifice into your superannuation and your rent or mortgage payments if eligible
- Start a microinvestment account. Invest tiny amounts to get used to market volatility and grow confidence and knowledge before investing with “real money”.
Once you Reach Peak Income
You want a plan before you receive your first peak income pay. You want to start catching up and building wealth immediately. Most of us high earners are behind our peers because of years spent in tertiary education and student loans.
It is important you decide whether you will invest in property or shares (or both) and start putting that money aside before upgrading your lifestyle.
Only buy that dream home once you have worked out what you can afford. Huge mortgage repayments can prevent any other financial goals from being achieved.
Still, you will find financial challenges come up and prevent you from progressing as you planned. Once you are on track to plans, your mind has a tendency of thinking up new goals. Remember to enjoy yourself along the way. Budget fun money and a holiday budget.
How to Overcome Money Challenges
When those irksome money challenges occur, take a deep breath and work out how bad it is. Can you fund it with your emergency fund? Do you need to pick up some extra work to refill the emergency fund?
Have a little faith, even if you are not currently on track to meet your financial goals, that an opportunity will come along. Keep plodding in the right direction as best you can, and keep your eyes open for those special opportunities. If you just keep making good financial decisions, it is likely you will hit those financial goals sooner than you thought possible.
Have you had frustrating money challenges? Comment below and share how you avoided getting too demoralised and stuck to your financial plan.
Your wealth accumulation journey starts as soon as you make the first step. Subscribe to Aussie doc for a weekly email to keep you up to date on track to your goals.
Aussie Doc Freedom is not a financial adviser and does not offer any advice. Information on this website is purely a description of my experiences and learning. Please check with your independent financial adviser or accountant before making any changes.