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About the Author
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The Perfect Balance
How to Get Ahead Financially and Still Have a Life
By Hannah McQueen
Allen & UnwinCopyright © 2012 Hannah McQueen
All rights reserved.
Let's get started
Where do you want to be?
Where are you now?
Are you flying, sinking or floating?
What is standing in your way?
Your money personality
Roadblocks to success
There are four things you need to understand if you are going to achieve financial success. They are:
Subconscious finance — the psychology of your spending habits
Conscious finance — your financial smarts
Your capability to optimise the decisions you make about money
How to build momentum and get the results you want.
It is not easy to get ahead and it is even harder to get ahead as fast as you possibly can. However, before we can change your financial future we need to understand where you are now and why you are there. Always remember, the only person that will truly ever care about your money is you. Burying your head in the sand is no longer an option.
Forget about maths, interest rates and the recession. Forget about your bills, your mortgage, how old you are and how many years until retirement. Think about the following:
Where do you want to be, financially?
Where are you now, financially?
What are the obstacles preventing you getting there?
WHERE DO YOU WANT TO BE?
If you do not know where you are going, you will end up some place else. — Yogi Berra
Individual goals vary from person to person, but we all need to aspire to being financially successful. Not rich — that is optional — but successful. I define financial success as being able to live a lifestyle you enjoy, free of anxiety and stress around money. For me, it means that you are mortgage-free, or well on the way to being mortgage-free, and you have your retirement sorted. Incorporated into 'living a lifestyle you want' are the micro goals of being in control of your money, not having to earn more money to get ahead, having a rainy-day fund, being able to replace your car when you want to, taking holidays when you want to and buying property when you want to.
To be financially successful is to be 'flying' financially. The reality for many people is they don't even feel like they are getting ahead on a day-to-day basis. The thought of being successful is not even on their radar. With this book, I hope that will change.
The end point is the same for everyone — to 'fly' financially. But before we can work out how to get you to this point, we need to establish where you are now. Are you sinking, floating, or flying?
WHERE ARE YOU NOW?
There is nothing noble about being superior to some other man. The true nobility is in being superior to your previous self. — Hindu proverb
Finding the balance financially has less to do with understanding maths and commerce, and more to do with understanding your natural tendencies and how your spending psychology works. You need to appreciate how you relate to money and the role money plays in your relationships on a conscious and subconscious level. If you can master this, money can start to play the right part in your life. Money is a tool. It's one of the most valuable tools you can have.
Have you ever had to hop on scales in front of someone? Have you noticed you tend to weigh more than you think? Just as we tend to weigh more than we think, we are usually not doing as well as we think financially. We are disconnected from the reality of our financial position, and we are often disconnected from the impact of our own financial behaviour.
ARE YOU FLYING, SINKING OR FLOATING?
Flying means different things to different people. Let's assume at the very minimum it encompasses you being able to live a lifestyle you enjoy, you being well on the way to repaying your mortgage, if you have one, your retirement being sorted and you having no stresses around money.
Some people fly higher than others, but how high you fly also relates to your stomach for risk, which we will discuss later.
Sinking means you are going backwards, or you are always on the back foot. Your back is up against a wall and no matter how you try it always feels tight. You tend to use debt, or credit cards, when life throws you a curve ball. You do this because you do not have a rainy-day fund. You do not always clear your credit cards each month. If you were to complete a true budget of how much money is coming in each month versus what you are spending, you would probably find that you are spending more than you earn. Another sign this may be the case is if you get a payrise but it doesn't make a difference because it gets used for your day-to-day living costs.
It is common in a relationship where one partner manages the money for the party managing the finances to feel as if they are sinking, whereas the person removed from the money feels as if they are floating. People on commissioned or irregular income may feel that they are sinking at various points of the year.
When you are sinking you tend to put purchases you cannot afford on credit. The purchase may feel good initially; for example, booking a holiday you can't afford, but this feeling rapidly wears off. Your overspending will catch up with you. Even if you can keep your creditors — the people you owe money to — at bay, it will eventually take its toll on your health and relationships. This is not the way to live.
Not surprisingly, people who are sinking do not set out to be in this situation. It usually starts slowly with being on the back foot. A curve ball throws you backwards again, and before you know it, you are picking up momentum in the wrong direction, again. Many self-employed people or people with commissioned income sit on the cusp of sinking as their irregular income can cause havoc with their finances. This is not the way to live and I would encourage them to develop a plan to help smooth out the ebb and flow of their income. I do not believe that past results indicate your future capability.
If you are the money-managing partner in a relationship and have a feeling that you are sinking, your partner needs to be made aware of and agree with, or at the very least acknowledge, your diagnosis. You need to share a strong desire to fix the situation otherwise there is no point in trying.
Where your personalities are such that one is more 'entrepreneurial, big-picture, broad-brush, it's going to be okay in the end', and the other prefers to deal with the 'right here and now, nuts and bolts' of managing money, you may never agree on your financial position because in accepting the diagnosis the entrepreneur can feel that you are not believing in them.
I do not bother seeing a new client if relationship finances are a problem unless both partners attend. It is never one person who is responsible for the problem and it will never be one person in a relationship who can fix it. When I set about fixing this sort of situation I often have to take a drastic, slash-and-burn approach. Clear the decks, suck it up, sell assets, stop spending and let's turn this situation around.
Working to a tight plan, you have about six months to turn a situation around. After that, people lose momentum and start to slide backwards again. So, the first plan has to work and get immediate results, otherwise you might as well hang up the gloves before you even start. In that six-month period, the sole objective is to get to a floating position. Then, as soon as people are floating the goal posts need to change.
Floating is when you are not going backwards, but you are not getting ahead particularly fast. You may be earning the most money you have ever earned, but you don't feel better off.
Most of my clients initially sit in this category. They are living a comfortable lifestyle, but are living from payday to payday. If they were to lose their job tomorrow, they could probably survive a few weeks with available cash, and then use credit or access the equity in their property to get by. When they come to me they are not necessarily stressed about money but disillusioned that they are not making the progress they expected.
If you are in this situation you need to understand where the money is going. Knowing your actual spending patterns can help you identify the money that is being 'frittered', or lost. You need to maximise tax efficiencies and start structuring your debt — usually a mortgage — to repay it faster. You need to enjoy your lifestyle, accepting that you do not have to spend every dollar you earn to do so.
Having established a plan with my clients to get them ahead, we test it, refine it, track their progress, and as they stick to the plan consistently, they start to pick up momentum. Usually after twelve months, they get some wind beneath their wings and start to fly, maybe slowly to begin with, but with each month will start flying higher and towards their destination faster.
Flying means more than having no money worries. It means being on track to achieve your financial goals that, at the very least, incorporate being able to live a lifestyle you enjoy and fund your retirement. Flying is living in perfect balance.
If you are reading this book, I assume you are sinking or floating or, at the very least, not flying as high as you might like or in the direction you want to go. Many clients say they don't feel as if they are going backwards, but there is no real sense of getting ahead. This creates a stress or frustration of sorts. Add this money dynamic to your personal relationships and you are in for a rocky ride, unless you and your spouse develop some money skills fast.
If you can diagnose your current situation, and you know the destination, you are almost there. Next you need to identify and understand your current obstacles to tailor a plan to overcome them in order to achieve your goals faster.
WHAT IS STANDING IN YOUR WAY?
If you can find a path with no obstacles, it probably doesn't lead anywhere. — Frank A. Clark
People seldom improve when they have no other model but themselves to copy. — Oliver Goldsmith
So if you know where you are at, and where you want to go, what is holding you back? Is it you? Is it your situation? Do you lack understanding or motivation? Is it a combination of these? Obstacles come in many different forms — from biology, psychology, relationships, and self-created walls.
Until you set about identifying why you are where you are, there is a higher chance you will repeat the same mistakes that led you to your current position.
I divide obstacles that might be standing in your way into three categories:
As a combination, or in isolation, any of these obstacles can prevent you getting ahead as fast as you might. Each roadblock needs to be identified, so that it can be turned into a building block.
To identify psychological obstacles you need to look inward. They include your money personality, or your natural tendencies around money. Don't think that because you are rational in normal life you are rational around money, or that because you manage money as part of your job that you will be able to manage it well in your private life. I have found little connection between the two; for example, I know many accountants who are shopaholics.
YOUR MONEY PERSONALITY
There are essentially three money personalities:
Plodder — neither a shopper or a saver.
Some people fit the textbook description of one key personality, yet still have tendencies from other personalities. Others have been known to take these definitions to an extreme. Many people have never considered their relationship with money.
To help you identify your money personality ask yourself the following questions:
Do I find it easier to spend money, or save money?
Do I enjoy spending money?
Am I rational with my money?
If you are in a relationship ask yourself the following questions:
Does my partner agree with me about money matters?
Are we financially compatible? (For more on this subject see Chapter 2 on money and relationships.)
Shoppers derive emotional satisfaction from spending money — they like to shop. Some shop to feel good, some shop to celebrate feeling good. Some shop for no reason at all. The instant satisfaction of buying something motivates them. I am probably a shopper. One of my favourite pastimes is spending money. My best weekends have involved illicit trips to Sydney or Melbourne for a 'quick fix'. The more money I earned, the easier I found it to rationalise my spending. The more I earned, the more generous I became, with myself and with others. A shopper doesn't always have to spend large amounts of money. Some feel it is their entitlement to spend money, so they do. It is common for this type of personality to work in high-stress jobs where a quick-fix purchase can buy instant reward or help them to keep working hard. Shoppers are often time-poor and will happily pay for convenience.
'Controlled shoppers', or 'bargain shoppers', disguise their tendency from themselves, as they spend very little on a day-to-day basis, but when it comes to one-off purchases — often around technology or toys — they hold nothing back.
Someone who can be fairly tight on a day-to-day basis — like my Scottish husband — will buy the best of a big-ticket item once they decide they want to buy something. This can be quite common in a male who is not as engaged in the running of a household. Generally, he may not spend much on himself, but when he decides he wants to buy a 'toy', he will happily go ahead and spend a large amount without any qualms. Some people spend on their children, or their house, and don't attach the same responsibility or guilt they might have if they spent the same amount of money on something for themselves. If you cannot afford to spend money, even if it is for a righteous endeavour, you cannot afford to spend it.
Not everyone is a shopper all of the time, yet overall shoppers find it easier to spend money than save it. Subcategories of the shopper include the comfort shopper and the binger.
'Bingers' are created by natural tendency or by circumstance. People who are self-employed or have an irregular income are more used to a feast-or-famine lifestyle. When there is no money they stop spending, but when the money is coming in thick and fast, usually from a big lump-sum payment, they spend as if there is no tomorrow.
The natural tendency of a binger is to be able to successfully save for something. But in the absence of a clear goal, they are more inclined to spend their money on 'stuff'. Or they save, and then they splurge, sometimes spending more than what they have saved.
A comfort shopper is just that. Some people eat food to derive comfort; some people shop. If you derive emotional satisfaction from the goods you buy or the process of purchasing them, then you might be a comfort shopper. You do not have to enjoy buying all things to be guilty of this pleasure, either — just some is enough to be classified a comfort shopper.
Savers derive more satisfaction from saving than spending — generally they take little joy from spending money. They are quite happy to go without, and have a natural consciousness about money. A saver does not need to be industrious, just tight. Some cultures tend to be predisposed towards savings; for example, the Scottish and the Dutch. A Jewish client of mine said that he derives satisfaction from seeing his bank account grow — it gives him a small thrill. It is not enough for him to not spend — he wants to see his wealth grow. On the other hand, his European wife seems to get a similar thrill when she grooms her very expensive animals. Interestingly enough, in this relationship there were no arguments around money, but a general acceptance that things could be done better. They just needed to find out what to do so that they both got what they needed and could reach the perfect balance faster.
A lot of people incorrectly diagnose themselves as savers, when it is more appropriate to say that they are tight on a day-to-day basis. When it comes to buying something they like, or spending money on their hobbies, however, they happily make large lump-sum payments. Often, those big lump-sum payments equal, and at times outweigh, the small but frequent amounts their partner may have spent, even though they consider themselves more of a saver than their partner.
A lot of people have saved historically, or have saved for an event; for example, a wedding, and may therefore consider themselves savers. Using the analogy of fitness, being fit at some stage in your life doesn't mean that you can run a marathon right now.
Plodders are ambivalent about spending and saving. They take things as they come and have an expectation that if they keep doing what they are currently doing, they should be okay. Typically, they will be okay while they are working, but plodders and an enjoyable retirement do not often go together. If you do not identify with the traits of the other personalities, it is likely you are a plodder.
Excerpted from The Perfect Balance by Hannah McQueen. Copyright © 2012 Hannah McQueen. Excerpted by permission of Allen & Unwin.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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Table of Contents
1. Let's get started,
2. Your situation,
3. Financial literacy,
4. Buying your first home,
6. Understanding your capability,
7. Building momentum,
Appendix I — The five-step program,
Appendix II — Financial compatibility questionnaire,
Appendix III — Financial assessment template,