Wealth Creation for Gen X – Why most people don’t (and won’t) achieve Financial Freedom
Believe it or not, in reality very few people actually achieve (or will achieve) financial freedom. In fact in this day and age, where access to financial knowledge and resources is unprecedented…the majority of people will still reach retirement either partially, or fully reliant on the government to help fund their cost of living for life after work. This both astounds and saddens me!
Of course Gen Xer’s and Gen Y’s have a head start on Baby Boomers due to compulsory superannuation from the start of their working lives. But as discovered in Wealth Creation for Gen X – Is Superannuation still so super? even a decent income earner won’t be able to rely on employer superannuation contributions alone in order to achieve future financial freedom…in fact employer contributions may only result in building around 1/3 of “retirement” assets required.
So how extreme exactly is the problem? Well, studies have shown that out of 100 people who start work at age 25, by the age of 65;
- 1% will be considered wealthy (financial freedom on their terms)
- 3% will have adequate savings to be secure without any financial help.
- 7% will still be working…because they have to (not because they want to).
- 74% are dependent on the Age Pension, family, friends or charity.
- and the other 15%? …well, unfortunately they don’t make it to 65.
Not overly exciting statistics…especially for those in the 15% category.
It still amazes me to think that only around 4% of people ever really achieve any sort of financial freedom & security. However this got me thinking why this is…and here’s the brain dump I came up with. No doubt you can think of more reasons – and I’d be keen to hear your thoughts. For those of you just after the highlights, see the main headline points below. But, for those of you striving to achieve future financial freedom, but not sure how to go about it…I’d encourage you to invest the time and delve into the detail (you know that you deserve to invest this time in yourself). Feel free to reach out if you need more guidance, we’d be delighted to help.
The 21 reasons why most people don’t (and won’t) achieve Financial Freedom…and what you can do to avoid the same mistakes.
1. They don’t set it as a goal to achieve financial freedom.
You might recall from Wealth Creation for Generation X – Clarity is Critical that only 3% of people have written goals, while 14% of people have goals but not written down. The majority of the remaining 83% tend to drift through life with little or no direction. They don’t believe that they have the ability or the right to be financially successful…or it never occurs to them that they can do it. Those who achieve financial freedom “begin with the end in mind” and set it as a clear (written) goal to achieve future financial freedom.
2. They spend everything or more than they earn.
In order to achieve future financial freedom, cash flow, or more specifically surplus cash flow is like oxygen. As discovered in Wealth Creation for Generation X – Introduction Part 1 81% of people spend everything they earn…and 9% of people actually spend more than they earn – through racking up credit card debt and personal loans. If you are striving towards achieving future financial freedom, it’s crucial that you find a way to create surplus cash flow and then use that cash flow towards achieving your future financial and lifestyle goals. If you are struggling to create surplus cash flow on your current income and you have slashed your expenses as much as possible, then see Wealth Creation for Generation X – Making yourself more Valuable for a few ideas on how you might be able to increase your earning capacity.
3. They “pay themselves” last.
Traditional budgeting doesn’t work…which is great news as very few people do it any way. Those that do budget don’t necessarily save any more than everyone else…they just know where there money goes. A key reason most people won’t achieve future financial freedom is because they “pay themselves” last. A powerful trick as covered in Wealth Creation for Generation X – Introduction Part 2 is to flip the whole budgeting process on its head and pay yourself first. At The Practice we call this “bottom-up budgeting”. When you are “taking money off yourself” and “paying yourself first”, you don’t have to go through the pain of tracking your expenses on a regular basis. All you need to do is learn to live off what is left over, content in the knowledge that you have put steps in place to “fuel your family’s future”.
4. They take on too much bad debt i.e. credit card and personal loans.
Linked to the points above and as covered in How to best smash your credit card debt…forever! too often over the years I have met with well meaning, hard working people that have dug themselves a massive hole by racking up obscene amounts of credit card debt and personal loans that are suffocating them. Quite often this spending has been on unnecessary “toys” or lifestyle spending. They buy liabilities instead of assets. Falling for the temptation of easy credit…in particular excessive credit card debt or expensive car loans are the biggest contributor to Generation X & Y not being in a position to build wealth. The purchases that these personal debts are used for might make us feel good in the short term…but just like too much ice cream or pizza on a regular basis – they are terrible for us in the long term. Those who achieve financial freedom, or are well on the way towards this, actively avoid unnecessary lifestyle spending and racking up credit card debt and personal loans. They practice delayed gratification…knowing that once they achieve their future financial goals, they will be able to buy all the “toys” that they want (this is of course if they still even want them).
5. They don’t build an emergency cash buffer.
The majority of people are 1 month away from “homelessness”. By this I mean that very few people have more than 1 month’s expenses in a cash buffer…and how could they if 90% of people are spending everything (if not more than they earn). Life is full of unexpected expenses. And what happens when unexpected expenses pop up? Of course very few people actually become homeless, but their credit cards take a belting…beginning the dangerous spiral that keeps many people trapped. They want to build wealth but have that $5,000, $10,000 or even $20,000 credit card debt hanging over their head, due to a series of unexpected expenses…and due to failing to build an emergency cash buffer. As we touched on in Wealth Creation for Generation X – Where should you invest your money? ideally aim to build a cash buffer of 3 months worth of expenses just in case you lose your job or become sick and injured and not able to work for a few months. This will virtually eliminate the need to even hold a credit (which most people originally take out “just for emergencies”) and importantly it will give you a feeling of security and peace of mind.
6. They overstretch themselves on their mortgage leaving no cash flow for wealth creation.
Clearly over the past few years Melbourne and Sydney house prices have had a very strong run. Whilst many new home owners have paid more than they wanted to (due to hot competition) just to get in the property market, many others have bought bigger or higher value houses than necessary…that they really can’t afford. My gut feeling is that over the past few years as property prices have shot up, many Gen Xer’s & Gen Y’s have borrowed to their cash flow capacity and haven’t necessarily factored in that average interest rates are closer to 7% rather than 4%. Many homes have been purchased to keep up with the Jones’ – or their close friends – leaving no cash flow to build towards future financial freedom…or even have a decent lifestyle now. It’s important to realise that most “Jones’” can’t afford their home loan either…(well possibly they can now but not when interest rates get back to 7%). Gen Xer’s and Gen Y’s on the path to future financial freedom live humbly. When buying a house, they buy a house that is suitable for their needs (not a trophy home), and they buy a further suburb or two out. By doing this they have a more surplus cash flow than the “Jones’” and then use this cash flow to fuel their future financial freedom…as well as have a better lifestyle now.
7. They don’t protect their greatest asset through appropriate wealth protection.
As discussed in Wealth Creation for Generation X – Protect your greatest Asset (part 1) your greatest asset is not your house, your superannuation balance, or your comic book collection from 1987 (no matter how limited edition)…your greatest asset is your ability to generate income – your earning capacity between now and “retirement”. Let’s say you are 35 years old and earning $100,000 per annum. Assuming you are able to grow your income a bit above inflation by continually getting better at what you do and adding more value, then between now and age 65 you are likely to earn a total of over $6.6 mil. Those are Powerball jackpot numbers. But you don’t need to buy a lotto ticket…you just need to invest in and protect your earning capacity. However too few people protect their earning capacity via appropriate wealth protection. Added to the fact that very few people have more than 1 month expenses in emergency cash…it’s a financially train wreck waiting to happen. Those on the path to future financial freedom protect against being derailed financially due to potential health issues. They protect themselves and their families via adequate wealth protection cover to give themselves the peace of mind that if they are off work for a extended period due illness or injury, that they can maintain their financial position until returning to work.
8. They don’t adequately protect themselves – estate planning, binding financial agreements, asset protection, ownership, and business succession planning (voluntary & involuntary exit agreements for business owners).
As an extension of point 7, not enough people seek appropriate advice on the above headline. Binding Financial Agreements are a good example. 48% of 1st marriages end in divorce, whilst 73% of 2nd marriages end in divorce. Quite often people entering 2nd marriages have kids from the first marriage as well as significant assets. Many times with both 1st & 2nd marriages, one person has significant assets and the other person doesn’t. If you are in this position be willing to have courageous conversations as early as possible in the relationship and get the right legal advice. Same goes for business owners in business with one or more people (who isn’t your husband or wife). See Wealth Creation for Gen X – How to plan for “success” in Business Succession Planning and protect your business equity and the future viability of the business. Remember, “if it’s in writing…there’s no fighting”.
9. They put off saving money until they feel they can afford it…which is never.
No matter what position you are currently in just get started. Build good financial habits with small amounts of money. Very few people actually feel wealthy…even wealthy people. Don’t wait until you feel like you are able to afford to start saving for your future financial freedom…just do it regardless. There will always be something to spend money on and there will always be unexpected expenses. Also even if you are in over your head in credit card debt and have a negative asset position, start saving something for the future. It’s like building muscle and getting fit. You’ll slowly be becoming financial fit. Save money in conjunction with bad debt reduction and take the long term view. It’ll feel better mentally and emotionally, and you’ll be back on track. As Brian Tracy says, “It doesn’t matter where you are coming from…all that really matters is where you are going”.
10. They make bad and impulsive investment decisions.
Most people spend far more time planning their annual holiday than they do their major investment decisions in life. As such, people far too often make impulsive decisions; they buy rubbish properties off the plan in high rise apartment buildings that are never going to grow in value, they blindly take advice from an untested or untrusted source, they take “hot tip” share advice from their mates at the pub, or they actually do nothing because investing is “risky”…their impulsive neighbour who lost money following their own misguided advice says so. People who achieve financial freedom seek advice and guidance, but they also make informed financial decisions and take calculated risks that are right for them. They are not in a rush. They know that investments are like buses. If they miss out on one through wanting to make informed decisions…then another “bus” will be right around the corner. And they will be more informed and capable when that “bus” arrives.
11. They become complacent and accept their current reality.
Too many people just accept what life has dished up to them and don’t try to actively improve their situation. Years ago they might have had grand plans of what their life would look like and what financial position they would be in all the way in future…in 2017. However the present reality is now much different. But rather than be striving to improve their circumstances they have become complacent and settled that this is the best life has to offer. People on the path to future financial freedom don’t settle. They keep learning and growing, and despite set backs along the way, stay committed to achieving their future desired life and lifestyle.
12. They don’t contribute extra into superannuation.
One thing I know for sure is that if you contribute extra money into superannuation throughout your working life…you’ll thank yourself when you are 65. I met with a 38 year old client the other day who has $280,000 in superannuation already. This is outstanding! In fact it’s higher than the average superannuation balance for most 65 year olds…and she still has a 25 year plus career ahead of her. She has always contributed an extra 5% of her income into superannuation. As her income has grown, so too has her super contributions. And her super balance has grown exponentially. As covered in Wealth Creation for Gen X – Is Superannuation still so super? whilst the superannuation rules will keep on changing and most Gen Xer’s and Gen Y’s may not be able to access super until age 70, the main benefits of superannuation are 1) the lower tax environment and 2) the power of compounding over the longer term. Whilst nobody should rely on superannuation as their only wealth creation vehicle, most Gen Xer’s who want to achieve future financial freedom should give serious consideration to “taking money off themselves” and contributing extra into superannuation.
13. They just pay the minimum home loan repayments.
Too few people have a plan to accelerate the repayment of their home loan debt…and additionally they spend 100% of the rest of their income on current lifestyle. They pay just the minimum required off their home loan…which will rise significantly as home loan interest rates gradually return to normal. They will wake up in 25-30 years with their home loan paid off…but unfortunately no other assets apart from their superannuation balance (which they may not be able to access until 70). And your home will not produce an income. Ideally as covered in Wealth Creation for Generation X – Good Debt versus Bad Debt a powerful financial strategy should include a combination of accelerated debt reduction and wealth creation. Plenty of people advocate paying properties interest only and freeing up cash flow to invest. But what if the property market plateau’s for an extended period? And what if interest only loans aren’t available in the near future?..which I believe is highly likely. Debt reduction creates equity in your property(ies) regardless of whether the property market is growing. Many (but not all) people who achieve future financial freedom pay extra off their home loan and investment property loans. They realise that by accelerating debt reduction creates more cash flow for them by saving interest and in turn using this interest savings to further invest in order to create future financial freedom.
14. They plan to pay down their mortgage first before investing for the future.
Even where people might be paying more off their home loan than what is required, people can make the mistake of thinking they should first pay off their mortgage in full before investing towards securing their future financial freedom. As touched on in Wealth Creation for Generation X – Where should you invest your money? it’s important to be reducing debt and building wealth in tandem which one another and not just focus on only one avenue towards achieving your goals. What if that one option (such as paying down your home loan before investing) ends up being the worst option of all options available? Don’t get me wrong, paying down home loan debt should be part of your strategy. Just do it in tandem with investing in quality assets to build towards future financial freedom. The earlier you start investing, the more the powers of compounding will work for you and the less you have to put away personally to enable you to achieve your goals.
15. They and their spouse are not on the same page in regard to their financial and lifestyle goals.
Even if one member of the couple is typically the driving force behind financial decisions, it’s important that couples are “in it together” and both committed to achieving their collective future lifestyle and financial goals. Occasionally we are contacted by new clients seeking advice, however they say that their spouse is not interested in discussing their future goals and financial strategy and won’t be attending the initial strategy meeting or any future meetings…they flat out just aren’t interested. It’s almost a waste of time mapping out a financial strategy unless you and your partner are on the same page (which is why we highly recommend that both members of the couple attend at least the initial strategy meeting…and ideally all future financial strategy meetings). This doesn’t mean that you need to work evenly on your strategy together, but at least be able to have open and honest communication as to where you are now and where you want to be in the future. If couples can’t communicate openly enough to develop a strategy together to achieve their future financial & lifestyle goals, then it can be worth considering having separate finances and separate financial strategies. Some clients have done this quite successfully (out of necessity) as their partner has their head in the sand and refuses to take it out. When you are both on the same page in terms of your short & longer term goals, developing a strategy to help you both achieve these goals becomes a lot easier and realistic. If you are the driver in your relationship in regard to finances (and let’s face it you must be if you’ve read this report this far…assuming you didn’t jump here first) then the key is to develop common ground and shared goals that you can both then commit to working towards and being “in it together”.
16. They take on too much risk…or too little risk.
It’s important for you to know your risk tolerance (including debt management, investment risk/volatility and cash flow requirements to help fund investment strategies). Many people don’t achieve their financials goals due to taking on unnecessary and ill-informed risks. They buy a property or a business without proper due diligence or a back up plan. The put too much money into speculative shares hoping to triple their money in a few months…this is gambling, not investing. One of the greatest risk that people can take right now (and for the past few years) is buying apartments off the plan. This is likely to cause a lot of pain for many people over the next year or two as they go to settle and banks potentially value them at significant less than the contract price. High risk strategies like this can leave people in a massive financial hole that takes years to bounce back from. On the flip side, another large risk is not taking on any risk. Paying down your mortgage and then investing in cash earning 1% above inflation is unlikely to help you achieve financial freedom either. Those on the path towards financial freedom, take calculated risks. They are clear on what they want to achieve, understand the various complexities of their risk tolerance, and they execute on their plan to buy quality assets and develop multiple income streams to help them achieve their financial and lifestyle goals.
17. They don’t know “how much is enough”, and therefore don’t aim high enough.
It would be hugely disappointing to think you were on track to being able to “retire” comfortably at say age 65 and then get there and realise that you don’t have nearly enough to cover the lifestyle you envisaged…whether that be due to the age pension you were relying on not being available, life expectancy dramatically increasing due to medical and technological advances, or relying on well meaning but potentially dangerous studies around the level of assets a couple needs in retirement (dangerous because they rely on current rules or out of date assumptions). As detailed in Wealth Creation for Generation X – How much is enough…really? I’ll go out on a limb and say that if you are currently 45 years or younger 1) you will not be able to access your superannuation until you are age 70, and 2) the Age Pension will not be around by the time you retire. If it is, then it may only be available when you are down to your last dollar and have been forced to sell your house! Those on path towards creating their own future financial freedom, know that the government will not be there to help them like they do current retirees. They are building assets both inside and outside or superannuation, so when the accessibility rules of superannuation change, it doesn’t matter as they were expecting it and have sufficient overall assets by age 60-65 to help fund to future desired lifestyle in a sustainable manner…even if they happen to live to age 100+.
18. They don’t maximise their earning capacity.
Fuelling your financial future requires cash flow…consistently. However this is a challenge for most people given 90% of people spend everything that they earn. As covered in detail in Wealth Creation for Generation X – Making yourself more Valuable there are only two ways to create cash flow; 1) Reduce expenses (not overly exciting but often necessary), and 2) Increase income while keeping expenses constant (far more exciting but easier said than done). There is a limit to how much expenses can be reduced, so the real pay off is to increase your income. So in this day and age where wages increases seem close to non-existent, how do you increase your earning capacity? And the answer is…you make yourself more valuable. People on the path towards future financial freedom run their personal finances like a business – with the goal of making a profit each year and growing those profits over time. They invest in themselves and they consistently grow their earning capacity by adding as much value as possible to their employer/business and their customers/clients lives.
19. They don’t have the required self discipline to stick with it.
This is the main reason that human beings don’t achieve many of their goals in life. Working towards future financial freedom is no different to becoming and keeping fit…it requires self discipline and consistent effort. You don’t get fit by just going to the gym once. You need to exercise regularly, eat well and avoid some bad habits. It’s no different with your personal finances. Those that want a quick fix, get rich quick solution are going to crash and burn and will be largely reliant at whatever minimal age pension there is by the time they retire. People who achieve financial freedom do so through consistent effort over the longer term. They may not necessarily be more self disciplined than others, but they have systems in place and a team around them to keep them on track and hold them accountable towards achieving their goals.
20. They don’t have a Game Plan.
As covered in Wealth Creation for Generation X – Introduction Part 3 most people (from a financial perspective) drift through life and from time to time have their head in the sand. There has never been a more important time to be building towards your own Financial Freedom than right now. But this won’t happen through positive thinking…you need to work at it…and it’s important to have a Game Plan. At The Practice we are big believers in having structure in developing holistic wealth creation strategies for our clients. The structure that we use is what we call The 3 Pillars of Cash Flow;
- Pillar #1 – Building: Develop strategies around how to best create and use cash flow to cover your current lifestyle. While also creating and using cash flow to manage and pay down your mortgage (or other debts) in tandem with building assets to cover your future lifestyle.
- Pillar #2 – Freedom: The Freedom “pillar” is about building enough investment assets to cover your future “retirement” lifestyle and have complete choice whether you work or not.
- Pillar #3 – Protection: As covered above your greatest asset is your ability to generate income. It’s crucial to have a strategy around how to best protect your earning capacity as this is required to fund the other two “Pillars”.
21. They try to figure it out all by themselves.
Very few Australian’s actually seek any sort of financial advice throughout their lives. In fact survey’s conducted by BlackRock indicated that only around 15% of Australian’s seek advice from a financial adviser…and the majority of these people are aged 55-64. While the number above is small, the study also indicated that of those that sort of financial advice to help map out their financial future…89% of these people found the advice extremely useful. Most people who have either achieved financial freedom, or are on the path towards achieving financial freedom, have a team around them (of advisers, accountants, mortgage brokers & lawyers) to help advise them, challenge them and work together as a collaborative team to help them stay on track towards achieving their future financial and lifestyle goals.
No matter where you are currently starting from, it is possible for you to improve your financial situation. And provided both cash flow and time are available, it is possible for most people to achieve future financial freedom within their working lives…and you can too (provided you really want to that is).
Matthew Morrison is the Director of Wealth Advisory at The Practice, a Personal Wealth Advisory & Business Advisory firm based in Parkville, Melbourne. Matt along with The Practice team are committed to and passionate about developing & implementing wealth creation strategies for clients to enable them to Fuel their Family’s Future (while protecting them along the journey).
Matt and The Practice team can be contacted via http://thepractice.com.au or (03) 8888 4000.
Disclaimer – the above views and ideas are general advice only and are purely the opinions of the author. It’s important that you seek professional advice tailored to your needs before taking action regarding your financial future.