In the previous post, we looked at the importance of taking financial control and everything you need to know about it. This time, we'll look at what you need to do.
Everything you Need to DO
1. Control Your Spending
All financial planning comes down to income and outgoings. A good budget is at the heart of financial success – there is literally no other way to make it with money than to spend less than you earn. Spending less doesn’t really sound like fun, but if you learn to align your spending with your values, you won’t go far wrong.
What does that even mean? Well, if you have defined what your future might look like, then that will inform the spending decisions you make now. I you are clear on your vision and your values, then aligning the two will get easier.
For example, if you have your heart set on stopping work at 55 and you’re 40 now, and you have 20 years to go on your mortgage, you may plan to overpay the mortgage to get it cleared by the time you reach your desired retirement age. Once your vision is clear enough, you won’t be tempted by other things that come your way.
Keep your visions close to hand. Revisit it regularly, even if you write a statement and display it somewhere. You can find lots of resources on my website about budgeting, plus a course over on Udemy.
2. Control Your Savings Rate
Closely linked to controlling your spending is controlling your savings rate, which is a really important measure of your likely future financial success. However, there is no ‘standard’ savings rate because individual situations are different.
I’d say 10% of your net income is a good starting point, or make that your goal. Once you reach it, increase it by 1% per year if you’re under 30 and 2% if you’re over. If you’re over 50, work harder!
Control your savings rate by staying on top of it. Review it at least annually, and every time you get a pay rise or promotion. If you receive a windfall of some kind, first determine how much you are going to save of that money before you blow the rest on something lovely for yourself.
3. Control Your Costs
When it comes to investing money for the future, you cannot control the returns you will get. You can’t control the stock markets, or the price appreciation or depreciation of your property. But you can control how much of the returns you keep by keeping a close eye on costs:
- Asset management costs: the cost of the funds you choose, or the maintenance and management costs of property
- Wrapper costs: In the case of pensions, ISAs, and other similar contracts, and platforms too, there can be a very wide disparity of costs from one contract to another
- Advice costs: Unless you DIY, you may use the services of a financial planner, an accountant, a property manager or other professionals, and these all cost money
- Tax: The stealthiest cost of all, tax is something many of us can do a better job of controlling than we do
Controlling your finances is about making sure your costs are optimised at all levels of your wealth-building strategy.
4.Control Your Complexity
I think that complexity is the enemy of progress. We can fool ourselves that having complex financial affairs is part of being successful, but I find that those with very simple affairs are the ones who worry least and who enjoy life the most.
Complexity often comes from a lack of control. We move jobs, we gain another pension plan. We do this ISAs with a different company each year. Before we know it, we have six different ISAs, four different pensions and zero handle on what money is where. Keep things simple, refine your plans and portfolio to a manageable form and keep it there.
5. Control Yourself
Finally, remember this quote from Benjamin Graham, the father of modern investing:
“The investor’s chief problem, even his worst enemy, is likely to be himself”. We all need to control our human emotions as best we can. Controlling our money is really about controlling ourselves. It’s about controlling our impulses when they don’t align with our future hopes and dreams, and our fears when markets are falling, and we see the value of our investments fall with them.
It’s about controlling our greed when we see an investment surging ahead and we’re tempted to put everything into it, and our pride when we think we’re a genius investor when instead we got lucky. It’s about knowing ourselves and applying that knowledge to hack our way to success.