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Wednesday, June 27, 2012

How to get what you want

How do I get what I want?  That's the million-dollar question isn't it?  Sometimes I find it impossible to believe that I can get what I want.  Maybe I'm just impatient.  Maybe I'm not being realistic in what I can actually get.  Or is the form of what I want inconsistent to the how the universe works.  Let's say that I want one million dollars to appear in my bank account.  I realise that this is perhaps a silly wish.  After all, if one million dollars suddenly did appear, and it wasn't a bank error, would five minutes actually pass before I started to spend it?  So for that reason alone, I would never really achieve my goal.  Perhaps I need to think things through a little more.  On the other hand, certain things like my million dollars, seem like such an impossible dream that I don't even allow myself to want them.  The thought is so fleeting that I don't even realise that I even entertained the thought that I wanted something, let alone remember what that something might have been.   My mind automatically dismisses the idea before I'm even conscious of it. 

So how do we get what we want? The first step would have to be, to allow ourselves to want something.  After all, if we don't want anything, or don't let ourselves want anything, nothing is going to change is it?  So... step one.. decide what you want.  For people who have never let themselves want anything, this can be the hardest part of getting what you want.  Get yourself a piece of paper and write down anything and everything that comes into your head that you might want.  When I start doing this, I tend to think of cliche-type stuff. Private Jet, Helicopter, Jet-ski, Beach House, Yacht, etc.  I actually want none of these things but I write them down regardless just to get them out of my head and move on to the things that I actually want.  I try to write down at least twenty things because then I have to really think.  I really can't get excited about those first few, not because they are so far out of my reach that they are silly goals.  By all means if you really want a private jet then you should keep it on your list, but I don't regard them as realistic goals for me because, I don't like travel, I don't like salt water and sand irritates me.  My parents have a beach house and when I go there to visit, I can spend an entire week without touching the sand or surf, or sitting on the balcony looking at the water.  So lets get these ridiculous fantasies onto the page and then really think about what we actually want.  Stick with this step for a whole day.  Like a shopping list, put it somewhere handy and keep coming back when you think of something else.  Go do your daily routine and let your mind wander back on its own accord to add to your list when the inspiration arises.

So we have a list... now what?  Pick out the thing that speaks to you the most and let's work on that.  It's all well and good having your wish on paper, but if we do nothing else, it's like my million dollar wish and probably not likely to happen.  What we need to do is tweak the wording or our goal to make it more achievable.  A good way to do this is to use the SMARTIE formula.  SMARTIE stands for Specific, Measureable, Attainable, Realistic, Time-bound, Inspirational and Emotional.  If we review these one by one and change our wording of our goal, I think you'll find that it goes from a silly wish to something that you may actually be able to get.  Lets use my million dollars as an example and really work it through this system.

Be Specific.  What is it that I actually want?  Do I want one million dollars? Or do I want something that the million dollars can buy?  What would I actually do with one million dollars?  When I think rationally about this, I imagine that one million dollars would be completely wasted, sitting in a bank account. After all, interest on bank balances is pretty pathetic.  I'd much rather have my money working harder for me than just earning bank interest.  Personally, the million dollars represents the opportunity to purchase investments such as property or shares.  These would be used to produce an income which I could use for the option of enhancing my lifestyle or increasing my investments.  Here, I'm going to change my original wish for one million dollars and instead, replace it with a One million dollar investment portfolio.  Still, I don't know that we've gotten specific enough so I'm going to get even more specific by suggesting that I want two $350 000 investment properties and $300 000 worth of shares.  There.  That's one million dollars.  It's not in my bank account but it is in a recognisable form.

That takes care of the S in SMARTIE.  Now for the M.  M stands for Measurable.  Can this goal actually be measured.  Will I know when I have attained my goal?  How will I know?  If my goal had been to maintain good health, this would be difficult as I wouldn't know when I have achieved this.  Even my investment portfolio is not quite measurable as I could have these things but with borrowed money.  The question is, does it count if I had to borrow the funds? And if so, how much of it can be borrowed and still have the goal considered to be achieved?  Let's explore the option of having my million dollar investment portfolio completely debt-free.  I would then have a net worth of one million dollars.  That's measurable.  I would know this has been achieved when I have two $350 000 properties and $300 000 worth of shares with no borrowings on them.  That works for M.  Let's see if it stacks up with the rest of the SMARTIE.

Moving on to A.  A stands for achievable.  This is a little harder to measure.  How do I know what I can reasonably achieve.  Is it possible for me to have this investment portfolio?  What would be an unachievable goal?  Flying to the moon using my arms as wings comes to mind as something completely unachievable.  Owning two houses and a bunch of shares is probably reasonable.  While I have the ability to earn an income, my portfolio is probably not out of reach.  It may take me fifty years to get there (hopefully not) but I'm going to suggest that we've covered the Achievable criteria and move on.

R stands for Realistic.  Is my goal realistic?  Possibly.  But I think that I can make it more realistic.  Having two properties and a share portfolio completely debt-free doesn't actually make a lot of sense to me.  After all, there's the theory of compounding to consider.  By this I mean that the more money I have working for me, the faster it will grow.  I could use equity I already have, to get a loan for a property and watch my net worth increase as the value of the property increases.  If I'm going to do this for one property, why not do it for more?  I don't think that I would realistically stop at two properties if I had enough equity to buy more.  More investments mean faster growth and a shorter time period towards reaching my goal.  I still want my million dollars in net worth but it makes more sense to me to use borrowings to get there.   Also, if I was to buy two properties worth $350 000 each, by the time I had these paid off, they would be likely to be worth a whole lot more because of capital growth.  I may even get to the point of having a property worth $550 000 and only owing $200 000 on it.  That would be the same as owning a $350 000 property outright wouldn't it?  Let's imagine that I get to that point.  I'm not likely to trade this one in on a lower priced property just to achieve my goal specifically.  So to make my goal more realistic, let's change it to this:  My goal is to have an investment portfolio consisting of shares and property which has a net value of one million dollars.  I concede that this is not quite as specific as the two properties and $300 000 in shares but I think that it is still specific enough to be measurable and it is far more realistic.

T is for Time-bound.  Here's where it get's a little scary.  Up until this point, I can brush off this exercise as a bit of fun or a bit of a dream but now we get to the point where we make ourselves accountable for actually achieving the goal.  In this part of the goal setting process we decide exactly when this goal is to be achieved.  Without this step, you can drag the process out indefinitely.  I'm reluctant to place a time on this.  What if I fail?  The answer to this question is this: It doesn't matter.  If I get the timing wrong, I'm still going to have made some progress towards the goal aren't I?  That's got to be better than not trying at all hasn't it?  After all, life happens and we can't predict what's around the corner.  But without a goal, without an estimated time for achievement, I have no real accountability for my actions (or lack of).  Let's just get something down.  I can always change it later if I think that I might get there faster or if something gets in my way.  Okay here goes:  My goal is to have an investment portfolio consisting of shares and property with a net worth of one million dollars by my fiftieth birthday.  That gives me about fifteen years.  Since the average home loan is for thirty years, this means I will have to put in considerably more money than the average repayment on a loan.  This should still be achievable and realistic as I will have tenants paying rent, and dividends from my shares. Is it still SMART? I think we're still good.

I stands for Inspirational.  So the question now is do I feel inspired by this goal?  Well, it started out as an example for the purpose of this blog but now that I have worked it through, I have to admit that I'm actually inspired by this goal.  Since I've been through all of the steps and decided that it is realistic and attainable for me, I  think I'll go for it.  It's even more inspiring since I know that I'm already on my way.  The vehicle for achieving the goal is already in place, so why not?  I'm inspired.

The last part of the SMARTIE is Emotional.  What is this and why is it important?  Attributing emotion to your goal is about getting up front and personal with it.  Have a think about the benefits that achieving your goal can provide for you.  What's so good about having a million dollars in net worth?  For starters, it can provide me with an income which means that I don't have to work.  It gives me options for the education of my children and that is really important to me.  Being able to enjoy a holiday without looking at the prices on restaurant menus is a big plus.  Mostly, having this money gives me choices.  I probably don't necessarily need a million to achieve this same outcome but it's a nice round number and a specific figure to aspire to.  Let's get excited.

That covers goal setting.  But it hasn't actually covered the how question.  We've decided what we want, made it specific, measurable, achievable, realistic, time-bound, inspiring and emotional.  What's next?  How do we actually achieve said goal?  We by now you should have enough motivation to start.  So start.  I decided that I want property and shares.  If I didn't have one already, I would look into setting up an online trading account.  I might start researching property investing.  I might go to a bank and ask about investment loans.  You have your goal, start.  Do something, anything that will make that first step towards achieving it.  You don't have to know the complete route to your destination, that will become more obvious as you move towards it.  Just begin moving in the general direction of where you want to go and you'll find yourself picking up momentum in no time.  Good Luck!

Thursday, June 14, 2012

How much is too much debt?

Is there such as thing as too much debt?  One person may be comfortable with $5million worth of borrowings yet someone else may be struggling with the $5000 on their credit card. How do we work out how much is the right amount for us?
How loans work
There are two things you need when borrowing money, equity and serviceability.  Equity refers to the value of the asset you are borrowing against.  If you are buying a new car, the car is used as insurance against the loan.  The same goes for a house or property.  In the event that you can’t pay your loan, the lender has the right to sell your asset to recover the cost of the loan.
Serviceability is the amount of income you have that you can put towards paying off the loan.  If you have no money coming in, it doesn’t matter how much your assets are worth, you won’t get a loan.
When borrowing, a bank may lend you up to 60% of your rural property or 80% of your residential property provided you have serviceability.  But that doesn’t mean that you can afford your loans.  Banks have a formula for determining how much money a person can reasonably live on.  Any surplus is considered for repayments of the loan. 
If you borrow right up to the amount that is offered, you could get into financial trouble if your standard of living requires more than the banks have allowed.  Also, if interest rates rise or you change jobs, move house or have a medical situation, you may find it difficult to repay your loan.

Work out what’s right for you.
Each person is comfortable with different amounts of debt.  If you are borrowing for something that will increase your income, factor this into the equation.  If you are borrowing for something that will be used up quickly, factor in repayments so that you are not still paying for it when it is gone.  If you are looking for a simple formula, a standard rule is not to have your total repayments exceed 25% of your income.  This should give you a good buffer for those emergencies.

Tuesday, June 5, 2012

Sticking with it

Forming new habits is hard.  How many of us start each year with a resolution to quit smoking/ lose weight/ start a diary/ get our finances in order or any number of other things only to lose interest and motivation mere weeks later? Down the track we remember what it was that we were planning to do and what happens then?  Do we take ourselves on a guilt trip?  Do we beat ourselves up over our lack of self-discipline?  It's not difficult to take a hit to our self-esteem if we acknowledge that we failed in our goal.  So we often justify to ourselves why it was never going to work in the first place, or instead try to forget that we ever set that goal or downplay its significance.

You don't have to accept failure from yourself for anything.  The goals that you set, or even a slight whim that you would like to happen doesn't have to be completely out of reach.  Here are five simple things that you can do to achieve the goals that you set for yourself:

1.  Don't be too hard on yourself.
You slipped up.  Big deal.  Life happens.  Acknowledge the positive.  You set a goal... That's a big step towards achieving it.  Good for you.  You started to move towards achieving that goal.  Another big step, another commendation.  You lasted ...... days!  Woohooo!

2. Don't play catchup.
Okay so you were going to eat better food and exercise half an hour a day.  You lasted two weeks then spent three days eating only chocolate cake.  This does not mean that you have to starve yourself tomorrow and exercise for a full hour and a half.  Acknowledge that you tried.  Acknowledge that you slipped up and start again tomorrow with the original plan.  This goes for your financial goals as well.  You may have decided to save $100 per week and did really well for three weeks then something happened and you didn't get to save for a month.  Don't try to find the extra $400 in the next pay check.  Acknowledge that life happened, and begin again with the original plan. Save only the $100 and try to stick with it for longer this time.

3.  Reevaluate your goals
Just because you said you were going to save $100 per week doesn't mean this isn't flexible.  If you goal was too ambitious, adjust it.  You tried it, it didn't work, this doesn't mean that the plan was no good in its entirety.  Perhaps you would be better to save only $50 per week.  Keep trying until you find a goal that you can stick with.

4.  Move your deadline.
If your plan was to achieve something by a certain time, and you realise that this is all of a sudden impossible, that doesn't mean that it can't happen eventually.  You want to save $5000 for an overseas trip in September but you're $2000 short.  Does that mean that you give up on your dream?  Heck no!  Keep saving... even at a slower rate if need be, but you can go next year can't you?  If you give up now, all you'll do is lose your confidence and possibly blow the money you have already saved on something that gives you no real pleasure.

5.  Get a coach.
It's much easier to stick with your goals if you share them with someone.  Having someone meet you at the gym for a workout is far more motivating than going on your own.  You don't want to let your friend down so you make the effort to go.  The same goes with any goal.  Get a friend or mentor to keep in touch with you on a regular basis to see how you are going and keep you accountable.  You'll find it harder to put off the work you need to do if you know that you will be getting a phone call in the next week checking up on your progress.  Professional coaches can also help you to find realistic goals and give you the tools that you need to achieve them.  Also, if you are paying for the service, you are far more likely to keep yourself accountable because your wallet depends on it.

Give yourself permission to succeed by not giving yourself an excuse to fail.  An to finish on a cliche: If at first you don't succeed, try, try again.