14 July 2016

First steps to financial well-being

Sonnie Bailey

Trent Hamm at “The Simple Dollar” blog has an interesting article titled “10 things you need to do before you start investing“. I agree with much of the article. In particular:

Money can help or hinder you, so it’s a big part of the equation. Some recurring themes: own a home; educate your children; become financially independent.

Fair enough, but there are many different types of homes, educations, and definitions of “financially independent”. What suits you?

And if you’re in a relationship, it’s important that you and your partner are on the same page. 

  • When it comes to your financial life, your net worth is the key metric.

I tend towards excluding lifestyle assets other than your home from this calculation. I even exclude cars. Why? Because for the most part, the type of car you drive is a consumption decision. It makes me think twice about buying that Porsche. 

  • Pay off your high-interest debts.

Credit cards are a prime example. If you’re paying interest at 15%, paying off that debt is a guaranteed, risk-free return. You won’t get that anywhere else.

  • Wean yourself off your worst spending habits.

If you want something, consider: waiting a bit, renting it, borrowing it, finding what else you have that might do the trick. Remember that every dollar you spend, is gone forever

Again: the aim is to spend your money on things that reflect your priorities and values..

  • Once you’ve done all of the above, if you have any other debts (including a mortgage) consider doing everything you can to pay it off. If you can do it a year or ten early, that will have a huge impact on your future outcome. And remember – the interest you’re repaying is pre-tax and risk-free. It’s a great deal.

Investing is an important part of becoming financially independent and having a comfortable retirement. But it’s not the first step. Especially for people getting started in their professional lives, investing is secondary to knowing what you want and value; focusing on the right metrics; debt and cash management; and being mindful of your spending habits.

You need to be in a position to have funds to invest, in order to invest. 

Related: Getting rich slowly – building a solid foundation for long term wealth


About the author 

Sonnie Bailey

In his spare time, Sonnie likes telling people that he’s a former Olympic power walker, a lion tamer, or that he is an orthodontist. He is none of those things. In reality, Sonnie is a financial planner based in Christchurch. Through his business, Fairhaven Wealth (www.fairhavenwealth.co.nz), he provides independent, advice-only, fixed-fee financial planning services. Sonnie is a “recovering lawyer”: he has specialised in trusts and personal client work. He has also worked as a financial services lawyer for many years.

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