I’ve often been asked by my mentees, what advice would I give to someone who is just starting out and want to become financially independent as fast as they possibly can. My best advice to you is – don’t make the mistakes I made! As a young 20-year-old, the world was at my feet and I could do no wrong. I was invincible. As a 65 year old, I know better. I made “money” my career – I am, after all, a Chartered Accountant! But even accountants make money mistakes. And I made so many that it’s just not funny. Admittedly, I’ve had a really wonderful time, I’ve travelled the world many times over and I’ve enjoyed life. The only wish I have is that I had a mentor earlier than I did because I wouldn’t have made half the mistakes I made. Hindsight is wonderful and a great teacher.
What do I mean by financial independence? It means that at some stage in your life, probably at retirement but it could be earlier, you can say that you have a choice what to do with the rest of your life, because you have enough income from investments, or you have enough investments to generate sufficient income not to have to rely on your present job.
For many people this is a pleasant thought. But can it be achieved?
Depending on each person’s circumstances the answer is always YES. It can be achieved to at least some degree. You may not be able to leave your present job or business but you should be able to ease the financial burden. What do you need to do? No surprises here – determination and discipline are the key ingredients from the individual’s point of view.
COMMON MONEY MISTAKES
I’m sure it’s nothing new to you if I tell you that we (as in the human race) keep making the same mistakes. The most common money mistakes, in no particular order, (and dare I say, I’ve made most of them and some have resulted in spectacular losses) makes for some “entertaining” reading.
Money Mistake #1
I didn’t establish a financial plan when I first entered the work force. Herein lies Money Mistake #1 for most people. When we’re young and invincible, this is just boring stuff that can be left till at least middle age before we have to think about it. Besides, I didn’t think I needed it. I had plenty of time to do that “later”.
If done properly, a financial plan is a solid exercise. The process involves:
- Summarising our personal position i.e looking at our assets, liabilities, income, expenditure, insurances, family position, dependants, etc.
- Identifying our short-term and long-term goals and objectives.
- Identifying any current problem areas e.g. skills, mindset and habits required
- Knowing our risk profile – What am I comfortable investing in and what is my attitude to fluctuating markets.
- Seek professional advice.
- Implement the recommendations.
- Review investments on a regular basis.
Did you do any of that? I didn’t. At 30, I thought I was still too young to worry about it. At 40, I thought I still had plenty of time. At 45 I knew I should have done it when I was 20! That was my mistake.
Money Mistake #2
I decided that the only investment I needed to make was in my business. My business was going to be my superannuation nest egg. Whilst I did pretty OK with this one (having sold my accounting practice in 2001), it is actually not sensible to do that. Covid-19 has just wiped out all the goodwill in many businesses. Healthy viable businesses that would have been saleable just 6 months ago is not worth much today as sales plummeted and overheads drive many to bankruptcy. I was lucky. Not everyone will be that lucky. With hindsight, I can see that this attitude could have seen my entire superannuation nest egg wiped out and turn this into my biggest money mistake.
The answer therefore is to make sure that you invest elsewhere too. The main areas of investment are:-
- Shared Related – Either direct on the stock market or through equity trusts.
- Property Related – Either direct into residential or commercial property or through property trusts
- Interest Bearing Deposits Investments – These can range from short term cash deposit to long term first mortgage debentures and government bonds.
I can’t advice which you should do. I strongly recommend that you seek proper professional advice on this. The golden rule is to invest consistently and as early as possible! There are two very good books that anyone interested in financial independence should read – The Richest Man in Babylon and The Millionaire Next Door. I wish I found out about both much earlier than I did.
So, TODAY is a good time to start investing. It is never too early to start! Even if the amount to invest is small, any start is better than no start! I started a savings account for my grandsons the day they were born. One day, grandma is going to be their favourite person in the whole wide world when there’s enough in their piggy bank to pay for their first car J.
Money Mistake #3
I thought I would be an accountant running my own accounting practice till the day I retire. My father only ever worked for one employer. I was brainwashed as a kid to study hard, get a job, work hard so I can please the boss and rise up through the ranks with that one employer.
Money mistake #3 for me was to carry the remnants of that mindset with me till I was nearly 45. We face increasingly rapid change – we cannot easily predict where any country is heading nor where we would be next year. Job security is no longer a foregone conclusion, continuous education is the norm, and from a national point of view all countries are at the crossroads – no longer can we simply rely on its our traditional industries. We must now compete on the international stage and produce products and services that are in demand.
At 45, I had an epiphany, sold my accounting practice and ventured out into the unknown. The next 20 years took me on a journey to property development, manufacturing, retail and now business mentoring and coaching and hospitality. The skills I need today are different to that which I needed when I ran my accounting practice. At 45, I realized that I needed those skills and started on a journey of personal growth. I found mentors to fill my skill gaps.
What does this have to do with money? A lot. Without it, I would probably have given up at the first sign of trouble. I would probably still be running an accounting practice and it would have become a “job” rather than me doing something I love to do. I would have listened to the naysayers telling me to “get a real job”. It is this growth that has strengthened my entrepreneurial mindset and enabled me to chase my dreams and do that which I am passionate about.
Money Mistake #4
I spend a lot of my time advising my clients to get their house in order. Never assume that you will live forever or that you have plenty of time to do this. I always work on the basis that I may walk under a bus tomorrow (not intentionally). My family need to know how and where to access my information.
I’ve seen too many incidences of the bereaved widow or widower struggling to sort out financial affairs because it is all over the place. Often times, there isn’t even a will and the public trustees step in to administer the estate. Before you know it, the estate has been depleted by trustee fees. None of these are too difficult – what is required is acknowledging that it must be done and just doing it. Reasonably simple systems can be implemented to put these matters in order and to keep them under review.
The rule is – do this now or everything you’ve worked for will go to pay lawyers and accountants instead of those you choose. Of course, some do have the attitude of “who cares” because they won’t be here to worry about it. That is your prerogative. As for me, I prefer to make sure that those I care about will have to pick up a mess when I’m gone.
Money Mistake #5
I have never ever had a problem borrowing money from the bank. I had a good accounting practice with more than sufficient income to support any borrowings needed to fund the various projects I was doing. I knew all the parameters the banks work with (Check out my previous blog XXX for details on how to keep the bank manager happy J). I knew I could comply easily. My money mistake was to think this was never going to change. We tend to get complacent. And that’s not a good thing.
The “unexpected” happened when the Global Financial Crisis (GFC) hit in 2007 and the market crashed (although it was predicted by some financial analysts that we should expect this).
Then just as it got good again and the economy was bouncing along, Covid-19 hit. It has spread with alarming speed and according to the World Bank will cause one of the deepest global recession in decades.
If there is one lesson that we should all learn from the GFC and Covid-19, it is that CASH IS KING. If you owned your business premises and you had no borrowings, the GFC and Covid-19 would not have impacted you to the same extent. You would not have been left in the position where you have to negotiate with a landlord to reduce or waive your rent. Financial independence in this case means that not only will you survive the current Covid-19 crisis, you will emerge stronger on the other side – simply because your competitors who are most likely to be highly geared would not have survived!
I’m not advocating that you do not borrow at all. There are good borrowings and there are bad borrowings. What’s the difference? Good borrowing is one that will increase your net worth. Bad borrowing is when you borrow to purchase depreciating assets. Make sure you only have the former.
Money Mistake #6
Refusing to do any tax planning because you believe it is a waste of time is another common money mistake. Proper tax planning will save you a lot of money. The old adage, “failing to plan is planning to fail” applies.
In my previous life as a practising accountant, I had clients who begrudged paying accounting fees to the extent that they refused to do any tax planning at all and ended up paying the maximum amount of tax each fiscal year. On the other side of the spectrum were those who wanted to use every loophole possible and pay no tax at all.
Neither works. Tax evasion is illegal and never to be condoned. On the other hand, a taxpayer is entitled to structure their tax affairs in such a way as to minimise the amount of tax they pay each year – provided you do it within the letter and spirit of the law.
There are many ways to save on your tax … It is generally achieved by using deductions, exemptions and structures to reduce your taxable income. However, I’m not going to discuss those here. Every country has its own tax laws and there is no way I can cover every country on an article that is read cross borders. They are therefore more appropriately discussed with your own tax advisor who knows your particular circumstance.
What you should be aware of are some of general principles when you decide to do tax planning. The worst thing you can do is to not do any tax planning and maximise your tax contribution each year.
- One of the favourite ways that tax advisors use is the pre-pay your expenses up-front. Be aware, many countries also have rules as to how far ahead you can prepay your expenses. The biggest disadvantage of doing this is that you have to cough up the cash upfront to get the tax deduction – and that is not always going to be possible. After all, the only other reason you need the tax deduction, apart from reducing your tax bill, is that you haven’t got the money to pay the tax in the first place!
- There are obviously “schemes” and various “incentives” available that will reduce your tax … but such tax planning measures must be considered to be risky as they tend to rely on the availability of the tax deduction to give you a positive return on investment. Generally, they are all based on one tax barrister’s opinion against another and they tend to be very heavily marketed. Any tax planning must be based on sound commercial principles regardless of the tax advantages gained. If it doesn’t make sense to you commercially, it will be just as easy for the Tax Office to argue that this is a tax evasion scheme! Making business decisions for tax reasons is not a good business decision.
- To avoid getting into deep waters with your Tax Office, review any tax claim against the old adage “if it’s too good to be true” is probably too good to be true! You would not want to be in the position where you are audited and then asked to pay up additional taxes. Or worse, be subject to the court’s decision that may take 2-3 years to resolve in court AND penalties if you lose the court battle! AND we all know lawyers are not cheap!
- Grill your tax advisor and get proper written advice that deals specifically with the facts of the situation. Seek a second opinion if necessary. It’s better to be safe than sorry.
Money Mistake #7
Money mistake #7 is to make investment choices based on tax effectiveness rather than sound commercial reasons. Many people begrudge paying taxes and they will go to great lengths to avoid having to pay any tax at all. That is a self-imposed limitation that hurts no one but you.
I have had clients who tell me that they don’t want to earn more than $25,000 a year (or whatever the zero-tax threshold is in your country) because they don’t want to pay any tax. That’s crazy thinking. Wouldn’t you rather pay $1 million in tax because it means you’ve earned a lot more than that? Or would you rather earn $25,000 and pay no tax. I know which I would opt for.
Then there are the negative gearing advocates. These are the people who will often over-stretch and borrow to invest because the Tax Office will allow the interest payments as a tax deduction. Unfortunately, many soon find themselves unable to service the shortfall and end up having to sell out at a loss. I much prefer positive gearing – where the after tax cost of gearing is lower than the expected return to be generated. Negative gearing has a self-imposed limit whereas positive gearing is limitless.
Money Mistake #8
One of the biggest money mistakes you can make is to not focus your business efforts on your strengths. Don’t allow yourself to get distracted by all the shiny new opportunities that presents itself to you. Singaporeans are well known for having this “kaisu” weakness. Shortly after selling my accounting practice, I made the terrible mistake of taking on too much and in areas I should not have ventured into. I had money in bank from selling the business and I thought I would try something new and entirely different. THAT was stupid.
At one stage I was running 6 businesses in one go. That was a bad money mistake and definitely not to be recommended. I did none of them really well. Don’t get me wrong – I managed to do an OK job. I just didn’t do great job. And I know that I could have done a great job if I had focused on just the one in my area of strength. What is yours? If you’re not sure, have a read of this article by John C Maxwell. It was written a long time ago in 2008 but still perfectly valid today.
I could actually go on and on. My litany of money mistakes in my 40+ years in business could fill a book J. My biggest loss cost me $600,000. Ouch! The older I got, the better I got at what I did. I would hope so too! The last 20 years of actively pursuing personal development and growth has made a big difference to my approach and thinking. I look back at my foolishness when I was just 20 and I do regret not pursuing this much earlier than I did. That was my biggest money mistake. Don’t let it be yours.