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The Fierce Girl's Guide to Finance

Get your shit together with money

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November 2016

An Insider’s Guide to Finance: the risk-reward relationship

I’ve taken plenty of risks in my life. Some were productive, like packing up and moving to London. Leaving my marriage was a big risk that was hard to take, but the right thing to do. Wearing neon patterned tights with a crushed velvet skirt to a mufti day in year 7 – that risk did NOT pay off in either social or fashion terms.

When it comes to money, you need to get comfortable with risk. You see, there is a thing called the risk-reward premium, which means the higher the risk, the higher the (potential) reward.

This also means you can put a price on risk – the riskier the deal, the higher the stakes.

It’s why a car loan has a much lower interest rate than a credit card. The car can be repossessed if you can’t pay back the loan, while the credit card is ‘unsecured’ – they can’t come after you for the delicious cocktails you just bought, and the bank manager won’t fit into that Kookai dress. So the risk is higher for bank and more expensive for you.

Risky Business?

Now I am not saying let’s go to Vegas and put it all on black.

But when you invest, you want to balance the risk within your portfolio and within the asset class so that you get a good return while not losing your money.

Ok wait, I just dropped some jargon there. Let’s break it down.

Your portfolio is your entire wardrobe.

Your asset classes are each section: shoes, dresses, underwear, activewear, etc.

We talk about being ‘underweight’ or ‘overweight’ certain types of investments. For example, when the banks aren’t performing well, you might sell off some of those stocks and become underweight in banks. Or if you think resources are about to get hot again, you buy more and go overweight.

This can apply within one asset class – so you can be overweight on running shoes and underweight on high heels, within the broad ‘footwear’ asset class.

Or it can apply to the broader asset classes, so you have heaps of activewear, but not much in the way of work clothes (yep, me). That would be like having a lot of property (your own home) but only a small parcel of shares.

So now we have the lingo, let’s talk about risk. Here’s what you need to know:

1. You need some risk in order to make money, and that’s ok.

2. You can manage that risk by spreading it around – aka diversification

Now let’s talk more about that.

Why risk is ok.

Risk is what makes you money. It’s the old adage of ‘nothing ventured, nothing gained’. So it’s safe to keep your money in a term deposit in bank, but that’s not going to make you money.

In fact you could even lose money in the bank.

Wait, what?

Thing is, there are heaps of different risks when it comes to money, and one of them is inflation risk. You know how a bag of lollies used to cost 20 cents when you were a kid, and it’s $2 now? That’s inflation.

The value of money changes over time (it’s a really complicated backstory as to why), but let’s just say, inflation usually runs around 2-3% per year. (It’s lower than that right now, but has often been 5-6% in the past 30 years).

If your money is in the bank getting 2% interest, and inflation is 2%, you aren’t making money, but you’re breaking even. But if inflation goes up to 2.5%, you’re actually losing money. The dollar you put in buys less than what it bought a year ago.

This makes intuitive sense right? Things cost more all the time.

So that’s called Inflation Risk, and it’s a risk you face even when you think you’re not facing a risk. Crazy huh.

Here are some other fun and friendly risks:

Interest Rate Risk – The risk that interest rates will change and affect your investment. For example, you buy a property at 5% interest from the bank and then interest rates go up. Suddenly, the $2000 a month mortgage that was covered by rent becomes $2200. Not only do you have to find more cash, it changes the yield – i.e. the return you’re getting for the money you spend.

Liquidity Risk – The risk that you might not be able to turn your investment into cash as quickly as you need to. In the example above, you decide to sell the house as you can’t cover the repayments. But a bunch of other people have been hit by rate rises and are selling too. And with home loans more expensive, the number of buyers falls. So you might have the house on the market for several months, even drop the price. The property investment has low ‘liquidity’ and it can cause all sorts of headaches.

Market Risk – You can be the best stock picker in the world – or pay the best stock picker – but if the whole market falls, it’s pretty likely your investments will fall too. Economies – and the markets they’re part of – are always cyclical. They go up and down – that’s as much a part of life as the fact that you’ll get your period on the exact day you don’t want it to come.  The trick is to be prepared for the cycle and have diversified your risks – that way you can manage the dips when they come.

This is just a short list to give you a flavour. There are plenty more, like

  • sequencing risk (the risk that your investments are in the toilet right at the time you need them);
  • credit risk (the risk that the company you lent money to – in the form of bonds – goes under and doesn’t pay you back);
  • operational risk (the risk that you invested in a company run by morons who bugger it up and lose your money); and
  • concentration risk (the risk that you put all your eggs in one investment basket and then drop the whole darn basket).

You can make friends with risk

I’m not trying to scare you though. You don’t avoid investing just because there are some risks. If I listened to my mum about all the risks of going on holidays to the US (being shot, getting raped, the plane crashing, the car crashing…) then I’d never go.

What you do is manage risk, by being clear about your time horizons and your goals. (A financial adviser can totally help you there).

The rule of thumb is that you only invest in shares if you have at least a five-year horizon, because that’s how long you need to smooth out their ups and down (technically called volatility).

An investment property generally needs even longer because of the costs and drama associated with buying and selling.

And with your superannuation, you have 30-40 years to smooth out the returns, so if you’re young (under 45 or so) then you can tolerate even more risk in the hope of getting higher returns.

Spreading the risk is crucial. The ideal (possibly over your lifetime) is to have a bit of everything. Not just a property, not just shares, not just a term deposit, not just bonds. A bit of everything.

But you can start small. For example, think about a managed fund or ETF if you already own your home. Think about buying listed property instruments (REITS) if you already have shares but can’t afford an investment property.

Basically, don’t just buy a bunch of super cute high heels but then never have any good flats you can walk in.

Risk in a nutshell

So here are the takeaways you should know about risk:

Risk is a part of life, and investing. But if you stay away from crazy, get-rich-quick, too-good-to-be-true investments, you can tolerate and manage risk effectively.

There is also risk in doing nothing. Letting your money sit there and track inflation is a risk, because you risk your future returns and wealth.

So don’t be scared of risk – because the other side of it is reward. Imagine if you never took the risk of drinking too much, wearing too little and partying too hard – what fun stories would you have to remember? Investing is just like that, but with less booze.

Photo credit: Aaron Perkins

 

That awkward payrise conversation: how to slay it (and not piss off your boss)

Now that we are all super BFFs with the four ladies who will make us rich, I want to spend a little bit of quality time with one of them. Think of it as a Single Date on The Bachelor, but no awkward kissing at the end. (Unless that’s your thing, which is fine, no judgement here).

The tricky thing about Earning is that she can be hard to control. There are many factors in play, including the job you choose, your level of experience and the fundamentally patriarchal workforce that embeds a 17% gender gap.

But there are things you can control (unless you’re on an Award or Enterprise Agreement – in which case, stop reading and go watch some Real Housewives, cos I got nothin’ for you. Soz). One of them is growing your salary.

Women are great negotiators

Of the many arguments put forward about why women earn less than men, one is our unwillingness or inabilty to negotiate.

I don’t know about you, but I long ago honed my deal-making skills – with myself. All those complex arguments about whether to eat that cake, but only if we go to the gym and if we just cut a small bit off and there are no calories if it’s off someone else’s plate and look it’s Sunday and I really worked hard this week and it’s gluten-free … etc etc etc.

A brain that spends that much time making trade-offs about the size of your butt can totally nail a pay deal.

And yet I was amazed to find out that my very grown-up, professional, confident friend who has worked in corporate for many years, HAS NEVER ASKED FOR A PAYRISE.

Wait, what?

Now to be honest I am not the best at it myself – I’m lucky to have had bosses who offer them up without asking. But if you don’t have a fair and generous manager who knows you’re pretty effin’ hard to replace, then you need to step up and ASK.

However, having sat on the other side of these conversations many times (as a #girlboss), let me make a few points.

You do not get a payrise for simply showing up. You get rewarded when you do a great job, not an ordinary job. If your performance review is a little iffy, or if you’re as committed to the job as that time Britney performed at the AMAs, then be realistic.

Your salary is linked to the business. A company’s profit has to grow in order for your paypacket to grow, otherwise it just eats into the profits (and no CEO is okay with that). So be conscious of your employer’s financial position, and temper your request accordingly.  

You should take an interest in the performance of your employer anyway (because you are a Fierce Girl), so if you don’t know, ask! Most leaders are pleased to see their team members take an interest in the business.

On a related note, don’t feel bad for asking your manager. It’s not coming out of their own pocket; it’s coming out of the business’s, which is essentially a bunch of numbers on a balance sheet.

Go in high, but don’t take the piss. Arriving at a number to ask for is tricky. You don’t want to go too low and miss out, but go too high and it doesn’t reflect well. In all the salary surveys I have worked on over the years (doing the PR for them), average payrises across the workforce end up between 3-5%.

I’ve sometimes received payrises around 10% though. My friend recently went in for 5% and got it no questions asked – suggesting she could have started higher. So, I don’t have a magic number, but I reckon 5-10% is safe.

You don’t get a payrise because you’re shit with money. ‘As if anyone would think that!’ you say. I can’t tell you the number of times I’ve heard people ask for more money because they need it. ‘Oh this city is so expensive!’ or some version of that.

As a boss, I give absolutely zero fucks about your lifestyle needs, because I am running a business. If your need for wine money is the basis of your request, don’t bother. Please see the first point above.

You only get to go nuclear once. Here’s a scenario: you speak to some recruiters, friends in similar roles and your best friend, and reach a conclusion: you are grossly underpaid.

Now, this may be true or not – it’s hard to know for sure. Also, your market rate can fluctuate depending on whether you’re in a niche sector, have in-demand skills or very specific experience, that make you ‘hot right now’.

So you come to your boss with a figure that you’re sure you’re worth. It’s pretty high. But you feel it’s fair, you state your case and are duly rejected.

So now, do you go nuclear? Threaten to leave – or even get another job and wait for a counteroffer?

In my experience, you maybe get to do this once. And the chances of it working are 50/50, so be sure it’s worth it – and you’re really ok with leaving if they call your bluff. It can also take a toll on your reputation (you look demanding) … but then it could also show you are not to be messed with. So, it’s one option, but use it with care. 

Tips from some bad-arse bossladies

That’s my take on the issue (with input from one of my mates). But because I love you Fierce Girls, I actually went an asked some experts. Jane Neale co-owns an executive search firm called Hattonneale, hiring the people who run corporate Australia. Before that, she slayed it in the male-dominated world of advertising, as managing director of the largest ad agency, George Patterson. (Take that, Mad Men!). She is also an awesome human being, and kindly gave me these do’s and don’ts of nailing a payrise. (Btw – she is far less keen on the nuclear option).

Don’t demand a payrise or give your manager an ultimatum.
Do put forward your case for an increase in a businesslike way: why do you deserve a payrise? – list your achievements in your role in a clear and measured way.

Don’t focus on hours spent on the job.
Do focus on outcomes and achievements.

Don’t compare yourself to other colleagues as a way of leveraging support for an increase.
Do focus on your own merits.

Don’t threaten to leave if you are not successful.
Do ask for feedback and seek clarity on what you need to focus on to ensure you are in line for a review next time.

Don’t have unrealistic expectations.
Do your homework and be clear about the broader market and business performance as well as your own performance. Is this an environment when increases should be expected?

Don’t blindside your manager at an inappropriate time or place.
Do schedule a meeting when you both have time for a proper conversation.

Then I asked my own boss, whom I actually called Bosslady (she calls me Bey, obvs). Philippa Honner has run her own PR agency for 20 years, so she knows a thing or two about, well, everything. She says:

“Put yourself in the Bosslady’s shoes and think about what you are contributing to the place you work. This can be a commercial contribution, but also softer stuff like being a good team player, being positive and helping make the company a better place to work.

“If the Bosslady divided the staff in to stars and less shiny people… are you making the stars list? Make sure you really understand the value of what you are contributing so when you ask for a pay rise, you can explain why you think you deserve it on the basis of your contribution now, and in the future.

“Because even if the Bosslady likes you, it’s her job to run the business and make a profit so she can pay everyone, and have a bit left over.”

So there you go ladies. Earning and you are now much closer: you’ve invited her to your birthday drinks and friended her on Facebook. Now, make sure you keep up the friendship if you want to get rich.

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The 4 best friends who will make you rich

A wise man once said “Get rich or die tryin’”. Ah yes, Fifty Cent. You fill us with ambition. But how do you get rich? And what is ‘rich’ anyway? I’m not talking about the richness of family,…

Source: The 4 best friends who will make you rich

The 4 best friends who will make you rich

A wise man once said “Get rich or die tryin’”. Ah yes, Fifty Cent. You fill us with ambition.

But how do you get rich? And what is ‘rich’ anyway?

I’m not talking about the richness of family, friends and emotional connections.

I’m talking cold, hard cash that makes you feel like you’re in a rap video wearing giant diamond necklaces*.  

However, most of us aren’t going to get rich by a) marrying a millionaire b) inheriting a fortune or c) inventing Post-it Notes**.

And so, I’m introducing your #squad. Actually, your #richsquad. Probably not as hot as Taytay’s girlsquad, because we don’t have Gigi Hadid.

But these girls will have your back – as long as you get to know them, respect the hell out of them and don’t sleep with their boyfriends.

Introducing: Earning, Spending, Saving & Investing

Earning is pretty hot but doesn’t always get noticed. Girls are socialised not to pay attention to her. We take lower-paid jobs in lower-paid sectors. We take time out to raise families. We ‘follow our passions’ and other bullshit.

We are told that Earning is more of a guy’s kind of girl.

But you need to take this chick seriously.

Always be maximising your earnings, and don’t apologise for it.  Don’t ignore the power of boosting your paypacket – whether by making the right career moves, asking for payrises or having a side hustle.

And pay attention to Earning when you have to make life decisions. Firstly, she’s hard to win back if you leave her alone too long – if you step down, cut your income or take time out of the workforce, it can be really hard to catch up.

I’m not saying you should let her control your whole life. I made a decision to work a 9-day fortnight, which cuts my income by 10%. Is it worth it? While I’m studying, yes. Am I conscious of the hit I’m taking? Yes, and I review it often.  

Spending is everyone’s favourite fun friend. She loves ordering shots and telling you to live a little.

But this friend is a little cray-cray; she needs to be handled with care. DO NOT let Spending take over your life or your credit card. She makes you feel good when you are out partying, but she leaves you with a hangover.

The key to a healthy relationship with Spending is to give her respect and pay attention to her. Define the boundaries of your relationship. Embrace mindful spending (read more here). Be clear on what you will and won’t do with this friend.

Because if you let Spending take over your life, you will never be rich. You will feel rich at the time you’re hanging out together. But over time, she can be a bad influence who holds you back from achieving your goals.

So if that bitch tells you that you need to drop hundreds of dollars eyelash extensions, shut her down and go hang out with your other, more sensible friend…

Saving. Your quiet but powerful friend. She isn’t as glamorous or as fun as Spending, but she really does have your back. She will help you reach your goals, be there for life’s unexpected dramas and generally be an awesome wingman.

She loves inviting your over to drink reasonably-priced wine, rather than go out to fancy bars. She makes you bring your own lunch to work, only ever buys stuff on sale and tells you to follow a budget.

But Saving is a true friend, and the more you get to know her, the more you’ll see her value. You see, she gives you choices and opportunities, and makes you feel far more in control of your life. Aaaand, she will introduce you to her smart and sassy friend…

Investing. This chick seems scary at first, because she’s so clever and uses a lot of big words. But don’t be put off – if you listen for a while, she makes sense.

And Investing is actually the one who makes you rich – or richer. She gives you money all the time. Like, for free! Just to say thanks for being friends.

Investing takes your money, multiplies it, and gives it back to you. That’s not something Spending can do. And while Saving does it a bit, she’s pretty tight – she buys you a coffee, whereas your glamorous friend Investing buys you an espresso martini.

So please don’t turn your back on this lady when she tries to befriend you. She can be hard to get to know. Ok, so she seems like a total know-it-all bitch at first.

But once you get past all the bullshit jargon, Investing is your true friend, and she’ll help you become more than you ever could on your own.

So that’s it. Your #richsquad. And you know what your #squadgoals are, right? Independence, freedom and choices. (Not flashy clothes and fancy cars. Well, maybe a few).

The thing is though, just like the Sex and the City girls, or the girls from Girls, or the Gilmore Girls, or the Spice Girls, or any other famous girl group, they function at their best when they are all together.

Cut Investing out, and you will just chug along,never really getting ahead. Give Spending too much booze and she will wreak havoc. Ignore Earning for too long, and she’ll start drifting from you. Drop Saving, and you’ll feel out of control of your life.

So, make friends with ALL of these lovely ladies, and you’ll be a Fierce Girl for life.

*(I’m thinking of the line from Ludacris’ Stand Up, where he says “Watch out for the medallions/My diamonds are reckless/Feels like a midget is hanging from my necklace”)

** That’s a Romy & Michelle reference, duh.

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