Do you ever find that when you’re being ‘good’ with your diet, you’re really good in the morning. No muffins for me!
Pretty good at lunch. I’ll take the sushi instead of the schnitzel thanks.
And by 3pm? If I open the work pantry and there happen to be TimTams, it’s not my fault if they fall into my mouth.
Well, you’re not alone my friend. There is a real scientific concept called decision fatigue.
From the moment we wake up, we’re forced to make all these small decisions. What to wear, what to eat, when to leave, how long to spend on Instagram.
And this literally drains our brains of power.
In fact, a study on this topic found that judges hearing parole cases were more likely to grant parole in the morning, when they were fresh and unfatigued. When they got tired and cranky, it was easier just to say ‘no, go back to jail’.
The one variable was that straight after lunch, they perked up and started saying yes more. Until TimTam o’clock, that is.
But the take-outs for me, in relation to money, were three-fold.
1. Don’t shop at night – I’m as fond of a Thursday night jaunt as the next girl. But if you’re tired and over work, there’s a good chance you’ll make questionable decisions about what to buy.
Of course, we may have shopping emergencies (who doesn’t?). But in general, try and save your shopping sprees for a weekend morning, or at least a lunch break after you’ve eaten. Much better chance of buying something you actually need and like.
Similarly, cruising the ASOS or Iconic websites in front of the TV might not be the best habit if you’re trying to save money.
Maybe just limit yourself to filling your shopping cart but not hitting the checkout til the next day. You’ll feel differently in the morning – I very rarely make a purchase in this scenario.
2. Sometimes a ban is easier than moderation – If you’re trying to make decisions about whether to buy something, and you’ve already made a bunch of choices that day, it’s pretty easy to say ‘bugger it, spend the money’.
But what about if it’s not even an option? No decision required in that case.
If I’m trying to save money, I ban myself from shopping for a month. I also find it easier for losing weight. For instance, if I have to try and weigh up whether to have a wine, I usually go with yes.
But if I just say ‘no booze in October’, then I don’t expend energy trying to justify it.
I get that not everyone works like this (the rebels among us). Some people just need to break a rule as soon as they impose it.
So, my friend Jo said that when she moved to being a vegetarian, she gave herself a ‘once a week’ option of eating meat. She didn’t end up using it much, but was comforted by that slice of freedom.
So maybe it’s not a shopping ban – instead, it’s ‘I can buy one piece of clothing this month’. And you may not even find anything. But the rebel in you will feel ok about not being told what to do.
3 . Automate the shit out of everything – One of the most important parts of achieving financial security is to pay yourself first. In other words, put your savings aside in a nicely inaccessible account as soon as you get paid.
Do you ever spend the weeks after payday going out, buying lunches, hitting the shops and all that cool stuff, and then seeing how much you have left over to save? If so, the odds are it’s a big fat zero.
So try and automate things like saving and paying bills. Have a direct debit into various accounts. Check out this post for some tips on how to structure your bank accounts – boring but possibly life-changing!
So there are three things that science can help you with, and they apply to other good behaviours too. One of the reasons I food prep like a boss (some of my tips here) is that it takes away the need to decide. You don’t have to weigh up healthy or unhealthy, expensive or cheap. You just eat your darn curry and shut up. It’s strangely liberating, I promise!
Disclaimer: literally no connection to Channing or Ryan – I just wanted you to read this.
I had a conversation at work today about a journalist failing to understand the difference between real estate ‘debt’ and ‘equity’ as asset classes.
And then realised that this is totally normal, and I’m just surrounded by nerds who get paid a lot to think about this stuff all the time.
Really, most financial education happens on the fly. We don’t sit down at school and get taught about the capital stack in the same way we get walked through trigonometry.
That is crazy! Like when was the last time you needed to work out the angle of an isosceles triangle? (My vague memory of what it’s for).
But I’ll bet, sure as shit, you’ve wondered if you can afford to save for a home or your retirement.
So today is a quick primer on some of the basic stuff that nobody ever took the time to publish in your Year 11 textbooks.
What’s Capital Growth and why should I care about it?
It’s when the value of an asset goes up over time, often without you having to do anything.
The most common place we see this is housing. You know how your folks bought a bungalow in the suburbs way back when, and paid like five bucks for it? Well, the fact that it could now fund a small developing nation is thanks to capital growth.
Similarly, some people who bought shares in Apple, back when they were making Macs for Where in the World is Carmen San Diego. Now, they have seen the value of those shares increase by about a bazillion. That’s capital growth.
How does this magic happen? Well, it’s complicated.
When you buy shares, you’re often hoping that a company will grow over time. Certain styles of investor will only buy these types of shares – betting on their future.
With property, it mainly boils down to population growth. You’re betting that over time, more people will want to come to the area you’ve bought in. Supply is under pressure, demand is up, and voila, somehow it costs a million bucks to live in a shitty two-bedroom cottage miles from the city.
This is how a lot of people make money in Australia.
But it’s also the reason people freak the hell out when property prices look flat – or even worse, decline. If you’ve bet the house (haha get it) on prices going up, it all looks a bit scary when that stops happening.
But wait, is capital growth the only way to make money?
Glad you asked! The answer is no. Sometimes you buy an asset for its yield (aka income). For example, Telstra shares have gone nowhere fast in terms of capital growth (pretty much since they were floated onto the market).
But they usually pay sweet dividends (i.e. a little thank you payment from the company), and thus are beloved by retiree investors, who need the income to live on. (Be annoyed with Telstra’s service as much as you like, but they likely funded your last birthday present from Grandma and Grandpa.)
In terms of investment property, you have tenants who pay the equivalent of dividends. If the value of the property is flat or declining, ideally you’ll still get income from rent to pay the mortgage and possibly have a bit left over.
Some investments don’t have any growth, but give you reliable income – like a term deposit. The advantage is low risk – you know how much you’ll get back at the end.
So, should I look for growth or income or what?
Well it depends on your goals and timeframe. If you have a long time horizon, like retirement saving, you’re looking for capital growth with a bit of income thrown in.
If you are living off your investments, you’ll be more focused on steady income, and would look at things like bonds or dividend stocks.
Big difference between those two things, however, is that one is predictable and one is not. Also known as ‘fixed income’, bonds are based on an agreement that the issuer will pay you – the bondholder – a certain amount of income.
With shares, dividends are not guaranteed. It’s like dating a total player (or in fact any guy I’ve dated in the last four years): they’ll promise you a lot but when the chips are down, they’ll disappoint you.
Kind of not their fault though: under corporate law, companies are only allowed to pay dividends if they have their shit together. (I feel like this should apply to men on the dating scene, but there is a sad lack of law in this regard).
And hey, what’s the difference between debt and equity?
Here’s a quick primer as it relates to investments.
Equity is when you take an ownership stake in something. It might be your home or it might be a small chunk of a company, which you buy on the stock exchange (hence why the asset class is called Equities).
You become an owner, and that means taking on all the risks and rewards that come with it. Like this week when my apartment started leaking through the roof, I was reminded of the sheer tedium of home ownership.
With shares, if the company tanks or even goes out of business, shareholders cop a lot of the losses. In fact, if it goes bust, shareholders are last in line among creditors (i.e. all those people queued up trying to get their money back).
On the upside, if it goes gangbusters, you’re set to make a lot of money – hello Apple shares!
Debt is the more sensible friend of equity.
If you don’t want the volatility or hassles of ownership, you can lend money to companies instead.
Yep, you heard me, be your own bank baby!
That’s what bonds are: a loan to a government or company. You agree to give them $XX and they agree to pay XX percent interest (often monthly or quarterly). Usually it’s a fixed rate, but there are ones called ‘floating rate’ which move around. Maybe that’s TMI but there you go.
Bondholders are also at the front of the line if things go belly-up, but the downside is they won’t increase in value over time – much. (I could talk about yield curves here but that is 100% TMI).
So, this is an example of this truism: what you give up in sexiness you gain in comfort. Bonds are just like … Bonds! As in, the undies.
A pair of Bonds hipsters isn’t going to set any boudoir action alight, but goddamn it, they will save you from an all-day wedgie.
And for a retiree who won’t be earning an income from work, bonds can provide a predictable income without so much stress.
Wow, do I have to choose one of these things?
The key thing to remember is that a cluey investor doesn’t have to choose just one of these. Most diversified portfolios – like the one your super is probably invested in – have a bit of everything.
Like the joy of owning the perfect eyeshadow palette, a diverse portfolio gives you a little bit of everything. It also spreads the risk, so if one asset class tanks, you’re not totally exposed.
You can build your own portfolio with some careful selection or pay a fund manager to do it.
What if I am freaked out by this and want to do nothing?
It’s fine, no big deal. You’ll likely have some exposure to all this through your super (which I am sure you’re going hard on).
Most people in Australia will go through life with probably one big equity investment that relies on capital growth to make money: their home.
Maybe they’ll buy an investment property and hope for some more capital growth, plus a bit of income to service it.
About a third will give the share market a red hot go, picking stocks based on professional advice, their own research or maybe a tip from a random on Hot Copper (like Reddit but for investor nerds).
Some will make money and some will lose it, but overall they will be looking at a Total Return generated by combination of Yield and Capital Growth.
But basically, you can go out there and live your best life knowing all these things that nobody ever bothered to explain to you.
(Oh, and this is a long post and if you’ve read this far, go you! Brad says well done).
I got a message from a friend recently, asking me if I could recommend a financial planner. This friend, let’s call her Gemma, is 27 years old, a few years out of uni and in PR – all of which suggested to me that she isn’t on the big bucks (yet!).
I said hey, why don’t you come over and have a planning session with me. If all you need is some goal setting, then the only cost is that you have to be a case study on the blog. If you need the real deal, then no worries.
She came over, we gossiped about everyone in PR, then we finally sat down with some coloured pens and blank paper (which I effing love!). What follows is of the bones of our conversation.
Let me preface it by saying I’m not a planner. All I am is a person who knows how to ask questions, provide life advice and use a smartphone calculator. The latter one, not even very competently.
But this is the kind of session many people never really do. I had a similar one over cake and coffee about 18 months ago with a mate from work. Sure, he is the head of a Wealth business, but really, he just helped me frame some goals and put some numbers around them. And it was massively useful – it led me to buying my current home … which I bloody love.
Question 1 – What are your goals?
Gemma had helpfully come prepared with these! One short-term goal was to ‘enjoy my lifestyle’, which sounds vague, but seemed to translate to ‘please don’t stop me buying a coffee every day’.
This is where mindful spending comes in. If you really, really love that coffee, and it’s the one thing standing between you and the despair of the working world, then cool. Build it in. Take some other cost out.
Other goals were to move overseas in a couple of years, and to buy a property in her mid-30s. So are these goals do-able? Let’s see.
Question 2. How much are you earning and spending?
This wasn’t the most exacting process. Ideal world, you’d track every purchase for a month or two, and/or go through your bank statements. But we broke it down enough to get a sense of money in and money out.
This step is so damn critical, but people have a strong aversion to it. They seem scared to look their money dead in the eye, as if it will reach out and punch them.
But actually it’s the opposite most times. Stare that balance sheet down, and it will give you clarity and power.
We worked out that Gemma would have roughly $700 to spare every month, after expenses.
That surplus amount is where all the magic happens. Whether you want to save or invest, you need to play around with incomings and outgoings til you end up with an amount of money you can put to work.
If you are struggling to get to that point, you have two choices: earn more or spend less. So, get a second job, start a side hustle, sell some of your stuff etc. Or go through your spending and work out what you really need, and what you can live without.
Question 3 – How will you allocate your surplus?
This is where it comes down to timing and priorities. Yeah, you probably can’t do everything you want.
So, what’s most important now, in a year, in five? If you’re looking at goals within those timeframes, putting it in the bank can be the best option, or maybe a low-risk investment like an enhanced cash product.
That’s because anything less than five years means you don’t have time to ride out the ups and downs of markets.
If it’s longer than that, you can look at higher-risk things like shares and managed funds. This is where it can make sense to see a financial planner, because sifting your way through products is a bit of a mission.
For our friend Gemma, we decided to put most of it towards medium-term goals like going overseas (so, in the bank).
Question 4: How committed are you to your goals?
Then we looked at the viability of saving to buy a property seven years from now. While the idea of saving $100k (a pretty modest 20% deposit these days) sounds bloody hard, it’s not impossible.
The good thing about Gemma’s situation is that she’s at the start of her career. She is also whip-smart and ambitious AF. So even though she is on pretty crap money now, she is going to keep going up and up. The real trick for her is not to allow too much lifestyle inflation.
That means not spending more as you earn more. And goddamn that is haaaard.
I’ll confess. I earn pretty good money these days, and do a decent job of saving. I’m smashing my mortgage and stuff. But I have pitfalls. Like, I’m currently in a cycle of Shellac manicures (nothing but a dirty addict).
And it’s hard to talk myself out of the $35 spend when I have money in my account. So I am giving myself a few months of enjoyment. I swear I can give up whenever I want. But anyway, I feel your pain babes. If you have money, it’s natural to want to spend it on sugar hits like clothes and restaurants and make-up.
Anyway, you’re going to have lots of growing expenses if you’re in your 20s or 30s. You have so many decisions to make about what to splash out on. You can’t avoid them all. What you can do is stay mindful, set goals and check in on them regularly.
When we worked it out, Gemma can indeed save for a home if she keeps earning more, but doesn’t give into the temptation of pissing it away on fancy stuff. Too often, anyway.
Goal-setting is like going to the gym
It seems hard and sometimes scary beforehand. Gemma told me as much. It’s like you don’t want to hear bad news.
But just like the high you get walking out of a Spin class, it’s a fantastic feeling to have your goals all mapped in front of you.
So don’t be scared. Get your pens and pencils out babes, and get cracking on your future!
Hot tip: Check out this post for more on goal-setting, and a free worksheet I made for you!