4 tips to change your financial life

We’re now well into the new financial year and I’m wondering how many of us are thinking about improving our financial positions in the 2015 tax year – and how many of us are actually taking action.

What you need to do to organise your finances seems like common sense – budget, plan etc. But it’s amazing how many people just don’t do this. I believe, for the most part, that they think their dream lifestyle is just too far out of reach. Or, maybe they hope they will stumble upon some kind of quick fix (lottery win, inheritance, rich partner!).

This blog isn’t about how to create a budget or a financial plan. It’s about sharing a few simple tips that have stuck with me through the years, made the process simpler and more effective, and provided clarity during my decision making.

TIP #1: Goals are essential - but be realistic and don’t have too many!
I think one of the main reasons people don’t stick to budgets and don’t realise their goals is because their goals just aren’t realistic. Grand ideas of paying your mortgage off in 10 years while investing in three properties, taking a two month trip around Europe and buying a new car seem great. But what will be the impact of this on your daily life? Will you be unable to go out, socialise, buy new clothes etc because the budget doesn’t stretch that far?

Rather than working for you, your budget is working against you. You begin to feel contempt towards the budget because it’s depriving you of enjoyment. Before long, the budget has been forgotten and you’re back to your old habits!

Budgeting is not about deprivation. It’s not about cutting funds for social occasions, holidays and personal items altogether. It’s about structure. It’s about allowing yourself these things while ensuring you don’t spend more on them than you can afford.

Set realistic goals, and you’ll find you’re much more likely to stick to your budget.

TIP #2: Invest time in financial planning - it will be your greatest investment ever
As life seems to get busier and busier, taking time out to review and plan your finances can be a hard thing to do, regardless of whether you have the assistance of a professional. Investing this time though is one of the best investments you will ever make – and it will save you time and money in the long run. Once you have your finances in place, they will, for the most part, take care of themselves – with a yearly review.

The prospect and process of creating a budget isn’t something most people enjoy. Change your mind set about what a budget means though, and it can actually be a very exciting process. Seeing what your projected savings will be at the end of the year, how much you would have paid off your mortgage, the interest you may saved, the assets you might own... It’s truly empowering and motivating. While enlisting the help of a financial planner is highly recommended, you can get started with the basics on your own – there are some fantastic free financial planning tools on the web these days.

TIP #3: Invest simply – understand what you’re investing in and why
The investment options available today are mind-boggling.  Without fully understanding what each investment offers - the pros, cons and risks - it’s easy to get caught up in the latest investment fad and market hype.

When you’re just starting out, it’s especially important to take a simple approach so that you can easily understand what you’re getting into, the risks and the potential returns. It will make it easier to align your investment options with your financial goals.

The simplicity of residential property investment is why it’s still such a popular option for retail investors. That doesn’t mean that investment diversity isn’t important – a mix of property, shares and high interest savings – is generally a sensible approach and can be tailored further depending on your appetite for risk

As you become more informed, you can look at more complex investments – as long as they align with your goals and risk comfort level.

TIP #4: Use the power of leverage – but know your limits
One of the great advantages of property investing is the ability to benefit from leverage or gearing – that is, borrowing to invest. Put simply, you use someone else’s money (the bank’s) to increase your profit and build wealth quicker. It means earning a profit on a $500,000 property, for example, while using only $100,000 (or less) of your own funds. As you build equity in your investment, you can then use this as a line of credit to borrow to invest again, further increasing your profits.

You can also borrow to invest in shares.

In our current tax system, borrowing to invest can also reduce your tax bill, as ongoing borrowing costs (interest and fees) are tax deductible. However, using leverage simply to reduce your tax bill isn’t a recommended strategy.

Remember though, just as leveraging can increase your gains, it can also amplify your losses. If the investment drops in value, you can end up owing the bank more than your assets are worth.

Consider the risks carefully and how much you can afford to lose if things went wrong. Then set a limit on your debt exposure.

Financial planning doesn’t need to be complicated. Keep it simple (at least in the beginning), keep it realistic, and admire your progress!

About Ryan Crawford
Ryan Crawford is one of Australia’s most successful property investors under 40 and a leading expert in positively geared property investment. In less than a decade, Ryan built a portfolio of more than 40 positively geared properties and is now dedicated to helping others plan and implement successful property investment strategies.

Since establishing Crawford Property Group in 2008, he has coached thousands of everyday Australians to financial freedom through positively geared property. Ryan is regularly featured in the media as an industry thought leader and commentator, including Channel 7’s Today Tonight, national newspapers and investment magazines.