SEVEN KEYS TO FINANCIAL INDEPENENCE

Historically less than 5% of the Australian population achieves financial independence by retirement age and less than 2% of the population are regarded as being wealthy at retirement age.  These are alarming statistics given that most working adults earn sufficient income during their lives to achieve financial independence.

At the beginning of the century most people did not expect to live much past 50 years of age.  In 1994, the average life expectancy for males was 75 years whilst for females was 81 years.  Average life expectancy is expected to grow to 81 and 86 respectively by 2051.  The percentage of Australia’s population over 65 years of age is currently around 12% and is expected to grow to 23% by 2051.

Improvements in life expectancy rates along with a dramatic reduction in birth rates have resulted in the phenomenon known as the ‘ageing population’.  The trend is clear, there will be fewer working Australians (taxpayers) generating revenue to assist in providing for those that are not.

This is a significant problem and individually Australians can contribute by ensuring that they become financially independent.

After considerable thought and effort and after contribution from the work of many leading financial advisors we have established what we believe are seven keys to financial independence.  Whilst these concepts may not be startling to those that understand financial concepts, hopefully they assist in encapsulating important principles.

#1 Develop Supporting Philosophies, Beliefs and Goals About Money and Success

Many people have beliefs that limit their ability to earn income, accumulate assets and become successful. 

For example, some people believe that there is only so much money to go around and therefore if they increase their contribution to society and earn more income someone else must be missing out.  Another popular belief shared by some is that people who succeed financially must have obtained their wealth by being dishonest or manipulative.

In many cases these belief systems have been established by negative affirmations and examples set by our parents and support group.  All of these beliefs act to limit the ability of the thinker to achieve financial independence by establishing self imposed boundaries or hurdles.    

The truth is that many financially successful individuals achieved their success without being dishonest while there are people who are not financially successful that are dishonest.  Quite simple, these belief systems are simply that, belief systems that have no basis and simply serve to hold us back. 

Fortunately, new belief systems can be established that are more supportive and can assist to provide positive momentum that can help in our efforts to achieve financial success.

Finally successful people generally consistently set goals for their financial achievements and strive to achieve these goals by taking positive action. 

In fact most success people in any area of life at some stage have set a goal, taken a set of actions and have been prepared to continually modify and take new actions until they achieved their goals.

Creating supportive belief systems and setting goals is perhaps the most important ingredient in your quest for financial success.

#2 Gain and Maintain Control of Your Business and Personal Financial Position

In order to get anywhere you need to know where you are now, know where you want to go and regularly monitor your progress and position.

Most of us would have heard the analogy of a plane taking off in say Melbourne and landing in London and the process the pilot has to go through of making regular checks and adjustment to ensure that the plane stays on course.

It is the same with your financial position.  You need to know your current position including your monthly income and expense levels, the monthly income required to allow you to fund your cost of living, pay any taxes due and save and invest for the future. 

The first step to achieving financial success is understanding your financial position, having the discipline to stick to a course of action and being able to monitor your progress and make adjustments where necessary.

#3 Identify the Key Performance Indicators of Your Business to Ensure That You Are Maximising Your Income-Earning Ability

Most businesses have certain key performance indicators that can be used to assist the progress of the performance of your business once you understand the factors that drive your business. 

Key performance indicators may be the ability to retain an identified customer type, maintain gross profit margins or the ability to produce your goods or services efficiently.

The point is that once the key performance indicators are identified they can be improved upon and monitored to ensure that you maximise your ability to earn income.

For chiropractors, key performance indicators may include new patient flow on a weekly basis relative to advertising expenditure, the conversion of new patient opportunities to long term chiropractic patients and ratio of fixed operating expenses to gross revenue. 

In our view, target performance levels can be set for all business key performance indicators and they can be used successfully to assist you to monitor your performance and build your practice.

#4 Build Discretionary Income

In order to accumulate wealth you generally need to establish a level of discretionary income or savings. 

Discretionary income is income that is not required to fund your business expenses, taxes, reduce debt or meet your personal expenses.  Discretionary income can be generated by increasing income levels or by reducing expenditure.  The level of discretionary income that you can generate will impact your ability to accumulate assets.

The best way to establish a savings habit is to save first.  That is, save before you spend.  We advocate saving a percentage of your gross practice income before undertaking any expenditure and increasing this percentage over time so that you continue to increase your level of performance in this area.  

This process will eventually become second nature once you establish a habit.  The power of compound investment returns can then be used to build and accumulate investment assets.

#5 Ensure That You Establish An Optimal Operating Structure to Assist to Protect Assets and Minimise Tax

It is important to ensure that you establish an operating structure that will assist in protecting your assets.  Many unexpected events can occur particularly if you are in business and more particularly if you are operating a health care business.  It is important that your investment assets are protected from the claim of potential creditors as best that they can. 

It is also important to ensure that you have some control and flexibility in planning for tax liabilities on business and personal income.  In our view, having a supportive operating structure that allows you to legally minimise your income tax liability will support you to make commercial business and investment decisions that are not made purely for the purpose of saving tax.  It has been our experience that decisions made purely for tax purposes often have no commercial basis and will generally under-perform sound investments opportunities.

#6 Focus on Income Producing Debt – Eliminate Non-Income Producing Debt

Many will understand the concept of good debt and bad debt.  Bad debt is debt that is used to finance items that generally have no intrinsic value and items that depreciate in value as well as items that do not produce as cash flow.  Common examples of bad debt include credit card debt and personal loans used to finance personal expenses, car loans and in some cases excessive home loans. 

Good debt on the other hand is debt that is used to finance assets that generate a cash flow and those assets that generally increase in value.  Examples of good debt include margin loans on share portfolios, investments loans secured to acquire investment properties, business loans used to finance a business opportunity. 

Some of the benefits of good debt is that it finances assets that normally generate an income that can assist to service the debt (interest), the interest is generally tax deductible which in cases can reduce the after-tax cost of holding the asset while the asset generally increases in value the debt level is generally fixed or may reduce over time.

Individuals that reduce bad debt quickly and use good debt effectively to acquire wealth generating assets have a better opportunity to achieve financial independence than those who do not.

#7 Convert Business or Exertion Income to Passive Income

An extremely important key to financial independence is the ability of the individual to convert business or earned income to passive income as quickly and effectively as possible. 

The ability of an individual to convert their income to the accumulation of appreciating assets (generally quality property and share investments) will be a significant determinant in their ability to become financially independent.

The sooner this strategy can be implemented the better as growth assets such as shares and property need time to appreciate in value.  The growth in value of investment assets over time will generally also result in the increase of investment income generated.

A careful process of accumulating investment assets utilising good debt to assist to accelerate the process of investment while using discretionary income to service the cost of accumulation is a popular and effective wealth accumulation strategy.  

Axis Consulting Group and Beacon Wealth Management specialise in assisting clients to manage and improve their financial positions.