In 2021, I’m going on a mission to help you become Finvincible. That means financially invincible, by the way.
It’s a sad fact that, here in the UK, more than a quarter of families don’t have sufficient financial resilience to cope with a 25% fall in their household employment income for a period of three months.
The Covid pandemic has reminded us once more just how fragile our personal financial circumstances can be, with rising unemployment and many businesses forced to close unexpectedly.
There are 7 Finvincible principles that I’m going to share with you in this blog and video.
Tick off each of these seven principles in 2021 and join me on your journey to becoming Finvincible.
What are the seven Finvincible principles that I’ll be explaining in this blog and video? I’ll run through the list first and then look at each of the seven in more detail.
My Finvincible principles are; start with your why, widen the gap, automate what matters, spend on health and self-improvement, know your numbers, protect your weaknesses, and grow business wealth.
Number one then, start with your why.
Personal finance is just that; personal! The things that you want in life are unique and personal to you.
There’s no blueprint for an ideal life. There might be some common factors that we all aspire to; things like good health and financial security often feature.
What you want out of life is very much up to you. And until you know what you want, it’s very hard to build an effective financial plan to support those goals.
Let me clear; Financial Planning isn’t really about money. The money part comes along later, to support those your goals and objectives you’ve chosen.
What is your meaningful purpose in life?
The start of a year is a fantastic opportunity to consider this. Write it down.
The clearer you can be when it comes to your goals, the more likely you are to develop a plan that will get you there.
We rarely get to our desired destination by accident.
Imagine the pilot of a plane taking off without knowing their intended destination. What course would they set? How much fuel would they need?
Decide where you are going before you start thinking about how you are going to get there.
Finvincible principle number two is to widen the gap.
We build financial resilience by earning more than we spend, and by doing this consistently.
There are only two ways to widen the gap. You can spend less or you can earn more.
Too many personal finance commentators focus on the money-saving bit. Yes, this can make a meaningful difference to your ‘gap’, but there’s so much more potential for widening the gap if you switch your attention to earning more.
But start with your budget. Look at everything you spend and determine whether that money being spent is serving your purpose.
Go back to Finvincible principle number one; start with your why. Is spending that money moving your closer towards your why, or taking your further away.
A seriously effective way of looking at the money we spend and the money we earn is to convert it from pounds and pence, into days and years.
Every pound you spend unnecessarily is a period of time further from your financial independence. You need to work longer to pay for that expenditure.
But too few people make this direct link between spending and earning, and time. We’ll come back to this later, in Finvincible principle number 5.
With an effective budget in place, what about your earnings. How can you widen your gap by earning more?
Your ability to earn more is likely going to depend on your employment status.
If you’re employed, how do you achieve a pay rise this year? If that’s not an option, and I know it’s not for everyone right now, how can you create additional income in 2021 through a part-time job or starting your own business – I’ll come back to this in Finvincible principle number 7, in just a moment.
Finvincible principle number 3, automate what matters.
Humans are flawed. We’re emotional beings and have limits to so many important features, including our willpower.
You would have heard before the notion of paying yourself first each month. When your income enters your bank account, that’s the time to allocate to repaying debt, savings and investments, not once you get towards the end of the month and see how much money, if any, is left available.
So, automate your debt repayments, your cash savings and your investments, at the start of each month.
Take the effort out of the equation. If you don’t need to think about this stuff, it’s more likely to happen. You can then cut your cloth accordingly, spending each month what’s leftover.
Finvincible principle number 4, spend on your health and self-improvement.
There are, broadly speaking, four elements to wealth.
We hear all the time about money, being rich. But that’s only part of the equation.
Along with riches usually comes status, something as humans we’re all too keen to experience.
But on the other side of the wealth coin, the two most valuable wealth components are freedom and health.
Freedom is about being able to do the things you want, when you want and where you want. It’s the ultimate goal of financial independence, to obtain freedom.
And running alongside this wealth component is health, which we definitely have a tendency to overlook too often.
Without health, we can’t enjoy our freedom, we can’t enjoy our money. In fact, poor health is very likely to cost you more money, especially in later life.
Spending money on improving your health is a worthwhile investment, at any stage in life. Getting regular exercise, eating healthy food, taking care of our mental health – these are all activities worth spending money on.
Alongside this, don’t be afraid to spend money on your self-development. It’s an investment in you!
Whether that’s buying books to read, signing up for online courses, or paying a coach, self-development is an area of spending money you should never deeply question.
Finvincible principle number 5, know your numbers.
How much do you actually need to become financially invincible? We’ve all got a number, and all financial planning can be related back to that headline figure. But do you know what it is?
There’s the easy way of calculating this number, based on something known as the 4% rule. You take your required annual income and multiply it by 25.
This works on the overly simplified assumption that most of us can maintain a 4% a year withdrawal from an investment portfolio, without too much risk of that money running out during our lives.
That’s the easy way of doing it, and it’s better than nothing, but to become Finvincible I want you to calculate your numbers more accurately.
That means creating a lifetime cash flow forecast, understanding your target investment return numbers, and the impact of price inflation on your lifestyle, as well as getting to know your savings rate and how this translates into time, rather than purely money.
There’s a huge amount to take into account when it comes knowing your numbers, and I’ll cover this in a great deal more detail in a future video.
Finvincible principle number 6, protect your weaknesses.
Getting into a financial position where you’ve paid down your debt, and you’re consistently saving and investing each month, to build assets, is fantastic. It’s far better than the alternative of experiencing more month than money, and funding your lifestyle with expensive debt; or the reality so many experience of not having enough of a cash buffer to get through a month or more of lost income.
But we don’t want to be slightly better than that, we want to become Finvincible! And that means recognising our weaknesses and then neutralizing them.
We’ve all got some common weaknesses that can massively derail our financial plans; including dying, contracting a critical illness, or losing our income due to accident or sickness.
The first step for this Finvincible principle is to think about the catastrophes that could knock our financial position over, and then determine an order of priority for the insurances we need to neutralise the risk.
Look, you wouldn’t dream of driving your car down the road unless you had car insurance. Yet so many people are comfortable waking up every day without life assurance in place, which would secure their families’ financial future should they drop dead that day.
I’ve worked in the world of financial planning for long enough to know two things about life assurance.
Firstly, people don’t like thinking about their mortality. We know, deep down, that we’re going shuffle off this mortal coil at some point. It’s a certainty.
That doesn’t make it nice to think about or talk about.
Secondly, life assurance is a product that’s sold not bought.
What we mean by that, is it usually takes a wakeup call to prompt someone to buy a life assurance policy. That wakeup call might be a friend or family member dying, or it might be a meeting with a mortgage broker. But it takes something to spur us into action. Maybe this blog will prompt that action.
Last but not least, Finvincible principle number 7 is grow your business wealth.
There are plenty of ways to build wealth, but I’m convinced that the single most effective way to do this is by building business wealth. Here’s why.
When you start a business, and for UK viewers I’m talking about a limited company, that’s a separate legal entity, and you own shares in that businesses, you can do a couple of wonderful things.
Firstly, you can offset a lot of expenses against tax.
Assuming the money you spend is wholly and exclusively for businesses purposes, that spend is knocked off your profits when it comes to calculating corporation tax.
In a similar vein, your business can make contributions to your pension pot, without paying tax on that money. It’s a seriously effective way to build wealth.
Secondly, owning a business allows you to grow a truly passive source of income.
What is going to start as a side hustle can evolve in time to become a lifestyle business, and then a way to leverage your time and money, by hiring people to carry out the work for you.
There are a couple of simple rules of thumb to keep in mind as you grow business wealth.
One is the rule of thirds; anyone you hire in a business should be paid approximately a third of the revenue for which they are responsible, for another third going to business running costs, and the other third representing profit.
The other rule of thumb is the £100,000 rule, which is that every full-time equivalent employee in a business should represent £100,000 worth of annual turnover.
Keep these two rules in mind as you hire staff and you will have a profitable business that helps you build wealth.
This Finvincible principle of growing business wealth extends also into the types of investments you should consider, because it’s important not to place all of your eggs in one basket, in this case your own business.
Investing in companies which sell things, goods or services, and then share profits with their shareholders, is a seriously effective way to grow wealth over the longer term. With that wealth behind you, you can become Finvincible.