Recognising and understanding your ‘financial story’ is the number one way to achieve your financial goals, according to taxation specialist and senior partner of CIA Tax, Dr Steven Enticott.
In his new book, How to Deal with Financial Distraction, Enticott explains how everyday distractions such as credit card debt, children (education/living), retirement planning or divorce/separation can cause us to lose sight of our personal vision and prevent us from setting realistic goals.
“Understand your financial story and how it fits into the passage of time because without this vision, you’re not set for either the future or your goals,” he says. “When you understand your own financial story, your financial distractions will begin to disappear.”
Put your financial worries in context
Firstly, to understand what your financial distractions are, Enticott suggests using a checklist and scoring system to examine your financial health. Being aware of your financial health and realistic about your financial obstacles – and how these fit within the greater scheme of things – will help you set realistic goals and actually reach them.
Enticott’s Financial Health Index asks you to consider key financial issues affecting your life including your lifestyle goals, what definition of success you’re working towards, your cash flow, what your debt strategy is, whether you have income protection insurance and whether you have an up-to-date will in place. He then asks you to give yourself a score for each section so that you can review it later. The score doesn’t matter, he says, but what does matter is identifying the things you need to address to remove financial distraction.
“My message is simple. Relax, draw up a plan (with a professional, if you like) that focuses on your story, that addresses the distractions specific to you and alleviates the pressures that financial distraction all too often will bring,” he says. “Once you’ve done this, your financial goals will finally start to fall into place.”
When asked what he means by ‘financial distractions’, Enticott offers the following example:
You have a very young child and you’re financially well behind where you want or need to be. Your partner’s career has stalled and the marriage is feeling a little shaky because you’re constantly arguing about money and it’s possible you won’t return to full-time work for a few years yet.
Far from repaying your mortgage, it’s actually rising slightly each year and, with your kids’ secondary education to think about on top of all the other demands on your mostly single income, this situation isn’t like to change any time soon.
To top it all off, your superannuation is poor so there’s no way retirement at 55 will be a possibility, and with your 70-year-old mother’s chronic health issues and associated bills, where’s that going to leave us over the next 20 years?
According to Enticott, this is not an unusual situation and represents a life full of financial distractions.
“The question is: Is there a way to positively respond to what looks like such a bleak outlook?” says Enticott. “The answer is, ‘Yes’.”
How to respond positively to your financial woes
If the situation above sounds familiar, Enticott offers the following for how you can take action and put your financial concerns in context:
- Your mortgage: “Is the mortgage really a problem? After 20 years, the payments will fall as the balance falls and even if it doesn’t happen quite that way, inflation will deflate the balance, shrinking its real value while inflating the property’s price, creating a bigger gap between debt and equity – and all by doing absolutely nothing.”
- Superannuation: “As for superannuation, we can start treating it seriously and review the fees and the advisor commissions we’re paying. By taking an entirely new and sensible approach to our investment strategies, and by adding to our superannuation balance from our wages each month, over the next 20 years the balance will increase and compound in plenty of time for retirement.”
- Cost of living: “Our cost of living will start to fall as the children finish secondary school and move onto university and eventually out of home. Knowing this means we can stop being distracted by it and plan to maintain a neutral cash flow over that period, after which there will be a solid base to grow from again. After that, we’ll return to a positive cash flow again and start adding to our superannuation. With our house’s value and therefore its mortgage gap growing steadily, together with the ability to take on other investments, it’s really looking like we’ll be able to get back on track.”
- Retirement planning: “While planning to retire earlier may not be an option, reducing hours to three days a week at 55 certainly may be.”
Enticott notes in his book that giving into financial distraction means you haven’t established a strong enough vision for your future financial goals. He says the choice to take action is entirely up to you, as is the decision to take no action at all.