Many of us dream of financial independence. In these dreams, independence is often attained by being on the receiving end of some form of windfall gain. Such fantasies can keep our chins up when times are tough. But, they can do more harm than good when they affect our behaviour. We need to be careful that dreaming of a windfall gain does not lead us to procrastinate on taking concrete steps towards financial freedom. Here are four common financial fantasies. Forget about them and put some realistic plans in place.
Four Common Financial Fantasies
i. Receiving an inheritance
A surprise inheritance from a long-lost relative is a common financial fantasy but the reality is that an inheritance is likely to come from grandparents or parents. Grandparents may set aside a small part of their estates for their grandchildren but the large part is likely to go to your parents. Then, if your parents attain a typical life span, you may not receive anything until you are into your fifties. Hanging on to the hope that your financial independence will come from the passing of a family member could see you waste your prime earning years. After that, you may find that the windfall gain is not quite as large as you expected. If your parents live a long life, they are likely to be eating into savings in the latter stages of their lives. Health services and retirement accommodation are not cheap.
ii. Winning lotto
Even though we know the odds of winning are incredibly low, millions play every week. Tuning in every Monday night to see if your numbers drop may keep hope alive. Yet, for many, winning a jackpot turns into a financial nightmare. They often do not have the skills to manage that amount of money and squander their winnings. Nor do they know how to deal with the hoards of advisors, spruikers, sales people, charities, friends and family that come out of the woodwork looking for a piece of the action.
iii. Start a website
It is now a decade since the internet bubble when every internet-based business seemed to carry a billion dollar price tag. Since then, only a select few have maintained or built on these valuations. Most others have fallen by the wayside or are barely eking out an existence. Creating a popular website and selling advertising seems like a “set and forget” means of generating an income advocated by many “get-rich-quick” books or websites. Some recommend “junk” websites that have no useful content but show up in search engine results. However, popular advertising programs, such as Google AdSense, keep an eye out for sites that clutter the web and make it more difficult for people to find valuable information online. Advertisers are also likely to shun such sites for fear of brand degradation. Running a legitimate website with real content which attracts viewers and ultimately advertisers is a highly competitive game that requires considerable investment of time and money. It is certainly possible to make money from running one or more legitimate websites or blogs, but, like any business, it requires hard work and something that makes you stand out from the pack.
iv. Make a killing on the stockmarket
Most of us hear stories of those that have had the good fortune to invest in a stock that has delivered meteoric returns, increasing three-fold, ten-fold, 100-fold or more. In 1969/70, the Australian nickel company, Poseidon, increased in value from 80c to $280 per share before collapsing. Sure, opportunities exist for the astute, fleet-footed investor but there are several flaws to this dream. First, you have to have money to invest and significant amounts to make a real difference to your lifestyle. Second, you need to dedicate a large amount of time to developing your stock picking expertise to have any chance of getting in (and out) ahead of the pack. Third, the world is full of uncertainty and risk which is magnified significantly when wagering bets on a single stock rather than a diversified portfolio. Even the best researched “next best thing” can be tomorrow’s “dog”.
If you see windfall gains as the only route to your financial salvation then these fantasies may be preventing you from reaching your potential. It is time to acknowledge that they are unlikely to come true and develop more realistic routes to independence. Here are several tried-and-true paths.
1. Start a business
Your own business can be a source of financial freedom long before you get that inheritance from the passing of your parents. A business can be started at almost any age. There are lots of examples of successful businesses being established and managed by kids still in high school. The income of salaried employees is typically limited on the upside. However, the self employed often have far greater upside potential and incentive to bring on board that extra client or work those extra hours. With the ability to determine your own financial destiny, those extra hours can be far less of a drag.
Whilst starting a business could be the path to financial freedom, overnight successes are rare. Success is more likely to result from holding the course over a number of years. Extensive planning, attention to detail in execution and tenacity are required.
2. Get educated
In the modern world, CEOs that started their careers in the mail room are almost non-existent. Those without qualifications quickly hit a brick wall in career progression whilst watching younger, less-experienced but better-educated employees pass them by. Openings within other companies are also likely to be scarcer for those without a degree. Yet, there are now more paths than ever to attaining a tertiary quaIification, particularly for mature age students. A degree lifts lifetime earnings potential by so much that, across a working career, it can be as good, if not better than, most of the windfall gains above. Education is not just confined to external courses. Many companies offer a range of short internal courses. Actively seeking out and attending these courses can not only enhance your proficiency on the job but can also signal to your boss a willingness to invest in your own career development.
3. Save and invest
Financial independence often starts by committing to spend less than you earn. This means saving and investing a little bit of every pay cheque. Your money will start working for you generating a second passive income stream in the form of dividends (particularly tax-advantage ‘franked” dividends), interest and/or other distributions. Commit to making regular small investments and be alert to the power of compounding by ploughing investment income back into your portfolio (for example through dividend reinvestment programmes) where you have the capacity to do so.
Stop dreaming and take control
You are the best person to take control of your path towards financial independence rather than waiting on your numbers to drop or a family member to drop off. Rather than dreaming of the improbable, stop procrastinating. The sooner you invest in yourself, work hard and save, the more likely you are to attain financial success.