johnm

A cash floor saves stress and provides financial stability when s$%t hits the fan, and you need dollars quickly.

Murphy, the bulldog, is proof of the importance of having a cash floor.

There are two key mistakes I see people make with managing their money and ultimately progressing financially. 

Mistake 1 – Not having a system of allocation for income and expenses

Mistake 2 – Not having a cash floor for emergencies

Essentially, money is coming in and going out, and none is sticking to the side to use for emergencies or the future.

The money flow system

Generally speaking, you would have some income flowing through into your household, and ideally, with that income, you would have a system of allocation that would send some away for future use.

So you can invest in shares, pay down debt, or use it for a future fun goal. It might be a holiday or other fun experiences. 

And then you want to be able to allocate some dollars to today for expenses and lifestyle.

Expenses include your bills, groceries, Netflix and other daily, weekly and monthly costs.

And lifestyle can be whatever you want it to be. It’s about filling up the Happiness Bank account, not just your financial bank account.

This is called the system of allocation or what we refer to as the ‘money flow system’. 

Unfortunately, when I first meet with clients, this system for allocating income is missing.

And this means they generally don’t have money set aside for emergencies.

The cash floor

The cash floor is the pot of money you set aside that you don’t touch until something unexpected happens and you need cash quickly.

It’s your emergency piggy bank.

We generally recommend you have a cash floor of $2,000, and as you refine your money flow system, you can build that cash floor up.

You slowly raise your cash floor as you can afford to.

When the fridge carks it, and you need a new one, you dip into your cash floor without feeling worried or guilty.

Then you’ll tighten your belt to bring it back up to your comfort level and rinse and repeat that process.

And that’s your financial thermostat.

The goal is to raise the cash floor for the unforeseen stuff that pops up.

Murphy and our cash floor

Having a tidy cash floor paid me back in dividends recently. 

While Britt, Norah and I were soaking up the sunshine on holiday in Queensland recently, our beloved family member Murphy the Bulldog suffered an elbow injury.

He required a three-night stay in the hospital, lots of CT scans, anesthetic X-rays, and a course of drugs.

We were lucky enough to have a friend house-sit who got him to the vet for us. 

And whilst it was distressing to know our family member was unwell, we could press on with our holiday as planned.

We knew Murphy had the best treatment and care he would need while we were away.

We were in the kitty for seven thousand dollars for the vet expenses. 

Thankfully, we had enough money set aside in our cash floor for these types of unexpected situations. 

We didn’t need to go and use credit card debts or take the money from our home loan to get Murphy the best care.

Sort out your cash floor

I often encourage people to get used to having a cash floor of $2,000, $5,000, and then $10,000, ultimately aiming for $20,000 over time.

A good rule of thumb is to set aside three months of your expenses.

You treat your cash floor like zero. 

You don’t use it for everyday expenses or tap into it for a boozy night out with your mates.

So if something happens, and let’s face it, something unexpected will happen at some stage, you don’t have to eat into your future savings or fun money to fund the emergency. 

Cheering you on!

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Important

This is general advice only. Your personal objectives, needs or financial situation have not been considered when preparing this information.

You should consider the appropriateness of any general advice we have given you and, if necessary, seek advice before acting on it.

Let’s dive into my top tips to help you lower your donation to the ATO this financial year.  

Start planning early

You need to start planning as early in the financial year as possible.

A lot of people come to me after the financial year wanting to plan around lowering their tax bill for the previous year. 

The problem is that once the date the line in the sand has passed, it’s very difficult to make any adjustments or do anything from that point onwards.

Be crystal clear on what you can and can’t as tax deductions 

I recommend getting clear on what deductions you can claim as part of your job. These can include study costs, investment and tax advice-related expenses, interest costs, and work-related expenses.

Thousands of dollars in deductions are left sitting on the ground, not getting picked up. So make sure you’re clear by looking at the ATO guides on their website or talking to your tax professional.

Consider selling underperforming investments

Say, through the year, you sold an investment at a gain. And you also have another investment that’s gone backwards in value. If you’re no longer confident in keeping that investment, you can dispose of that asset, realise that loss, and offset your capital gains.

And you can carry that loss forward into future years and offset against future capital gains.

It has the added benefit of giving just a little refresh or tidying up of your investments.

Bring forward ‘necessary’ expenses

If you pay for the whole expense in this financial year, you can claim that expense assuming it is investment, business or study related.

An important thing to note is that you only get the tax rate back, not the full expense. If you don’t have that planned expense in the pipeline, it’s not worth just going out and making an expense. So the idea is not to buy random things you don’t necessarily need.

Use super as a chunky tax deduction

The annual limit of tax-deductible contributions that you can put into your super is $27,500. This limit includes your employer contribution. So there might still be a little bit left, depending on what your employer’s putting in. Instead of leaving your contribution until the end of the financial year, you can make smaller contributions throughout the year so it doesn’t hurt your hip pocket so much.

There are other rules around where you can carry forward prior unused super contributions limits to help offset big gains. We’ve used this strategy with clients who’ve sold investments during the year.

Once the money is in super, the long-term earnings are at 15% instead of your marginal rate.

Lastly, note on that one, once the money is in super, it’s generally locked away with a key and you can’t get your mitts on it until you’re 60.

Keep good records

You must keep good records of your expenses.

The good old shoe box is fine. Or, you can take photos of your receipts and save them in your notes or on your computer. 

So, when it comes to tax time, you aren’t scratching your head trying to remember your expenses throughout the year. It keeps you organised throughout the year and takes the stress and guesswork out of tax time.

Get top-notch advice

Make sure you get advice from an accounting professional and financial adviser to squeeze the most out of your tax return.

Important

This is not tax advice. Your personal objectives, needs or financial situation have not been considered when preparing this information.

You should consider the appropriateness of any general advice we have given you and, if necessary, seek advice before acting on it. 

Book a free phone chat

Click here to book a free phone chat to talk about your specific situation.

It’s the 18th hole. This pro-golfer has nailed this putt a thousand times. But then a noise from the crowd rattles him, and he starts to 2nd guess himself. 

He’s got a case of ‘the yips’ (also referred to in the sporting world as ‘mental static’.)

He overshoots. The ball rolls past the hole and across the green. The crowd sighs.

I think about “the yips” as it relates to investing all the time.

Most investors are aware of market cycles, but many still fall into the trap of making investment decisions based on outside influences and emotions.

They set out with a plan with their eye on the long-term prize – financial freedom – to do what they want, when they want, free from financial stress.

But then they get nervous—the news, media money experts, and well-meaning mates panicking about investment markets tanking.

They start to overthink their investments.

Despite working hard to build their investment portfolio, they let fear and uncertainty creep in, causing them to overthink and make impulsive decisions. 

They might pull out of the market entirely or act on a ‘hot’ investment tip from their brother-in-law.

It doesn’t help that financial media is obsessed with “miracle” investments – the elusive “hole in ones” of the financial world. 

It’s hard not to get distracted and sidetracked by all the noise. But you may overshoot and derail your long plans by getting tricky and trying to “time” the market.

But, with a solid financial foundation in place, an investment strategy that considers your goals and timeframes and some handy hacks, you can conquer the investing yips and reap the rewards in the long term.

Investing hacks to beat the yips

1. MASTER YOUR EMOTIONS.
   By understanding the psychology of investing, you can avoid the trap of reacting to short-term market movements.
   
   
2. BLOCK OUT THE NOISE.
   We know it’s hard to do, but we recommend you ignore the media hysteria and tune out the short-term static. And avoid checking your investment apps and balances too regularly.
   
   
3. IT’S INVESTING. NOT SPECULATING.
   Investing should be boring; it’s not about the frequent dopamine hits. Investing starts with knowing:
   1. What you want to achieve (your goals).
   2. How much is enough money to reach those goals.
   3. The timeframe to achieve your goals.
   4. Your ‘sleep-at-night’ factor (how much risk are you willing to accept).
      
      Once you are clear on the above, you can invest in assets that suit your situation, with a focus on the long term.
      

4. PUT YOUR EGGS IN DIFFERENT BASKETS.
   Diversifying across different asset classes is a crucial rule of investing. Generally speaking, growth assets like property and shares are higher risk and higher reward investments. Defensive assets like cash and fixed interest are lower-risk, lower-reward investments.
   
   
5. TAKE ADVANTAGE OF TIME.
   The sooner you get started investing, the longer you have for the power of compounding to work its magic.
   
   
6. TIME IN THE MARKET IS MORE IMPORTANT THAN TIMING THE MARKET
   Market timing or picking the right shares at the time is almost impossible, even for the experts trading on Wall Street.
   
   
7. DOLLAR-COST AVERAGING
   With dollar-cost averaging, you make regular incremental investments over a period of time. It’s a simple tool to take the emotion out of investing so you can ignore short-term market volatility.
   
   
8. KNOW YOUR ENEMIES.
   Inflation, tax and fees are sneaky enemies for investors. Investing in growth assets with returns that outpace the rate of inflation is one of the best ways investors can beat inflation. Always speak to an accountant before making investment decisions. And know the fees you are paying for your investments and calculate the impact those fees will have on your investments over the long term.

I cover these hacks in more detail in our Investment Playbook – you can download it here.

I will leave you with one of my favourite investment quotes by Peter Thornhill. It wraps up investing perfectly:

“THE TRICK IS TO OWN THE RIGHT ASSETS – ASSETS THAT GENERATE INCOME, THAT WILL GROW AND MAINTAIN THEIR VALUE OVER THE LONG TERM AND ENABLE US TO PURSUE THE REST OF OUR LIVES WITH AS MUCH PASSION AND PLEASURE AS WE CAN MUSTER.”

Best,

John

Download the Investment Playbook

Download the Investment Playbook

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