How To Set Up Your Finances So That You Don’t Even Need To Work

This isn’t an article about blogging on the side or doing surveys for cash. We’re thinking big; the kind of set up that means you only need to work if you really want to. We asked The Cusp finance expert, Canna Campbell – Financial Advisor and founder of SugarMamma.TV – to give us a rundown of something every Millennial should know when it comes to getting your finances on point for the rest of your life: passive income. This is the second in a two-part feature, read the first here.

In my recent article, I explained the importance of having a passive income. A passive income is an income received on a regular basis, with little or no effort required to earn it. It can either supplement our living expenses or totally cover them, but either way, a passive income is what sets up our financial future and helps give us true, authentic financial freedom.

Why is financial freedom important?

Because freedom means the ability to change jobs or start a business; take time off from work to raise children or support older family members; to throw the towel in and enjoy a very early retirement. It’s important because it means choice without restriction or pressure; the choice to do what you really want.

Start ASAP

The key point with passive income is that you need to take the time today to start buying and building long-term passive income streams, that can continue to grow and either keep up with or exceed inflation. In this article I want to show you some of the ways of achieving this.


Step #1: get some goals

The first step is to have financial goals that make you feel uplifted, excited and inspired. Only you can come up with these as they need to resonate with you – you’ll use them to super charge your motivation, so that you put the right actions in place to help make these goals a reality. For example, in my previous article I mentioned my client needed a passive income of $62,000 gross per annum to be able so to quit her day job. That was her ‘magic number’ and her ultimate financial goal. This was her source of drive and determination. If you want more info on your magic number, my previous article goes through that here.

Step #2: figure out what type of investor you are

The second step is to understand what type of investor you are. Are you someone who is fairly nervous when it comes to investing, who doesn’t like to take risks and may panic at the thought of markets moving up and down with the value of your investment portfolio? Or are you a thrill seeker, who actually understands and appreciates the volatility of market movements and even sees this as an opportunity to capitalise on?

Essentially, there are five different typical risk profiles that you can be: Defensive, Conservative, Balanced, Growth and High Growth.

The only way to find out where you ‘fit in’ (and there is no wrong or right profile), is to take a Risk Profile Questionnaire, which asks you a range of questions including your experience with investing, the time frame of your goals, your natural reaction to certain changes in your portfolio and so on.

The Risk Profile Questionnaire gives you your profile as well as a guide as to what the ideal balance and blend of investment assets you should have in your portfolio – cash, fixed interest, property, Australian shares, international shares – to help you sleep well at night as well as head in the right direction towards the achievement of your magic number.

Typically each profile has a different percentage of income-based assets and growth-based assets. The more averse to risk that you are, the more income-based investments are recommended in your portfolio (such as cash and fixed interests), and the more risk inclined you are, the more growth-based investments are recommended in your portfolio (such as property, Australian shares and international shares).

Step #3: even if you hate risk, include some growth-inclined assets

One key point that you should be aware of, is that you want your passive income to continue to grow over time with your long term goals, so that is doesn’t get eroded away with inflation. Remember that $62,000 today, won’t buy the same amount of clothes or food for my client as it will in 15 years’ time. So having some growth-inclined assets in your portfolio can be valuable over the long term, but within your comfort ranges.

Pro tip: your risk profile isn’t static, so check it periodically

As you become more informed about your finances, experienced and comfortable with investing and understand the market, your risk profile can evolve, moving up and down. Check your risk profile every few years so that you are never out of your comfort zone but you are also not selling yourself short.

Step #4: research the types of investments you want to make and how you want them handled

From this point, you can start with your research process in working out the actual investments that will form the entire portfolio.

First things first though, a crash course on asset classes. An asset class is a category of investments that behave similarly – they have similar risks and returns – and generally have the same laws and regulations applied to them. Asset classes include cash (this is low risk, and includes things like term deposits and savings accounts); fixed interest (moderate risk with things like bonds and mortgages); property (moderate to high risk, whether that’s residential, industrial or commercial); and equities (high risk and considered growth assets).

Now, back to your different options. The first is the easiest: you can find an already diversified Managed Fund with a blend of asset classes available and constructed. This allows you to invest your funds without much thought and even make regular or ad hoc contributions.

The second option is that you go about finding the individual Managed Funds for each asset class (such as an Australian Share-based Managed Fund) or pick each individual investment. That means you could be selecting individual Australian company stocks that form your overall recommended exposure to Australian shares.

Each option can range in price from an upfront and ongoing fee perspective; Managed Funds have ongoing fees, whereas shares typically just have brokerage costs. But it’s good to note that while Managed Funds have ongoing feeds, they also can have a greater level of diversification, which can smooth out volatility.

No matter what, your portfolio needs to do this

At the end of the day, it comes down to what you feel most comfortable doing with the key point being that the assets are providing you with a passive income that consistently grows over time.

You can speed this process up by continuously adding to the portfolio as well as reinvesting the passive income generated (such as interest or dividends). This helps the effect of compounding interest really work for you and your goals.

The earlier that you start this simple process, the easier and quicker you should be on the right track to looking at a much more stress-free financial future.

Canna Campbell is a certified financial advisor running her own company, SASS Financial, established in 2007. Her blog and YouTube channel, SugarMamma.TV teaches people the power of financial freedom; covering everything from managing budgets and investing in stock and shares, to saving strategies for your ultimate designer handbag. Canna regularly appears on TV as a personal finance expert, and has written for many publications.

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