My wife and I are thirty weeks in to our first pregnancy. Such a huge life change provides an opportune moment to re-assess life’s priorities and the underlying financial support these require. However it does not need a life changing event to create cause for reflection on your finances. The onset of a new financial year is a perfect time to undertake a re-assessment of your financial situation.
I believe there are 6 key tips for you to consider.
Tip 1: Review the big picture first
Having a clear picture of where you are going is crucial before putting in place any financial strategy. At the same time try to weed out the aspects of your professional and personal life which are no longer priorities. Define what’s important and what’s not. Painting this picture should help you define the non-negotiable financial requirements to reach your aspirations.
Tip 2: Determine the non-negotiable financial commitments
Probably the most difficult step is to work out what financial support you are going to need to meet your priorities in life, either the lump sum capital or ongoing cash flow. When you are putting this together don’t forget to factor in the impact of inflation.
Tip3: Attack your financial decisions like a CEO
After defining priorities and what amount of money it is going to take to reach them you can then start to work on specific strategies.
- Focus on maximising cash flow – increasing income & decreasing expenses,
Being business like with your own personal finances is crucial. The keys are to:
- Measure and analyse your personal balance sheet – assets and debts,
- Assess the use of debt and focus on getting rid of the bad personal debt and rather use tax deductible debt or no debt at all,
- Implement strategies to improve the efficiency and effectiveness of your money through carefully considered investment decisions
Tip 4: Focus on risk-free cash flow enhancement strategies first
Many focus on finding the perfect investment without first considering how to maximise cash flow through non risky approaches. By this I mean increasing cash flow through accessing all of your government benefit entitlements, making sure you are not paying too much tax by claiming all the relevant deductions and offsets, and carefully considering your budget to see if savings can be made to help reach those big picture priorities.
Consider the following as examples:
- Claiming valid tax deductions and offsets,
- Opening a first home saver account,
- Making a personal contribution into super to receive the government co-contribution,
- Salary sacrificing into super to build retirement savings and reduce tax,
- Starting a transition to retirement income pension.
TIP 5: Target strategies relevant to your stage of life
Financial advice should be specific to the needs of the individual but some broad generalisations can be made to help provide food for thought depending on your stage of life.
Age 20 - 35 (Starting out, getting a first job)
Number 1: 'Don't Run it Off Into the Ditch'
This is the age where a lot of people get into financial stress because of debt. Avoiding consumer debt, credit card debt, car loans and personal loans means that you do not have to use part of every pay packet to pay fees, interest of finance companies. If you are spending more than you earn and racking up debt, it is going to be nigh on impossible to be successful financially.
Number 2: Understand the Power of Compound Interest
The younger you are the longer the period of time you can have your money working for you in investments. Compound interest is the effect whereby investment earnings from this year are re-invested and then earn more next year - and so on. $10,000 invested for 41 years and earning 10 per cent a year will turn into $500,000. However compound interest is a long term effect. The power of it is only effective over time so you must be patient.
Number 3: Insure your income
If you get ill or injured and are unable to earn an income this is a major financial risk for someone early in life. The answer to this risk - get a good income protection policy in place, preferably one that pays a benefit through to age 60 or 65 in case something bad happens.
Number 4: Superannuation
Keep your superannuation in the one, low fee superannuation environment invested mainly in growth assets, seeing as it is a long term investment.
Age 35 - 50 (Mortgage and often family commitments)
Number 1: Get some life insurance if you have debts and family - think about how your family/partner would cope if something bad happened to yourself.
Number 2: Pay off your mortgage with extra repayments. If you mortgage interest rate is 7.5 per cent, making extra repayments 'earns' you a rate of return of 7.5 per cent by saving interest on every loan repayment from then. That compares favourably to a savings account where the after tax return is more like 4.5 per cent. This strategy also provides a buffer should interest rates rise sharply at any time.
Number 3: Keep building your superannuation in growth assets - keeping fees low and your account in the one place.
Number 4: Make some long term investments outside of superannuation to provide overall financial flexibility until you can access your superannuation.
Age 50 - 65 (high income years, family becoming independent, preparing for retirement)
Number 1: Salary sacrificing to superannuation saves tax and positions your superannuation in the strongest way leading up to retirement.
Number 2: 'Transition to Retirement' income streams allow people over the age of 55 to take some superannuation benefits as an income stream. People can do this and save tax by salary sacrificing more of their income to superannuation. This is particularly effective after the age of 60 when the superannuation income stream is tax free.
Number 3: Think of a strategy to pay down any debt prior to retirement. You don't want to be servicing debt in retirement.
TIP 6: Seek out a fresh approach
If you feel like you are stuck in a rut or just not getting anywhere with your finances, its time you sought out a fresh set of ideas. I am the first to acknowledge that the financial planning industry still leaves a lot to be desired but there are many great advisers out there. The key is to find someone who is independent from any biases either through their fee structure or because of who they are owned by. Without these biases you can be confident that they are there to serve you rather than you just being another source of income for them.
Now these 6 tips don’t even start to consider the types of investments you should or shouldn’t be using. I’ll leave that for another time.
Before too much more of the new financial year gets away, give yourself a well earned break; get to that favourite place where you can think with clarity and start re-assessing your life priorities and the financial structures it will take to reach.