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Everyone needs a plan

Many people don’t spend much time planning their financial life. Sure, most people try to save some money for holidays, a new car or a big ticket item that they’ve always wanted, but I’m talking about ‘life planning’. In a previous Cuffelinks article (‘The superannuation essentials’), I included a chart which illustrated how much longer and more complex our lives are compared to previous generations. Whereas our grandparents went to school, got a job, retired at 65 and on average only had six or seven years in retirement, we now look forward to college, gap years, later marriages and longer lives.

We are starting full-time work later, taking on much higher debts and facing the prospect of more than 20 years without employment income. We cannot afford to ‘make things up as we go along’. We need a plan that addresses short, medium and long term goals, and we need to take action to address all those goals now, not later.

Key steps in the process

  • Define your goals
  • Work out the time frame for each goal
  • Develop strategies to achieve them
  • Assess what risks you are prepared (or need) to take
  • Plan for unexpected events
  • Obtain professional advice

1. Define your goals

Many people start off with great intentions, but somehow never seem to get around to actually making things happen. It’s a certainty that unless you have the discipline to sit down and put together some numbers, you are unlikely to make any headway.

Setting clear goals with achievable targets is the first step in the planning process. Try not to be vague. Spell things out. For example, ‘I want to retire at 60 with an after-tax income of $60,000 which will last at least 25 years’. Or, ‘I want to accumulate $200,000 for a mortgage deposit in three years time’.

2. Work out the time frame for each goal

Most goals can be split into short term (18 months or less), medium term (three to five years) and long term (over five years). Firstly, it is likely that you will have a number of goals which need to be achieved over the course of your life. Secondly, at any one time some of these goals will have a higher priority.

3. Develop strategies to achieve your goals

Your objectives and time frame will often dictate what strategies and asset classes may be appropriate. Some accepted ‘rules’ are:

  • for short term goals it’s safer to invest your money in more conservative asset classes, such as cash and fixed interest
  • for long term goals, it is imperative that your investments beat tax and inflation otherwise you are going backwards in real terms. Consequently, including growth-orientated asset classes such as shares and property in your investment strategy is almost imperative. Cash and fixed interest will simply not yield sufficient returns over long periods
  • for medium term goals, such as saving for a home loan deposit, it is difficult to construct an investment strategy. If you are too conservative, you may not create sufficient money, but if you are too aggressive you run the risk that your investments are in a ‘down period’ when you need to cash them out.

It is highly likely that when you have written down all your objectives and matched them with your savings capability there will be a gap. In these situations, you need to prioritise by deciding whether you can afford to set aside some goals for a while. You may need to get some advice about this because you may be able to achieve more than you think by re-structuring some of your income and expenses.

4. Assess what risks you are prepared (or need) to take 

One of the key influences on your investment strategy, and which products you select, is your ‘risk profile’. Your risk profile will depend on a number of factors including your:

  • stage of life
  • performance expectations
  • time frame
  • familiarity with investment markets
  • ability to deal with fluctuations in the value of your investments
  • purpose for investing.

Most risk profile questionnaires are inadequate in this regard because they only cover your natural risk/return tendency. As I have previously mentioned, you need to consider whether some long term goals (super is the best example) deserve a higher risk profile than you would ordinarily feel comfortable with for the simple reason that you will run out of money if you are too conservative.

5. Plan for unexpected events 

Death and disability are the most serious risks, but there are others you need to think about. For example, your investments deliver less than you expected, you get made redundant, or your children need extra tuition. All these possibilities need to be factored in and allowed for.

Once you have formulated your objectives and strategies, it’s very likely that some sort of budgeting will be necessary to ensure you have the means to make them achievable. A previous Cuffelinks article (‘The insurance essentials’) may help you assess which risks are more important to cover.

6. Obtain professional advice

Financial planning is complex. There are many issues to think about, and if you’re working eight hours a day it’s unlikely you have the time, expertise or inclination to do all this planning yourself. It is important that you tap into relevant expertise.

Most people equate financial advice with investment advice, but this is short-changing many advisers who focus on ‘strategy’ and ‘life planning’. An experienced financial adviser will have wide- ranging knowledge and useful information that can help you with many other financial decisions. They may not be expert in tax efficiency, estate planning and housing loans for example, but they know what to look for and where to get help. It may help to view them as a ‘financial’ GP whose ability to spot an opportunity could literally save your financial life. Or at least a severe illness.



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