Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 7

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.

 


 

Leave a Comment:

     

RELATED ARTICLES

Choosing your investment strategy is like a road journey

Millions of households are missing out on good financial planning

banner

Most viewed in recent weeks

24 hot stocks and funds for 2021

Many investors use the new year to review their portfolios, and in this free ebook, two dozen fund managers and product providers give their best ideas for 2021 - some stocks, some funds, some sectors.

10 key themes for 2021

A summary of 10 investing themes for 2021 including early-cycle opportunities, populism, digital transformation and supply chains, plus the outlook for equities, fixed interest and alternatives.

Seven steps to easier management of your estate

Don't make life difficult for the person trusted to manage your estate. Find the time to arrange your documents, contacts, online accounts and files in a convenient place, including giving them some cash.

Five reasons Australian small companies are compelling investments

Many investors focus primarily on the big listed companies but the smaller end in tech, mining and healthcare outperforms through innovation. Many Australian companies are world-leaders in their speciality.

Two courageous responses to the Retirement Income Review

The Retirement Income Review has received criticism for compromising future super balances and not supporting the SG increase. The same result as an increase could be achieved by changing two other policies.

Retirement changes everything: a post-retirement investing framework

Categorising post-retirement needs – living, lifestyle, legacy and contingency – creates a framework for retirees. Advisers can translate these needs into investment goals and portfolios.

Latest Updates

Alternative investments

What to do when your collectibles become collapsibles

Collectibles are everywhere, from old cars, to sneakers, to wine, to cards and anything old and prized. But even if a collectible once attracted thousands of followers, what happens when the fans lose interest?

Financial planning

Compound interest rewards patience in an impatient world

Let compounding do its work. It starts slowly. This is why many of those who start an investment programme (or fitness programme, dietary change, sport, or business) give up in the early stages.

Shares

How did you go? Australian and global stockmarket winners and losers

The Australian market overall finished flat for calendar 2020, but the pandemic delivered big wins and losses. The companies, sectors and companies you invested in delivered vastly different results.

Investment strategies

What is endowment-style investing and who should use it?

For investors who have the scale, long-term investment horizon and lack of liquidity requirements, it makes sense to implement an asset allocation that can take advantage of a lack of constraints.

Investment strategies

Five ways to build investment portfolios amid growing inequality

At the start of the 20th century, a 'Gilded Age' for plutocrats created vast fortunes and economic inequality surged. COVID is having the same impact now, but portfolios can be adapted to respond to the opportunities.

Investment strategies

The hazards of asset allocation in a late-stage major bubble

The Grantham article everyone is quoting, in full. "The long, long bull market since 2009 has finally matured into a fully-fledged epic bubble ... this could very well be the most important event of your investing lives."

Investment strategies

Best and worst performing equity funds of 2020

Growth was the place to be through the pandemic while value managers couldn't catch a break. It's the long run that matters but 2020 delivered pleasure or pain for many managers.

Sponsors

Alliances

© 2021 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use.
Any general advice or class service prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, has been prepared by without reference to your objectives, financial situation or needs. Refer to our Financial Services Guide (FSG) for more information. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.