Wouldn’t it be amazing if you could just put your money in a bank and watch it multiply at a rate that delivered all the returns that you ever needed? Or if you could make an investment in your business that would bring great returns without having the requisite risk?
Unfortunately, neither is very likely. Financial success requires planning and patience. There are many factors that contribute to both personal and business financial goals, and not all of them are easy to understand.
Even though most people have some financial planning skills, most people don’t have the education and experience to understand the best strategies to achieve long term success. A financial plan devised by someone with the skills and experience is crucial for ensuring financial freedom in your future.
With good financial planning, you can squeeze every drop of your financial potential. You can manage your income and achieve the lifestyle that you want now and in the future.
So, how does this work?
What Does “Financial Planning” Look Like?
The process of financial planning may not seem that complex. The steps are quite straightforward, and due to technology, actually making investments is becoming easier each year. However, as they say – ‘”The devil is in the detail.”’ Making investments is one thing, actually having a plan is quite different.
The good news is that our financial partners do this day in and day out. They help you crunch the numbers and develop a strategy that suits your situation.
A financial plan will encompass the following six steps:
- Establishing the goal – This is the beginning of the relationship between a financial advisor and their client. The advisor will ask various open-ended questions to see where the client is and where they want to be.
- Gathering relevant data – Once the goal is in place, the advisor will gather all the information necessary for achieving it. Everything from your age to your income is important, so you can expect to dig up all the data.
- Data analysis – Once the advisor collects all the data, they’ll analyse it thoroughly. This allows them to make some basic assumptions about the different ways for you to achieve your goals.
- Strategy development – With everything on the table, your advisor and you can curate a plan for achieving your financial goals. There are all kinds of ways to do this and you’ll have your options. The actual steps will depend on you decide with input from your advisor.
- Strategy implementation – This is where you get to put the plan into practice. Of course, this is the hardest step you’ll go through, so the relationship with your advisor plays a huge role.
- Monitoring – To keep the plan on track, you need to monitor various metrics. With time, this will become easier and you’ll get better at staying on the right track.
So this is how the planning process looks in theory. Now it’s time to see how it works in real life.
Case Study #1 – To Sell or Not to Sell?
John & Debbie were property investors in a dilemma that’s relatively common: should they sell one of their properties to pay off debt. If not, they’d have to carry the debt into their retirement. To help them answer this question, they turned to a financial planner.
Since John had worked for a long time, the value of his superannuation was quite large. The couple had three options:
- Withdraw a lump sum for their use or transfer it to another super fund.
- Withdraw one part as a lump sum and leave the rest as a lifetime pension.
- Put the whole balance towards a lifetime pension.
The financial planner researched and strategized around the following issues
- At what age would the lump sums be depleted
- What would be the most tax effective times to sell down the properties to minimise capital gains tax
- What is the return required on all investments to ensure a comfortable lifestyle in retirement
- Does their current portfolio reflect their risk profile given their age
Now we’re back to the original decision – should the John & Debbie sell their property to get out of debt?
After carefully examining their portfolio, the advisor realised that this made a lot of sense. The property that they wanted to sell was in a great equity position, but they still owed a large amount which did not suit their risk profile.
Since John & Debbie had other properties in their portfolio, sacrificing this one to get out of debt made sense. The end result was a comprehensive plan for maximising their pension and enjoying their retirement.
Case Study #2 – The Right Cash Flow Strategy
Mike & Ange had two children and desperately needed help from a financial advisor due to serious cash flow issues. Even though Mike had a high executive salary, the cost of the family’s everyday living expenses was quite high as well.
Since the kids went to a private school, a lot of money was going in that direction. In addition, the family’s living costs were steadily rising.
The couple had almost no knowledge of their superannuation or insurance, nor had they ever done any kind of financial planning. They also weren’t sure about their banking and loan facilities, so managing money was quite a challenge.
Mike & Ange had the following goals:
- Continuing their children’s private education
- Building a pool in their home and taking regular holidays
- Not stressing over bills and ongoing financial issues
- Ensure the family would be protected should adverse circumstances affect them
- Developing a plan for the future when the kids are out of school
The first thing that the advisor did was to take a look at the family’s cash flow and review it for the previous six months. With knowledge of how the family spends money, the advisor would then be able to restructure their finances and understand their potential free cashflow which could be used to invest. He also reviewed their superannuation and their risk strategies.
The advice provided to Mike & Ange contained the following recommendations:
- Pool all superannuation into one fund (not uncommonly, due to different employment history, there were multiple funds with each one paying fees). A self managed superannuation fund was suggested at a later date
- Redo all life insurance policies to reflect their current debt levels and potential investments. It was also suggested that this policy be held in superannuation, to assist with current cash flow
- Redo their income protection insurance to reflect their current living expenses
- Remortgage their house. A more favourable interest rate would save them over $12,000/year
- Follow a cash flow plan which would put cash into an investment account to be used as part of their strategy
- Complete their wills
- Make an investment based on their age and income. In this case an investment property was considered the best option. The investment property had strict criteria on its own including being cash flow positive and in a suburb with good growth potential. Mike & Ange were referred to a professional in this space
After putting the plan into motion, Mike & Ange started following a strict cash flow plan and monitoring all their money. Not long after that, they were rather pleased to see the first results. Now they’re well on their way to achieving their ultimate goal of financial freedom.
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The Takeaway
As you can see, financial planning can make a world of difference to your future. It’s not about how much money you make but how well you’re able to manage it.
If you take a close look at your cash flow, you’re going to find holes in it where you’re bleeding money unnecessarily. The issue is that you might not know how to plug up those holes.
This is why hiring an advisor can be a smart idea. Think of it as an investment in your future to get the most out of your income. You’ll love the feeling of knowing that your wealth is in good hands.