Here’s some pretty valuable financial advice I’ve gathered over the last 25 years of being an adviser. My purpose in sharing these 5 tips is to allow you to be able to shape your thinking, off the back of my experience. Experience is an extremely good teacher but sometimes, you just haven’t been in the game long enough to acquire a lot of it.
So learn from me, but always, make sure you synthesize the information and make it your own. Go and do some back - checking and make sure that what I am saying is not only correct but more importantly suits your situation.
Simple is good
During my time as an adviser, quite a few of the clients coming to me for advice had already formulated their own financial plans. Interestingly this became more prevalent in the latter stages of my career than in the early days. So it certainly didn’t require Einstein’s intellect to realise that this was the ‘Google’ factor playing a substantial and ubiquitous role within client information gathering.
All of a sudden, with a few deft search parameters, any client could lay their hands on the most complex financial information within minutes. But as they say, ‘a little bit of knowledge is a dangerous thing’. And so it was with my clients.
Hence it became quite common during interviews to be told portfolio preferences (contrary to risk profiles) that weighted investments strongly in favour of whatever was the ‘flavor’ of the investment month. Or a suggested product armed with an array of features requiring a Ph.D. in Finance to fully understand their true mechanics. These products no doubt turning up in client searches as a direct result of the paid advertising that’s a feature of Google search.
By the way, this corporate advertising was particularly distracting to the financial planning process as no marketing manager in their right mind is ever going to highlight any negative features for your benefit. And I can assure you, they all had them!
Add to this the many ‘expert’ opinions so freely available across all forms of media. Either touting the greatest ever bull market or a cautionary message about entering the depths of the longest ever depression and everything in between. These ‘pundits’ (read authors, fund managers, finance journalists, CEO’s et al) all had corporate /personal reasons (money) for their commentary on current market conditions. You can be guaranteed that theirs was certainly not to sprinkle words of wisdom purely for the benefit of mankind I can assure you.
Sadly, none seemed to venture into any weather forecasting, rather containing their predictive powers to the far more complex arena of global finance. I just want to know if it will rain Saturday rather than if a financial Armageddon will arrive in the next 3 years!
Unfortunately, as a result of this overload of information, the personal investment space complicated itself into a mishmash of both ill-suited products and inappropriate advice all jostling for your money. And if you needed proof, one doesn’t need to look beyond the recent Australian Banking Royal Commission to see the extent of the misinformation peddled by even our most revered financial institutions.
It would seem their ‘kind and considerate’ offerings of advice and products, were merely disguised, as being genuinely helpful, but in actuality, we're just money traps for their unsuspecting and trusting customers. Tsk, tsk banking behemoths’.
So it's very important for investors to remember that there are really only three assets to invest in; cash, shares, and property. And all the ‘bells and whistles’ added by financial institutions are only included to entice your investment funds. Try to stick with plain old, well-researched investment options sourced through your own efforts rather than relying on the spurious message of an advertisement.
And always follow the tried and true investment axiom that “the higher the returns - the higher the risk”. Any investment product, offering a return well above market norms, will definitely have higher risks, no matter how well they may be hidden through the magic of marketing.
So be very cautious and try to follow the advice of one of the richest men on earth, Warren Buffett, who suggests - “if you don’t understand it, don’t invest in it”.
Try to avoid credit and use cash only
Banks are solely in the business of lending money to make a profit. They make money from this endeavour by charging an interest rate. This interest rate is determined by the risk the bank associates to the particular borrower. Thus the higher the chance of not being able to recover their money, the higher the interest rate they charge. As a result, unsecured lending attracts a higher interest rate than secured lending.
And it’s also very important to remember that merely being granted a loan or credit from a bank is certainly not their imprimatur on the success of the venture you intend the funds for. A bank actually couldn’t care less for your endeavours. They’re sole concern is only if they’ll get their money back. And yes, this is totally contrary to their heart tugging, emotional advertising!
Unfortunately, any credit you accumulate can become a financial millstone around your neck which will haunt you for a very long time. Very often you see mentioned in the financial press the term good and bad credit. Consumer lending is a prime example of bad credit. This bad boy is the main enemy of your financial wellbeing and avoidance is the best advice. Try to adhere to the rule that if you don’t need something, don’t buy it, and particularly don’t buy it on credit.
But if you do have consumer credit debt, formulate a plan to pay it down as quickly as possible. Trust me; I have seen many bank customers dragged into despair purely from overusing their credit cards. Why? Because whatever was purchased with the credit card immediately diminishes in value once bought.
Which means paying out the loan becomes solely dependent just on your cash flow/salary. It’s therefore not hard to imagine that the more consumer loans you acquire the more strain that’s put onto the family budget. And sooner or later something ‘gives’ - it certainly won’t be the bank, I can promise you that!
Good debt, on the other hand, is defined as debt being used to purchase growth assets. Therefore, your debt over time is actually nullified, by the increase in the value of the purchased asset. To get out of this loan, liquidating your purchase actually leaves you with a profit. (That’s the theory anyway) Not only that but good debt can also accrue some reasonable tax advantages which further adds to its usefulness.
Of course, there are some 'consumer' transactions that will always require the use of a loan; home purchases the most obvious. But this loan actually straddles between the good and bad debt definition. The home you purchase will certainly grow in value over time and will provide funds to pay out the home loan when required.
Additionally, depending on the time elapsed and the prevailing market conditions, selling your home could also leave you with a profit. Importantly though, there are no tax advantages when purchasing your own home as there is with an investment property. (In Australia at least, check in your own country to see if this is the same)
From a personal investment perspective, in order to qualify to borrow ‘good debt’, you will need a good credit history. Quite simply this will mean you really need to be clear of any ‘bad debt’. Your credit cards and any personal loans are all aggregated by the bank when assessing your loan applications. (By the way, the bank also counts the amount of any loan you may be a guarantor for.) It's therefore in your best interests to eliminate all your bad debt as too much of it will preclude your investment borrowing.
So it’s important to concentrate on reducing your consumer loans as quickly as possible. This not only free's you from an onerous millstone around your neck it also allows you to enter the world of asset building using the bank's money!
Retirement planning should start on your first day of work
Don’t waste time by ignoring your retirement - even if it’s 40 years away. The minute you begin to earn money is the perfect time to commence saving for this big event. Over my many years as an adviser, probably the most commonly uttered phrase from clients was, “I just wish I had started saving earlier”.
And in this day and age, it is a very simple matter to put small amounts away for your future. Recognised superannuation accounts provide not only for the ability to salary sacrifice or make extra, regular deposits, they will also give you some decent tax advantages. Yes, I know the system isn’t perfect, but it is the only system available and it’s a very good idea to make some use of it.
Now I know you have all heard about the 8th wonder of the world according to Albert Einstein – compound interest. Well, the earlier you get this magical formula working for you, the better off your retirement is going to be.
So start by salary sacrificing a small amount into your current super. Just $10 per week will do it. I can assure you, you won’t miss this from your spending money! Keep monitoring your fund and over time, increase the amount as your pay increases.
But be aware that there are limits on how much can be deposited yearly into super from your gross wages. Avail yourself of these numbers and make sure to adhere to them. If you are going to exceed the limits, put future deposits to your account as ‘after-tax contributions’. These are certainly not as tax effective but are still a valuable contribution to your retirement savings never the less.
Also, make sure to review your super account. The fees you're paying and how your funds are invested are two particular areas that will cause diminished balances over the long term.
So always shop around as saving just 1% per annum makes a huge difference over time. And make sure you are in an investment option suitable for your age and risk tolerance.
The younger you are, the more tolerance to risk you should have. Higher-risk investment provides higher returns over the long run. But as you get older, reduce your risk to ensure you maintain your balance leading up to your retirement.
It's also a good idea to invest some funds outside of the superannuation system. This will alleviate any issues that may arise with the constant Government tinkering to the retirement system - a common event. Often, changes made are not always as suitable for your personal situation as originally thought.
Again, as this is long term investment, start small and use growth assets. There are plenty of ‘apps’ these days to automate your saving and it is a good idea to look around and select something suitable.
Remember, when embarking on long term investment, small amounts regularly over the long period makes all the difference. And the earlier you start the greater the result and benefit to yourself.
Create an emergency fund
One very smart idea is to establish and maintain a cash emergency fund. I have often read that many families can’t cope with even the smallest financial emergency without dipping into credit. Figures often quoted suggest that problems costing greater than around the $500 mark are where the trouble begins.
So it doesn’t require the brains of a mathematician to realize that most people are ill prepared for a family ‘black swan’ financial events. The answer is an emergency fund.
As we have discussed within this article already, consumer credit such as credit cards can be a real poison to your financial wellbeing. Relying on them to extricate you from an emergency is silly, very silly in fact.
So review your family budget, and find ways to make some savings. Then allocate the savings to a separate bank account ready to use when required. Importantly the emergency account funds are not investment funds so they should be kept in at call bank savings account. Yes, the interest rates are shocking but remember it is the purpose of the savings that is the main game and not what can be earned from them.
Here is a post about everything you will need to know about establishing an emergency fund so take a look and get started. (While you’re at it, also have a read of this post about saving money, it will help you to get some ideas about freeing up cash from the household budget for your emergency fund.)
Always plan for contingency – this means insurance
Now during your life, you are going to be faced with many financial trials and tribulations. We have just discussed the importance of establishing an emergency fund for those unexpected events, however, there will be times when this just won’t be enough.
Hopefully, they won’t happen, but there are certainly some large scale occurrences that can really knock a family for six. Serious illness, long term unemployment, and even death can visit any family at any time. And when they do, it will cause some real problems.
From a pure money viewpoint, it is vital that a family protects itself from the financial stress and strain these major events can and will put them through. At the very least, having the financial problems associated with calamities put to rest allows for 100% concentration on your families wellbeing.
Now, insurance is considered a bit of a dirty word, with many stories of rip-offs and unfair treatment abounding through the actions of our large financial institutions. (refer Banking Royal Commission) However, to create a safety net for your family you need to look past this type of behavior and examine suitable, reputable options that are certainly available in the market.
Again I have created an earlier post about everything you need to know about insurances and recommend it to you. It discusses the 4 main personal insurances including how you can calculate the right amount of cover appropriate to your family’s situation. Heres the link.
Remember, insurance is for those totally unexpected events that we go through life thinking will never happen to us. Sadly they do, so be prepared.
Now there are certainly many more helpful hints I have acquired over the last 25 years so make sure to avail yourself of my blog and immerse yourself in its information and knowledge. Share it with your friends and family and above all, happy and successful investing.
Thank you for reading, see you next time. Homepage