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How to make a plan to achieve your financial goals

Chris Wright

A reader sent us a letter saying: “I would like to ask if Financial Review Smart Investor can explore the financial road map for investors.” He asked if we could tell readers how to develop their own financial road map “and get their financial house in order and then keep it that way”.

It’s an intriguing idea: how do you prepare your finances for the watershed moments of your life?

If you don’t know where you’re going, you’ll end up somewhere else

So we set out to do it. But just remember: if you’re going to get good use out of a map, you need to know what destination you’re trying to reach with it.

“Your requirements do change,” notes Sergio Arcaini, a financial planner at Chiltern Peak (part of Genesys Wealth Advisers) in Kew, Melbourne.

“While the regulator can keep talking about risk and return, I think the focus of people should be to create a budget and try to stick to it. Once you have done that you can work out what your goals are and what you would like to achieve in life.

“One problem we have as an industry today is we don’t teach clients to set goals and stick to them.

“Anything you lie awake at night dreaming about – anything you want so badly you can taste it – you can find ways of making it happen if you are prepared to make the sacrifices to achieve that goal.”

Don’t be vague, dream of a Porsche

A practical example: “It is much more important to say, ‘I would like to get a Porsche’ than to say ‘I would like to have $250,000’,” Arcaini says. “If you are dreaming about a Porsche, it becomes a powerful motivating factor. If it’s just a figure, it doesn’t have the same power.”

Goals can be anything. The house on the beach. A family – or education for that family. Early retirement. Part-time work for much of your life. A return to study. Or simply breaking even and providing as best you can for your dependants.

But it’s only with the goals in place that you can build a road map towards them. With that done, here are some typical life stages and the issues they tend to raise.

Getting started

The first big life stage for most of us in financial terms is leaving home, starting work and just trying to make some progress.

The priority of many young people having bought their first home,is to pay down the mortgage as much as possible – and there’s nothing wrong with that; after all, home loan debt is not deductible.

Planners recognise that saving at this age is more easily said than done, but they recommend that if there are any surpluses, they be put aside in a savings or investment plan.

Many Australians when they begin to accumulate money opt for the tried and tested route of an investment property.

That has pros and cons: on the plus side, if everything goes in your favour, it’s a great way of growing your assets over the long run, as a tenant pays down your mortgage, your equity increases, and hopefully the property itself increases in value; on the downside there’s a big upfront cost and issues around what happens if it is not tenanted – can you still pay the mortgage?

The not very exciting option

It’s a big ask to try to get young people to put money into superannuation, although planners do suggest salary sacrificing where appropriate to build for the future. The earlier you put money in, the greater the power of compounding returns over time.

Others recognise that there are likely to be short-term requirements to liquidate investments when young, for a first house or to upgrade to a bigger one, and therefore suggest managed funds or exchange traded funds.

Since this age bracket is largely about accumulation of assets from a low base, some recommend borrowing to invest, but remember this is a double-edged sword: leverage increases rewards when things go well, and losses when they go badly. Borrowing to invest has a tax benefit, but that should never be the main reason you do it.

Another important component of this bit of the road map is insurance: particularly income protection insurance. If your greatest asset is your ability to earn income, then that’s worth protecting.

The kids

Let’s be honest: you didn’t have kids to improve your wealth. For at least a couple of decades they are a one-way street when it comes to cash flow.

When kids come along they present both a need for long-term saving and a barrier against doing exactly that, particularly if you’re paying Sydney or Melbourne mortgages, rents or childcare rates. If you’re in state schools they become considerably cheaper once they’ve started primary school.

Saving for the kids depends on what you propose to do for them. If you want to put them through private education and have a rough idea where you will do so, then you can look ahead to the likely costs and build a savings plan to be ready when the time comes. Likewise if you want to pay uni fees – rather than the kids paying them back from HECS or the like – then that can be planned and saved for, as can the living expenses for that time if they won’t be living at home.

Should you buy a house for your child?

Some families help their kids by buying investment properties and allowing their children to live in them with subsidised or no rent while they find their feet.

This isn’t for everyone; it means another mortgage without income coming in to service it. But it does mean an investment in an asset which will hopefully enjoy capital growth.

Approaching retirement

One of the biggest moments in all of our lives is retirement, and this of course is where your financial road map has been aiming. But few of us suddenly shift from full-time to retirement in one day: we’re more likely to reduce hours, do part-time work for a few years, and perhaps continue to do a bit of work while drawing on super for more years.

Either way, when the day approaches, transition-to-retirement rules become important. Once you reach preservation age (between 55 and 60, depending on when you were born) you can reduce your working hours and top up whatever income you get from your part-time job with an income stream from your super.

Time to pay less tax

Planners generally urge people in this age bracket to get as much money into the most tax-effective vehicle possible (super) then into an account-based pension. Minimising tax is naturally a crucial consideration now. Again, salary sacrifice can make a lot of sense.

This group should ensure their estate planning, wills and insurance structures are in order. It’s also common for those approaching retirement to reduce their risk profile: less in equities, more in bonds. But not everyone agrees with this capital preservation approach and you need to work out what’s right for you.

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