How financial advice can help you live your best life
How much money is enough money to live a good life? I don’t think you can ever put a cap on that, but here are a few questions you should ask yourself to ensure you have enough money to live within your means and enough savings to meet your life goals.
How will financial planning help me?
Should I really be living in the moment?
How much should I save?
How should I temper my lifestyle to ensure I have savings for a rainy day?
What are my short-term and long-term goals?
It’s never too late to start asking these questions, but ask them you must!
I hope to open your eyes to the basic fundamentals that you need in place to start planning your finances and offer some advice on how to improve the productivity of surplus money as opposed to just splurging it. Lets now look at some the questions we are often asked.
What do people think about financial planning and cash flow? What’s the typical approach they might take before they seek financial advice?
Most people haven’t really thought about financial planning and have no idea where to start. Others think twice about going to an financial adviser because they feel they’ll be told to make sacrifices and give up the things they enjoy in life to ensure they have money to invest; but that’s definitely a misguided impression.
How does budgeting, saving and cash flow work when it comes to putting together a financial plan?
There are some basic fundamentals that you need in place to start building wealth. A good first step would be to get a basic understanding of what’s coming in and what’s going out and try to ensure there’s some money left at the end of the day. Once this is figured out, then we can work out what to do with the surplus money or help you get to a point where there is a surplus.
What are the things you could do to identify where the money is coming from and going to?
Initially we ask people to complete a budget, though people are reluctant to do that at times. But, this is essential to the process to gain an understanding of what the fixed costs are and hazarding a guess as to what the discretionary spending is.
What are the types of fixed costs?
Typically, fixed costs include rent or mortgage, private health cover, car insurance, childcare and other regular expenses that are incurred every month.
What about discretionary spending?
Entertainment, going out, buying clothes, looking good, all come under the discretionary spending umbrella. That’s where people aren’t sure because it is something that changes from month to month. So based on their previous spending habits, we would have to make a reasonable guess as to how much their discretionary spend would be.
Once you get a handle on the current spend, what do you do next to work on a financial plan?
First we would map out a cash-flow diagram, which would detail the bank accounts that need to be set up to support the client’s budget. Once we have an idea about what you’re currently spending, we set a target as to what you want to be spending. So, it’s based on what our client wants. We don’t tell you to cut back in certain areas, we help you come to that decision yourself. Once you know how much you’re spending, you should ask yourself if you’re happy to continue that trend or if you want to spend a little less on going out with friends and things like that, in light of the larger picture.
Then setting up the bank account structure is the next important step to help capture what should be leftover from your income. On paper you might have a surplus, but in reality, if that surplus isn’t being stored somewhere or it’s not being saved for a purpose, it eventually gets spent.
So are there any little secrets to help capture that surplus?
Setting a target budget definitely helps. Then, having your cash flow set up so that it’s automated,not having to manually transfer your money is a big help. We give our clients the tools to set it up so that it runs in the background without having to be monitored on an ongoing basis.
So, once you identify the target that you’re working towards, you would identify what the saving is and you would automatically put that away. So, you make a conscious decision regarding how much you want to actually save, not just what’s leftover at the end of the month.
What’s the relationship between short-term and long-term cash flow planning and how does that fit into the mix?
When we first meet with clients, a lot of the plans may be around short-term goals and objectives. We also try and get a picture of what their long-term goals are. Cash plays an important part because having money available does create a sense of security for a lot of clients. We often ask how much they would need in an emergency fund to make sure they always have a comfortable amount of cash available.
But, if there are important short-term expenses, our plans will ensure that money is available for the intended use, not tied up in long-term investments. On the other hand, if we know what the long-term plans are, the cash flow can be worked in such a way to figure out if it’s best sitting in a bank account or whether there are other ways to maximise the use of that money.
So, what are the longer term plans?
A regular investment is a long-term plan. If we know that there will be a surplus amount of a $1000 a month and that the client doesn’t really need the extra cash because he or she already has savings or an emergency fund, we might start a regular investment plan. This will just tick on in the background without being accessed for quite some time. By doing so, we’ve taken away the risk that the surplus money would just be frivolously spent, as a result, it will be available when the need arises.
Would super potentially play a part in that sort of planning?
It definitely can, for some clients. Superannuation is a fantastic strategy and obviously has a lot of tax advantages. However, you need to weigh up the fact that it is preserved, so if there are shorter-term or medium-term goals, perhaps superannuation is not always the best option, especially for our younger clients. They could consider investing the funds in their personal name, so they have the flexibility of accessing it when required.
What if you want to continue enjoying your life, and you’re concerned that you’re going to have to go without a financial plan?
A lot of people think that way. When I start talking about budgeting, some clients get a little uneasy because they feel I’m going to start imposing restrictions on their lifestyle. But, it’s not that at all. It’s just making a conscious decision. For instance, if you’re spending $500 in one area then you might want to cut that back or not spend that at all. But, if you really want to spend that, you need to look at where else you shave back a little bit of cash. It’s up to the client at the end of the day. We give them the tools, the guidance and the strategy, our clients have to execute it.
Is it also about finding a balance about living your life now and living your life the way you want to be at some point in the future?
Some people just love living in the moment and enjoying the lifestyle. With such clients, if they’re unclear about long-term plans, it’s very difficult to cut back on some expenses. But, once you actually have a clear mapped-out financial plan, it’s easier to figure out what that might impact.
It’s good to know that if you do continue spending the way you are now, you may not be able to achieve some of those long-term plans, then you know that you’re setting yourself back. Sometimes, all it takes is one conversation to clarify what you want to do in the long-term, so it’s a bit easier to be held accountable to that over the planning process.
What are the typical things people save towards, where a good focussed cash flow plan can help them achieve something?
Home deposit savings, investment property savings, savings for travel. For example setting aside funds for a month long trip to Europe are common.
Another one is taking career breaks. Some of our clients are in high-level positions. Their jobs are quite stressful, and as much as they enjoy it, it’s fast-paced. So, they may want to put aside cash so that they can take a break from work at some point and have the funds set aside for that.
How hard is it to get started on a disciplined financial plan?
I don’t think it’s hard, it’s more about not knowing where to start. It helps to have a discussion about what you want to achieve in the future, and to have someone point out that ‘this is what you said that you’d like’ and ‘this is how you can do it’, is exactly the motivation you need. That breaks down the initial barrier and takes away the uncertainty of how to get started.
Are there any tips for people who are not quite ready to meet a professional financial adviser? Is there anything they could try?
You should start paying attention to what you’re spending your money on. A lot of people have one spending black hole which can be really hard to identify, until you start looking at banking transactions. That can be a real eye-opener, to know that you were spending so much money in one area or one shop.
For instance, I realised I was spending too much money at this shop called Priceline. Every single time I walk in there for one thing and end up buying a lot of other things. Once you actually start paying attention, then you can decide to avoid the shop, which is what I’ve been trying, or just stick to that one thing you actually need to buy.
Awareness helps initially. Then, you should get thinking about what position you want to be in, in the long term, and what changes you need to make now to ensure that happens.
Where can you go to get more information?
Our website http://evalesco.com.au has relevant information that will be helpful. Then, of course, you can turn to the MoneySmart website for budgeting and that can be a good starting point. That website has a great template budget as well. But ideally, getting professional financial advice is essential to help both initially and over time. It is obviously an investment of time and money, but it does pay off.