How to put your finances to work to get what you want
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Yesterday, I met a TV journalist, socially. I didn't recognise her and we thought to formalise our introductions only after 30 minutes spent bonding over kids. That's where the fun began.
Journalists are curious, intelligent people by definition so once she knew what I do, she asked what women need to do to get their finances working smarter for them. It's a good question, and I love answering it.
First up is planning; we women are typically very good at planning. It's no wonder there's a new phenomenon emerging called the Hub Organiser Woman, or a woman around whom the entire life of the extended family turns, thanks to her organisational and management skills.
What if we could take our organisational skills a step further and apply them to achieving our own dreams and goals and those of our families? That is, after all, what financial planning is all about, as noted a few weeks back.
Retirement is the dimension that rightly gets the most attention, but what about other more lifetime aspirational goals such as:
- School fees;
- University fees;
- Holiday home;
- Car for you or for the kids down the track;
- Upgrading the home as the kids grow and strew their smelly shoes everywhere;
- Downsizing the home when they and their shoes have left.
Costing out those goals that apply to you is the first step since you can't plan for something unless you know how much it's going to cost. Most people's financial resources are finite and are not necessarily going to stretch to meet all of their aspirations in a lifetime, so unless you're one of the few with significant earnings capacity and a strong chance of coming into a chunk of cash down the track that will fund your goals, there are two concepts to think about.
- What are you prepared to trade off to achieve your goals if they can't all be met? We manage trade-offs every single day, so these are no different.
- How are you going to create more wealth over and above your finite resources? The answer to this is, of course, investment.
It's important to make the distinction here between investment and savings.
Typically, savings are an accumulation of short-term ready cash with
- An expected high degree of security
- The intent of having access at any time for any purpose.
A term deposit account or a wad of notes stuffed in your mattress is savings.
Investment, on the other hand, is a longer-term commitment and usually involves:
- A form of business transaction linked to the intent of making more money;
- Ownership of an asset;
- A lower degree of security than savings with varying degrees of risk;
- A correlation (usually) between risk and return.
Listed share portfolios, ownership of a small business, additional property are all investments.
If you're hell-bent on achieving your goals but, like most of us, have finite resources, then investment is going to be a necessary tool for you.
The question then becomes: what's the best way to make the right investment choice and one which is matched to:
- Your timeframes;
- Financial targets;
- Your appetite for risk.
Once you've answered that question, the next one to address is the vehicle into which the investment is placed. A lot of people get this bit back-to-front and let the tax tail wag the investment dog.
Super is a good example. Super is an investment vehicle, not an investment in itself. It is a crinkly foil wrapper, granted special tax concessions by the ATO, into which investments can be placed. Whether it's self-managed, industry, small APRA or corporate in nature, it's just a tax wrapper for your investments that offers some administration benefits on top to make things easier to track and manage. Make sure the investments drive the super vehicle choice, not the other way around.
Similarly, managed funds are just a wrapper for shares, where you can delegate the choice of shares and their administration to a professional manager for a fee. Nothing more than that, really.
Quite simply, if you want to end up where you want to end up, you have to plan. You know you're good at planning, otherwise you wouldn't have read this far. So what are you waiting for? Get out your pen or your spreadsheet or pick up the phone and call your adviser and start planning. You'll thank yourself for it in years to come: trust me.