This week, I was meeting with a prospective client. He asked me, “How do I know that I’ll get a return on my investment using your services?” A good question, but a hard one to quantify when a plan has not yet been prepared. Below is a list of strategies that I regularly recommend to clients that provide value for the service I provide and help our clients to grow real wealth.
1) Setting the right goals and objectives: It starts with a simple question – How much money do you need to enable you to choose if you want to work or not? Surprisingly, most clients cannot answer this when I first meet them. We create a plan that works out how many assets they need to put them in a position of ‘financial freedom’ – where recurring income from assets covers their living and lifestyle expenses. Setting a clear vision on what this is and how short a client is of this objective provides great value in understanding what needs to be done.
2) Accurate cash flow monitoring and budgeting: Most people do not track their spending or have a budget. We want to enable clients to track their spending and set a budget. Ultimately, it enables us to deliberately make a monthly contribution to an investment strategy. This varies between $200 to $5,000 for some of my clients, thus, this discipline achieves between $2,400 to $60,000 per annum to creating real wealth.
3) Restructuring non-deductible debt: I am surprised at how many financial planners will only focus on managing assets (e.g. superannuation) and have no plan to help a client reduce non-deductible debt on their home. By simply restructuring your home loan repayments from principle and interest to interest only with an offset account can create anywhere between $5,000 to $12,000 of cash flow savings per year. This free cash flow can then be used towards an investment strategy to build real wealth. Many clients achieve an outcome where they can purchase more assets for building wealth without possibly needing to give up cash flow to fund their lifestyle. There is great value in that.
4) Getting the asset mix right: A good investment plan will cover the purchase of property, shares, some fixed income securities and a healthy cash reserve. Proper and thorough research will facilitate the purchase of quality investment assets that will maintain their value and cash flow throughout the full economic cycle (the time between a recession and a booming economy). Appropriate gearing for investment assets can help to get more capital working for you which creates a compounding effect when growing real wealth.
5) Using superannuation wisely: Australians are very fortunate to benefit from our superannuation regime. However, for most Australians, their superannuation will not be enough to achieve the financial outcomes they desire. A good plan will consider if an industry superannuation fund or a self-managed superannuation fund is most appropriate to facilitate the creation of wealth for retirement. For many, this may include deciding if it is appropriate to combine all their superannuation into a self-managed superannuation fund and purchase an investment property. This gets more capital working and growing over the long-term in a concessionally-taxed environment.
Secondly, maximising superannuation contributions to save tax may not be the most appropriate strategy for everyone. If you still have non-deductible debt on your home, you may be better off paying the higher rate of tax on your income and reducing your home debt. This strategy may save more money on reduced home loan repayments than on the tax saved by maxing additional superannuation contributions.
In summary, a good financial strategy will easily be able to demonstrate benefits such as tax savings, cash flow improvements and projected increase in real wealth through the purchase of investment assets. The cost of paying for that financial plan should be a pretty small price to pay for the benefits of implementing it.
Andrew Zbik, senior financial planner, Omniwealth