Part 2: Building the decision-making framework for your investment strategy
11 Apr 2013
By Darren Higgs
In my first blog I discussed the questions you need to ask yourself to determine your goals. In my second blog I'll focus on how, in conjunction with your financial adviser, you can build a decision-making framework to achieve them.
Once you and your financial adviser truly understand what you want to achieve, the framework can start to be built. The first step should always be to understand your cashflows, including:
- 'active' income (e.g. income from work)
- 'passive' income (e.g. investment income)
- 'certain' income (e.g. salary)
- 'uncertain' income (e.g. potential bonus)
As well as the cashflow you get 'today' and the income you are likely to get in the 'future'.
The other, and often more difficult part to the cashflow equation, is expenses. A common characteristic for financially successful people is to 'spend less than what you earn'. Sounds simple, right? However, less than 2% of Australians actually do a budget and know what they are spending so is it any surprise that a lot of people are not where they want to be financially?
Knowing what you spend is far more than just scribbling numbers on the back of an envelope and running with that. Does your budget factor in the following?
- Taxes which are likely to be the biggest expense in your life so how can we legally reduce them?
- Loan repayments, which are likely to be the second biggest expense in your life
- Irregular expenses, such as clothing and entertainment
- Your children's education and extracurricular expenses
- Holidays including any major overseas trips
- Motor vehicle updates including how often and what you spend after trade-ins
- Home renovations such as the kitchen and bathroom
- Home maintenance and whitegoods upgrades (such as refrigerators)
- Your hobbies and interests
- Regular savings plans
- Inflation which is the biggest enemy to any financial plan.
While getting the cashflows right may seem complex to start with, once they have been determined, they are very easy to track with the help of your financial adviser. In fact, every review meeting should focus on your cashflows to ensure that your financial plan is staying on track.
Once the cashflows have been determined, you and your financial adviser should then determine which of your goals and cashflows should be priorities. There is an old saying, "You can have anything you want in life, but not everything". While this may or may not be true, it is always best to focus your energies towards your most important priorities. "The world makes way for the focussed and determined person" is another old saying that should apply.
Once the priorities have been ascertained, a good financial adviser will be in the right position to give you the best advice and implement the changes required to ensure that your financial goals are being met.
If you like this article, please feel free to share it with your family and friends.