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Me, myself and financial planning

I am planning to become my own financial planner and I realise I have a lot to do before I am qualified to advise myself but I would appreciate some guidance on how I should go about doing the job. I am 28 years of age and earn $1500 a week after tax. I don’t own a house or apartment and still live at home on a board fee of $80 a week, which is a good deal. I am interested in shares and have been reading extensively about them and various companies for the past year or so.

If you’re a big eater, that’s definitely a good “board fee”, as you call it. OK, the challenge ahead for you is extensive and some wise guys actually go to an adviser and get a plan done to understand the processes and then they monitor and tweak their plan as they gain experience.

However, as you want to start from scratch – you seem very careful with your money – this is what I recommend you do. A financial plan starts off by our clients outlining their goals – pay off their house, have a million dollars in super at retirement, an investment property, etc. Others include goals such as paying private school fees, annual holidays and any other big ticket items that are better planned for rather than making them happen as you go along.

That’s the nice bit of financial planning, and it’s important to have vision, but the hard bit for many is to do what I call ‘laying out your life on the lawn’. This is where you do a frank and honest stock take of your assets, liabilities (debts), income and expenses. It’s where you look at yourself as a business and when it’s done you can actually draw up your own personal balance sheet!

You then need to do some projections on future income and expenses to get a handle on what you can afford to buy or invest in as part of your financial plan. For example, you might plan to buy an investment property and you need to estimate your other expenses as well as your rental income.

It’s critical that your cash flow will cover those obligations and give you the returns you have planned for. As you can see, there’s a fair bit of financial modelling based on assumptions and if these change then you need to tweak your plan. That’s why many people pay advisers for ongoing service as it means as circumstances change the plan can be adjusted.

Many advisers get clients to do a budget to see where they’re spending their money and it helps them find money for the savings and investment strategies in the plan. I have advised people in the past to GST their lives by trying to cut their costs by 10 per cent and use this to achieve a savings goal, which is then ploughed into the plan.

Once you get your goals and your finances sorted, it’s up to you to select the investment strategy that will make you achieve your goals. Traditionally, financial planners will divide a client’s money into say three or four kinds of assets or investments. Someone might end up with 60 per cent of their money in shares, 20 per cent in property, 15 per cent in fixed interest deposits and five per cent in cash.

Others with a high tolerance to risk might go 80 per cent into the stock market and 10 per cent in fixed deposits and 10 per cent in cash. This selection of investments is worked out between adviser and client – it’s really important that the client’s appetite for risk is understood.

Many advisers won’t recommend direct property, and there can be some good reasons for that but others don’t because they can’t get a fee from a financial institution. On the other hand, property can bring problems with tenants and repairs and unlike shares can be hard to turn into cash quickly if it’s needed.

Once you do all the basic stuff around goals and finances, you have to create a good investment strategy and then monitor it. You should read as much as you can from the experts who think about money 24/7. Good luck with it.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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Published on: Friday, December 03, 2010

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