Following the next investment trend might seem like the right financial move. But for many busy C-suite executives, there is increased personal financial risk if you don’t take a more considered approach to mapping out your financial plan.
Setting goals for your life, including your financial life, is central to the financial planning process. Financial goals can be short, medium or long-term and most people have a mix of all three. The ultimate goal for many who seek advice is to ensure they retire comfortably and debt-free.
Building your financial house without good foundations puts your entire house at risk. Here are five solid foundations upon which to build a personal financial plan.
1. Respect your earnings
When you earn good money, it is easy to fall into the trap of thinking it will continue indefinitely. Of course, that’s not necessarily the case.
When you earn good money, it is easy to fall into the trap of thinking it will continue indefinitely.
Equally, if you did a quick calculation of your average earnings over your working life, you will see the outcome is really significant. From a financial planning perspective, blindness to these issues puts your financial future at risk.
Respecting your earnings is important for two reasons. First, they fund your living expenses today. Second, earnings have the ability to fund the goals that you want to achieve in the medium and long-term. This includes the investments that will be the backbone of your life after work.
Your income is key to building your financial future – so respect it.
2. Pay attention to your spending
Every household, including yours, has a range of expenses. If you’re raising a family and paying off a mortgage, the expenses can seem never-ending.
Paying attention to your spending is about understanding where your money is going and making sure you get the best value out of the dollars you spend.
Paying attention to your spending is about understanding where your money is going and making sure you get the best value out of the dollars you spend.
Unfortunately, we cannot assume that we are always getting fair value for our money when we buy something. It requires us to take the time to shop around, which can be difficult when you’re time poor.
Paying attention to your spending is never about denial, it’s all about getting fair value and avoiding waste. If we do not get fair value, we rob ourselves of achieving our financial goals sooner.
3. The cost of money is interest
Most things in life have a cost – including money.
Interest is the price you pay if you have debt. Interest is also the income you can earn from the savings and investments you have. Compounding interest over time also has a great impact on your financial position.
Many busy executives do not get around to reviewing the interest rates in their financial life.
As a result, interest plays an important part of your financial planning. But many busy executives do not get around to reviewing the interest rates in their financial life.
It is well worth the effort.
A good mortgage broker will also be able to explore the marketplace for a better deal on your mortgage, too. This is especially beneficial in a rising interest rate environment, like where the economy is right now, if you’re carrying debt.
4. Be realistic
To be realistic, is simply to see things in your financial life exactly as they are.
This is important, as being realistic provides greater certainty. Most executives like to make decisions that provide them with more certain outcomes, and the same should be true in your financial life.
The central challenge – and it is a challenge for everyone – is that you don’t know what you don’t know.
The central challenge – and it is a challenge for everyone – is that you don’t know what you don’t know.
When you have knowledge gaps, or gaps in your financial information, it’s easy to make decisions based on emotional reactions and not facts.
Being too reserved or negative can limit your opportunities. Likewise, being too positive can make you take too much risk as a result of being overconfident.
So make being realistic one of the financial foundations of your financial house.
5. Reward yourself
Rewarding yourself might seem to be a counter intuitive foundation, but it is a positive driver and extremely useful when you link a reward to achieving a financial goal.
A successful financial plan is one that celebrates goal achievement.
It might be reaching a savings goal, a superannuation savings goal, a home loan reduction goal (at different milestone amounts) or perhaps even paying off a personal loan or credit card.
The reward should be proportionate and it does not need to be extravagant. It could be taking yourself and your partner out to dinner, buying gold class movie tickets, or perhaps buying concert tickets for a well-earned night out.
A successful financial plan is one that celebrates goal achievement.
Strong foundations help to provide you with the greatest probability of achieving your financial goals. If your foundations are good, they also reduce the risk of the financial planning strategies you stack on top of them to build your financial house, and this will ultimately help you to achieve your goals.
Luke Smith is a licensed Australian financial planner and author of the new book, Smart Money Strategy – Your Ultimate Guide to Financial Planning (Wiley, $34.95), published by Wiley. Luke is also the host of the popular podcast ‘The Strategy Stacker – Luke Talks Money’ and appears every Friday afternoon on Canberra’s 2CC. Find out more at www.thestrategystacker.com.au.
