Henry Ford once said, “Before Everything Else, Getting Ready is the Secret of Financial Success.”
Financial success is not easy to achieve and requires adherence to certain basic principles and financial discipline.
It is not the property of a privileged few but can be achieved by anyone who works hard for it and resorts to financial planning. Yes, even you can become rich and have a strong financial position if you are willing to work for it. Accept it and make a commitment that you will achieve it.
The process of achieving financial success is a continuous one and involves setting goals and working to achieve them, while making corrections and modifications as we proceed forward.
One thing, however, that we need to remember is that different people perceive financial success in different ways. While some believe that achieving financial success is to have adequate monetary resources to take care of their lives even after retirement, there are others who wish to have all the luxuries of life, besides a hefty bank balance and assets for the benefit of their family and children. Again, there are some people who are satisfied with a position in which they have no debt and are earning a reasonably good amount of money to take care of their regular expenses.
Different perceptions about financial success point to the development of unique and customised financial plans for each individual and organisation. But everyone wants to have adequate funds and have more choices in life. This article will talk about the eight basic steps that are crucial to financial planning and can help Australians become financially disciplined and achieve financial success.
Set a life goal plan
Goal setting is a powerful process of thinking about your ideal future and for motivating yourself to turn your vision of a perfect life into reality. It is a key step in attaining success, especially financial success. This requires the identification of what you aim to achieve and in what time frame. Think of where you would like to be in two, five, ten or twenty years from today. Identify what you wish to achieve and be clear about your personal goals. Make a note of your goals: whether you want to fund your children’s tertiary education, purchase a new house, go for a holiday every year or plan for retirement.
The next step is to set a time frame within which you wish to achieve these goals. It is important that you be specific and set a clear date. If done properly, your goals will range from short, medium to long term. Visualise what you will be thinking and feeling when that date arrives and you have successfully achieved your goal.
Finally, identify the quantum of funds you need for each of your goals and then set a total figure accordingly. This should be done keeping in mind the rising inflation levels. You also need to chalk out a strategy (or strategies) that outline where you are currently and where you would like to reach.
Spend less than you earn
Excessive spending is a major reason why people face financial difficulties. So it is very important for you to implement a system that involves identifying your sources of income as well as the expenses. This step also involves an analysis of all your expenses and identification of the expenses that can be reduced or done away with totally to boost your overall savings level.
Nobody can achieve financial success by spending more than what they earn. Savings play an important role in helping you achieve your financial goals. So, your aim should be to maximize savings. An analysis of your expenses will reveal that a little cost cutting on various fronts can result in big savings.
Your Biggest Asset, Don’t Risk It
There is an old saying in the life insurance industry that life insurance is not bought, it’s sold. Not surprisingly, it’s not until you sit in front of a professional advisor that you begin to appreciate what you and your family stand to lose if the unthinkable occurs.
Personal life insurance policies have been compared to an umbrella salesman who is always willing to sell you an umbrella until it starts raining. Therefore it is recommended that this important area of your financial affairs is addressed early and completely.
The important questions to ask when implementing your personal insurance policies are:
- How much is enough?
- How should the premiums be structured?
- Who should pay for the insurance premiums?
- Who should you insure with?
Focus on Reducing Tax
Taxes may take away a large part of your income. An important step in financial planning is look for ways to reduce your tax payments. A proactive tax strategy will allow you take advantage of the various tax breaks provided by the government and benefit from various incentives available on investments in certain areas. You can reduce your tax liability by:
- Making contributions to your superannuation fund.
- Prepaying interest is a common strategy used to claim interest deductions on your margin loans or investment property loan. You can claim a tax deduction on interest payments as long as the loan is used to generate taxable income. In case of margin loans, the interest rate is likely to be reduced when you make your payments in advance.
- You can offset capital gains tax by claiming losses incurred on the sale of some other asset.
- If possible, defer some of your income to the next year because tax is payable on income when you actually receive it,
- Claim for a tax rebate on medical and other allowable expenses.
You can also take the advice of a financial expert on further ways to reduce your tax liability.
Lose that ‘Bad Debt’, reduce that ‘Good Debt’ and manage that ‘Smart Debt’
‘Bad’ debt is borrowing money, typically at high interest rates, to buy something destined to go down in value. Usually this debt provides no tax advantage.
Using ‘easy finance’ or a credit card to buy a wide screen TV is an example of ‘bad debt’. Paying well over 10% interest on a personal loan from the bank to buy a second hand car is another example of bad debt. In both of these cases, you’re not really buying an asset as both the TV and the car will be worth considerably less than they initially cost long before the loan is paid out.
The characteristics of ‘bad’ debt are high interest, no tax advantages and the purchase of something set to go down in value over time. Borrowing money to pay for holiday is arguably even worse than bad debt as you are left with nothing except a few happy snaps to show for it.
For most of us, ‘good’ debt is the unpaid mortgage on the property we live in. Whilst the interest repayments are not tax deductible, your home will at least grow in value in the long term. And, you get somewhere to live without paying rent. The characteristics of ‘good debt’ are a low interest rate and the potential for the asset to grow in value.
So, if the upside of ‘bad’ debt is ‘good debt’, what is the the upside of ‘good’ debt? It’s called ‘smart’ and is defined as debt:
- That has a low interest rate
- Is used to purchase an asset that grows in value
- That purchases an income producing asset, hence the interest costs maybe tax deductible.
Get an Investment Portfolio
We all have different ideas about what level of risk we are comfortable with. Some of us love the rush of adrenaline we get from skydiving, while others find simply diving into a pool to be plenty of excitement. It’s partly to do with where we are in life and partly, it’s just a personality thing. Some people hear the word ‘risk’ and think ‘danger’, others hear the word ‘risk’ and think ‘woo hoo!’.
One thing investors quickly learn is that you cannot control investment markets. Volatility is part of investing. What you can control is your investment strategy – having the framework in place to give you the best chance of meeting your goals and expectations and aligning investments to your risk profile.
Taking some time to plan your strategy before you start investing can be the difference between achieving your goals or simply aspiring to them.
Having a clear idea of your investment objectives, timeframe and attitude to risk provides a solid basis on which to build your investment portfolio. The more specific you are, the better your chances of success.
Just like life, your investment plan is a work in progress. It should be flexible enough to cater for changes and market challenges – both big and small.
Can the Government Help?
Governments play an important role in providing a safety net from which we are all protected. In Australia, Centrelink is the statutory authority responsible for delivering services on behalf of the Department of Families, Housing, Community Services & Indigenous Affairs and the Department of Education, Employment and Workplace Relations.
Unfortunately, many people simply do not realise they are entitled to assistance or payments from the government. An example that illustrates this point can be found in early 2011 when the Australian Minister for Child Care released a report estimating that up to 100,000 Australian families, thought to be eligible for the Child Care Benefit or Child Care Rebate payments, were not claiming that entitlement.
It is never too early to familiarise with the benefits Centrelink administers and seek information on how these benefits can be claimed.
Where there’s a will, there’s a way
Making financial and legal arrangements about the transfer of your personal assets to chosen beneficiaries can be difficult and emotional. An integral part of the financial planning process is ensuring that the assets which are accumulated during a person’s lifetime are disposed of in accordance with their wishes upon death.
Approximately 50% of Australians die without having a current Will. Many people would not be too concerned about this statistic as they believe their assets will automatically pass to their spouse or family on death.
An integral part of the financial planning process is ensuring that the assets which are accumulated during a person’s lifetime are disposed of in accordance with their wishes upon death.