It did start me thinking about the consequences of financial clutter, and the stress that it creates in many lives. We are all experiencing the increased cost of living with the subsequent pressure on finances.
Implementing financial change might be difficult, but sometimes it takes an external shock to make us evaluate how we do things.
Balancing the books. The reality is, you can’t manage what you’re not measuring.
If you are not running some form of budget, then you have no real way of understanding your finances, let alone taking control of them. There are many free apps and software available to help with this. I recommend categorising your expenses in three classes.
1. Fixed expenditure. These are the costs that you are obliged to pay each month and have limited ability to control. E.g, mortgage and insurance costs.
2. Variable expenditure. With these expenses, you have some influence on how much you spend but they can never be eliminated. E.g, food and electricity.
3. Discretionary expenditure. This category is for those expenses that, if necessary, you could turn off completely. E.g., gifts and holiday savings.
Thinking about your finances in this way helps you understand, what is within your control, whether you are running a cashflow deficit and what level of savings might be possible.
Debt repayment. For those who have debt, there is a decision to be made about how quickly this should be repaid, and which debt should be repaid first. As a generalisation, highest interest rate debt should be repaid first. However, questions such as "is the debt tax deductible?" also need to be considered.
The reality is the lender will generally need to see some form of repayment occurring. Repaying capital keeps the bank happy and also builds equity in the property, over and above, any capital growth that may occur. Ultimately you may wish to retire and not be in a position where you are funding debt.
Automate your savings programme. For many people, their level of saving is driven purely by what remains in their transactional account after their living costs are covered.
You need to turn this thinking on its head.You can do this by establishing an automatic saving programme with contributions being directed to your short, medium and long-term investment accounts, directly from your transactional account.
However, this approach can only be employed if you have constructed a budget in the first instance and know what level of saving is sustainable. Short-term saving provides a safety net function by creating a fund to cover unexpected expenses. Ideally it should be set at three months of family expenditure. Costs like property repairs might fall into the medium-term category. Your long-term goals may initially be defined as retirement and be limited to your KiwiSaver contributions.
What happens if you die prematurely? Most of us have a natural reluctance to consider our mortality. But the reality is, we don’t always get advance notice.
At the very least you need to have a current will to ensure that you assets are distributed in the way that you intend. Other important considerations are whether you should establish Enduring Powers of Attorney and how your property and investment assets are owned.
You need to speak with a lawyer about these matters. From my observation, when most people contemplate a discussion with a financial adviser, they tend to think about investment advice alone.
However, with careful thought the advice process encompasses much more than just investment advice and this wider approach can help lead to a more organised and less stressed life.
Peter Ashworth is a principal of New Zealand Funds Management Ltd and is a Dunedin based financial adviser. The opinions expressed in this column are his own and not necessarily that of his employer. His disclosure statements are available on request and free of charge.
