Free Financial Advice
Our free financial advice page is dedicated to showing you a framework for a basic financial plan your very own personal financial planning program. This framework consists of a step-by-step guide. We will explain each individual step and give you practical examples. There are several free financial advice snippets along the way that you might find useful too. All this is general advice only but perfectly customizable to an individual's situation. Let's remind us again what we're trying to achieve. We want to build wealth with the help of savings and cash flow from passive income sources.
Here is the summary of our Step-by-Step financial planning guide which we will go through in a moment:
Free Financial Advice - Step 1 First, a word about the rich and why they're always getting richerEveryone has to start somewhere financially. It doesn't matter how much money you have. People who are better off, or who are rich already, have it a bit easier because somebody did do the work for them at an earlier stage. Maybe, generations of families before them created their wealth and it's been passed on to them. If not, maybe, they created it all by themselves and were simply extremely lucky. Maybe they used a successful business to get them there. What matters is that if you stick to a financial planning process such as our framework presented here you will be able to improve your financial wellbeing too. The process detailed on this page is free financial advice to you and most invaluable. It is the same process we successfully use with our financial planning clients. If we have a closer look at how the wealthy people spend their money we can see that the more wealth they have the less money they need to spend on basic needs. They have been able to progress through life and change from an 80-20 profile (80% basic needs, 20% luxury needs) or similar to something like a 50-30-20 (50% basic needs, 30% luxury needs, 20% wealth creation). We can illustrate this in the following example. What to do when you're wealthyRich dad has good wealth of about $10m which provides him with an average passive income of say 5% or $500,000 a year. This would result in approximately $290,000 net of Australian tax (assuming no further tax minimization strategies). With a 50-30-20 profile he could use the $290,000 in the following way, year after year:
Oh, I forgot. If he still happens to have a job he might be able to do even better; adding to this tax-effective investment strategies and he could create even more additional cash flow. The ultimate goal of every personal financial plan is to create wealth to an extent that you can eventually live off passive income. The rich get richer because they have a large base of good wealth already and it just keeps growing from the compounding effect. They don't really need as much for basic needs any more unless they keep going with the spending spiral and want to mingle with high society. In other words if they start spending $20 on a regular soft drink. Once you reach a certain level of good wealth, basic lifestyle costs won't increase that much any more and any income beyond that level is surplus. This is one of the best pieces of free financial advice we can give. If we do as the rich do we'll eventually get the same results. Free Financial Advice - Step 1 Collect your personal and financial detailsThe purpose of this first step is to put together your entire personal financial situation/p>. Even if you know who you are and what you have you will get a good overview of all bits and pieces that are important and that you will need in the following steps.
Most people have a rudimentary money management process. The putting together of the above information can be quite rewarding on its own. Ideally, you'd have all your finances recorded in a personal finance software and ready at the click of a button; you'd have a budget and you'd control every dollar coming in and going out. You can also check out our smart money management tips, another free financial advice resource, to find additional ideas for managing your finances. Free Financial Advice - Step 2 Define your future goals and needsThis is simply producing a list of financial goals and needs that you have. Note down all your goals and needs that are important to you. Then give them time frames and prioritize them. For example: "I want to be able to buy a house in about 3 years for which I will need $150,000 to make a deposit." It is important to give details about the time frame by when you want to achieve your goals. Some goals and needs may be more important than others or might even be conflicting or unrealistic. If you realize that you can't build a deposit of $150,000 and invest in a managed fund portfolio of $100,000 at the same time you'd have to make a decision to drop one of the goals or scale them both back to more achievable levels. If goals and needs are achievable or not depends on your financial situation (see Step 1 above). There is a fair bit of thinking that must go into listing your goals and needs. I personally like to list my goals in a table format so that I can allocate importance, time frame and priority to each of them. This way I can weigh them up individually and against each other until I have them in the preferred order. Goals and needs are similar. Generally, financial needs refer to money that is required for more important matters or that cannot wait or have a set date, i.e. for a specific need. For example: "I need $800,000 of life insurance to make sure that if something happened to me my wife and children would not have to sell the house to survive financially." Free Financial Advice - Step 3 Analyse your current financial situationIn this step, we'll have a closer look at your current finances. The aim is to find opportunities for saving money and redirecting it to good wealth creation. You would typically analyze your:
Don't leave a stone unturned. You will be amazed how much you can find out about your money habits this way. You will undoubtedly find room for improvement. Make sure to keep an eye out for irregular expenses too. They can occur once a year only or just sporadic every several years, e.g. that old fridge that might break down soon. You can also check out our free financial advice resource money saving tips for more clues. Free Financial Advice - Step 4 Analyse your risk appetiteOkay, we've found some opportunities for wealth creation. We know that we want to create passive income from investment assets but before we look at investing, we need to do more research on ourselves. Everything we do with money is prone to risk. Even if you keep all your cash in the bank you have risks that your money will not be worth tomorrow what it is today. Financial risks are manifold and every person reacts differently to financial risks. Financial risks for example are:
These are just three risk categories that then can be split into many other sub-risks such as economic risk, financial risk, political risk, liquidity risk, opportunity risk and many more. The key question about your risk appetite is: How much risk are you comfortable with and prepared to take? For that purpose we need to put together an investor risk profile for you. The following are some examples of risk profiles that we use at our office:
It is very important to find out what type of risk profile you personally have. In principle, taking more risks can yield more rewards like with the High Growth Investor. However, most people want high returns for as little risk as possible. In the recent Global Financial Crisis an aggressive High Growth Investor could have lost up to 50% of his investment portfolio with single investments down 80% to 100% where everything was lost. If you're not comfortable with taking that risk you're certainly not a High Growth Investor type. There are ways to deal with risks. A good personal financial planning program addresses these risks and defines various risk management strategies to control and mitigate risks which we'll see a little later in step 5. Taking risks and knowing your limits is very important when it comes to investing. So, please consider your position carefully.Financial planners have a variety of questionnaires available to assess a client's investor risk profile. They go through investment and return scenarios and based on your response they can put together a personal profile. They use simple risk profiling questionnaires to more advanced techniques such as psychometric testing. This is not an exact science and it would be rather academic to go into these here. However, a chat with a financial planner could enlighten you further with regard to what is possible and you might even be able to collect this as a free financial advice snippet from them. I'd go for a more practical way instead and suggest having a personal brainstorming session to run your own scenarios about what could happen with your finances, wealth and investments. Think about scenarios you've had in the past or new ones from the Global Financial Crisis and draw from your experience too. If you are new to investing read up on financial news and pick some success and disaster stories about companies and investments reported in the financial press. This will give you the necessary food for thought. If you would like to run an investor risk profile with one of our financial planners, of course, we'd be happy to help you out too. Just let us know. Free Financial Advice - Step 5 Research financial strategies and solutionsNow is the time to turn to the world of financial strategies and solutions to find the wealth creation vehicles that work for you. There is a myriad of investment options out there and good research will pay off. Don't be rushed by the excitement that you want to invest today. There are always opportunities at any point in time. Strategies are things you can do in a smart way that will give you financial advantages. For example, it is a common strategy to salary sacrifice into superannuation as a way of saving on tax. Solutions are financial products and structures that will give you an investment vehicle. For example, based on the above strategy you allocate the extra money paid into super to a portfolio of well rated and diversified managed funds. Researching strategies and solutions is:
Solutions can be anything from a cash account to structured investments with a protected margin loan. If they are suitable or not depends, again, on your investor risk profile. As a financial planner, I always check out independent research reports on particular investment solutions from well known research companies. This in itself is no guarantee for success but it helps with understanding the different products and their features. Some reports you'd have to pay for, others, mainly marketing related product brochures, you usually get directly from the product providers website. These will give you additional knowledge and are free financial advice for your product solutions. I also look for simplicity. If you're a first time investor don't stress yourself trying to understand a structured product with ASX 200 exposure, protection mechanisms through options writing or threshold management. - Always keep it simple. Investment solutions must be diversified. Diversification means not putting all your eggs into one basket. If you invest all your savings into shares of the one company you're entire wealth is at the mercy of the company's management. What if they mismanage and go belly up tomorrow? And who is going to pay for your investments and your ongoing expenses if you have an accident or you might lose your job? Review your insurances and make sure you'll have reasonable solutions in place. The last thing you want is your program failing because you forgot about insurance. If you're planning for retirement you'd want to look at strategies of maximizing your government entitlements. In that case, you might not even need any financial solutions but detailed knowledge about your pension entitlements and how to structure your existing wealth so that you can make the most of it. Other strategies such as investing into direct residential property through a self-managed superannuation fund are highly regulated and often the obvious is not allowed by law. If you are considering any advanced strategies and solutions I wholeheartedly suggest you get professional help, for example, from a financial planner. This is nothing else than protecting yourself from making mistakes and the wrong decisions because you didn't know. This can be costly and counter productive. Here's another snippet of free financial advice. - Did you know that if your self-managed super fund is declared non-compliant because you did something wrong that you risk losing 50% of your assets to the government in penalties? Free Financial Advice - Step 6 Formulate your personal financial planAt this stage, we put things down in writing. This is the actual writing of your personal financial planning program. It is the crystallizing of all your research you have done. Whether you build a cubby house or a multistorey building you need a plan that you can go back to as a reference point. This is no different here. A well written financial plan includes the reasons for selecting particular strategies and solutions. It includes a detailed description of the features and benefits even if these might be documented in separate product disclosure statements. When you write down your personal strategies and solutions you will gain a detailed understanding of your personal financial planning program. This will help you well immensely during the implementation phase because you will be the architect who is in control and has a detailed plan. The result will be a manifest of your financial wealth including wealth protection and preservation for many years to come. When writing the financial plan you document selected and customized strategies and solutions for:
Think outside the box and provide for your beneficiaries beyond your lifetime, for children and grandchildren, spouses and other family members. This area is called estate planning and is just as important as tax minimization. In fact, often they go hand in hand. Below, we show a typical table of contents for a financial plan. This free financial advice snippet can be tailored to your requirements as you see fit.
Free Financial Advice - Step 7 Implement and put your plan into actionIn this step, we implement every selected strategy and solution until complete. Once completed your structures and products are active. For example, if you wrote in your plan that you need a self managed superannuation fund (SMSF) you now purchase the trust deed and trustee company, execute minutes and agreements, fill in the required application forms, provide identification details, open a bank account and so on until the structure is set up. You then go and make the investments in your SMSF that you had researched. As you implement one strategy after another you will make final decisions and communicate with the product providers until everything is ready. After all is done, you will have established your personal financial planning program. This is not the implementation of the whole program but the initial set up only. Your structures and products are active and will start moving with markets and other circumstances. The real work starts now. Your personal financial planning program requires regular monitoring to make sure you are on track to achieve your goals. Free Financial Advice - Step 8 Review your program and monitor the performance of each individual strategyInvestment vehicles need to be monitored and reviewed. Protection products need to be reviewed if they still are sufficient if your personal financial situation changes. Wealth creation, cash flow, savings and passive income must be monitored to make sure you can achieve the expected benefits and returns. If anything does not work out according to plan it is then time to make adjustments. Again, these adjustments must be fully researched so that you can make an informed decision. For example, if one of your managed funds is performing badly you'd want to find out if you hang in there or replace that fund. Are there any other and better managed funds that you could replace it with; which one and why? How does that change your risk diversification? Will the portfolio still be within your investor risk profile? Here are some pointers to look for when monitoring your plan:
At other times, you may find new opportunities that you would like to pursue. Then, it is time to go back to the drawing board and see how you can provide for these additional strategies and solutions. This could mean making some compromises with existing ones. In any case, make sure to update your personal planning program and document all the changes along the way. You don't want your financial plan to get out of date. Free Financial Advice - Step 9 Review your financial situation regularly and monitor cash flowYour personal financial situation can change too. For example, you're changing jobs, get a pay increase or move house. Changes like these may impact on your financial strategies so that you need to make adjustments. Double check if such changes could restrict or even improve your financial strategies. Everyone loves a pay rise. The smart thing to do might be to feed additional cash into one or several of your investments. A review of your financial situation once a year is ideal. Cash flow should be monitored regularly, e.g. on a monthly basis. Here are some key areas to closely monitor:
The key to managing these steps successfully is to become passionate about your personal financial planning program. If you develop the discipline and passion to be on top of your finances you will gain control and be able to change your financial future to your benefit. Did you know that the average Australian family can't make it beyond 90 days if one main source of income stops? This illustrates the importance of financial planning and why everyday Australians should take control of their finances rather sooner than later. For most people, wealth creation won't happen overnight. In my view, it is better to have a sound rich slow program than a get rich quick scheme that doesn't work. And when the time comes, yes, we go and buy that bigger car or better house, and yes, we'll go on a world trip. Having a plan is much better than getting your dream car and your mansion now, only to find out that if things aren't going rosy, that you'll have to give it all up again. I'd sum it up like this: Maximize your opportunities but spend in moderation! More information and free financial advice:
Importance of Financial Planning
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