Have you ever done a budget and found out you should have a surplus but still can't seem to save as much as you would like??? Or maybe you should have a surplus but you still can't save anything? You are not alone!! It is seriously like money just disappears into thin air.
Of all the people we have seen at Financial Planning Qld over the years, nobody has saved all of their "surplus". In fact, most people before seeing us had not saved ANY of their "surplus". Hanging on to that elusive dollar is definitely a challenge sometimes.
The reason for this is that a budget does not make a plan - it just tells you what you have to make a plan with. An investment plan will organise your cash flow in a way that the investment just happens and then money stops "disappearing into thin air".
Now, it is VERY adventurous to make a plan expecting to invest ALL of your surplus, but around 50% of your "budget surplus" is probably a fair place to start.
Getting ahead financially is not about how much you earn, but how much you keep. There are plenty of people who earn low to average incomes during their working life, yet enjoy the pleasures that saving and investing bring. Maybe it is frequent holidays, maybe it is a holiday home; maybe it is accumulating enough to help the kids buy their first homes; or maybe it is about taking a semi retirement or seachange prior to being able to use your super.
Whatever the reason, it needs to be YOUR reason. You own specific reason for investing is your motivation and this will be a strong driver of the success of your investment plan. This will give you the motivation to do all the right things that will see your goal/s materialise.
If you have a goal, well then you can start to put together a strategy that will get you there.
The Right Investment Strategy for You
The fundamental driver behind any decision to invest should be to make money. To make money to fund your goal/s. Any ancillary benefits such as tax deductions should be treated merely as a bonus - or, at best, assistance in funding. The reason you want to make the money will be different for everyone as we mentioned up top.
So, now we have that sorted, to make money we need to have a strategy with that very goal in mind. Essentially we have a few core options when it comes to the basis of any investment strategy but quite simply we need to start with where the money is going to come from...
Invest a lump sum that you have inherited or saved
Start with nil and invest an amount each fortnight or month
If you are a home owner, borrow an amount of money using your home as security
Borrow an amount of money using the investments (that you are about to make) as security
Or a combination of the above
Now, that takes care of where the money is coming from that we are going to invest. Next is to decide on where to invest. Because our goal is to make money (for whatever personal reasons you have for the money) then we need to be focused primarily on investments that will provide capital growth over time. The need for some degree of income from our investments, however, is still likely to be important - especially if we have borrowed some money so need to pay the dam interest bill!
So, there are a few things to consider before choosing where to invest. Once you have some clarity around these things, your investment choices may well become clearer. So, consider these, if you will...
Your tolerance for risk
Level of capital growth you want - be realistic
Level of income you need (for interest payments etc) - this can be worked out accurately
Your marginal tax rate
Access to your money - if you need some cash, can you sell part of your investment easily and quickly?
Other personal financial circumstances you may have
If you don't allocate good time to develop your strategy first, then you will just end up in a big mess!
OK, so now we need to consider which growth assets are going to achieve what we want to achieve based on our answers above. Like it or not, when it all comes down to it, there are only two asset classes that continue to produce ongoing capital gains as well as income:
Equities or shares and
When it comes to Equities, you have many choices. Typically, you would be considering the following:
Domestic - Australian
Direct shares - where you choose them and purchase them yourself
Managed shares - where expert fund managers choose and purchase them on your behalf
Depending on market conditions, your tolerance for risk, and your investment objectives, you may also wish to avoid certain market segments to mitigate possible market downsides.
The combination of equity investments you choose should be dependant on your answers to the considerations we mentioned above when we were talking about strategy. Your investments need to accommodate those needs.
When it comes to Property, again you have a few choices. Typically, you would be considering the following:
Domestic - Australian
Direct Property - where you choose and purchase the property yourself
Managed Property - where expert fund managers choose and purchase it on your behalf
And, once again, depending on market conditions, your tolerance for risk, and your investment objectives, you may also wish to avoid certain market segments to mitigate possible market downsides.
Again, like equities, your property investment choices should accommodate your needs as you have considered them in your strategy. Access to cash (or liquidity) is possibly the big one that many people over look when it comes to property. If you own direct property and you need $50,000, you can't just sell a bedroom! But, if you own listed property and you need $50,000, you can definitely sell a part of your investment and get that $50,000 real quick!
Remember, different property sub-classes will have their own advantages and pitfalls, and will achieve different investment objectives.
Financial Planning Qld is a financial planning firm based in Brisbane, Queensland. We offer a full range of financial planning services and our advice is always underpinned by our Corporate Values. Click here to read more!