As we enter uncertain times, it is more important than ever to review your finances. Regardless of your stage of life, change is inevitable. 2022 was no different, from markets to the cost of living. Below are a few tips to ensure you have prosperous 2023.
Financial health check
We tend to book our car in for a service without hesitation and forget about our biggest assets. Whether you are working or retired, having an up-to-date financial plan means you are following your dreams and overcoming hurdles.
For accumulators, I often use the term roadmap to retirement. The hardest part is determining what your definition of retirement means and quantifying it. The health check ascertains your current position and identifying gaps, which may be rectified now via solving an underinsurance problem, increasing mortgage repayments, starting a salary sacrificing strategy or amending your portfolio. Other gaps take longer, such as transferring personal wealth.
For retirees, the health check never stops. When markets are volatile like 2022, a common question is “how does this effect my super?”. We are all living longer, so longevity of your super needs to be measured. The process might identify a need to increase your pension payments. Depending on how your portfolio has performed, this could lead to your super monies exhausted years earlier than expected.
“The most common gap is the one you simply have not identified yourself”.
This is where a deep dive into your entire financial situation, with sound advice, can make all the difference.
Get advice on your structures
Establishing the correct structures now can mean a greater net outcome over the long term. This is where financial advisers work well with accountants and lawyers. From family trusts to distribute wealth, to business owners and estate planning.
The cost of not getting this right, can be substantial.
Take interest in your investments
You don’t need to be an expert. You just need to take an active approach in understanding how they are working and a broad knowledge of associated risk you hold.
The best advice I received early on was to take advantage of compounding returns over the long term. As time in the market smooths out the drama of short term volatility.
For example, over the past 122 years, the Australian Sharemarket has returned 13.2% p.a. (Source Market Index). Even a typical Balanced portfolio has returned 6.6% p.a. (Source Morningstar) over 10 years, including the negative impacts recently from Covid-19 and 2022.
Calculate your net wealth
It sounds simple, yet many people don’t know their true wealth. It’s important to track this often, as a visual of your wealth progression can be a form of motivation. I tend to use charts for my clients, as a picture often tells a story.
Budget
Cashflow drives everything. Yet a budget is only one if you can stick to it. The key here is to categorise your expenses into fixed and variable.
Fixed are mortgage repayments, insurance, petrol, food, utilities, etc. These must be committed to first, as they are an essential part of living costs.
Variable may be viewed as more lifestyle and non-essential such as entertainment, holidays, gifts, etc, but also an emergency fund. We have good and bad months, so when a month sees surplus cashflow, this should be set aside to build an emergency fund and cover unexpected expenses such as medical and repairs.
Review insurances
Whether it is private health or personal cover such as income protection, the cost has risen for insurers, which is unfortunately passed on to us. The Government intervened to force higher premiums for personal income policies, as the Australian market was losing billions.
This is why insurance is not set and forget. Premiums, benefits, definitions and products will change. Reviewing existing and exploring new products could not only reduce costs, but also ensure you are not paying for cover you don’t need.
Create your Legacy
When was the last time you sat down and read your will? If you don’t have one, that’s another issue.
A will is not just a document for your passing – it’s your legacy and how you want to be remembered, so take time to get it right.
Beneficiaries also change. Don’t assume an inheritance is beneficial. For example, a father may leave $300,000 to his adult daughter, not knowing this pushes her over the assets test for the Age Pension. In reality, the daughter may prefer the payment goes to her son to help buy a home, while she can keep the Age Pension and associated benefits.
Another tip is to ask your executor if they understand their roles and responsibilities and whether they are capable. This is not for everyone, so don’t assume it is.
The levels of complexity are higher for blended families and larger family groups. The last thing you want is a judge deciding how you will be remembered.
If you have any questions regarding the above, contact Associate Director and Financial Adviser, Ben Travers at btravers@prosperity.com.au. Alternatively you may contact your Principal Adviser on 1300 795 515 to discuss.
This communication contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information. Prosperity Wealth Advisers (ABN 32 141 396 376) is an authorised representative of Prosperity Wealth Advisory Services Pty Ltd, Australian Financial Services Licensee (533675).