Find yourself managing money for the first time? Julie Buckleton narrows down to the key issues.
One of the situations I see frequently is people seeking help because they’re managing money for the first time.
Whether the situation results from separation, the death of a family member or a rearrangement of responsibilities, they need to learn a new set of skills.
My next step is to explain that as their knowledge grows, so will their confidence. It’s not that they can’t manage their finances, they just haven’t had the experience yet. It might be that they’ve always made financial decisions with someone else, and now they are deciding on their own.
Finally, we tackle their finances. And I’ve found there are some common pieces of advice that apply to many in this situation.
1. Start with your immediate needs
If your life is changing dramatically, there may be some important short-term goals you want to achieve to help you get things back on track. For example, you may be focused on returning to work, rebuilding your skill set through study, or you may have the needs of children to consider.
Making sure your immediate needs are taken care of is usually the first step to taking control of your money. Once you feel this aspect of your life is under control, you’re better placed to start thinking about your long-term goals – such as planning for your retirement.
2. Master your cash flow
After a separation it’s very common for women in particular to be asset rich (for example, owning the family home) but cash poor. This lack of cash can make it harder to rebuild your life and achieve your financial goals.
In situations like this it’s essential for you to get a better understanding of your income and expenses (i.e. your cash flow). In some cases you may need to sell assets to provide the cash you need for everyday spending. Or you may be able to invest your cash in a way that provides ongoing income.
The most important thing to remember is to take action by seeking advice as soon as you can: a financial plan will help you get on top of these issues quickly.
3. Review your risk profile
Helping my clients balance risk in their investments with the time frame they have to grow their wealth is an important, often challenging, but necessary conversation. A desire to be conservative is understandable, but less risk tends to result in less return, so building money quickly can be hard.
For example, if you have $200,000 in cash as a result of an inheritance or separation, and you put that money in a cash account earning 2.5 per cent interest each year for 10 years, you would end up with $256,017 (assuming an annual compound frequency).
However, if you had invested that money in a managed fund that averaged a 7 per cent annual return over the 10 years, you would end up with $393,430, acknowledging that the managed fund option may have some hiccups along the way, and required a longer term outlook.
While it’s always good to have some cash readily available for your short-term goals, it’s important to ensure you’re taking on enough risk to help your long-term savings grow.
Where to from here?
If you’re in this position and you’re thinking “I haven’t done anything like this before”, that’s OK. There are people out there, such as financial planners, who have done it many times before.
Find someone you trust, sit down, work out what your situation, goals and concerns are, and go from there. Ultimately, our role as a financial planner is to be empathetic to your situation and help you navigate through whatever life throws at you.
Julie Buckleton is a Melbourne-based financial planner for ANZ Global Wealth.