Your personal financial audit
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The importance of reviewing your financial affairs cannot be overemphasised, and the rewards for doing so are enormous, Andrew Bradley, chief executive officer of Old Mutual Wealth, told the recent series of meetings of the acsis/Personal Finance Financial Planning Club.
Reviewing your financial affairs is vital, because the financial landscape is always changing, he says. “It’s like sailing: in spite of all the planning in the world, things change, and so you need to nip and tuck along the way, lest you stray off course. If you don’t have your wits about you, you will need to be rescued.”
Bradley says you need to be taking in information about “the winds” – the markets – and making adjustments accordingly.
“We constantly hear that we’re entering a low-returns environment. The facts, however, show something different. Make sure you don’t get caught up in the rhetoric. We’re in an uncertain world,” he says.
So, what’s going on?
Bradley says that despite high levels of affluence, improved education and a huge range of financial products and providers, most South Africans are “chronically under-insured, under-saved and under-invested”. This, he says, is because of “unprecedented lifestyle choices”, increasing longevity and being more active in retirement.
The important thing is to keep reassessing where you stand, Bradley says.
“Very often, we’re so close to our circumstances, we can’t see the wood for the trees. But the further back we stand, the better our perspective.”
When doing a personal financial audit, Bradley says you need to ask yourself four key questions:
1. Where am I now? This is a very important question, he says. It requires that you honestly appraise your situation.
2. Where do I want to be? It’s essential to have specific goals, he says.
3. Am I still doing the right things? “Very often, we start off on a journey, and along the way things change. For example, about 15 years ago, we, as South Africans, couldn’t invest overseas. We need to keep making sure that we’re up to date with what is possible.”
4. What should I be doing differently?
Bradley says these questions will help you to establish your financial goals, develop a strategy and take appropriate action.
For example, it may be one of your goals to be financially independent and retire by 2020. If so, your strategy to achieve this goal could be to settle all debt, including your home loan, and boost your investment portfolio. The actions you need to take to this end will include paying off all short-term debt by 2014 and paying extra into your home loan every month, plus saving additional amounts in your portfolio every month, he says.
When setting goals, it helps to consider all spheres of life, Bradley says. Think about your family and your home, your health and fitness, your work and career, your relationships, spirituality, community and recreation. “In each area, what do you want to achieve? Realise that most goals have a financial consequence. The key thing is to define your goals in terms of outcomes,” he says.
Bradley says goals should be reviewed annually; your spouse should do the same, and you should compare notes. He says you should ask yourself: if I change nothing, will I achieve my goals?
When defining a strategy, you must consider both a disaster scenario and an ideal scenario, Bradley says.
He says a disaster scenario would involve premature death, disability or damage to your property.
Bradley tells of a friend who owns a house in Cape St Francis. Not long ago, he decided to cancel the insurance on the house, which was paid off. His house was one of the 70-odd that were destroyed in the fire that recently ravaged the Eastern Cape coastal town. Bradley says his friend will have to review his financial plan thoroughly in light of his loss. A disaster such as this can decimate your wealth.
When planning for a disaster, consider your family’s lifestyle needs and whether you’ve made sufficient provision for these needs – which may have changed. Also consider how your debts will be paid off, and if there will be enough cash in your estate to pay taxes and executor’s fees.
He says if your will is older than five years, it’s out of date. Wills need to be regularly reviewed and updated. Consider whether you need to appoint guardians and/or trustees. Review who your beneficiaries are. Ensure that your records are up to date.
Bradley says being organised helps you to take control when things that are beyond your control happen, such as the loss of a job; unforeseen medical expenses; children moving back to the family home; disasters; poor investment market returns; and a longer-than-expected retirement.
We fail to achieve our goals, not because of the things that are beyond our control, but because of our emotions, he says, particularly fear and greed.
“But we can control our emotions and behaviour,” Bradley says. It comes down to how you: plan your estate; allocate assets; manage risk and debt; choose investment vehicles; relate to your investments; and make decisions that are tax-efficient.
You also need to consider the ideal scenario. What if everything is ticking along nicely and all goes according to plan? Bradley says this is an important question to ask yourself.
“If you carry on saving what you’re saving and spending what you’re spending, and you live 20 years in retirement and get the investment returns that you’re expecting, will you be okay – assuming you have no disasters?”
He says many people will not be okay but don’t want to face reality. It’s easier to do this now rather than later, he says.
Assessing your budget is an integral part of your personal financial audit.
“Budgeting is a bit like going on diet,” Bradley says. “You always start out with the best intentions, but after a few weeks you’ve given up.” He says very often this is because our goals are unrealistic.
You have only so much money, so make sure you’re spending it wisely.
“Understand how much you have, where it goes and how best to allocate it,” he says.
“Actions tend to be a consequence of our goals and strategies,” Bradley says. If your goal is to be financially free, the “winning formula” is simply long-term planning plus a disciplined strategy, he says.
Being disciplined is about taking the pain now and reaping the rewards later. But you won’t reach your goal unless you audit your financial affairs at regular intervals, Bradley says.