Customer Education
Superannuation & Investments
Financial planning
Sound financial planning helps to achieve a secure financial future, no matter what your goals are in life and no matter how much money you earn. A formal financial plan is a long-term strategy that aims to help you achieve your life goals by accumulating wealth and then maintaining and managing your wealth throughout your life.
In order to start financial planning a personal financial review is suggested. This begins with defining your needs, objectives and your current situation. By doing this, you are able to establish goals, which will help maintain and create a desired standard of living in your working life and in retirement. This process will raise a number of important issues and questions.
Some of these will include:
- How much and when do I need to save?
- What investment products are available?
- Am I more or less conservative in my investment approach?
- Do I invest inside or outside of super?
- Will I need to protect my wealth and family with insurance?
Within the four main asset classes of investment (cash, bonds, property, shares) there are a number of ways to invest and there are different investment products to choose from. Investments can be made direct or indirect.
A direct investment in the share market would involve purchasing shares in a company, while an indirect investment would involve purchasing units in a managed fund. By investing money in a managed fund you are not investing in one company but rather a number of companies in whom the fund manager holds shares on your behalf. Investing in a managed fund achieves some diversification as the return is not reliant on the performance of one company. This is similar to direct investment in property or indirect investment in a property trust. The property trust will give you a share in a number of properties rather than having exposure to just one property.
One of the other factors that should be considered when investing is spreading your investments across different asset classes to minimise risk. For example, if you invested all of your money in shares and the stock market crashed, the value of your portfolio could plummet overnight. While on the other hand, if you had your money invested in property and cash as well as shares, then the effect of a stock market crash may not be so dramatic. Investment fundamentals provides more information on different asset classes and the risk return trade off.
It is important to invest your money where you feel comfortable. Even though most people would like to earn the highest possible return it is important to realise that these higher returns are usually accompanied by higher levels of risk and that they could in fact lose some or all of the money they originally invested. To look at two extreme points of view, a very conservative investor may only feel comfortable investing their money in a capital guaranteed investment, while a less conservative investor may feel comfortable in investing in companies that may either be a great success or fail completely. Once you have decided on where you would feel comfortable in investing your money, putting together an investment portfolio becomes easier.
Your individual goals and stage in your working life may impact your decision on whether to invest within the super system or outside in a non-super investment. Making additional contributions to super may not always be the optimal strategy, particularly for individuals who have just commenced their working careers and may have short-term financial goals they would like to achieve, for example buying a house. The reason is that super is subject to preservation rules and therefore generally can not be accessed until the preservation age is reached (currently at least age 55).
On the other hand, there are many benefits to placing additional investments in super.
Some of these benefits include:
- Favourable taxation treatment on investment earnings within super. These earnings are taxed at 15%, while investment earnings outside of super can potentially be taxed at the top marginal tax rate of 45% (plus the Medicare levy).
- Lump sum withdrawals and income payments (from super pensions) are tax free from taxed sources if you are age 60 or over
- Additional investments can be made through arrangements such as salary sacrificing, which may reduce income tax paid
- Additional personal contributions may be eligible for the Government Co-contribution
In addition, many industry experts believe that super guarantee contributions will not be sufficient to fund retirement income expectations. So making additional investments into super throughout your working life could help you meet your retirement income goals.
In order to meet your financial objectives it is important to ensure that financial needs are met in times where you may not be able to work due to accident or sickness. There should also be consideration placed on how beneficiaries will manage financially in the event of your death. One of the ways to achieve these goals is by having life insurance covering death, total and permanent disablement and critical medical events and by having income protection insurance to cover loss of income during extended time off work due to accident or sickness.
The level of insurance that each individual will require will depend entirely on his or her financial responsibilities and liabilities. So the level of life insurance required for a young couple starting out in life with children and a mortgage will be entirely different to an older more established couple with no mortgage or dependent children.
