The Key to a More Effective Financial Plan

Most people excel in one part of their financial plan. Wither they are very proficient in budgeting, investing, or have sought out expert advice regarding their insurances. However, almost no one talks about how they actually work together. In this episode, I break down the hidden link between all three, and why being weak in one can quietly sabotage the others. The alignment of all three is a fundamental to a smart financial plan.

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The information shared on The Dollars & Sense Podcast is general in nature and does not consider your individual circumstances. Dollars & Sense exists purely for educational purposes and should not be relied upon to make an investment or financial decision. Tim Ellis (FSP778196) and Brodie Haggerty (FSP778174) are both Financial Advisers providing advice on behalf of FoxPlan Ltd. FoxPlan Ltd (FSP39630) is a licensed Financial Advice Provider. Important information can be found at www.foxplan.nz/disclosure 

Transcript

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Most people tend to focus to, or at least be very proficient at uh one or two of the three key strategies uh within their personal financial planning. Uh for some, it's being very excellent at cash management. So controlling their income and their expenditure and their budgeting. Uh for others, it's more uh they're very proficient and interested in their investment knowledge uh and the willingness to invest wisely and aggressively. Some people have sought expert financial advice regarding their insurances, um, which is likely a result, really, of an eager financial advisor that's very proficient in providing advice, and that's what they've provided to this person. These are the three key strategies that I actually focus on when designing financial plans for clients. And what often goes very unspoken is the consideration or the link between the three key strategies that's actually really important. Welcome back to another episode of the Dollars and Cents podcast. As per usual, you're listening to myself, which is Tim Alice. This week I'll be explaining the link between the three key strategies I tend to focus on uh when preparing recommendations within a financial plan and how improving one area can actually improve another, and how neglecting one area can completely sabotage the other two key strategies. For a bit of a spoiler, being weak in one area means being weak in all. Before I get underway with this week's topic, which I'm really excited to get into, by the way, I uh maybe giving away a little bit too much of intellectual property here, but I'm looking forward to sharing it with listeners. I do have a request. I've been sharing the content online, I've been taking feedback from various places. What I would absolutely love is to hear from some of the other listeners I haven't heard from before. I have some uh I can't explain it, but uh uh a strong following in the USA. About 12% of downloads are coming from USA, Massachusetts of all places. I'm yet to hear from any listener in the USA. Uh what are you getting out of the show? What are you enjoying? Is it just our funny, lazy uh accent or or monotone voice that we use? If so, hey, I'd still love to hear that as well. But please, I encourage all listeners, reach out. Let me know what you're enjoying about the show. Let me know what you would prefer to hear more. Let me know if you have any questions that you want me to address or how you think I might be able to assist. I'll reply to every email that I receive. And I encourage you to be uh forthcoming with your criticism. If you have some, I'd love to hear it. As per usual, this week's content is educational in nature. It's not designed to be specific financial advice. We highly recommend seeking the relevant professional before making any financial decisions. So, as I mentioned in the intro, when it comes to providing clear and specific recommendations within a full financial plan, my focus is always considering three key strategies. And those are cash management, investments, and insurance. Whilst each strategy is completely different to the next, there's actually a link between all three of them where structuring and making arrangements in one area actually improves the abilities in the others. This is so rarely spoken about uh on podcasts or in education, mainly because a short podcast will be targeted to one specific area with one clear message. And that makes perfect sense. But what is unspoken about is when you combine these three key strategies, again, adjustments in one area can actually affect the other too. Before I get into the details of what those links are and how one area affects the other, let's actually get super clear in defining what those three key strategies really are. The first is cash management, which is all about your bank account. Okay, this is that this is where controlling income and expenditure actually occurs. It is very, very difficult to control what's not measured. So the the first thing to accomplish in in the cash management area is actually understanding what's occurring each week, fortnight, month, quarter, and year in terms of income and expenditure. So, what income is actually hitting the bank accounts? How is the money distributed to uh ensure that all the bills are paid, all the lifestyle expenses are covered, and the the savings for short and medium-term goals are actually occurring. When this area gets completely neglected, measurement tends to stop. Um, savings are either occurring at a too high a level or a too low a level, um, which can often result in missed opportunities and disappointment, anxiety for upcoming expenses and bills and the necessity to check bank accounts and shift money around from one account to another. The ideal outcome from implementing strategies within this key strategy is simply to have clients, you know, um feeling as though they've actually got complete control over what's coming in and what's going out and where it's actually going. More importantly, why it's going to each area that it's being distributed to. You know, I don't want clients that feel the need to check their bank accounts all the time or needing to transfer funds to, uh, for lack of better words, steal from Peter to pay Paul. You know, another key outcome of proficient cash management and a key recommendation that is made in every single financial plan that I've ever delivered in my life is to have a cash reserve. Obviously, the purpose of the cash reserve, and if you read any financial literacy book, is of course it's about emergency and opportunity. That's what the fund is there for. However, having that and having control over cash management actually affects the next two strategies, being investments and insurance, quite heavily. Today's episode, I'm going to be digging into what that link actually is and how tweaking one area can actually affect the other. So if we first of all focus on the link between good cash management and investment strategies. So the the link between cash management investment is thusly. If someone is to implement uh an investment strategy without any cash reserves and with completely neglecting the cash management area, when making a specific investment uh choice decision or implementing a particular portfolio or plan, quite often they can be quite conservative in their thinking and quite conservative, therefore, in their investing. This can obviously uh occur because their foot's only halfway through a door. If they have no cash reserves and they are starting to funnel some funds into investments, quite often those investments could be seen as a bit of a backstop, uh, an emergency fund in itself. Sometimes this will occur when people say, Look, I need to start investing. I don't have any idea what's happening with my money. I earn good money, I know that I can afford to start investing. So I just want to open an investment account to start putting some money in to keep it out of sight and out of mind. They've completely neglected the cash management side of their financial plan and jump straight to the solution of starting to do some investing. When that occurs and we're starting to uh assess the level of risk that the client is open to or willing to accept, quite often there's a little thought in the back of the mind that, heck, I might need to get my hands on some of this money at some point. So I might need to have a little bit of a defensive element within my investment strategy in case that occurs. If they don't have that thought process and they say, no, let's go completely aggressive. I want to start investing, I have time on my side, which is a common thought. What can occur without a sizable cash reserve is sure, they'll start investing, they'll start putting money away, it'll start doing its work in the market. But as soon as something goes wrong, they need to get their hands on capital. Their options are limited. Quite often they'll either liquidate their investments, in which case they're all the way back to square one, or even worse, they'll go and use borrowing or lending and credit cards and lines of credit to get their hands on cash, which is only kicking the can further down the road until that starts to catch up, and all of a sudden the investment portfolio becomes the scapegoat to it, and they can be liquidated. And again, you're now then back to step one. Another big side effect of starting the investment strategy without addressing the cash management is but without a reserve fund there, people tend to be more heavily impacted or affected by market corrections. If all your eggs are in one basket being an investment basket and uh the the whole portfolio goes down due to market corrections, which does happen, that tends to have a bigger impact on people that have no other backstop, no other reserve funds. So the emotional roller coaster of volatile investments uh it can really have a large impact, and that can start determining decisions and making snap decisions. If I can circle back to this need to liquidating funds to fund capital uh in an emergency situation where a reserve fund is not available, I use the example of of liquidating investments mainly aligned to managed funds where they are highly liquid. What could be a more devastating situation is if the chosen investment vehicle was a illiquid investment, such as property. In that kind of situation, the only way to get access to funds and capital might be to sell property. And if that were to happen just after a market correction in property values, that might put you in a fire sale mode where you need to sell property really fast and you're gonna have to accept a much lower price than what it could be if you had time on your site. One other link between the cash management and the investment strategies is without clear measurement and understanding of income and expenditure, it's very, very difficult to understand what's actually available to be invested. If people have no idea what's coming in and what's going out, they just know that they're earning a good rate and they really need to start investing. If you had to ask the question, okay, well, how much per month or fortnight or quarter would you like to invest, the answer's gonna have to be a guess. Because the data's not there, it has to be a guess. Typically, when people have to take a guess at how much of their income they can forego to investing, the guess is gonna be undershooting what's actually available. And that's likely because there's a fear that if they overshoot it, they'll need to change it in the future, or if they overshoot it, they'll need to take some back. So why not start a bit smaller with a number that you're completely comfortable with? I understand the line of thinking, but that simply means that you're you're guessing and potentially undershooting things purely because you didn't know the true answer of what was actually available to be building your wealth for the future. Now just put that in contrast with somebody that has exact clarity on how much is coming in, how much is going where and why it's going there, and therefore how long does it need to go there, and might be funding something that's not a a long-term expense. So for this period of time, they only have this much surplus left over after all their bills and lifestyle and goals are funded. Um, but in the future, they'll raise it to a higher amount. If they had that kind of level of clarity, that would let them make a much more confident, smart decision in how much they can actually afford to completely forego, take out of their bank account, put it into an investment with absolutely no intention of taking the money back. That provides a level of confidence that their investment strategy can go forward into the future without any need to change plans, react to things, or or be worried about what might happen or occur uh uh along the journey. The key to a good investment strategy is having the confidence that it's going to get the outcome that you're looking for. If that's all relying on as long as my calculations aren't wrong, the investment plan does not provide the level of confidence that it possibly could. Okay, so let's move on to the second strategy, which is obviously, as I've alluded to here, investments. So, you know, having excellent cash management plan and detailed budget and committed savings is great. However, that strategy alone is not likely to ever build true wealth. Uh once inflation has taken its impact and taxes come into the picture with your fixed interest, there's a very, very good chance and highly likely that all the cash sitting in the bank will actually start going backwards over time. Again, purely due to tax and inflation. Investments are absolutely key to growing wealth. And a well-planned investment strategy is arguably the most important strategy within a wealth-building financial plan. I might remind you, not all financial plans are about building wealth. Plenty of financial plans are about spending money and not actually accumulating wealth and making the best use of funds that are available. But I'm relating purely today about people that are trying to accumulate wealth. The desired outcome from a well thought-through investment plan is that clients feel confident that their long-term goals will be achieved and that investment strategies that they have actually chosen to implement are aligned to those goals. And providing the goals don't change hugely or majorly, then the investments that they have have a very high chance of providing the capital required to achieve those goals. We've already discussed the link between cash management strategies and investment strategies. So now let's look at the third strategy, which before getting to the link between investments and insurance, let's define the desired outcomes of what a smart insurance strategy we're trying to achieve with clients within their financial planning. So the desired outcome that we want within a financial plan when we're considering insurances, and sure, there's plenty of other risk management strategies that need to be considered within risk management, such as wills and enduring powers attorney and relationship property agreements. Uh I'm not here to chat through those today. I'm really focusing mainly on the work that we can do with an insurance uh program. What we're aiming to achieve is making sure that all risks that cannot be managed can be offset. And they are offset with an insurer that has a very, very high chance or likelihood of paying at claim time. If we can have all risks that are on the table that are not currently able to be managed completely offset, that provides a level of certainty that even if something goes wrong along the way, the financial plan can still progress and go forward. When I'm talking about risks that simply cannot be managed, let me explain what I'm getting at here. So for the vast majority of people that are trying to and attempting to and successfully accumulating wealth, their financial plan and their ability to accumulate wealth is most often fully reliant on their ability to generate an income. Generating an income via their uh employment or self-employment, you know, both uh are requiring time and expertise and uh uh the ability to perform their occupation and their duties, that's what's generating the income. So, with that in mind, for the vast majority of people that are relying on that earned income to support their financial plan, if something was to occur that stopped them from being able to uh perform those duties or generate that income without any kind of risk management or insurance plan in place, for a lot of people that puts the ability to achieve their financial goals completely out the window. When it comes to risk management, everybody has uh four options they can use to approach every kind of risk. They can either uh ignore risk, which quite often sounds uh along the lines of don't worry, that won't happen to me. They can avoid risk, which is the uh relevant of I'm gonna eat the perfect diet. If I have enough supplements and if I have the perfect diet, I have the right amount of exercise and I I look both ways before I cross the street, uh, I should be able to avoid any of the risks that can occur. There's managing risk. Well, if this happens, here's what I'll do about it. I'll I'll find another way to get by. And that's just managing the risk. And then there's offsetting risk, which is well, this might occur. And if it does occur, it's not going to be my financial burden, it'll be somebody or another company's financial burden, which in other words is insurance. The most common form of risk offsetting. So to try and make this relevant or to paint a picture, but quite often there's a belief of, I'm so wealthy, why would I need insurance? I have no need for this. However, imagine uh a couple where uh let's say that he's earning a very large income. Uh, there's a couple of investment properties, and the rent that's been generated from those properties is enough to service the mortgage and all the bills along with it, and the debts being reduced. There's a managed fund portfolio that's been uh regularly uh contributed to, that's now starting to grow, it's had plenty of time in the market. They are completely on track to achieving uh a retirement income in 10 years' time, which is when they've planned to retire. Their KiwiSaver is building in the background as well, just to support the whole retirement plan, and they are well on track to be achieving their retirement goals. If you remove the one element of the income that is supporting contributing to the KiwiSaver, contributing to the managed funds, paying for living expenses and lifestyle expenses and goals and family expenses, you take that income out of the picture. Let's imagine that they were very disciplined in their cash management strategies. They had one whole year of expenses of cash sitting in the bank. Well, after year one, that cash fund is now depleted. Once the reserve fund is depleted, we're gonna have to look for other options. Most people would flock to, well, there's managed funds sitting there. Let's just start liquidating a smaller pound of the uh amount of the managed funds, and we'll use that to support lifestyle expenses for the time being. Once that gets to a a degree of being depleted, the properties are gonna be considered and looked at, and now we need to maybe consider selling one of those properties. How will we choose which one to sell? What is the market doing right now? That completely on track plan can be completely sabotaged by an event that does and can occur. Again, the desired outcome that we're looking to achieve when it comes to insurances is making sure that we've considered all the risks that can occur. However, there is a plan in place for should they occur, the financial burden will not stop the financial plan from progressing. The goals can still be achieved, and the investments can stay intact. So that's clearly the link that I'm trying to allude to here when we're considering the link between insurances and investments. Without insurances there, it should something occur that can completely sabotage all the hard work that's been done in the investment strategy. It despite how good you were at your cash managements, how well structured your portfolio was, how how much wealth you'd built in there, uh a stop to that income uh through inappropriate insurances or lack thereof can completely undo all the hard work you've done in the first two strategies. Now let's look at the link between insurances and cash management. This is more on a positive note. If you had done appropriate work in the cash management strategies and you had managed to save a reserve fund, you had at least three months of expenses sitting as cash in the bank. When it comes to structuring and choosing appropriate uh insurance program that fits your needs, when it comes to uh products such as income protection, you need to choose what kind of waiting period you have on your particular policy. A waiting period means how long you must wait before the benefit starts getting paid. For people that have no cash management skills and no reserve fund, they probably need to have a much shorter waiting period on any kind of income protection benefit they have because they can't weather any storm. Having a short waiting period means that your monthly premiums are gonna be a lot higher than somebody that had a longer waiting period. If you had three months, or even better, if you had six months of expenses sitting as cash in the bank, you would feel more confident about choosing a waiting period of uh eight weeks, three months, or even six months, if that's how you felt, uh, which is gonna make your monthly premiums much, much cheaper. When it comes to medical insurance, you need to select your excess level. You can either have a$0 excess, which if you have no money in the bank is probably appropriate, because you don't want to have to uh juggle money around to pay an out-of-pocket expense should you need to claim on your medical insurance. However, if you had three months or six months of expenses sitting as cash in the bank, if I could relate that to a financial number, that might be$50,000 sitting in a cash bank account for emergencies. The thought of having a$1,000 or$2,000 excess on your medical account. Medical insurance doesn't need much thought at all. It's not going to impact your financial plan. Spending$1,000 to address a medical emergency or a medical need that's n shouldn't be a question whatsoever. It's a no-brainer. And having a larger excess on your medical insurance, well, that's going to save you a lot of money over the long run because every month's premiums are going to be much shorter. So having appropriate work in the cash management sector actually means that you're able to have insurances that are a lot cheaper. In the long run, you'll be saving a lot of money. On the negative side of that, ignoring the cash management means when you go to select appropriate insurances, they're likely going to be more expensive insurances. Despite the fact that the covers are exactly the same and covering the same risks, they're simply structured to people that aren't prepared to weather any kind of financial burden that could be easily saved in a bank account. Finally, the third link, the one that we haven't spoken about here, the link between insurances and investments. Again, it is a level of confidence. When people know that they have their income protected, they have cash in the bank, they've done appropriate work in the insurances and the cash management with a very solid base and foundation, it puts them in a position to be a lot more aggressive with their investing. It removes this idea of a foot half in, half out, and I might need to access the capital, they can go full steam ahead with a much more aggressive investment plan. Furthermore, and more on the positive note, the link between insurances and investment. Once investments have started to build and there's been time in the market and the wealth is starting to accumulate, the debt on investment properties is reduced, the the managed fund portfolio is now at a level where it's actually generating an income that can support a lifestyle. We can actually now start to remove insurances that are no longer needed. Again, those insurances were only there to uh to deal with risks that could not afford to be managed. Once you're able to actually afford to manage some of those risks, we don't need to offset anymore. Self-management is the fastest way to remove insurances. The faster we can uh accumulate wealth, the the the sooner we can stop paying insurance companies the monthly premiums because the risk does simply doesn't need to be offset anymore. I guess the takeaway that I'm hoping uh listeners take from this is it it's one thing to be very knowledgeable in each of these areas. It's another to have a great strategy in each of those three, but a smart financial plan will also consider how the three are connected, how you can tailor each area uh when considering all three together in alignment with the financial goals and outcomes that that are uh are important to you. That's how we can really make a financial plan the the most effective and and impactful and uh successful uh for financial planning. Failing to connect the three might mean that you're not working in the most efficient way, paying for unnecessary insurances, uh not being able to invest with enough confidence to be aggressive in investments and needing to take a slower approach to wealth accumulation. That's the real point that I'm trying to drive home in this week's episode. I've enjoyed sharing this. I I hope it's inspired thoughts or questions for listeners. And if you do have some questions, or you know, you want me to dive deeper into how the two are connected or three are connected or how you might be able to better your position with this in mind, uh, feel free to reach out, getin touch, podcast at foxplan.nz. I'll reply to every email as I always have. Uh, I look forward to hearing from you as well. As for this week, that's usually