As financial planners we try to optimise an individual’s personal finances to maximise everything where possible.
However, in the ongoing pursuit to try and demystify financial planning and personal finance in general, I wanted to try and explain the three most important things that really impact people’s financial progress. It’s not to say that the other elements are not important, but often that they feed off these three things or are related to them but to a lesser extent.
- How your capital is allocated
In really simple terms people already have capital and so what is actually important is how this is allocated at a high level. Historically speaking, allocating more capital towards ‘real assets’ (property an equities) has resulted in the greatest returns for people relative to ‘defensive assets’ such as cash and fixed interest and would have had more impact compared to say product wrapper or charges. Putting it bluntly a low return with no taxation is likely to be worse than a high return with taxation. It should also be said that not making changes to this based on short term circumstances is also important (see point 3).
- Contribution and withdrawal rates
With the above being super critical, as is the amount of money that you either contribution if you are in the building phase of your financial life or withdrawal if in the drawing phase of your financial life. Without these rates being correct at both stages of your financial life, it is extremely difficult to make up for this if not.
Contributing too little leads to insufficient future assets, needing to make significant lifestyles changes in the future or taking an unsustainable withdrawal rate that could lead to financial ruin.
- Your financial behaviour
Assuming that you have the first two in hand, what can go wrong in normal circumstances aside from your own emotions and behaviour getting the better of you to ruin it?
Positive financial behaviour would be considered to be staying disciplined, not reacting to short term events/movements or following the crowd of people who do. It’s ok to feel uncertain during uncertain times, but not to react because of it.
I would also add keeping on top of things regularly (say six monthly or annually) but not being tempted into making tweaks and changes too frequently would also be positive.
Speaking from experience, those who manage to be successful with the above have better outcomes over the long term.
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