In any review of a client’s circumstances and strategy, as their adviser, I am invariably going to ask the following question, ‘how much are you spending’? What I’m trying to confirm is whether a client has enough money coming in to pay for what they tell me is important to them, now and into the future.

You may find this strange, but most people don’t really know how much they are spending. Sure, most will have an idea (often the wrong idea), and some (the minority) will have detailed it out on a spreadsheet.

However, an accurate and truthful answer to the question is critical. Without it, we have no real way of knowing how successful, or otherwise, the strategies we’ve put in place are likely to be. We also have no real way of identifying additional resources that may be applied to help to achieve outcomes we’re looking for.

So, what’s the best way of working it out? Well, as noted above, some people maintain detailed spreadsheets. This is fine, but generally more than required. A simple review of monthly credit card and bank account statements (over say a 6 month period), will give most people a sense of where the money is going. Personally, I use Quicken software in which I record all credit cards and banking transactions to help me monitor the cash flows of my little household (my wife hates this!).

Knowing where the money’s going, may not sound particularly exciting, however, it’s absolutely a fundamental part of planning for your financial future.

If you would like to learn more about our personal financial planning services, please contact us today. One of our advisers would be delighted to speak with you.

Please note this article provides general advice only and has not taken your personal, business or financial circumstances into consideration. If you would like more tailored advice, please contact us today.

“What’s the matter Joe, you look upset?” I asked. Joe is a longstanding client of The Investment Collective. He’s a sharp minded, sprightly nonagenarian who still lives in his own home and is fiercely independent.

“Well,” Joe said forlornly, “I recently received a letter telling me that the NBN was coming down my street. I was trying to work out what I needed to do, when a very helpful gentleman from ‘Telstra Platinum’ service called me. He told me that he could have me connected to the NBN in about 30 minutes. All he needed was remote access to my computer, and I gave it to him.”

Within 30 minutes $9,000 had been withdrawn from Joe’s bank account. He’d fallen foul of a telephone scammer. Joe managed to get down to his bank on the same day. They closed his bank account and assured him he would receive his $9,000 back.

Joe isn’t out of pocket, however, his confidence has been severely shaken. He’d asked himself, how could he, of all people, have been so gullible as to unquestionably pass over control of his computer to a ‘voice’ on the other end of the telephone line?

That ‘voice’ was friendly, courteous, helpful, and beguiling. It was able to disarm Joe’s otherwise critical faculties. Also, it belonged to a person that had no qualms whatsoever in stealing from Joe. If it can happen to Joe, it can happen to me, it can happen to you.

Be careful!

Who should see a financial adviser?

“I don’t have any money to invest so there is no point in my seeing a financial adviser.”

“We manage our own finances so we don’t need to see a financial adviser.”

“We struggle to make ends meet, so we haven’t got any spare income to do anything else so we won’t be seeing a financial adviser.”

“I’m only in my 20s, 30s, I don’t need to see a financial adviser.”

“It’s too late for me to see a financial adviser as I’m retiring in 6 months’ time.”

All of these thoughts are far from the truth.

When should I seek financial advice?

There is a general perception that financial planning is only for people who have money to invest. That if you don’t have any spare cash and are having difficulty in making ends meet, financial planning isn’t for you.

Having a personally tailored financial plan will assist you in every facet of your financial lives regardless of your current financial situation.  In fact, your financial plan will help you achieve other personal goals simply because these goals are planned for.

Your financial adviser will assess your entire current financial situation. This means the adviser will be obtaining information on your earnings, what it costs you to live, the value of all your assets including superannuation, and of course, what you owe.  The adviser will also assist you in identifying what you want to achieve, both now and into the future.  We consider your life risk requirements so that your family and wealth are protected in the case of death, serious injury or illness.

Once the data has been collected and analysed, the adviser will write your financial plan.  The plan will include a summary of the current situation and this in itself can be an eye-opener for the client because many of us do not take stock of our overall financial picture.  Taking into account your goals and objectives and the things that have been identified during the collection and analysis step, the adviser will make recommendations to improve your situation and to help you to meet the goals you have identified.

Sometimes the recommended strategies can be confronting, but always valuable.  For example, if cash flow is a problem for you, the plan will include budgeting advice and strategies.  If you have surplus funds for investment, the plan will include recommendations as to how those funds should be invested.  If you are nearing retirement, the plan will address streamlining and consolidating your financial affairs ahead of retirement and strategies to maximise potential Centrelink payments.

There will be recommendations to adjust the investment option in your superannuation if it does not match the risk profile identified during discussion. If you have debt, there will be advice as to how best to manage that debt and if a restructure is required. If your life risk protection is inadequate, we will include recommendations to bring this protection to the correct level.

Your financial plan will also contain information on any ongoing costs you may incur if you accept the proposals, and there will be comparisons and projections between the current situation and the recommended strategies, including current and future costs.

So, when you should see a financial adviser? The answer is – as soon as possible!

For young people, a tailored financial plan will set them on a path to growing their wealth, perhaps via a savings plan.  For pre-retirees, it is essential that you consult with an adviser to ensure that what you have worked a lifetime for will support you in the way you want during retirement.  Centrelink payments and health care cards are very important and this is a major part of the planning for those either in or nearing retirement.

If our recommendations are accepted and you proceed with the plan, we manage the implementation of the plan and if there is an ongoing component, this activates. Centrelink management is part of the ongoing work and it can be invaluable to retiree clients to have this onerous task managed.

Beginning the process of seeking financial advice is very simple.  It is a matter of contacting either our Rockhampton or Melbourne offices with a request to see an adviser.  Your meeting confirmation includes a list of things to bring with you. From there the adviser will lead and guide you through the process.

What are you waiting for?

Interest only loans have been a popular choice for property investors for tax purposes, and first home buyers and other borrowers looking to minimise the repayments on their debt.  Many purchasers use Interest only loans to ease the financial burden of servicing their loan.

Due to the growth of the property market in recent years, the average loan size has increased, and Interest only loans can be a short-term option to reduce the repayments and improve affordability.  This type of loan is a popular choice for property investors to lower the repayments, while hopefully the value of the property increases in value over the longer term.  Many lenders offer Interest only options on their products for up to 5 years.

On a loan of $300,000, the monthly repayment on an interest loan would be approximately $500 less per month than an equivalent Principal and Interest product at the same rate.  There can be significant savings on repayments for an Interest only loan in the shorter term, but there are also some longer-term issues:

• As the name suggests, you are only paying back the interest on the debt. You are not making any progress on your mortgage!  At the end of the Interest only term based on the example above, you still owe $300,000.  If you selected a Principal and Interest loan (at the same rate), you would have reduced your loan by nearly $30,000.
• Property investors and homeowners expect that the property will increase in value over time. With an Interest only loan, you will have equity in the property without paying any principal.  However, if your property doesn’t substantially increase in value over the Interest only term, you will not have gained any equity in the property.
• At the end of the Interest only period, the loan repayments will ‘rollover’ to an increased Principal and Interest repayment. Many borrowers may be unprepared for the additional financial commitment, and will experience ‘Mortgage Stress’.  If the borrower’s circumstances have changed since the loan was established, and they cannot extend the Interest only period, it may be difficult to refinance to another Interest only loan.  The only option may be to sell the property.

As of 2015, Interest only home loans represented approximately 40% of the residential loans in Australia.  From March 2017, the lending regulator, Australian Prudential Regulation Authority (APRA) introduced restrictions on new Interest only loan business.  APRA has limited Interest only lending to less than 30% of new loans written.  The restrictions were imposed In order to limit riskier forms of lending practices, which allow borrowers to pay for escalating property prices, while not reducing their debt.

The restrictions introduced by APRA have led to rate increases on Interest only loans, and tougher requirements for customers applying for Interest only loans.  Interest only loan applicants may be subject to increased scrutiny such as more thorough income verification and higher loan servicing standards.

There have been several headlines recently in relation to the issues with Interest only home loans ‘rolling over’ to Principal and Interest loans after the interest-only period expires.  The Reserve Bank of Australia has estimated that over the next 3 years, approximately $360 billion of Interest only loans will convert to Principal and Interest Loans.  This will increase the repayments by approximately 1/3 or $7,000 p.a. on average for a $400,000 loan.

The rollover to Principal and Interest repayments may leave many borrowers struggling to meet higher repayments.  The most vulnerable will be homeowners with a high Loan to Valuation Ratio (LVR) who will find it harder to refinance or sell the property to extinguish the debt.

If you need assistance with your home loan or lending needs, please contact one of our lending specialists to determine the costs and benefits, and to discuss your options.

Please note that the above has been provided as general advice. It has not taken into account your personal or financial circumstances. If you would like more tailored advice, please contact us today, one of our friendly advisers would love to speak with you.