As we start another year we have a choice. Do we take it
a day at a time with no particular aims or obligations other
than to get by, or do we make a conscious effort to set objectives
and targets for this year and beyond? The latter is the way
to go if you want to build up wealth and ensure financial
security. If you are running a company it is essential to
have a business plan. A similar plan can be drawn up on a
personal level. So where do we start?
Take stock of assets and liabilities
If you conducted the exercise recommended in this column two
weeks ago you will have already recorded all the information
you need. If not, make an effort now to list and put a value
to all your assets including land, property, cash in the bank,
investment portfolios, savings and retirement plans, collectibles,
motor vehicles and any other assets. Remember the true value
is what a willing and able buyer would pay for them today,
not what you paid for them or what your asking price would
be. Next, list any loans, credit card debts and any other
liabilities. Deduct the liabilities from the assets and you
should have a figure that represents your net worth. Apart
from this being a useful reality check it now gives you something
to work on and against which you can measure your progress
at the end of the year.
Projected expenditures
The next task is to itemise all your anticipated expenditures
during the coming year. To the extent possible this should
be done on a monthly basis. It may be that most months will
be the same, but there will invariably be certain expenditures
that fall just once or at certain times of the year. Don’t
forget to allow for contingencies such as sudden illness,
family events etc. The best way to provide for these is to
allocate a monthly amount to a contingency fund, which could
be a separate bank account.
Projected income
Again, note the income you expect to receive on a monthly
basis. If you receive a regular salary this should be a simple
matter. If your income depends on commissions or the performance
of a business it is somewhat harder. If you have to make estimates
it is better to err on the pessimistic side. Remember all
the setbacks to many businesses due to events that have hit
Bali in recent years. Also be aware of changes in global supply
and demand. A business may prosper one year, but that is no
guarantee the same product will be in demand and the same
price may be charged the following year. The garment industry
for example is facing increasing competition from China and
Vietnam. If you run a successful business there will always
be people out there trying to emulate and undercut you. You
have to keep one step ahead.
Protecting your assets and income
All your best estimates could be put in jeopardy if you were
to lose your assets or income. Not protecting these can be
a false economy. Make sure your house and contents, as well
as any motor vehicles, are fully insured. If your income depends
on a business it too must be insured. Don’t forget your
most important assets – you and your family! Make sure
you have adequate life cover. If you have a young family you
should be looking at cover of up to a million dollars to ensure
they can maintain their standard of living and the children
get the best education. If you have a large business and you
are essentially the driving force you should be looking at
key man (or woman) insurance. In such cases special policies
can be drawn up that actually encourage and monitor health
and lifestyle so that premiums can be kept low.
Loss of a job is another matter. In Europe you can expect
to receive sickness benefit or compensation from a redundancy
fund and unemployment benefit. No such chance in Bali! You
can protect yourself against serious illness by disability
insurance and critical illness insurance. For other risks
your best strategy is to build up a healthy cash reserve.
In deficit?
Having completed the exercise you should now be in a position
to see what your surplus or deficit is likely to be. If it
is likely to be in deficit you will have to go back to the
drawing board. Unless you happen to be the American government
which can rely on a continued flow of funds from abroad to
fill the gap, you cannot afford to go into debt. An exception
is if you have a debt such as a mortgage since you would have
an asset against which to offset the debt. Care must still
be taken; if the value of the asset falls the debt does not
fall with it. In a deficit situation you either have to seek
ways to reduce expenditure or increase income or both.
Or in surplus?
If you have a surplus on the other hand you have a number
of options, basically to conserve, invest or spend it! If
the surplus is a small one it is best to conserve it, ideally
in an interest bearing account. If your reserves are adequate
then you must allocate a portion to long term investment and
retirement plans. Ideally you should be investing 15% of your
income throughout your working life in order to maintain the
same standard of living in retirement. Building up financial
assets, as well as fixed assets, is an essential part of wealth
building. Still got money left over? OK – go out and
spend some of it but make sure all the other needs are met
before you order that Ferrari!
Colin Bloodworth is a senior financial adviser with Financial
Partners International. The views expressed are his own. If
you have any questions related to personal finance you may
contact him at 021 520 8099 or
colin.bloodworth@financial-partners.biz
