Financial Planning for Younger Clients

What information do you use to evaluate a client’s situation and financial position?

For each client we complete a fact find document. This captures their personal financial position that will include:

• Personal information such as their employment, starting a conversations of when they would like to retire, and if they are married/divorced and have any children (now or planned). Whether they work as an employee, partnership, self-employed or trust income.
• Cashflow (income and expenses). If they haven’t completed a budget we may ask them to complete one manually or use one of the many budgeting apps available now.
• Anticipated costs in the next few years. Eg: updating a car or purchasing a new home or investment.
• A balance sheet of their assets. This will include current valuation, written down cost for tax purposes, income and growth expectations and whether they want to retain or when they want to sell. Who owns the assets such as individual, joint or through a trust.
• Any loan details including if they are deductible or not.
• Details of superannuation including investments, insurance, beneficiaries, taxable components and cost of the product.
• Review their risk profile to determine their appetite for risk.
• If they have a will and what the details are for executor and power of attorney’s.
• What insurance they have for Life, Total and Permanent Disability, Income Protection and Trauma.

We then work through the clients’ short and long term goals and aspirations. It is our job to then make recommendations and a plan of action to meet these goals. We use financial planning software that can provide very detailed projections of where they are heading and a comparison for ongoing reviews.

What are common financial strategies that you will offer young people?

We work through a budget and determine what surplus income they have to save. Starting a savings plan now, will be one of the best habits they can create. If they are saving for a house, generally we will hold this in cash because of the security. Funds that are available for a minimum of 5 years we may start an investment. A 25 year old isn’t going to be able to access their super for another 35 years, so we would generally own the investments outside of superannuation.

Should a young person focus solely on high-risk investments or a more conservative approach?

There is no one size fits all approach. Before anyone makes an investment decision they should understand if the investment matches their personal risk tolerance. This would also include a discussion about the long term expectations for the money. For example if saving for a house to buy in 3-4 years a high growth investment would not be appropriate.

However, in general terms a young person will benefit from investing long term savings (eg: super) in a higher growth investment.

What would a balanced portfolio look like for a 20-year-old vs a 30-year-old?

Balanced in my eyes should have a 50% weighting to growth assets (equities, property and alternatives such as infrastructure or absolute return funds), and 50% to defensive assets (cash, treasury bills, short and long duration fixed investments including government debt, corporate debt).

Both a 20 and 30 year old have a long time to retirement, so if they are investing for their retirement they could both consider a portfolio with a higher weighting to growth assets.

What areas of investment would you recommend young people to investigate?

I would recommend they don’t get caught in the headlights such as cryptocurrencies.

A good first investment could be in some good books to understand the investment markets and understand what they want to achieve from the investment. Do they want to have an active approach to the investment, or be passive.

If investing for the long term they could consider some form of borrowing or a geared investment.

If the are working, and starting to accumulate savings, they could consider a small contribution to super each pay which can be very powerful over a 30+ year period.

What are common risk factors that you talk to clients about?

For investment risks we talk to clients about:

• Making sure they invest within their risk profile.
• Not trying to time the market.
• Only invest in something that has been researched by you or someone else.
• If their investments will keep pace with inflation.
• If their portfolio has sufficient diversification to reduce risk of one sector performing badly.
• Liquidity risk of the investments and how they can redeem capital or receive income.
• Legislative risk of their investment if current laws were changed.
• Currency risk for investments held overseas.

For younger clients, it will also include reviewing their insurance to ensure their strategies are not impacted if they are unable to work because of an injury or illness. Their ability to earn an income is the biggest asset they have.

DISCLAIMER: 

This is intended to be general advice only. Goldsborough Financial Services has not taken into account the objectives, financial circumstances or investment needs of any particular person.  For specific advice on your situation please contact your Goldsborough Financial Planner.