Regardless of where you’re at in your financial life, be it building your career with your first job, planning for your retirement after work, or perhaps somewhere in-between, there are a range of financial planning strategies you can use to reach your goals.
There are, however, a small group of strategies called ‘framing strategies’ that are imperative to achieving your financial goals.
So what are framing strategies? They are a core group of strategies that help you shape your other financial strategies and financial plan.
In much the same way as a house frame structures different rooms, framing strategies shape what your financial plan will look like. If we think of earnings and expenses as a floor, the framing strategies can be used to shape how well you can use and stack the other financial planning strategies together, to build your financial house.
There are four framing strategies you should consider when you start thinking about putting your financial plan together, or reassessing the financial plan you have.
Regardless of how much you earn, the ability to manage what you earn and spend makes a big difference to the financial planning strategies you can use. It’s also the biggest driver to helping you reach your short, medium, and long-term goals.
If you haven’t spent some time listing out your income and expenses lately, you probably should. It’s even more important in the environment we find ourselves in right now with the rising cost of living. Many people with home loans are also going to pay more as they come off fixed-interest rates and onto variable rates, with rates that might be two to three times higher than what they had been paying.
The budget management strategy is about understanding where your money is going and making sure you get the best value out of the dollars you spend.
Don’t you think you deserve to get fair value for your hard-earned dollars when you buy something?
The cashflow management strategy also considers your earning and spending, but it’s also about time. It’s about making sure you have the money available to pay the bills when they arrive.
Many people know they have annual bills such as car rego and home and contents insurance, quarterly bills such as electricity and monthly bills such as phone and internet. But have you ever stopped to think about when these come in? By doing that, you give yourself the best chance to put something aside, perhaps in a savings account to earn interest, or an offset account to reduce your home loan interest.
It’s a great strategy for people who want to take more control of their financial lives and be less worried about larger expenses arriving.
As the example above shows, it also provides the opportunity to do something good with your money such as earn interest, or reduce debt, which is especially good in a higher interest rate environment.
All debt needs to be paid back at some point. Some debt requires principal and interest payments while other loans offer interest-only repayments, where the outstanding loan does not reduce over time.
If you really want to take control of debt, you need to really understand your budget and your cashflow.
If you’re getting fair value for the dollars you spend, you’re robbing yourself of the opportunity to pay debt off sooner and you will pay more in interest over the life of the loan.
Similarly, if you have good cashflow, direct some of it to debt repayment.
Risk and return – it’s an important consideration to ponder before you make any important money decisions.
All aspects of life have an element of risk, and your financial life is no different.
One of the keys here is to not have an emotional relationship with money.
For example, some people fall in love with a new home and want to buy it, but they’ve perhaps not thought about their ability to pay back the loan if interest rates were to double.
Emotional behaviour can apply to investors too. They are the ones who buy shares and cheer and frown every time the share price goes up and down. Neither of the examples provide a sustainable way to live your financial life.
Instead, spend time thinking rationally about the risks before you act. Everyone looks at risk differently. Find the right level of comfort for yourself and move forward more confidently.
Together, the framing strategies play a fundamental role in your financial plan to help you reach your short, medium and long-term goals. They’re also a great way to help younger family members take control of their financial futures too.
By managing the framing strategies well, you build a stable financial house. You also give the other financial planning strategies you use the best chance of success.
Have you put much thought into your investment strategy? Would this advice change your mind? Why not share your opinion in the comments section below?
Luke Smith is a licensed Australian financial planner and author of the new book, Smart Money Strategy – Your Ultimate Guide to Financial Planning (Wiley, $34.95), published by Wiley. Luke is also the host of the popular podcast The Strategy Stacker – Luke Talks Money and appears every Friday afternoon on Canberra’s 2CC. Find out more at thestrategystacker.com.au